Fin Acc Textbook

FINANCIAL
ACCOUNTING
188/179
© STELLENBOSCH UNIVERSITY 2023

CHAPTER 1
NATURE AND OBJECTIVE OF ACCOUNTING
Page
Learning outcomes 1-2
1.1 Nature and objective of accounting 1-3
1.2 Background to accounting standards 1-4
1.3 Users of accounting information 1-5
1.4 Forms of entities 1-6
Appendix A 1-7
1-1
At the end of this chapter, students should be able to:
- understand the nature and objective of financial accounting
- define the users of accounting information and their information

needs
- identify the various forms of entities
1-2
1.1 Nature and objective of accounting
Accounting is often called the language of the business world because it provides the
financial information that managers at various entities need to make decisions. It is
also the means by which account is given and justification is provided for
transactions concluded between various entities.
Accounting looks at methods by which all transactions and events that can be
converted to a monetary value, can be recorded orderly and systematically.
Accounting also provides methods to analyse and interpret results of transactions.
Accounting is a measurement process and can therefore be defined as the recording

of monetary values of financial transactions with the main objective to provide
information in the form of financial statements which could form the basis of decision
making.
Accounting as a measurement process, as discussed in this book, is presented as a

diagram in Appendix A.
The management of an entity will require the following information, at a minimum:
 The amount of money that the entity owes others (e.g. loans and creditors)
 The amount of money that is owed to the entity by others (e.g. debtors)
 Nature and value of the entity’s assets (e.g. property and investments)
 Nature and amount of expenses paid in a specific period (e.g. rent, salaries,
electricity)
 Nature and amount of income received in a specific period (e.g. selling of
goods and rendering of services)
 The profits/losses for a specific period
 Amount of the shareholders’ interest/contribution towards the entity (e.g.
equity/capital and retained earnings)
1-3
1.2 Background to accounting standards
In order to meet the need for reliable and comparable financial statements that reflect
the financial position and financial performance of an entity’s activities, specific
accounting rules are required based on the accounting language known as the
double-entry system. These rules became known as generally accepted accounting
practice (GAAP). Before globalisation, different countries used their own unique
forms of GAAP, commonly referred to as national GAAP. This led to problems since
the national GAAP used in one country differed from that used in another country.
There was an increasing need for a global GAAP to ensure comparability. This global
GAAP is referred to as the set of International Financial Reporting Standards
(IFRSs).
The International Accounting Standards Committee (IASC) was established in 1973.

The IASC issued global accounting standards called International Accounting
Standards – these are prefixed with ‘IAS’. In 2001, the IASC was replaced by the
International Accounting Standards Board (IASB). All global accounting standards
issued by the IASB are now called IFRSs (prefixed with ‘IFRS’). These standards
represent the set of principles applied by accountants. The IASB adopted all of the
work of the IASC. Hence, use is still made of standards prefixed with IFRS as well as
IAS. It is possible that a standard contains complex principles. The IASB provides
clarity by issuing additional documents called Interpretations, prefixed with SIC or
IFRIC. IFRSs broadly refer to both the standards and interpretations.
IFRSs are based on the Conceptual Framework for Financial Reporting (discussed in
Chapter 2) that was issued by the IASB, to reduce the different circumstances that
lead to the use of various definitions and recognition criteria which are used for the
preparation of financial statements. At the same time the value of use of financial
statements for decision making is enhanced.
In South Africa, Statements of GAAP (SA GAAP) were issued by the Accounting
Practices Board (APB). This body was replaced by an independent regulatory body,
the ‘Financial Reporting Standards Council (FRSC)’, in terms of the Companies Act,
no 71 of 2008. SA GAAP will no longer apply in respect of financial years
commencing on or after 1 December 2012. The financial reporting frameworks
available in South Africa are IFRS and IFRS for small and medium-sized entities
(SMEs).
IFRSs were designed primarily for the preparation of company financial statements.
For non-public companies, the complexity is unnecessary and irrelevant, as well as
costly. Hence the development of IFRSs for SMEs, which contains a simpler set of
accounting standards.
1-4
1.3 Users of accounting information
Financial information is an important role player in economic decision making for a

large variety of users with unique information needs. The following are users of
financial statements and their different information needs:
 Investors – the providers of risk capital require information on the inherent risk
and return on their investment. Information is needed to make a decision on
whether to buy, retain or sell shares. Shareholders are also interested in
information about the dividend payment ability of the entity.
 Employees – require information on the stability and profitability of their
employers. They are also interested in the ability of the entity to provide for
their remuneration, retirement benefits and job opportunities.
 Lenders – require information on the timeous payment of amounts and interest
due. They are interested in the solvency and liquidity of the entity.
 Suppliers and other trade creditors – require information to judge whether
amounts owed to them will be paid when due. Trade creditors will probably be
interested in the entity as lenders of money over a shorter period, unless they
are dependent on the entity for continued existence as an important client.
 Customers – require information on the continued existence of the entity,
particularly when they have been involved for an extended period or are
dependent on the entity.
 Government and government institutions – require information on the
allocation of resources and activities of the entity. They also require
information on the levying of taxes and statistical information for policy
decisions.
 Public – require information on the contribution of the entity towards the
economy and the creation of job opportunities. Financial statements can
provide information on tendencies and developments concerning the
prosperity of the entity and its activities.
1-5
1.4 Forms of entities
An entity is any enterprise that conducts activities and engages in business

operations. They can sell goods or render services with the objective of showing
profit or not. There are different forms of entities. The most general forms are shown
in the table below:
Sole proprietor Partnership Close Company

Corporation
1 Owner 2 or more Partners 1 -10 Members Shareholders
Not a separate Not a separate Separate Separate

legal entity legal entity legal entity legal entity
No acts No acts Close Corporation Companies Act

Act
Profits belong to Profits are Profits are Profits belong to

owner distributed in allocated to the company and
specific ratios to members as are paid out to
partners profitshare shareholders by
way of dividends
Chapter 1 – 14 Chapter 19 Chapter 16 Chapter 14 & 15
1-6
ACCOUNTING AS A MEASUREMENT PROCESS
Accounting equation
A=E+L
BEGINNING OF PERIOD END OF PERIOD
DURING PERIOD
FINANCIAL TRANSACTIONS FINANCIAL REPORTING
- How much profit did I make?

Purchases (cash/credit) Liabilities
Results of financial activities
Expenses (Income statement)
Profit/loss
- Did my equity increase?
Income Assets
Financial position of entity
Sales (cash/credit) (Balance sheet)
Capital (contributions/withdrawals)
ACCOUNTING CYCLE
(1) Capturing of data on source documents

(2) Recording of transactions in journals
(3) Posting to the ledger accounts
(4) Compile a trial balance
(5) Adjustments and correction of errors
Rules
- Underlying assumptions
- Qualitative characteristics
- Recognition & measurement of elements
1-7
CHAPTER 2
THE CONCEPTUAL FRAMEWORK FOR FINANCIAL
REPORTING
Page
2.1 The objective of the conceptual framework 2-3
2.2 Scope of the conceptual framework 2-3
2.2.1 Objective of general purpose financial reporting
2.2.2 Qualitative characteristics of useful financial information

2.2.2.1 Fundamental qualitative characteristics
2.2.2.2 Enhancing qualitative characteristics
2.2.2.3 The cost contraint on useful financial reporting
2.2.3 Underlying assumptions

2.2.3.1 Accrual basis
2.2.3.2 Going concern
2.2.4 Elements of financial statements
2.2.5 Recognition of the elements of financial statements
2.2.6 Measurement of the elements of financial statements
2.3 The entity concept 2 - 10
2.4 Consumables 2 - 10
Questions 2 - 11
2-1
- understand the conceptual framework
- identify and define the elements of financial statements
- apply the recognition and measurement principles of the elements of

financial statements
- understand the entity concept
2-2
2.1 The objective of the conceptual framework for financial reporting
The objective of the conceptual framework (hereafter refered to as the framework) is

to lessen the different circumstances that lead to the use of various definitions and
recognition criteria which are used for the preparation of financial statements. At the
same time the use of financial statements for decision making will be enhanced.
2.2 Scope of the framework
2.2.1 Objective of general purpose financial reporting
The objective of general purpose financial reporting is to provide financial information

about the reporting entity that is useful to existing and potential investors, lenders
and other creditors (primary users) in making decisions about providing resources to
the entity.
General purpose financial statements cannot provide all the information that is
needed by users. Users also have to consider general economic conditions, political
events and the industry in which the entity operates in their decision-making process.
The financial statements are not directed at regulators, management of the entity and
the general public, but they can still use it.
General purpose financial statements are not designed to show the value of a
reporting entity, but they provide information to help estimate the value of the
reporting entity. The financial statements are, to a large extent, based on estimates,
judgments and models rather than exact depictions. The framework establishes the
concepts that underlie those estimates, judgements and models.
2.2.2 Qualitative characteristics of useful financial information
Qualitative characteristics are features that make information in financial statements

useful for the users. The two groups of characteristics according to the framework are
discussed below:
2-3
2.2.2.1 Fundamental qualitative characteristics
Financial information is useful, when it is relevant and a faithful representation of

what it purports to represent.
 Relevance
Information is relevant to users if it can influence their decisions. The information can
make a difference if it has the following characteristics:
 Predictive value
Information can be used by users to make their own predictions.
 Confirming value
Information provides feedback (confirms or changes) about previous

evaluations.
The materiality of the information must also be taken into account to determine the
relevance thereof. Information is material when its omission or misstatement
influences the economic decisions of users who rely on the financial statements.
Materiality is determined by the size of the item or error in relation to the specific
circumstances where it was omitted or represented incorrectly. Materiality can differ
from entity to entity.
 Faithful representation
Financial statements represent economic phenomena in word and numbers, to be

useful the information must faithfully represent the events that it purports to
represent. The following are characteristics of faithful representation:
 Completeness
Material omissions can result in information being false and misleading and
therefore unreliable and irrelevant.
 Neutrality
Information is neutral as it is presented not to achieve a predetermined result.
 Freedom from error
Information must be free from error in terms of description and the process to
produce the information.
2-4
2.2.2.2 Enhancing qualitative characteristics
The usefulness of financial information is enhanced if it has the following

characteristics:
 Comparability
Users want comparable information to judge tendencies over time and between
similar entities to evaluate their own relative financial position/performance.
Measuring and presenting financial results of similar transactions and other events
must therefore be done consistently across the entity over a period of time and also
consistently for different entities. It is therefore important that entities disclose
comparable figures in their financial statements for at least one year.
 Verifiability
Verifiability helps assure users that information faithfully represents the economic
events it purports to represent. It means that different knowledgeable and
independent observers could reach consensus.
 Timeliness
Information must be available on a timely basis for users to influence their decisions.
 Understandability
Information must be reasonably understandable to users. For this purpose it is

accepted that users have reasonable knowledge of business and economic activities
as well as accounting and that they will be prepared to study the information single-
mindedly. However, information on complex matters should not be left out merely
because certain users find it difficult to understand.
2.2.2.3 The cost constraint on useful financial reporting
The balance between benefit and cost is more of a constraint than a qualitative
characteristic. To obtain the information, the benefits from financial information must
exceed the cost involved. The estimation of benefits and cost is mainly a judgement
process.
2-5
2.2.3 Underlying assumptions
According to the framework, the following two assumptions are underlying to the
preparation of financial statements:
2.2.3.1 Accrual basis*
Financial statements are prepared in accordance with the accrual basis. According
to this, transactions and other events are accounted for when they occur, and not as
late as the date on which cash is received or paid. Financial statements prepared on
the accrual basis, provide the user with information on transactions in the past that
resulted in the movement of cash as well as information on the future payment of the
entity’s obligations or the future recovery of amounts due to the entity.
2.2.3.2 Going concern
Financial statements are prepared with the assumption that the entity will continue to
be in business in the foreseeable future. It is therefore accepted that the entity does
neither plan or is neither compelled to scale down materially on its activities nor to
turn them into cash.
2.2.4 Elements of financial statements
The financial implications of transactions and events are classified according to their
economic characteristics which are called elements. The elements that relate directly
to the measurement of the financial position as reflected in the balance sheet are
assets, liabilities and equity. The elements that relate directly to the measurement of
performance as reflected in the income statement are income and expenses.
The framework explains elements as follows:
 Assets
An asset is a present economic resource controlled by the entity as a result of past

events.
An economic resource is a right that has the potential to produce economic benefits.
The control of the asset can result from the possession of a legal title, although
ownership is not essential to qualify as asset. The entity only needs to control
benefits that flow from the possession of the asset.
The future economic benefits of an asset, is the potential to contribute directly or

indirectly to the inflow of cash or cash equivalents to the entity.
*Implied in the framework but not stated specifically as such (point 3, page 10).
2-6
An asset can be tangible or intangible.
Assets are divided into 2 broad groups namely:
 Non-current assets (e.g. property, plant, equipment, vehicles, patents,

trademarks, investments)
 Current assets (e.g. cash, inventory, debtors)
 Liabilities
A liability is a present obligation of the entity to transfer an economic resource as a

result of past events.
A distinctive characteristic of a liability is that it has a present obligation. An obligation

is a duty or a responsibility to act or perform in a specific manner. Obligations may
legally be enforceable as a result of a binding agreement or legal requirement.
Obligations also originate from normal business practice, general use and the desire
to maintain healthy business relations or to act fairly.
The settlement of a liability normally comprises the sacrifice of resources with

economic benefit, to comply with the claim of the other party.
Liabilities are divided into 2 broad groups, namely:
 Non-current liabilities (e.g. long-term loans)

 Current liabilities (e.g. creditors, bank overdrafts, provisions)
 Equity/ownership interest
Equity is the residual interest in the assets of the entity after deducting all its
liabilities.
The amount, against which equity is shown in the balance sheet, is dependent on the
measurement of assets and liabilities. Very rarely the amount of total equity will
correspond with the total market value of the entity’s shares.
Equity can be subdivided as follows:
- Capital, that is the difference between capital contributions (cash or any other
asset that the owner made available to the entity to use in its ordinary activities)
and capital withdrawals (cash or any other asset of the entity that is taken by the
owner for personal use)
- Profit/loss, that is the difference between income and expenses
2-7
 Income
Income is an increase in assets, or decreases in liabilities, that result in increases in

equity, other than those relating to contributions from holders of equity claims.
The description of income encompasses both revenue and gains. Revenue that
arises in the course of the ordinary activities of an entity comprises amongst others,
sales, fees, interest, dividends, royalties and rent. Gains represent other items that
do not necessarily arise from the ordinary activities of an entity e.g. gains that arise
from the sales of non-current assets.
 Expenses
Expenses are decreases in assets, or increases in liabilities, that result in decreases

in equity, other than those relating to distributions to holders of equity claims.
Expenses include losses as well as current expenses. Current expenses are

expenses arising from the ordinary activities of an entity e.g. cost of sales, wages,
interest, rentals and depreciation. Losses result from sales of non-current assets as
well as from disasters e.g. fires and floods.
2.2.5 Recognition of the elements of financial statements
Recognition is the process of including an item, which complies with the definition of
an element and satisfies the criteria for recognition, in the balance sheet or income
statement.
An item (assets or liability), which complies with the definition of an element, should
be recognised when if it results in both relevant information about assets, liabilities,
equity, income and expenses and a faithful representation of those items, because
the aim is to provide information that is useful to investors, lenders and other
creditors
The relevance of an item is influenced by:
 Low probability of a flow of economic benefits

 Existence uncertainty
The faithful representation of an item is influence by:
 Measurement uncertainty
 Recognition inconsistency
 Presentation and disclosure
2-8
Recognition of income and expenses
The financial statements/ recognition of incomes and expenses, are linked because
the recognition of one item (or a change in its carrying amount) requires the
recognition or derecognition of one or more other items (or changes in the carrying
amount of one or more other items).
For example:
(a) the recognition of income occurs at the same time as:
(i) the initial recognition of an asset, or an increase in the carrying amount of an
asset; or
(ii) the derecognition of a liability, or a decrease in the carrying amount of a liability.
(b) the recognition of expenses occurs at the same time as:

(i) the initial recognition of a liability, or an increase in the carrying amount of a
liability; or
(ii) the derecognition of an asset, or a decrease in the carrying amount of an asset.
 Income is recognised simultaneously with an increase in assets or decrease in

liabilities
Assets = Equity + Liabilities
Opening balance 2 000 1 000 1 000

Transaction 1 500 500
Transaction 2 300 (300)
Closing balance 2 500 1 800 700
 Expenses are recognised simultaneously with an increase in liabilities or

decrease in assets
Opening balance 2 000 1 000 1 000

Transaction 1 (200) (200)
Transaction 2 (400) 400
Closing balance 1 800 400 1 400
2.2.6 Measuring the elements of financial statements
Measurement is the process of determining the amount at which the elements of the
financial statements are recognised and reflected in the balance sheet and the
income statement. This will depend on the choice of the correct measurement basis.
Various measurement bases are used to different extents and in different

combinations in financial statements. Such measurement bases include:
2-9
 historical cost
o Assets: the amount paid or the fair value of the consideration given to
acquire
o Liabilities: settlement amount (amount of proceeds received in
exchange for the obligation)
 current cost
o Assets: cash/cash equivalents to acquire the same asset currently
o Liabilities: undiscounted cash/cash equivalents needed to settle the
obligation currently
 realisable value
o Assets: cash/cash equivalents that could currently be obtained by selling
the assets in an orderly disposal
o Liabilities: cash/cash equivalents expected to be paid to settle the liability
in the ordinary course of business
 present value
o Assets: present discounted value of the future net cash inflows expected to
be generated in the normal course of business
o Liabilities: present discounted value of the future net cash outflows
required to settle the liabilities in the normal course of business
The measurement basis that is mostly used by entities in the preparation of financial
statements is a combination of historical cost and one of the other three.
2.3 The entity concept
A fundamental concept in accounting is the difference between the enterprise/entity

and its owners/shareholders. A separate set of financial records and financial
statements are required for each enterprise/entity as well as for the
owners/shareholders of the enterprise/entity.
The entity receives its equity/capital from its shareholders (own capital) and external
lenders of money (foreign capital). These funds are used to purchase assets in the
name of the entity, which in turn can be used to generate income for the entity.
2.4 Consumable inventory on hand
During the year expenses are incurred for consumable inventory e.g. stationery and
cleaning materials. It is possible that some consumable inventory was unused at
year-end and that it will be used in a future period. The portion of the expense
regarding consumable inventory that will be used in the future period must be
reclassified as consumable inventory at year-end.
Note: The following assumption applies in FinAcc 188/179: Unless told otherwise, all
consumables have been consumed during the current financial year.
2 - 10
CHAPTER 2
QUESTIONS
Page
Question 2.1 Definitions and recognition criteria 2 – 13
Question 2.2 Definitions and recognition criteria 2 – 14
Question 2.3 Identification of elements 2 – 15
2 - 11
QUESTION 2.1
Green Farms acquired a farm with the objective to grow and later on sell fruit. The
purchase price of the farm amounted to R1.7m and the development of the land was
started immediately.
The accountant showed the costs as expense in the statement of comprehensive

income, but the financial director is certain that there is adequate justification to show
the costs as an asset in the financial statements.
REQUIRED
Discuss, with reasons (using the Conceptual Framework for Financial Reporting as
basis), whether this plantation establishment costs should be treated as expense or
as an asset on initial recognition (date of purchase). Your answer should address the
following:
- the definition of an asset and its application to the farm;

- the recognition criteria regarding assets;
- the definition of expense and its application to the farm;
- your conclusion in respect of the issue on hand.
2 - 12
QUESTION 2.2
PART A:
Happy Foods purchased inventory on 15 December 20X7 for R100 000 from AB
Suppliers. The full purchase price is still payable at financial year-end, 31 December
20X7
REQUIRED
basis), whether the amount outstanding at financial year-end should be treated as a
liability. Your answer should address the following:
- the definition of an liability and its application to the amount owing;

- the recognition criteria regarding liabilities;
PART B:
Happy Foods received cash from their bank, this relates to interest from an
investment amounting to R1 000 for the current financial year.
REQUIRED
basis), whether the interest earned during the financial year should be treated as an
income. Your answer should address the following:
- the definition of an income and its application to the amount received;

- the recognition criteria regarding incomes;
PART C:
Happy Foods paid wages in cash amounting to R1 200 000 for the current financial
year.
REQUIRED
basis), whether the wages paid during the financial year should be treated as an
expense. Your answer should address the following:
- the definition of an expenses and its application to the amount paid;

- the recognition criteria regarding expenses;
2 - 13
QUESTION 2.3
The following accounting activities, amongst others, took place with regard to Kings
Cleaning Services, during the month ended 28 February 20X7:
1 Settle Compu’s account of R4 000, for computer repair services rendered by

them.
2 Render R3 500 worth of cleaning services to SA (Pty) Ltd. on credit.
3 Sell an old carpet cleaner, with a value of R3 500 in the records of Kings
Cleaning Services, on credit to Portia.
4 Receive cash from SA (Pty) Ltd. as settlement of the full amount owed by
them for services rendered on 2 February 20X7.
5 The owner donates his vehicle to the entity.
6 Pay the electricity account, amounting to R800, for January 20X7 per
electronic funds transfer to Eskom.
7 Receive an order for cleaning services of R12 000 from Fame Ltd. which
should be rendered in March 20X7.
8 Render cleaning services of ten Persian carpets at R100 each to Persian
Palace on credit.
9 Purchase carpet cleaning detergents to the value of R5 000 from The Crazy
Carpets on credit and receive a purchase invoice.
10 The owner takes R250 from the petty cash for private use.
REQUIRED
Name the element(s) (using the Conceptual Framework for Financial Reporting as
basis), involved in the transactions above.
2 - 14
CHAPTER 3
ACCOUNTING EQUATION AND FINANCIAL STATEMENTS
Page
3.1 The accounting equation 3-3
3.1 Objective of financial statements 3-4
3.3 Components of financial statements 3-4
3.3.1 Balance sheet

3.3.2 Income statement
3.3.3 Statement of changes in equity
3.3.4 Statement of cash flows
3.3.5 Notes to the financial statements
Questions 3-9
3-1
- understand the accounting equation
- compile the outline of financial statements
3-2
3.1 The accounting equation
The basic accounting equation which is explained below is a direct result of the entity
concept:
The owner of a business provides capital/equity to the business, which gives him
interest in the business. The business can also make use of loans/liabilities as
additional financing. The business then uses the capital and liabilities (right side of
equation) to purchase assets (left side of equation). The result is that equity will be
the remaining interest in the assets after all liabilities have been deducted.
The accounting equation can be expanded to make it more understandable:
 Equity can be subdivided into 4 components as follows
Assets = (Capital contributions + Income – Capital withdrawals – Expenses) +

Liabilities
 The items (capital withdrawals and expenses) that have a negative impact on
equity, can be carried over to the asset side of the equation, with the result that
the equation only contains positive items.
Assets + Capital withdrawals + Expenses = Capital contributions + Income +

Liabilities
The accounting equation can be illustrated in a T-form balance sheet to determine

the financial position of the entity:
DR CR
Assets xxx Equity

Capital contributions xxx
Capital withdrawals (xxx)
Income xxx
Expenses (xxx)
Liabilities xxx
xxx xxx
3-3
The accounting equation will always balance. This means that when the balance
sheet of a business balances at the start of the period, each transaction that was
concluded during that period will also be a balanced accounting equation to ensure
that the balance sheet will balance again at the end of the period.
The theory of accounting is therefore based on a double-entry system which means

that for every debit entry there must be a corresponding credit entry for the same
amount.
3.2 Objective of financial statements
The objective of financial statements is to provide information on the financial

position, financial performance and cash flow of an entity which is useful for a wide
variety of users when making economic decisions. Financial statements also show
the results of management’s stewardship of the entity’s resources that have been
their sole responsibility.
The period for which financial statements have to be prepared, is called the
financial/accounting period. The financial period for internal reporting is normally
one month. The financial period/financial year for external reporting to external users
may be any twelve consecutive months and do not have to correspond with the
calendar year (January to December). The twelve months must in each case end on
the same date every year. The most popular closing dates are 28 February (in
correspondence with the tax year), 30 June and 31 December (in correspondence
with the calendar year).
3.3 Components of financial statements
A complete set of financial statements consist of the following:
 Balance sheet (Statement of financial position)

 Income sheet (Statement of comprehensive income)
 Statement of changes in equity
 Statement of cash flows
 Notes to financial statements, including accounting policy notes
3.3.1 Balance sheet
The balance sheet presents the financial position of an entity at a specific point in
time, the last day of the financial year. Financial position is the wealth or ability of an
entity at a specific point in time, as well as a breakdown of the individuals that have
an interest there-in.
The layout of the balance sheet is based on the accounting equation:

assets = equity + liabilities
3-4
An example of a balance sheet for entities, other than companies, is set out below:
ENTITY
Balance sheet as at 28 February 20X7
R
ASSETS
Non-current assets
Equipment XXX
Vehicles XXX
Investments in securities XXX
Total non-current assets XXX
Current assets
Trading inventory XXX
Debtors XXX
Cash XXX
Total current assets XXX
Total assets XXX
EQUITY AND LIABILITIES

Equity
Capital XXX
Balance at beginning of year XXX
Plus: Profit / Less: Loss for the year XXX
Plus: Contributions XXX
Less: Withdrawals (XXX)
Non-current liabilities
Long term liabilities XXX
Total non-current liabilities XXX
Current liabilities
Creditors XXX
Total current liabilities XXX
Total liabilities XXX
Total equity and liabilities XXX
3-5
3.3.2 Income statement
The income statement presents the financial results of an entity for a specific
financial period. The financial results are the gains or losses that contributed towards
an improvement or decline in the financial performance of an entity.
An example of an income statement for service entities, other than companies, is set
out below:
ENTITY
Income statement for the year ended 28 February 20X7
R
Income XXX
Services rendered XXX
Interest received XXX
Less: expenses XXX

Salaries and wages XXX
Stationary XXX
Advertising costs XXX
Profit for the year XXX
An example of an income statement for trading entities, other than companies, is set
out below:
ENTITY
Income statement for the year ended 28 February 20X7
R
Sales XXX
Cost of sales XXX
Gross profit XXX
Plus: other income

Less: expenses XXX

Salaries and wages XXX
Stationary XXX
Advertising costs XXX
3-6
3.3.3 Statement of changes in equity
The statement of changes in equity is a reconciliation of equity (financial position) at

the beginning of the financial year with equity (financial position) at the end of the
financial year.
An example of a statement of changes in equity for entities, other than companies, is

set out below:
ENTITY
Statement of changes in equity for the year ended 28 February 20X7
R
Balance at 28 February 20X6 XXX

Capital contributions XXX
Capital withdrawals (XXX)
Balance at 28 February 20X7 XXX
3-7
3.3.4 Statement of cash flows
The statement of cash flow provides information on the ability of the entity to produce
cash and cash equivalents and the demand of the entity to utilize that cash flow.
The entity presents its cash flow from operating, investment and finance activities in
a manner that is the most appropriate for the business.
An example of a statement of cash flows for entities, other than companies, is set out
below:
ENTITY
Statement of cash flows for the year ended 28 February 20X7
R
Cash flow from operating activities

Cash received from customers XXX
Cash paid to suppliers and employees (XXX)
Cash generated from operations XXX

Interest paid (XXX)
Net cash flow from operating activities XXX
Cash flow from investment activities

Proceeds from sale of non-current assets XXX
Purchase of non-current assets (XXX)
Purchase of investments in securities (XXX)
Net cash used for investment activates (XXX)
Cash flow from financing activities

Capital contributions XXX
Capital withdrawals (XXX)
Long term loans incurred XXX
Long term loans redeemed (XXX)
Net cash received from financing activities XXX
Net decrease in cash and cash equivalents (XXX)

Cash and cash equivalents at the beginning of the period XXX
Cash and cash equivalents at the end of the period XXX
3.3.5 Notes to the financial statements
Notes to the financial statements (including accounting policy notes) are discussed in
Chapter 15 & 18.
3-8
CHAPTER 3
QUESTIONS
Page
Question 3.1 Elements of financial statements 3 - 10
3-9
QUESTION 3.1
REQUIRED
For each item listed below, identify the element and financial statement the element
will be included in, if the element is a liability/asset state if the element will be
presented as current/non-current on the balance sheet.
No. Item Element Statement Current/Non-

Current
E.g Bank Asset Balance sheet Current Asset
1 Creditor
2 Investment
3 Sales
4 Electricity expense
5 Interest income
6 Inventory
7 Debtors
8 Fixed deposit
9 Rental income
10 Buildings
11 Machines
12 Rental paid
13 Loan payable within a
year
14 Loan payable in full in 10
years
15 Capital contributions
3 - 10
CHAPTER 4
ACCOUNTING SYSTEMS
Page
4.1 Objective of an accounting system 4-3
4.2 Requirements of an accounting system 4-3
4.3 The design of an accounting system 4-3
4.4 Purchases and creditors system 4-3
4.4.1 Objective of the system

4.4.2 Flow of the system
4.4.3 Purchases
4.4.4 Creditors
4.4.5 Returns
4.4.6 Discount received
4.5 Sales and debtors system 4-7

4.5.3 Sales
4.5.4 Debtors
4.5.5 Returns
4.5.6 Discount allowed
4-1
- define the concept of debtors and creditors
- identify the source documents that are used in a purchases and creditors
system
- identify the source documents that are used in a sales and debtors system
- understand the flow of transactions in a purchases and creditors system
- understand the flow of transactions in a sales and debtors system
- understand the concept of trade discount and cash discount
4-2
4.1 Objective of an accounting system
In an accounting system all transactions that have to do with the same activity are
processed systematically. Examples of systems are: the purchases and creditors
system, the sales and debtors system, the fixed asset system and the salaries and
wages system.
These systems must disclose information necessary for decision making to the
management of an entity. This is internal reporting. The same system must also
provide information for external reporting to users of the financial statements on the
financial position and results of the entity.
4.2 Requirements of an accounting system
 Relevant and accurate information must be disclosed timely.

 Internal control measures are necessary to protect the assets and to ensure
reliable information.
 The system must be flexible enough to adapt in order to accommodate
changes.
4.3 The design of an accounting system
Examine the system and determine which procedures should be followed. Design
the source documents, the format of the journals, ledger accounts and financial
reports. The necessary internal control measures must be instituted to ensure that
the information in the financial reports is correct.
4.4 Purchases and creditors system
 All purchases must be authorised

 To ensure that goods which have been ordered, were indeed received
 The prices on the invoice must correspond with those that have been agreed
upon
 All obligations must be recorded accurately
 The creditor must be paid on time
4-3
The flow of the purchases and creditors system can diagrammatically be presented
as follows:
4-4
4.4.3 Purchases
Purchases can be done for cash or on credit. In both situations there are two
transactions, a purchase transaction and a cash payment transaction. In the case of
cash purchases both transactions occur simultaneously. In the case of credit
purchases the purchase transaction occurs immediately but the cash payment occurs
on a later stage. The supplier, to whom the money is owed, is called a creditor.
There is a claim against the entity from the creditor.
Accounting:
Cash purchases (inventory or assets) or expenses paid in cash, are recorded in the
cash payment journal from one of the following source documents: Electronic fund
transfers, original cash invoice or original receipt.
Credit purchases (inventory or assets) or expenses incurred on credit, are recorded

in the purchase journal from one of the following source documents: original
purchase invoice or original goods received note.
4.4.4 Creditors
The claim from the creditor against the entity that resulted from the credit purchase
transaction is settled by a payment at a later stage when the amount is due. If the
entity pays the creditor on time, the supplier may grant the entity a cash discount.
Accounting:
The payment of the creditor is recorded from the EFT/Bank statement in the cash
payment journal together with cash discount received if applicable.
4.4.5 Returns
Sometimes purchased items are not up to standard. The entity can then claim
discount from the supplier. The following can be reasons for granting a claim:
 return of damaged goods

 reduction in price after invoice was issued
 trade discount omitted on invoice
 correction of error on invoice
4-5
If the entity wants to claim discount from the supplier he needs to send a debit note
to the creditor, and if the creditor is willing to allow the discount he will send a
credit note to the entity as answer.
Accounting:
Purchase returns that relates to cash purchases are recorded from duplicate debit
notes or original credit notes in the cash receipt journal.
Purchase returns that relates to credit purchases are recorded from duplicate debit
notes or original credit notes in the purchase return journal.
4.4.6 Discount received
Discount received can be divided into two groups, namely purchase or trade discount
and settlement or cash discount.
Trade discount is normally received from suppliers when the entity purchases in bulk.
The amount of the discount is directly subtracted from the purchase price. Therefore,
trade discount received from suppliers is not recorded at all.
If the entity pays its creditors on time, the supplier may grant the entity a settlement
or cash discount.
Accounting:
Trade discount is not recorded.
Cash discount received is recorded in the cash payment journal together with the
cash payment made to the creditor.
Example 4.1
ABC purchases inventory with a cost price of R20 000 on credit from XYZ. XYZ
decides to allow 10% trade discount on the cost price. Trade discount received =
R20 000 x 10% = R2 000
The inventory will be recorded at R18 000 (R20 000 – R2 000) in die records of ABC.
Example 4.2
ABC settles their outstanding account of R18 000 and makes payment in cash to
XYZ. XYZ decides to allow 5% cash discount on this transaction. Cash discount
received = R18 000 x 5% = R900
ABC will pay R17 100 (R18 000 – R900) in cash to XYZ. Discount received of R900
will be recorded as an income in the records of ABC.
4-6
4.5 Sales and debtor system
 All sales must be recorded timely

 The correct amount must be invoiced
 All payments must be recorded
 Control over collection from debtors is essential
The flow of the sales and debtors system can diagrammatically be presented as
follows:
4-7
4.5.3 Sales
Sales can be done for cash or on credit. In both situations there are two
transactions, a sale transaction and a cash receipt transaction. In the case of cash
sales, the above transactions occur simultaneously. In the case of credit sales, the
sale transaction occurs immediately but the cash receipt occurs on a later stage.
The customer, to whom the credit is granted, is called a debtor. The entity has a
claim against the debtor.
Accounting:
Cash sales from inventory or other income received in cash and cash sales of other
assets, are recorded respectively in the cash receipt journal and general journal from
one of the following source documents: cash register slips, duplicate cash invoice or
duplicate receipts.
Credit sales from inventory or the rendering of services on credit and credit sales
from other assets are recorded respectively in the sales journal and the general
journal from a duplicate sales invoice.
4.5.4 Debtors
Credit will be granted to customers only after a credit inquiry into their financial
position has been done. These customers are then granted an extended period to
settle their accounts. Credit terms may vary, but is normally between 30 and 60
days.
Monthly statements must be sent to debtors, indicating the following:

- Name and reference number of debtor
- Date and details of each invoice
- Initial and final balance
- All payments received, with date, reference and amount
- An age analysis of the debt
An age analysis of all debtors must be done regularly in order to exercise sufficient
control over debtors who exceed their credit terms and whose debt may be
irrecoverable.
The entity has the right to exercise his claim against the debtor once the credit
granted becomes receivable. If the customer settles his account on time, the entity
may allow the customer a cash discount.
Accounting:
The payment received from the debtor is recorded from the duplicate receipt in the
cash receipt journal together with cash discount allowed if applicable.
4-8
4.5.5 Returns
All sold items are not always up to standard. The customer may then demand
discount from the entity. The following are reasons for the granting of claims:
 return of damaged goods

 reduction in price after invoice was issued
 omission of trade discount on invoice
 correction of errors on invoices
If the customer wants to claim discount from the entity he needs to send a debit note
to the entity, and if the entity is willing to allow the discount he will send a credit note
to the debtor as answer.
Accounting:
Sales returns that relate to cash sales are recorded from original debit notes or
duplicate credit notes in the cash payment journal.
Sales returns that relate to credit sales are recorded from original debit notes or
duplicate credit notes in the sales return journal.
4.5.6 Discount allowed
Discount granted can be divided into two groups namely sales or trade discount and
settlement or cash discount.
Trade discount is normally granted to customers who purchase in bulk. The amount
of the discount is directly subtracted from the sales price. Therefore, trade discount
granted to customers, is not recorded at all. The reduced sales price replaces the
original sales price and sales will be recorded at this lower value.
When customers settle their accounts on time, the entity may grant the customer a
cash discount.
Accounting:
Cash discount allowed is recorded in the cash receipt journal together with the
payment received from the debtor.
4-9
Example 4.3
ABC delivers services with a selling price of R20 000 on credit to XYZ. ABC decides
to allow 10% trade discount on the selling price. Trade discount allowed = R20 000
x 10% = R2 000
The income / services rendered will be recorded at R18 000 (R20 000 – R2 000) in
die records of ABC. Trade discount is not recorded.
Example 4.4
XYZ settles their outstanding account of R18 000 and makes payment in cash to
ABC. ABC decides to allow 5% cash discount on this transaction. Cash discount
allowed = R18 000 x 5% = R900
ABC will receive R17 100 (R18 000 – R900) in cash from XYZ. Discount allowed of
R900 will be recorded as an expense in the records of ABC.
4 - 10
CHAPTER 5
TRANSACTIONS
Page
5.1 Transactions regarding assets 5-3
5.2 Transactions regarding assets and liabilities 5-3
5.3 Transactions regarding equity 5-4
5.4 Effect of transactions on the accounting equation 5-8
5.5 Recording of transactions in T- accounts 5 - 11
5-1
At the end of this chapter students should be able to:
- understand the application of the accounting process on various

transactions
- analyse the effect of transactions on the accounting equation
5-2
5.1 Transactions regarding assets
5.1.1 Purchase an asset for cash
EGOLI purchases additional equipment of R3 000 from A-Z Furniture and pays cash.
Accounting equation: Assets increase

Assets decrease
Double entry: Dr Equipment

Cr Bank
5.1.2 Payment received from debtor – no discount
EGOLI receives cash from S. Louw as settlement of his account, R2 250

Assets decrease
Double entry: Dr Bank

Cr Debtors
5.2 Transactions regarding assets and liabilities
5.2.1 Purchase an asset on credit
EGOLI purchases a delivery van worth R15 000 on credit from Motors Ltd.

Liabilities increase
Double entry: Dr Vehicles

Cr Creditors
5-3
5.2.2 Paying a creditor
EGOLI pays Z Combrink and A Koster respectively R915 and R660 cash.
Accounting equation: Assets decrease

Liabilities decrease
Double entry: Dr Creditors

Cr Bank
5.2.3 Borrow money from financial institution
EGOLI incurred a long-term loan of R10 000 at Bank Ltd.


Cr Long-term loan
5.3 Transactions regarding equity
5.3.1 Capital contribution
The owner of EGOLI, Mr Edwards deposits R20 000 of his personal funds in EGOLI’s
bank account

Equity increases (capital contributions)

Cr Capital
5.3.2 Withdrawals by owner
Mr Edwards pays his private telephone account of R800 by business EFT.

Equity decreases (withdrawals)
Double entry: Dr Withdrawals

Cr Bank
5-4
5.3.3 Services rendered for cash
EGOLI rendered services to the amount of R6 700 for cash

Equity increases (income)

Cr Services rendered (income)
5.3.4 Services rendered on credit
EGOLI rendered services on credit to:
S Louw - R3 350
K Muller - R1 125, on which trade discount of 20% is granted

Double entry: Dr Debtors

Cr Services rendered (income)
5.3.5 Cash expenses
EGOLI pays salaries and wages to employees by means of electronic funds

transfers, R3 450
Accounting equation: Equity decreases (expenses)

Assets decreases
Double entry: Dr Salaries and wages (expenses)

Cr Bank
5-5
5.3.6 Expenses on credit
EGOLI purchases stationery for R300 on credit from W Walton, on which trade
discount of 10% is received
Accounting equation: Equity decreases (expenses)

Double entry: Dr Stationery (expenses)

Cr Creditors
5.3.7 Purchase returns
EGOLI sends a debit note for R45 to W Walton together with damaged stationery
Accounting equation: Liabilities decrease

Equity increases (expenses – decrease)

Cr Stationery (expenses)
5.3.8 Sales returns
EGOLI issues a credit note for R165 to K Muller to correct an error on the invoice
Accounting equation: Equity decreases (income – decrease)

Assets decrease
Double entry: Dr Sales returns (income)

Cr Debtors
5-6
5.3.9 Payment received from debtor and discount allowed
EGOLI received an EFT from G. Basson for R1 200 after R300 cash discount was
allowed

Assets decrease
Equity decreases (expense)

Cr Debtors
Dr Discount allowed (expense)
5.3.10 Payment of creditor and discount received
EGOLI settles the account of P Malan of R2 000 and received 10% cash discount

Creditors decrease

Cr Bank
Cr Discount received (income)
5-7
5.4 Effect of transactions on the accounting equation
The effect of transactions 5.1.1 tot 5.3.10 above can be analysed as follow by using
the extended accounting equation to determine the effect on the financial position of
EGOLI:
5-8
Assets + Withdrawals + Expenses = Capital + Income + Liabilities
5.1.1 Purchase asset for cash +/- 3 000
5.1.2 Payment from debtor +/- 2 250
5.2.1 Purchase asset on credit + 15 000 +15 000
5.2.2 Pay creditor -1 575 -1 575
5.2.3 Borrow money from bank +10 000 +10 000
5.3.1 Capital contribution + 20 000 +20 000
5.3.2 Capital withdrawal - 800 +800
5.3.3 Services rendered (cash) + 6 700 +6 700
5.3.4 Services rendered (credit) + 4 250 +4 250
5.3.5 Cash expenses - 3 450 +3 450
5.3.6 Expenses on credit +270 +270
5.3.7 Purchase returns -45 -45
5.3.8 Sales returns -165 -165
5.3.9 Discount allowed + 1 200 +300

- 1 500
5.3.10 Discount received - 1 800 +200 -2 000
47 860 800 3 975 20 000 10 985 21 650
5-9
Below is a summary of the financial position of EGOLI at the beginning of the period
and at the end of the period subsequent to the processing of transactions 5.1.1 to
5.3.10:
Beginning Accumulated End of

of period analysis of period
transactions
Assets
Equipment 30 000 3 000 33 000
Vehicles - 15 000 15 000
Debtors 6 200 335 6 535
Bank 35 800 29 525 65 325
Total assets 72 000 47 860 119 860
Equity
Capital 50 000 20 000 70 000
Withdrawals (1 500) (800) (2 300)
Income *17 700 10 985 28 685
Expenses **(3 700) (3 975) (7 675)
62 500 26 210 88 710
Liabilities
Loan 5 000 10 000 15 000
Creditors 4 500 11 650 16 150
9 500 21 650 31 150
Total equity and liabilities 72 000 47 860 119 860
* Services rendered 16 700

Interest income 1 000
17 700
** Salaries 2 800
Advertising 900
3 700
5 - 10
5.5 Recording of transactions in T-accounts
The recording of transactions in T-accounts is derived from the accounting equation

and is a clear illustration of the double entry rule.
The T-account has 2 sides, on which only positive amounts will be showed namely:
 the left side (comprise left hand side of the equation), which is called the debit
side (Dr), and
 the right side (comprise right hand side of the equation), which is called the credit
side (cr).
The accounting equation is set out in a T-account as follows:
Dr Cr
Assets Liabilities
Withdrawals Capital
Expenses Income
The following rules can be derived from the above:
 Assets, withdrawals and expenses (including losses) always have net debit
balances, with the result that:
- an increase in any of the above items will be recorded on the left side of the
account (debit side), and
- a decrease in any of the above items will be recorded on the right side of the
account (credit side)
 Liabilities, capital contributions and income (including profits) always have net
credit balances, with the result that:
- An increase in any of the above items will be recorded on the right side of the
account (credit side), and
- A decrease in any of the above items will be recorded on the left side of the
account (debit side)
The transactions in 5.1.1 to 5.3.10 will be recorded as follow in the T-accounts:
5 - 11
Equipment Capital Loans

5.1.1 3 000 5.3.1 20 000 5.2.3 10 000
Vehicles Withdrawals
5.2.1 15 000 5.3.2 800
Debtors Income Creditors

5.3.4 4 250 5.1.2 2 250 5.3.8 165 5.3.3 6 700 5.2.2 1 575 5.2.1 15 000
5.3.8 165 5.3.4 4 250 5.3.7 45 5.3.6 270
5.3.9 1 500 5.3.10 200 5.3.10 2 000
335 10 985 11 650
Bank Expenses
5.1.2 2 250 5.1.1 3 000 5.3.5 3 450 5.3.7 45
5.2.3 10 000 5.2.2 1 575 5.3.6 270
5.3.1 20 000 5.3.2 800 5.3.9 300
5.3.3 6 700 5.3.5 3 450 3 975
5.3.9 1 200 5.3.10 1 800
29 525
5 - 12
A summary of the totals of above T-accounts correspond with the accumulated
analysis of transactions in 5.4 and is as follows:
Σ debits 47 860 (4 775) 21 650

Σ credits 30 985
Net 47 860 = 26 210 + 21 650
5 - 13
CHAPTER 6
THE ACCOUNTING CYCLE
Page
6.1 Steps in the accounting cycle 6-3
6.2 Capturing data on source documents 6-3
6.3 Recording of transactions in journals 6 - 10
6.4 Posting to the ledger accounts 6 - 11
6.5 Prepare a trial balance 6 - 11
6.6 Adjustments and corrections of errors 6 - 12
6.7 Prepare financial statements 6 - 13
Questions 6 - 14
6-1
- identify the steps in the accounting cycle
- recognise the various types of source documents
- understand the process of preparing source documents
6-2
6.1 Steps in the accounting cycle
The basic steps in the accounting cycle can be summarised as follows:
 Capturing data on source documents

 Recording of transactions in journals
 Posting to the ledger accounts
 Prepare a trial balance
 Adjustments and corrections of errors
 Prepare financial statements
6.2 Capturing data on source documents
Most transactions are concluded within a few seconds. The data of the transaction must
therefore be captured when it occurs. In practice there are various source documents that
are used to capture the data of the transaction, which then will serve as the source for
capturing transactions in the accounting records. The capturing of data on source
documents occurs daily.
The nature, amount, date and parties involved should be indicated on the source
document. Source documents are sequentially numbered beforehand for better control.
The person, who processes source documents, must ensure that each document is
accounted for.
Source documents can either be generated internally or can be from an external source.
The following is a list of source documents that are mostly used for cash receipt- and cash
payment transactions:
 receipts (example page 4)

 bank deposit slips
 cash register slips
 credit card slips
 proof of electronic fund transfers (example page 4)
 cash invoices
- a cash invoice is a source document that provides a two-fold proof. It is proof
of a cash receipt or cash payment transaction as well as proof of a purchase
or sales transaction
 bank statements as proof of:
- debit orders or stop orders
- bank charges
- interest received / paid
- direct payments
6-3
Examples of source documents used in cash transactions by EGOLI are shown below:
- Render services to the amount of R6 700 for cash (Chapter 5, 5.3.3)
- Pay the entity’s water and electricity account via an electronic transfer, R2 112.42
6-4
The following is a list of source documents that are mostly used in cash- and credit
purchases and creditor systems (for a graphical representation of the purchases- and
creditors system, refer to Chapter 4.4.2):
 requisition
 order form
 goods receipt note
 purchase invoice (purchases on credit, example page 7)
 cash invoice (purchase for cash, example of the cash invoice on page 5 represent
cash sales, not cash purchases)
 cash register slip
 creditor monthly statement
 bank statement for direct payments
 debit notes (example page 8)
- purchaser of goods issue a debit note
- when goods previously purchased are returned
- debit notes cancel purchase transactions
6-5
Examples of source documents used in credit purchase and creditors transactions by
EGOLI are shown below:
- Purchase stationery for R300 on credit from W. Walton, on which trade discount
of 10% is received (Chapter 5, 5.3.6)
6-6
- Sends a debit note for R45 to W. Walton together with damaged stationery
(Chapter 5, 5.3.7)
The following is a list of source documents that are mostly used in cash- and credit sales
and debtors systems (for a graphical representation of the sales- and debtors system,
refer to Chapter 4.5.2):
 delivery note
 sales invoice (sales on credit, example page 9)
 cash invoice (sales for cash, example page 5)
 cash register slip
 debtor monthly statement
 receipt (example page 4)
 bank deposit slip
 bank statement for direct deposits
 credit notes (example page 10)
- seller issue a credit note
- when goods previously sold are received back (returned)
- credit notes cancel sales transactions
6-7
Examples of source documents used in credit sales and debtors transactions by EGOLI
are shown below:
- Render services on credit to K. Muller for R1 125 on which trade discount

of 20% was allowed (Chapter 5, 5.3.4)
6-8
- Issue a credit note for R165 to K. Muller to correct an error on the invoice
(Chapter 5, 5.3.8)
6.3 Recording of transactions in journals
Transactions are events that can be measured in terms of money and can influence the
financial position of an entity. Transactions are recorded from source documents in
journals.
Journals are also called books of first entry, as they are the books for first recordings of
source documents. The journal links the source document with the general ledger by
creating a way by which a transaction can be traced from its source to its processed form
and vice versa. Similar transactions are grouped and recorded in a specific journal. The
journals are analysed regularly and the totals are posted to the different ledger accounts.
In addition to the general journal that is used for recording certain cash and various
transactions, there are also journals which have been designed specifically for certain
accounting systems. A list of the most general journals is as follows:
Regarding purchases and creditors systems
 the purchase journal

 the purchase return journal
 the cash payment journal
6-9
Regarding sales and debtors systems
 the sales journal

 the sales return journal
 the cash receipt journal
The abovementioned journals are discussed in detail in Chapter 7.
6.4 Posting to the ledger accounts
All transactions regarding a certain item are recorded in an account. The conventional
account is in the form of a “T”. The left side of the “T” is called the debit side and the right
side, the credit side. A ledger is a collection of all accounts. In the general ledger one finds
asset, liability, capital, income and expense accounts. There are also a number of
convenience accounts, which represent summaries of certain items, e.g.:
 a debtors’ control account, which is a summary of all the debtors of the entity in
the debtors’ ledger,
 a creditors’ control account, which is a summary of all the creditors of the
entity, in the creditors’ ledger,
 a trade account which contains all the information regarding sales and cost of
sales,
 a profit and loss account which contains all the information regarding income
and expenses.
The process of calculating the net debit and credit of each ledger account in order to get to
a debit or credit balance, is called balancing.
The recording of transactions from source documents in the journals is posted to the
ledger at the end of each month. The balance of the ledger accounts are used in turn to
prepare the trial balance.
Ledger accounts are discussed in more detail in Chapter 8.
6.5 Prepare a trial balance
A trial balance is a list of all the accounts in the general ledger and their balance/totals. It
tests the double entry system as well as the accounting accuracy of entries.
The pre-adjusting trial balance includes the balance of all the balance sheet and income
statement accounts in the general ledger. The pre-adjusting trial balance is prepared
monthly and serves as starting point for the preparation of management accounts for
internal decision making.
After having closed-off the income statement accounts (i.e. there is only one figure for the
income statement namely the profit and loss account and certain year-end adjustments)
the after-closing trial balance is prepared. Only balance sheet accounts will appear in this
trial balance and in the case of an individual, net profit (if it has not been closed to the
6 - 10
capital account) or in the case of a company, retained earnings. The after-closing trial
balance is prepared annually and serves as starting point for the preparation of financial
statements for external users.
The trial balance is discussed in more detail in Chapter 9.
6.6 Adjustments and corrections of errors
At the end of the financial year there are normally a number of year-end adjustments that
should be done after the trial balance had been prepared, examples are as follows:
 irrecoverable debts
 inventory (when periodic inventory system is used)
 depreciation (when not provided during the year)
 accrued expenses
 prepaid expenses
 accrued income
 income received in advance
Year-end adjustments result in certain income and expense accounts having been
increased or decreased at the end of the accounting period to present the actual amounts
for the accounting period involved.
During the capturing of source documents and consequential recording in journals and
posting to the ledger accounts, it would not be unusual for accounting errors to occur. The
trial balance is a control mechanism to identify various accounting errors.
Year-end adjustments and the correction of errors are comprehensively recorded in the
general journal and posted to the different accounts in the general ledger.
Only when all adjustments are finalised and errors corrected, can the final trial balance be
prepared. The final trial balance is then used to compile the financial statements.
The adjustment and closing process are discussed in more detail in Chapter 13 and the
correction of errors in Chapter 14.
6 - 11
6.7 Preparation of financial statements
At the end of a financial period financial statements must be prepared. A financial period
can be a day, month, six months or a year. Financial statements must be prepared at least
every 12 months.
Financial statements contain the information that will be sent to a wide variety of users.
These statements provide information on the financial position of the entity (balance
sheet), the results of financial activities (income statement) for the period as well as the
cash that flowed (statement of cash flows) during the period.
6 - 12
CHAPTER 3 - 6
QUESTIONS
Page
Question 6.1 Source documents and accounting equation 6 – 15
Question 6.2 Accounting equation 6 – 17
Question 6.3 Source documents and accounting equation 6 – 19
Question 6.4 Classification and accounting equation 6 – 21
6 - 13
QUESTION 6.1
Pascal Services is a sole proprietor that renders computer services. During January 20x7,
the following accounting activities amongst other took place:
1. The entity purchased a computer on credit for R3 500 from ABC Computers for the
purpose of rendering services to clients. ABC Computers allowed a trade discount of
10% on that amount.
2. Services were rendered to P Nel at a fee of R700, the cash was received
immediately.
3. Stationery of R500 was purchased on credit from DP Printers.
4. Fuel of R125 was purchased for the vehicle from GP Motors and paid by EFT.
5. A new computer with a cost price of R5 000 was ordered from CD Roms on
10 January 20x7. Delivery will only take place during February 20x7.
6. Paid a deposit of R500 by EFT to CD Roms on 10 January 20x7 when the above-
mentioned order was placed.
7. The salaries for January 20x7 of R4 000 were paid to the employees on
25 January 20x7 via electronic funds transfer.
8. The amount owing to ABC Computers in respect of the January 20x7 purchases was
paid by EFT, after deducting a cash discount of 10%.
9. An amount of R450 was received from a client in full settlement of his account of
R500 in respect of services rendered to him during December 20x6.
10. An amount of R1 200 was received from a client as a deposit for services to be
rendered during February 20x7.
11. A computer that was utilised to render services was repaired at a cost of R835 and
paid by EFT.
12. The owner took R150 from petty cash for personal use.
13. The owner increased his capital contributions by making his own motor vehicle
available to the entity for its exclusive use in its business activities. The original cost
price of the motor vehicle was R40 000 and the value on the date of the capital
contribution was R30 000.
YOU ARE REQUIRED TO
indicate in respect of each of the above accounting activities for the financial period
1 January 20x7 to 31 January 20x7:
(a) the source document on which transaction data is captured.
(b) at which amount it will be recorded in the financial records of the entity.
(c) the classification of the transaction and the effect on the accounting equation.
(Include the account name and amount influenced by each transaction)
6 - 14
QUESTION 6.1
Suggested solution
(a) (b) (c)

10
11
12
13
6 - 15
QUESTION 6.2
TP Technical Services is a sole proprietor that repairs garden tools. The entity had the
following assets and liabilities on 1 January 20x7:
ASSETS R EQUITY AND LIABILITIES R

Tools 20 000 Equity 25 000
Equipment 18 000
Debtors 16 000 Loan - AB Bank 30 000
Cash in bank 9 000 Creditors 8 000
63 000 63 000
The following accounting activities took place during January 20x7:
1. The amount of R5 000 owing to a creditor CM Suppliers was paid by EFT of

R4 750, after deducting 5% cash discount.
2. An EFT of R855 was received from a debtor G. Vos as payment of the amount of
R900 owing by him, after he had deducted 5% cash discount.
3. The owner invested further capital in the entity by depositing an amount of R30 000
in the entity’s bank account.
4. Stationery of R750 was purchased on credit from CM Suppliers. It was agreed that a
trade discount of 10% would be allowed on that amount.
5. Services of R1 600 were rendered to a client on credit and a trade discount of 5%
was allowed on that amount.
6. The owner withdrew an amount of R750 per EFT from the bank account of the entity
for his personal use.
7. Obsolete tools were sold for R800 cash, which was received on the same date. The
value of the tools in the records of TP Technical Services was R1 000 on the date of
sale.
8. Redundant equipment was sold for R6 500 to S. Viljoen on credit. The value of the
equipment in the records of TP Technical Services was R5 000 on the date of sale.
9. Pay Escom regarding electricity costs for January 20x7 by EFT, R1 950.
10. Pay Telkom regarding telephone cost for January 20x7 by EFT, R1 380.
11. Purchase cleaning materials and pay R3 048 cash, after 4.75% cash discount was
received.
12. Render services to W. Britz and received R4 150 cash.
YOU ARE REQUIRED TO
a) record the effects of the above accounting activities on the accounting equation in
column format.
b) change transaction 9 and 10 as follows:
1. Escom's account statement of R1 950 in respect of electricity costs for

December 20x6, was paid by EFT.
2. Telkom's account statement of R1 380 in respect of telephone costs for
December 20x6, was paid by EFT.
6 - 16
QUESTION 6.2
Suggested solution
Abbreviations
T = Tools L = Loans CC = Capital contributions

Q = Equipment C = Creditors CW = Capital withdrawals
D = Debtors I/P = Income/profit
B = Cash in bank E/L = Expenses/losses
E = Equity
Nr T Q D B CW E/L L C E CC I/P
a)
ß 20 000 18 000 16 000 9 000 30 000 8 000 25 000
1
2
3
4
5
6
7
8
9
10
11
12
ß 19 000 13 000 23 120 32 927 750 7 450 30 000 3 675 25 000 30 000 7 572
b)
9
10
6 - 17
QUESTION 6.3
Build & Break Construction is a sole proprietor in the construction business. The following
accounting activities took place during September 20x7:
1. Sell an old cement mixer with a value of R6 350 in the records of Build & Break
Construction to E. Els for R3 500 cash.
2. Purchase a new cement mixer on credit from Esso Building Supplies for R9 200, on
which a 10% trade discount is allowed.
3. Pay the telephone account for August 20x7 of R2 170 by EFT.
4. The owner took building material with a cost price of R1 000 for personal use.
5. D. Davids repairs a cement mixer for R1 190 cash on which a cash discount of 10% is
allowed.
6. Purchase building material of R2 200 on credit from AB Suppliers on which a trade
discount of 15% is allowed.
7. Render services of R15 000 on credit to a client S. Nel on which a trade discount of
10% is allowed.
8. Pay an amount to ABC Construction by EFT, after deducting a cash discount of 10%,
in full settlement of the amount owed to them of R1 250.
9. Pay the salaries for September 20x7 of R20 000 via electronic funds transfer.
10. Receive the telephone account for September 20x7 of R1 980 for which no payment
has been made yet.
11. Receive R7 250 from R. Botha in settlement of his account of R8 000.
YOU ARE REQUIRED TO
indicate the following in respect of each of the above accounting activities:
a) the source document that will be used.

b) the amount at which the entity will record the transaction in their accounting records.
c) the classification of the transaction and the effect of the transaction on the accounting
equation.
6 - 18
QUESTION 6.3
Suggested solution
(a) (b) (c)

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
6 - 19
QUESTION 6.4
GPN Services is a sole proprietor that organises sight-seeing tours in the Western Cape
for overseas visitors. The following items, with the exception of the Capital account of the
owner, appeared in the ledger of the entity on 28 February 20x7, the end of its financial
year:
Assets Liability Income Expense Contri- Withdrawal

bution
Capital account ???
Loan owing to AC 50 000
Bank
Amounts invested 10 000
by the owner
Debtors 12 500
Creditors 8 700
Vehicles at carrying 140 000
amount
Withdrawals by the 50 000
owner
Printing and 900
stationery
Rent of office 14 400
premises
Electricity costs 7 200
Telephone costs 9 600
Income earned 287 700
Interest on loan of 10 000
AC Bank
Discount received 700
Discount allowed 200
Repairs of vehicles 18 700
Salaries and wages 85 000
Licenses and 10 100
insurance of
vehicles
6 - 20
YOU ARE REQUIRED TO
(a) indicate in respect of each of the above items what its classification would be (asset,
liability, expense, income, etc.)
(b) calculate the basic accounting equation
(c) calculate the opening balance of the owner’s capital account.
6 - 21
QUESTION 6.5
Namqua Transport is an entity that transports bricks for the building industry. The
following accounting activities, amongst other, took place during October 20x7 on the
dates as indicated:
Oct 02 Render transport services of R12 000 to Barny’s Builders on which a cash
discount of R360 is allowed. (Cash invoice no 750)
05 Render transport services of R33 000 to Bou&Breek on which a trade discount
of 10% is allowed. (Sales invoice no 230)
07 Issue EFT 912 for R11 000 to Gharies Properties in respect of the lease of the
entity’s administrative offices for October 20x7.
10 An electronic funds transfer of R13 650 was received from a debtor, Klipwerk
Construction, as payment of the amount owed by them after discount of R350
was deducted. (Receipt no 654)
11 Issue credit note no 286 to Bou&Breek for R1 200 in respect of a casting error
on the invoice.
14 Issue EFT 913 of R2 150 to Vodacom as payment of the amount owing in
respect of the cell-phone costs for September 20x7.
19 Sell a truck to Springbok Motors with a carrying amount of R103 600 for
R105 000. (Cash invoice no 751)
21 Receive R1 500 from Namaqua Bank in respect of interest earned for
October 20x7 on a term deposit.
26 Settle the account of ABC Services for repairs to one of Namqua’s trucks, by
paying R18 408 via electronic funds transfer, after the discount of R472 is
deducted.
28 Purchase equipment worth R35 000 from Equip Ltd., on which a trade discount
of R3 500 is allowed. (Purchase invoice no 444)
29 Purchase stationery of R425 from Waltons, on which cash discount of R50 is
allowed. (Cash invoice no 528)
30 Purchase a truck from M Joos for R250 000. (Purchase invoice no 345)
31 Send debit note no 145 together with damaged equipment of R2 500 to
Equip Ltd.
31 The statement of Vodacom for October 20x7 shows that cell-phone costs of
R1 797 were incurred during the month. No payment has been made yet.
YOU ARE REQUIRED TO
record the effect of above accounting activities in column format on the accounting
equation and calculate the accounting equation after the last transaction.
6 - 22
QUESTION 6.5
Suggested solution
Abbreviations
V = Vehicles C = Creditors I/P = Income/profit

E = Equipment E/L = Expenses/losses
D = Debtors
B = Cash in bank
Oct V E B D E/L C I/P
02
05
07
10
11
14
19
21
26
28
29
30
31
31
146 400 29 000 99 857 14 500 13 932 259 767 43 922
6 - 23
QUESTION 6.6
GOLF is a sole proprietor which provides golf lessons to students that study sport science.
During March 20x7 the following accounting activities, amongst other, took place.
01. Render services on credit to R. Goosen at a value of R7 000, on which 10%

discount is allowed.
03. Pay the telephone account in respect of telephone costs for February 20x7 per
EFT, R530.
08. Received R950 from E. Els as settlement for his account of R990.
10. Sell old equipment with a carrying amount of R4 470 at a loss of R270 for cash.
11. Send a credit note to R. Goosen of R330 to correct an error on the invoice.
14. Buy equipment on credit from T. Woods, R11 130.
15. The owner made a capital contribution of equipment worth R15 000 for the use in the
business activities.
17. Send a debit note of R1 090 to T. Woods due to damaged equipment.
19. The owner pays his personal electricity account of R210 with a EFT.
22. Order goods with the value of R6 000 from V. Singh.
25. Pay T. Woods R9 000 per EFT as settlement of his account, after a discount of
R1 040 was received.
YOU ARE REQUIRED TO
a) document the above accounting activities in the table on the next page.
b) calculate the equity of the entity after the last transaction. Opening balances are given
in the table.
6 - 24
NB: Decreases must be shown in (brackets)!
Equipment Debtors Bank Withdrawals Expenses Creditors Capital Contri- Income

butions
22 000 7 000 15 000 5 000 12 000 8 000 35 000 2 000 16 000
01
03
08
10
11
14
15
17
19
22
25
6 - 25
QUESTION 6.7
ABC Transport is an entity that renders transport services. The following accounting
events, amongst other, took place during the month ended 30 April 20x1 with regards
to the entity:
04 Render transport services of R1 600 to S Brits for cash, on which 10% cash
09 Sell a truck with a value of R32 000 (on 9 April 20x1) in the records of ABC
Transport for a profit of R3 000 on credit to Blue Motors.
10 Received a EFT for R970, after 3% discount had been deducted, from a
debtor, B Smit, as payment of the amount owing.
11 Settle X Ltd.’s account of R3 000 and receive 15% cash discount.
12 Purchase a computer from SA PCs for R5 400, on which 5% cash discount
is allowed (Cash Invoice C7).
13 Repair a truck for R1 200 on credit at XY Repairs.
14 The owner withdrew the entity’s old computer. The value of the computer in
the records of ABC Transport amounted to R2 500 on 14 April 20x1.
15 Render transport services for R7 000 on credit to T Bester, on which 5%
16 Issue an EFT for R1 300 to MTN as payment for the amount owing in
respect of cell-phone cost for March 20x1.
19 Purchase stationery for R100 on credit from G Swart, on which 10%
20 Return half of the stationery purchased from G Swart on 19 April 20x1, as
the stationery had been damaged at purchase.
25 Place an order for a new vehicle for R150 000 at Blue Motors, that should
be delivered on 9 May 20x1 and issue an EFT for R15 000 as deposit.
28 Issue an EFT to the amount of R10 000 to Stellenbosch Properties as
payment for the rent of the entity’s business premises for April 20x1.
30 Pay W Swanepoel’s salary of R1 500 for March 20x1.
Additional information:
- MTN’s account statement for April 20x1 shows that cell-phone cost to the amount
of R560 was incurred during that month. No payment has been made yet.
YOU ARE REQUIRED TO
Record accounting activities for April 20x1 in column format on the accounting
equation. You do not have to calculate the closing balances.
NB: Negative amounts must be indicated in brackets.
6 - 27
QUESTION 6.7
Ander Bates / Debiteure/ Bank / Onttrekkings/ Uitgawes/ Krediteure/ Kapitaal / Inkomste/

Other Assets Debtors Bank Withdrawals Expenses Creditors Capital Income
Apr 04
09
10
11
12
13
14
15
16
19
20
25
28
30
30
6 - 27
CHAPTER 7
JOURNALS
Page
7.1 Nature and function of journals 7-3
7.2 Layout of journals 7-4
7.2.1 Cash payment journal

7.2.2 Cash receipt journal
7.2.3 Purchase journal
7.2.4 Purchase return journal
7.2.5 Sales journal
7.2.6 Sales return journal
7.3 Recording of transactions in journals 7-7
Questions 7 - 11
7-1
At the end of this chapter students should be able to:
- understand the nature and function of journals
- identify the various journals that are used by an entity
- identify how journals are structured to suit specific needs
- understand the process of recording transactions in journals
- classify transactions to be recorded in journals
7-2
7.1 Nature and function of journals
Journals can be defined as the accounting records of an entity in which all

accounting activities (transactions and events) of the entity are recorded
systematically. The process of classification of transactions occurs in the journals.
The process of recording source documents in journals must be structured in such a

way that all information can be recorded comprehensively and accurately. Journals
are therefore set out that the following information regarding each activity will be
displayed:
 the nature of the specific document

 the serial number of the specific document
 the other party involved in the activity
 the date on which the activity took place
 the amount at which the activity took place
 the ledger account that will be debited/credited as a result of the classification
 nature of a journal entry (journal narrative in general journal)
Journals are conveniently structured that the frequent recording of source documents
and postings to the various ledger accounts are minimised. Repetitive information
(narratives, amounts and classification) will be combined and recorded in separate
journals and posted to the ledger collectively. The journals listed below are generally
used for this purpose:
 Cash payment journal

 Cash receipt journal
 Purchase journal
 Purchase return journal
 Sales journal
 Sales return journal
When the accounting activity is non-repetitive or a once-off occurance, it is customary

not to open a separate journal, but to record the transaction in the general journal.
Accounting activities for which no source documents exist are also recorded in the
general journal. The transactions in the general journal are posted individually to the
relevant ledger accounts.
7-3
7.2 Layout of journals
The following steps are normally followed when source documents are recorded in
journals:
 The transaction date and document number must be recorded accurately.

 The transaction must be classified and recorded in the correct columns in the
various journals.
 Columns in the journals can be created for frequently used activities during a
month. The total of each column will be posted to the same ledger account.
 Less frequently used activities are recorded in the ‘sundry’ column and will be
posted individually to the relevant ledger accounts.
 All the columns must be added. The accuracy of the total column will be
verified by cross casting to ensure that the accounting equation balances
before posting to the ledger can take place.
 The totals of the columns and amounts in the ‘sundry’ column are then posted
to the ledger.
Below are examples of the details and layout of journals that are frequently used:
7.2.1 Cash payment journal
Date Doc no Details Fol Sundry Purchase/ Creditors Discount Bank

Inventory received
(1) (2) (3) (4) (5)
Posting to the ledger will be as follows:
Ledger account Debit Credit
(1) ‘Specific expense/asset’ X

(2) Purchases/Inventory X
(3) Creditors’ control X
(4) Discount received X
(5) Bank X
7-4
7.2.2 Cash receipt journal
Date Doc no Details Fol Sundry Sales/ Debtors Discount Bank

Income allowed
(1) (2) (3) (4) (5)
(1) ‘Specific income’ X

(2) Sales/Income X
(3) Debtors’ control X
(4) Discount allowed X
(5) Bank X
7.2.3 Purchase journal
Date Doc no Creditors Fol Sundry Purchase/ Total

Inventory
(1) (2) (3)
(1) ‘Specific espense/asset’ X

(2) Purchases/Inventory X
7.2.4 Purchase return journal
Date Doc no Creditors Fol Sundry Purchase Total

return
(1) (2) (3)
(1) ‘Specific expense/asset’ X

(2) Purchase return X
7-5
7.2.5 Sales journal
Date Doc no Debtors Fol Sundry Sales/ Total

Income
(1) (2) (3)

(2) Sales/Income X
7.2.6 Sales return journal
Date Doc no Debtors Fol Sundry Sales Total

return
(1) (2) (3)

(2) Sales return/ X
Services rendered
7.2.7 General journal
Date Details Fol Debit Credit
Journal narration
Transactions in the general journal are posted on a line-by-line basis to the ledger.
7-6
7.3 Recording transactions in journals
The transactions in Chapters 5, 5.1.1 to 5.3.10 will be recorded in the various journals and posted to the general ledger as follows:
Cash payment journal of EGOLI
Dat Doc no Details Fol Sundry Purchase/ Creditors Discount Bank

Inventory received
A-Z Furniture 5.1.1 Equipment 3 000 3 000

Z Combrink 5.2.2 915 915
A Koster 660 660
Salaries and wages 5.3.5 Salaries 3 450 3 450
P Malan 5.3.10 2 000 (200) 1 800
6 450 3 575 (200) 9 825
7.3.1 Dr Equipment 3 000

Dr Salaries and wages 3 450
Dr Creditors’ control 3 575
Cr Discount received 200
Cr Bank 9 825
7-7
Cash receipt journal of EGOLI
Dat Doc no Details Fol Sundry Sales/ Debtors Discount Bank

Income allowed
S Louw 5.1.2 2 250 2 250

Services rendered 5.3.3 6 700 6 700
G Basson 5.3.9 1 500 (300) 1 200
6 700 3 750 (300) 10 150
7.3.2 Dr Bank 10 150

Dr Discount allowed 300
Cr Services rendered 6 700
Cr Debtors’ control 3 750
Purchase journal of EGOLI
Dat Doc no Creditors Fol Sundry Purchase/ Total

Inventory
Motors Bpk 5.2.1 Vehicles 15 000 15 000

W Walton 5.3.6 Stationery 270 270
15 270 15 270
7.3.3 Dr Vehicles 15 000

Dr Stationery 270
Cr Creditors’ control 15 270
7-8
Purchase return journal of EGOLI
Dat Doc no Creditors Fol Sundry Purchase Total

return
W Walton 5.3.7 Stationery 45 45
45 45
7.3.4 Dr Creditors’ control 45

Cr Stationery 45
Sales journal of EGOLI
Dat Doc no Debtors Fol Sales/ Total

Income
S Louw 5.3.4 3 350 3 350

K Muller 900 900
4 250 4 250
7.3.5 Dr Debtors’ control 4 250

Cr Services rendered 4 250
7-9
Sales return journal of EGOLI
Dat Doc no Debtors Fol Sales Total

return
K Muller 5.3.8 165 165
165 165
7.3.6 Dr Sales return/ 165

Services rendered
Cr Debtors’ control 165
General journal of EGOLI

Dat Details Fol Debit Credit
Bank 5.2.3 10 000

Long term loan 10 000
(Additional financing from Bank
Ltd.)
Bank 5.3.1 20 000

Capital 20 000
(Owner deposit of his personal
funds in the entity’s bank
account)
Withdrawals 5.3.2 800

Bank 800
(Owner pays personal telephone
with EFT)
7 - 10
CHAPTER 7
QUESTIONS
Page
Question 7.1 Preparation and closing of journals 7 – 12
Question 7.2 Preparation and closing of journals and posting to ledger 7 – 16
Question 7.3 Classification of transactions in journals 7 – 27
Question 7.4 Recording of transactions in journals 7 – 28
Question 7.7 Preparation of journals 7 – 41
7 - 11
QUESTION 7.1
Zetkor Traders is a sole trader in furniture. The following accounting activities, amongst
others, took place during March 20x7:
Mar 02 Sell furniture to C Zuan for R20 000, on which 10% trade discount is allowed
(Sales invoice, VF 131).
04 Purchase furniture from CB Meubels for R12 000, on which 20% trade discount
is allowed (Purchase invoice, AF/CB78).
06 Receive an EFT for R1 850 from D Tsabalala for payment of the amount owing
by him, after 7½% discount was deducted (Receipt no 98).
07 Do an electronic payment (payment no 007) of R8 500 to MB Beleggings in
respect of the rent of the business premises for March 20x7.
09 Order furniture of R2 000 from Knysna Meubels, on which 15% trade discount is
allowed (Order form, BV062).
10 Received damaged furniture of R2 000 back from C Zuan (sale transaction –
2 Mar) and issue credit note 34.
11 Do an electronic payment (payment no 008) of R1 890 to Escom as payment for
the amount owing in respect of the electricity costs for February 20x7.
12 Sell furniture of R12 000 to E Young for cash, on which cash discount of 5% is
allowed (Cash invoice, KF51 and receipt no 99).
13 Do an electronic payment (payment no 009) of R1 145 to Telkom as payment
for the amount owing in respect of the telephone costs for February 20x7.
15 Purchase furniture of R6 000 from Brakrivier Meubels for cash, on which a cash
discount of 5% is allowed (Cash invoice, KF/BM48 and payment no 010).
19 Sell furniture to V Uys for R1 500, on which 25% trade discount is allowed
(Sales invoice, VF 132).
20 Received damaged furniture to the value of R2 500 back from E Young (sale
transaction – 12 Mar) and refund him.
24 Purchase a delivery vehicle for R80 000 from CL Motors (Purchase invoice,
AF/CL69).
27 Receive an order for furniture of R9 000 from M King, on which 20% discount is
allowed (Order form, BV/MK52).
28 Send debit note no 23 to CB Meubels (purchase transaction – 4 Mar) for
R1 200 in respect of a casting error on the invoice.
29 Send poor quality furniture to the value of R3 500 back to Brakrivier Meubels
(purchase transaction – 15 Mar) and receive cash back.
31 The owner withdraws R1 000 cash for his personal use.
YOU ARE REQUIRED TO
record the above accounting activities in date sequence in suitable journals, close-off and
cross-cast the journals.
7 - 12
QUESTION 7.1
Suggested solution
KONTANTBETALINGSJOERNAAL/CASH PAYMENT JOURNAL

Datum No Besonderhede Diverse Aankope/ Kred Korting Bank
Date Details Sundry Voorraad Cred Discount
Purchases/
Inventory
KONTANTONTVANGSTEJOERNAAL/CASH RECEIPT JOURNAL

Datum No Besonderhede Diverse Verkope Deb Korting Bank
Date Details Sundry Sales Discount
7 - 13
AANKOOPJOERNAAL/PURCHASE JOURNAL
Datum No Krediteure Diverse Aankope/ Totaal
Date Creditors Sundry Voorraad Total
Purchases/
Inventory
VERKOOPJOERNAAL/SALES JOURNAL
Datum No Debiteure Diverse Verkope Totaal
Date Debtors Sundry Sales Total
AANKOOPTERUGSENDINGSJOERNAAL/PURCHASE RETURN JOURNAL

Datum No Krediteure Diverse Aankoop- Totaal
Date Creditors Sundry retoere Total
Purchase
returns
VERKOOPTERUGSENDINGSJOERNAAL/SALES RETURN JOURNAL

Datum No Debiteure Diverse Verkoop- Totaal
Date Debtors Sundry retoere Total
Sales
returns
7 - 14
ALGEMENE JOERNAAL/GENERAL JOURNAL
Datum No Besonderhede Debiet Krediet
Date Details Debit Credit
7 - 15
QUESTION 7.2
Dormie Cycles is an entity trading in bicycles. The following balances appeared amongst
others in the various ledgers, as indicated, on 1 March 20x7:
GENERAL LEDGER R
Capital account - Owner 800 000
Cash in bank 28 960
Creditors’ control 79 240
Motor vehicles 640 000
Furniture 128 500
Fixed deposit - BB Bank 50 000
Trading stock 352 930
Debtors’ control 92 960
DEBTORS’ LEDGER R
J Salie 16 390
D Diddy 2 860
P Luck 3 080
CREDITORS’ LEDGER R
Le Jeune 18 200
Telkom 11 660
Escom 9 960
The following documents in respect of March 20x7 were made available to you for
processing in the various journals:
PROOF OF PAYMENTS FOR EFTS MADE

Number Details Amount
Date
R
462 Mar 03 Le Jeune - Creditor 4 180
463 08 Cash - Wages 7 250
464 09 Telkom - February’s account 11 660
465 14 Escom - February’s account 9 960
466 23 Le Jeune - Creditor 6 270
467 29 K Dormie - Withdrawal by owner 5 000
468 30 Cash - Purchase of bicycle 3 200
469 31 M Green - Salary for March 9 750
470 31 F White - Salary for March 8 600
471 31 Cash - Wages 7 440
RECEIPTS
Number Date Details Amount
R
96 Mar 06 J Salie - Debtor 9 000
97 15 P Luck - Debtor 900
98 23 Cash - Sale of bicycle 6 460
99 31 BB Bank - Interest for March 20x7 on fixed deposit 450
7 - 16
SALES INVOICES/CASH INVOICES
R
192 Mar 02 D Diddy - Sale of bicycle 6 340
193 07 C Gouws - Sale of bicycle 3 750
194 11 T Louw - Sale of furniture 2 090
195 14 P Swart - Sale of bicycle 4 150
196 20 R Roux - Sale of bicycle 4 590
1014 23 Cash - Sale of bicycle 6 460
PURCHASES INVOICES/CASH INVOICES/GRN

R
A421/76 Mar 06 Le Jeune - Purchase of bicycle 6 600
A691/77 10 Le Jeune - Purchase of bicycle 7 200
GOB/78 12 Bears - Purchase of furniture 4 350
K444/81 30 Cash - Purchase of bicycle 3 200
CREDIT NOTES
R
KN 113 Mar 07 C Gouws 3 750
KN 114 26 P Swart 4 150
DEBIT NOTES
R
DN 208 Mar 15 Le Jeune 2 200
DN 209 29 Le Jeune 2 400
1. Only Le Jeune allows a 10% trade discount on all purchases and a 5% cash discount
on payments made within 30 days after the date of the corresponding purchase.
2. All payments to Le Jeune during March 20x7, were made within 30 days after the
corresponding purchase had been made.
3. Dormie Cycles does not allow any trade discount. However, 10% cash discount is
allowed to all debtors where payment is received within 30 days after the date of the
corresponding sale.
4. All payments received from debtors during March 20x7 were within 30 days after the
corresponding sale.
5. The owner contributed further capital to the entity on 15 March 20x7 by making his
personal motor vehicle available for use by the entity. On this date the agreed value of
the motor vehicle was R50 000. No purchase invoice was issued in respect of this
transaction.
6. The statement from Escom in respect of the electricity costs for March 20x7 of
R13 150 was received on 31 March 20x7.
7. The statement from Telkom in respect of the telephone costs for March 20x7 of R8 670
was received on 31 March 20x7.
7 - 17
YOU ARE REQUIRED TO
(a) record the above documents and other accounting events in suitable journals and
properly close-off the journals.
(b) show the ledger accounts in the general ledger, creditors ledger and debtors ledger
after the various postings from the journals had been made.
7 - 18
QUESTION 7.2
Suggested solution
(a)

Purchases/
Inventory

7 - 19
Purchases/
Inventory

Purchase
returns

Sales
returns
7 - 20
7 - 21
(b)
- Only ledger accounts that contain entries for March 20x7 are shown.
- Assumptions are made i.r.o opening balances in the various ledger accounts.
GENERAL LEDGER
Capital account – Owner Bl 1

Date Details Fo Amount Date Details Fo Amount
Mar 01 Balance b/f 800 000
Capital contribution by owner Bl 2

Mar 15 Motor vehicles 50 000
Bank account Bl 5
Mar 01 Balance b/f 28 960 Mar 29 Withdrawals 5 000
31 CRJ 16 810 31 CPJ 68 310
Creditors control account Bl 7

Mar 31 CPJ 32 620 Mar 01 Balance b/f 79 240
31 PRJ 4 600 31 PJ 52 410
Motor vehicles Bl 10
15 Capital
contribution 50 000
Furniture Bl 12
Mar 10 Balance b/f 128 500 Mar 11 SJ 2 090
12 PJ 4 350
Fixed deposit (BB Bank) Bl 14

7 - 22
Purchase of trading inventory Bl 15
31 CPJ 3 200
PJ 26 240
Withdrawals by owner Bl 16
Mar 29 Bank 5 000
Debtors control account Bl 17

Mar 01 Balance b/f 92 960 Mar 31 SRJ 7 900
31 SJ 20 920 CRJ 11 000
Discount allowed Bl 46
Mar 31 CRJ 1 100
Interest received
Bl 87
Mar 31 CRJ 450
Salaries and Wages Bl 90

Mar 08 CPJ 7 250
Mar 31 CPJ 9 750
Mar 31 CPJ 8 600
Mar 31 CPJ 7 440
Telephone costs Bl 95
Mar 31 PJ 8 670
7 - 23
Electricity costs Bl 97
Mar 31 PJ 13 150
Sales of trading inventory Bl 101

Mar 31 SJ 18 830
31 CRJ 6 460
Purchase return Bl 103

Mar 31 PRJ 4 600
Sales return Bl 105

Mar 31 SRJ 7 900
Discount received Bl 121

Mar 31 CPJ 550
7 - 24
DEBTORS LEDGER
J Salie Bl 51
Mar 01 Balance b/f 16 390 Mar 06 CRJ 10 000
D Diddy Bl 52
02 SJ 6 340
P Luck Bl 54
Mar 01 Balance b/f 3 080 Mar 15 CRJ 1 000
R Roux Bl 57
Mar 20 SJ 4 590
T Louw Bl 58
Mar 11 SJ 2 090
C Gouws Bl 61
Mar 07 SJ 3 750 Mar 07 SRJ 3 750
P Swart Bl 63
Mar 14 SJ 4 150 Mar 26 SRJ 4 150
7 - 25
CREDITORS LEDGER
Le Jeune Bl 28
15 PRJ 2 200 06 PJ 6 600
23 CPJ 6 600 10 PJ 7 200
29 PRJ 2 400 21 PJ 8 000
23 PJ 4 440
Telkom Bl 33
Mar 09 CPJ 11 660 Mar 01 Balance b/f
11 660
31 PJ 8 670
Escom Bl 35
31 PJ 13 150
Bears Bl 38
Mar 12 PJ 4 350
7 - 26
QUESTION 7.3
Artwork is a sole proprietor entity that trades in artworks. During March 20x7, the following
events occurred, amongst other, on the dates as indicated.
The following transactions will be classified in the different journals as shown below:
Transaction Journal
1. The owner gives one of his own artworks to the entity. The
artwork was purchased 3 years ago for R2 500. At present,
the value of the artwork is R3 000.
2. Do an electronic payment to the amount of R15 000 to
Property Ltd. in respect of the rent of the business premises.
3. Receive an EFT to the amount of R3 500 from Alice Gallery in
payment of their account of R4 000.
4. Purchase artworks of R4 000 from C Bosch on credit.
5. Sell artworks for R5 500, on which 10% trade discount is
granted, for cash.
6. The owner took artworks to the value of R1 850 for personal
use.
7. Purchase a new computer for R7 000, on which 10% trade
discount is granted, from CC Computer on credit.
8. Purchase artworks to the value of R2 800 on which 15% trade
discount is granted, from F Claerhout for cash.
9. Return artworks to the value of R700 to C Bosch.
10. Purchase packaging material for R500 from PP Packaging on
credit.
11. Sell artworks to the value of R26 500 to P Paint on credit.
12. Pay the amount of R2 970 due to C Bosch after a 10% cash
discount has been received.
13. Pay salaries and wages of R7 500 by EFT.
14. Receive interest of R1 200 on the savings account.
15. Send a credit note to P Paint for the over invoicing of R1 500.
16. Deliver artworks to the value of R3 500 on which a trade
discount of 20% is granted, to B le Roux on credit.
17. Receive R8 000 from P Paint in partial payment of his
account.
7 - 27
QUESTION 7.4
Tudor Services is a sole proprietor that trades in interior decorating items and renders
interorior decorating related services. The following accounting activities, amongst other,
took place during September 20x7 on the dates as indicated:
Sep 02 Render services of R5 760 to AF Gouws for cash, on which a cash discount of
21/2% is allowed.
07 Do an electronic payment for R2 240 to CLM Properties in respect of the rent of
the showroom for September 20x7.
13 Do an electronic payment of R1 896 to Vodacom as settlement of the amount
owing in respect of the cell phone costs for Augustus 20x7.
15 Send a credit note to L Smit for over invoicing of R700.
18 Purchase a delivery vehicle on credit from Telbos Motors for R85 000, on which
a discount of 3% is allowed.
19 Receive R10 200 from A Malan as full settlement of her account.
21 The owner took R4 890 cash to buy curtains for the living room of his private
residence.
25 Send a debit note together with a dining room table to the value of R3 000 to P
Kloppers.
27 Purchase curtain material of R8 250 from The Curtain King for cash, on which a
trade discount of 20% is allowed.
29 The entity’s cutting machine is repaired by F Smit for R1 440 cash, on which
cash discount of 21/2% is allowed.
30 Receive R750 from Expo Bank in respect of interest earned for
September 20x7 on a term deposit.
- All cash payments are made with electronic transfers and all cash receipts are
deposited immediately at the bank.
- Vodacom’s account statement for September 20x7 shows that cell phone costs
incurred during that month amounted to R2 000.
YOU ARE REQUIRED TO
record the above accounting activities in date sequence in suitable journals. (You are not
required to insert document numbers in those journals or close the journals off.)
7 - 28
QUESTION 7.4
Suggested solution

Purchases/
Inventory

7 - 29
Purchases/
Inventory

Purchase
returns

Sales
returns
7 - 30
7 - 31
QUESTION 7.5
Namqua Transport is an entity that transports bricks for the building industry. The
following accounting activities, amongst other, took place during October 20x7 on the
dates as indicated:
Oct 02 Render transport services of R12 000 to Barny’s Builders on which a cash
discount of R360 is allowed. (Cash invoice no 750)
05 Render transport services of R33 000 to Bou&Breek on which a trade discount
of 10% is allowed. (Sales invoice no 230)
07 An electronic funds transfer (no 912) was made for R11 000 to Gharies
Properties in respect of the lease of the entity’s administrative offices for October
20x7.
10 An electronic funds transfer of R13 650 was received from a debtor, Klipwerk
Construction, as payment of the amount owed by them after discount of R350
was deducted. (Receipt no 654)
11 Issue credit note no 286 to Bou&Breek for R1 200 in respect of a casting error
on the invoice.
14 Do an electronic funds transfer (no 913) of R2 150 to Vodacom as payment of
the amount owing in respect of the cell-phone costs for September 20x7.
19 Sell a truck to Springbok Motors with a carrying amount of R103 600 for
R105 000. (Cash invoice no 751)
21 Receive R1 500 from Namaqua Bank in respect of interest earned for October
20x7 on a term deposit.
26 Settle the account of ABC Services for repairs to one of Namqua’s trucks, by
paying R18 408 via electronic funds transfer, after the discount of R472 is
deducted.
28 Purchase equipment worth R35 000 from Equip Ltd., on which a trade discount
of R3 500 is allowed. (Purchase invoice no 444)
29 Purchase stationery of R425 from Waltons, on which cash discount of R50 is
allowed. (Cash invoice no 528)
30 Purchase a truck from M Joos for R250 000. (Purchase invoice no 345)
31 Send debit note no 145 together with damaged equipment of R2 500 to Equip
Ltd.
31 The statement of Vodacom for October 20x7 shows that cell-phone costs of R1
797 were incurred during the month. No payment has been made yet.
YOU ARE REQUIRED TO
record the above accounting activities in date sequence in suitable journals, close-off and
cross-cast the journals.
7 - 32
QUESTION 7.5
Suggested solution

Purchases/
Inventory

7 - 33
Purchases/
Inventory

Purchase
returns
7 - 34
Sales
returns

7 - 35
QUESTION 7.6
Gigabyte is an entity that trades in computers and computer programmes. The following
accounting activities, amongst other, took place during April 20x2:
Apr 02 The owner gave one of his personal vehicles to the entity for use as a delivery
vehicle. The cost price of the vehicle was R150 000 3 years ago. The value of the
vehicle now is R120 000.
03 Receive an EFT of R13 500 from Dell Ltd. for settlement of their account of
R14 000.
04 Pay an amount of R18 810 via electronic funds transfer to M Mecer, a creditor,
after 10% discount is received.
05 Do an EFT of R3 050 to Escom for payment of electricity costs for
March 20x2.
07 Sell old equipment with a carrying amount of R3 000 for R3 750 cash.
08 Buy packaging material of R2 250 from P Packaging on which 20% discount is
allowed. (Purchase invoice 175V)
11 Sell computer programmes of R2 700 on which 20% trade discount is allowed.
(Cash invoice C48/13)
12 Buy computers of R130 800 on credit on which discount of 10% is allowed.
13 Sell 2 computers, worth R7 600 each, to Eikestad Sound on which 15% discount
is allowed. (Sales invoice W13/89)
15 The owner took a computer and gave it to his son as a birthday present. The cost
price of the computer is R5 500 and the selling price is R7 000.
16 Order a new delivery vehicle from Stellenbosch Motors for R180 000 to be
delivered on 1 May 20x2, and do an EFT of R18 000 as deposit.
17 Send a debit note with a value of R200 to P Packaging in respect of a summation
error (too much) on the invoice received on 8 April 20x2.
19 The computer programmes sold on 11 April 2012 contained viruses and the
purchaser cancelled the transaction. Gigabyte refunded the purchaser in cash.
20 Sell computers for R12 000 cash, on which 5% cash discount is allowed.
21 Send a credit note to Eikestad Sound to the value of R730 in respect of the sales
on 13 April 20x2.
22 Buy computer programmes to the value of R7 200 from Excel Ltd., on which cash
discount of 5% is allowed. (Cash invoice EXK54)
23 Send a damaged computer valued at R13 400 back in respect of the purchases
on 12 April 20x2.
25 Receive an EFT of R2 280, after 5% discount was deducted, from a debtor
W Word as payment of the amount owing by them.
26 Do an electronic funds transfer to P Point, after deducting 5% discount, for
payment of the amount of R6 600 owing to them.
28 Receive a direct deposit of R1 350 from Posbank in respect of interest for
April 2012 on a fixed deposit of R17 000 which was made during January 20x0.
7 - 36
29 Pay the salary of N Smit for April 2012, via electronic funds transfer of R13 300.
30 Receive a statement from Telkom in respect of telephone costs for April 20x2,
R1 520. No payment has been made.
YOU ARE REQUIRED TO
record the above accounting activities in date sequence in suitable journals for
April 20x2. It is not necessary to record document numbers, to close-off the journals or to
provide journal narratives.
NB: All the transactions with the owner should be recorded in the general journal.
7 - 37
QUESTION 7.6
Suggested solution

Purchases/
Inventory

7 - 38
Purchases/
Inventory

Purchase
returns

Sales
returns
7 - 39
7 - 40
QUESTION 7.7
Kallis Ltd. is an entity that trades in cricket equipment. The following documents are made
available to you for processing in the respective journals for March 20x2:
PROOF OF PAYMENTS FOR EFT’S MADE

R
442 03 Cash purchases of cricket bats 2 160
443 11 Lazer Ltd. – Creditor 4 500
444 29 Newlands Properties – March’s rent 7 400
445 31 Escom – February’s electricity account 1 200
RECEIPTS
R
73 10 AB de Villiers – Debtor 1 045
74 17 H Amla – Debtor 2 470
75 25 Cash – Sale of cricket bats 1 700
SALES INVOICES
R
301 12 AB de Villiers – Sale of cricket memorabilia 2 700
PURCHASE INVOICES
R
GOB/609 18 Lazer Ltd. – Purchase of cricket balls 600
GOB/610 23 Home etc. – Purchase of furniture 6 900
DEBIT NOTES
R
DN 122 10 Waltons – Stationery 200
1. Lazer Ltd. allows 20% trade discount on all purchases and 10% cash discount on
payments made within 30 days after the date of the relevant purchase.
2. All payments to Lazer Ltd. during March 20x2 were made within 30 days after the
relevant purchase.
3. Kallis Ltd. allows 10% trade discount on all sales and 5% cash discount to debtors
where payments are received within 30 days after the date of the relevant sale.
7 - 41
4. All payments received from debtors during March 20x2 were within 30 days after the
relevant sale.
5. A cash discount of 10% was received by Kallis Ltd. on all cash purchases of cricket
bats made during March 20x2.
6. The statement from Escom in respect of electricity costs of R1 170 for
March 20x2 was received on 31 March 20x2. No payment has been made yet.
7. Kallis Ltd. sold a delivery vehicle (with a carrying amount of R30 100) to Protea Motors
on credit at a profit of R2 900 on 16 March 20x2.
8. The owner donated two cricket bats (cost price R950 each; selling price R1 700 each)
to the Let’s Play Foundation on 28 March 20x2.
YOU ARE REQUIRED TO
record the above documents and accounting activities in date sequence in the appropriate
journals for March 20x2. It is not necessary to close-off the journals or to provide journal
narratives.
7 - 42
QUESTION 7.7
Suggested solution

Purchases/
Inventory

7 - 43
Purchases/
Inventory

Purchase
returns

Sales
returns
7 - 44
7 - 45
CHAPTER 8
LEDGER
Page
8.1 Nature and function of the ledger 8-3
8.2 Layout of ledger accounts 8-3
8.3 Rules for recording of transactions in ledger accounts 8-3
8.4 Contol accounts 8-4
8.5 Posting from journals 8-5
8.6 Salaries and wages journal and ledger 8 - 10
8.7 Petty cash journal and ledger 8 - 13
Questions 8 - 16
8-1
- understand the function of a general ledger account
- identify the various ledgers that are used by entities
- understand the interaction of the debtors’ ledger and creditors’ ledger

with the general ledger
- define the concepts of debit and credit
- understand and apply the process of posting from journals to the ledger
8-2
8.1 Nature and function of the ledger
The purpose of ledger accounts is to gather and classify suitable and usable
information.
8.2 Layout of ledger accounts
All ledger accounts will have a similar layout and will all contain the same appropriate
information, namely:
 the name of the account

 the date on which the transaction/event occurred
 the amount at which the transaction/event occurred
 the source of the information
 details of contra account of journal
An example of a ledger account will be as follows:
Name of account
Date Details Fol Amount Date Details Fol Amount
8.3 Rules for recording of transactions in ledger accounts
Each transaction affects two accounts, the one account is debited and the other
account is credited. The two accounts concerned can be one of the following
combinations:
 2 assets
 an asset and a liability
 an asset and equity
 a liability and equity
8-3
The rules determining which account must be debited and which account has to be
credited are explained in the ledger accounts below:
Assets Liabilities
Dr Cr Dr Cr
Increase Decrease Decrease Increase
+ - - +
Withdrawals* Capital contributions*

Dr Cr Dr Cr
+ - - +
Expenses* Income*
Dr Cr Dr Cr
+ - - +
*Equity accounts
8.4 Control accounts
Entities often group separate accounts in the same group (eg. debtors and creditors)
in a ledger that is separate from the general ledger. The transactions in the
debtors’/creditors’ ledgers are replaced with a combined debtors’/creditors’ control
accounts in the general ledger. Only the accumulated total of a number of
transactions will be recorded in the control account in the general ledger. The
individual transactions will be recorded in the separate debtors’/creditors’ accounts in
the debtors’/creditors’ ledger. Control accounts are also used for property, plant and
equipment, investments, salaries and wages.
8-4
8.5 Posting from journals
The transactions of EGOLI as set out in Chapters 5, 5.1.1 to 5.3.10 are posted from
the journals in Chapter 7 to the ledger as follows:
General ledger of EGOLI
Equipment
Balance (Chapt 5) 30 000 28/02 Balance c/f 33 000
Cash payment 7.3.1 3 000
journal
33 000 33 000
01/03 Balance b/d 33 000
Vehicles
Purchase journal 7.3.3 15 000 28/02 Balance c/f 15 000
15 000 15 000
01/03 Balance b/d 15 000
Debtors’ control
Balance (Chapt 5) 6 200 Cash receipt 7.3.2 3 750
journal
Sales journal 7.3.5 4 250 Sales return 7.3.6 165
journal
28/02 Balance c/f 6 535
10 450 10 450
01/03 Balance b/d 6 535
Bank
Balance (Chapt 5) 35 800 Cash payment 7.3.1 9 825
journal
Cash receipt 7.3.2 10 150 Withdrawals 5.3.2 800
journal
Long-term loan 5.2.3 10 000 28/02 Balance c/f 65 325
Capital contribution 5.3.1 20 000
75 950 75 950
01/03 Balance b/d 65 325
8-5
Loan
28/02 Balance c/f 15 000 Balance (Chapt 5) 5 000
Bank 5.2.3 10 000
15 000 15 000
01/03 Balance b/d 15 000
Creditors’ control
Cash payment 7.3.1 3 575 Balance (Chapt 5) 4 500
journal
Purchase journal 7.3.3 15 270
Purchase return 7.3.4 45
journal
28/02 Balance c/f 16 150
19 770 19 770
01/03 Balance b/d 16 150
Capital contribution
28/02 Balance c/f 70 000 Balance (Chapt 5) 50 000
Bank 5.3.1 20 000
70 000 70 000
01/03 Balance b/d 70 000
Withdrawals
Balance (Chapt 5) 1 500 28/02 Balance c/f 2 300
Bank 5.3.2 800
2 300 2 300
01/03 Balance b/d 2 300
Services rendered
Previous months 16 700
of current financial
year (Chapt 5)
Cash receipt 7.3.2 6 700
journal
Sales journal 7.3.5 4 250
27 650
Interest income
Previous months of 1 000
current financial
year (Chapt 5)
8-6
Discount received
Cash payment 7.3.1 200
journal
Discount allowed
Cash receipt 7.3.2 300
journal
Sales return
Sales return 7.3.6 165
journal
Salaries and wages

Previous months 2 800
year (Chapt 5)
Cash payment 7.3.1 3 450
journal
6 250
Stationery
Purchase journal 7.3.3 270 Purchase return 7.3.4 45
journal
28/02 Net debit 225
Advertising cost
Previous months 900
year (Chapt 5)
8-7
Debtors’ Ledger of EGOLI
S Louw
Balance (Chapt 5) 2 250 Cash receipt journal 7.3.2 2 250
Sales journal 7.3.5 3 350 28/02 Balance c/f 3 350
5 600 5 600
01/03 Balance b/d 3 350
K Muller
Balance (Chapt 5) 1 950 Sales return journal 7.3.6 165
Sales journal 7.3.5 900 28/02 Balance c/f 2 685
2 850 2 850
01/03 Balance b/d 2 685
Verspreiders Ltd.
Balance (Chapt 5) 500 28/02 Balance c/f 500
500 500
01/03 Balance b/d 500
G Basson
Balance (Chapt 5) 1 500 Cash receipt journal 7.3.2 1 500
8-8
Creditors’ Ledger of EGOLI
Motors Ltd.
28/02 Balance c/f 15 000 Purchase journal 7.3.3 15 000
15 000 15 000
01/03 Balance b/d 15 000
W Walton
Purchase return 7.3.4 45 Purchase journal 7.3.3 270
journal
28/02 Balance c/f 225
270 270
Z Combrink
Cash payment 7.3.1 915 Balance (Chapt 5) 1 840
journal
28/02 Balance c/f 925
1 840 1 840
A Koster
Cash payment 7.3.1 660 Balance (Chapt 5) 660
journal
P Malan
Cash payment 7.3.1 2 000 Balance (Chapt 5) 2 000
journal
8-9
8.6 Salary and wage registers
The employees of the enterprise (to whom salaries and wages are paid) are in reality
also creditors of the enterprise who render services to the enterprise on a continuous
basis. The enterprise will therefore in return render legal rights/claims (obligation) to
the various employees on a continuous basis, which will normally be redeemed at the
end of an agreed period (weekly or monthly) by the enterprise.
These services rendered by the employees, are normally recorded in separate

journals, namely the salary and wage register.
The salary and wage registers will contain full particulars of each individual
employee. It is customary that these registers also serve as the journals in which all
individual salary and wage transactions will be recorded, for example each
employee's gross salary or wage, any deductions such as income tax, etc. The totals
of the various gross amounts in these registers will be posted to the debit side of the
particular expense accounts (for example salaries and wages) and posted to the
credit side of the corresponding control accounts (for example salary creditors and
wages creditors).
Journal entry:
Dr Salaries and wages

Cr Salaries and wages creditor’s control
The salaries and wages registers also serve as the salaries and wages creditors'
ledgers which will contain a ledger account for every individual employee in which all
individual salary and wage transactions and payments will be recorded. (In the
example that follows the gross salary of employee XYZ for March 21x5 will for
example be posted to his individual ledger account in the particular salary register.)
The gross legal right/claim (obligation) that an employee holds against the enterprise
will be redeemed in various ways. The amounts that the employee must pay i.r.o
income tax, unemployment insurance, medical aid contributions, etc., are paid
directly to those institutions on their behalf by the enterprise. The net amounts, after
deducting those amounts paid on their behalf, will be paid directly to the particular
employees themselves. All those payments will be recorded in the cash payment
journal. (In the example that follows the payment of R7 890 to employee XYZ i.r.o.
his net salary, was recorded in the cash payment journal, from which it was posted to
his individual ledger account in the particular salary register.)
Journal entry:
Dr Salaries and wages creditors’ control

Cr Bank (Net salary or wage)
Cr Bank (Income tax)
Cr Bank (Unemployment insurance)
Cr Bank (Medical aid)
8 - 10
The salary and wage registers, which would also serve as the corresponding salary
and wage creditors’ ledgers, would be set out in such a manner and include such
information as to make it possible to convey all the financial and other aspects
pertaining to each particular employee. Information would also be grouped and set
out in such a manner to ensure that the various accounting entries pertaining to
salaries and wages can be identified for further processing.
Example
The following documents in respect of March 21x5, were made available to you for
processing in the various journals:
PROOF OF PAYMENTS FOR EFT’S MADE

469 Mar 31 ABC – Salary for March 21x5 10 360
470 31 XYZ – Salary for March 21x5 7 890
471 31 SARS – tax 4 500
472 31 Medical 2 000
473 31 Unemployment insurance (UIF) 250
CASH PAYMENT JOUNRAL

Date Doc Details Sundry Salary Discount Creditors’ Bank
Nr creditors received control
Mar 31 469 ABC (Salary) 10 360 10 360
31 470 XYZ (Salary) 7 890 7 890
31 471 SARS – tax 4 500 4 500
31 472 Medical 2 000 2 000
31 473 UIF 250 250
25 000 25 000
SALARY REGISTER – MARCH 21X5

Name Personnel Personal Gross Deductions Net
number details salary salary
Tax Medical UIF
aid
ABC G3 Qualifications, R14 000 R2 500 R1 000 R140 R10 360

etc.
Amounts payable to employees
XYZ W2 Qualifications,
etc.
R11 000 R2 000 R1 000 R110 R7 890
R25 000 R4 500 R2 000 R250 R18 250
8 - 11
Salary and wages creditors’ control
Mar 31 CPJ (Net) 18 250 Mar 31 Salary register 25 000
31 CPJ (Tax) 4 500
31 CPJ (UIF) 250
31 CPJ (Medical) 2 000
The tax, UIF and medical contributions are normally paid over to the particular
institutions after the end of the month. The payments i.r.o. March 21x5 will, for
example, only be made on 7 April 21x5. Such payments will consequently be
recorded in the cash payment journal for April 21x5 and posted to the control account
at the end of the month, as shown above. The payments will normally be posted as
one amount from the cash payment journal to the salary creditors’ control ledger
account. Until such time that those payments are made, the control account will show
a balance that represents the creditor.
Salary expense
Mar 31 Salary register 25 000
8 - 12
8.7 Petty cash
Enterprises sometimes may find it necessary to pay for items such as stationery,
coffee, tea, milk, etc. in cash. Most enterprises in such instances make use of a petty
cash fund. The petty cash fund is an asset for the enterprise.
This fund is established by making a withdrawal for a certain amount, known as the
petty cash advance, via any form of withdrawal and cashing the money. This
advance is kept completely separate from the cash that the enterprise receives in its
ordinary course of business. In respect of company financial statements, the petty
cash fund forms part of cash and cash equivalents under current assets in the
statement of financial position.
Journal entry: Petty cash advance
Dr Petty cash control account

Cr Bank
The pay-outs of the petty cash advance are recorded in a separate journal, known as
the petty cash journal. Pay-outs are confirmed by number sequenced petty cash slips
that are normally signed by the person to whom the pay-out as well as by whom the
pay-out is made. On a periodic basis the employee responsible will compare the total
amount of pay-outs with the supporting petty cash slips and the cash on hand is
counted and compared with the balance according to the records (petty cash control
account). After this the petty cash fund is replenished up to the amount of the original
advance by withdrawing cash for the precise amount of the pay-outs of the particular
period. This system of periodical replenishment of the petty cash fund up to the
original amount is known as the advance system. The size of the advance will be
determined by the needs of the enterprise. It is important to note that the employee
responsible for handling the petty cash funds must not handle any other cash funds.
Journal entry: Petty cash payouts
Dr Stationery / Consumables / Advertising costs / Transport costs

Cr Petty cash control account
Journal entry: Petty cash replenishment
Dr Petty cash control

Cr Bank
When any form of payment is withdrawn for the initial advance, it will be recorded in
the cash payment journal. The following example illustrates the working of the
advance system.
8 - 13
Example
CASH PAYMENT JOURNAL

Date Doc Details Sundry Purchases / Discount Creditors’ Bank
Nr Inventory received control
Mar 01 512 Petty cash 1 000 1 000
advance
31 525 Petty cash 850 850
advance
1 850 1 850
The amount in the sundry column will be posted to the debit side of a petty cash
control account and to the credit side of the bank account in the general ledger.
Bank
Mar 31 CPJ 1 850
Petty cash control account

Mar 01 CPJ 1 000
31 CPJ 850
The petty cash journal is in column format to make provision for the allocation of
repetitive transactions, similar to the cash payment journal. For the purposes of this
module, only pay-outs will be recorded in the petty cash journal and no receipts of
cash will be recorded in the petty cash journal.
Example of petty cash journal:

PETTY CASH JOURNAL
Date Doc Details Sundry Consumables Stationery Total
Nr
Mar 02 PC1 Pens 150 150
13 PC2 Cleaning materials 300 300
15 PC3 Advertisement 210 210
18 PC4 Transport 150 150
25 PC5 Envelopes 50 50
350 300 210 850
The cash on hand and pay-outs were checked on 31 March 21x5. On this date the
expenses amounted to R850. Any form of withdrawal was withdrawn on the same
date to replenish the advance. This brought the balance of the petty cash control
account to R1 000 again.
Posting of the pay-outs from the petty cash journal:
 All the items in the sundry column are posted individually to the debit side of
the respective ledger accounts, e.g. advertising costs and transport costs.
 The totals of all further pay-out columns are posted to the debit side of the
respective ledger accounts, e.g. consumables and stationery.
8 - 14
 The total of the pay-outs (R850) is posted to the credit side of the petty cash
control account.
Petty cash control account
Mar 01 Balance b/d 0 Mar 31 Petty cash journal 850
01 CPJ 1 000 Balance c/f 1 000
31 CPJ 850
1 850 1 850
Apr 01 Balance b/d 1 000
Stationery
Mar 31 Petty cash journal 210
Consumables
Advertising costs
Transport costs
It is important to note that the balance of the petty cash control account must always
agree with the cash on hand. The reconciliation thereof must be done on a
continuous basis. The reconciliation must be done at least once a month or when
cash is withdrawn to replenish the advance of the petty cash again.
8 - 15
CHAPTER 8
QUESTIONS
Page
Question 8.1 Ledger accounts in general ledger 8 – 17
Question 8.2 Ledger accounts in general, debtors’ and creditors’ ledger 8 – 18
8 - 16
QUESTION 8.1
The following balances amongst other appeared in the general ledger of an

enterprise on 1 March 20x7:
R
Bank account (Favourable) 1 903
With the exception every time of only one column, the following totals of the various
columns appeared in the particular journals for March 20x7, after those journals had
been closed-off:
Sales journal Purchase journal
Sundries R2 247 Sundries R3 329

Sales R39 329 Purchases R22 384
Cash payments journal Cash receipts journal
Sundries R1 961 Sundries R2 197

Creditors ? Debtors ?
Discount R208 Discount R494
Bank R29 613 Bank R32 344
YOU ARE REQUIRED TO
show the following ledger accounts in the general ledger, properly closed-off, for
March 20x7:
- Bank account
- Debtors’ control
- Creditors’ control
- Discount received
- Discount allowed
8 - 17
QUESTION 8.2
The following balances represent a complete list of debtors and creditors of

Namaqua Transport on 1 October 20x7:
Debit (R) Credit (R)
Bou & Breek 10 000

Klipwerk Konstruksie 14 000
Vodacom 2 150
Shell 18 880
The totals of the various columns in the journals below for October 20x7 were as
follows, after these journals had been closed-off:
Sales journal Purchase journal
Income R29 700 Sundry R33 297

Total R29 700 Total R33 297
Sales return journal Purchase return journal
Sales returns R1 200 Sundry R2 500

Total R1 200 Total R2 500
Cash payment journal Cash receipt journal
Sundry R26 525 Sundry R88

Creditors R21 030 Income R12 000
Bank ? Debtors R14 000
Bank ?
1. During October 20x7 the business sold vehicles with a carrying amount of
R23 600 for cash and for a profit of R1 400. This entry was recorded in the
general journal.
2. All the credit sales and sales returns were made to Bou & Breek.
3. The only debtor that made payments during the month was Klipwerk Konstruksie.
4. Purchases were made as follows:
- Vodacom R1 797
- Equip Ltd R31 500
5. The following amounts were paid to creditors during the month:
- Vodacom R2 150
- Shell R18 880
6. All goods returned by Namaqua Transport was to Equip Ltd.
8 - 18
YOU ARE REQUIRED TO
a) show the following ledger accounts in the general ledger, properly closed-off, for
October 20x7:
- Bank (overdraft of R5 500 on 1 October 20x7)
- Debtors’ control
- Creditors’ control
b) show the ledger accounts in the debtors’ ledger and creditors’ ledger, properly
closed-off, for October 20x7:
8 - 19
CHAPTER 9
TRIAL BALANCE
Page
9.1 Nature and function of the trial balance 9-3
9.2 Errors that will be indicated by the trial balance 9-3
9.3 Limitations of the trial balance 9-4
9.4 Posting from the ledger to the trial balance 9-5
Questions 9-7
9-1
- define the function of the trial balance
- understand the errors that are indicated by the trial balance
- identify the limitations of the trial balance
- prepare a trial balance from the general ledger
9-2
9.1 Nature and function of the trial balance
A trial balance is a list that is prepared from all the balances in the general ledger to
verify whether the double entry for each transaction has been completed, i.e. that
one account is debited and another account credited.
9.2 Errors that will be indicated by the trial balance
The trial balance is an aid in finding errors. If it does not balance there is evidently an
error. By analysing the trial balance carefully, deviations, which are possibly the
result of an error, can be traced and followed up. The following errors might lead to
the trial balance not balancing:
 the trial balance was added incorrectly

 the balance in the ledger was carried forward incorrectly:
- the amount is incorrect
- debit on credit side and vice versa
- balance left out completely
- balance carried forward twice
 balance in ledger account incorrect:
- summation incorrect
- summation correct, but balance calculated incorrectly
 posting to ledger from journal incorrect:
- debit posted as credit or vice versa
- amount incorrect
- entry omitted
- entry posted twice
 journal entry incorrect
When the trial balance does not balance, the error must be searched for in a
systematic manner. It is recommended that the steps followed to prepare the trial
balance should be applied backwards.
 add trial balance again

 post ledger account balances to trial balance
- look for the amount and the correct side
 check summation and calculation of ledger balances
 do the posting from the journal to the ledger
 calculate the difference on the trial balance:
- 1 000, 100, 10 or 1 - difference indicates a summation error
- difference divisible by 2: debit balance equal to half of the
difference has been recorded on the credit side or vice versa
- difference divisible by 9: figures have been changed around, e.g.
230 instead of 320
9-3
9.3 Limitations of the trial balance
The fact that the total of the debit balances in a trial balance corresponds with the
total of the credit balances is proof only of a corresponding debit amount for each
credit amount in the accounting records and not necessarily an indication of no errors
in the accounting records.
The following errors may, amongst others, exist even though the trial balance
balances:
 Omission errors
Where an accounting transaction or event as a whole is not recorded in the

accounting records.
 Posting errors
Where an accounting transaction or event has been recorded in the

accounting records, but the debit and/or credit part has been recorded in an
incorrect ledger account.
 Compensating errors
Where the total of any error (recording, posting and summation error) on the
debit side correspond precisely with an error on the credit side.
 Recording errors
Where a document as a whole is recorded in the incorrect journal or the

amount was incorrectly recorded in the correct journal.
 Principle errors
Where an accounting event was classified incorrectly and the different

amounts of the entry were consequently on the correct side of the ledger
account but recorded in the incorrect ledger account.
9-4
9.4 Posting from the ledger to the trial balance
9.4.1 Pre-adjustment trial balance
The pre-adjustment trial balance is a list of all the balances in the general ledger.
The balances of both the balance sheet and income statement accounts appear in
the trial balance.
The pre-adjustment trial balance below was prepared from the ledger accounts as
set out in Chapter 8.
Trial balance of EGOLI at 28 February 20X7

Debit Credit
R R
Equipment 33 000
Vehicles 15 000
Debtors 6 535
Creditors 16 150
Bank 65 325
Loans 15 000
Capital 70 000
Withdrawals 2 300
Services rendered 27 650
Stationery 225
Advertising costs 900
Sales returns 165
130 000 130 000
9-5
9.4.2 Post-adjustment trial balance
The post-adjustment trial balance is prepared after the pre-adjustment trial balance
was adjusted for the following activities:
 closing journals of income statement accounts (Chapter 13)

- cost of sales
- trade account
- profit and loss account
 adjustments (Chapter 13)
 correction of errors (Chapter 14)
An example of a post-adjustment trial balance is shown in Chapter 13.
9-6
CHAPTER 9
QUESTIONS
Page
Question 9.1 Draft trial balance and financial statements 9-8
Question 9.2 Draft trial balance and financial statements 9 - 11
Question 9.3 Draft trial balance and financial statements 9 – 12
Question 9.4 Posting of journals to ledger accounts and 9 - 13

preparation of trial balance
9-7
QUESTION 9.1
The following balances appeared in the general ledger of Dormie Cycles on

31 March 20x7, after all the journals in respect of the year ended 31 March 20x7
were closed-off and posted to the particular ledger accounts:
Capital account 68 000

Withdrawals 500
Mortgage bond owing 30 000
Bank account 6 765
Fixed property 70 000
Equipment 12 300
Purchases of spares/Inventory 1 200
Fixed deposit 8 000
Income earned 6 580
Discount allowed 40
Interest earned 75
Wages 880
YOU ARE REQUIRED TO
(a) compile a trial balance on 31 March 20x7.
(b) compile the financial statements for the year ended 31 March 20x7, set out
according to acceptable norms.
9-8
QUESTION 9.1
Suggested solution
DORMIE CYCLES
TRIAL BALANCE ON 31 MARCH 20x7 Debit Credit
R R
Capital account
Withdrawals
Mortgage bond owing
Creditors' control
Bank account
Fixed property
Equipment
Inventory
Debtors' control
Fixed deposit
Income earned
Discount received
Discount allowed
Interest earned
Wages
9-9
DORMIE CYCLES R
INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 20x7
INCOME
LESS EXPENSES
PROFIT for the year
DORMIE CYCLES
BALANCE SHEET AT 31 MARCH 20x7
R
ASSETS
NON CURRENT ASSETS
Total non current assets
CURRENT ASSETS
Total current assets
Total assets
EQUITY
NON CURRENT LIABILITIES
CURRENT LIABILITIES
Total liabilities
Total equity and liabilities
9 - 10
QUESTION 9.2
The following balances, with the exception of the owner’s Capital account, appeared
in the general ledger of the enterprise on 28 February 20x7, after all the journals in
respect of the year ended 28 February 20x7 were closed-off and posted to the
particular ledger accounts:
Withdrawals by owner 2 300

Capital contributions by owner 20 000
Long-term loan owing 10 000
Bank 55 425
Vehicles 15 000
Income received 24 650
Rent income 1 000
Equipment 33 000
Intangible assets 5 000
Sales returns 165
Stationery 225
YOU ARE REQUIRED TO
(a) compile a trial balance on 28 February 20x7.
(b) compile the financial statements for the year ended 28 February 20x7, set out
9 - 11
QUESTION 9.3
Mactrack Transport is a sole proprietor that renders transport services. The following
balances, with the exception of the owner’s Capital account, appeared in the general
ledger of the enterprise on 31 March 20x7, after all the journals in respect of the year
ended 31 March 20x7 were closed-off and posted to the particular ledger accounts:

Long-term loan owing 50 000
Cash in bank 1 467
Trucks at cost price 180 000
Fixed deposit 10 000
Interest expense 6 250
Income earned 209 840
Interest earned 975
Rent of premises 12 745
Fuel and maintenance 45 287
Administration costs 14 386
YOU ARE REQUIRED TO
(a) compile a trial balance on 31 March 20x7.
(b) compile the financial statements for the year ended 31 March 20x7, set out
9 - 12
QUESTION 9.4
Dormie Cycles is a sole proprietor that service bicycles and trade in spare parts. The
following balances appeared in the general ledger of the enterprise on 1 March 20x7:
R
Capital account - K Dormie 68 000
Long term mortgage bond owing 30 000
Creditors' control 9 700
Cash in bank account 7 200
Fixed property at cost price 70 000
Equipment at carrying value 12 000
Debtors' control 10 500
Fixed deposit - AC Bank 8 000
After all the source documents for March 20x7 had been processed in the various
journals, the journals were closed off on 31 March 20x7, showing the following totals
for the various columns:
SALES JOURNAL PURCHASE JOURNAL

Debtors' control ? Creditors' control
?
Income from repairs R6 580 Purchases of spares R1 200
Sale of equipment R400 Equipment R700
CASH PAYMENTS JOURNAL CASH RECEIPTS JOURNAL

Bank account ? Bank account ?
Creditors' control R3 240 Debtors' control R4 080
Discount R70 Discount R40
Wages R880 Interest received from AC Bank R75
You establish that no journal entries were made in respect of the following:
- The owner withdrew R500 cash for personal use.
YOU ARE REQUIRED TO
(a) calculate the amount of the bank column in the cash receipt journal.
(b) calculate the amount of the bank column in the cash payment journal.
(c) calculate the amount of the creditors’ control account in the purchase journal.
(d) calculate the amount of the debtors’ control account in the sales journal.
(e) open suitable ledger accounts in the general ledger of the enterprise that will
show the opening balances on 1 March 20x7.
(f) post the amounts that appear in the various journals, to the respective ledger
accounts and to close-off those ledger accounts.
(g) compile a trial balance on 31 March 20x7.
9 - 13
QUESTION 9.4
Suggested solution
The various journals would have been compiled as follows:
CASH PAYMENTS JOURNAL

Date No Particulars Fo Sundry Discount Creditors Bank
Mar xx Wages 880 880
Other creditors (70) 3 240 3 170
c/c 880 (70) 3 240 4 050
CASH RECEIPTS JOURNAL

No Particulars Fo Sundry Discount
Date Debtors Bank
Mar xx Bank A - Int rec 75 75
Other debtors (40) 4 080 4 040
c/c 75 (40) 4 080 4 115
PURCHASE JOURNAL
Date No Creditors Fo Sundry Purchases Total
Mar xx Creditor X - Equipment 700 700
Other creditors 1 200 1 200
c/c 700 1 200 1 900
SALES JOURNAL
Date No Debtors Fo Sundry Income Total
Mar xx Debtor Z - Equipment 400 400
Other debtors 6 580 6 580
c/c 400 6 580 6 980
GENERAL JOURNAL
Date Particulars Debit Credit
Mar 31 Withdrawals 500
Bank 500
(Owner withdrew R500 cash for personal use.)
9 - 14
GENERAL LEDGER
Capital account - Owner

Date Particulars Fo Amount Date Particulars Fo Amount
Withdrawals - Owner
Mortgage bond owing

Creditors' control
Bank account
Purchases
Fixed property
9 - 15
Equipment
Debtors' control
Fixed deposit
Income earned
Discount received
Discount allowed
Interest-income earned
Wages
9 - 16
TRIAL BALANCE ON 31 MARCH 20x7 Fo Debit Credit
R R
Withdrawals 500
Bank account 6 765
Equipment 12 300
Purchases of spares 1 200
Fixed deposit 8 000
Income earned 6 580
Discount allowed 40
Interest earned 75
Wages 880
113 085 113 085
9 - 17
CHAPTER 10
PROFIT DETERMINATION AND THE CLOSING PROCESS
Page
Learning outcomes 10 - 2
10.1 The nature of profit 10 - 3
10.2 Profit determination of service-providing entities 10 - 3
10.3 Profit determination of trading entities 10 - 4
10.4 Convenience accounts 10 - 4
10.5 Determination of gross profit 10 - 5
10.6 Determination of cost of sales 10 - 7
10.7 Closing process 10 – 7
Appendix A: The closing process - simplified 10 - 11
Questions 10 - 12
10 - 1
- determine the profit of a service-providing entity
- determine the profit of a trading entity
- understand and apply the calculation of gross profit
- understand and apply the calculation of cost of sales
10 - 2
10.1 The nature of profit
The main objective of an entity is to show profit by selling goods or providing

services.
The profit made by an entity is regarded as both compensation for initiatives from
management’s side, and compensation to the owners for the risk taken to invest in
the entity. The profit made by the entity can be used to repay the owners of the entity
for the use of their capital, or the profit can be employed in the entity to generate
growth and progress.
Profit is the difference between the amount received for the selling of goods or
provision of a service (income) and the amount paid for the goods, including all
expenses incurred or the amount spent in providing the service (expenses).
Determination of the profit of the entity is strictly done in terms of the fundamental
principles of accounting.
10.2 Profit determination of service-providing entities
A service-providing entity uses its assets, incurs expenses and applies its skills,
abilities and expertise in order to provide a service. Attorneys, accountants,
architects and doctors are examples of service-providing entities.
Profit is estimated by comparing the income earned from services provided with the
expenses incurred in the same period.
The profit of a service-providing entity can therefore be determined as follows:
Income xxx
plus: Other income xxx
less: Expenses xxx
Profit xxx
10 - 3
10.3 Profit determination of trading entities
Trading entities purchase goods in order to sell them at a profit. The objective is
therefore to sell the inventory of the entity at the highest price, as soon as possible
and as many times possible.
The difference between the return on sales and the cost price of the goods that have
been sold is gross profit. The balance of the trade account in the ledger indicates the
gross profit (also see Chapter 10.4).
Other expenses of the entity, e.g. administrative, marketing and financial costs are
classified as trade expenses. The gross profit of the entity will be reduced with the
trade expenses to determine the profit of the entity. The balance of the profit and loss
account in the ledger indicates the profit.
The profit of a trading entity is therefore determined as follows:
Sales* xxx
less: Cost of sales (xxx)
Gross profit xxx
plus: Other income xxx
less: Trade expenses (xxx)
Profit xxx
* Sales less sales returns
10.4 Convenience accounts
During the closing-off process certain convenience accounts are created in the
ledger to make reporting easier. The different types of convenience accounts are set
out below:
Convenience Items included in the Purpose of the account

account account
Cost of sales Opening inventory, Determine cost of sales
purchases, closing
inventory, other items that
affect the cost of inventory
Trade account Sales, cost of sales Determine gross profit
Profit and loss Gross profit, other operating Determine profit for the period
account income and expenses
Thus all the income statement items are grouped together in one account to
determine the profit or loss for the period.
10 - 4
10.5 Determining gross profit
Gross profit can be defined as the profit that results from the entity’s primary
operations prior to allowing for any other income and expenses.
Example 10.1
M&M showed the following income and expenses for a specific period:
Sales 15 000
Profit from sale of equipment 2 000
Rental income 1 500
Cost of sales 11 250
Interest paid 800
Salaries 1 400
Gross profit will be determined as follows:
Sales 15 000
less: Cost of sales (11 250)
Gross profit 3 750
Gross profit is determined separately as it is an indication of the performance of the

trading entity regarding its primary operation: selling goods at a profit.
Gross profit is normally expressed as a percentage of either the sales price or the
cost price. Normally an entity aims for a predetermined gross profit percentage and
includes this in the entity’s budget. The budgeted gross profit percentage is one of
the factors that has to be taken into account when determining the sales prices of the
entity’s goods. The actual gross profit percentage of the entity is then determined
periodically and compared to the budgeted gross profit percentage. The following
factors play a role in determining the actual gross profit and will often explain the
difference between the budgeted and actual gross profit:
 actual sales prices and discounts allowed

 actual purchase prices and discounts received
 loss of goods
 accuracy of stock taking and measurement of inventory
10 - 5
Example 10.2
The 2 different types of gross profit percentages can be estimated as follows on the
basis of the information as set out in example 10.1:
- Gross profit percentage on sales price
Gross profit 3 750

Sales = 15 000 = 25%
- Gross profit percentage on cost price
Gross profit 3 750

Cost of sales = 11 250 = 33,33%
Example 10.3
Gross profit is consistently realised at 20% on cost price. Sales for the year amounts
to R90 000.
Required:
a) Calculate the cost of sales.
b) Calculate the gross profit.
CP + GP = SP
100 + 20 = 120
a) R90 000 x 100 / 120 = R75 000

b) R90 000 x 20 / 120 = R15 000
Example 10.4
Gross profit is consistently realised at 20% on selling price. Sales for the year
amounts to R90 000.
Required:
a) Calculate the cost of sales.
b) Calculate the gross profit.
CP + GP = SP
80 + 20 = 100
a) R90 000 x 80 / 100 = R72 000

b) R90 000 x 20 / 100 = R18 000
10 - 6
10.6 Estimating cost of sales
In practice it is not always possible for an entity to sell all its goods in the same
period that the goods have been purchased. Goods that have been purchased during
the year are kept in stock until it is sold.
By determining gross profit, only the cost price of the sold goods (cost of sales) is
matched with the sales price of the corresponding goods. The sales price of goods is
therefore not matched with the cost price of purchased goods (cost of purchases).
Consequently the cost price of sales is estimated as follows:
Opening inventory xxx

plus: Purchases* at cost price xxx
Cost of items available for sale xxx
less: Closing inventory xxx
Cost of sales xxx
* Purchases less purchase returns
10.7 The closing process
At the end of the financial period the ledger accounts regarding income statement
items are merged in convenience accounts to calculate the profit/loss for the period
which has an increase or decrease in equity as result. The following are the most
general convenience accounts:
 Cost of sales
 Trade account
 Profit and loss account
The closing-off process are illustrated as follows:
The following abbreviations will be used:

- CRJ = Cash receipt journal
- CPJ = Cash payment journal
- PJ = Purchase journal
- SJ = Sales journal
- PRJ = Purchase return journal
- SRJ = Sales return journal
10 - 7
Cost of sales and sales are transferred to the Trade account
Trade account
31/12 Cost of sales Jnl 10 15 050 31/12 Sales Jnl 9 40 785
31/12 Profit and loss Jnl 11 25 735
40 785 40 785
The trade account and all operating income and expenses are closed-off to the Profit
and loss account
Rent received
31/12 Income received in 13.8 4 500 CRJ Total 58 500
advance
58 500 58 500
Interest received
31/12 Profit and loss 13 3 000 CRJ Total 2 750
31/12 Income receivable 13.7 250
3 000 3 000
Bad debts recouped / recovered

31/12 Profit and loss Jnl 22 1 500 31/12 Bank 13.3 1 500
1 500 1 500
Cleaning materials
CPJ Total 750 31/12 Consumable 13.10 150
inventory
31/12 Profit and loss Jnl 14 600
750 750
Salaries and wages

CPJ Total 30 025 31/12 Profit and loss 15 30 025
30 025 30 025
10 - 8
Stationery
CPJ Total 800 31/12 Profit and loss Jnl 18 800
800 800
Telephone
CPJ Total 9 350 31/12 Profit and loss Jnl 16 10 200
Accrued expense 13.5 850
10 200 10 200
Insurance
CPJ Total 12 000 31/12 Prepaid expense 3 000
12 000 12 000
Bad debt
31/12 Debtors’ control 13.1 10 000 Bank 13.2 1 500
10 000 10 000
Depreciation
31/12 Accumulated depr. Total 3 000 31/12 Profit and loss Jnl 19 3 000
3 000 3 000
Movement in allowance for credit losses of debtors (expense)

31/12 Allowance for credit 13.5 2 500 31/12 Profit and loss Jnl 21 2 500
losses of debtors
2 500 2 500
10 - 9
The profit and loss account is closed-off to the Capital Account
Profit and loss account

Cleaning materials Jnl 14 600 Trade account Jnl 11 25 735
Salaries and wages Jnl 15 30 025 Rent received Jnl 12 54 000
Telephone Jnl 16 10 200 Interest received Jnl 13 3 000
Insurance Jnl 17 9 000 Bad debts recovered Jnl 22 1 500
Stationery Jnl 18 800
Depreciation Jnl 19 3 000
Bad debts Jnl 20 8 500
Movement in Jnl 21 2 500
allowance for credit
losses of debtors
Capital Jnl 23 19 610
84 235 84 235
10 - 10
APPENDIX A: THE CLOSING PROCESS - SIMPLIFIED
Purchase
N/A for A1S1 Discount
N/A for A1S1
returns received
STEP 1 N/A for A1S1

PURCHASES
N/ASales
for A1S1 N/ADiscount
for A1S1
returns allowed
STEP 2 SALES
Other
N/A for A1S1 Opening
N/A for A1S1 Closing
N/A for A1S1
expenses inventory inventory
COST
STEP 3 OF
SALES
STEP 4 TRADE ACCOUNT

(Gross profit)
Operating Operating
income expenses
STEP 5 PROFIT AND LOSS
STEP 6 Capital contributions/withdrawals CAPITAL
10 - 11
CHAPTER 10
QUESTIONS
Page
Question 10.1 Income statement and Balance sheet 10 - 13
Question 10.2 Cost of inventory 10 - 16
Question 10.3 Cost of sales, gross profit and closing inventory 10 - 17
Question 10.4 Closing off process 10 - 18
10 - 12
QUESTION 10.1
Dormie Cycles is a sole trader in bicycles. The following balances appeared amongst
others in the general ledger of the enterprise on 28 February 20x7, after the postings
from the various journals to the ledger accounts had been done:
R
Fixed property at cost 180 000
Contributions – Owner 17 150
Withdrawals – Owner 19 000
Interest received 990
Long term loan owing 120 000
Furniture and equipment at carrying amount 9 450
Sales of bicycles 121 300
Freight on sales 2 440
Inventory of bicycles on 1 March 20X6 35 000
Printing and stationery 900
Purchases of bicycles 89 400
Repairs of equipment 1 020
Sales returns 2 000
Purchase returns 1 810
1. The balance of the capital account of the owner on 1 March 20x6 does not appear
in the list of balances above. All the other balances however do appear in the list.
2. The cost price of the inventory of bicycles amounted to R37 600 on 28 February
20x7.
3. The financial year of the enterprise ended on 28 February 20x7.
YOU ARE REQUIRED TO
compile an income statement for the year ended 28 February 20x7 and a balance
sheet on 28 February 20x7.
(The income statement must show the gross profit and the profit for the year
separately.)
10 - 13
QUESTION 10.1
Suggested solution
DORMIE CYCLES
INCOME STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 20x7
SALES (121 300 - 2 000)

LESS COST OF SALES
Opening inventory
Add: Purchases (89 400 - 1 810)
Less: Closing inventory
GROSS PROFIT for the year
OTHER INCOME
Interest earned
LESS EXPENSES
Salaries and wages
Freight on sales
Printing and stationery
Telephone costs
Electricity costs
Repairs of equipment
PROFIT for the year
10 - 14
DORMIE CYCLES
BALANCE SHEET ON 28 FEBRUARY 20x7
R
ASSETS
NON-CURRENT ASSETS
Fixed property at cost price
Furniture and equipment at carrying amount
CURRENT ASSETS
Inventory
Debtors
CAPITAL
- Balance at beginning of the year
- Net profit for the year
- Contributions
- Withdrawals
NON-CURRENT LIABILITIES
Long term loan
CURRENT LIABILITIES
Creditors
10 - 15
QUESTION 10.2
(A)
Calculate the cost price of inventory, if a gross profit percentage of 25% on sales
price (R20 000) is budgeted
(B)
The sales price (R30 000) of inventories is calculated at cost price plus 25%.
Calculate the cost price
(C)
Use the information below and calculate cost of sales
R
Sales 150 000
Purchases 100 000
Opening inventory 40 000
Closing inventory 50 000
Purchase returns at cost price 5 000
Sales returns at sales price 12 000
Rental income 15 000
Profit on sale of vehicles 7 000
Loss on sale of equipment 4 000
Advertising costs 8 000
Salaries 14 000
Stationery 2 000
10 - 16
QUESTION 10.3
DVD Supply is a business that buys and sells DVDs with the purpose to make a
profit. You are provided with the following information of the business’s branches in
Cape Town and Gauteng for the year ended 31 March 20x7:
CAPE TOWN
 Inventory (1 April 20X6) - 1 500 DVDs @ R100 each

 Inventory (31 March 20x7) – 800 DVDs @ R120 each
 2 000 DVDs @ R120 each was purchased during the year
 2 700 DVDs @ R150 each was sold during the year
YOU ARE REQUIRED TO
calculate the cost of sales and gross profit for the year ended 31 March 20x7.
GAUTENG
Opening inventory 200 000

Purchases 550 000
Sales 900 000
Gross profit on sales = 25%
YOU ARE REQUIRED TO
calculate the cost of sales and the value of the closing inventory for the year ended
31 March 20x7.
10 - 17
QUESTION 10.4
The following balances, amongst others, appeared in the general ledger of Dre
Cycles on 31 March 20x7, after all the journals in respect of the year ended 31 March
20x7 were closed-off and posted to the particular ledger accounts:
R
Withdrawals 500
Discount allowed 40
Wages 880
Sales 15 000
Cost of sales 4 000
YOU ARE REQUIRED TO
(a) Provide the entries in the general journal, if any, to close of the accounts.
10 - 18
CHAPTER 11
INVENTORY
Page
11.1 Definition 11 - 3
11.2 Recognition of inventory 11 - 3
11.2.1 Recognition as an expense

11.2.2 Recognition as an asset
11.3 Measurement and valuation of inventory 11 - 3
11.3.1 Cost price

11.3.2 Net realisable value
11.3.3 Physical inventory count
11.4 Inventory systems 11 - 7
11.4.1 Periodic inventory system

11.4.2 Perpetual inventory system
11.5 Cost formulas 11 - 18
11.5.1 First-in-first-out method (FIFO)

11.5.2 Weighted average cost
11.5.3 Specific identification
11.5.4 Retail method
11.5.5 Standard cost method
11.6 Inventory losses 11 - 26
11.7 The closing process 11 – 27
Appendix A en B 11 – 34
Questions 11 - 36
11 - 1
At the end of the chapter students should be able to:
- define inventory
- understand recognition, measurement and valuation of inventory
- identify and apply the various inventory systems
- identify and apply the various cost formulas
- understand inventory losses and insurance claims
11 - 2
11.1 Definition
Inventories are assets that:
(a) are held for sale in the ordinary course of business (trading inventory),
(b) are in the process of production for such sale (work in progress), or
(c) are in the form of materials or supplies to be consumed in the production process or in
the rendering of services (raw materials and consumables).
11.2 Recognition of inventory
A primary issue in accounting for inventory is the amount of costs to be recognised as an

asset and to be carried forward until the related revenues are recognised. The cost price
of opening inventories and all inventories purchased or manufactured during a year can be
allocated as follows during any given year:
11.2.1 Recognition as an expense
When inventory is sold, the carrying amount (the value of the inventory in the financial
records) of this inventory must be recognised as an expense in the period in which the
related revenue is recognised. The amount of any write-down of inventory and all
inventory losses must also be recognised as an expense in the period in which the write-
down or loss occurs. The process of recognising as an expense the carrying amount of
inventory sold results in the matching of costs and revenues.
11.2.2 Recognition as an asset
The carrying amount of unsold, unfinished and unused inventory must be recognised as a
current asset.
Inventory can also be allocated to other asset accounts, for example, inventory used as a
component of self-constructed property, plant and equipment (fixed assets). The cost
price of inventory allocated in this way to another asset is included in the cost price of that
other asset and is recognised as an expense during the useful life of that asset (in other
words, as part of the depreciation written off on the fixed asset that includes the cost of the
inventory).
11.3 Measurement and valuation of inventory
Inventory is measured on the historical cost basis at the lowest of cost or net realisable
value.
11 - 3
11.3.1 Cost price
Cost price includes all costs incurred to bring the inventory to its present location and
condition (ready for sale).
The cost price of trading inventory is thus not only its purchase price, but also for example
the following (if applicable):
 import cost,
 freight to transport goods to the entity,
 insurance cost while inventory is in transit, etc.
The cost price of manufactured goods will include:

 cost of raw materials,
 direct labour cost to manufacture inventory,
 production overheads allocated to each inventory item.
Abnormal amounts of inventory losses or write-downs, storage charges, administrative

cost and sales cost are not included in the cost price of inventory.
11.3.2 Net realisable value
Net realisable value can be described as the estimated selling price in the ordinary course
of business less the estimated cost of completion and the estimated cost necessary to
make the sale.
Estimates of net realisable value are based on the most reliable evidence available at the
time the estimates are made, of the amount the inventory is expected to realise (sell for).
The cost of inventories may not be recoverable if those inventories are damaged, if they
have become wholly or partially obsolete, or if their selling prices have declined. The cost
of inventories may also not be recoverable if the estimated costs of completion or the
estimated costs to be incurred to make the sale have increased.
The practice of writing inventories down, below cost to net realisable value, is consistent
with the view that assets should not be carried at an amount in excess of the amount
expected to be realised from their sale or use (prudence concept). Therefore, the portion
of the value of inventories that will not lead to the future inflow of economic benefits to the
enterprise is written off as part of cost of sales.
11 - 4
Example 11.1
H2O is an entity that purchases and bottles purified water, to sell at a profit.
The following will form part of a bottle of water:

R
Purchase price of the 250ml water 0.80
Small plastic bottle 0.20
Label 0.05
Cap 0.02
Transport cost of water 0.05
Transport cost of bottles from wholesaler 0.08
Salary cost of factory staff apportioned 0.50
Overheads of factory 0.20
1.90
Head office cost 0.10
Salary cost of sales staff 0.15
Advertising costs 0.30
2.45
The costs of head office, sales staff or advertising do not form part of the cost of inventory.
Only the costs directly incurred to get the inventory in the present location and condition,
ready for sale, form part of the cost of the inventory. The cost of a bottle of water is
therefore R1.90.
Write-down to net realisable value:
10 000 bottles of water in the abovementioned example are nearing their expiry date and
the entity wants to sell them as soon as possible
H2O will sell them at a 40% trade discount. It will cost the entity R0.20 per bottle for
advertising and all other costs to sell the water will be R0.50 per bottle.
The water is usually sold at cost price plus 30%, thus R2.47 (1.90 x 130/100).
The cost price of 10 000 bottles of water is R19 000 (10 000 x 1.90).
Calculation of net realisable value of 10 000 bottles of water:
Normal selling price 10 000 x R2.47 24 700

Less : trade discount 24 700 x 40% (9 880)
Less : advertising 10 000 x R0.20 (2 000)
Less : other costs 10 000 x R0.50 (5 000)
Net realisable value 7 820
11 - 5
The write-down of inventory to net realisable value will be recorded as follows:
Dr Cost of sales 11 180

Cr Inventory 11 180
(19 000 – 7 820)
11.3.3 Physical inventory count
At the end of the financial year a physical inventory count is performed to determine the
quantity of inventory on hand. Most enterprises have regular inventory counts throughout
the year to strengthen internal controls.
During the count all inventories that are property of the enterprise are physically counted.
Therefore all inventories over which the enterprise has a proprietary right (all the risks and
rewards of ownership belong to the enterprise) are counted.
All goods must be included in inventory numbers where right of ownership of the goods
has been transferred to the enterprise and where the enterprise has an obligation to pay
for the goods. Right of ownership usually vests with the enterprise when the seller delivers
the goods to the enterprise. Goods must be included in inventories if the right of
ownership settled with the enterprise, whether the new inventory items are physically on
the premises of the enterprise or not. Where the right of ownership has been transferred
to a client, goods should not be included in the count even if it is still on the enterprise’s
premises.
Goods-in-transit on the cut-off date (date of inventory count) should be evaluated

according to the terms agreed with the supplier. If goods are purchased by the enterprise
“free on board (FOB) departure”, ownership transfers to the enterprise when the supplier
delivers the goods at the point of departure. Where goods are purchased “free on board
arrival”, ownership only transfers to the buyer on receipt at point of arrival.
Examples of inventories that are the property of an enterprise (even though it is not
physically in the enterprise’s possession) are:
 Inventory sent on consignment to an agent of the entity.

In the case of inventory sent on consignment, the agent keeps the inventory to sell
it on behalf of the sender (principal). The ownership of the inventory remains that of
the sender and is not transferred to the agent.
 Inventory of which the right of ownership is transferred before the inventory is

delivered to the entity (purchaser).
The right of ownership of goods that are sent free on board from point of departure
is transferred as soon as goods are loaded on board the ship/train/truck/plane at
point of departure.
 Inventory purchased of which delivery is deferred at the request of the purchaser,

but the purchaser has already taken title and accepted invoicing.
The opposite is also true: Where a person/entity has goods in their possession that
have to be sold on behalf of another person; or where inventory is sent FOB point of
departure to a client; or where inventory, already invoiced, is held at request of a
client, the inventory will not be included in the inventory of the entity.
11 - 6
11.4 Inventory systems
An inventory system must be able to handle large quantities of inventory items and show
the movement of these items. The number of items on hand, prices per unit and the value
of inventory on hand and inventory sold should be indicated on the system. Management
should also be able to extract all information necessary to make decisions from the
system. Control over inventories must also be strengthened by the system.
An inventory system can either be a continuous record of the inventory on hand

(perpetual), or it could be a less complicated system where the quantities obtained from a
physical inventory count are accepted as the only record of actual inventories on hand
(periodic).
11.4.1 Periodic inventory system
The periodic system only gives an indication of the inventory on hand once a physical
inventory count has been done. The physical inventory numbers, with adjustments if
necessary, are used as the closing inventory balance. At the end of the period, the cost of
the inventories sold is calculated as follow:
Opening inventory xxx

+ Purchases xxx
xxx
- Abnormal losses xxx
- Closing inventory xxx
Cost of sales xxx
11 - 7
Journal entries:
(1) The purchasing of goods

Dr Purchases
Cr Bank/Creditors
(2) The sale of goods

Dr Bank/Debtors
Cr Sales
(3) Recording of closing inventory*

Dr Inventory
Cr Cost of sales
(4) Purchase returns:

Dr Bank/Creditors
Cr Purchase returns
Dr Purchase returns
Cr Purchases
(5) Sales returns

Dr Sales returns
Cr Bank/Debtors
Dr Sales
Cr Sales returns
(6) Closing of opening inventory

Dr Cost of sales
Cr Inventory
(7) Closing of purchases:

Dr Cost of sales
Cr Purchases
(8) Closing of cost of sales:

Dr Trade account
Cr Cost of sales
(9) Closing of sales:

Dr Sales
Cr Trade account
(10) Normal inventory losses**
(11) Abnormal inventory losses***

Dr Inventory loss
Cr Cost of sales
11 - 8
*Calculated figure from physical inventory count.
**No entry is recorded for a normal inventory loss. Since actual physical closing
inventories are used, inventory losses are automatically taken into consideration in the
calculation of cost of sales in the cost of sales account.
***Under point 11.3.1.it has been indicated that abnormal losses should not be part of the
cost price of inventory. Since a portion of the cost price of inventory (that portion
applicable to inventory sold) is allocated to cost of sales, abnormal losses should also not
form part of cost of sales, but shown as a separate expense. As the actual physical
closing inventory is used when calculating cost of sales, all losses are automatically
included in cost of sales. Abnormal losses (that, as explained above, are not part of the
cost of sales expense), should therefore be taken out of the cost of sales account and
debited against a separate expense account. By crediting the purchase account with the
abnormal loss before purchases are closed off to cost of sales, the same result can be
achieved.
The opening inventory of a period is the closing inventory of the preceding period. The
balance of the cost of sales account which is transferred to the trade account is the cost of
the inventory sold during the period. The balancing figure in the trade account is the gross
profit which is transferred to the profit and loss account. The inventory account is stated
as a current asset in the balance sheet.
The advantages of this system are its simplicity and low cost. The disadvantage is that it
does not indicate physical inventory losses.
11.4.2 Perpetual inventory system
A perpetual inventory system will always show the physical inventories on hand in the
accounting records. The inventory account is adjusted for every movement in inventory.
The cost of goods sold to date is always available. A physical inventory count is still
performed at the end of the period. A comparison between the result of the physical
inventory count and the inventory balance per the accounting records will indicate the loss
in inventories since the last count.
11 - 9
Journal entries:
(1) The purchase of goods

Dr Inventory
Cr Bank/Creditors
(2) The sale of goods

Dr Bank/Debtors
Cr Sales (sales price)
Dr Cost of sales
Cr Inventory (cost price)
(3) Recording of a normal inventory loss

Dr Cost of sales
Cr Inventory
(4) Recording of an abnormal inventory loss

Dr Inventory loss
Cr Inventory
(5) Purchase returns

Dr Bank/Creditors
Cr Purchase returns
Dr Purchase returns
Cr Inventory
(6) Sales returns

Dr Sales returns (sales price)
Cr Bank/Debtors
Dr Sales
Cr Sales returns (sales price)
Dr Inventory (cost price)

Cr Cost of sales
(7) Closing of cost of sales

Dr Trade account
Cr Cost of sales
(8) Closing of sales

Dr Sales
Cr Trade account
11 - 10
The inventory account is always a theoretical indication of the physical inventory on hand
and the cost of sales account shows the cost of goods sold for the period. It is therefore
not necessary to do any closing entries for the inventory accounts. The inventory account
represents the inventory balance that should be disclosed in the balance sheet. The
balancing figure in the trade account is the gross profit and this is carried forward to the
profit and loss account.
Example 11.2
Information in respect of inventory is as follows:
Opening inventory R500 000

Purchases R700 000
Sales returns R60 000 (cost price R50 000)
Purchase returns R70 000
Sales R1 000 000 (cost price R600 000)
Normal loss R40 000
Abnormal loss R30 000
Closing inventory counted R510 000
Required:
Record information above in the journals and ledger when the following inventory systems
are used respectively:
A) Perpetual inventory system

B) Periodic inventory system
11 - 11
GENERAL INFORMATION
(i) In respect of both systems, the entries in the undermentioned journals would be the
same, namely: (Only the totals of the relevant columns are shown.)
PURCHASES JOURNAL
Date Doc no Creditors Fo Sundry Inventory/ Fo Total
Purchases
xx xx xx
xx xx xx
xx 700 000 700 000
SALES JOURNAL
Date Doc no Debtors Fo Sundry Sales Fo Total
xx xx xx
xx xx xx
xx 1 000 000 1 000 000
PURCHASES RETURNS JOURNAL

Date Doc no Creditors Fo Sundry Purchases Fo Total
Returns
xx xx xx
xx xx xx
xx 70 000 70 000
SALES RETURNS JOURNAL

Doc no Debtors Fo Sales Fo Total
Date Sundry Returns
xx xx xx
xx xx xx
xx 60 000 60 000
11 - 12
(ii) In respect of both systems, the entries in the various control accounts (Debtors and
Creditors) would also be the same, namely:
Debtors’ control
Balance b/d xxx Bank xxx
Sales 1 000 000 Sales returns 60 000
Balance c/f xxx
xxx xxx
Balance b/d xxx
Bank xxx Balance b/d xxx
Purchase returns 70 000 Purchases 700 000
Balance c/f xxx
xxx xxx
Balance b/d xxx
If the perpetual inventory system is used and the number of entries i.r.o. sales and sales
returns however are repetitive, the Sales journal and Sales returns journal can be adjusted
to include additional columns to thereby limit the number of postings to the various ledger
accounts. Those particular journals will therefore be set out as follows:
SALES JOURNAL
Date Doc Debtors Fo Sundry Cost of Sales Fo Total
no sales
xx xx xx xx
xx xx xx xx
xx 600 000 1 000 000 1 000 000
SALES RETURNS JOURNAL

Date Doc Debtors Fo Sundry Cost of Sales Fo Total
no sales returns
xx xx xx xx
xx xx xx xx
xx 50 000 60 000 60 000
The total of the ‘cost of sales’ column will not be taken into account when the journal is
checked through cross casting, because the posting to the ledger will be as follows:
Sales journal: Sales returns journal:
Dr Cost of sales Dr Inventory

Cr Inventory Cr Cost of sales
11 - 13
A) PERPETUAL INVENTORY SYSTEM
GENERAL JOURNAL
Date Particulars Fo Debit Credit

Inventory 600 000
(Cost price of inventory sold for R1 000 000 (2)
transferred from inventory account to Cost of sales
account.)
Inventory 50 000
(Cost price of sales returns of R60 000 transferred to (6)
inventory account.)
Cost of sales (3) 40 000
Inventory 40 000
(Recording of normal inventory losses)
Inventory losses (4) 30 000
Inventory 30 000
(Recording of abnormal inventory losses)
Purchases returns 70 000
Inventory 70 000
(Cost price of purchase returns transferred to (5)
inventory account.)
Sales 60 000
Sales returns 60 000
(Transfer of sales returns to Sales account.) (6)
Sales 940 000
Trade account 940 000
(Transfer of the net sales of the period to the trade (8)
account to establish the gross profit.)
(Cost price of items sold during the period, transferred (7)
to the trade account to establish the gross profit.)
GENERAL LEDGER
Inventory account
Balance b/d 500 000 Purchases return (5) 70 000
Purchases (1) 700 000 CoS (2) 600 000
CoS (6) 50 000 CoS (3) 40 000
Sales returns Inv losses (4) 30 000
Balance c/f 510 000
1 250 000 1 250 000
Balance b/d 510 000
11 - 14
Purchases returns
Inventory (5) 70 000 Creditors (5) 70 000
Sales returns
Debtors (6) 60 000 Sales (6) 60 000
Sales
Sales Returns (6) 60 000 Debtors (2) 1 000 000
Trade acc. (8) 940 000
1 000 000 1 000 000
Inventory losses
Inventory (4) 30 000 Profit&Loss 30 000
30 000 30 000
Cost of sales
Inventory (2) 600 000 Inventory (6) 50 000
Inventory (3) 40 000 Sales return
Trade acc (7) 590 000
640 000 640 000
Trade account
CoS (7) 590 000 Sales (8) 940 000
The balance (difference) on this account of R350 000 represents the gross profit for the
particular period. This amount will be transferred to the Profit and Loss account in which
the net profit (or loss) for the period will be established.
11 - 15
B) PERIODIC INVENTORY SYSTEM
GENERAL JOURNAL

Purchases 70 000
(Transfer of purchases returns to the Purchases (4)
account.)
Sales 60 000
Sales returns 60 000
(Transfer of sales returns to the Sales account.) (5)
Inventory account 500 000
(Transfer of opening Inventory to the Cost of sales (6)
account.)
Purchases 630 000
(Transfer of net purchases to the Cost of sales (7)
account.)
Inventory 510 000
(Transfer of closing Inventory to the Inventory (3)
account.)
Sales 940 000
(Transfer of the net sales for the period to the Trade (9)
account to establish the gross profit.)
(Cost price of items sold during the period (8)
transferred to the Trade account to establish the
gross profit.)
Inventory losses 30 000
(Recording of abnormal inventory losses) (11)
GENERAL LEDGER
Inventory account
Balance b/d 500 000 CoS (6) 500 000
CoS (3) 510 000
11 - 16
Purchases
Creditors (1) 700 000 Purchase (4) 70 000
Returns
CoS (7) 630 000
700 000 700 000
Sales
Sales Return (5) 60 000 Debtors (2) 1 000 000
Trade account (9) 940 000
1 000 000 1 000 000
Purchases returns
Purchases (4) 70 000 Creditors (4) 70 000
Sales returns
Debtors (5) 60 000 Sales (5) 60 000
Inventory losses
CoS 11 30 000 Profit & Loss 30 000
Cost of sales
O/Inventory (6) 500 000 C/Inventory (3) 510 000
Purchases (7) 630 000 I/losses (11) 30 000
Trade account (8) 590 000
1 130 000 1 130 000
Trade account
Gen jnl (C o S) (8) 590 000 Gen jnl (Sales) (9) 940 000
The balance (difference) on this account of R350 000 represents the gross profit for the
particular period. This amount will be transferred to the Profit and Loss account in which
the net profit (or loss) for the period will be established.
11 - 17
11.5 Cost formulas
It will only be possible in exceptional circumstances to attribute individual cost prices to

every inventory item after purchase and storage. A method must therefore be found to
allocate the cost of all purchases between inventories on hand at the end of the period
(asset) and the inventories sold during the year (expense). The method used to do the
allocation is known as the cost formula.
The following cost formulas are generally recognised:
 Weighted average cost

 First-in-first-out (FIFO)
 Specific identification
The cost of items that are not ordinarily interchangeable, and goods or services produced
and segregated for specific projects, should be assigned by using specific identification of
their individual costs. The cost of all other inventory items should be assigned by using
the first-in-first-out or weighted average cost formulas.
It is important for an enterprise to apply a cost formula that will achieve a result close to
the inventory’s actual cost prices. A cost formula can have a significant influence on the
value placed on closing inventory. The valuation of closing inventory also has a direct
influence on net income and current assets. It is therefore necessary that an enterprise
uses the cost formula selected consistently from year to year and discloses the basis used
to value inventories in the accounting policy note. The following is disclosed in the
accounting policy note with regard to inventories:
 The fact that inventories are valued at the lowest of cost and net realisable value (in
other words the deviation from historical cost prices is mentioned)
 The specific cost formula used on every inventory classification, for example:
o Consumables are measured according to the weighted average cost method
o Trading stock is measured on the FIFO basis.
Note that an enterprise does NOT have to disclose which stock system (perpetual or
periodic) it uses, since both systems deliver the same results.
The value placed on closing inventory is calculated as follows: number of items on hand at
the end of the period, multiplied with the unit price as calculated through one of the
methods mentioned above.
For the sake of convenience the standard cost and retail methods can be used as a
technique of determining cost prices if the results approximate historical cost prices.
11 - 18
11.5.1 First-in-first-out
This method is based on the principle that inventory that is bought first will be sold first.
Purchase 10 items @ R10 R100

Balance 20 items R250
Sells 12 items: 10 of R10 (100)
2 of R15 ( 30)
Balance 8 items @ R15 R120
11.5.2 Weighted average cost
The average cost price (total price/total quantity) can be recalculated after each new
purchase, or on a regular basis, e.g. after each month’s purchases.

Balance 20 items @ R12.5 R250
The weighted average price =

R250/20 items = R12.50
Sells 12 items of R12.5 R150

Balance 8 items @ R12.5 R100
11.5.3 Specific identification
This method can only be applied if the inventory is of such a nature that a specific cost
price can be linked to a specific unit over the course of time, e.g. yachts or other expensive
items.

Balance 20 items R250
Sells 7 items of R10 R 70
Sells 5 items of R15 R 75
Balance:3 items @ R10 R30
5 items @ R15 R75 R105
11 - 19
11.5.4 Retail method
The retail method is mainly applied by smaller entities where inventory includes a large
quantity of small items with a high turnover, that all have the same profit margin. The
inventory count indicates the inventory at sales price. The cost price is calculated by
applying the gross profit percentage on the sales price. Inventory marked down or up,
must be taken into account in this calculation. This method is also applied in cases where
insufficient information is available.
Entities can determine the sales price by adding a percentage to the cost price or to the
sales price. If the margin is 20% on cost price, the cost price is used as basis and equated
to 100. The sales price is the equivalent of 100 + 20 = 120. If the margin is 20% on the
sales price, the sales price is the basis and is equal to 100. The cost price is the
equivalent of 100 – 20 = 80.
Sales - cost of sales = gross profit

Sales - (opening inventory + purchases – closing inventory) = gross profit
11.5.5 Standard cost method
Some entities (especially in the manufacturing business) use the standard cost method to
calculate the value of inventory. Standard costs (estimations of prices) are determined for
each input necessary to manufacture the inventory item. These standard costs are
regularly evaluated and updated if necessary. All purchases during the year are then
recorded in the records at these prices that are calculated beforehand. The standard
prices are then compared to actual costs and variances are calculated. If the goods are
purchased at a price that is higher than the standard cost, the following entries are made:
Dr Purchases (at standard prices)

Dr Variance account (difference between purchase price and standard price)
Cr Bank
At the end of the year inventories on hand are valued by multiplying the number of units
with the standard cost per unit. If the standard prices are more or less close to historical
cost price (purchase price), standard prices can be used to value inventories. Cost of
sales is calculated by multiplying the number of units sold with the standard price per unit.
The variance account is written off in the income statement against cost of sales in order
to calculate actual cost of sales.
Standard cost will be covered in Management Accounting.
11 - 20
Example 11.3
The following transactions occurred:
Date Type of Unit price Number Total amount

transaction of units
01 March 20x5 Opening balance R50.00 100 5 000

05 March 20x5 Purchases R51.00 20 1 020
12 March 20x5 Sales ? 15 ?
25 March 20x5 Sales ? 100 ?
Required:
1. Calculate the cost of sales and closing inventory in terms of the perpetual system if
the:
 FIFO system
 Weighted average system is used.
2. Calculate the cost of sales and closing inventory in terms of the periodic system if
the:
 FIFO system
 Weighted average system is used.
11 - 21
PERPETUAL SYSTEM
First-in-first-out method
What was purchased first, will be sold first
Inventory
01/03/05 Opening 5 000 12/03/05 Cost of sales 750
inventory (15 x 50)
(100 x 50) Opening inventory goods
05/03/05 Purchases 1 020 25/03/05 Cost of Sales 5 015

(20 x 51) (85 x 50)
Remainder of Opening
inventory
(15 x 51)
10/03/05 Purchases 1 560 Purchases on 05/03
(30 x 52)
18/03/05 Purchases 2 750 Balance 4 565

(50 x 55)
10 330 10 330
Balance *4 565
*(5 x 51) + (30 x 52) + (50 x 55)
Cost of sales = 750 + 5 015 = 5 765
11 - 22
Weighted average method
The weighted average cost is calculated each time there is a sales transaction.
Inventory
01/03/05 Opening 5 000 12/03/05 Cost of Sales 758
inventory (5000 + 1020 + 1560)/150 =
(100 x 50) 50.53 x 15
05/03/05 Purchases 1 020

(20 x 51)
10/03/05 Purchases 1 560 25/03/05 Cost of Sales 5 174

(30 x 52) (50.53 x 135) + 2750 = 9 572
9 572/(135 + 50) =
51.74 x 100
OR
(5000 + 1020 + 1560 + 2750 –
758) / 185 = 51.74
18/03/05 Purchases 2 750 Balance 4 398

(50 x 55)
10 330 10 330
Balance *4 398
*(85 x 51.74)
Cost of sales = 758 + 5 174 = 5 932
11 - 23
PERIODIC SYSTEM
Closing inventory includes 85 units:
Opening inventory 100

+ Purchases 20
+ Purchases 30
- Sales (15)
+ Purchases 50
- Sales (100)
Closing inventory 85
First-in-first-out method
Closing inventory is the units that have been purchased last.
Closing inventory = 85 units valued as follows:
50 Units x R55 (18/3/05) = R2 750

30 Units x R52 (10/03/05) = R1 560
5 Units x R51 (05/03/05) = R 255
Closing inventory R4 565
Cost of sales = Opening inventory plus purchases less closing inventory
Cost of sales = 5 000 + 5 330 – 4 565 = 5 765
In the case of the FIFO system the value of the closing inventory and the cost of sales are
precisely the same despite the system (perpetual or periodic) is used, as that which has
been purchased first, will always be sold first.
Weighted average method
Weighted average unit price:
(5 000 + 1 020 + 1 560 + 2 750) / (100 + 20 + 30 + 50) = 51.65
Closing inventory = 85 x 51.65 = 4 390.25
Cost of sales = Opening inventory plus purchases less closing inventory
Cost of sales = 5 000 + 5 330 – 4 390.25 = 5 939.75
In the case of the weighted average method the amounts will differ between the two
inventory systems. The reason is that with the perpetual system the average value of the
inventory is calculated before each sale transaction to determine the cost of sales.
With the periodic system the average value of the inventory is calculated once for the
whole period and not before each sales transaction.
11 - 24
A summary of the calculations above and a comparison between the different inventory
systems and cost methods relating to closing inventory and cost of sales is shown in the
table below:
Closing inventory Cost of sales
Perpetual Periodic Perpetual Periodic
FIFO 4 565 4 565 5 765 5 765
WA 4 398 4 390 5 932 5 940
11 - 25
11.6 Inventory losses and insurance claims
It sometimes happens that assets of an enterprise are damaged or lost because of a fire,
theft or floods. These losses can be regarded as normal or abnormal depending on the
nature and scope of the event.
Normal inventory losses are those losses that arise from normal business activities. It is
for example normal for a brandy distillery to lose x% of its spirits due to evaporation. For a
winery to be able to perform their normal activities they will have to lose a certain amount
of litres. Because it is part of their normal business activities they regard it as cost of
sales. To be covered in Financial Accounting 288.
Abnormal losses are losses incurred that do not form part of an entity’s normal business
activities. Examples are losses due to fire, floods or any other losses incurred that do not
form part of an entity’s normal activities. These losses are not part of cost of sales. It is
an ordinary expense. To be covered in Financial Accounting 288.
Entities can take out insurance as protection against such losses.
11.7 The closing process
At the end of the financial period the ledger accounts regarding income statement items
are merged in convenience accounts to calculate the profit/loss for the period which has
an increase or decrease in equity as result. The following are the most general
convenience accounts:
 Cost of sales
 Trade account
 Profit and loss account
A diagrammatical presentation of the closing process is set out in Appendix A and B.
11 - 26
Example 11.4
The following abbreviations will be used:
- CRJ = Cash receipt journal

- CPJ = Cash payment journal
- PJ = Purchase journal
- SJ = Sales journal
- PRJ = Purchase return journal
- SRJ = Sales return journal
The steps taken in the closing-off process are illustrated as follows:
Step 1 - Purchase returns and discount received are closed-off to

Purchases
Purchase returns
31/12 Purchases Jnl 1 1 250 Creditors Bal 1 250
1 250 1 250
Discount received
31/12 Purchases Jnl 2 650 Creditors Bal 650
650 650
Purchases
Bank Bal 6 700 31/12 Purchase returns Jnl 1 1 250
Creditors Bal 10 900 31/12 Discount received Jnl 2 650
31/12 Cost of sales Jnl 8 15 700
17 600 17 600
Step 2 - Sales returns and discount allowed are closed-off to

Sales
Sales returns
Debtors Total 1 365 31/12 Sales 1 365
1 365 1 365
Discount allowed
Debtors Total 1 200 31/12 Sales Jnl 4 1 200
1 200 1 200
11 - 27
Sales
31/12 Sales return 1 365 Debtors Total 27 900
31/12 Discount allowed Jnl 4 1 200 Bank Total 15 450
31/12 Trade account Jnl 9 40 785
43 350 43 350
Step 3 - Purchases, inventory (periodical inventory system), and all expenses

relating to the purchase of inventory are transferred to
Cost of sales
Inventory
01/01 Balance b/f 29 500 31/12 Cost of sales Jnl 5 29 500
31/12 Cost of sales Jnl 6 33 600 31/12 Balance c/f 33 600
63 100 63 100
01/01 Balance b/f 33 600
Freight on purchases
Bank Total 3 450 31/12 Cost of sales 3 450
3 450 3 450
Cost of sales
31/12 Opening inventory Jnl 5 29 500 Closing inventory Jnl 6 33 600
31/12 Freight on 3 450 31/12 Trade account Jnl 10 15 050
purchases
31/12 Purchases Jnl 8 15 700
48 650 48 650
Step 4 - Cost of sales and sales are transferred to the

Trade account
Trade account
31/12 Cost of sales Jnl 10 15 050 31/12 Sales Jnl 9 40 785
40 785 40 785
11 - 28
Step 5 - The trade account and all operating income and expenses are closed-off
to the Profit and loss account
Rent received
31/12 Income received in 13.8 4 500 Bank Total 58 500
advance
58 500 58 500
Interest received
31/12 Profit and loss 3 000 Bank Total 2 750
31/12 Income receivable 13.7 250
3 000 3 000
Bad debts recouped / recovered

31/12 Profit and loss Jnl 22 1 500 31/12 Bank 13.3 1 500
1 500 1 500
Cleaning materials
Bank Total 750 31/12 Consumable 13.10 150
inventory
31/12 Profit and loss Jnl 14 600
750 750
Salaries and wages

Bank Total 30 025 31/12 Profit and loss 30 025
30 025 30 025
Stationery
Bank Total 800 31/12 Profit and loss Jnl 18 800
800 800
Telephone
Bank Total 9 350 31/12 Profit and loss Jnl 16 10 200
Accrued expense 13.5 850
10 200 10 200
11 - 29
Insurance
Bank Total 12 000 31/12 Prepaid expense 3 000
12 000 12 000
Bad debt
31/12 Debtors’ control 13.1 10 000 Bank 13.2 1 500
10 000 10 000
Depreciation
31/12 Accumulated depr. Total 3 000 31/12 Profit and loss Jnl 19 3 000
3 000 3 000
Movement in allowance for credit losses of debtors (expense)

31/12 Allowance for credit 13.5 2 500 31/12 Profit and loss Jnl 21 2 500
losses of debtors
2 500 2 500

Cleaning materials Jnl 14 600 Trade account Jnl 11 25 735
Salaries and wages Jnl 15 30 025 Rent received Jnl 12 54 000
Telephone Jnl 16 10 200 Interest received Jnl 13 3 000
Insurance Jnl 17 9 000 Bad debts recovered Jnl 22 1 500
Stationery Jnl 18 800
Depreciation Jnl 19 3 000
Bad debts Jnl 20 8 500
Movement in Jnl 21 2 500
losses of debtors
Capital Jnl 23 19 610
84 235 84 235
11 - 30
The closing-off journals will be recorded as follows in the general journal on
31 December 20x7
Jnl Details Debit Credit
1 Purchase returns 1 250

Purchases 1 250
(Closing-off purchase returns)
2 Discount received 650

Purchases 650
(Closing-off discount received)
3 Sales 1 365
Sales returns 1 365
(Closing-off sales returns)
4 Sales 1 200
Discount allowed 1 200
(Closing-off discount allowed)
5 Cost of sales 29 500

Inventory 29 500
(Transfer of opening inventory to cost of
sales)
6 Inventory 33 600
(Transfer of cost price of closing inventory
to inventory)

Freight on purchases 3 450
(Closing-off freight on purchase)

Purchases 15 700
(Closing-off purchases to cost of sales)
9 Sales 40 785
(Transfer of sales to trade account to
calculate gross profit)
10 Trade account 15 050

(Transfer of cost of sales to trade account
to calculate gross profit)
11 - 31
11 Trade account 25 735
Profit and loss 25 735
(Transfer of gross profit to profit and loss
account)
12 Rent received 54 000

(Closing-off rent received)
13 Interest received 3 000

(Closing-off interest received)
14 Profit and loss 600

Cleaning materials 600
(Closing-off cleaning materials)
15 Profit and loss 30 025

(Closing-off salaries and wages)

Telephone 10 200
(Closing-off telephone)

Insurance 9 000
(Closing-off insurance)
18 Profit and loss 800

Stationery 800
(Closing-off stationery)

Depreciation 3 000
(Closing-off depreciation)

Bad debts 8 500
(Closing-off bad debts)

Movement in allowance for credit losses 2 500
(Closing-off movement in allowance of
credit losses of debtors)
11 - 32
22 Bad debts recouped / recovered 1 500
(Closing-off bad debts recouped)
23 Capital contribution 10 000

Capital withdrawals 4 450
Capital (01/01/20x7) 25 160
(Closing-off profit and loss and capital
accounts)
11 - 33
APPENDIX A: THE CLOSING PROCESS: PERIODIC INVENTORY
SYSTEM
Purchase Discount
returns received
STEP 1 PURCHASES
Sales Discount
returns allowed
STEP 2 SALES
Other Opening Closing

expenses inventory inventory
COST
STEP 3 OF
SALES

(Gross profit)
Operating Operating
income expenses
11 - 34
APPENDIX B: THE CLOSING PROCESS: PERPETUAL INVENTORY
SYSTEM
Purchase
returns
STEP 1 INVENTORY
Sales Discount
returns allowed
STEP 2 SALES
Discount
received
COST
STEP 3 OF
SALES

(Gross profit)
Operating Operating
income expenses
11 - 35
CHAPTER 11
QUESTIONS
Page
Question 11.1 Calculation: Cost price of inventory 11- 37
Question 11.2 Calculation: Cost 11 - 38
Question 11.3 Net realisable value 11 - 39
Question 11.4 Calculation: Net Realisable Value 11 - 40
Question 11.5 Calculation: Net Realisable Value 11 – 41
Question 11.6 Ledger accounts: Cost of sales & Trade account 11 – 42

Journal entries: withdrawals & advertising
(periodic inventory system)

Journal entries: donation & inventory loss
Question 11.8 Ledger accounts: Inventory 11 – 44

(perpetual inventory system and SI)

Question 11.10 Journal entries 11 – 46

Question 11.11 Ledger accounts: Inventory and Cost of sales 11 – 47

(perpetual inventory system)
Question 11.12 Ledger accounts: Closing-off process (periodic) 11 – 48

Journal entries: Closing-off process
Question 11.13 Ledger accounts: Cost of sales 11 – 49

(SI, WA, FIFO cost formulas)
Question 11.14 Ledger accounts: Inventory 11 – 50

(WA & FIFO cost formulas)
Question 11.15 Calculation: Cost of sales & Inventory 11 – 51

(perpetual & periodic inventory system)
(WA & FIFO cost formulas)
11 - 36
QUESTION 11.1
La Vie Water is a sole trader of bottled mineral water. The water is purchased from a local
farmer and transported to the bottling factory, by truck, in large plastic containers where
the water is bottled and labelled. All sales take place in the sales room at the factory. In
some instances, customers request that the bottles be packaged in cartons. In such cases
the packaging is done in the sales room by the sales staff. The cost of despatching to
customers is carried by the enterprise and in all instances goods are transported to
customers by rail.
The enterprise incurred the following costs, amongst others, during the period 1 April 20x6
to 31 March 20x7:
R
Purchases of water 282 440
Purchases of plastic containers and bottles 124 390
Purchases of cartons 9 420
Purchases of labels 22 410
Rail freight costs 4 670
Transport costs of plastic containers 8 110
Wages - Factory workers 44 000
- Sales staff 28 600
- The enterprise bottled 205 200 bottles of water during the year ended 31 March 20x7.
YOU ARE REQUIRED TO
calculate the cost price, as defined for accounting purposes, of the 205 200 bottles.
11 - 37
QUESTION 11.2
Broom-Broom Ltd. manufactures handmade toy cars. Parts and paint are imported from
China and are delivered to the factory. After the car parts are assembled, they are painted
by outsourced artists. A final quality inspection is done, after which the cars are packed in
transparent boxes with the entity’s trademark on. Sales take place in the sales room at the
factory as well as via the internet. Dispatching to customers in respect of internet sales is
carried by the entity and in all instances transported by rail. Dispatching by rail is packed
in large cardboard boxes.
The following balances, amongst other, appeared in the general ledger on

31 May 2012:
R
Inventory on 1 June 2011 23 213
Purchases – Parts and paint 275 858
Purchases returns of poor quality parts and paint 6 492
Electricity & water – Factory where cars are manufactured 45 951
Electricity & water – Administrative offices 23 654
Purchases – Transparent boxes 8 946
– Large cardboard boxes 7 321
Import costs 99 456
Salaries and wages – Production staff 45 123
– Quality inspection staff 65 128
– Sales room staff 12 497
– Outsourced artists 17 564
– Cleaning staff 22 543
You establish the following amongst other things:
1. The cost price of the inventory amounted to R13 421 on 31 May 2012.
YOU ARE REQUIRED TO
compile the Cost of sales ledger account for toy cars, properly closed-off, for the year
ended 31 May 2012.
11 - 38
QUESTION 11.3
Pick n Plant Products is an enterprise that trades in fresh produce. It is the policy of the
enterprise to consistently realise a gross profit of 25% on the selling price of its products.
The cost price of the enterprise’s inventory amounted to R28 764 on 31 March 20x7. You
establish, however, that it included inventory with a cost price of R6 675 that was not fresh
anymore and that had to be removed from the shop's shelves the next day. The particular
inventory could however be sold to a local farmer on the following basis:
- The inventory can be purchased at its normal selling price, on which a trade discount of
60% is allowed.
- A cash discount of 5% must be allowed for immediate payment in cash.
- The farmer undertook to remove the existing packaging from the products at a cost of
R250.
- The enterprise had to transport the products to the farm at a cost of R356.
- The enterprise had to repackage the produce into the farmer's containers at a cost of
R100.
YOU ARE REQUIRED TO
(a) calculate the net realisable value of the inventory that was not fresh.
(b) calculate the value at which inventory must be shown in the balance sheet on
31 March 20x7 to comply with the requirements of IFRS / GAAP.
(c) show the journal entry that will be made in respect of inventory on
31 March 20x7.
11 - 39
QUESTION 11.4
Happy Campers is an entity that trades in camping equipment. The entity has a number of
branches across South Africa. The entity was under pressure during the current financial
year due to the entrance of a new rival, Due North, which imports tents from India at more
competitive prices.
It is the policy of the enterprise to realise a gross profit of 50% on the cost price of its
products.
A physical inventory count was performed on 29 February 2012, the end of the financial
year, and the cost price of the inventory amounted to R800 000. Included in the total
inventory are 550 tents with a cost price of R900 each. The sales manager of Happy
Campers has indicated that these tents cannot be sold at the normal selling price in the
market. These tents were subsequently sold on a clearance sale on 15 March 2012 on the
following basis:
1. The selling price was 60% of the normal selling price.
2. A cash discount of 10% will be allowed for settlement of the amount owing within
30 days.
3. All tents must be transported from the branches to the head office. The clearance sale
of the tents will only be done at this branch. The tents must be specially packed prior to
sending it to head office. The costs thereof were as follows:
- Transport cost from other branches R8 900

- Special packaging of tents R4 300
4. The salaries of the sales personnel at the head office amounts to R11 200 per month.
5. All tents have to be relabelled before it can be displayed in the shop on the clearance
sale. The cost of the new labels amounted to R1 200.
YOU ARE REQUIRED TO:
a) calculate the net realisable value of the tents on 29 February 2012.
b) provide the journal entry in the general journal of Happy Campers to show the tents at
its net realisable value on 29 February 2012. No journal narration is required.
c) calculate the value at which the item “trading inventory” must be shown in the balance
sheet of Happy Campers on 29 February 2012.
11 - 40
QUESTION 11.5
YB Sport is an entity that specialises in the selling of sport clothes. With the Cricket World
Cup held in England, YB Sport budgeted that their sales of South African cricket jerseys
would increase significantly. Due to the poor performance of the South African cricket
team during the World Cup, the sales did not increase as much as budgeted and YB Sport
still has 2 000 South African cricket jerseys left. YB Sport’s financial year-end is
31 March 2019.
It is the entity’s policy to realise a gross profit percentage of 40% on the cost price for
cricket world cup jerseys.
On 31 March 2019 the management of YB Sport confirmed that only 400 of the 2 000
jerseys would sell at their normal selling price. The remaining 1 600 jerseys would be sold
to a cricket development school at a trade discount of 50%. The cost price of the jerseys is
R280 each.
YB Sport will transport the remaining 1 600 jerseys to the cricket development school at a
fixed cost of R4 000. YB Sport will repackage the jerseys before they are sold. The cost of
staff directly involved in the repacking process amounts to R2 000. The cricket
development school will be adding their logos on the jersey at a cost of R40 per jersey.
YOU ARE REQUIRED TO
a) calculate the net realisable value of the 1 600 South African Cricket World Cup
jerseys at year-end.
b) provide the journal entry(-ies) in order to show the inventory at net realisable value on
31 March 2019. Journal narrations are not required.
Amounts must be rounded off to the nearest rand, if necessary. Show all
calculations. Ignore VAT.
11 - 41
QUESTION 11.6
customers by rail.
It is the policy of the enterprise to consistently realise a gross profit of 40% on the selling
price of the product.
The following is an extract of certain items that appeared in the trial balance on
31 March 20x7, the end of the financial year:
R
Inventory at cost on 1 April 20x6 30 000
Purchase returns of water 30 000
Advertising expenses 11 790
1. All sales took place at "normal" prices and there were no inventory losses during the
year.
2. During the year, the owner took bottled water with a total selling price of R2 800 for his
personal use, for which no accounting entries have been recorded to date.
3. The enterprise also made bottled water with a total selling price of R2 000 freely
available to certain clients during the year for advertising purposes, for which no
accounting entries have been recorded to date.
4. According to a physical inventory count on 31 March 20x7, the cost of the inventory on
that date amounted to R27 000.
YOU ARE REQUIRED TO
(a) show both the journal entries in the general journal to be made in respect of the
private use of the inventory by the owner and the inventory utilised for advertising
purposes.
(a)
(b) show the Cost of sales and Trade account, properly closed-off, for the year ending
31 March 20x7.
Note: for an example of a perpetual inventory system, see Question 11.11

11 - 42
QUESTION 11.7
The Pie Palace is an enterprise that trades in a selection of meat pies, home-baked by
housewives according to a special recipe. The enterprise supplies the bakers with all the
necessary ingredients and packaging material, which are delivered to their respective
homes. The baked pies are packed into large carton containers that are collected by the
enterprise and transported to the enterprise's shop. In the shop's storeroom, all the pies
are packed into transparent paper bags marked with the enterprise's name and checked
by the assistant manager for quality, where after they are placed on the shelves in the
shop's sales room. In most cases, pies that are sold are packaged in plastic carrier bags,
together with cans of cool drinks, which are also offered for sale.
The following balances appeared, amongst others, in the ledger of the enterprise on 28
February 20x7:
R
Inventory on 1 March 20x6 - Baked pies 3 140
- Cool drinks 1 224
Purchases - Pie ingredients 48 163
- Cool drinks 22 286
Purchases - Carton containers 1 644
- Paper bags 2 625
- Plastic bags 1 994
Transport costs - To bakers 1 526
- From bakers 2 414
Advertising costs - Brochures 1 006
- Newspapers 1 822
Salaries and wages - Bakers 61 416
- Sales manager 48 290
- Assistant manager 36 620
- Cleaning personnel 18 775
2. It is the policy of the enterprise to consistently realise a gross profit of 50% on the cost
price of products. All products were sold at normal prices during the year.
3. The enterprise donated pies with a selling price of R225 to an old age home on 6 April
20x6 and threw pies with a selling price of R285 away on 19 July 20x6, because they
did not comply with the standards set by the enterprise. No accounting entries were
made for these events.
4. The selling price of the pie inventory amounted to R3 330 and the selling price of the
cool drinks amounted to R1 995 on 28 February 20x7.
YOU ARE REQUIRED TO
(a) compile the Cost of sales account and the Trade account for only pies in the general
ledger, properly closed off, for the year ended 28 February 20x7.
(b) show the journal entries in respect of the accounting events described in additional
information 2 above.
11 - 43
QUESTION 11.8
Infotek Trading is an enterprise that trades in computers. The enterprise uses a perpetual
inventory system and uses the specific identification method of determining the cost price
of its inventory.
The enterprise had the following computers in inventory on 1 March 20x7:
Model Quantity Cost price per item

PA21 6 R4 586
LC5 3 R7 291
GQ100 9 R9 997
The enterprise entered into the following transactions in respect of computers during
March 20x7:
Mar 04 Purchase 4 models FG44 on credit from ABC Computers for R 5 439 each.
09 Sell 1 model GQ100 to D Foster for R12 384.
12 Sell 2 models FG44 to Stelkor Properties for R6 385 each.
13 Stelkor Properties returns 1 of the model FG44, which was defective.
17 Sell 3 Models GQ100 to Markies Trading for R12 650 each.
19 One model LC5 is taken from inventory for the enterprise’s own use.
22 Purchase 4 models BW13 on credit from ABC Computers for R6 060 each.
23 Return 1 of the models BW13 that is defective, to ABC Computers.
25 The owner took 1 model BW13 from inventory for his personal use.
YOU ARE REQUIRED TO
compile the inventory account for computers in the general ledger for March 20x7, properly
closed off and dated, in which all the appropriate accounting events for March 20x7 are
recorded.
11 - 44
QUESTION 11.9
Zorgsaam Cellar is a wine cellar that produces and bottles boutique wines for sales to
international tourists. The grapes are purchased from a few exclusive wine farms from
where it is transported in tankers by road to the wine cellar. The grapes are pressed in the
cellar and matured in wooden casks. After proper maturation the wines are blended and
bottled. The bottled wines are stored in a cellar, ready to be sold. Sold products are
packed in cartons if the clients should request it. Bulk sales are air freighted to the
particular clients for the enterprise’s own account.
The following balances, amongst others, appeared in the general ledger of Zorgsaam
Cellar on 28 February 20x7, the end of the financial year:
R
Inventory bottled wine on 1 March 20X6 39 218
Purchases of grapes 389 235
Purchases of bottles 34 207
Purchases returns of grapes 11 786
Road transport costs 24 346
Air freight costs 36 299
Wages - Sales personnel 78 922
Wages - Cellar personnel 98 896
1. It is the enterprise’s accounting policy to realise a gross profit of 60% on the cost price
of the wine.
2. All sales took place at normal selling prices.
3. Bottled wine with a selling price of R3 040 was used in the tasting room during the year
for marketing purposes, for which no accounting entries were made to date.
4. Bottled wine with a selling price of R1 920 was taken from inventory by the owner for
his personal use, for which no accounting entries were made to date.
5. The cost price of the bottled wine inventory amounted to R41 127 on
28 February 20x7.
YOU ARE REQUIRED TO
a) show the following ledger accounts for the year ended 28 February 20x7, properly
closed-off:
- Cost of sales account
- Trade account
b) show both the journal entries that will be made in the general journal in respect of the
following:
- the wine that was used in the tasting room for marketing purposes; and
- the wine that was taken from inventory by the owner for his personal use.
11 - 45
QUESTION 11.10
Garden Centre is an entity that sells lawnmowers to various gardening service contractors.
It is the policy of the entity to realise a gross profit of 50% on the selling price of all
lawnmowers. Garden Centre utilises a periodic inventory system.
All purchases and sales of lawnmowers are on credit.
The cost price of all lawnmowers on hand amounted to R600 000 on 1 March 2019.
The following transactions took place during March 2019:
 Lawnmowers with a cost price of R400 000 were purchased during the month. A
trade discount of 10% must still be taken into account.
 There were abnormal inventory losses with a total selling price of R5 000.
 Lawnmowers with a total cost price of R2 000 had an electrical fault and was
consequently returned by Garden Centre to the supplier.
 Lawnmowers with a total selling price of R1 425 000 were sold during the month.
 Lawnmowers with a total selling price of R1 800 were returned by clients to Garden
Centre due to the lawnmowers not working.
 The owner took a lawnmower with a cost price of R1 000 for his personal use.
The cost price of the lawnmowers on hand amounted to R242 900 according to a physical
inventory count performed on 31 March 2019.
YOU ARE REQUIRED TO
show all the accounting transactions as described above in the general journal of Garden
Centre, as well as all the closing entries, except the closing entries to the trade- and profit
and loss account. Journal narrations are not required.
Amounts must be rounded off to the nearest rand, if necessary. Show all
calculations. Ignore VAT.
11 - 46
QUESTION 11.11
customers by rail.
It is the policy of the enterprise to consistently realise a gross profit of 40% on the selling
price of the product. The enterprise uses a perpetual inventory system.
The following is an extract of certain items costs incurred for the current financial year
ended 31 March 20x7:
R
Purchase returns of water 30 000
Advertising expenses 11 790
Sales of bottled water (selling price) 752 450
1. All sales took place at "normal" prices and there were no inventory losses during the
year.
2. Inventory at cost price amounted to R30 000 on 1 April 20x6.
3. During the year, the owner took bottled water with a total selling price of R2 800 for his
personal use, for which no accounting entries have been recorded to date.
4. The enterprise also made bottled water with a total selling price of R2 000 freely
available to certain clients during the year for advertising purposes, for which no
accounting entries have been recorded to date.
YOU ARE REQUIRED TO
(a) show both the journal entries in the general journal to be made in respect of the
private use of the inventory by the owner and the inventory utilised for advertising
purposes.
(b) show the Inventory and Cost of sales account, properly closed-off, for the year
ending 31 March 20x7.
11 - 47
QUESTION 11.12
Dormie Cycles is a sole trader in bicycles. The following balances appeared in the general
ledger of the enterprise on 28 February 20x6:
R
Withdrawals - Owner 19 000
Interest earned 990
Furniture and equipment at carrying value 9 450
Sales of products 151 300
Freight charges on sales 2 440
Freight charges on purchases 2 550
Trading inventory on 1 March 20x5 33 400
Printing 610
Printing inventory on 28 February 20x6 400
Packaging costs of goods purchased 4 190
Repairs of equipment 1 020
Assembly costs of goods purchased 6 420
Cleaning costs of products sold 1 840
Sales returns 2 000
Purchases of products 77 750
1. The enterprise's financial year ended on 28 February 20x6.

2. The cost price of the trading inventory on 28 February 20x6 amounted to R37 600.
3. The following costs are also part of the costs of getting a bicycle ready for sale: Freight
charges on purchases, packaging costs of goods purchased, and assembly costs of
goods purchased.
YOU ARE REQUIRED TO
show the closing journal entries that will be made in the general journal on
28 February 20x6 in the process of calculating the gross profit and net profit for the year,
together with the journal entries that will be made to finally close off the accounting records
of the enterprise for the year ended 28 February 20x6.
11 - 48
QUESTION 11.13
Maritz Motors is a sole trader in new motor vehicles and various spare parts. It is the
policy of the enterprise to use the following inventory systems for the specific inventory
items, as indicated:
Motor vehicles - Perpetual inventory system

Spare part 224P - Perpetual inventory system
Spare part 376J - Periodical inventory system
The enterprise's inventory comprised the following on 1 March 20x7:
Product Quantity Cost price per item

Audi A4 1 R116 000
Golf Shuttle 3 R 42 000
Golf GS 2 R 56 000
Jetta CLI 1 R104 000
Spare part 224P 30 R 58
Spare part 376J 55 R 72
Assume all purchases and sales were for cash.

The enterprise entered into the following transactions, amongst others, during March 20x7:
Date Type of transaction Product Quantity Price per item

02 Sale Golf GS 1 R70 000
04 Purchase Spare part 224P 20 R60
11 Purchase Spare part 376J 25 R70
15 Sale Golf Shuttle 2 R55 000
17 Sale Spare part 376J 60 R78
19 Purchase Jetta CSX 2 R88 000
20 Sale Jetta CLI 1 R109 000
24 Sale Spare part 224P 40 R68
27 Purchase Audi A6 2 R120 000
29 Sale Jetta CSX 1 R93 000
30 Purchase Spare part 224P 45 R52
YOU ARE REQUIRED TO
(a) calculate the cost price of the motor vehicle inventory on 31 March 20x7 according to
the specific identification method by making use of a suitable ledger account.
(b) calculate the cost price of the spare part 224P inventory on 31 March 20x7 according
to the weighted average method by making use of a suitable ledger account.
(c) calculate the cost price of the spare part 376J inventory on 31 March 20x7 according
to the first-in-first-out method by making use of suitable schedules and calculations.
11 - 49
QUESTION 11.14
Dormie Cycles is a sole trader in bicycles and bicycle spares. The enterprise uses a
perpetual inventory system.
All sales and purchases were for cash.
The following is a summary of the inventory transactions that took place during October
20x7 in respect of a specific spare part:
Oct 01 Opening inventory - 800 units @ 60c each

05 Purchases - 200 units @ 70c each
16 Sales - 400 units
27 Sales - 500 units
YOU ARE REQUIRED TO
show the Inventory account for October 20x7 in the general ledger, properly closed off, if
the enterprise respectively calculates the cost price of its inventory according to each of
the following methods:
- Weighted average
- First-in-first-out (FIFO)
11 - 50
QUESTION 11.15
All-spares is an enterprise that trades in spare parts. On 1 May 20x7 the following spare
parts were on hand:
Item Quantity Price per item
876 E 35 R10
369 V 65 R17
During May 20x7 the following transactions regarding spare parts took place:
Date Item Quantity Transaction Price per item

May 03 876 E 20 Purchases R12
09 876 E 50 Sales R15
13 369 V 25 Purchases R18
16 876 E 25 Purchases R12
19 369 V 30 Sales R20
22 369 V 15 Purchases R19
25 876 E 15 Purchases R13
29 876 E 10 Sales R15
YOU ARE REQUIRED TO
(a) calculate the following regarding spare part 876 E when the FIFO cost formula is
applied:
(i) cost price of inventory on hand on 31 May 20x7 according to the perpetual
system
(ii) cost of sales for May 20x7 according to the periodic system
(b) calculate the following regarding spare part 369 V when the Weighted Average cost
formula is applied:
(i) cost price of inventory on hand on 31 May 20x7 according to the periodic
system
(ii) cost of sales for May 20x7 according to the periodic system
11 - 51
CHAPTER 12
PROPERTY, PLANT AND EQUIPMENT
Page
12.1 Definition and classification 12 - 3
12.2 Cost price and depreciable amount 12 - 3
12.3 Depreciation and accumulated depreciation 12 - 5
12.3.1 Straight-line method

12.3.2 Diminishing balance method
12.3.2 Production unit method
12.4 Fixed asset register 12 - 9
12.6 Derecognition of property, plant and equipment 12 - 9
Questions 12 - 13
12 - 1
- identify and calculate the cost of property, plant and equipment
- understand and account for the concepts of depreciation and

accumulated depreciation
- identify and apply the various methods of calculating depreciation
- prepare a fixed asset register
- account for the purchase and derecognition of property, plant and

equipment
12 - 2
12.1 Definition and classification
An asset is a resource that is controlled by the entity as a result of events in the past and
from which future economic benefits will flow to the entity.
Assets are divided into two broad groups namely, current assets and non-current assets.
Current assets are assets used in trading, i.e. there is an expectation that the assets will
realise within a period of twelve months or the entity’s normal operating cycle, or they are
sold or used. Non-current assets are assets used in more than one period to generate
income.
Non-current assets can be classified as follows:
Tangible assets Intangible assets Financial assets

Examples: Examples: Examples:
Property Goodwill Investments
- Land Computer software
- Buildings Patents
Plant Trademarks
- Machinery Copyright
- Production lines
Equipment (generic)
- Office equipment
- Computer equipment
- Motor vehicles
- Furniture
The rest of this chapter will deal with the accounting treatment of property, plant and
equipment, as detailed above.
12.2 Cost price and depreciable amount
Depreciable amount = cost price of asset less residual value
Cost price = cost price of asset and any direct costs incurred to bring the asset in working
condition for its intended use
Examples of direct costs are: transport cost, initial delivery and handling cost, installation
cost
Residual value = amount expected at the sale/trade-in of the asset at the end of its useful
life, after deduction of estimated sale and trade-in costs
Any costs incurred until the date the asset is ready for use, is included in the cost price of
that asset. Any costs incurred after that date will be accounted for as expenses that do not
form part of the cost price of the asset, excluding expenses incurred to increase the
original estimated performance standard with the result that additional future economic
benefits will flow to the entity.
12 - 3
Repairs to assets will not form part of the cost price, but will be recognised as an expense,
as it will only repair the asset’s ability to its original performance.
When items of property, plant and equipment are transported free on board, right of
ownership is transferred at a place called either point of consignment/departure or point of
arrival. All costs from that point are included in the cost price of the asset. In other words,
when assets are transported free on board point of consignment/departure, all costs are
included from the location from where it is transported. If assets are transported free on
board point of arrival, all costs from that specific location are included, and thus all costs
from the point of consignment to the point of arrival are excluded.
Example 12.1
An entity in Stellenbosch produces wine. On 31 May 20X7 a new bottling machine is

purchased free on board Germany. On 15 June 20X7 it is transported from Cape Town
Harbour to Stellenbosch and installed in the factory on 28 June 20X7. Final tests were
done on 30 June 20X7 and the machine was ready for use.
The following costs were incurred:

R
Purchase price 399 000
Freight 97 000
Marine insurance 7 800
All-risk insurance (1 June 20X7 – 30 November 20X7) 9 000
Loading cost – Germany 6 500
Loading cost – Cape Town 8 900
Transport in Germany 2 400
Transport from Cape Town Harbour to Stellenbosch 1 300
Repairs (machine was dropped in Cape Town Harbour) 4 000
Mounting cost 600
The cost price of the asset will be defined as follows:
R
Purchase price 399 000
Freight 97 000
All-risk insurance (1 June 20X7 – 30 June 20X7) 1 500
Loading cost – Cape Town 8 900
Transport from Cape Town Harbour to Stellenbosch 1 300
Repairs (machine was dropped in Cape Town Harbour) 4 000
Mounting cost 600
520 100
12 - 4
12.3 Depreciation and accumulated depreciation
The value of an asset used over more than one accounting period decreases, therefore
depreciation is written off. Depreciation is the apportionment of the depreciable amount of
a depreciable asset over its estimated useful life. In other words the initial cost of property,
plant and equipment is written down by depreciation write-offs as a cost against income
over the economic life span of the asset. It is done to ensure a fair presentation of financial
statements.
Depreciation is written off from the date the asset is ready for use and not from the date of
first usage. If the asset is idle, depreciation will not cease, but will still be written off.
Depreciation on an asset ceases at the earlier of date that the asset is derecognised and
the date that the asset is classified as held for sale in accordance with IFRS 5 (not
applicable to FA 188 – covered in FA 389). This means that an asset that is no longer
being used and is simply awaiting disposal continues to be depreciated.
Depreciation is an expense and will be debited; the cost price of the asset will be credited.
It is customary not to credit the asset account, but an accumulated depreciation account
as such. With the preparation of the financial statements the balance of the accumulated
depreciation account will be deducted from the cost price of property, plant and equipment
to show the carrying amount of the asset.
The depreciation entry will be as follows:
Dr Depreciation
Cr Accumulated depreciation
The carrying amount of property, plant and equipment will be disclosed in the balance
sheet as follows:
Cost price xxx

Less: accumulated depreciation (xxx)
Carrying amount xxx
12 - 5
There are various methods to calculate depreciation of which the following are the most
general:
12.3.1 Straight-line method
With this method, depreciation is written off as a fixed amount based on a fixed percentage
of the depreciable amount, calculated over the expected life of the asset to write the
asset down from the date ready for use. Where an asset has been used for a part of the
year, depreciation will be apportioned. Residual value will be taken into account.
Example
Cost price = R13 000; Rate = 20% per year (or 5 years); Residual value = R3 000
Yr 1: (13 000 – 3 000) x 20% = 2 000
Yr 2: (13 000 – 3 000) x 20% = 2 000 etc.
(after 5 years: asset is written off completely)
12.3.2 Diminishing balance method
With this method, depreciation is calculated on the carrying amount (cost price less
accumulated depreciation) of the asset, at a fixed percentage from the date ready for use.
Where an asset has been used for a part of the year, depreciation will be apportioned.
Residual value will NOT be taken into account.
Example
Cost price = R10 000; Rate = 10% per year
Yr 1: 10 000 x 10% = 1 000
Yr 2: 10 000 – 1 000 = 9 000 x 10% = 900
Yr 3: 10 000 – 1000 – 900 = 8 100 x 10% = 810 etc.
12.3.3 Production unit method
When purchasing certain assets, the estimated economic life will be based on the amount
of production units that can be manufactured by the asset. The depreciation percentage is
calculated annually by taking the total number of units manufactured for the year, as a
percentage of the budgeted total units. The percentage is then applied to the depreciable
amount. Where an asset has been used for a part of the year, depreciation is not
apportioned, as only the units, which have been used during the year, are included in the
calculation. This method is an exception to the standard, which states that depreciation
must be written off from the date that the asset is ready for use.
With this method no depreciation is written off in the period from the date that the asset is
ready for use until the date that it is put into use. Depreciation is only written off from the
date that the asset is put into use (or when manufacturing starts). If the asset is used for a
part of the year, there will be no apportionment as this method of depreciation is based on
units manufactured and not period of use. Depreciation written off is limited to the total
budgeted units manufactured. Instances may arise where more than the total budgeted
12 - 6
units are manufactured, but no depreciation is written off on these additional units.
Residual value is taken into account.
Example
Cost price = R53 000; Residual value = R3 000
100 000 total budgeted units
Yr 1: 10 000 units manufactured
10 000 / 100 000 x (53 000 – 3 000) = 5 000
Yr 2: 15 000 units manufactured
15 000 / 100 000 x (53 000 – 3 000) = 7 500
When 100 000 units in total have been manufactured – no further depreciation is written
off
12 - 7
Example 12.2
Information:
Cost price of vehicles on 1 July 20X6 R600 000

Vehicle purchased on 30 June 20X7 R150 000
Accumulated depreciation on 1 July 20X6 R240 000
Depreciation R10 000 per month
Required:
(a) Show the appropriate ledger accounts, duly closed on 30 June 20X7
(b) Show the disclosure in the balance sheet on 30 June 20X7
General ledger accounts
Vehicles (at cost price)

01/07 Balance b/f 600 000 30/06 Balance c/f 750 000
30/06 Purchase journal 150 000
750 000 750 000
01/07 Balance b/f 750 000
Depreciation
30/06 Accumulated depr 120 000 30/06 Profit and Loss 120 000
Accumulated depreciation
30/06 Balance c/f 360 000 01/07 Balance b/f 240 000
30/06 Depr 120 000
360 000 360 000
01/07 Balance b/f 360 000
Balance sheet on 30 June 20X7
Property, plant and equipment

Vehicles @ cost price 750 000
Less: accumulated depreciation (360 000)
Carrying amount 390 000
12 - 8
12.4 Fixed-asset register
Assets are purchased at different times at different cost prices. It would therefore be ideal
for each asset to have its own separate ledger account in the general ledger and to record
all the transactions related to the asset in its separate account. However, there is quite a
lot of detail regarding each asset that has to be recorded e.g. date of purchase,
description, cost price, depreciation method and rate, depreciation, accumulated
depreciation etc. It is therefore unpractical, and sometimes not possible, to gather all this
information in a ledger account. A fixed asset register is used to record all the detail. The
fixed asset register can serve as the individual ledger account for each asset with
corresponding control accounts (assets at cost price and accumulated depreciation) in the
general ledger. The control accounts will include all amounts recorded in the fixed asset
register, but only the combined totals.
The fixed asset register will have all the administrative detail of each individual asset as
well as all the information regarding the accounting transactions related to these assets.
An example of a register is given below:
Description Date Cost Residu Depr Depreciable Depr Depr Depr Depr
purchased price al value method amount Y1 Y2 Y3 Y4
Machine X 1 Apr 20X1 500 000 - PU 5% 500 000 5 000 7 000 8 000 10 000
Vehicle Y 1 Jun 20X4 100 000 10 000 DB 10% 90 000 9 000 8 100 7 290 6 561
Furniture Z 1 Nov 20X6 100 000 - SL 20% 100 000 20 000 20 000 20 000 20 000
The fixed asset register will consequently be updated after each transaction or event
regarding each individual asset and the corresponding asset and accumulated
depreciation control accounts in the general ledger will be adjusted with the totals.
12.5 Derecognition of property, plant and equipment
The carrying amount of a property, plant and equipment is derecognised:

a) on disposal; or
b) when no future economic benefits are expected from its use or disposal.
12.5.1 Sale or trade-in of property, plant and equipment
When property, plant and equipment is sold, the cost price and accumulated depreciation
of the asset must be taken out of the accounting records (general ledger and fixed asset
register).
The asset may sell for an amount equal to its carrying amount, less than its carrying
amount or an amount more than its carrying amount. A profit or loss on sale/trade-in of the
asset must be calculated. A profit is recognised where an asset is sold/traded-in for an
amount more than its carrying amount and a loss is recognised where an asset is
sold/traded-in for an amount less than its carrying value.
A realisation account is used to compare the proceeds of sale/trade-in of the asset with its
carrying amount (cost price less accumulated depreciation) of the asset to calculate the
profit or loss with sale/trade-in of the asset.
12 - 9
The following steps will be followed with derecognition of property, plant and equipment:
1. Write depreciation off on the assets up to the date of sale/trade-in
Dr Depreciation
Cr Accumulated depreciation
2. Transfer the cost price of the asset to the realisation account
Dr Realisation
Cr Asset @ cost price
3. Transfer the accumulated depreciation of the asset to the realisation account
Dr Accumulated depreciation
Cr Realisation
4. Record the proceeds of sale/trade-in in the realisation account
Dr Bank/Debtors
Cr Realisation
5. Close off the realisation account and transfer the profit or loss to the profit/loss on sale
of property, plant and equipment account
6. Take the information relating to the asset out of the fixed asset register
Example 12.3
Information:
Cost price of vehicles on 1 July 20X6 R60 000

Accumulated depreciation on 1 July 20X6 R24 000
Depreciation 20% straight-line
A vehicle with a cost price of R15 000 and a carrying amount of R9 000 on 1 July 20X6
was sold on 1 April 20X7 for R7 500 cash
Required:
Show the appropriate ledger accounts, properly closed off on 30 June 20X7
12 - 10
Vehicles (at cost price)
01/07 Balance b/f 60 000 01/04 Realisation 15 000
30/06 Balance c/f 45 000
60 000 60 000
01/07 Balance b/f 45 000
Depreciation
01/04 Accumulated depr 2 250 30/06 Profit and Loss 11 250
(15 000x20%x9/12)
30/06 Accumulated depr 9 000
(45 000 x 20%)
11 250 11 250
01/04 Realisation 8 250 01/07 Balance b/f 24 000
30/06 Balance c/f 27 000 01/04 Depr 2 250
30/06 Depr 9 000
35 250 35 250
01/07 Balance b/f 27 000
Realisation
01/04 Vehicles @ CP 15 000 01/04 Accumulated depr 8 250
30/06 Profit on sale 750 01/04 Bank 7 500
15 750 15 750
Profit on sale of vehicles

30/06 Profit and Loss 750 30/06 Realisation 750
12 - 11
12.5.2 Compensation received from insurer
If an asset is destroyed, damaged or stolen and an insurance claim is instituted against the
insurer, the asset that is destroyed, damaged or stolen, will be derecognised. The carrying
amount of such an asset shall be written-off against the profit and loss for the year. Steps
1 to 6 as detailed in paragraph 12.5.1 will still be applied.
Where compensation is received from an insurer, this compensation is recognised as a

separate income item in the income statement and a separate ledger account is opened.
The compensation received is therefore not accounted for as proceeds in the realisation
account and the carrying amount of the asset is written off, in full, as a loss in the
realisation account.
Only when compensation is receivable from the insurer (in other words, the insurer
approves the claim), will a debtor be created and the amount be recognised in the profit
and loss account for the year.
Recognise compensation from the insurer

Dr Debtor
Cr Compensation from the insurer (Income)
On the day the cash is received from the insurer, the debtor can be cancelled.
Cash received from insurer

Dr Bank
Cr Debtor
12 - 12
CHAPTER 12
QUESTIONS
Page
Question 12.1 Calculate cost price of asset 12 - 14
Question 12.2 Straight-line & Diminishing balance methods + realisation 12 - 15
Question 12.3 Production unit method + realisation 12 - 19
Question 12.4 Straight-line & Production unit methods + realisation 12 – 21
Question 12.5 Straight-line & Diminishing balance methods + fixed asset

register 12 – 22
Question 12.6 Calculate cost price of asset 12 – 23
Question 12.7 Straight-line & Production unit methods + realisation 12 - 24
Question 12.8 Calculate cost price of asset 12 – 25
Question 12.9 Straight-line & Production unit methods + realisation 12 - 26
12 - 13
QUESTION 12.1
Carto Printers is a Cape Town based business that prints brochures for the tourism
industry. Management decided on 15 March 20x6 to purchase a new computerised
printing press from a company in Hamburg, Germany. The order was placed on that date
on the following terms:
- The purchase price amounted to R248 000, on which the supplier has allowed a 10%
trade discount.
- The printing press was purchased Free-on-board Hamburg harbour with Carto Printers
acquiring ownership on the date the printing press left the Hamburg harbour. The
press left Hamburg harbour on 1 April 20x6 and was off-loaded in Cape Town harbour
on 1 May 20x6.
The following costs, amongst others, were incurred in respect of the printing press:
R
Shipping freight costs 19 800
Maritime insurance 3 600
Loading and storage costs - Hamburg harbour 2 200
- Cape Town harbour 2 000
All-risk insurance - 1 May 20x6 to 30 April 20x7 14 400
Installation costs 28 300
Purchases of paper and consumables 2 000
Installation of the press was completed on 10 May 20x6. During the testing of the press
on that date, an electrical fault caused damage to the press. This resulted in reparation
costs in the amount of R4 800.
Tests were completed on 1 June 20x6 and the press started operating on 1 July 20x6.
During the testing phase, paper and consumables amounting to R700 were used.
YOU ARE REQUIRED TO
(a) Calculate the cost of the printing press for accounting purposes.
(b) Calculate the depreciation that will be written off on the printing press for the year
ended 31 December 20x6, if it is the policy of the enterprise to depreciate such items
according to the straight-line method at 20% per annum.
12 - 14
QUESTION 12.2
Padrit Transport is an enterprise that transports domestic furniture with various similar
trucks. It is the policy of the enterprise to:
(a) Use the trucks for only 48 months, after which the particular truck is by agreement
traded in at a particular dealer for 10% of its original cost price, after which it is
immediately replaced with a new similar truck.
(b) Identify each truck separately with a code number that is allocated in the same
sequence as the date of purchase.
On 28 February 20x4, the end of the financial year, the enterprise owned the following
trucks:
- PV 5 that was purchased on 1 June 20x0 for R96 000.

- PV 6 that was purchased on 1 February 20x1 for R128 000.
- PV 7 that was purchased on 1 July 20x3 for R144 000.
An agreement was reached with the particular dealer that the prices of all new trucks
would be fixed at R160 000 each during the year 1 March 20x4 to 28 February 20x5. It
was also agreed that the amount owing to the dealer for the purchase of a new truck,
would be settled on the date of purchase, after taking into account any trade-in amount for
a used truck.
1. The truck PV 5 had been used for 48 months on 31 May 20x4 and was traded in on a
new truck PV 8 on 1 June 20x4.
2. The truck PV 6 had been used for 48 months on 31 January 20x5 and was traded in on
a new truck PV 9 on 1 February 20x5.
YOU ARE REQUIRED TO
show the following ledger accounts, properly closed off, for the year ended 28 February
20x5:
- Trucks
- Accumulated depreciation - Trucks
- Depreciation
- Realisation account
- Profit/loss with sale of Trucks
(a) If it is the accounting policy of the enterprise to write off depreciation of Trucks
according to the straight-line method over 48 months (25% per annum), taking into
account the residual value as indicated above.
(b) If it is the accounting policy of the enterprise to write off depreciation of Trucks
according to the diminishing balance method at 25% per annum, without taking its
residual value into account.
(Open both the Truck account and the Accumulated depreciation account with the
balances on 1 March 20x4 showing only the entries for the year ended 28 February 20x5,
together with the corresponding dates on which the particular entries had taken place.)
12 - 15
QUESTION 12.2
Suggested solution
(a)
Trucks
Date Particulars Amount Date Particulars Amount
01/3/x4 Balance b/d 368 000 31/5/x4 Realise PV5 (G/jnl) 96 000
01/6/x4 PV8 (Purch/jnl) 160 000 31/1/x5 Realise PV6 (G/jnl) 128 000
01/2/x5 PV9 (Purch/jnl) 160 000 28/2/x5 Balance c/f 464 000
688 000 688 000
01/3/x5 Balance b/d 464 000
Accumulated depreciation - Trucks

31/5/x4 Real - PV5 (G/jnl) 86 400 01/3/x4 Balance b/d 191 400
31/1/x5 Real - PV6 (G/jnl) 115 200 31/5/x4 Depr PV5 (G/jnl) 5 400
28/2/x5 Balance c/f 84 000 31/1/x5 Depr PV6 (G/jnl) 26 400
28/2/x5 Depr (G/jnl) 62 400
285 600 285 600
01/3/x5 Balance b/d 84 000
Depreciation
31/5/x4 PV5 (G/jnl) 5 400 28/2/x5 P & L acc (G/jnl) 94 200
31/1/x5 PV6 (G/jnl) 26 400
28/2/x5 PV7,8,9 (G/jnl) 62 400
94 200 94 200
Realisation account
31/5/x4 Cost price PV5 (G/jnl) 96 000 31/5/x4 Acc depr PV5 (G/jnl) 86 400
31/5/x4 Proceeds PV5 (SJ) 9 600
96 000 96 000
128 000 128 000
12 - 16
(b)
Trucks
01/3/x4 Balance b/d 368 000 31/5/x4 Realise PV5 (G/jnl) 96 000
01/6/x4 PV8 (Purch/jnl) 160 000 31/1/x5 Realise PV6 (G/jnl) 128 000
01/2/x5 PV9 (Purch/jnl) 160 000 28/2/x5 Balance c/f 464 000
688 000 688 000
01/3/x5 Balance b/d 464 000
Accumulated depreciation - Trucks

31/5/x4 Real - PV5 (G/jnl) 65 151 01/3/x4 Balance b/d 162 219
31/1/x5 Real - PV6 (G/jnl) 87 242 31/5/x4 Depr PV5 (G/jnl) 2 057
28/2/x5 Balance c/f 87 333 31/1/x5 Depr PV6 (G/jnl) 12 117
28/2/x5 Depr (G/jnl) 63 333
239 726 239 726
01/3/x5 Balance b/d 87 333
Depreciation
31/5/x4 PV5 (G/jnl) 2 057 28/2/x5 P & L acc (G/jnl) 77 507
31/1/x5 PV6 (G/jnl) 12 117
28/2/x5 PV7,8,9 (G/jnl) 63 333
77 507 77 507
Realisation account
31/5/x4 Loss on disp (G/jnl) 21 249
96 000 96 000
31/1/x5 Loss on disp (G/jnl)) 27 958
128 000 128 000
Loss with sale of Trucks

31/5/x4 Realise PV5 (G/jnl) 21 249 28/2/x5 P & L acc (G/jnl) 49 207
31/1/x5 Realise PV6 (G/jnl) 27 958
49 207 49 207
12 - 17
(a)
FIXED ASSET REGISTER
Financial year end: 28 February

Residual value: 10% of cost price
ID Date purchased Cost price

Annual depreciation
20x1 20x2 20x3 20x4 20x5
R R R R R R
PV5 01 Jun 20x0 96 000 16 200 21 600 21 600 21 600 5 400
PV6 01 Feb 20x1 128 000 2 400 28 800 28 800 28 800 26 400
PV7 01 Jul 20x3 144 000 - - - 21 600 32 400
PV8 01 Jun 20x4 160 000 - - - - 27 000
PV9 01 Feb 20x5 160 000 - - - - 3 000
(b)
FIXED ASSET REGISTER
Financial year end: 28 February

Residual value: None
ID Date purchased Cost price

Annual depreciation
20x1 20x2 20x3 20x4 20x5
R R R R R R
PV5 01 Jun 20x0 96 000 18 000 19 500 14 625 10 969 2 057
PV6 01 Feb 20x1 128 000 2 667 31 333 23 500 17 625 12 117
PV7 01 Jul 20x3 144 000 - - - 24 000 30 000
PV8 01 Jun 20x4 160 000 - - - - 30 000
PV9 01 Feb 20x5 160 000 - - - - 3 333
12 - 18
QUESTION 12.3
Domco Dienste is a sole trader that renders computer services to educational institutions.
The enterprise uses a number of micro computers with suitable software to render these
services. The accounting date of the enterprise is 28 February.
The accounting policy of the enterprise with regards to micro computers, is as follows:
- All computers are utilised for only 10 000 hours, after which it is scrapped or replaced.
- All computers are purchased from the various suppliers with a guarantee that the
particular supplier would repurchase the specific computer at 10% of its original
purchase price after it had been utilised for 10 000 hours.
- Depreciation is written off annually according to the production unit method, based on
the number of hours utilised in a specific year as a percentage of the total 10 000
utilisable hours.
The following details in respect of computers in use, appeared in the ledger of the
enterprise on 1 March 20x5:
Model Date purchased Cost price Accumulated depreciation

PC 1000 16 June 20x2 R26 000 R17 500
AP 330 13 May 20x3 R27 900 R13 950
DB 56L 04 April 20x4 R29 000 R 7 830
- The PC 1000 had been utilised for 10 000 hours by 5 January 20x6 and was traded in
on that date for a new model, the PC 1000L which cost R35 000.
- On 17 January 20x6 another electrical short circuit occurred, which resulted in the AP
330 being irreparably damaged. The insurer entered into an agreement on that date
to compensate the enterprise with the full value of the computer, on the basis that the
computer's value is equal to R2 for each unutilised hour. The insurance company paid
the agreed amount out on 4 March 20x6. The AP 330 had been utilised for a further 1
000 hours during the period 1 March 20x5 to 17 January 20x6.
- During the year ended 28 February 20x6, the PC 1000L was utilised for 1 000 hours
and the DB 56L for 2 500 hours.
YOU ARE REQUIRED TO
show the following ledger accounts, properly dated and closed off, for the year ended 28
February 20x6:
- Computers
- Accumulated depreciation
- Profit/loss with sale of computers
- Compensation received from insurer
12 - 19
QUESTION 12.3
Suggested solution
Computers
01/3/x5 Balance b/d 82 900
01/3/x5 Balance b/d 39 280
Realisation account
Loss with sale of computers

Compensation received from insurer

# Calculation of amount:
Hours utilised to 28 Feb 20x5
Hours utilised: 1 Mar 20x5 to 17 Jan20x6
Total hours utilised
Total hours unutilised
Total hours budgeted
Proceeds: 3 444,5 hours @ R2 per hour
12 - 20
QUESTION 12.4
Lanco Manufacturers is an enterprise that manufactures clothing. The accounting date of

the enterprise is 30 June. The accounting policy of the enterprise in respect of fixed
assets is as follows:
Machinery  All machinery is utilised for only 5 000 hours.

 All machinery is purchased from the supplier with a guaranteed
repurchase value of R2 000.
 Depreciation is written off according to the production unit method.
Equipment  All equipment is purchased from the supplier with a guaranteed
trade in value of 10% of the original purchase price.
 Depreciation is written off according to the straight-line method at
20% per annum.
The following particulars, amongst others, appeared in the fixed asset register of the
enterprise on 1 July 20x4:
Description Date purchased Carrying amount Accumulated

depreciation
Machine X13P 14 August 20x3 R 9 050 R16 450
Equipment No 66 31 December 20x1 R24 750 R20 250
1. Machine X13P had been utilised for its full 5 000 hours on 27 September 20x4 and was
repurchased by the original supplier.
2. A new machine, the PX24 was purchased from the same supplier on 1 November 20x4
for R55 000 on the agreed basis. This machine was utilised for 1 000 hours to 30 June
20x5.
3. The equipment No 66 was irreparably damaged on 31 May 20x5 as a result of a fire.
The equipment was insured and a claim for R12 500 for the damage was lodged with
the insurance company on 26 June 20x5. The insurance company decided, however,
to first investigate the claim during July 20x5 for any negligence.
4. New equipment, with code No 84, was purchased on 30 June 20x5 for R48 000.
YOU ARE REQUIRED TO
June 20x5:
- Machinery
- Equipment
- Depreciation
- Accumulated depreciation - Machinery
- Accumulated depreciation - Equipment
12 - 21
QUESTION 12.5
Protek Transport is an enterprise that renders transport services. The enterprise utilises a
truck for the transport of heavy goods and two LDV’s (bakkies) for the transport of loads of
less than 1 ton. The enterprise’s accounting policy in respect of its motor vehicles are as
follows:
LDV’s: Are written off according to the diminishing balance method at 20% per
annum without taking any residual value into account.
Trucks: Are written off according to the straight-line method at 25% per annum,
taking into account any residual value.
The following particulars in respect of motor vehicles appeared, amongst others, in the
fixed asset register of the enterprise on 1 March 20x5:
Description
Cost price Date
purchased
LDV – CL3498 R 80 000 01 Jul 20x2
LDV – CL1156 R120 000 01 Apr 20x3
Truck – CL2818 R348 000 01 Jul 20x2
1. The enterprise’s financial year ends on 28 February.

2. The truck was purchased from a local dealer who gave the enterprise a guarantee that
they would trade the truck in for R48 000 after 48 months.
3. The LDV – CL3498 was traded in on a new LDV – CL9915 on 30 September 20x5 at
its book value. The new LDV cost R168 000. There were no further purchases or
sales of motor vehicles during the year ended 28 February 20x6.
YOU ARE REQUIRED TO
(i) compile a detailed fixed asset register for the period 01 March 20x2 to 28 February
20x6; and
(ii) show the ledger account “Accumulated depreciation – Motor vehicles (Trucks and
LDV’s)”, properly dated and closed off, for the year ended 28 February 20x6.
(Round amounts off to the nearest R)
12 - 22
QUESTION 12.6
Tanco Services is an enterprise from Stellenbosch that transports liquid gas for clients with
stainless steel tanks by road. The enterprise ordered a new stainless steel tank free-on-
board Cape Town harbour on 2 February 20x0 from an enterprise in Port Elizabeth. The
purchase price for the tank amounted to R85 000, on which trade discount of 35% was
negotiated.
The tank left Port Elizabeth harbour on 12 March 20x0 and arrived at Cape Town harbour
on 15 March 20x0. The tank was transported by road on 17 March 20x0 from Cape Town
harbour to Tanco Services' premises in Stellenbosch.
The tank was mounted on a low-bed on 21 March 20x0, after which the tank was cleaned
properly with chemicals and the enterprise's logo affixed to it. The tank was ready for use
on 1 April 20x0 when the hydraulic pump for the pumping of the liquid gas was installed on
that date. The first load of liquid gas was loaded for transportation on 11 April 20x0.
The following costs, amongst other, were incurred in respect of the tank:
R
Cost of low-bed 35 092
Road transport costs - To Port Elizabeth harbour 795
- To Stellenbosch premises 420
Maritime insurance 1 802
Shipping costs 4 004
All risk insurance - 23 March 20x0 to 22 March 20x1 1 460
Cost of hydraulic pump 3 051
Installation costs - Steel tank 1 682
- Hydraulic pump 927
Cleaning materials used - 17 March 20x0 to 1 April 20x0 402
- 2 April 20x0 to 10 April 20x0 133
During the loading of the tank onto the ship at Port Elizabeth harbour, a hole was torn in
the side of the tank. The tank was repaired at the suppliers expense in Stellenbosch on 25
March 20x0 at a cost of R450.
During the loading of the first load of liquid gas, the hydraulic pump was damaged, which
was repaired on 13 April 20x0 at a cost of R381.
YOU ARE REQUIRED TO
(a) calculate the cost price of the tanker for accounting purposes.
(b) calculate the depreciation that will be written off on the tanker for the year ended 30
June 20x0 and 30 June 20x1 if it is the accounting policy of the enterprise to write off
depreciation on the diminishing balance method at 25% per annum.
12 - 23
QUESTION 12.7
Bandag Transport is an enterprise that transports building material. The enterprise utilises
a truck for the transport of the building material and two forklifts for the loading of the
building material onto the truck. The enterprise’s accounting policy in respect of trucks
and forklifts are as follows:
Forklifts: Are written off according to the straight-line method at 20% per annum
without taking any residual value into account.
Trucks: Are written off according to the production unit method, based on the number
of kilometres clocked as a percentage of the projected maximum 300 000
kilometres, taking into account any residual value.
The following particulars in respect of motor vehicles appeared, amongst other, in the fixed
asset register of the enterprise on 1 June 20x5:
Description
Cost price Carrying amount
Case forklift R124 000 R 75 000
Toyota forklift R144 000 R 98 000
Truck – CL90986 R498 000 R258 000
1. The enterprise’s financial year ends on 31 May each year.

2. The truck was purchased from a local dealer who gave the enterprise a guarantee that
they would trade the truck in for R48 000 when the truck had clocked 300 000
kilometres.
3. The Case forklift was traded in for a new Case forklift on 30 September 20x5, which
cost R175 000. The amount of R138 000 that was owed to the dealer in respect of the
transaction, was paid in cash on 15 October 20x5.
4. The Toyota forklift was involved in an accident on 30 November 20x5, was temporarily
withdrawn from operations. A claim for the damage was lodged with the insurance
company on 3 December 20x5. The insurance company wrote off the asset as scrap
and paid out an amount of R92 000 to the enterprise on 31 December 20x5 as full and
final settlement of the insurance claim. The forklift was not replaced by a new one.
5. The truck had clocked a total of 240 000 kilometres by 31 May 20x6.
YOU ARE REQUIRED TO
May 20x6:
- Forklifts - Accumulated depreciation: Forklifts

- Truck - Accumulated depreciation: Truck
12 - 24
QUESTION 12.8
Wine Barrel Services is an entity in Paarl that bottles wine for small wine farmers on their
estates. On 17 March 20x7 the entity ordered a new bottling machine free on board Cape
Town Harbour from an entity in Durban. The purchase price of the machine amounted to
R140 000 on which a trade discount of 25% was bargained. On 3 April 20x7 the machine
left Durban Harbour and arrived at Cape Town Harbour on 11 April 20x7. On 12 April
20x7 the machine was transported from Cape Town Harbour by road to Wine Barrel
Services in Paarl.
On 24 April 20x7 the machine, together with a new stainless steel wine tank, was mounted
on to the entity’s truck, after which all the pipes were connected and the machine was
cleaned out with chemicals. On 30 April 20x7 the machine was ready for use when a
spray pump for spraying the wine into the bottles was mounted on the machine on that
date. The first wine was already bottled on that day.
When they loaded the machine on to the ship in Durban Harbour the mounting rods of the
machine were damaged. The rods were mended in Paarl on 14 April 20x7 at a cost of
R976.
The following costs regarding the bottling machine were also incurred:
R
Cost of steel wine tank 62 486
Road transport cost - To Durban Harbour 1 098
- To Paarl premises 565
Shipping costs 5 289
All risk insurance - 11 April 20x7 to 10 April 20x8 1 825
Cost of spray pump 2 982
Mounting cost - Steel tank 1 186
- Spray pump 1 211
Cleaning materials used - 12 April 20x7 to 30 April 20x7 492
- 1 May 20x7 to 31 May 20x7 308
YOU ARE REQUIRED TO
calculate the cost price of the bottling machine for accounting purposes.
12 - 25
QUESTION 12.9
M&M Groundworks is a company that does earth-moving work for clients in the building
industry. The company uses front-end loaders to do the earth-moving after which the
ground is removed by trucks. The company’s accounting policy relating to its front-end
loaders and trucks is as follows:
Depreciation is written off according to the production unit method

Front-end taking into account any residual value based on the number of hours
loaders used.
Depreciation is written off according to the straight-line method at 20%
Trucks per year taking into account any residual value.
The following detail relating to front-end loaders and trucks appeared, amongst others, in
the company’s fixed asset register on 1 July 20x6.
Description Date purchased Cost price Residual value Hours used

Front-end loader C10 14 April 20x4 R264 000 R54 000 26 330
Front-end loader F16 4 September 20x4 R303 400 R63 400 20 560
10% of cost
Truck CJ 3389 1 April 20x5 R188 000
price
1. The company’s financial year ends on 30 June.

2. According to specifications of the manufacturers of the front-end loaders the model
C10 has a life of 30 000 hours and the model F16 a life of 32 000 hours and they
guaranteed the different residual values.
3. Truck CJ 3389 was irreparably damaged on 30 August 20x6. A claim was submitted to
the insurers. On 30 August 20x6 the insurers undertook to pay only R25 000 of the
claim.
4. A new truck CJ 9112 was purchased on 1 October 20x6 for R234 000 and on 15
October 20x6 it was put into use. The supplier was not prepared to guarantee any
trade-in-value.
5. By 11 February 20x7 the front-end loader model C10 had been used for 30 000 hours.
On that date it was traded in at its residual value on a new front-end loader model B22
with a cost price of R396 000. According to the manufacturer’s specifications the new
front-end loader has a life of 36 000 hours. The supplier gave the entity a guarantee
that the front-end loader can be traded in for R72 000 on 36 000 hours.
6. The front-end loader model F16 had been used for 7 400 hours and the front-end
loader model B22 for 2 800 hours during the year ending 30 June 20x7.
12 - 26
YOU ARE REQUIRED TO
show the following ledger accounts, appropriately dated and closed off for the year
ending 30 June 20x7:
- Front-end loaders
- Accumulated depreciation – front-end loaders
- Trucks
- Accumulated depreciation – trucks
- Compensation received from insurer
Amounts must be rounded off to the nearest Rand.
12 - 27
CHAPTER 13
ADJUSTMENTS
Page
13.1 Adjustments of ledger accounts 13 - 3
13.1.1 Bad debt

13.1.1.1 Bad debts written off
13.1.1.2 Bad debts recouped / recovered
13.1.2 Allowance for credit losses of debtors
13.1.3 Accrued expenses
13.1.4 Prepaid expenses
13.1.5 Income receivable / Accrued income
13.1.6 Income received in advance
13.1.7 Consumable inventory on hand
13.1.8 Suspense accounts
13.2 The closing process 13 - 11
13.3 Compile income statement and balance sheet 13 - 19
Questions 13 - 15
13 - 1
- understand the concept of bad debts, allowance for credit losses

of debtors, accrued and prepaid expenses, income receivable,
income received in advance, consumable inventory on hand and
suspense accounts
- adjust the ledger accounts in accordance with the accrual basis
- prepare and close-off convenience accounts in the general ledger
- understand the closing process and apply it
- compile an income statement and balance sheet
13 - 2
13.1 Adjustments of ledger accounts
During a financial period transactions are recorded from source documents in the
financial records as they occured and payments have been made and received. At
the end of the financial period the transactions must be a faithful representation of
the financial result and position of the entity, which will require compliance with the
underlying assumptions and with the qualitative characteristics as set out in the
framework. Adjustment of the income statement items at the end of a financial
period is necessary to comply with the accrual basis. The adjustments to the ledger
accounts are done in the form of adjustment journals. The adjustment journals are
recorded in the general journal and from there posted to the general ledger. The
most common adjustments are discussed below:
13.1.1 Bad debt
13.1.1.1 Bad debts written off
Bad debts are specific debtors that are written off as proof exists that the debtors in
all probability will not be able to pay their debts.
An entity will take various steps before a debtor will be written off, e.g.:
 Various accounts will be sent to the client;

 The client will be phoned and requested to settle his account
 A debt collector can attempt to collect the money on account of the entity and
 An attorney can be appointed to collect the debt.
If there is reasonable certainty that the debtor is unable of paying his debts, it will be
written off as bad debt. The specific debtor will be written off and therefore an
adjustment will have to be made in the debtors’ ledger. The amount is then taken out
of the debtor system completely.
Example 13.1
An entity has the following debtors:

A Brink 15 300
B Coetzee 10 000
C Davel 19 600
D Els 15 100
60 000
B Coetzee is declared insolvent and will not be able to pay his outstanding debts.
13 - 3
The write-off of bad debt will be recorded as follows:
Dr Bad debts 10 000

Cr Debtors 10 000
The bad debt will be written off in the income statement and the debtors will
decrease. The debtors’ control account will decrease and the debtors’ ledger will also
decrease.
13.1.1.2 Bad debts recouped / recovered
It sometimes happens that debt, initially written off as bad debt, is collected later on.
At this stage the debtors are non-existant in the records, because it has already been
written off and the entry will not influence debtors.
There are two possible scenarios:
 Debts that have been written off as bad debt in the current year, are collected
in the same year
 Debts that have been written off as bad debt in the previous year are collected
in the current year.
In the case where debts, that have been written off as bad debt in the current year,
and therefore have been written off as an expense in the income statement, the bad
debt expense will decrease with the debts being collected. This means that the bad
debt expense is only the bad debts for the year that is actual bad debt. The debtors
that have been written off and then pay later in the same year will not be regarded as
bad debt.
In the case where bad debts were written off as an expense in the previous year’s
income statement, the debt collected in the current year will be recorded as income
in the current year’s income statement as bad debts recouped / recovered.
Example 13.2
Assume the same data as in example 13.1 and later in the same year the debtor’s
curator pays out a portion and we collect R1 500.
The write-off of bad debts and the collection of bad debt occurred in the same year
and therefore it is netted off against each other.
The collection of bad debt, written off previously, will be recorded as follows:
Dr Bank 1 500
Cr Bad debts 1 500
13 - 4
The debtors’ control account and the debtors’ ledger are not affected as the debtor
has already been written off and taken out of the debtors’ control account and the
debtors’ ledger. The expense regarding the bad debt amounts R8 500 (R10 000 –
R1 500).
Example 13.3
Assume the same data as in example 13.2 with the difference that the bad debts are
not written off in the current year, but are already written off as an expense in the
income statement a year ago.
The R1 500 bad debt, being collected, will now be regarded as an income, as the
bad debt has already been regarded as an expense in the year of the write-off.
The collection of bad debt, previously written off, will be recorded as follows:
Dr Bank 1 500
Cr Bad debt recouped / recovered 1 500
Bad debt recovered will be an income in the income statement.
13.1.2 Allowance for credit losses of debtors
Debtors are indicated as an asset in the balance sheet as an amount that can
possibly be recovered. If there is, after bad debt has been written off, still an amount
that can not be recovered from debtors, the debtors must be tested for impairment.
The basis for impairment of debtors is only an estimate, but it is important not to
decide on a random amount. The method to be followed is to work through the list of
debtors and to make provision (allowance for credit losses of debtors) for specific
debtors that have not gone bad yet, but where the collection is doubtful. After the list
of debtors has been reviewed and all doubtful debtors have been identified, an
amount, specifically based on these debtors, is provided. The allowance should be
revised annually.
Although the amount of the allowance for credit losses of debtors is based on specific
debtors the accounting entry is made overhead over debtors and is not aimed at
specific debtors. The allowance for credit losses only indicates a possibility that the
amount owed by the debtor will not be recovered in full in the future and is not written
off against the amount owed by the debtor, therefore there is no entry in the debtors’
ledger. For disclosure purposes, the allowance for credit losses of debtors is
deducted from the value of the debtors and the net amount is presented in the
balance sheet, no entry is necessary in the general ledger.
13 - 5
Example 13.4
At year-end the debtors amount to R110 000. The allowance for credit losses of
debtors amounts to R4 500 at the beginning of the year and R5 500 at the end of the
year.
The allowance for credit losses of debtors at the beginning of the year must be
reversed as follows, before the allowance for credit losses of debtors for the current
year is recognised:
Dr Allowance for credit losses of debtors 4 500

Cr Movement in allowance for credit losses of debtors 4 500
The allowance for credit losses of debtors at the end of the year will be recorded as
follows:
Dr Movement in allowance for credit losses of debtors 5 500

Cr Allowance for credit losses of debtors 5 500
The net movement in the allowance for credit losses of debtors (R1 000) is an
increase (debit) and will be recognised as an expense in the income statement. The
total of the allowance for credit losses of debtors (R5 500) will be netted off against
the debtors for disclosure purposes. The debtors will thus be presented as R104 500
in the balance sheet.
Example 13.5
Assume the same information as in Example 13.5 except that the allowance for credit
losses of debtors at the end of the year amounts to R2 500.
The allowance for credit losses of debtors at the beginning of the year must be
reversed as follows, before the allowance for credit losses of debtors for the current
year is recognised:
Dr Allowance for credit losses of debtors 4 500

Cr Movement in allowance for credit losses of debtors 4 500
The allowance for credit losses of debtors at the end of the year will be recorded as
follows:
Dr Movement in allowance for credit losses of debtors 2 500

Cr Allowance for credit losses of debtors 2 500
The net movement in the allowance for credit losses of debtors (R2 000) is a
decrease (credit) and will be recognised as an income in the income statement. The
total of the allowance for credit losses of debtors (R2 500) will be netted off against
the debtors for disclosure purposes. The debtors will thus be presented as R107 500
in the balance sheet.
13 - 6
13.1.3 Accrued expenses
An accrued expense is an expense that is applicable to a specific financial period,

but has not been paid at year-end, the expense is thus in arrear. Although the
expense will be paid in the next financial period, it accrued in the current period and
must be recognised in the current period together with a current liability.
Example 13.6
Year-end = 31 December 20x7.
The telephone account regarding the telephone cost for December 20x7 has not
been received at year-end. It means telephone expenses (R9 350) for only 11
months have been recorded in the current period. At year-end the expense together
with a current liability, which will be paid in January 20x8, must be recognised and
recorded as follows:
Dr Telephone cost 850

Cr Accrued expense 850
Telephone cost for 12 months (R10 200) which is applicable to the current period,
has now been recognised. If the telephone account for telephone costs for
December 20x7 is received in January 20x8 and payment is made, the transaction
will be recorded as follows:
Dr Accrued expense 850

Cr Bank 850
13.1.4 Prepaid expenses
A prepaid expense is an expense that is paid in the current financial period, but is
applicable to a future financial period. Only the portion of the expense applicable to
the current period must be recognised in the current period. The portion of the
expense applicable to a future period must be reclassified as a current asset at year-
end.
Example 13.7
The annual insurance premium of R12 000 has been paid on 1 April 20x7. Only
R9 000 of the expense is applicable to the current period. The R3 000 of the
expense, applicable to the year 20x8, will be reclassified as follows as a current
asset at year-end:
Dr Prepaid expense 3 000

Cr Insurance 3 000
13 - 7
In January 20x8 the prepaid expense will be written back to ensure that the R3 000
regarding insurance, is recognised in the applicable period.
Dr Insurance 3 000
Cr Prepaid expense 3 000
13.1.5 Income receivable / Accrued income
Income receivable is an income applicable to a specific financial period but one that
has not been received at year-end, the income is thus accrued. Although the income
will be received in the next financial period, it accrued in the current period and must
be recognised in the current period together with a current asset.
Example 13.8
Interest of 10% on a fixed deposit of R30 000 is earned and received monthly at the
end of each month. The interest received for December 20x7 will only appear on the
January 20x8 bank statement. Interest for December 20x7, however, is applicable to
the current period and the income together with a current asset will be recognised at
year-end as follows:
Dr Income receivable / Accrued income 250

Cr Interest received 250
If the interest received for December 20x7 appears on the January 20x8 bank
statement, the income will be recorded as follows:
Dr Bank 250
Cr Income receivable / Accrued income 250
13.1.6 Income received in advance
Income received in advance is income received in the current financial period, but is
applicable to a future financial period. Only the portion of the income applicable to
the current period must be recognised in the current period. The portion of the
income applicable to a future period must be reclassified as a current liability at year-
end.
13 - 8
Example 13.9
Rent is received and recorded at the beginning of the month. The monthly rent
amounts to R4 500. On 28 December 20x7 a receipt was issued for rent received of
R4 500 regarding January 20x8. This means that rent for 13 months (R58 500) has
been recorded. Only R54 000 of the income is applicable to the year 20x7. The
R4 500 applicable to the year 20x8 will be reclassified as a current liability at year-
end as follows:
Dr Rent received 4 500

Cr Income received in advance 4 500
In January 20x8 the income received in advance will be written back to ensure that
the R4 500 rent income is recognised in the applicable period.
Dr Income received in advance 4 500

Cr Rent received 4 500
13.1.7 Consumable inventory on hand
During the year expenses are incurred for consumable inventory e.g. stationery and
cleaning materials. It is possible that some consumable inventory was unused at
year-end and that it will be used in a future period. The portion of the expense
regarding consumable inventory that will be used in the future period must be
reclassified as consumable inventory at year-end.
Example 13.10
During the year cleaning materials to the amount of R750 was purchased and
recorded as an expense. Only R600 worth of cleaning materials has been used in the
current period. The R150 cleaning materials that will be used in the year 20x8 must
be reclassified as consumable inventory as follows:
Dr Consumable inventory 150

Cr Cleaning materials 150
In January 20x8 the consumable inventory will be written back as follows to ensure
that the expense regarding stationery is recognised in the period of use:
Dr Cleaning materials 150

Cr Consumable inventory 150
13 - 9
13.1.8 Suspense accounts
It sometimes happens that when transactions are recorded, the accountant is unsure
about the correct classification of one of the elements (income, expense, asset or
liability) of the transaction. It is customary in such cases to temporarily post the
element of the transaction to a suspense account (convenience account) until the
uncertainty has been cleared up. Once the uncertainty has been cleared up, the
suspense account must be closed-off with a general journal entry to ensure the
correct classification of the element. The use of the suspense account must be
avoided if possible and the account must be closed-off at year end.
Examples
1.) The enterprise receives a deposit of R500 and the accountant is unsure what the
deposit is for. The transaction is recorded in the cash receipt journal and posted to
the bank ledger account (bank is debited) and the suspense account (suspense
account is credited).
Bank
CRJ 500
Suspense account
GJ 500 CRJ 500
The accountant finds out later that the deposit received was for interest earned
(income). To close-off the suspense account, the suspense account is debited with
R500 and interest earned credited with R500. The suspense account is closed-off
with a general journal entry.
Interest earned
GJ 500
2.) The enterprise makes a payment of R300 and the accountant is unsure what the
payment is for. The transaction is recorded in the cash payments journal and posted
to the bank ledger account (bank is credited) and the suspense account (suspense
account is debited).
Bank
CPJ 300
Suspense account
CPJ 300 GJ 300
The accountant finds out later that the payment was for repairs done to the motor
vehicle (expense). To close-off the suspense account, the suspense account is
credited with R300 and repairs debited with R300. The suspense account is closed-
off with a general journal entry.
Repairs
GJ 300
13 - 10
13.2 Compiling income statement and balance sheet
The income statement and balance sheet will be drafted from the post-closing trial
balance, which is compiled after all the adjustments and closing-off journals are
recorded in the general journal and are posted to the general ledger.
Example 13.11
The pre-adjustment trial balance below (opening balances/totals from general ledger
in step-by-step illustration of the closing-off process) is adjusted as follows to prepare
the post-closing trial balance from which the income statement and balance sheet is
drafted.
(1) journal entries in respect of the following adjustments:
 bad debts written off (example 13.1)

 bad debts recovered (example 13.2 en 13.3)
 allowance for credit losses of debtors (example 13.5)
 accrued expenses – telephone (example 13.6)
 prepaid expenses – insurance (example 13.7)
 income receivable / accrued income – interest (example 13.8)
 income received in advance – rent (example 13.9)
 consumable inventory on hand – cleaning materials (example 13.10)
(2) closing journal entries as set out in Example 13.11
Only for illustration purposes, does not appear in post-closing trial balance – amounts are
included in profit and loss of R19 610 (total of income statement) which will be closed-off as
follows to capital:
Dr Profit and Loss 19 610

Cr Capital 19 610
The total capital in the balance sheet will thus be R125 160.
Pre-adsjustment Post-closing
trial balance Trial balance
DR CR DR CR
Equipment 30 000 24 000
Accumulated depreciation 6 000
Debtors 60 000 50 000
Creditors 27 150 27 150
Inventory *29 500 **33 600
Cash 16 160 19 160
Investments 30 000 30 000
Capital *100 000 105 550
Capital contributions 10 000
Capital withdrawals 4 450
Purchases 17 600
13 - 11
Sales 43 350
Rent received 58 500 54 000
Interest receveid 2 750 3 000
Freight on purchases 3 450
Cleaning materials 750 600
Stationery 800 800
Salaries and wages 30 025 30 025
Insurance 12 000 9 000
Telephone 9 350 10 200
Depreciation 3 000 3 000
Bad debts 8 500
Bad debts recouped / recovered 1 500
Movement in allowance for credit losses of 2 500
debtors (expense)
Sales returns 1 365
Trade account (gross profit) 25 735

Consumable inventory (cleaning materials) 150
Prepaid expenses (insurance) 3 000
Income receivable / Accrued income (interest) 250
Accrued expenses (telephone) 850
Income received in advance (rent) 4 500
Allowance for credit losses of debtors 2 500
249 650 249 650 160 160 160 160
* 1 January 20x7 / ** 31 December 20x7
13 - 12
Income statement for the year ending 31 December 20x7
R
Sales 40 785
Cost of sales (15 050)
Gross profit 25 735
Plus: other income 58 500

Rent received 54 000
Interest received 3 000
Bad debts recovered 1 500
Less: expenses 64 625

Cleaning materials 600
Stationery 800
Insurance 9 000
Telephone 10 200
Depreciation 3 000
Bad debts 8 500
Movement in allowance for credit losses of debtors 2 500
Profit for the year 19 610
13 - 13
Balance sheet as at 31 December 20x7
R
ASSETS
Non-current assets
Equipment 24 000
Investments 30 000
Total non-current assets 54 000
Current assets
Trading inventory 33 600
Consumable inventory 150
Debtors 47 500
Prepaid expenses 3 000
Income receivable / Accrued income 250
Cash 19 160
Total current assets 103 660
Total assets 157 660

Equity
Capital 125 160
Current liabilities
Creditors 27 150
Accrued expense 850
Income received in advance 4 500
Total current liabilities 32 500
Total liabilities 32 500
Total equity and liabilities 157 660
13 - 14
CHAPTER 13
QUESTIONS
Page
Question 13.1 Bad debts and allowance for credit losses of debtors 13 - 16
Question 13.2 Adjustment journals (current year), ledger accounts,

post-adjustment trial balance and financial statements 13 - 19
Question 13.3 Adjustment journals (write back of previous year and

current year) 13 – 26
Question 13.4 Financial statements 13 – 28
Question 13.5 Bad debts and allowance for credit losses of debtors 13 – 32
Question 13.6 Financial statements (after adjustments) 13 – 33
Question 13.8 Closing journal entries 13 – 37
Question 13.10 Closing journal entries 13 – 40
13 - 15
QUESTION 13.1
The following balances appeared in the general ledger of an enterprise on 28

February, the accounting date, as indicated respectively:
2010 2011
R R
Debtors' control 72 000 69 000
Allowance for credit losses of debtors - 1 March 2009 1 980 -
Bad debts written off 2 750 2 060
Bad debts recouped (recovered) - 1 370
1. The balance of the debtors' control account amounted to R66 000 on 1 March
2009.
2. The allowance for credit losses of debtors amounts to R2 160 and R2 055
respectively on 28 February 2010 and 28 February 2011.
3. A further amount of R500 owed by a debtor on 28 February 2011 must be written

off on that date as a bad debt.
4. R850 of the bad debts that were recouped, are amounts that were written off as
bad debts during the year ended 28 February 2010 and the other R520 are
amounts that were written off as bad debts during the year ended 28 February
2011.
YOU ARE REQUIRED TO
(a) show the accounting entries in the various suitable ledger accounts for both the
2010 and 2011 financial years in respect of the above particulars.
(b) show how the above particulars would be set out in the Income statement and
Balance sheet in respect of both the 2010 en 2011 financial statements.
13 - 16
QUESTION 13.1
Suggested solution
(a) GENERAL LEDGER

Debtors' control
01/3/09 Balance b/d 66 000 28/2/10 Sales returns (SRJ) X xxx
28/2/10 Sales (SJ) Xx xxx 28/2/10 Bank (CRJ) Xx xxx
28/2/10 Interest levied (G/jnl) Xxx 28/2/10 Bad debts (G/jnl) 2 750
28/2/10 Balance c/f 72 000
Xx xxx Xx xxx
01/3/10 Balance b/d 72 000 28/2/11 Sales returns (SRJ) X xxx
28/2/11 Sales (SJ) Xx xxx 28/2/11 Bank (CRJ) Xx xxx
28/2/11 Interest levied (G/jnl) Xxx 28/2/11 Bad debts (G/jnl) 2 060
28/2/11 Bad debts (G/jnl) 500
28/2/11 Balance c/f 68 500
Xx xxx Xx xxx
01/3/11 Balance b/d 68 500
Allowance for credit losses of debtors

01/3/09 Movement in 1 980 01/3/09 Balance 1 980
allowance for credit b/d
losses of debtors
(G/jnl)
28/2/10 Balance c/f 2 160 28/2/10 Movement in 2 160
losses of debtors
(G/jnl)
4 140 4 140
01/3/10 Movement in 2 160 01/3/10 Balance 2 160
allowance for credit b/d
losses of debtors
(G/jnl)
28/2/11 Balance c/f 2 055 28/2/11 Movement in 2 055
losses of debtors
(G/jnl)
4 215 4 215
01/3/11 Balance 2 055
b/d
13 - 17
Movement in allowance for credit losses of debtors
28/2/10 Allowance for credit 2 160 01/3/09 Allowance for credit 1 980
losses of debtors losses of debtors
(G/jnl) (G/jnl)
28/2/10 P & L acc (G/jnl) 180
2 160 2 160
28/2/11 Allowance for credit 2 055 01/3/10 Allowance for credit 2 160
losses of debtors losses of debtors
(G/jnl) (G/jnl)
28/2/11 P & L acc (G/jnl) 105
2 160 2 160
Bad debts written off

28/2/10 * Debtors (G/jnl) 2 750 28/2/10 P & L acc (G/jnl) 2 750
27/2/11 ª Debtors (G/jnl) 2 060 28/2/11 ¥ B/D recoup (G/jnl) 520
28/2/11 Debtor (G/jnl) 500 28/2/11 P & L acc (G/jnl) 2 040
2 560 2 560
Bad debts recouped

28/2/11 Bad debts (G/jnl) 520 28/2/11 Bank (CRJ) 1 370
28/2/11 P & L acc (G/jnl) 850
1 370 1 370
* Bad debts progressively written off during the year 1 Mar 2009 to 28 Feb 2010.
ª Bad debts progressively written off during the period 1 Mar 2010 to 28 Feb 2011.
¥ Bad debts recouped during the year 1 Mar 2010 to 28 Feb 2011.
(b)
INCOME STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2011 2010

R R
INCOME
Bad debts recouped 850 -
Decrease in allowance for credit losses of debtors 105 -
EXPENSES
Increase in allowance for credit losses of debtors - 180
Bad debts written off 2 040 2 750
BALANCE SHEET ON 28 FEBRUARY
Debtors # 66 445 69 840
# The amount for debtors is shown in the balance sheet after deducting the
respective allowance for credit losses of debtors on those dates.
13 - 18
QUESTION 13.2
The following balances appeared in the general ledger of Jappy Cells on

28 February 20x7, the end of its financial year:
R
Bank overdraft 15 000
Vehicles at cost price 132 000
Accumulated depreciation - Vehicles 52 000
Printing and stationery 2 500
Loan owning - Gogo Bank 102 000
Interest paid - Gogo Bank 21 400
Rent of premises paid 31 200
Fixed deposit - Cosmo Bank 50 000
Interest received - Cosmo Bank 5 500
Income received for repair work 33 900
Sales returns 1 000
Sales 280 000
Depreciation 14 000
Selling costs 15 000
Repairs 8 500
1. Purchases of inventory are recorded in the purchase journal. All other purchases
and costs were recorded only when the respective amounts owing were paid,
which amounts were posted from the cash payment journal directly to the
particular ledger accounts. The interest earned in respect of the fixed deposit
was also only recorded in the cash receipt journal when it was received, from
where it was posted directly to the particular ledger account.
2. Printing and stationery amounting to R660 were unused on 28 February 20x7.
3. The loan owing to Gogo Bank is repayable in equal annual instalments of R18
000 on 30 November each year and interest is charged at a rate of 20% per
annum, payable monthly at the end of each month. (The instalment in respect of
30 November 20x6 was paid on that date.)
13 - 19
4. The enterprise had been renting its business premises for the past year at a fixed
rental of R2 400 per month, payable monthly. The rental amount remained
unchanged until 30 June 20x7.
5. The fixed deposit at Cosmo Bank was made for a period of 3 years to
31 March 20x8. Interest is earned at a rate of 12% per annum, which is paid out
by the bank every month.
6. Repair services amounting to R220 had been rendered to a client P Vos on
28 February 20x7, but no invoice for those services had been issued to date.
7. Both the electricity account for R520 and the telephone account for R1 470 in
respect of February 20x7, were only received on 17 March 20x7. No accounting
entries had been made to date for these costs.
YOU ARE REQUIRED TO
(a) record the accounting events applicable to the year ended 28 February 20x7 in
a suitable journal.
(b) post the particular journal entries to the corresponding ledger accounts.
(c) compile an adjusted trial balance on 28 February 20x7.
(d) compile the income statement for the year ended 28 February 20x7 and the
balance sheet on that date, set out according to acceptable accounting norms.
Suggested solution
(a) GENERAL JOURNAL

13 - 20
(b) GENERAL LEDGER
Printing and stationery inventory

Feb 28 Gen jnl 660
Printing and stationery used

Feb 28 Prior to adjustments 2 500 Feb 28 Gen jnl 660
Interest expense
Feb 28 Prior to adjustments 21 400
28 Gen jnl 1 700
Gogo Bank - Creditor (Interest owing)

Feb 28 Gen jnl 1 700
Rent of premises
Feb 28 Prior to adjustments 31 200 Feb 28 Gen jnl 2 400
Lessor - Debtor (Rent paid in advance)

Cosmo Bank - Debtor (Interest income outstanding)

Feb 28 Gen jnl 500
Interest earned
28 Gen jnl 500
P Vos - Debtor (Income outstanding)

Feb 28 Gen jnl 220
13 - 21
Income earned from repair work
28 Gen jnl 220
Electricity costs
28 Gen jnl 520
Escom - Creditor (Electricity costs owing)

Feb 28 Gen jnl 520
Telephone costs
28 Gen jnl 1 470
Telkom - Creditor (Telephone costs owing)

13 - 22
(c) TRIAL BALANCE ON 28 FEBRUARY 20x7 Fo Debit Credit
R R
Accumulated depreciation - Vehicles 52 000
Depreciation written off 14 000
Printing and stationery inventory 660
Printing and stationery used 1 840
Loan owing - Gogo Bank 102 000
Interest expense 23 100
Interest owing (Creditor) 1 700
Rental cost of premises 28 800
Rent of premises paid in advance (Debtor) 2 400
Fixed deposit - Cosmo Bank 50 000
Interest earned 6 000
Interest income outstanding (Debtor) 500
Income earned for repair work 34 120
Income outstanding (Debtor) 220
Electricity costs owing (Creditor) 520
Telephone costs owing (Creditor) 1 470
Sales returns 1 000
Sales 280 000
Sales costs 15 000
Repairs 8 500
627 650 627 650
13 - 23
(d) INCOME STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 20x7
R
SALES (280 000 - 1 000)

LESS COST OF SALES
ADD OTHER INCOME
Income from repair work
Interest earned
LESS EXPENSES
Salaries and wages
Depreciation
Interest expense
Electricity costs
Telephone costs
Selling costs
Administration costs
Rent of premises
Repairs
PROFIT for the year
13 - 24
R
ASSETS
NON-CURRENT ASSETS
Vehicles
Cost price
Less: Accumulated depreciation
Intangible assets
Fixed deposit
Financial assets
Total non-current assets
CURRENT ASSETS
Trading inventory
Debtors
Income outstanding
Interest income outstanding
Rent paid in advance
CAPITAL
Balance at beginning of the year
Profit for the year
Less: Withdrawals
Loan owing
CURRENT LIABILITIES
Creditors
Interest expense owing
Electricity costs owing
Telephone costs owing
Short term portion of loan owing
Bank overdraft
13 - 25
QUESTION 13.3
Corleo Products is a sole trader that imports olive oil from Italy. The enterprise's
financial year ends on 30 June each year.
On 29 July 20x5, the bookkeeper of the enterprise compiled a trial balance in respect
of 30 June 20x5. The following items amongst other appeared in that trial balance:
R
Interest on loan paid in advance - 1 July 20x4 2 000
Interest on loan paid 19 800
Interest on fixed deposit received in advance - 1 July 20x4 750
Interest on fixed deposit received 7 500
Rent paid in advance - 1 July 20x4 900
Rent paid 9 450
Wages owing - 1 July 20x4 850
Wages paid 61 370
Telephone costs owing - 1 July 20x4 220
Telephone costs paid 4 140
Electricity costs owing - July 20x4 290
Electricity costs paid 4 355
particular ledger accounts. The interest earned in respect of the fixed deposit was
also only recorded in the cash receipt journal when it had been received, from
where it was posted directly to the particular ledger account.
2. The long term loan has owed since 20x0 and is repayable in equal annual
instalments of R5 000 each on 1 April each year. All instalments were paid each
year on that date. Interest is charged on the loan at a rate of 24% per annum,
payable monthly.
3. The fixed deposit of R60 000 was made during 20x2 and earns interest at a rate
of 15% par annum, payable monthly.
4. Both the June 20x5 telephone account for R190 and electricity account for R325
were received only on 21 July 20x5, for which no accounting entries had been
made to date.
5. Wages in respect of July 20x5 to the amount of R1 050 were paid on 29 June
20x5.
6 The enterprise had entered into a lease agreement for its premises during 20x2.
The rental amounted to R900 monthly until 31 December 20x4. From
1 January 20x5 the rental was increased to R990 per month to 31 December
20x6, payable monthly.
YOU ARE REQUIRED TO
record the above accounting events applicable to the year ended 30 June 20x5 in a
suitable journal.
13 - 26
QUESTION 13.3
Suggested solution
GENERAL JOURNAL
20x4
Jul 01
20x5
Jun 30
20x4
Jul 01
20x5
Jun 30
20x4
Jul 01
20x5
Jun 30
20x4
Jul 01
20x5
Jun 30
20x4
Jul 01
20x5
Jun 30
20x4
Jul 01
20x5
Jun 30
NB! The above journal entries will each be posted to the suitable corresponding
ledger account.
NB! No entry will be made in any ledger account without the particular accounting
event being recorded and circumscribed in a suitable journal.
The following amounts would therefore appear in the Income statement for the
year ended 30 June 20x5:
R
INCOME
Interest on fixed deposit earned 9 000
EXPENSES
Interest on loan 23 700
Wages expense 59 470
13 - 27
QUESTION 13.4
Monsaai Traders is a sole trader, trading in cellular telephones. The enterprise

utilises a perpetual inventory system.
On 28 February 20x7, the end of the financial year, the following pre-adjustment
balances, with the exception of the owner's Capital account, appeared in the general
ledger of the enterprise:
R
Cash in bank 1 007
Debtors' control account 52 809
Creditors' control account 40 239
Interest income received in advance on 1 March 20x6 600
Interest income received 6 000
Equipment at cost price 160 000
Accumulated depreciation - Equipment 50 000
Electricity costs owing on 1 March 20x6 501
Fixed deposit at bank 60 000
Allowance for credit losses of debtors on 1 March 20x6 1 625
Bad debts written off 1 930
Bad debts recouped 1 023
Rent of premises owing on 1 March 20x6 1 200
Printing and stationery inventory on 1 March 20x6 317
Printing and stationery 1 089
Telephone costs owing on 1 March 20x6 711
Wages paid in advance on 1 March 20x6 2 450
Wages paid 48 622
Sales and administration costs 21 212
Repairs and maintenance 2 547
was also only recorded in the cash receipt journal when it had been received,
from where it was posted directly to the particular ledger account.
2. On 28 February 20x7, the printing and stationery inventory amounted to R275.
13 - 28
3. The enterprise entered into a lease agreement for its premises during 20x3,
which stipulated that the rent would amount to R1 200 per month until 31 May
20x6 and would increase to R1 350 per month from 1 June 20x6 for the
following 2 years. The rent is payable monthly.
4. On 28 February 20x7, wages of R1 875 were still owing to an employee who

was absent during that week.
5. The fixed deposit of R60 000 was made during 20x5 for a period of 5 years and
earns interest at a rate of 12% per annum, payable monthly.
6. The telephone account for February 20x7 amounting to R844 was only received
on 19 March 20x7, for which no further accounting entries were made.
7. The electricity account for February 20x7 amounting to R401 was only received
on 21 March 20x7, for which no further accounting entries were made.
8. The estate of a debtor, who owed an amount of R859 on 28 February 20x7, was
declared insolvent on that date. This amount is included in the balance of the
Debtors' control account above.
9. R820 of the bad debts that were recouped, are amounts that had been written
off as bad debts during the current year.
10. On 28 February 20x7 the allowance for credit losses of debtors amounts to
R1 039.
YOU ARE REQUIRED TO
compile the financial statements for the enterprise for the year ended 28 February
20x7, set out according to acceptable accounting norms.
(NB! - You can accept that all the journals, with the exception of the general journal,
had been closed off already each year before any adjustments had been made.)
13 - 29
QUESTION 13.4
Suggested solution
INCOME STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 20x7

R
SALES
LESS: COST OF SALES
OTHER INCOME
Interest earned
Bad debts recouped
Decrease in allowance for credit losses of debtors
LESS: EXPENSES
Electricity costs
Telephone costs
Depreciation written off
Repairs and maintenance
Sales and administration costs
Wages
Rent of premises
Bad debts written off
PROFIT for the year
13 - 30
R
ASSETS
NON-CURRENT ASSETS
Equipment
Cost price
Less: Accumulated depreciation
Intangible assets
Financial assets
Fixed deposit
CURRENT ASSETS
Trading inventory
Debtors
Interest income outstanding
Rent paid in advance
Cash in bank
CAPITAL
Balance at beginning of the year
Profit for the year
Less: Withdrawals
CURRENT LIABILITIES
Creditors
Electricity costs owing
Telephone costs owing
Wages owing
13 - 31
QUESTION 13.5
The following toals of the debtors' columns appeared in the respective journals of an
enterprise after those journals had been closed off for the year ending 30 April 20x6:
R
Sales journal 28 913
Sales return journal 984
Cash receipt journal 27 909
1. The balance of the Debtors' control account in the general ledger amounted to
R55 613 on 1 May 20x5.
2. An amount of R302 that had been owed by debtor G Vos, was written off on
22 April 20x6 as bad debt, due to the fact that he had been owing the amount for
the past 7 months and did not adhere to his numerous promises to settle the
amount. The account was handed over to an attorney for collection.
3. In accordance with an agreement, interest of R28 was levied on 30 April 20x6 on

the amount of R495 that had been owed by a debtor, M Smal, since
January 20x6.
4. The balance of the bad debts recouped account in the general ledger amounted
to R820 on 30 April 20x6. R620 of this amount are amounts that were written off
as bad debts during previous years, while the balance is amounts that were
written off during the current year.
5. The allowance for credit losses of debtors amounts to R480 on 30 April 20x6. The
allowance for credit losses of debtors amounted to R520 on 1 May 20x5.
YOU ARE REQUIRED TO
(a) show the further suitable general journal entries to record the above
transactions for the year ending 30 April 20x6.
(b) show the following ledger accounts in the general ledger for the year ending
30 April 20x6, properly closed-off:
 debtors’ control
 allowance for credit losses of debtors
 interest earned
 movement in allowance for credit losses of debtors
 bad debts written off
 bad debts recouped
(c) indicate how the item "debtors" would be shown in the balance sheet on
30 April 20x6.
13 - 32
QUESTION 13.6
Jabulani Jewellers is a sole trader in exotic jewellery. The enterprise utilises a

perpetual inventory system. The following pre-adjustment balances, with the
exception of the owner’s Capital account, appeared in the general ledger on
28 February 20x5, the end of the enterprise’s financial year:
R
Delivery vehicle at cost price 189 540
Purchases of packaging material 4 928
Amounts invested by the owner 25 000
Electricity costs owing - 1 March 20x4 797
Rent of premises paid in advance - 1 March 20x4 3 200
Costs of sales 404 269
Loan owing to KSOK Bank 110 000
Bad debt written off 2 645
Bad debt recouped 1 029
Accumulated depreciation - Delivery vehicle 71 293
Interest on loan paid in advance - 1 March 20x4 1 220
Interest paid on loan paid 11 000
Interest on fixed deposit in arrear - 1 March 20x4 600
Salaries and wages paid 69 460
Salaries and wages owing - 1 March 20x4 4 200
Cell phone costs owing - 1 March 20x4 1 182
Cell phone costs paid 15 847
Sales 727 886
Inventory packaging material - 1 March 20x4 2 318
Allowance for credit losses of debtors - 1 March 20x4 2 102
Depreciation written off - Delivery vehicle 22 313
1. Purchases of trading inventory are recorded in the Purchases journal. All other
purchases and costs were recorded only when the respective amounts owing
were paid, which amounts were posted from the cash payments journal directly
to the particular ledger accounts. The interest earned in respect of the fixed
deposit was also only recorded in the cash receipts journal when it had been
received, from which it was posted directly to the particular ledger account.
13 - 33
2. Packaging material of R4 209 was used during the year ended
28 February 20x5.
3. The fixed deposit was made on 11 May 20x3 for a period of 3 years. The deposit
4. The KSOK Bank loan has been owed since 1 April 20x2. Interest is levied on the
loan at a rate of 12% per annum, payable monthly. The loan is repayable in
equal annual instalments of R12 000 each on 1 April each year. All instalments
were paid to date.
5. On 19 March 20x4 the owner gave his personal Armani watch to the enterprise
at an agreed price of R5 000 to be sold by the enterprise as trading inventory, for
which no accounting entries were made to date.
6. On 24 December 20x4 the owner took a gold bracelet with a cost price of R1 680
and a selling price of R2 675 from inventory as a Christmas-present for his wife,
for which no accounting entries were made to date.
7. The enterprise had entered into a lease agreement on 1 June 20x3 for its
business premises in terms of which the monthly the rent amounted to R3 200
until 31 May 20x4 where after it increased to R3 500 per month until
31 May 20x5. The rent is payable monthly.
8. The invoice for the electricity costs for an amount of R1 009 in respect of
February 20x5 was only received during March 20x5, for which no accounting
entries were made to date.
9. The invoice for the cell phone costs for an amount of R1 337 in respect of
February 20x5 was only received during March 20x5, for which no accounting
10. The salary of an employee for March 20x5 for an amount of R1 660 was already
paid to him during February 20x5.
11. The amount of the debtors’ control shown in the list of balances above, includes
an amount of R780 owed by a debtor, M Ndo. The particular debtor indicated on
27 February 20x5 that he will not be able to settle the amount within the
foreseeable future.
12. The allowance for credit losses of debtors decreased with R125 on
28 February 20x5.
13. R366 of the bad debts that were recouped, are amounts that were written off as
bad debts during the current year. The balance of the bad debts recouped is
amounts that were written off as bad debts during previous years.
YOU ARE REQUIRED TO
compile a balance sheet on 28 February 20x5 and a detailed income statement for
the year ended 28 February 20x5, set out according to acceptable accounting norms.
13 - 34
QUESTION 13.7
Crusader Steel is a sole trader in stainless steel products. The enterprise utilises a
periodical inventory system. The following pre-adjustment balances, with the
exception of the owner’s Capital account, appeared in the general ledger of the
enterprise on 28 February 20x6, the end of the financial year:
R
Purchases returns of trading inventory 14 989
Purchases of trading inventory 358 389
Purchases of packing material 7 271
Electricity costs owing – 1 March 20x5 1 012
Electricity cost paid 11 926
Rent of premises owing – 1 March 20x5 4 280
Cash in bank 8 276
Loan owing to Cape Bank 130 000
Accumulated depreciation – Truck – 1 March 20x5 62 818
Interest on loan owing – 1 March 20x5 1 450
Interest on fixed deposit in arrear – 1 March 20x5 400
Salaries and wages paid in advance - 1 March 20x5 6 230
Cell phone costs owing - 1 March 20x5 1 182
Cell phone costs paid 15 847
Rail costs on purchases of trading inventory 12 876
Rail costs on sales of trading inventory 9 793
Sales-en administration costs 56 389
Sales 727 886
Trading inventory – 1 March 20x5 76 898
Inventory of packing material – 1 March 20x5 2 318
Allowance for credit losses of debtors – 1 March 20x5 1 802
Truck at cost price 180 700
1. Purchases of trading inventory are recorded in the Purchase journal. All other
purchases and costs were recorded only when the respective amounts owing
were paid, which amounts were posted from the cash payments journal directly
to the particular ledger accounts. The interest earned in respect of the fixed
deposit was also only recorded in the cash receipts journal when it had been
received, from which it was posted directly to the particular ledger account.
2. The packing material inventory amounted to R3 293 on 28 February 20x6.

13 - 35
3. The cost price of the trading inventory amounted to R72 440 on
28 February 20x6.
4. The loan from Cape Bank has been owed since 1 July 20x2. Interest is charged
on the loan at a rate of 12% per annum, payable monthly. The loan is repayable
in equal annual instalments of R15 000 each on 1 July each year. All instalments
were paid to date.
5. The owner gave his personal computer to the enterprise on 1 June 20x5 at an
agreed price of R8 000 for use by the enterprise, for which no accounting entries
were made to date.
6. The owner took steel products with a cost price of R2 200 and a selling price of
R3 850 from inventory on 17 October 20x5 to make a security gate at his home,
for which no accounting entries were made to date.
7. Depreciation of R21 370 on the truck and R450 on the computer must still be
written off for the year ended 28 February 20x6.
8. The enterprise entered into a lease agreement on 1 August 20x4 for its business
premises in terms of which the monthly rent amounted to R4 280 until
31 July 20x5 after which it increased to R5 120 per month until 31 July 20x6.
The rent is payable monthly.
9. The fixed deposit was made on 12 September 20x4 for a period of 3 years. The
deposit earns interest at a rate of 6% per annum, payable monthly.
10. It was decided to charge a debtor, Z Nel, interest of R134 on 28 February 20x6,
because his debt had been outstanding for 6 months. No accounting entries
were made to date in respect of the interest.
11. The amount for Debtors’ control in the list of balances above, include an amount
of R658 owed by a debtor, M Ndo. The particular debtor indicated on
27 February 20x6 that he was not able to pay the outstanding amount within the
foreseeable future.
12. The allowance for credit losses of debtors increased with R417 on
28 February 20x6.
13. R1 201 of the bad debts recouped represent amounts that were written off as
bad debts during the current year and the balance represent amounts that were
written off as bad debts during previous years.
14. The invoice for the electricity costs of R1 009 in respect of February 20x6 was
only received during March 20x6, for which no accounting entries were made to
date.
15. The invoice for the cell phone costs of R1 337 in respect of February 20x6 was
only received during March 20x6, for which no accounting entries were made to
date.
16. The salary for March 20x6 of R4 800 of an employee, who took his annual leave,
was already paid to him during February 20x6.
YOU ARE REQUIRED TO
compile a balance sheet on 28 February 20x6 and a detailed income statement for
the year ended 28 February 20x6, set out according to acceptable accounting norms.
(NB! – You can accept that all the journals were closed off at the end of the financial
year before any adjustments were made.)
13 - 36
QUESTION 13.8
Loco Brands is a sole trader in sport equipment and utilises a perpetual inventory
system. The following balances appeared in the general ledger of the enterprise on
28 February 20x6, the end of the financial year:
R
Sales 667 472
Amount invested by the owner 25 000
Furniture and equipment at cost price 101 790
Depreciation written off – Furniture and equipment 9 682
Accumulated depreciation – Furniture and equipment 39 381
Trading inventory at cost price 98 183
Cash in bank 9 004
YOU ARE REQUIRED TO
show the closing journal entries that will be made in the General journal on
28 February 20x6 to finally close off the accounting records for the year ended
28 February 20x6. (Ignore any journal narratives.)
13 - 37
QUESTION 13.9
Toys-4-U is a sole proprietor that trades in toys. The enterprise uses a periodical
inventory system. The following pre-adjustment balances appeared in the general
ledger of the enterprise on 28 February 2010, the end of the financial year of the
enterprise.
R
Capital - 1 March 2009 155 553
Loan owing to Netbank 104 000
Allowance for credit losses of debtors - 1 March 2009 3 289
Trading inventory – 1 March 2009 90 284
Inventory of packaging material - 1 March 2009 782
Amounts contributed by owner 7 500
Depreciation written off – Furniture and equipment 4 028
Purchases of trading inventory 594 969
Sales 757 162
Packaging material purchased 2 901
Salaries and wages owing - 1 March 2009 2 140
Cell phone cost owing - 1 March 2009 1 004
Cell phone cost paid 10 937
Interest on loan owing - 1 March 2009 1 500
Interest paid on loan 19 200
Rail costs on purchases 2 382
Interest on fixed deposit received in advance - 1 March 2009 125
Rent of premises owing - 1 March 2009 3 890
Electricity cost owing – 1 March 2009 746
Bad debts recouped 983
Sales returns 3 249
was also only recorded in the cash receipt journal when it had been received,
from where it was posted directly to the particular ledger account.
13 - 38
2. According to the physical inventory taking on 28 February 2010 the cost price of
the trading inventory was R79 582.
3. On 1 May 2008 the entity entered into a lease contract for its shop premises in
terms of which the rent amounts R3 890 monthly until 30 April 2009 and
thereafter increases to R4 100 per month until April 2010. The rent is payable
monthly.
4. The loan owing to Netbank was incurred during July 2007. Interest is levied on
the loan at a rate of 15% per year, payable monthly. The loan is repayable in
equal annual instalments of R15 000 each on 1 July each year. All instalments
have been paid on date.
5. Packaging material to the amount of R2 909 was used during the year ended
28 February 2010.
6. On 23 December 2009 the owner took from the inventory toys with a cost price
of R894 as presents for his children for which no accounting entries were made
to date.
7. The fixed deposit was made on 12 August 2008 for a period of 2 years. The
deposit earns interest at a rate of 10% per year, payable monthly.
8. The amount for debtors’ control in the list of balances shown above includes an
amount of R1 126 due by a debtor, M Lusani. Lusani’s estate was declared
insolvent during February 2010.
9. R300 of the bad debt recovered, is an amount written off as bad debt during the
previous year while the balance included amounts written off during the current
year.
10. The allowance for credit losses of debtors amount to R2 961 on
28 February 2010.
11. The invoice for the electricity cost to the amount of R697 regarding
February 2010 was only received during March 2010 for which no accounting
12. The invoice for the cell phone cost to the amount of R1 213 regarding
February 2010 was only received during March 2010 for which no accounting
13. The salary of R2 280 for February 2010 of an employee that was absent as a
result of illness, was only paid to him on 6 March 2010 and recorded on the
same day.
YOU ARE REQUIRED TO
prepare a balance sheet on 28 February 2010 and a detail income statement for the
year ended 28 February 2010, set out accounting to acceptable accounting norms.
13 - 39
QUESTION 13.10
Gifts Galore is a sole proprietor that trades in gift products. The products are
wrapped in gift wrapping when sold to the client. On 31 May 2010 the end of the
financial year, the following balances appeared in the enterprise’s general ledger:
R
Furniture and equipment 12 890
Trading inventory on 1 June 2009 65 209
Cash in bank 4 985
Amount contributed by the owner 5 000
Purchases of products 159 291
Transport cost on purchases 1 928
Dispatching costs on sales 678
Withdrawal by owner 91 864
Interest on fixed deposit 6 745
Sales returns 1 874
1. The enterprise uses a periodical inventory system.

2. Discount received and discount allowed is related to the purchase and sale of
inventory.
3. The cost price of the trading inventory amounted to R72 396 on 31 May 2010.
YOU ARE REQUIRED TO
show the closing journal entries to be made in the general Journal on 31 May 2010
as the final closing of the accounting records for the year ended 31 May 2010.
(Ignore any journal narratives.)
13 - 40
QUESTION 13.11
Moto Traders is a sole proprietor that trades in motorbikes. The enterprise uses a
perpetual inventory system.
On 28 February 20x4, the end of the enterprise’s financial year, the following pre-
adjustment balances appeared in the general ledger:
R
Capital – 1 March 20x3 162 678
Accumulated depreciation - Furniture and equipment 5 860
Fixed deposit at US Bank 30 000
Cash in bank 3 109
Amounts contributed by owner 12 000
Loan owing to SA Bank 48 000
Allowance for credit losses of debtors - 1 March 20x3 2 726
Sales 919 853
Interest on fixed deposit received in advance - 1 March 20x3 300
Interest received on fixed deposit 3 000
Interest on loan paid in advance - 1 March 20x3 600
Lease on premises owing - 1 March 20x3 2 400
Lease on premises paid 35 760
Electricity cost owing - 1 March 20x3 1 124
Telephone cost owing - 1 March 20x3 997
Telephone cost paid 10 371
Sales and administration cost 73 067
and costs were recorded when the respective amounts owing were paid, which
amounts were posted from the cash payments journal directly to the particular
ledger accounts. The interest earned in respect of the fixed deposit was also only
recorded in the cash receipts journal when it had been received, from where it
was posted directly to the particular ledger account.
13 - 41
2. Depreciation of R2 380 must still be written off for the year ending
28 February 20x4.
3. The loan from SA Bank has been owed since 1 July 20x2. Interest is levied on
the loan at a rate of 12% per annum, payable monthly. The loan is repayable in
equal annual instalments of R12 000 each on 30 June every year. All instalments
were paid to date.
4. The fixed deposit was made on 1 May 20x2 for a term of 4 years at US Bank and
5. On 1 July 20x2 the enterprise entered into a lease agreement for its business
premises in terms of which the lease amounts R2 400 monthly till 30 June 20x3
and from 1 July 20x3 will increase to R2 640 per month for the following year.
The lease is payable monthly.
6. On 23 December 20x3 the owner took from the inventory a motorbike with a
sales price of R12 674 and a cost price of R8 212 as a Xmas present for his son,
for which no accounting entry had been made up to date.
7. The invoice for the electricity costs amounting R999 in respect of February 20x4
was only received on 10 March 20x4 for which no accounting entries had been
made to date.
8. The invoice for the telephone costs amounting R1 044 in respect of
February 20x4 was only received on 12 March 20x4 for which no accounting
entries had been made to date.
9. The debtors’ control includes an amount of R417 owed by a debtor on
28 February 20x4. On 27 February 20x4 the debtor’s estate was declared
insolvent.
10. R600 of the bad debts recovered, was written off during the current financial year
as bad debts and the balance of the bad debts recovered, was written off as bad
debts during the previous year.
11. The allowance for credit losses of debtors increased with R178 on
28 February 20x4.
12. An employee’s salary of R3 450 in respect of March 20x4 has already been paid
out to him on 25 February 20x4.
YOU ARE REQUIRED TO
prepare a balance sheet on 28 February 20x4 and a detailed income statement for
the year ended 28 February 20x4 for Moto Traders, set out in accordance with
acceptable accounting norms.
(NB! - You may assume that all journals, excluding the general journal, had been
closed at the end of each year before any adjustments were done.)
13 - 42
QUESTION 1
Longships Ltd is a company that trades in toys. The following pre-adjustment balances,
amongst others, appeared in the general ledger of the company on
30 September 2016, the end of the financial year:
R
Fixed deposit at Capitec Bank 250 000
Loan owing to Nedbank 420 000
Allowance for credit losses of debtors – 1 October 2015 35 600
Interest received on fixed deposit in advance – 1 October 2015 2 500
Interest received on fixed deposit 25 000
Rent of premises paid in advance – 1 October 2015 22 000
Interest on loan owing – 1 October 2015 3 450
Electricity paid 35 000
Purchases of stationery 24 560
1. Purchases of inventory are recorded in the purchases journal. All other purchases
and costs were only recorded when the respective amounts owing were paid,
which amounts were posted from the cash payment journal to the particular ledger
accounts. The interest earned i.r.o. the fixed deposit was also only recorded in the
cash receipt journal when it had been received, from where it was directly posted
to the particular ledger accounts.
2. The fixed deposit was made at Capitec Bank on 1 October 2012 and has earned
interest at 12% per annum, payable monthly, since that date.
3. The loan from Nedbank has been owed since 1 January 2009. The loan bears
interest at a rate of 9% per year, payable monthly. The loan is repayable in equal
annual instalments of R40 000 each on 1 January every year. All instalments have
been paid to date.
4. Stationery to the amount of R5 700 was unused on 30 September 2016.
5. The company entered into a three year lease contract for its business premises
on 1 February 2014, whereby the monthly rent amounts to R20 000 for the first 12
months. Thereafter the monthly rent will increase by 10% on 1 February every
year.
6. R6 250 of the bad debt recovered is in respect of amounts written off as bad debts
in the previous financial year.
7. The company received an invoice of R3 200 on 15 October 2016 for the electricity
costs for September 2016. No accounting entry, with regards to this invoice, has
been recorded in the accounting records.
8. The allowance for credit losses of debtors amounted to R30 000 on 30 September
2016.
YOU ARE REQUIRED TO

show the journal entries in the general journal to account for the abovementioned
adjustments for the period 1 October 2015 to 30 September 2016 (Narrations are not
required).
QUESTION 2
Corleo Products Ltd is a company that imports olive oil from Italy. The company's
financial year ends on 30 June each year.
On 29 July 2015, the bookkeeper of the company compiled a trial balance in respect
of 30 June 2015. The following items amongst others appeared in that trial balance:
R
Interest on loan paid in advance - 1 July 2014 2 000
Interest on fixed deposit received in advance - 1 July 2014 750
Rent paid in advance - 1 July 2014 900
Rent paid 9 450
Wages owing - 1 July 2014 850
Wages paid 61 370
Telephone costs owing - 1 July 2014 220
Electricity costs owing - July 2014 290
and costs were recorded only when the respective amounts owing were paid, which
amounts were posted from the cash payment journal directly to the particular ledger
accounts. The interest earned in respect of the fixed deposit was also only recorded
in the cash receipt journal when it had been received, from where it was posted
directly to the particular ledger account.
2. The long term loan has owed since 2010 and is repayable in equal annual
instalments of R5 000 each on 1 April each year. All instalments were paid each
year on that date. Interest is charged on the loan at a rate of 24% per annum,
payable monthly.
3. The fixed deposit of R60 000 was made during 2012 and earns interest at a rate of
15% per annum, payable monthly.
4. Both the June 2015 telephone account for R190 and electricity account for R325
were received only on 21 July 2015, for which no accounting entries had been made
to date.
5. Wages in respect of July 2015 to the amount of R1 050 were paid on 29 June 2015.
6. The company had entered into a lease agreement for its premises during 2012.
The rental amounted to R900 monthly until 31 December 2014. From
1 January 2015, the rental was increased to R990 per month until 31 December
2016, payable monthly.
YOU ARE REQUIRED TO
record the above accounting events applicable to the year ended 30 June 2015 in a
suitable journal.
CHAPTER 14
COMPANIES
Page
14.1 Characteristics 14 - 3
14.2 Benefits and disadvantages 14 - 3
14.3 Foundation of a company 14 - 4
14.4 Managing a company 14 - 4
14.5 Categories of companies 14 - 5
14.6 Share capital 14 - 6
14.6.1 Authorised and issued share capital

14.6.2 Classification of shares
14.6.3 Share values
14.6.4 Issue of shares
14.7 Reserves and Surplus accounts 14 - 10
14.8 Dividends 14 - 11
14.9 Income tax of companies 14 - 15
Questions 14 - 18
14 - 1
- identify the characteristics, benefits and disadvantages of companies
- understand how a company is founded and managed
- identify the different types of companies
- classify the different kinds of shares of a company
- account for transactions regarding shares
- define and account for reserves and surplus accounts of companies
- calculate and account for dividends of companies
- account for SA normal income tax regarding companies
14 - 2
14.1 Characteristics
The company as a form of entity is regulated by the Companies Act No. 71 of 2008 and
differs from other forms of entities. It is different, as a company is a separate entity for
legal purposes. It means that the company can continue to exist separately from its
shareholders. The company have ownership of its own assets and is liable for its own
liabilities. The accounting procedures are similar to other forms of entities, but there are
accounting events inherent to a company.
The characteristics of a company are set out below:
 it is a form of entity appropriate for small to large business enterprises

 the number of shareholders can vary from 1 to unlimited according to the kind of
company
 the company is a legal entity with right of ownership of its own assets and liable for
its own liabilities.
 the company has an indefinite existence
 ownership is transferable without any changes to the capital structure of the
company
 natural persons, trusts and other legal entities may be shareholders
14.2 Benefits and disadvantages
Companies have the following benefits:
 The company has a separate legal identity which gives it the right to own assets,
incur liabilities and execute other legal dealings.
 The company exists independently of its shareholders.
 The shareholders have limited liability in respect of the company's operations.
 It is easy to change ownership of a company by selling shares.
 The company tax rate of 27% may be less than the tax rate for a natural person.
Companies have the following disadvantages:
 The separation between ownership and management may be problematic.

 Onerous regulations and procedures apply in order to protect the shareholders.
 Statutory audit of the annual financial statements for public companies.
 Companies are complex to found and to dissolve.
14 - 3
14.3 Foundation of a company
A company is founded in terms of the regulations of the Companies Act No. 71 of 2008.
A company originates when a Notice of Incorporation, together with the prescribed fees
and a copy of the Memorandum of Understanding is filed at the Companies and
Intellectual Property Commission (CIPC). The commission will then:
 approve the name of the company,

 allocate a unique registration number to the company,
 enter the prescribed information concerning the company in the companies register,
 endorse the Notice of Incorporation and the Memorandum of Understanding, and
 issue a registration certificate to the company.
 The authorised share capital of the company and the accounting date of the
financial year-end are also determined.
With the foundation of a company the following costs can be incurred:

 printing and stationery
 professional fees for the preparation and submitting of the company documents
Foundation costs incurred with foundation are written off directly against equity (retained
earnings).
The write off of foundation cost will be recorded in the general journal as follows:
Dr Retained earnings xxx

Cr Bank/creditor xxx
14.4 Managing a company
The shareholders elect directors to manage the company on their behalf. The directors
normally delegate the responsibility to general management and its officials. The company
must be managed in accordance with the Companies Act, the Memorandum of
Understanding and additional rules as determined by the board.
The Memorandum of Understanding stipulates:

 The external powers and characteristics of the company for example the name,
main business, authorised share capital.
 Internal management aspects of the company for example the procedures relating
to share issuing, voting rights, borrowing powers, meetings and rights and duties of
directors.
14 - 4
The Companies Act stipulates the rights, competencies and duties of the directors and that
each public company should have an annual general meeting (once per calendar year).
The following should be concluded during the meeting:
 presentation of directors’ report, audited financial statements (previous year) and

report of the audit committee
 election of directors
 appointment of an auditor and an audit committee
 any matters raised by shareholders
14.5 Categories of companies
The following is a schematic presentation of the categories of companies:
Categories of companies
Profit company Non-profit company (NPC)
State-owned Private company Personal liability Public company

company (Pty) Ltd. company (Ltd.)
(SOC Ltd.) (Inc)
A company registered A profit company that: A company that meets A profit company that is
in terms of the Act and: the criteria for a private not a state-owned
- is not a state-owned or company, whose company, a private
- falls within the personal liability Memorandum of company or a personal
meaning of “state- company; and Understanding states liability company
owned enterprise” - its Memorandum of that the company is a
in terms of the Understanding prohibits personal liability
Public Finance it from offering any of its company
Management Act, shares to the public and (ex: law firms)
1999; or restricts the
- is owned by a transferability of shares
municipality, as
contemplated in the
Local Government
Municipal Systems
Act, 2000
(ex: municipalities)
(a) Companies without share capital
These companies are established not for gain, for example, cultural institutions and
welfare organisations. These companies do not obtain capital by investment of
shareholders, but finance their operations with foreign capital.
14 - 5
(b) Companies with share capital
These companies obtain capital by the investment of shareholders and can be subdivided
as follows:
Public companies Private companies
- At least 1 shareholder - At least 1 shareholder
- Name ends with “Limited" Ltd. - Name ends with “Proprietary Limited” (Pty) Ltd.
- Shares are freely transferable - Shares are not freely transferable
- Shares may be offered to the public - Shares may not be offered to the public
- Financial statements must be - Financial statements only need to be audited if
Audited (refer to appendix B turnover and size of workforce exceeds a
chapter 2) certain limit
- No limit on number of authorised - No limit on number of authorised shares
shares
14.6 Share capital
The capital of a company originates when investors are invited by means of a prospectus
to apply to purchase shares in the company. Shares are then allocated and issued to
successful investors, who are known as shareholders. In the case of a private company,
investors are approached in person to take up shares. The interest of each shareholder is
represented by the amount of shares he holds in the company.
A shareholder’s shares grant him the following rights:

 A right to vote on annual general meetings of the company
 A right to information of the company
 A right to share in profits distributed by means of dividends (if declared)
 A right to share in the final distribution of net assets at liquidation of a company
14.6.1 Authorised and issued share capital
The authorised share capital refers to the maximum share capital that a company is
authorised to issue in terms of its Memorandum of Understanding. Shares that have been
issued form part of the issued share capital. The portion of the authorised share capital
that has not yet been issued is known as the authorised, unissued share capital. It
represents the maximum remaining shares that the Memorandum of Understanding allows
the company to issue – over and above, what is already in issue. Unissued shares have
no rights attached to them.
14.6.2 Classification of shares
The Companies Act No. 71 of 2008 identifies two classes of shares – preference and
ordinary shares. Separate general ledger accounts are used for preference share capital
and ordinary share capital. The two classes of shares are distinguished by the degree of
rights attaching to each type of share:
 Right to ownership and/or control of the company
 Right to a share in the profits of the company
14 - 6
 Right to a share in the net assets of the company upon liquidation
(a) Preference shares
Preference shares can only be issued if ordinary shares have been issued with regard to
preference shares receiving preference rights. Preference shareholders have a preference
right on dividends calculated according to a fixed amount per share allowing for the term
for which the shares have been held. The term will depend on whether the preference
shares are cumulative or non-cumulative. If the contrary is not defined, preference shares
are cumulative with regard to dividends. Regarding cumulative preference shares the
dividend accumulates if it is not declared and paid in a specific year. A liability for a
company can arise in the form of preference dividends in arrears. A non-cumulative
preference shareholder is only entitled to a dividend if sufficient gains are available and the
dividend is declared in the way as set out in the rules of the company. Dividends are
discussed in detail later.
Preference shareholders may also have a preferential right to capital, upon liquidation of
the company. In this case, the net assets of the company are first used to settle amounts
due to preference shareholders before being applied to ordinary shareholders.
(b) Ordinary shares
Each ordinary share gives its holder one voting right when company decisions are put to a
vote at shareholder meetings. The ordinary shareholder thereby has partial ownership and
control of the company. Ordinary shareholders are entitled to a dividend, upon declaration
by the company. If no dividend has been declared, the ordinary shareholders have no right
to the profits of the company. Dividends are declared to ordinary shareholders from
remaining profits, in other words, after preference dividends have been paid or provided.
Dividends are calculated as a fixed amount per share without allowing for the term for
which the shares have been held. Ordinary shareholders can therefore share unlimited in
profits.
The ordinary shareholders have the right to a distribution of a company’s net assets upon
liquidation, after all its liabilities and amounts due to preference shareholders have been
settled.
14 - 7
14.6.3 Share values
The Companies Act No. 71 of 2008 stipulates that shares do not have nominal or par
values.
14.6.4 Issue of shares
Examples of the recording of shares issued under the Act is set out below:
Example 14.1 (Private company)
A company issued 50 000 ordinary shares at R4 per share for cash.
Dr Bank 200 000

Cr Ordinary share capital1 200 000
The board of directors of a company can pass a resolution to issue unissued shares, as
long as the class and number of shares is authorised in the Memorandum of
Understanding. The issue price of the shares is determined and approved by the board.
Costs incurred with the issue of shares are written off directly against retained earnings in
the statement of changes in equity.
The write off of share issue costs will be recorded in the general journal as follows:

Cr Bank/creditor xxx
Shares are presented to investors as follows:

 Public company: a prospectus with an application form will be submitted to
investors
 Private company: potential investors are approached in person
Capitalisation issues are shares issued at no cost to existing shareholders
The recording of shared issued under a capitalisation issue will be recorded in the general
journal as follows:

Cr Ordinary share capital2 xxx
1 Alternatively: Preference share capital

2 Alternatively: Preference share capital
14 - 8
Example 14.1 (Public company – sale of shares by prospectus)
Recording the issue of shares:

50 000 ordinary shares are offered to the public at R2.30 per share. Applications for
60 000 the shares were received.
Step 1 - Applications for 60 000 shares are received
Interested investors return the completed application form with an electronic payment
directly to the company’s attorneys. These electronic payments are deposited in the
company’s bank account managed by their attorneys, known as the trust account.
Because no shares have yet been issued in exchange for the monies received, the
company has a liability toward these interested investors, known as the application
account.
Dr Trust account 138 000

Cr Application account 138 000
(Receive 60 000 x R2.30)
Step 2 - 50 000 shares are allocated
Management compares the number of shares offered for sale and the number of shares
applied for. Shares are then allocated to the successful investors and payment for these
shares transferred by the attorneys from the trust account to the company’s bank account.
Dr Bank 115 000

Cr Trust account 115 000
(Funds for shares issued 50 000 x R2.30 are transferred to own bank account)
Dr Application account 115 000

Cr Ordinary share capital 115 000
(Recorded share capital issued)
Step 3 - Refunding of unsuccessful applications
Monies are refunded to unsuccessful investors, if any, by the attorneys out of the
company’s trust account. If applications received exceed the amount offered for sale, the
share issue is said to be oversubscribed. If fewer subscriptions are received than were
offered for sale, the share issue is said to be undersubscribed.
Dr Application account 23 000

Cr Trust account 23 000
(Amounts refunded 10 000 x R2.30)
14.7 Reserves and surplus accounts
Reserves form part of the equity of a company and include profits not yet distributed.
Reserves may be raised out of realised and unrealised profits. Realised profits are usually
14 - 9
generated through transactions where a consideration has or will be paid to the company,
while unrealised profits are usually generated when a valuation is done on an asset.
There has to be distinguished between the following reserves and surplus accounts:
 Retained earnings
 Revaluation surplus
(a) Retained earnings
Retained earnings are created from realised or unrealised profits/losses. It is profits arising
from past events. These profits are not distributed in the form of dividends in the current
year and are held in a reserve from which future dividends may be declared (provided that
it satisfies the solvency and liquidity tests). These reserves are available for distribution at
any time.
The profit for the year after tax as calculated in the statement of profit or loss and other
comprehensive income is closed-off to the retained earnings account.
Dr Profit and loss account xxx

Cr Retained earnings xxx
The retained earnings can then be distributed as follows in the statement of changes in
equity:
- Transfer to other reserves (FA 288 and 389)
- Formation or share issue costs
- Preference dividends
- Ordinary dividends
- Capitalisation issues
The retained earnings account will be set out in the general ledger as follows:
Retained earnings
Formation / Issue costs xxx Balance b/d xxx
Preference dividend xxx Profit-and-loss* xxx
Ordinary dividend xxx
Capitalisation issue xxx
Balance c/f xxx
xxx xxx
Balance b/d xxx
* Closing-off of the profit and loss account (PROFIT AFTER TAX in statement of profit
or loss and other comprehensive income).
14 - 10
(b) Revaluation Surplus
A Surplus that was created from unrealised profits should adhere to certain liquidity and
solvability requirements, as set out in the Companies Act, before the reserve can be
distributed. Examples of other reserves and surplus accounts include:
 Revaluation Surplus (created from unrealised profits)

The fixed property was re-valued during the year and the value was increased with
R25 000.
If the revaluation surplus is created, the journal will be as follows:
Dr Land (SFP) 25 000

Cr Gain on revaluation (OCI) 25 000
Closing entry at year-end:

Dr Gain on revaluation (OCI) 25 000
Cr Revaluation surplus (SFP) 25 000
14 - 11
14.8 Dividends
Dividends are the portion of profits paid out to shareholders. Dividends are only due when
it has been authorised (declared) by the board. There is thus no obligation for the
company to pay any dividends (except for cumulative preference dividends) before
dividends are declared. No accounting entry is made in the current year for dividends
declared after year-end. Payment of the declared dividends usually occurs some time after
the declaration date.
Preference dividends must always be declared before there can be a distribution to

ordinary shareholders. Cumulative preference shares entitle preference shareholders to a
dividend every year. If these dividends are not declared during a year, the dividends in
arrears must be declared in a subsequent year, before any other dividends for that
particular year are declared.
Requirements for declaration and payment of dividends:
 The dividend must be authorised by a resolution of the board

 The company must satisfy the solvency and liquidity tests immediately after
completing the distribution:
- The fair value of the assets of the company must exceed the fair value of the
liabilities
- The company will be able to pay its debts as they become due in the ordinary
course of business for a period of 12 months from the distribution of the dividend
 Ordinary dividends may only be declared after provision has been made for all
dividends in arrears on cumulative preference shares and current period dividends
on non-cumulative preference shares
The recording of dividends in the general journal will be as follows:
(1) Date of dividend declaration
Dr Dividends (SFP) xxx

Cr Dividends payable (Liability) (SFP) xxx
(2) Date of dividend payment
Dr Dividends payable (Liability) (SFP) xxx

Cr Bank (SFP) xxx
(3) Closing-off of the dividend account to retained earnings
Dr Retained earnings (SFP) xxx

Cr Dividends (SFP) xxx
14 - 12
(a) Ordinary dividends
Dividends on ordinary shares are expressed as a fixed amount per share. The term for
which the shares were held is not taken into account when calculating ordinary dividends.
Each ordinary shareholder receives an amount equal to the fixed dividend per share
multiplied by the number of shares he owns.
Example 14.2
 200 000 issued ordinary shares

 Year-end 28 February 20X8
 Declare dividend of 4 cents per share on 1 July 20X7
 Dividend payable on 30 July 20X7
Ordinary dividend: 200 000 x 4c = R8 000
(b) Preference dividends
Preference shares’ dividends are normally calculated according to a fixed amount per
share. The term for which the shares were held is taken into account when calculating
preference dividends.
The term of cumulative preference dividends stretches from the last date of dividend
declaration to the date of the new declaration (without allowing for year-end). The right to
the cumulative preference dividend does not expire every accounting date.
The term of non-cumulative preference dividends stretches from the latest of the previous
year-end or previous dividend declaration, to the date of the new declaration. The right of
non-cumulative preference dividends expires every accounting date.
Example 14.3
Cumulative preference dividends
 100 000 issued cumulative preference shares that earn dividends of 24c per share
 Declare dividend on 1 July 20X7
 Previous dividend declaration on 31 December 20X5
31/12/20x5 1/7/20x7
x x
Year end: Year end: Year end:

28/2/20x6 28/2/20x7 28/2/20x8
Cumulative preference dividend: 100 000 x 24c x 18/12 months = R36 000
14 - 13
Non-cumulative preference dividends
 400 000 issued non-cumulative preference shares that earn dividends of 30c per share
 Declare dividend on 1 July 20X7
 Previous dividend declaration on 31 December 20X5
31/12/20x5 1/7/20x7
x x
Year end: Year end: Year end:
28/2/20x6 28/2/20x7 28/2/20x8
Non-cumulative preference dividend: 400 000 x 30c x 4/12 months = R40 000
14.9 Income tax of companies
A company is a legal entity and thus taxable in terms of the Income Tax Act. Companies
pay an annual income tax on their taxable income at the company’s tax rate which is fixed
by the Minister of Finance and communicated in the budget speech.
Income tax is an expense. Normal income tax for companies is calculated as 27% of
taxable income. It is important to realise that although calculation of taxable income is
derived from profit before tax, the taxable income is not necessarily the same amount as
profit before tax.
Because the actual tax payable for a tax year is not known until the profit and taxable
income are calculated at financial year-end, the company estimates what the actual tax will
be and starts paying SARS in six month intervals. These six-monthly payments are known
as provisional tax. A company is obliged to make two provisional tax payments annually to
SARS (South African Revenue Services) as follows:
- First payment: six months after the beginning of the financial year
- Second payment: last day of the financial year
Because the provisional tax calculations are merely estimates, the sum of the provisional
payments usually never equal the actual tax payable for the tax year. These payments
decrease bank and are recognised as a prepayment to SARS.
The provisional income tax payments will be recorded in the general journal as follows:
Dr SARS/Income tax payable (SFP) xxx

Cr Bank (SFP) xxx
14 - 14
At the end of the financial year, the financial statements are prepared and profit and
taxable income are calculated. The tax amount calculated by the company is known as the
tax estimate for that tax year. This tax estimate is then recognised as an expense on the
last day of the financial year (regardless of when it was actually calculated) and a
corresponding liability to SARS is recognised.
The income tax expense (estimate) will be recorded in the general journal as follows:
Dr Income tax expense (P&L) xxx

Cr SARS/Income tax payable (SFP) xxx
After the end of the financial year a tax return is submitted to SARS. SARS recalculates
the tax and sends the company an assessment. On this the final tax obligation for the year
is indicated less all provisional payments. The tax of each financial year is treated
separately. When the assessment for the year is received, the company have to compare
whether its tax estimate for that year agrees with the amount calculated by the SARS. If
there is a difference, the adjustment must be made in the year in which the assessment is
received. If the company provided for less than the final obligation according to the
assessment, it has been an underprovision. If the provision was in excess, it was an
overprovision.
An underprovision will be recorded in the general journal as follows:
Dr Income tax expense (P&L) xxx

An overprovision will be recorded in the general journal as follows:
Dr SARS/Income tax payable (SFP) xxx

Cr Income tax expense (P&L) xxx
Finally, the company must settle the outstanding amount owed to SARS. A third tax
payment to SARS, if needed, must be made within six months (seven months for
28 February year-end) after the end of the financial year.
Penalties and interests can be levied by SARS on late and insufficient payments. These
penalties and interest are ordinary expenses and are not recorded in the tax expense
account. However, because the amounts are owed to SARS, the liability is recorded in the
income tax payable account.
Fines and interests will be recorded in the general journal as follows:
Dr Fines/interests (P&L) xxx

14 - 15
Example 14.4
An enterprise estimated its profit before tax for the year ended 28 February 20X7 at
R100 000. Assume a tax rate of 27%. The following events took place during the year
ended 28 February 20X7 and 20X8:
Date Event Journal entry
31/08/20X6: 1st provisional payment Dr SARS (Provisional tax) (SFP) 10 000

of R10 000 i.r.o. 02/X7 Cr Bank (SFP) 10 000
28/02/20X7: 2nd provisional payment Dr SARS (Provisional tax) (SFP) 13 000

Record normal tax Dr Tax expense (P&L) 28 000

expense for the current Ct SARS (Tax payable) (SFP) 28 000
year (02/X7) of R28 000
30/06/20X7: Receive assessment

from SARS i.r.o. 02/X7
Case (i) - R26 000 Dr SARS (Taxation payable) (SFP) 2 000
Cr Tax expense (over provision) (P&L) 2 000
Case (ii) - R32 000 Dr Tax expense (under provision) 4 000
(P&L) 4 000
Cr SARS (Taxation payable) (SFP)
31/08/20X7: 1st provisional payment Dr SARS (Provisional tax) (SFP) 20 000

30/09/20X7: Final payment of

28/02/20X7 assessment
Case (i) - R26 000 Dr SARS (Taxation payable) (SFP) 3 000
Cr Bank (SFP) 3 000
Case (ii) - R32 000 Dr SARS (Taxation payable) (SFP) 9 000
Cr Bank (SFP) 9 000
28/02/20X8: 2nd provisional payment Dr SARS (Provisional taxation) (SFP) 15 000

Record normal tax Dr Tax expense (P&L) 42 000

expense for the current Cr SARS (Taxation payable) (SFP) 42 000
year (02/X8) of R42 000
Fine of R1 000 Dr Fines (expense) (P&L) 1 000

Cr SARS (Taxation payable) (SFP) 1 000
14 - 16
Effect on financial statements (disclosure will be discussed in detail in chapter 15):
28/02/20X7 28/02/20X8 28/02/20X8

Case (i) Case (ii)
Income tax expense
- current 28 000 42 000 42 000
- (over)/underprovision (2 000) 4 000
Income tax payable (SARS) 5 000 8 000 8 000
Fines 1 000 1 000
Ledger accounts in general ledger only for case (ii):
Income tax payable (SARS)

31/08/X6 1st provisional 10 000 28/02/X7 Tax expense 28 000
28/02/X7 2nd provisional 13 000
28/02/X7 Balance c/f 5 000
28 000 28 000
31/08/X7 1st provisional 20 000 01/03/X7 Balance b/d 5 000
30/09/X7 Pay assessment 9 000 30/06/X7 Tax assessment* 4 000
28/02/X8 2nd provisional 15 000 28/02/X8 Tax expense 42 000
Balance c/f 8 000 28/02/X8 Fine expense 1 000
52 000 52 000
01/03/X8 Balance b/d 8 000
Income tax expense

28/02/X7 Tax payable 28 000 28/02/X7 Profit & Loss 28 000
28 000 28 000
30/06/X7 Tax assessment* 4 000 28/02/X8 Profit & Loss 46 000
28/02/X8 Tax payable 42 000
46 000 46 000
* Underprovision
Bank
31/08/X6 1st provisional 10 000
31/08/X7 1st provisional 20 000
30/09/X7 Assessment 9 000
Fines
28/02/X8 Fine payable 1 000 28/02/X8 Profit & Loss 1 000
1 000 1 000
14 - 17
Example 14.4
First provisional tax Second provisional tax First provisional tax Second provisional tax
payment payment payment payment
R10 000 R13 000 R20 000 R15 000
X X X X
31/8/20X6 30/6/20X7 31/8/20X7 30/9/20X7
1/3/20X6 28/2/20X7 28/2/20X8
Normal tax expense Over provision (Case i) Normal tax expense

(Tax return) (Tax assessment R26 000) (Tax return)
R28 000 R28’[CPY] – R26’[SARS] R42 000
= R2 000
Fine per assessment
Under provision (Case ii) R1 000
(Tax assessment R32 000)
R28’[CPY] – R32’[SARS]
= R4 000
Refund of overprovision
per assessment (Case i)
Payment of under
provision per assessment
14 - 17
CHAPTER 14
QUESTIONS
Page
Question 14.1 Issue of shares 14 - 19
Question 14.3 Income tax 14 - 21
Question 14.4 Issue of shares, retained earnings and trial balance 14 - 23
Question 14.5 Issue of shares, retained earnings 14 - 26
Question 14.7 Issue of shares, retained earnings 14 - 29
Question 14.8 Retained earnings 14 - 30
14 - 18
QUESTION 14.1
Soektog Ltd. was incorporated on 9 May 20x3. According to the Memorandum of

Incorporation the company is authorised to issue 500 000 ordinary shares.
The company decided on 8 October 20x9 to increase its issued share capital and therefore
offered 100 000 ordinary shares to the public at R1,25 each.
During the period 10 October 20x9 to 15 November 20x9 the company received
applications for 140 000 ordinary shares.
The 100 000 ordinary shares were allotted to the various shareholders on
1 December 20x9.
YOU ARE REQUIRED TO
show the journal entries that will be made in the general journal in respect of the
applications and issue of shares for the period 10 October 20x9 to 1 December 20x9.
(Also record the journal entries in respect of the flow of cash in the general journal.)
Suggested solution
GENERAL JOURNAL
R R
14 - 19
QUESTION 14.2
Bokobok (Pty) Ltd. was incorporated with the following authorised share capital:
- 300 000 ordinary shares; and

- 150 000 preference shares that earn dividends of 10c per share.
The company was registered on 1 May 20x5.
Formation costs amounted to R1 500, which were paid when the company had sufficient
cash funds available.
The following shares were issued on 15 May 20x5:
- 250 000 ordinary shares at R1,20 each for cash; and

- 100 000 preference shares at R2 each to redeem the amount owing to
Ace (Pty) Ltd. in respect of the cost price of a fixed property purchased on
3 May 20x5.
YOU ARE REQUIRED TO
show all the journal entries that will be made with regard to the various accounting
activities that took place during the period 1 May 20x5 to 15 May 20x5. (Also record the
journal entries in respect of the flow of cash in the general journal.)
Suggested solution
GENERAL JOURNAL
R R
14 - 20
QUESTION 14.3
Merriman Ltd. has not made any entries in their records for the year ending
28 February 2002 with regards to their income tax matters. You have been requested to
assist them and you are provided with the following information:
1. On 1 March 2000 the balance on the income tax payable account (SARS) in the
general ledger was nil. A provision of R144 000 for normal income tax was made on
28 February 2001. Provisional tax payments were made as follows during the year
ended 28 February 2001:
 First provisional payment on 31 August 2000 R70 000

 Second provisional payment on 28 February 2001 R70 000
Merriman Ltd. paid the portion of the income tax expense for 2001 that was still
outstanding according to their calculations on 31 August 2001 (the date when the third
provisional tax payment was due). On the same date the first provisional tax payment
of R75 000 for the 2002 tax year was made.
2. On 30 November 2001 Merriman Ltd. received their assessment for the 2001 tax year
from SARS. A further payment of R5 500 for the 2001 tax year was made on
31 December 2001 to avoid interest.
3. On 28 February 2002 Merriman Ltd. made their second provisional tax payment of
R80 000 for the 2002 tax year.
4. Normal income tax, amounting to R145 000, still had to be provided for the 2002 tax
year.
YOU ARE REQUIRED TO
show the general ledger accounts for the year ended 28 February 2001 and 2002 that
relates to the above income tax transactions.
14 - 21
QUESTION 14.3
Suggested solution
General ledger
Income tax payable / SARS (SFP)
Income tax expense (P&L)
Bank
14 - 22
QUESTION 14.4
Bafana Ltd. was incorporated on 1 May 20x3 with an authorised share capital of:
- 200 000 Ordinary shares; and

- 50 000 Non-cumulative preference shares that earn dividends of 24c per share.
Apart for the undermentioned share issue, the company had already issued the following
shares since 20x3:
- 100 000 Ordinary shares at R1,20 each; and

- 20 000 Preference shares at R2,20 each.
The balances of the various ledger accounts in respect of the shares that had been issued,
together with the following ledger account balances, appeared in the general ledger of the
company on 30 June 20x6, end of the financial year:
R
Fixed property at valuation 400 000
Debtors 23 800
Creditors 35 000
Revaluation Surplus 80 000
Retained earnings on 1 July 20x5 105 000
Profit for the year before tax 60 000
Interim dividend paid 3 200
Provisional tax paid 15 000
Cash in bank 2 000
1. A further 50 000 ordinary shares were offered to the public on 20 June 20x6 at R1,20
per share. Applications for 40 000 shares were received on 29 June 20x6, which funds
were held in trust. All applications were allotted on 30 June 20x6, for which no
accounting entries were made to date. The share issue costs for these shares
amounted to R1 000, which had not been accounted for or paid to date.
2. The interim dividend was declared on 1 October 20x5 and paid on 1
November 20x5.
3. No entries were made in respect of the income tax of R20 000 for the current year,
which has to be provided for.
4. The directors decided the following on 30 June 20x6, for which no accounting entries
were made:
- A final ordinary dividend of 3 cents per share is declared.
- The fixed property must be re-valued to R425 000.
YOU ARE REQUIRED TO
(a) show all the appropriate and closing journal entries that will have to be made on
30 June 20x6.
(b) show the retained earnings account on 30 June 20x6.
(c) compile a trial balance on 30 June 20x6, after the accounting records had been
updated and closed-off.
14 - 23
QUESTION 14.4
Suggested solution
(a)
GENERAL JOURNAL
Particulars Debit Credit
R R
Trust account 48 000
Application account 48 000
(Entry which must be made on 29 June 20x6 in respect of the
applications that were made for 40 000 ordinary shares at
R1,20)
Application account 48 000
Ordinary share capital 48 000
(Allotment of 40 000 ordinary shares at R1,20 each.)
Bank account 48 000
Trust account 48 000
(Transfer of funds in respect of ordinary shares that were
allotted.)
Retained earnings (Share issue costs) 1 000
Costs owing (Creditor) 1 000
(Recording of transaction in respect of share issue costs
incurred.)
Income tax expense 20 000
Income tax payable/SARS (Creditor) 20 000
(Provision for income tax for the current year.)
Profit and loss account 20 000
(Closing journal entry.)
Preference dividend (20 000 x 24c for 9 months) 3 600
Preference dividend payable (Creditors) 3 600
(Provision for final preference dividend.)
Ordinary dividend (140 000 shares @ 3 cents each) 4 200
Ordinary dividends payable (Creditors) 4 200
(Provision for final ordinary dividend.)
Revaluation 25 000
(Revaluation of fixed property from R400 000 to R425 000.)
Retained earnings 11 000
Preference dividends 4 800
Ordinary dividends 6 200
(Closing journal entry.)
Profit and loss account 40 000
(Closing journal entry. Transfer of net profit for the year from
the profit and loss account to the retained earnings account.)
14 - 24
QUESTION 14.4
(b)
Retained earnings
Particulars Amount Particulars Amount
Preference dividend 4 800 Balance b/d 105 000
Ordinary dividend 6 200 Profit after tax 40 000
Share issue costs 1 000 (Transferred from profit and loss
account)
Balance c/f 133 000
145 000 145 000
Balance b/d 133 000
(c)
TRIAL BALANCE ON 30 JUNE 20X6 Debit Credit
R R
Preference share capital 44 000
Debtors 23 800
Creditors 35 000
Share issue costs owing (Creditor) 1 000
Income tax payable/SARS (Creditor) 5 000
Preference dividend payable (Creditor) 3 600
Ordinary dividend payable (Creditor) 4 200
Revaluation Surplus 105 000
Cash in bank account 50 000
498 800 498 800
14 - 25
QUESTION 14.5
PART A
In terms of the Memorandum of Incorporation of Courts Products Ltd., the company’s

authorised share capital consist of 1 000 000 ordinary shares and 200 000 non-
cumulative preference shares that earn dividends of 8c per share.
1. The company decided on 1 July 2007 to issue a further 200 000 ordinary shares at
R1,18 in order to raise necessary cash. Applications for 286 500 shares were received
during the period 14 July 2007 to 15 August 2007. The 200 000 shares were allocated
by the directors on 31 August 2007. Share issue costs to the amount of R2 300 were
incurred during that period, which has not been accounted or paid for.
2. The company purchased a fixed property for R350 000 on 15 July 2007 for the
construction of an additional business premises. There was an agreement with the
seller of the property to settle the purchase amount on date of registration of transfer by
issuing 100 000 preference shares at R1,20 each and the balance in cash. The
registration of transfer of the fixed property in the name of the company took place on
30 September 2007.
YOU ARE REQUIRED TO
show all the applicable journal entries for the period 1 July 2007 to 30 September 2007.
Journal narrations are not required.
14 - 26
PART B
World Cup Ltd. was incorporated on 1 May 2004 with an authorised share capital of:

- 50 000 Non-cumulative preference shares that earn dividends of 24c per share.
The company issued the following shares at the incorporation date :
- 100 000 Ordinary shares at R1,20 each; and

- 30 000 Preference shares at R2,20 each.
The balances of the various ledger accounts in respect of the shares that had been issued,
together with the following ledger account balances, appeared in the general ledger of the
company on 30 June 2007, the end of the financial year:
R
Retained earnings on 1 July 2006 120 000
Interim dividend paid 3 800
Share issue cost 1 450
1. On 15 September 2006 a further 50 000 ordinary shares were issued at R1, 30 each.
2. The interim dividend was declared and paid on 1 October 2006. This was the first time
the company declared a dividend since incorporation.
3. No entries were made for the income tax to the amount of R15 000 for the current year.
4. A final ordinary dividend of 3 cents per share was declared on 30 June 2007.
YOU ARE REQUIRED TO
(a) show journal entries (including closing transfers) with regard to the provision for
income tax on 30 June 2007.
(b) show the retained earnings account on 30 June 2007.
14 - 27
QUESTION 14.6
Vasvat Ltd. was founded on 14 March 2002. The company’s authorised share capital is
divided into 100 000 cumulative preference shares earning R0.25 dividends per share,
50 000 non-cumulative preference shares and 200 000 ordinary shares.
The founders of the company have taken up 100 000 ordinary shares and paid
R100 000 for it on 31 March 2002. They also took up all the non-cumulative preference
shares and paid R50 000 for it on the same day.
In a prospectus dated 30 June 2002 the public was invited to apply for the following
unissued shares:
- Cumulative preference shares at R2,50 per share

- Ordinary shares at R1,25 per share
Applications for the 150 000 preference shares and 600 000 ordinary shares were
received on 30 July 2002 and on 15 August 2002 the shares were allotted as follows:
- The preference shares were fully allotted and the excess application fees received
were paid back on 14 August 2002.
- The total amount of ordinary shares offered to the public was allotted and the
excess application fees received were paid back on 14 August 2002.
The share issue costs amounted to R2 500.
YOU ARE REQUIRED TO
show the journal entries for above transactions.
14 - 28
QUESTION 14.7
The following balances, amongst other, appeared in the general ledger of Legion Ltd. on
30 June 20x5, the end of the financial year:
R
Ordinary share capital (50 000 issued shares) 58 000
Revaluation surplus 15 000
Profit before tax 100 000
1. The authorised share capital of the company is as follows:

- 50 000 Cumulative preference shares that earn dividends of 10c per share.
2. The company was incorporated on 1 January 20x2, on which date 50 000 ordinary and
20 000 preference shares were issued.
3. SA normal income tax of R35 000 must be provided for on 30 June 20x5.
4. The company had not previously declared or paid any dividends. The directors decided
to declare and provide for an ordinary dividend of 12 cents per share on 30 June 20x5.
YOU ARE REQUIRED TO
(a) show all the appropriate journal entries that still have to be made on 30 June 20x5.
(b) show the retained earnings account on 30 June 20x5.
14 - 29
QUESTION 14.8
Bio (Pty) Ltd. was founded on 24 November 2005 with the following authorised share
capital:
- 1 000 000 ordinary shares; and

- 100 000 cumulative preference shares that earn dividends of 20c per share.
Since foundation the company has issued the following shares:
- 250 000 ordinary shares on 7 December 2005

- 30 000 preference shares on 1 January 2006
- 12 000 preference shares on 31 July 2008
The following balances amongst other appeared in the ledger of the company on
31 August 2008, the end of the financial year:
R
Retained earnings on 1 September 2007 128 582
Interim dividends paid 22 000
Normal income tax (provided for current year) 31 464
1. The interim dividend was declared on 31 May 2008 and paid on 31 July 2008. It was
the first time since foundation that the company has paid a dividend.
2. On 31 August 2008 the company re-valued its fixed property at R625 000, for which no
accounting entries were made.
3. The board of directors decided on 31 August 2008 to declare a final dividend of 4 cents
per ordinary share. No accounting entry has yet been made yet.
YOU ARE REQUIRED TO
(a) show the retained earnings account for the year, appropriately closed-off, on
31 August 2008. (Show the dividends for ordinary shares and preference shares
separately and in respect of both, the interim and the final dividend separately.)
(b) show the journal entry in the general journal with regards to the revaluation of the fixed
property. (Ignore journal narratives.)
14 - 30
CHAPTER 15
IFRS FINANCIAL STATEMENTS
Page
15.1 Objective of IFRS Financial Statements 15 - 3
15.1.1 Compilation of IFRS Financial Statements

15.1.2 Faithful representation of IFRS Financial Statements
15.2 Accounting policy 15 - 6
15.3 Statement of Financial Position 15 - 8
15.3.1 The face of the Statement of Financial Position

15.3.2 Notes to the Statement of Financial Position
15.4 Statement of Profit or Loss and other Comprehensive Income 15 - 15
15.4.1 The face of the Statement of Profit or Loss and other

Comprehensive Income
15.4.2 Notes to the Statement of Profit or Loss and other
Comprehensive Income
15.5 Statement of Changes in Equity 15 - 19
15.5.1 The face of the Statement of changes in Equity
15.6 Other disclosure requirements 15 - 20
Appendix A 15 – 21
Questions 15 - 22
15 - 1
- understand the objective of financial statements
- identify the compilation of financial statements
- apply and understand the faithful representation of financial statements
- prepare company financial statements to comply with the minimum

requirements of International Financial Reporting Standards and
the Companies act.
15 - 2
15.1 Objective of IFRS Financial Statements
The objective of financial statements is to provide information on the financial position,

financial performance and cash flow of an entity which is useful for a wide variety of users
to make economic decisions. Financial statements also show the results of management’s
stewardship of the entity’s resources that have been entrusted to them.
A company’s financial statements are submitted to the shareholders of the company

during the shareholder’s meeting. The financial statements are also filed at the office of the
Companies and Intellectual Property Commission for inspection by the users of the
financial statements.
The interested parties of the annual financial statements include:

 shareholders
 auditor
 management
 directors
 employees
 company secretary
 creditors
 SARS
 banks
15.1.1 Compilation of IFRS Financial Statements
The minimum information disclosed in a company’s financial statements is stipulated by

IFRS (International Financial Reporting Standards) which are issued by the South African
Institute of Chartered Accountants (SAICA) and the Companies Act No 71. of 2008.
According to section 29 of the Companies Act, the annual financial statements must:
 meet the financial reporting standards;
 reflect the company’s state of affairs fairly;
 show the company’s transactions and financial position;
 show the company’s assets, liabilities, income and expenses in the prescribed
format;
 show the date on which the financial statements were compiled;
 show the accounting period that is applicable;
 show whether the statements were audited or reviewed independently and
 show the name and professional qualifications of the person who supervised while
the financial statements were drafted.
The Companies act also requires that financial statements are prepared in accordance
with financial reporting standards. Currently there are 2 types of financial reporting
standards i.e.:
- IFRS (International Financial Reporting Standards): companies that do not qualify to

apply IFRS for SME’s, must apply these standards
15 - 3
- IFRS for SME’s (International Reporting Standards for Small and Medium sized
Entities): only companies that do not have public accountability, qualify to apply these
standards
An entity has public accountability if:

 its debt or equity instruments (shares) are traded in a public market or it is in the
process of issuing such instruments for trading in a public market (a domestic or
foreign stock exchange or an over-the-counter market, including local and regional
markets), or
 it holds assets in a fiduciary capacity for a broad group of outsiders as one of its
primary businesses. This is typically the case for banks, credit unions, insurance
companies, securities brokers/dealers, mutual funds and investment banks.
15.1.2 Faithful representation of IFRS Financial Statements
Faithful representation requires the faithful presentation of the consequences of

transactions and events according to the definitions and recognition criteria of assets,
income and expenses set out in the Framework. Faithful representation also requires the
following:
 selecting and applying accounting policy

 presenting information in a way that is complete, neutral and free of material errors
The following standards that have been issued must be taken into account when preparing
financial statements:
 Conceptual framework for financial reporting 2010

 IAS 1 – Presentation of financial statements
In terms of IAS 1, a complete set of financial statements consists of:
 Statement of financial position as at the end of the period;

 Statement of profit or loss and other comprehensive income for the period;
 Statement of changes in equity for the period;
 Statement of cash flows for the period;
 Notes, consisting of accounting policies and explanatory notes.
The Framework for the preparation and presentation of financial statements has been fully
dealt with in Chapter 2. IAS 1 gives an explanation of the overall considerations (fair
presentation, going concern, accrual basis, materiality and aggregation, offsetting,
comparative information and consistency) for the presentation of financial statements,
guidelines for the structure of the financial statements and minimum requirements for the
contents of financial statements.
Fair presentation
Financial statements should fairly present the financial position, financial performance and
cash flows of the enterprise, as required by the conceptual framework. It requires the
faithful representation of the effects of transactions in accordance with the definition and
recognition criteria for assets, liabilities, income and expenses. The appropriate application
15 - 4
of IFRSs, with additional disclosure where necessary, is presumed to result in financial
statements that achieve a fair presentation.
Compliance with IFRS
If financial statements comply with all the requirements of IFRSs, that fact should be
disclosed in the notes. Financial statements shall not be described as complying with
IFRSs unless they comply with all the requirements thereof.
Going concern
Financial statements shall be prepared on a going concern basis unless management

either intends to liquidate the entity or cease trading. Uncertainties relating to events or
conditions which may cast significant doubt upon the entity’s ability to continue as a going
concern shall be disclosed, as well as the reasons for the decision to prepare the annual
financial statements on the going concern basis.
Accrual basis
Financial statements must be compiled on the accrual basis. Therefore transactions are
accounted for when they occur and not when the cash is received or paid.
Materiality and aggregation
Each material class of similar items shall be shown separately. Items that are dissimilar
because of their nature or function are also presented separately unless they are
immaterial. Materiality is determined by looking at the nature or size of an item. A user
regards an item as being material, if a different decision would have been made on non-
disclosure of that item.
Offsetting
Assets and liabilities should not be offset except when offsetting is permitted or required by
a specific standard.
Income and expense items should only be offset when:

 an IFRS standard requires or permits it for example profit or loss on sale of assets,
or
 gains, losses and related expenses arising from the same or similar transactions,
are immaterial.
Frequency of reporting
Financial statements should be compiled at least annually. When, in exceptional

circumstances, an enterprise's statement of financial position date changes and annual
financial statements are presented for a period longer or shorter than one year, an
enterprise should disclose, in addition to the period covered by the financial statements:
 the reason for the change, and
 the fact that the comparative figures are not comparable.
15 - 5
Comparative information
Comparative information should be disclosed in respect of the previous period for:

 all numerical information in the financial statements
 descriptive or narrative information must also provide comparative information when
it is relevant to an understanding of the current period's financial statements.
Comparative figures help users of financial statements to analyse trends in financial

information. Should disclosure be changed in the current period, comparatives must also
be amended, unless impractical. If impractical, the following must be disclosed:
 the reason why no change was made, and

 the nature of the change if the comparatives had been changed.
Consistency of presentation
The presentation and classification of items in the financial statements must remain the
same within each accounting period and from one accounting period to the next, unless:
 there is a change in the nature of operations, or
 the change would bring about more appropriate disclosure, or
 a standard requires the change.
15.2 Accounting policy
A company must disclose the accounting policy as part of the notes to the financial
statements. The following information must be included in the accounting policy note:
 the measuring basis applied in the preparation of financial statements

 the fact that the policy corresponds with previous years
 if the statements comply with IFRS or IFRS for SME’s
 other policies that are followed i.r.o certain assets, liabilities, income and expenses
that is relevant for and understanding of the financial statements (i.e., property,
plant and equipment, financial assets, inventory and income)
15 - 6
An example of an accounting policy note is set out below:
1. Accounting policy
The financial statements are prepared in accordance with International Financial

Reporting Standards. The financial statements are prepared on the historical cost basis
except for certain property, plant and equipment items that are measured at revalued
amounts and financial assets that are measured at fair values, as set out in the
accounting policies below. The accounting policy is in agreement with the policy
followed in the previous year and is as follows:
1.1 Property, plant and equipment
Property, plant and equipment are initially recognised at cost price. Land is
subsequently measurement at re-valued amounts. All other property, plant and
equipment are measured at historical cost less accumulated depreciation. Gains or
losses upon revaluation of property, plant and equipment are recognised in other
comprehensive income and accumulated in the revaluation reserve in the statement of
changes in equity.
Historical cost includes expenditure that is directly attributable to the acquisition of the
property, plant and equipment. Subsequent costs are included in the asset’s carrying
amount, only when it is probable that future economic benefits associated with those
subsequent costs will flow to the company and the cost can be measured reliably.
Land is not depreciated. Depreciation on vehicles is written off according to the

straight-line method and has a useful life of x years. Depreciation on equipment is
written off at x% per year according to the diminishing balance method.
The assets’ residual values are reviewed, and adjusted if appropriate, at each reporting
date. Gains and losses on disposals are recognised as part of profit and loss in the
statement of profit or loss and other comprehensive income.
1.2 Investments in subsidiaries
Investments in subsidiaries are shown at cost price as determined on the acquisition

date.
1.3 Financial assets (for the purpose of Fin Acc 188, shares are acquired with
the purpose to sell it in the short-term)
Financial assets are initially recorded at fair value. Subsequent measurement is also at
fair value. Any adjustments to fair value are shown as part of profit and loss in the
statement of comprehensive income.
1.4 Inventory
Inventory is measured at the lowest of cost and net realisable value. The cost price is
calculated according to the first-in-first-out or weighted average cost basis. Any write-
down to net realisable value is recognised in profit and loss.
15 - 7
1.5 Revenue (Covered in FA 288)
Revenue is measured at the fair value of the consideration received. Revenue from the
sale of goods is recognised when risks and rewards of ownership has passed to the
buyer. Revenue from services rendered is determined on the stage of completion
basis. The stage of completion is determined according to surveys of work performed
(or services performed to date as a percentage of total services performed or costs
incurred to date as a percentage of total estimated costs).
15.3 Statement of Financial Position (SFP)
15.3.1 The face of the Statement of Financial Position
In terms of IAS 1 the Statement of Financial Position should at least include the following
line items:
 property, plant and equipment

 investment property (FA 389)
 intangible assets (FA 288 & 389)
 financial assets
 equity-accounted investments (FA 288 & 389)
 biological assets (not covered)
 inventory
 trade and other receivables
 trade and other payables
 cash and cash equivalents
 provisions (FA 288)
 financial liabilities
 deferred tax liabilities and assets (FA 288 & 389)
 assets and liabilities for current income tax
 non-controlling interest (FA 288 & 389)
 issued capital and reserves
The following separate classifications must be presented on the face of the Statement of
Financial Position unless a presentation based on liquidity provides reliable and more
applicable information:
 non-current assets and current assets

 non-current liabilities and current liabilities
15 - 8
An example of a company’s Statement of Financial Position is set out below:
Statement of Financial Position on 28 February 20X7
Note R
ASSETS
Non-current assets
Property, plant and equipment 2 195 000
Intangible assets -
Investments in subsidiaries 3 100 000
Financial assets 4 45 000
Total non-current assets 340 000
Current assets
Inventory 5 28 000
Trade and other receivables 43 000
Cash and cash equivalents 13 000
Total current assets 84 000
Total assets 424 000

Equity
Share capital 6 73 000
Revaluation surplus 7 50 000
Total equity 312 000
Borrowings 8 55 000
Total non-current liabilities 55 000
Current liabilities
Trade and other payables 34 000
Borrowings 8 5 000
Income tax payable 10 000
Dividends payable 8 000
Total current liabilities 57 000
Total liabilities 112 000
Total equity and liabilities 424 000
15 - 9
15.3.2 Notes to the Statement of Financial Position
(a) Non-current assets
(i) Property, plant and equipment

In respect of each class property, plant and equipment:
 measuring basis for determining the gross carrying amount
 depreciation methods
 useful life or depreciation rates
 gross carrying amount and accumulated depreciation
 reconciliation of the carrying amount at the beginning and end of the period
including amongst other things the following:
- additions
- increases or decreases as a result of revaluation (decrease n/a FA 188)
- depreciation
- disposals
 if property, plant and equipment are pledged as security for any borrowings or
obligations
 if property has been re-valued: year of revaluation, basis, policy on frequency,
qualification and name of valuator
 if compensation from insurer is received for loss of an asset the carrying amount
of the asset
An example of the note on property, plant and equipment is set out below:
2. Property, plant and equipment
Property Plant Equipment Total

R R R R
Cost price / Revalued amount 80 000 58 500 42 500 181 000

Accumulated depreciation (10 500) (7 500) (18 000)
Carrying amount start of year 80 000 48 000 35 000 163 000
Additions - 24 500 20 000 44 500
Revaluation 20 000 - - 20 000
Improvements 5 000 - - 5 000
Depreciation - (7 500) (5 000) (12 500)
Disposals - (15 000) (10 000) (25 000)
Carrying amount end of year 105 000 50 000 40 000 195 000
Cost price / Revalued amount 105 000 65 000 50 000 220 000
Accumulated depreciation (15 000) (10 000) (25 000)
The property has been re-valued according to the (basis) at market value on (date), by
(name and qualification of valuator) a sworn valuator.
A first mortgage loan (amount) on land and buildings (carrying amount) serves as security
for the borrowing. (Note will be expanded in FA 389).
15 - 10
(ii) Intangible assets (FA 288)
(iii) Investments in subsidiaries (covered extensively in FA 288 & 389)
When a company can control another company, the company that is controlled
becomes the subsidiary of the controlling company. For the purpose of Fin Acc 188,
a company usually has the power to control another company when it owns more
than 50% of the companies’ issued ordinary shares.
IAS 27 “Consolidated and separate financial statements” offers users a choice to

either account for an investment in a subsidiary at its cost price or at its fair value in
the entity’s separate financial statements. For the purpose of Fin Acc 188 the
investment in a subsidiary will always be shown at cost price.
Disclose the following information iro the subsidiaries
- names of companies
- nature of business
- place of business
- percentage of the issued share capital and voting right
An example of the note on investments in subsidiaries is set out below:

3. Investments in subsidiaries
%
Nature of Place of shareholding
Name of company business business and voting right R
ABC Ltd. Trade in.. Gauteng 70 55 000

XYZ Ltd. Service… Cape Town 55 40 000
Long-term loan to ABC Ltd. 5 000
100 000
The long-term loan to ABC Ltd. is non-interest bearing, unsecured and repayable on xxx
(iv) Financial assets (covered extensively in FA 288 & 389)
IAS 32 defines a financial asset as:

 cash; or
 an equity instrument of another entity (e.g. share investment); or
 a contractual right to receive cash or other financial assets from another
entity (e.g. debtors or loans); or
 a contractual right to exchange financial assets or liabilities with a positive
outcome for the entity (covered in FA 389).
15 - 11
If an entity purchased another company’s share capital, the interest the entity has in
the other company, will be shown as an investment in its statement of financial
position. For the purpose of Fin Acc 188 it will be assumed that share investments
were acquired with the purpose to sell it in the short-term and that these
investments are shown at their fair values. Any adjustments to their fair values are
recognised as a “fair value adjustment” in the statement of profit or loss and other
comprehensive income. (Exception: For the purpose of Fin Acc 188 no fair value
adjustment will be made to the cost price of any fixed deposits. Fixed deposits will
thus be kept at cost price.)
IFRS 13 defines fair value as follows:

 the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement
date.
For a listed company the fair value of the shares is the current share price as traded
on the JSE. For an unlisted company specialised valuation techniques are used to
determine the fair value of the shares. Any differences between the original cost
price and the fair value of shares, or the difference that arises with later changes to
the fair value of a company’s shares, is recognised as a profit or loss in the
statement of profit or loss and other comprehensive income as a “fair value
adjustment’.
Example:
XYZ purchased 100 shares in ABC Ltd. at R5 per share (cost price). The fair value
of the financial asset (shares) was R7 per share at year-end.
The entry in the general journal in the books of XYZ:
Dr Investments (SFP) (100 x (R7 – R5)) 200

Cr Fair value adjustment (SCI) 200
(unrealised profit)
Disclose the following information iro the financial assets:

- names of companies
- number of shares and class of shares
- listed or unlisted
- fair value of assets
15 - 12
An example of the note on financial assets is set out below:
4. Financial assets
R
Listed shares
xxx ordinary shares in xxxxx Ltd. 30 000
Unlisted shares
xxx preference shares in xxxxx (Pty) Ltd. 15 000
45 000
The fair value of listed shares is the market value at which the shares trade on the
JSE at year-end.
The fair value of unlisted shares is the current market value as determined by an
independent valuator.
(b) Current assets
(i) Inventory
 accounting policy, including cost formulas
 total carrying amount and carrying amount according to classification
 net realisable value if lower than cost price
 amount of inventory recognised as an expense during the period
(cost of sales)
 amount of any write-off of inventory
 carrying amount of inventory pawned as security for obligations
An example of the note on inventory is set out below:

5. Inventory
Inventory on hand consists of: R
- Finished goods (at net realisable value) 15 200
- Raw materials 5 000
- Work-in-progress 7 000
- Consumer goods 800
28 000
(c) Equity
(i) Share capital
 number of authorised shares

 number of issued shares
 rights, preferences and restrictions on shares, including distribution of dividends
and refunding of capital
 reconciliation of amount of shares
15 - 13
An example of the note on share capital is set out below:
6. Share capital
R
Authorised
- XXX Ordinary shares
- XXX Cumulative preference shares
- XXX Non-Cumulative preference shares
Issued
- XXX Ordinary shares 40 000
- XXX Cumulative preference shares 33 000
- XXX Non-Cumulative preference shares XXX
73 000
Reconciliation of amount of shares

Non- Cumulative
Ordinary Cumulative preference
shares preference shares
shares
Balance – begin xxx xxx xxx
Issued xxx xx xx
Balance – end xxx xxx xxx
(ii) Dividends
Dividends per class of share paid or declared are disclosed in the statement of change in
equity. However, the following (if applicable) must also be disclosed in a note to the
financial statements:
 the amount of dividends proposed or declared, after year-end, but before the
financial statements are authorised for issue and thus have not been recorded in
the statement of change in equity (n/a FA 188).
 the amount of any cumulative preference dividends in arrears and thus not
recognised (n/a FA 188).
15 - 14
(d) Non-current liabilities
(i) Borrowings
 distinguish between interest-bearing and non-interest-bearing borrowings
 distinguish between secured and unsecured borrowings
 interest rates
 repayment terms (including instalments and renewal dates)
An example of the note on borrowings is set out below:

8. Borrowings
Secured Non-current Current Total

10% mortgage loan 40 000 5 000 45 000
40 000 5 000 45 000
The loan is repayable in (number) instalments of (amount) each year on

(date). The interest rate is x% and the loan is insured/secured by a first
bond on land and buildings with a carrying amount of xxx.
Unsecured Non-current Current Total

Bank loan 15 000 15 000
Bank overdraft 0 0
15 000 15 000
The loan carries interest at (rate) and is repayable on (date).
15.4 Statement of Profit or Loss and other Comprehensive Income (SCI)
15.4.1 The face of the Statement of Profit or Loss and other Comprehensive Income
In terms of IAS 1 the Statement of Profit or Loss and other Comprehensive Income should
at least include the following line items:
 revenue
 finance income and finance charges
 equity-accounted income (FA 288 & 389)
 profit/loss with terminated operations (not covered)
 income tax expense
 profit or loss
 components of other comprehensive income
 total comprehensive income
The Statement of Profit or Loss and other Comprehensive income can be presented in two
ways, namely:
 Classification according to nature of expenses (n/a FA 188)
15 - 15
 Classification according to function of expenses (cost-of-sales method)
An example of a company’s Statement of Profit or Loss and other Comprehensive Income
(classification according to function of expenses) is set out below:
Statement of Profit or Loss and other Comprehensive Income for the year ended
28 February 20X7
Note R
Revenue 9 550 000
Gross profit 412 500

Other income 7 000
Other expenses (309 500)
Distribution cost (4 750)
Administrative expenses (19 250)
Finance charges (6 500)
Finance income 11 20 500
Profit before tax 10 100 000

Income tax expense 12 (30 000)
Other comprehensive income:

Profit on revaluation of property 20 000
Income tax on other comprehensive income (n/a FA 188) -
Other comprehensive income for the year, net of tax 20 000
Total comprehensive income for the year 90 000
15 - 16
15.4.2 Notes to the Statement of Profit or Loss and other Comprehensive Income
(a) Revenue
 the accounting policy for the recognition of revenue

 The main categories of revenue (sales, rendering of services, interest, royalties,
dividends, rent income)
An example of the note on revenue is set out below:

9. Revenue
R
Revenue from the sale of trading inventory 550 000
(b) Other income and expenses
In respect of other income:

 split between dividends received from subsidiaries and other financial assets
 examples:
- profit on disposal of property, plant and equipment
- profit iro fair value adjustments of financial assets
- compensation from insurer for loss of property, plant and equipment
In respect of other expenses:

 examples:
- loss with disposal of property, plant and equipment
- depreciation and amortisation
- operating lease payments (per asset category)
- losses iro fair value adjustments of financial assets
- employee benefit expenses
- director’s remuneration (split between service as director and other services)
- write-down of inventory to net realisable value
- abnormal inventory losses
15 - 17
An example of the note on profit before tax where other income and other expenses is
included is set out below:
10. Profit before tax
Profit before tax is shown after the following has been taken into account: R
Income
- dividends received from subsidiaries 1 500
- dividends received from financial assets 300
- profit on disposal of equipment 3 000
- compensation from insurer for loss of equipment 9 000
- profit iro fair value adjustment of financial assets 800
Expenses
- employee benefits 6 300
- loss on sale of plant 1 500
- loss iro fair value adjustment of financial assets 600
- depreciation
- plant 7 500
- equipment 5 000
- operating lease payments
- vehicles 5 750
- computer equipment 8 000
- director’s remuneration
- for service as director 33 000
- for other services 165 000
- abnormal inventory losses 1 500
- write-down of inventory to net realisable value 200
(c) Finance income
 split between interest received from subsidiaries and

 other interest income (bank accounts, debtors and other financial assets)
An example of the note on finance income is set out below:

11. Finance income
R
- interest from subsidiaries 4 000

- other interest income 16 500
20 500
15 - 18
(d) Income taxation
 different classes of taxation (SA normal income tax)

 split between current and prior years’ tax
An example of the note on income tax is set out below:

12. Income tax
R
SA normal income tax – current year 28 000

- prior year 2 000
30 000
15.5 Statement of Changes in Equity (SCE)
The statement of changes in equity is a reconciliation from the opening balance of each
class of equity at the beginning of a financial year till the closing balance at the end of the
financial year. The line items represent each transaction which affects the equity of a
company.
15.5.1 In terms of IAS 1 the following should be shown in the statement of change in
equity:
 total comprehensive income (split between profit and other comprehensive income)
 dividends paid and declared
 transfers to or from reserves
 transactions with shareholders
 for each component of equity, a reconciliation from the beginning to the end of the
year
15 - 19
An example of a company’s statement of changes in equity is set out below:
Statement of Changes in Equity for the year ended 28 February 20X7
Ordinary Preference Reval Retained Total

share share surplus earnings
capital capital
R R R R R
Balance beginning of year 25 000 20 000 30 000 137 000 212 000
Ordinary shares issued 15 000 - - - 15 000
Preference shares issued - 13 000 - - 13 000
Total comprehensive income
for the year - - 20 000 70 000 90 000
- profit for the year - 70 000 70 000
- other comprehensive
income for the year 20 000 - 20 000
Ordinary dividend - - - (12 000) (12 000)
Preference dividend - - - (4 000) (4 000)
Share issue costs - - - (2 000) (2 000)
Balance end of year 40 000 33 000 50 000 189 000 312 000
15.6 Other disclosure requirements
Financial statements must clearly be distinguished from other information in the company’s
annual report, therefore it is necessary to show information below on a repetitive basis:
 name of the company

 period covered by the financial statements
 currency in which reporting is displayed
 round off level used in the presentation of amounts in the financial statements
A company must disclose the following information in the financial statements if it has not
been disclosed elsewhere in the annual report:
 the domicile and legal form of the entity

 country of incorporation and address of registered office
 a description of the nature of the company and its most important operations
15 - 20
SCHEMATIC PRESENTATION (IAS 1)
IAS 1
Statement of Statement of Statement Statement of

profit or loss financial of changes cash flows
and other position in equity
comprehensive
income
Notes to financial statements
15 - 21
CHAPTER 15
QUESTIONS
Page
Question 15.1 Statement of Financial Position and notes 15 - 23
Question 15.2 Statement of profit or loss and other comprehensive 15 - 28

income and notes
Question 15.3 Statement of Changes in Equity 15 - 31
Question 15.4 Financial Statements and notes 15 - 33
Question 15.5 Financial Statements and notes 15 - 40
Question 15.6 Notes to Statement of profit or loss and other 15 - 42

comprehensive income

income and notes

income and notes, Statement of Changes in Equity
Question 15.9 Property, plant and equipment note 15 – 47
15 - 22
QUESTION 15.1
The bookkeeper of Good Hope Ltd., a manufacturer of radio sets, has approached you in
assisting him in the drafting of the company’s Statement of Financial Position on 30
September 20x5. He has prepared the following trial balance:
Trial Balance on 30 September 20x5

Dt Cr Also see
Share capital 157 000 1
Reserves 118 500 2
Long-term loan 22 500 3
Sundry debtors and creditors 49 600 36 000 5
Bank 15 000
Provisional tax payments 4 000 9
Property, plant and equipment (carrying amount) 201 000 6
Inventory 43 400 7
Financial assets at cost price 53 000 8
R351 000 R351 000
1. The company was founded on 1 June 20x0 with an authorised share capital of
100 000 ordinary shares and 50 000 non-cumulative preference shares that earn
dividends of 8c per share. Since the formation of the company, 60 000 ordinary
shares were issued at R2,25 each and 20 000 preference shares at R1,10 each. No
shares were issued during the current year.
2. The reserves consist of the following: R

Profit (before tax) for the year ended 30/9/20x5 26 000
Retained earnings as on 1/10/20x4 62 500
118 500
The revaluation surplus was created from the revaluation of land and buildings on
30/9/20x3.
3. A loan of 13%, secured by a first mortgage on land and buildings, was received on
1/1/20x2 and is repayable in 6 equal annual payments of R7 500, of which the first
payment was due on 1 September 20x3.
4. A final dividend of 10c per ordinary share was declared on 30 September 20x5 and
must still be recorded.
5. Included in Sundry Debtors is a long-term loan to C Ltd. for R6 000.
15 - 23
6. Property, plant and equipment consists of the following:
(i) Land and Buildings:
Land consists of 2 stands, stand 1431 and 1432 that is situated in Castle
Street, Cape Town. The stands were purchased for R15 000 each. A building
was erected on stand 1431 at a cost of R75 000 in September 20x0.
Improvements were made to the building as follows:
June 20x1 R10 000
August 20x3 R 5 000
February 20x4 R15 000
July 20x5 R 8 000
(ii) Vehicles: Cost price R35 000; Accumulated depreciation: R14 000.
Depreciation of R7 000 has already been written off on vehicles this year. No
vehicles were purchased or sold during the year.
(iii) Office equipment: Cost Price R15 000; Accumulated depreciation:
R8 000. Depreciation of R2 333 has already been written off on office
equipment this year. No office equipment was purchased or sold during the
year.
No depreciation is written off on land and buildings, but 20% per year on vehicles on
the straight-line method and 25% per year on office equipment on the diminishing
balance method.
7. Inventory is measured at the lowest of cost price on a first-in-first-out basis or net

realisable value and consists of the following:
(i) Spare parts R 5 000
(ii) Incomplete radio sets 12 000
(iii) Complete radio sets 26 400
R43 400
8. The financial assets consist of: Fair value

- 7 000 of the 100 000 preference shares in A Ltd.
(cost price – R7 000) 10 500
- 20 000 of the 250 000 ordinary shares in B Ltd.
(cost price – R20 000) 21 000
- 8 000 of the 15 000 ordinary shares in C Ltd.
(cost price – R8 000) 10 000
- 15 000 of the 300 000 ordinary shares in D Ltd.
(cost price – R18 000) 13 500
Investments in subsidiaries are shown at cost price and financial assets at fair
value through profit and loss. Assume that all public companies are listed.
9. The income tax expense for the year ended 30 September 20x5 amounted to R10
000 and must still be recorded.
YOU ARE REQUIRED TO
prepare the Statement of Financial Position on 30 September 20x5 of Good Hope Ltd. that
will comply with the minimum requirements of the Companies Act and International
Financial Reporting Standards. Ignore accounting policy notes.
15 - 24
QUESTION 15.1
Suggested Solution
Good Hope Ltd. - Statement of Financial Position as on 30 September 20x5
ASSETS Notes R
Non-current assets
Property, plant and equipment 1
Investment in subsidiary 2
Financial assets 3
Current Assets
Inventory 4
Trade and other receivables

Equity
Share Capital 5
Retained earnings
Revaluation surplus
Non- current liabilities

Borrowings
6
Current liabilities
Borrowings 6
Trade and other payables
Income tax payable
Dividends payable
Bank overdraft
15 - 25
Notes to the financial statements on 30 September 20x5
1. Property, plant & equipment
Land & Vehicles Equipment Total

Buildings
Gross carrying amount
Accumulated dep
Carrying amount 1 October 20x4
Improvements
Depreciation
Carrying amount 30 Sept 20x5
Gross carrying amount
Accumulated dep
Land and buildings (carrying amount R173 000) are pledged as security for the first
mortgage bond to the amount of R22 500.
The land and buildings were re-valued on 30 September 20X3 according to the xxx basis
by mr X, a sworn valuator.
2. Investment in subsidiary
%
Nature of Place of shareholding
Name of company business business and voting right R
C Ltd. Trading in.... Gauteng 53,33%
Long-term Loan to C Ltd.
The long-term loan to C Ltd. is non-interest bearing, unsecured and repayable on xxx
15 - 26
3. Financial assets
Listed shares R
7 000 preference shares in A Ltd.
20 000 ordinary shares in B Ltd.
15 000 ordinary shares in D Ltd.
The fair value of listed shares is the market value at which the shares trade on
the JSE at year-end.
4. Inventory
Spare parts
Incomplete Radio Sets
Complete Radio Sets
5. Share Capital
Authorised
100 000 ordinary shares
50 000 non-cumulative preference shares
Issued
60 000 ordinary shares
20 000 non-cumulative preference shares
Reconciliation of number of shares

Ordinary Non-cumulative
shares preference
shares
Balance – 1 October 20x4
Shares issued during the year
Balance – 30 September 20x5
6. Borrowings
13% loan secured by a first mortgage on land and buildings with a

carrying amount of R173 000, payable on 1 September each year in
three equal annual payments of R7 500.
15 - 27
QUESTION 15.2
The following balances appear in the books of Winter Ltd., a listed company, on
31 December 20x6:
R
Share capital - 400 000 ordinary shares 400 000
- 100 000 preference shares (non-cumulative) 50 000
Investments - Rain (Pty) Ltd. 1 000
- Wind (Pty) Ltd. 250
Sundry expenses 251 680
Dividends received - Rain (Pty) Ltd. 300
- Wind (Pty) Ltd. 150
Long-term loan 100 000
Loan to Rain (Pty) Ltd. 20 000
Machinery at cost price 160 000
Accumulated depreciation – machinery 57 600
Retained earnings - 1 January 20x6 45 000
Interest received – Rain (Pty) Ltd. 3 600
Sales 935 500
Accumulated depreciation – vehicles 36 000
Additional information
1. Share capital
Ordinary share capital consists of 400 000 ordinary shares. Preference share
capital consists of 100 000 shares that earn dividends of 5c per share. An ordinary
dividend of 10c per share was declared at year-end.
2. Investments
The investments consist of the following:
o 1 000 ordinary shares of the 1 500 issued ordinary shares of
Rain (Pty) Ltd. Winter Ltd. exercises control.
o 200 ordinary shares of the 2 000 issued ordinary shares of
Wind (Pty) Ltd. Winter Ltd. does not exercise control. The fair value of
the investment was R200 on 31 December 20x6. No accounting entry
has been recorded regarding this.
3. Long-term loan
The long term loan was incurred on 1 January 20x6 at an interest rate of 15% per
year. Interest is payable four monthly in arrears.
4. Loan to Rain (Pty) Ltd.

The loan was made on 1 January 20x5 and the interest rate is 18% per annum,
payable monthly. The balance was unchanged during the year.
15 - 28
Sundry expenditure
5. 251 680
Interest paid – long-term loan 15 000
Administrative expenses 13 000
Distribution costs 11 500
Managing director’s salary 18 000
Remuneration paid to director for the attendance of meetings 4 000
Lease of vehicles 12 600
Telephone 4 800
Electricity and water 6 600
Management advisory services by external consultants 7 000
Remuneration to auditors
- for normal duties 4 000
- for the keeping of the company register 1 000
Depreciation – vehicles 12 800
- machinery 20 080
Loss on sale of machinery 1 300
6. Income tax
6.1 The 20x5 assessment was received during the year and has been paid. The
payment has correctly been recorded. It was noted that there was an over provision
on income tax in 20x5 of R1 000. The over provision must still be recorded.
6.2 The provision for income tax for the year ended 31 December 20x6 amounting to
R84 545 must still be recorded.
7. Fixed property
7.1 The fixed property was re-valued on 31 December 20x6, thereby increasing the
value by a further R30 000.
YOU ARE REQUIRED TO
prepare a Statement of profit or loss and other comprehensive income for

Winter Ltd. for the year ended 31 December 20x6, according to the minimum requirements
of the Companies Act and International Financial Reporting Standards. Ignore comparative
figures and the accounting policy note.
15 - 29
QUESTION 15.2 - Suggested solution
Winter Ltd.
Statement of profit or loss and other comprehensive income for the year ended 31
December 20x6
Notes
Revenue 1
Cost of Sales
Gross Profit
Other income
Other expenses
Distribution costs
Administrative expenses
Finance income 3
Finance costs
Profit before tax 2
Income tax expense 4
Profit for the year
Other comprehensive income
Total comprehensive income for the year
Notes to the financial statements - 31 December 20x6
1. Revenue
Revenue from the sale of trading inventory
2. Profit before tax

Profit before tax is shown after the following has been taken into account:
Income
Dividends from subsidiaries
Dividends from other financial assets
Expenses
Directors’ remuneration
- for services as director
- for other services
Operating lease payments – vehicles
Loss on sale of machinery
Depreciation
- on vehicles
- on machinery
Employee benefits
Loss with fair value adjustment of financial asset
3. Finance income
Interest from subsidiaries
4. Income tax
SA normal income tax
- current year
- prior year
15 - 30
QUESTION 15.3
The following balances amongst other appeared in the trial balance of Cellshop (Pty) Ltd.
on the accounting date, 30 June 20x8, after certain closing journal entries had already
been made:
R
Preference share capital (50 000 issued shares) 50 000
Dividends (Interim) 8 000
Share issue costs 1 200
1. The company was incorporated with an authorised share capital of 200 000 ordinary
shares and 50 000 non-cumulative preference shares that earn dividends of 12c per
share.
2. The company issued 20 000 ordinary shares on 1 May 20x8 at R1,20 per share. No
further shares were issued during the year.
3. The SA normal income tax for the current year was estimated to amount to
R28 000, which must still be provided for in the accounting records.
4. A final dividend of 4 cents per ordinary share was declared on 30 June 20x8. The
interim dividend was declared and paid on 28 February 20x8.
5. The fixed property was re-valued during the year ended 30 June 20x8 and the value
was increased with R25 000.
YOU ARE REQUIRED TO
compile a Statement of Changes in Equity for the year ended 30 June 20x8 which will
comply with the requirements of the Companies Act and International Financial Reporting
Standards.
15 - 31
QUESTION 15.3
Suggested solution
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 20X8
OCI: Other comprehensive income
15 - 32
QUESTION 15.4
Dormoc Ltd. is an enterprise that trades in computer equipment. The following

balances appeared in the ledger of the company on 30 September 20x5, the
company’s accounting date:
R
Preference share capital (60 000 issued shares) 60 000
Retained earnings on 1 October 20x4 129 000
Gross profit for the year 360 000
Interest paid 8 200
Managing director’s salary 30 000
Dividends received 3 500
Profit on sale of equipment 3 240
Loss on sale of vehicle 4 500
Investments at cost price 43 000
Remuneration of Orlo CC for management services 7 200
Inventory at cost price 115 000
Debtors 45 000
Creditors 46 800
Rent of premises for parking 2 400
Depreciation written off - Equipment 4 500
Depreciation written off - Vehicles 600
Bank charges 2 160
Remuneration to directors for attending meetings 1 400
Auditors remuneration 4 850
1. The company's authorised share capital is as follows:
- 75 000 Non-cumulative preference shares that earn dividends of 10c per share
- 75 000 Ordinary shares
2. The company issued 25 000 preference shares at R1.56 per share on 1 July
20x5. No ordinary shares were issued during the current year.
3. The company constantly realises a gross profit of 50% on the cost price of its
products.
15 - 33
4. The income tax expense for the current year amounted to R12 000 and must still
be recorded.
5. The interim dividend was declared on 30 June 20x5 and paid on 31 July 20x5.
The company has not declared any dividends prior to this interim dividend. A
final dividend of 10 cent per ordinary share was declared at year-end.
6. Dormoc Ltd. made the following investments in the shares of other companies:
- 10 000 of the 15 000 issued ordinary shares in Abbo (Pty) Ltd.

(independent valuation is 15c per share)
- 5 000 of the 20 000 issued ordinary shares in Backo (Pty) Ltd.
(independent valuation is 120c per share)
- 20 000 of the 100 000 issued ordinary shares in Cisco Ltd., a listed
company.
(JSE: 160c per share)
- Long-term loan to Abbo (Pty) Ltd. of R8 000
All the shares were issued at R1 per share. Fair value adjustments have not yet
been taken into account in ledger balances above.
7. All three the companies mentioned in paragraph 6 above, declared and paid a
dividend of 10 cents per share during the year ended 30 September 20x5.
8. Abbo (Pty) Ltd. paid interest of R1 200 to Dormoc Ltd. during the year ended
30 September 20x5.
9. The fixed property was re-valued on 30 September 20x5, thereby increasing the
value by R30 000. No accounting entry has been recorded in this regard.
10. Vehicles with a cost price of R35 000 and accumulated depreciation of R14 400
was sold on 1 April 20x5 for R16 100. The cost price and accumulated
depreciation of vehicles was respectively R35 000 and R13 800 on 1 October
20x4. No vehicles were purchased during the current year.
11. Equipment with a cost price of R12 000 and accumulated depreciation of R2 000
was sold during the year at a profit. No equipment was purchased during the
current year.
YOU ARE REQUIRED TO
compile a Statement of Financial Position on 30 September 20x5, a Statement of

profit or loss and other comprehensive income for the year ended 30 September
20x5 and a Statement of Changes in Equity for the year ended 30 September 20x5,
which will comply with the requirement of the Companies Act and International
Financial Reporting Standards.
(Ignore comparative figures.)
(Where there is a lack of specific information i.r.o. items in these financial statements,
make use of imaginary particulars.)
15 - 34
QUESTION 15.4
Suggested solution
STATEMENT OF FINANCIAL POSITION ON 30 SEPTEMBER 20X5

R
Note
ASSETS
NON-CURRENT ASSTES
Property, plant and equipment 2
Investment in subsidiary 3
Financial assets 4
CURRENT ASSETS
Inventory 5
Trade and other receivables
EQUITY
Share capital 6
Revaluation surplus
Retained earnings
Borrowings
CURRENT LIABILITIES
Borrowings
Trade and other payables
Income tax payable
Dividends payable
Bank overdraft
15 - 35
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 SEPTEMBER 20X5
Note
R
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 SEPTEMBER

20X5
-
-
OCI: Other comprehensive income
15 - 36
NOTES TO THE FINANCIAL STATEMENTS
1. ACCOUNTING POLICY
The financial statements are prepared in accordance with International Financial

Reporting Standards. The financial statements are prepared on the historical cost
basis except for certain property, plant and equipment items that are measured at
revalued amounts and financial assets that are measured at fair values, as set out in
the accounting policies below. The accounting policy is in agreement with the policy
followed in the previous year and is as follows:
Property, plant and equipment are initially recognised at cost price. Land is
subsequently measurement at re-valued amounts. All other property, plant and
equipment are measured at historical cost less accumulated depreciation. Gains or
losses upon revaluation of property, plant and equipment are recognised in other
comprehensive income and accumulated in the revaluation surplus in the statement
of changes in equity.
Historical cost includes expenditure that is directly attributable to the acquisition of

the property, plant and equipment. Subsequent costs are included in the asset’s
carrying amount, only when it is probable that future economic benefits associated
with those subsequent costs will flow to the company and the cost can be measured
reliably.
Land is not depreciated. Depreciation on vehicles is written off according to the

straight-line method and has a useful life of x years. Depreciation on equipment is
written off at x% per year according to the diminishing balance method.
The assets’ residual values are reviewed, and adjusted if appropriate, at each
reporting date. Gains and losses on disposals are recognised as part of profit and
loss in the Statement of profit or loss and other comprehensive income.
Investments in subsidiaries
Investments in subsidiaries are shown at cost price as determined on the acquisition

date.
Financial assets
Financial assets are initially recorded at fair value. Subsequent measurement is also
at fair value. Any adjustments to fair value are shown as part of profit and loss in the
Statement of profit or loss and other comprehensive income.
Inventory
Inventory is measured at the lowest of cost and net realisable value. The cost price is
calculated according to the first-in-first-out or weighted average cost basis. Any write-
down to net realisable value is recognised in profit and loss.
15 - 37
2. PROPERTY, PLANT AND EQUIPMENT
The fixed property was re-valued on 30 September 20x5 by S Nel, a sworn

appraiser, on the basis of replacement cost.
3. INVESTMENT IN SUBSIDIARY
4. FINANCIAL ASSETS
5. INVENTORY
15 - 38
6. SHARE CAPITAL
Reconciliation of amount of shares

Ordinary Non-cumulative
shares preference shares
8. REVENUE
9. PROFIT BEFORE TAX
Profit before tax is shown after the following has been taken into account:
Income
Expenses
10. FINANCE INCOME
11. INCOME TAX
15 - 39
QUESTION 15.5
Partu Ltd. is an enterprise that trades in building material. The following balances
appeared in the ledger of the company on 30 June 20x6, the company's accounting
date:
R
Long-term mortgage bond 165 000
Creditors and income tax owing 60 000
Debtors 75 000
Accumulated depreciation – Vehicles 34 000
Investments at cost price 100 000
Gross profit for the year 240 000
Interest paid 4 200
Rent of equipment 8 000
Depreciation – Vehicles 9 000
Rent received 3 800
Directors' remuneration - Attending meetings 3 800
Normal income tax provided 26 500
Auditors remuneration 6 000
1. The company was incorporated on 4 May 20x0 with an authorised share capital of
500 000 ordinary shares and 100 000 cumulative preference shares that earn
dividends of 12c per share.
2. The company issued the following shares on the dates as indicated:
- 180 000 Ordinary shares at R1,10 each on 1 June 20x0

- 50 000 Cumulative preference shares at R1,20 each on 1 January 20x1
- 20 000 Ordinary shares at R1,10 each on 1 February 20x6.
15 - 40
3. The company declared a dividend for the first time on 30 June 20x6 when a
dividend of 2 cents per ordinary share was declared. No accounting entries had
been made to date in respect of the dividend that had been declared.
4. 50% of the investments comprise an investment in Abscondo Ltd., which is a

listed company, while the other 50% comprises an investment in Frantic (Pty) Ltd.
Neither of the two companies are subsidiaries of Partu Ltd. and they both paid the
same dividend for the year ended 30 June 20x6. The fair value of the investments
for which no adjustments have been made yet, were respectively R30 000 for
Abscondo Ltd. and R60 000 for Frantic Ltd. on 30 June 20x6.
5. The company consistently realised a gross profit of 40% on its sales during the
year.
6. The salaries and wages included the managing director's salary of R60 000.
7. The fixed property was re-valued on 1 May 20x6, thereby increasing the value by
a further R20 000.
8. No vehicles were purchased or sold during the year.
9. The mortgage bond is repaid in equal annual instalments of R11 000 each.
YOU ARE REQUIRED TO
compile a Statement of Financial Position on 30 June 20x6 and a Statement of profit

or loss and other comprehensive income and a Statement of Changes in Equity for
the year ended 30 June 20x6, which will comply with the requirement of the
Companies Act and International Financial Reporting Standards. (Ignore
comparative figures.)
15 - 41
QUESTION 15.6
The Statement of profit or loss and other comprehensive income of Bytes Ltd. below
is compiled correctly from the accounting records on 30 June 2001.
Statement of profit or loss and other comprehensive income for the year ended
30 June 2001
Revenue 487 000

Gross profit 129 000
Other income 7 790
Other expenses (27 000)
Distribution costs (18 000)
Administrative expenses (2 700)
Finance income 13 340
Finance costs (1 800)
Income tax expense (40 000)
Profit after tax 60 630
Other comprehensive income:
Profit with revaluation of fixed property -
Income tax on other comprehensive income (n/a) -
Other comprehensive income for the year, net of tax -
1. Other expenses include amongst other the following:
Salary of full time company secretary 4 000
Salary of the managing director 6 000
Directors’ fees for attending meetings 1 200
Auditors’ fees for auditing 3 000
Depreciation 12 000
2. At the beginning of the year, machinery and equipment with a cost price of R24
000 and accumulated depreciation of R9 000, were sold for R18 000. There were
no other sales and purchases of machinery and equipment during the year.
3. Bytes Ltd. made the following investments in shares of other companies

(cost price = fair value):
- 3 240 of the 5 000 issued ordinary shares in HP (Pty) Ltd.

- 4 450 of the 7 500 issued preference shares in DELL (Pty) Ltd.
- 11 260 of the 975 000 issued ordinary shares in MECER Ltd., a listed company
4. Interest was earned as follows during the year:
- HP (Pty) Ltd. – R11 910

- Debtors – R1 030
- Bank account – R400
15 - 42
5. Dividends were received from the following companies:
- HP (Pty) Ltd. – R1 620

- DELL (Pty) Ltd. – R355
- MECER Ltd. – R2 815
6. The revenue for the year represents gross sales of trading inventory to clients
after taking all returns into account.
7. There was no under provision of over provision for income tax during the current
year.
YOU ARE REQUIRED TO
prepare the notes to the Statement of profit or loss and other comprehensive income
of Bytes Ltd. for the year ended 30 June 2001 to comply with all the disclosure
requirements of the Companies Act and International Financial Reporting Standards.
Accounting policy notes and comparative figures are not required.
15 - 43
QUESTION 15.7
The following post-adjustment balances appeared amongst other in the ledger of

Harry's Hunters (Pty) Ltd. on 31 March 20x9, the accounting date:
R
Retained earnings on 1 April 20x8 110 300
Re-valuation surplus 80 000
Depreciation written off - Equipment 2 140
Rent income earned 568 931
Interest on mortgage bond paid 66 485
Dividends earned - Markies (Pty) Ltd. 1 441
- Las Pampas Ltd. 2 157
- Macmac (Pty) Ltd. 1 010
Bank charges 966
Loss on sale of equipment 2 643
Repairs and maintenance 27 226
Auditors' remuneration 4 600
Remuneration to Rekdienste CC for accounting services 12 260
Dividends declared 2 500
1. The company's main business comprises the letting of its fixed property.
2. Markies (Pty) Ltd. is the only subsidiary of Harry's Hunters (Pty) Ltd. and is an
unlisted company.
3. The salaries and wages include the managing director's salary of R120 000.
4. The directors estimated that the normal income tax for the current year would
amount to R27 183. No accounting entry has been made for this.
5. There were no changes in the fair value of the respective investments.
6. Interest was earned from the following sources:
- Savings account: R2 892 - Markies (Pty) Ltd.: R4 951
YOU ARE REQUIRED TO
compile a Statement of profit or loss and other comprehensive income for the year
ended 31 March 20x9, together with the appropriate notes, which will comply with
only the minimum requirements as stipulated by the Companies Act and International
Financial Reporting Standards. (Ignore comparative figures.)
15 - 44
QUESTION 15.8
4-BY-4 (Pty) Ltd. trades in exclusive four-wheel drive motor vehicles. The following
after-adjustment balances appeared in the company’s ledger on 31 August 20x3, the
end of the financial year:
R
Share investments 81 020
Long-term loan to subsidiary 52 000
Inventory at cost price on 1 September 20x2 464 398
Debtors 103 908
Retained earnings on 1 September 20x2 531 975
Loan owing to RSA Bank 74 500
SARS – provisional tax paid 39 028
Creditors 186 276
Sales 2 446 014
Sales returns 7 265
Profit with sale of equipment 4 207
Purchases of inventory 1 498 276
Rent paid for showroom 86 780
Interest paid on loan from RSA Bank 14 895
Fees for accounting services 24 800
Sales and administration cost 128 967
Auditor’s fees 19 743
Loss with selling of furniture 2 894
Cell phone costs 31 678
Rent paid for office equipment 11 296
Profit with fair value adjustments (net) 3 458
1. The company’s authorised share capital consists of 500 000 ordinary shares.
2. The cost price of the inventory amounted R488 300 on 31 August 20x3.
15 - 45
3. The company issued an additional 25 000 ordinary shares at R2,25 per share for
cash on 4 January 20x3.
4. 4-BY-4(Pty) Ltd. made the following investments in the shares of other companies:
- 98 300 of the 1 000 000 issued ordinary shares in Rover Jeeps Ltd., a listed
company, at a cost price of R44 902 (fair value, R50 200)
- 8 150 of the 15 000 issued ordinary shares in 4x4 Spares (Pty) Ltd. at a cost
price of R14 820 (fair value, R15 000)
- 6 000 of the 10 000 issued preference shares in Expedition Spares (Pty Ltd. at
a cost price of R3 000 (fair value, R3 000)
- 7 240 of the 25 000 issued ordinary shares in Trailer Products (Pty) Ltd. at a
cost price of R14 840 (fair value, R13 000)
Investments in subsidiaries are shown at cost price and investments in other

financial assets at fair value.
5. During the year interest was earned as follows:

- Loan to subsidiary - R6 749
- Debtors - R2 002
- Fixed deposit - R928
6. Dividends were received from the following companies during the year:
- Rover Jeeps Ltd. - R1 966
- 4x4 Spares (Pty) Ltd. - R1 467
- Expedition Spares (Pty) Ltd - R360
- Trailer Products (Pty) Ltd. - R649
7. The interim dividend was declared on 31 December 20x2 and paid on 15 February 20x3.
8. The loan owing to RSA Bank is fully repayable on 31 May 20x5.
9. The financial director’s salary of R334 000 is included in the amount for salaries
and wages above.
10. The directors estimated the income tax for the current year will amount to R41
092, for which no accounting entry has been made to date.
11. A final dividend of 7 cents per share was declared on 31 August 20x3, payable on
1 October 20x3.
YOU ARE REQUIRED TO
(a) prepare a Statement of profit or loss and other comprehensive income, for 4-BY-
4 (Pty) Ltd., for the year ended 31 August 20x3, with the appropriate notes to
comply with only the minimum requirements as defined by the Companies Act
and International Financial Reporting Standards.
(b) prepare a Statement of Changes in Equity, for 4-BY-4 (Pty) Ltd., for the year
ended 31 August 20x3 to comply with only the minimum requirements as defined
by the Companies Act and International Financial Reporting Standards.
15 - 46
QUESTION 15.9
Le Roux Transport Ltd. is a company that renders local and international transport
services to enterprises and the general public. The following after-adjustment
balances appeared in the company’s general ledger on 31 October 2011 (the end of
the financial year):
R
Fixed property at valuation 1 620 000
Trucks at cost price 1 940 000
Accumulated depreciation – Trucks 1 045 700
Revaluation reserve 120 000
Profit on sale of truck 15 700
Depreciation written off - trucks 340 600
1. Property, plant and equipment
1.1 The fixed property was re-valued on 1 June 2011. The revaluation was done by a
sworn appraiser, Mr Duvenhage, thereby increasing the value of the property by
a further R55 000. He used the current market value as the basis for his
revaluation.
1.2 A truck was sold for R350 000 on 1 June 2011. The cost price of the truck and
the accumulated depreciation up to the date of sale was R680 700 and
R346 400 respectively. No other vehicles were purchased or sold during the
year.
YOU ARE REQUIRED TO
prepare the Property, Plant and Equipment note to financial statements of Le Roux
Transport Ltd. for the year ended 31 October 2011, which will comply with the
minimum requirements as defined by the Companies Act of 2008 and International
Financial Reporting Standards (IFRS).
15 - 47
CHAPTER 16
CLOSE CORPORATIONS
Page
16.1 Formation 16 - 3
16.2 Characteristics 16 - 3
16.3 Advantages 16 - 3
16.4 Disadvantages 16 - 4
16.5 Members 16 - 4
16.6 Accounting officer 16 - 5
16.7 Accounting records 16 - 5
16.8 Accounting treatment 16 - 6
16.8.1 Retained earnings

16.8.2 Taxation
16.8.3 Payments to members
16.9 Financial statements 16 - 7
16.9.1 Statement of financial position

16.9.2 Statement of profit or loss and other comprehensive income
16.9.3 Statement of net investments
Questions 16 - 10
16 - 1
- understand the formation and operating of a close corporation as an

entity
- identify the characteristics, advantages and disadvantages of a close

corporation
- understand the appointment and duties of a an accounting officer
- identify the accounting records of a close corporation
- prepare the financial statements of a close corporation
16 - 2
16.1 Formation
In terms of the Companies Act No. 71 of 2008 promulgated in 2011, the Close Corporation
(CC) as an entity form has fallen away and no new CCs can be formed. CCs formed before the
change in legislation however, will continue to be in existence.
In the past, CCs were formed according to the provisions of the Close Corporations Act No.69
of 1984 and all existing CCs are still regulated in terms of this act. CCs were formed when a
founding statement (CK1 form) was registered with the Registrar of Close Corporations and a
certificate of incorporation was issued.
16.2 Characteristics
 Is a separate legal person

 Continues to exist even if members change
 Members of a CC have limited liability (limited to capital contributions); they can be
jointly and individually liable for the obligations if they contravene the Act.
 A minimum of 1 and maximum of 10 natural persons can be members of a CC.
 Can purchase a member’s interest
16.3 Advantages
 All statutory information is contained in one single document (the foundation statement).
 Close Corporations are less expensive, less complex and easier administrative legal
entities.
 Unlike companies, no differentiation is made between the owners and the management
of a close corporation.
 The accounting officer may be a member/employee of the CC.
 Normal taxation is charged at the rate that is applicable to companies. It is currently
lower than the marginal rate applicable to individuals.
 In terms of the CC Act, a CC may give financial assistance (loan or security) to a
member to obtain an interest in the CC, if:
o All members agree
o The assistance does not lead to the insolvency or illiquidity of the CC.
16.4 Disadvantages
16 - 3
 The number of members is limited to 10.
 Small number of members can limit growth.
 The nature of the members is limited because only natural persons can be a member,
for example, a company, a trust or a close corporation cannot hold an interest in another
close corporation.
 A member can be personally liable to a corporation for a breach in his fiduciary duty or
for losses due to lack of competence and due care.
 A member can be held accountable for liabilities of the CC if he does not comply with
the Act.
 Simplicity/lack of formalities makes fraud/unauthorised actions easier.
16.5 Members
Every person wishing to become a member must make an initial contribution to the members’
interest. This contribution can be in cash or in other assets or services rendered in relation to
the formation of the corporation.
The interest of any member is a single interest expressed as a percentage. A member’s

interest is not necessarily in relation to his share in the total members’ contributions. A
member’s interest is transferable, but all members must agree to the transfer or the
requirements of the association agreement should be met.
Members are limited to the following:
 natural persons
 a trustee of a testamentary trust who is a natural person or legal entity, but who is not a
beneficiary of the trust and who does not control a beneficiary of the trust
 a natural person or legal entity who acts on behalf of a member who is insolvent, dead,
mentally incapacitated or otherwise unqualified.
Every member has a fiduciary duty towards the corporation. The relationship between
members is regulated by the CC Act. Members should also enter into a written association
agreement in order to arrange the internal relations. The association agreement should
stipulate the following:
 Duties of each member with regard to the management of the CC.

 How disputes should be settled.
 Remuneration of each member.
 Distribution of profits to members.
 How changes in members’ contributions should be treated.
 Powers to enter into loan agreements, etc.
Payments (distribution of profits and repayment of contributions) can be made to members if

the CC complies with solvency and liquidity requirements.
If a member causes damage to a CC either by action or neglect, he/she will be liable for any
losses caused by such action or neglect.
16.6 Accounting officer
16 - 4
The Act requires every CC to appoint an accounting officer who must be a member of
(amongst others) one of the following recognised professions as determined by the Minister of
Finance in the Gazette:
 South African Institute of Chartered Accountants (CA (SA))

 Chartered Institute of Management Accountants (CIMA)
 South African Institute of Professional Accountants (SAIPA)
 Chartered Association of Certified Accountants (ACCA)
The accounting officer must lodge a written agreement of his appointment with the Registrar
and should also give notice in writing to the Registrar if he resigns.
The accounting officer has the right to access the documents of the CC. His/her duties
primarily include the following:
 determine whether the financial statements correspond to the accounting records;

 revise the appropriateness of the accounting policy;
 report to the members in respect of the above.
The accounting officer should give notice to the Registrar, when:
 The CC no longer operates as a business.

 The liabilities exceed the assets.
 The financial statements incorrectly indicate that the assets exceed the liabilities.
In his/her report the accounting officer should indicate whether there were any contraventions
of the CC Act and whether or not he/she is an employee of the CC.
16.7 Accounting records
In terms of the CC Act a close corporation must keep accounting records that are regarded as
necessary to fairly present the state of affairs and operations of the corporation and to explain
the transactions and the financial position of the business.
The following specific records should be kept:
 Records that show assets and liabilities, members’ contributions, retained earnings,
revaluation of fixed assets and loans to and from members.
 Fixed asset register.
 Records in respect of daily cash receipts and payments.
 Records of goods and services bought/received or sold/delivered on credit.
 Annual inventory counts.
 Evidence that supports accounting records.
 Sufficient details of individual transactions in respect of contributions by members, loans
from and to members and payments to members.
16 - 5
16.8 Accounting treatment
16.8.1 Retained earnings
Members do not have an automatic right to retained earnings. They are only entitled to
retained profit after it has been formally approved for distribution by all members and
subsequent to the distribution:
 the corporation’s assets, fairly valued, exceed all its liabilities (solvency criteria);
 the corporation will be in the position to pay its debts as they become due during the
ordinary course of business (liquidity criteria).
Earnings that are distributed to members are not recognised as an ordinary expense for the
CC, but rather as a distribution of earnings. The distribution of earnings is disclosed in the
statement of net investments.
16.8.2 Taxation
In terms of the Income Tax Act, CCs are treated as companies and the tax position of a CC is
therefore similar to that of a company.
Income tax is calculated on the taxable income of the CC at the company tax rate.
In the past, secondary tax on companies was calculated on any distributions made to members
at the prescribed rate. Since 1 April 2012, distributions to members are no longer subject to
secondary tax on companies, but to dividend taxation.
16.8.3 Payments to members
All income and expense transactions (salaries, rent and interest) afftecting the members must
be disclosed in the transactions with members note.
16 - 6
16.9 Financial statements
The users of the financial statements are primarily the members of the CC and therefore their
needs should firstly be met.
The Close Corporations Act contains few requirements in respect of the content of the financial
statements and recommends that the financial statements should be prepared according to
general accepted accounting practises. This implies that the statements should meet the
requirements of the Companies Act and therefore also those of IFRS.
The financial statements must be drawn up as simple and logical as possible, with the main
requirement of faithful representation. It has to agree with the accounting records.
The CC Act requires that the financial statements should be prepared in accordance with
GAAP and should include the following:
 Statement of financial position and notes

 Statement of profit or loss and other comprehensive income (preferably detailed) and
notes
 Statement of net investments of members
 Report of the accounting officer
Statements prepared for the first time, should cover a period of more than three months, but
less than fifteen months. The financial statements must be approved and signed by or on
behalf of every member.
16 - 7
16.9.1 Statement of financial position
An example of a statement of financial position of a CC is set out below:
CC
Statement of financial position on 28 February 20X7
R
ASSETS
Non-current assets
Equipment XXX
Vehicles XXX
Intangible assets XXX
Total non-current assets XXX
Current assets
Inventory XXX
Debtors XXX
Loan to member XXX
Cash XXX
Total current assets XXX
Total assets XXX

Members’ interest
Members’ contributions XXX
Retained earnings XXX
Total members’ interest XXX
Long term loans XXX
Total non-current liabilities XXX
Current liabilities
Creditors XXX
Short term portion of long term loan XXX
Loan from member XXX
Taxation payable XXX
Total current liabilities XXX
Total liabilities XXX
Total equity and liabilities XXX
16 - 8
16.9.2 Statement of profit or loss and other comprehensive income
A statement of profit or loss and other comprehensive income sets out the financial
result/performance of an entity for a specific financial period. The financial result is the profit or
loss that contributes to an improvement or impairment of the financial position of an entity.
16.9.3 Statement of net investments
The statement of net investments of members contains the same information as the statement
of changes in equity of companies. The statement of net investments also includes loans to
and from members, since (as a result of the requirements of the Act) it can be accepted that
members have a choice whether they want to invest in the CC through loans or through
members’ contributions and whether they want to draw amounts out of the CC through
withdrawals of members’ interest, distributions or loans from the CC.
An example of a statement of net investments is set out below:
CC
STATEMENT OF NET INVESTMENTS OF MEMBERS for the year ended 28 February 2007
Members’ Retained Loan from Loan to Total

contibutions earnings member member
Opening balance xxx xxx xxx (xxx) xxx
Net profit xxx xxx
Distributions (xxx) (xxx)
Contributions made xxx
Contributions repaid (xxx)
Loan from member xxx xxx
Loan to member (xxx) (xxx)
Repayment of loan xxx xxx
Closing balance xxx xxx xxx (xxx) xxxx
16 - 9
CHAPTER 16
QUESTIONS
Page
Question 16.1 Statement of net investments 16 - 11
16 - 10
QUESTION 16.1
Harry's Hunters CC was registered during 20x0. The CC's main business activities comprise
the preparation and selling of fast food. The following pre-adjustment balances appeared in
the general ledger of the CC on 30 June 20x7, the end of the financial year:
R
Members' contributions 60 000
Cash in bank 2 000
Equipment at carrying amount 80 400
Retained earnings at the beginning of the year 94 600
Loan granted to M. Moos (member) 20 000
Loan owing to member M. Ngoco (member) 30 000
Interim distribution to members 32 000
1. The net profit before taxation for the year ended 30 June 20x7, amounted to
R108 500.
2. The interim distribution was declared and paid to members on 14 February 20x7. It was
decided to declare a final distribution of R25 000 to members on 30 June 20x7, payable on
14 August 20x7.
3. It was estimated that the SA normal income tax for the current year would amount to R42
600, for which no accounting entries had been made.
4. Member G. Meyer sold his members’ interest to the CC on 17 January 20x7. An amount of
R12 500 cash was paid to him by the CC on that date.
5. M. Moos became a member of the CC on 14 July 20x6 by making a members’ contribution
to the CC of R24 000 cash. The CC granted Moos an interest free loan for that amount,
repayable in 6 equal annual instalments on 1 January each year. All instalments were paid
to date.
6. P. de Waal became a member of the CC on 9 May 20x7 by purchasing a 15% interest from
member M. Malan for R20 000 cash.
7. Member M. Ngoco granted an interest free loan of R36 000 to the CC on
12 April 20x7, repayable in 6 equal annual instalments on 1 June each year. All
instalments were paid to date.
YOU ARE REQUIRED TO
compile the statement of net investments of members for the year ended 30 June 20x7.
(Ignore comparative figures.)
16 - 11
CHAPTER 17
CORRECTION OF ERRORS
Page
17.1 The nature of accounting errors 17 - 3
17.2 Identifying accounting errors 17 - 3
17.3 Internal sources 17 - 4
17.3.1 Trial balance

17.3.2 Control accounts
17.4 External sources 17 - 10
17.4.1 Creditor monthly statements

17.4.2 Bank statements
Questions 17 - 23
17 - 1
- understand the nature of accounting errors
- identify accounting errors throughout the accounting process
- understand and apply the process of using internal sources to identify

and correct errors
- understand and apply the process of using external sources to identify

and correct errors.
17 - 2
17.1 The nature of accounting errors
The financial statements of an entity must be a faithful representation of the entity’s

financial position and the result of its financial operations, i.e. the financial statements
must be reliable and free from any errors or omissions.
Accounting transactions and events are recorded in the entity’s accounting records
on a continuous basis. The possibility of errors is a reality, mainly because there are
always people involved in the accounting process. Entities will always design internal
control measures to minimise errors and they will follow procedures to ensure that
errors are identified and corrected at early stages.
17.2 Identifying accounting errors
Below are procedures that entities can follow to identify errors that occurred during
the recording process of accounting transactions and events:
 A synoptic review of amounts in the trial balance i.e. a reasonability test

 Comparison of actual amounts with budgets and benchmarks
 Review of entity’s own internal sources e.g. the trial balance and control accounts
 Review of entity’s external sources e.g. creditor monthly statements and bank
statements
General errors that may occur and can be identified by internal control systems or the
procedures as mentioned above are as follows:
 Summation errors
 Incorrect cross-casting of columns
 Transposition errors (e.g. 357 instead of 375)
 Transposing debits and credits
 Incomplete/ Incorrect information on source documents
 Incorrect classification of transactions or events
 Omission of transactions or events
 Incorrect recording of transactions in journals
 Incorrect postings of journals to ledger
 Balances incorrectly transferred from ledger to trial balance
17 - 3
17.3 Internal sources
The use of internal sources to identify errors is based on a process of reviewing and
evaluating documents, amounts and entries. The entity can make use of the following
internal sources to identify accounting errors.
17.3.1 Trial balance
The trial balance is a list of all the balances of accounts in the general ledger. If the
trial balance does not balance, it might be an indication of one or more of the
following errors:
 the debit and credit sides of a journal are not in agreement

 summation or transposition errors in the columns of the journals or trial balance
 incorrect posting from journals to the ledger
 balances of ledger accounts are incorrectly calculated or recorded incorrectly in
the trial balance
Abovementioned errors will be corrected as follows:
 The correction will be recorded in the general journal with a complete narration.
These corrections in the general journal sometimes result in a single-leg journal
entry: e.g. in a hand system where the debit and the credit side of a previous
journal entry did not agree, but it was posted as such. It is not customary to
record single-leg journal entries, but in cases where a previous journal entry or
posting error in a hand system has to be rectified, it is sometimes necessary.
 If a computerised accounting package is used, the package is normally
programmed with built-in internal controls. One of these controls is that the
system will not allow a user to record an unbalanced journal entry, where the
debit and credit side do not agree, and an error message will be displayed to
correct the journal entry. Posting from journals to ledger accounts occur
automatically and therefore posting errors should not occur. Situations where the
trial balance is unbalanced should not exist.
 The individual ledger account will be corrected with the appropriate amount.
17 - 4
Example 17.1
The bookkeeper of Uno Traders compiled a trial balance on 31 March 20X7 for the
entity. The respective totals of that trial balance were as follows:
- Debits R90 047

- Credits R89 036
1. The debit side of the trial balance was added incorrectly with R599 too much.
2. The credit side of the trial balance was added incorrectly with R319 too little.
3. The debit side of the wages account in the general ledger was added incorrectly
with R25 too much.
4. The credit side of the interest received account in the general ledger was added
incorrectly with R31 too little.
5. A payment of R495 that had been received from a debtor was entered as R459
into the correct journal.
6. Bad debts of R191 that was recovered in respect of the previous year, was not
posted from the journal to that particular ledger account.
7. The total column of the cash receipt journal was added incorrectly with R300 too
little and posted as such to the correct ledger account.
8. The total of the discount column in the cash payment journal amounting to R209
was not posted to any ledger account.
9. The total of the discount column in the cash receipt journal amounting to R181
was posted as R118 to the correct side of the correct ledger account.
The bank account had a favourable balance, which will not be in overdraft after the
correction of any accounting errors.
Required
Show the entries in the general journal, if any, to correct the abovementioned
transactions.
17 - 5
The corrections will be recorded in the general journal as follows:
GENERAL JOURNAL OF UNO TRADERS
No Details Debit Credit

R R
3. Wages 25
4. Interest received 31
5. Bank account 36
5. Debtors’ control 36
6. Bad debts recovered 191
7. Bank account 300
8. Discount received 209
9. Discount allowed 63
NOTES:
1. Entries will be made in the general journal only if a particular error will result in an
entry in a ledger account.
2. Because errors are being rectified in the various ledger accounts, it could result in
so-called “one-leg” entries being made, in other words there will not necessarily
be a corresponding credit for every debit.
3. The correction of the individual debtors’ and creditors’ control accounts in the
debtors’ and creditors’ ledger will not be recorded in the general journal.
17 - 6
17.3.2 Control accounts
Convenience accounts such as the debtors’ and creditors’ control accounts are
opened in the general ledger to support internal control. The control accounts involve
the total of the entries in the individual debtor’s and creditor’s accounts in the debtors’
and creditors’ ledgers. The control account is therefore a duplication of the individual
accounts. The balance of the control account should be equal to the total of the
individual accounts on a continuous basis.
When the balance of the control account does not correspond with the totals of the
individual accounts, it may indicate one or more of the following errors:
 source documents have incorrectly been recorded in the journals

 summation errors or transposition errors in the debtors’ or creditors’ columns of
journals
 incorrect postings from journals to control accounts and/or individual debtor’s and
creditor’s accounts
 balances of individual debtor’s and creditor’s accounts and/or control account
have been calculated incorrectly
 balances on the debtors’ and creditors’ lists have been recorded incorrectly from
the individual debtor’s and creditor’s accounts
 The debtors’ and creditors’ control accounts will be corrected with the appropriate
amount (use a supplementary debtors’ control/creditors’ control account)
 The correction will be recorded in the general journal with a complete narration
 Update the debtors’ and creditors’ lists with appropriate corrections.
17 - 7
Example 17.2
Double Sports is an entity that trades in sports equipment. The bookkeeper of the
entity compiled the following ledger accounts in respect of March 20X7:
Debtors’ control
Details Amount Details Amount
Balance b/d 73 891 Sales returns (SRJ) 1 009
Purchases (PJ) 32 096 Interest levied on debtors 102
Movement in allowance for Bank (CRJ) 28 471
credit losses of debtors 309 Bank (EFT beneficiary not 365
recognised)
Bad debts written off 728
Bad debts recovered 297 Balance c/f 77 734
107 321 107 321
Balance b/d 77 734
Detail Amount Detail Amount
Purchase returns (PRJ) 782 Balance b/d 62 924
Bank (CPJ) 23 803 Sales (SJ) 40 194
Interest levied by creditors 64
Balance c/f 78 649
103 118 103 118
Balance b/d 78 649
1. The total of the list of the debtors amounted to R84 313 and the total of the list of
creditors amounted to R70 609 on 31 March 20x7.
2. A sales invoice to G Kibbs for R682 was recorded in the purchase journal as
purchases of inventory of that amount.
3. A purchase invoice from S Monjoy Ltd of R302 in respect of purchases of

inventory was recorded in the sales journal as sales of inventory of that amount.
4. A sales invoice to K Dallis for R894 was recorded in the correct journal as R984
and was posted as such to the correct ledger accounts.
5. A purchase invoice from T Sendul of R377 was recorded in the correct journal as
R773 and was posted as such to the correct ledger accounts.
17 - 8
6. The credit side of the account of a creditor, S Dom, in the creditors' ledger was
added incorrectly with R11 too little.
7. The debit side of the account of a debtor, A Don, in the debtors' ledger was added
incorrectly with R22 too much.
8. The total column in the sales journal was added incorrectly with R53 too much.
9. The total column in the purchase journal was added incorrectly with R121 too
little.
YOU ARE REQUIRED TO
compile supplementary debtors' and creditors' control accounts on 31 March 20x7,

properly closed-off, showing only the entries that were made to rectify any mistakes.
compile supplementary lists of the individual debtors' and creditors' ledger accounts
on 31 March 20x7, properly closed-off, showing only the entries that were made to
rectify any mistakes.
The supplementary debtors’ and creditors’ control accounts will be prepared as

follows:
SUPPLEMENTARY DEBTORS’ CONTROL
Detail Amount Detail Amount

Incorrect balance b/d 77 734 Summation error 360
Interest error 102 Purchases rectified 32 096
Interest rectified 102 Movement in allowance for 309
credit losses rectified
Sales rectified 40 194 Bad debts error 728
EFT error 365 Bad debts rectified 728
EFT rectified 365 Bad debts recovered 297
Invoice Kibbs rectified 682 Sales Monjoy rectified 302
Invoice Dallis error 90
SJ total rectified 53
Balance c/f 84 581
119 544 119 544
Balance b/d 84 581
17 - 9
SUPPLEMENTARY CREDITORS’ CONTROL

Summation error 180 Incorrect balance b/d 78 649
Sales rectified 40 194 Purchases rectified 32 096
Invoice Kibbs rectified 682 Interest error 64
Invoice Sendel rectified 396 Interest rectified 64
Invoice Monjoy rectified 302
Balance c/f 69 844 PJ total rectified 121
111 296 111 296
Balance b/d 69 844
Supplementary lists of individual debtor’s and creditor’s ledger accounts will be

prepared as follows:
SUPPLEMENTARY DEBTORS’ LIST SUPPLEMENTARY CREDITORS’ LIST
R R
Original incorrect total 84 313 Original incorrect total 70 609
G Kibbs 682 G Kibbs (682)
S Monjoy (302) S Monjoy 302
K Dallis (90) T Sendul (396)
A Don (22) S Dom 11
Correct total 84 581 Correct total 69 844
17.4 External sources
The use of external sources to identify errors is based on a process of comparing

documents, amounts and entries in the entity’s records with external sources from
third parties such as creditor monthly statements and bank statements. The entity
can make use of the following sources to identify accounting errors:
17.4.1 Creditor monthly statements
A creditor is involved in every purchase transaction that occurs on credit. The

following are activities (transactions or events) that can take place:
 Purchase of goods
 Cancellation of purchase transaction (purchase returns)
 Interest levied by creditor on outstanding amounts
 Payment of the creditor
17 - 10
 Cash discount received from creditors
The operations will be recorded as mirror images in the accounting records of the
entity and the creditor (supplier). Debits in the entity’s records will be credits in the
supplier’s records and vice versa.
At the end of the month, the supplier will send an account statement (creditor
monthly statement) to the entity and it will be a perfect reflection of the entity’s
account in the records of the supplier. There might be a difference between the
balance of the creditor’s (supplier’s) account in the entity’s records and the entity’s
account in the supplier’s records as a result of errors or omissions by one or both
parties.
If the balance of the creditor’s account in the creditors’ ledger does not correspond
with the creditor monthly statement received from the supplier, it may indicate that
one or more of the following errors occurred:
 Source documents were incorrectly recorded or omitted

 Amounts have been incorrectly posted from the journals to the creditor’s
account
 Returns for which the entity issued a debit note that was not accepted by the
supplier
 Cash discounts that the entity subtracted from payments which have not been
allowed by the supplier
 Interest levied by the supplier on late payments which have not been recorded
by the entity
 Payments already made, have not been recorded by the supplier
 Summation and transposition errors in accounting records and monthly
statements.
 The entity will correct errors made by itself, in its own records
 The entity will send the supplier a settlement statement with a list of errors and
omissions to be corrected in their records.
Example 17.3
The following activities took place between Entity Ltd. (entity) and Supplier Ltd.
(creditor):
1.) Entity Ltd. purchases goods to the amount of R5 000 on credit from Supplier
Ltd. (Purchase invoice A345);
2.) Entity Ltd. returns damaged goods to the value of R500 to Supplier Ltd. (Debit
note DN21);
3.) Entity Ltd. pays a portion of the outstanding debt by electronic payment
number 007, R3 000 to Supplier Ltd. and receives R300 discount;
4.) Supplier Ltd. levies interest of R150 on outstanding debt of Entity Ltd.
17 - 11
The transactions will be recorded in the accounting records of the different parties as
follows:
Accounting records of Entity Ltd.
Supplier Ltd. (Creditor)

(2) Purchase returns 500 Balance b/d 1 000
(3) Bank 3 000 (1) Purchases 5 000
(3) Discount received 300 (4) Interest 150
Balance c/f 2 350
6 150 6 150
Balance b/d 2 350
Accounting records of Supplier Ltd.
Entity Ltd. (Debtor)

Balance b/d 1 000 (2) Sales returns 500
(1) Sales 5 000 (3) Bank 3 000
(4) Interest 150 (3) Discount allowed 300
Balance c/f 2 350
6 150 6 150
Balance b/d 2 350
The account statement which Supplier Ltd. will send to Entity Ltd. at the end of the
month will be as follows:
Amount due 1 000

(1) Purchase invoice A345 5 000
(2) Credit note KN78 500
(3) Receipt 69 3 000
(3) Discount allowed 300
(4) Interest levied 150
Amount due 2 350
6 150 6 150
17 - 12
Example 17.4
You are the accountant of Trio Services that renders computer services to clients and
purchases consumables from Comperprinters on the following basis:
- Interest of 1% is levied monthly on amounts that are still outstanding for more
than one month after the end of the month which the particular purchase was
made.
- A trade discount of 25% is allowed on all purchases.
- A cash discount of 2% is allowed on all payments that are received within one
month after the end of the month during which the particular purchase was made.
The following monthly statement was received from Comperprinters on 9 May 20X7:
20X7 R R
Mar 26 Amount due 2 665

28 Invoice A23 236
29 Credit note M4 101
Apr 03 Receipt 395 1 200
03 Interest levied 12
11 Invoice C9 404
16 Invoice D7 511
19 Credit note P12 123
20 Invoice F6 324
22 Invoice F22 252
24 Invoice G9 487
25 Receipt 673 1 617
25 Amount due 2 247
5 103 5 103
The ledger account for Comperprinters in the creditors’ ledger for April 20X7 was as
follows:
Comperprinters
Date Details Amount Date Details Amount
Apr 03 CPJ (EFT 762) 1 200 Apr 01 Balance b/d 2 850
16 Invoice D7 511 11 Invoice C9 440
23 Debit note G22 142 19 Debit note G6 132
25 CPJ (EFT 811) 1 650 20 Invoice F6 324
30 Balance c/f 927 22 Invoice F22 252
24 Invoice 334 187
27 Invoice H12 290
4 475 4 475
Apr 30 Balance b/d 927
17 - 13
1. Except for the under mentioned and other obvious mistakes, all other items are
correct on the monthly statement.
2. Invoice A23 was added incorrectly with R50 too little.
3. The amount of R1 200 that was owed on 28 February 20X7 was settled in full on
3 April 20X7.
4. Invoice F6 shows a trade discount of 10%.
5. Invoice F22 includes goods of R64 which had not been purchased by Trio
Services.
6. Debit note G22 is in respect of goods which had been returned on that date.
7. Invoice 334 is in respect of goods purchased from Komper Services.
8. The amount owing on 31 March 20X7, was settled in full on 25 April 20X7.
9. Invoice H12 was issued by Comperprinters for goods that had been purchased
by Trio Services on 27 April 20X7.
10. Comperprinters also issued Invoice H16 amounting to R366, for goods
purchased by Trio Services on 27 April 20X7. The invoice included an item for
R140, the net amount after trade discount of 30% had been deducted.
YOU ARE REQUIRED TO
compile a supplementary ledger account for Comperprinters for April 20x7 in the
records of Trio Services to rectify the account. (Commence with the balance of
R927, as given.)
prepare a settlement statement to Comperprinters showing the amount that Trio

Services will pay on 31 May 20x7 in respect of the amount due on
30 April 20x7. (Commence with the balance of R2 247, as given.)
Round amounts off to the nearest R, if necessary.
17 - 14
The supplementary ledger account for Comperprinters will be prepared as follows:
SUPPLEMENTARY LEDGER ACCOUNT - COMPERPRINTERS

Debit note G6 * 264 Balance given b/d 927
Invoice C9 incorrect* 36 Addition error in ledger account * 45
Invoice F6 incorrect* 54 Invoice D7 (2 x R511) * 1 022
Invoice F22 incorrect * 64 Interest levied * 12
Invoice 334 incorrect * 187 Debit note G6 incorrect * 9
Balance c/f 2 273 Invoice G9 * 487
Invoice H16 * 376
2 878 2 878
Balance 2 273
b/d
NOTE:
* The entries in the supplementary ledger account regarding the correction of the
various errors will be posted from the general journal where the details regarding
each entry will be fully explained.
The settlement statement to Comperprinters that indicates the amount that Trio
Services will pay before 31 May 20X7 regarding the amount due on 30 April 20X7 will
be prepared as follows:
SETTLEMENT STATEMENT AT 30 APRIL 20X7
R
Balance in terms of monthly statement 2 247
Addition error on monthly statement 27
Invoice A23 short of 50
Credit note M4 debited incorrectly (2 x 101) (202)
Interest levied credited incorrectly (2 x 12) 24
Credit note P12 debited incorrectly (2 x 123) (246)
Invoice F6 trade discount incorrect (54)
Invoice F22 incorrect (64)
Returns on 23 April (142)
Cash discount not included on Receipt 673 (33)
Invoice H12 not included 290
Invoice H16 not included 376
Amount due on 30 April 20X7 2 273
Less: 2% Cash discount (45)
Amount payable on 31 May 20X7 2 228
NOTE:
Comperprinters’ ledger account in the creditors’ ledger was closed-off on 31 March
and a balance of R2 850 was calculated. A reconciliation was done on that date to
reconcile Comperprinters’ monthly statement balance with the ledger account
balance on that date. Consequently Trio Services would already have corrected
Invoice A23 dated 26 March, which has been added short of R50, in their own
records before 31 March.
17 - 15
17.4.2 Bank statements
Each entity has an agreement with a bank in terms of which the bank keeps the
entity’s cash in safe custody and makes payments on behalf of the entity when
instructed to do so in writing. The business relationship between the bank and the
entity will result in the following activities (transactions and events):
 Entity deposits money at the bank

 Bank makes payments on behalf of the entity via electronic transfers, stop orders,
debit orders, etc.
 Customers of the entity deposit money directly into the entity’s bank account
 Bank provides credit facilities (overdraft)
 Entity earns interest on amounts due by the bank
 Bank levies interest on amounts due by the entity
 Bank levies bank charges, commissions, fees for services rendered
The activities will be recorded as mirror images in the accounting records (bank
account) of the entity and the accounting records (entity’s account) of the bank.
Therefore debits in the entity’s records will be credits in the bank’s records and vice
versa.
The bank will send a bank statement to the entity on a regular basis, generally
monthly, in which the position of the entity’s account involved at the bank is set out. It
might be that a difference is detected between the bank balance in the entity’s
records and the balance on the bank statement, as a result of errors or omissions by
one or both parties. The errors or omissions can often be attributed to a time
difference and will automatically be corrected in the next period.
The following errors or omissions can occur:
 Source documents are incorrectly recorded or omitted

 Deposits have been made but have not been recorded by the bank
 Bank charges, interest levied/earned etc, have not been recorded by the entity
(these costs/incomes are normally acquired from the bank statement)
 Direct deposits at the bank have not yet been recorded by the entity
 Summation errors and transposition errors in accounting records
 Electronic payments made or received and not yet reflected on bank
statement
 The entity will correct the errors made by itself in its own records
 The entity will list errors and omissions made by the bank in the form of a bank
reconciliation statement. Outstanding items on the bank reconciliation statement
will then be compared to the bank statement of the next month to ensure that
corrections have been made. Corrections that do not relate to timing differences
will have to be followed up with the bank in writing together with supporting
documentation.
17 - 16
 For each correction made by the entity there will be an appropriate journal entry
with a complete narration.
Example 17.5
The following is an illustration of the bank account of Entity Ltd. and its account in the
accounting records of the bank:
Accounting records of Entity Ltd.
Bank
(1) Balance b/d 1 915 (3) EFT payments 5 985
(2) Deposits 4 103 (4) Debit orders 1 080
(6) Interest earned 45 (5) Stop orders 650
(10) Other receipts 8 880 (7) Interest paid 15
(8) Bank charges 43
(9) Other payments 1 410
Balance c/f 5 760
14 943 14 943
Balance b/d 5 760
Accounting records of Bank
Entity Ltd.
EFT payments 5 985 Balance b/d 1 915
Debit orders 1 080 Deposits 4 103
Stop orders 650 Interest earned 45
Interest paid 15 Other receipts 8 880
Bank charges 43
Other payments 1 410
Balance c/f 5 760
14 943 14 943
Balance b/d 5 760
1. The debit balance in the bank account (a current asset) will appear on the
bank statement as a credit balance. If the bank account shows a credit
balance the bank statement will show a debit balance, therefore an overdraft
bank account (current liability).
2. Deposits will be recorded from receipts or deposit slips in the cash receipt
journal and then posted to the bank account in the ledger.
3. EFT payments will be recorded from the bank statement in the cash payment
journal and posted to the bank account in the ledger.
17 - 17
4. Debit orders (amount differs from month to month) can be recorded from the
account statement received from the third party in the cash payment journal
and posted to the bank account in the ledger, or it can be recorded from the
bank statement in the general journal and posted to the bank account in the
ledger.
5. Stop orders (fixed amount each month) can be recorded from the stop orders
signed at the bank in the cash payment journal and posted to the bank
account in the ledger or it can be recorded from the bank statement in the
general journal and posted to the bank account in the ledger.
6. Interest earned will be posted from the cash receipt journal to the bank
account in the ledger if it is a fixed amount each month. If interest earned
differs from month to month it will normally be recorded from the bank
statement in the general journal and posted to the bank account in the ledger.
7. Interest paid will normally be recorded from the bank statement in the general
journal and then posted to the bank account in the ledger.
8. Bank charges include charges for services delivered, commissions, etc. and
will be recorded from the bank statement in the general journal and posted to
the bank account in the ledger.
9. Other payments can include capital withdrawals by the owner or electronic

payment of creditors or expenses and can be recorded in the cash payment
journal and then posted to the bank account in the ledger or it can be recorded
from the bank statement in the general journal and posted to the bank account
in the ledger.
10. Other receipts can include capital deposits by the owner or direct payments
from debtors and can be recorded in the cash receipt journal and posted to the
bank account in the ledger or it can be recorded from the bank statement in
the general journal and posted to the bank account in the ledger.
The bank statement which the bank will send to Entity Ltd. at the end of the month
will be as follows:
Date Details Debit Credit Balance
Feb 01 Balance 1 915

03 EFT 424 785 1 130
EFT 425 1 300 -170
05 Stop order – ABC Bank 650 -820
Debit order – Telkom 415 -1 235
07 EFT 426 320 -1 555
10 Debit order – Escom 665 -2 220
11 Interest on debit balance 15 -2 235
17 - 18
15 Deposit slip 3 750 1 515
17 Electronic transfer 1 410 105
20 Direct deposit 8 880 8 985
23 EFT 427 2 200 6 785
25 Service charges 33 6 752
26 Deposit slip 353 7 105
EFT 428 910 6 195
27 EFT 429 470 5 725
Commission 10 5 715
28 Interest on credit balance 45 5 760
If the bank account has a positive balance, only the amount will show in the balance
column, but if it is overdrawn, the amount in the balance column will be indicated with
a minus (-).
Example 17.6
The following bank reconciliation statement was prepared for Quad Ltd. in respect of
31 January 20X7:
BANK RECONCILIATION STATEMENT AT 31 JANUARY 20X7
Balance according to bank statement (overdraft) (4 000)
Plus: outstanding deposits 10 150
Balance according to bank account 6 150
Quad Ltd. received the following bank statement for February 20X7 on 9 March
20X7:
BANK STATEMENT - FEBRUARY 20X7
Date Details Debit Credit Balance

01 Balance -4 000
Deposit 10 150 6 150
02 Deposit 9 100 15 250
EFT 36 4 470 10 780
EFT 35 1 690 9 090
05 Bank charges 140 8 950
Error corrected 360 9 310
EFT 38 2 275 7 035
06 Deposit 7 770 14 805
Interest levied 120 14 685
10 EFT 40 3 260 11 425
EFT 44 1 610 9 815
17 - 19
Deposit 12 470 21 775
17 Error regarding service 100
21 675
charges
EFT 42 2 610 24 285
EFT 43 3 650 20 635
25 Deposit 5 200 25 835
EFT 39 14 920 10 915
EFT unpaid 1 200 9 715
26 Deposit 4 700 14 415
27 Debit order 7 530 6 885
28 Stop order 13 260 -6 375
The following entries were made in the journals below for February 20X7:
CASH RECEIPT JOURNAL

Date Dep Details Fo Sundry Discount Fo Debtors Total
no
* 11 # (900) 10 000 9 100
* 12 # 7 770 7 770
* 13 # 12 470 12 470
* 17 # (300) 5 500 5 200
* 15 # 5 050 5 050
* 16 # 8 000 8 000
(1 200) 48 790 47 590
CASH PAYMENT JOURNAL

Date EFT Details Fo Sundry Discount Fo Creditors Total
no
* 35 # 1 690 1 690
* 36 # 4 470 4 470
* 38 # 2 275 2 275
* 39 # (1 580) 16 500 14 920
* 42 # 2 610 2 610
43 # (350) 4 000 3 650
44 # 6 110 6 110
6 110 (1 930) 31 545 35 725
1. Apart from any obvious mistakes, the bank statement is otherwise correct.
2. The outstanding deposit amounting to R10 150 which appears in the bank
reconciliation statement on 31 January 20X7 was incorrectly recorded on the
deposit slip as R10 150 and also recorded as such in the relevant journal. The
correct amount however, was R10 510 according to the receipt.
3. A debtor deposited an amount of R4 700 directly into the entity's bank account on
26 February 20x7 without notifying the entity thereof.
4. The entity made a deposit of R5 050 on 28 February 20X7, but the bank
erroneously recorded the deposit in the owner's personal bank account.
5. The electronic payment received of R1 200 which had been returned unpaid by
the bank due to incorrect beneficiary information, had originally been received
17 - 20
from a debtor N. Louw and was included in the deposit which had been made on
15 February 20X7.
6. The debit order of R7 530 is in respect of a short-term insurance premium.
7. The stop order of R13 260 is in respect of the monthly rental of equipment.
YOU ARE REQUIRED TO
a) show the bank account in the general ledger of the entity on 28 February 20x7.
b) compile the bank reconciliation statement on 28 February 20x7.
a) The bank account including the corrections of any errors is as follows:
BANK ACCOUNT

Balance b/d 6 150 Total column (CPJ) 35 725
Total column (CRJ) 47 590 Bank charges 140
Direct deposit 4 700 Interest 120
Deposit incorrect 360 EFT 40 3 260
EFT 44 incorrect 4 500 Bank charges 510
Bank charges 100
EFT write back 1 200
Debit order 7 530
Stop order 13 260
Balance c/f 1 455
61 845 61 845
Balance b/d 1 455
The bank reconciliation statement on 28 February 20X7 will be as follows:
BANK RECONCILIATION AT 28 FEBRUARY 20X7
Balance according to bank statement (overdraft) (6 375)
Plus: outstanding deposit 8 000 8 000
Plus: deposit not shown in bank statement 5 050
Less: EFT 42 incorrect side (5 220) (5 220)
Balance according to bank account (overdraft) (1 455)
17 - 21
CHAPTER 17
QUESTIONS
Page
Question 17.1 Correction of trial balance 17 - 24
Question 17.2 Debtors’ and creditors’ control accounts 17 - 26
Question 17.3 Creditor settlement statement 17 - 29
Question 17.4 Bank reconciliation 17 - 32
17 - 22
QUESTION 17.1
The bookkeeper of an entity compiled a trial balance on 31 July 20x1 that did not
balance. While scrutinising the accounting records, you establish, amongst other
things, the following:
1. The total of the total column in the cash payment journal of R16 177 was posted
to the correct side of the correct ledger account as R16 771.
2. The total of the total column in the purchase journal of R9 896 was posted to the
credit side of the debtors’ control account.
3. A sales invoice of R565 in respect of sales of inventory was recorded in the

purchase journal as a purchase of inventory and posted as such to the particular
ledger accounts.
4. The total of the total column in the cash receipt journal of R15 329 was posted to
the debit side of the debtors’ control account.
5. The total of the discount column in the cash payment journal of R179 was posted
to the credit side of the discount allowed account.
6. The total of the creditors’ column in the purchase journal was added incorrectly
with R303 too little and posted as such to the ledger account.
7. The total of the creditors’ column in the cash payment journal was added
incorrectly with R202 too much and posted as such to the ledger account.
8. A withdrawal by the owner of R750 that appears in the sundry column in the cash
payment journal was posted to the debit side of the wages account in the ledger.
YOU ARE REQUIRED TO
show the journal entries in the general journal to rectify the above errors in the
general ledger. Journal narratives are not required.
17 - 23
QUESTION 17.1
Suggested solution
GENERAL JOURNAL
Debit Credit
No Details
R R
1.
2.
3.
4.
5.
6.
7.
8.
17 - 24
QUESTION 17.2
The following ledger accounts, amongst other, appeared in the general ledger of
Cosmo Traders:
Debtors' control

26 950 Bank (CRJ) 51 080
Opening balance
b/d
Sales (SJ) 54 389 Purchases returns (PRJ) 1 955
Sales returns (SRJ) 2 096 Interest levied on debtors (GJ) 404
Bad debts written off (GJ) 1 544 Closing balance c/f 31 450
84 979 84 979
Balance b/d 31 450
Creditors' control

Bank (CPJ)
42 537 Opening balance b/d 19 439
Closing balance c/f
21 657 Purchases (PJ) 44 773
64 212 64 212
Balance b/d 21 657
1. The total of the list of creditors amounted to R19 355 and the total of the list of
debtors amounted to R28 378 on 31 March 20x5.
2. The entity's journals are designed in such a way that when cash is received
from debtors, the gross amount is shown in the debtors’ column in the cash
receipt journal and when cash is paid to creditors, the gross amount is shown
in the creditors’ column in the cash payment journal.
3. A debtor, J. Nel, paid the balance of the amount owing by him of R105 on
15 March 20x5. He was allowed a discount of R5. His electronic payment
was however returned by the bank on 29 March 20x5 due to incorrect
beneficiary details, but no accounting entries were made in respect of the
electronic payment that had been returned or the discount allowed that had to
be written back.
4. The total column of the purchase journal was added incorrectly with R691 too
much.
17 - 25
5. The total column of the sales journal was added incorrectly with R850 too little.
6. A payment of R450 was made to a creditor, Limbo Traders, on 28 March 20x5.

Cosmo Traders had been allowed a discount of R45, which had not been
deducted from the payment and had not been recorded for in the records.
7. The balance on 31 March 20x5 on the account of a debtor, P. Vos, was

included in the list of debtors as R945 instead of R495.
8. The account of a creditor, DB Trading, had a debit balance of R163, but was
included in the list of creditors as a credit balance.
9. A purchase invoice from PCB Systems for R701 was not recorded in any
particular journal.
10. The debit side of the account of a debtor, G. Bosh, was added incorrectly with
R55 too much during the calculation of his balance on 31 March 20x5.
11. A sales invoice to R. Smit, was recorded in the correct journal as R450 instead
of R540. This incorrect amount was posted to the relevant ledger accounts.
YOU ARE REQUIRED TO
(a) compile supplementary debtors' and creditors' control accounts on 31 March

20x5, properly closed-off, showing only the entries that were made to rectify any
mistakes. (Commence the supplementary ledger accounts with the incorrect
balances of R31 450 and R21 657 respectively, as given above.)
(b) compile supplementary lists of the individual debtors' and creditors' ledger
accounts on 31 March 20x5, properly closed-off, showing only the entries that
were made to rectify any mistakes. (The supplementary lists of individual
creditors and debtors must show both the incorrect original totals and the
correct final totals.)
17 - 26
QUESTION 17.2
Suggested solution
(a)
Supplementary debtors’ control

Balance given 31 450
Balance c/f 28 068

35 348 35 348
Balance b/d 28 068
Supplementary creditors’ control

Balance given 21 657
Balance c/f 19 685

22 376 22 376
Balance b/d 19 685
(b)
List of debtors R List of creditors R

Total given 28 378 Total given 19 355
Correct total 19 685

Correct total 28 068
17 - 27
QUESTION 17.3
Sampo Cycles purchases products from, amongst other, Vastrap Ltd. on the
following basis:

- A cash discount of 10% is allowed on all payments received within one month
after the end of the month during which the particular purchase was made.
- Interest of 1% is levied on all payments received after more than one month after
the end of the month during which the particular purchase was made.
Sampo Cycles received the following monthly statement on 17 July 20x5 from
Vastrap Ltd.:
Debit Credit
20x5 R R
May 26 Amount owing 890

28 Invoice 202 180
30 Credit note 16 25
31 Invoice 294 380
Jun 04 Receipt 629 500
10 Invoice 361 240
17 Invoice 392 270
22 Invoice 408 360
23 Invoice 419 302
25 Receipt 704 747
25 Amount owing 1 445
2 707 2 707
The ledger account of Vastrap Ltd. in the creditors' ledger of Sampo Cycles for
June 20x5 was as follows:
Vastrap Ltd.
Jun 02 CPJ (EFT 1244) 500 Jun 01 Balance b/d 1 330
22 Invoice 408 300 10 Invoice 361 240
25 CPJ (EFT 3191) 830 12 Debit note 15 80
30 Debit note 24 180 18 Invoice 392 720
30 Balance c/f 1 099 22 Invoice 849 106
24 Invoice 419 203
28 Invoice 507 270
2 949 2 949
Jun 30 Balance b/d 1 099
17 - 28
1. All the items on the monthly statement are correct, except for the under
mentioned and other obvious mistakes.
2. Vastrap Ltd. did not take the trade discount for Invoice 294 into account.
3. The amount that was owed on 30 April 20x5 was settled in full on 2 June 20x5.
4. Invoice 361 was added incorrectly with R60 too much and was recorded as
such.
5. Credit note 26 is in respect of the goods that Sampo Cycles returned on

12 June 20x5.
6. Vastrap Ltd. only took a 10% trade discount into account in respect of Invoice
408.
7. The amount that was owed on 31 May 20x5 was settled in full on 25 June 20x5.
Vastrap Ltd. did not take the cash discount into account.
8. Invoice 849 is in respect of goods purchased from Vasvat Cycles.
9. Invoice 507 is in respect of goods purchased from Vastrap Ltd. on that date and
is otherwise also correct.
10. Debit note 24 was issued for the return of a third of the goods purchased
according to Invoice 507, due to certain defects to Vastrap Ltd.
YOU ARE REQUIRED TO
(a) compile a supplementary ledger account for Vastrap Ltd. for June 20x5 in the
records of Sampo Cycles to rectify the account. (Commence with the balance
of R1 099, as given.)
(b) prepare a settlement statement to Vastrap Ltd. showing the amount that Sampo
Cycles will pay on 31 July 20x5 in respect of the amount due on 30 June 20x5.
(Commence with the balance of R1 445, as given.)
17 - 29
QUESTION 17.3
Suggested solution
Vastrap Ltd.’s account in the creditors’ ledger was closed-off on 31 May 20x5 and the
balance of R1 330 correspondingly reconciled with the monthly statement balance as
follows:
SETTLEMENT STATEMENT ON 31 MAY 20x5

R
Balance owing according to monthly statement 890

Invoice 202 180
Credit note 16 (25)
Invoice 294 380
Error Invoice 294 trade discount (95)
Balance owing on 31 May 20x5 1 330
(a)
Supplementary ledger account – Vastrap Ltd.
Balance b/d 1 099
Balance c/f 1 157

1 933 1 933
Balance b/d 1 157
(b) SETTLEMENT STATEMENT ON 30 JUNE 20x5 R
Balance owing according to monthly statement 1 445
Balance owing on 30 June 20x5 1 157
Balance owing on 30 June 20x5 1 157,00

Less: 10% Cash discount (115,70)
Amount payable on 31 July 20x5 1 041,30
17 - 30
QUESTION 17.4
You have been appointed as the accountant for A B Traders. The previous
accountant compiled the following bank reconciliation statement:
BANK RECONCILIATION STATEMENT ON 28 FEBRUARY 20x3

R
Bank statement balance on 28 February 20x3 178 593

Add: Deposit of B A Services incorrectly on statement 113 056
Less: Outstanding deposits (639 231)
Bank account balance on 28 February 20x3 (347 582)
1. The bank corrected all the mistakes shown in the bank reconciliation statement
of 28 February 20x3 during March 20x3.
2. The favourable bank statement balance amounted to R11 398 on 31 March

20x3.
3. The total of the bank column in the cash receipts journal for March 20x3
amounted to R4 573 268 and the total of the bank column in the cash payments
journal for March 20x3 amounted to R4 379 811.
4. A deposit in respect of the receipts for the week ending 18 March 20x3
amounting to R910 961 was incorrectly shown as a deposit of R190 961 on the
bank statement of March 20x3.
5. A deposit amounting to R163 929 in respect of the receipts for the last two days
of March 20x3 was only made at the bank on 1 April 20x3.
6. All the electronic payments made during March 20x3 appear at their respective
correct amounts in the March 20x3 bank statement.
7. Electronic payment 310 was incorrectly shown as a credit of R16 116 instead of
R11 616 on the bank statement for March 20x3.
8. Stop orders for insurance amounted to R25 000 and the total bank charges
amounted to R5 630 for March 20x3.
17 - 31
YOU ARE REQUIRED TO
(a) prepare the correct bank reconciliation statement on 28 February 20x3.
(b) prepare the bank account in the general ledger that will show all the entries for
the month ended 31 March 20x3. (Commence the account with the balance on
28 February 20x3.)
(c) prepare a bank reconciliation statement on 31 March 20x3.
17 - 32
QUESTION 17.4
Suggested solution
(a)
BANK RECONCILIATION STATEMENT ON 28 FEBRUARY R
20x3
(b)
Bank account
(c)
BANK RECONCILIATION STATEMENT ON 31 MARCH 20x3 R
17 - 33
QUESTION 17.5
The bookkeeper of an entity compiled a trial balance on 30 April 20x6 that did not
balance. While scrutinising the accounting records, you establish, amongst other,
the following:
1. The total of the bank column in the cash payment journal of R24 897 was posted
to the debit side of the debtors’ control account.
2. A sales invoice of R1 021 was recorded in the sales journal as R2 012 and
posted as such to the particular ledger accounts.
3. The total of the discount column in the cash payment journal of R236 was
posted to the debit side of the discount allowed account.
4. A purchase invoice of R672 in respect of purchases of inventory was recorded in

the sales journal as a sale of inventory and posted as such to the particular
ledger accounts.
5. The total of the total column in the purchase journal of R21 398 was posted to
the debit side of the inventory account.
6. An invoice for the purchase of inventory of R2 144 was recorded in the purchase
journal as R1 244 and posted as such to the particular ledger accounts.
7. A withdrawal by the owner of R2 240 that appears in the sundry column of the
cash payment journal was posted to the credit side of the withdrawals account.
8. The total of the creditors’ column in the purchase journal was added incorrectly
with R360 too much and posted to the correct ledger account as such.
9. The total of the debtors’ column in the cash receipt journal was added incorrectly
with R97 too little and posted to the correct ledger account as such.
10. The total column of the sales returns journal of R564 was posted to the debit
side of the creditors’ control account.
YOU ARE REQUIRED TO
general ledger. Journal narratives are not required.
17 - 34
QUESTION 17.6
The following information appeared, amongst other, in the accounting records of

Greengrow Traders:
BANK RECONCILIATION STATEMENT ON 31 MAY 20X3 R
Overdraft balance according to bank statement (2 000)

Add: Outstanding deposit 4 750
Add: Adding error by bank 1 450
Favourable balance according to bank account 4 200
CASH RECEIPT JOURNAL FOR JUNE 20X3

Date Particulars Debtors Bank
R R
Jun 09 A. Nel 2 900 2 900
13 B. Vos 1 500 1 500
16 F. Swart 2 500 2 500
23 J. White 3 000 3 000
25 P. Smith 5 000 5 000
30 M. Thabo 1 950 1 950
c/c 16 850 16 850
CASH PAYMENT JOURNAL FOR JUNE 20X3

Date EFT Particulars Creditors Bank
R R
Jun 02 021 AB Traders 2 500 2 500
17 023 Artspan 3 800 3 800
18 024 MT Suppliers 200 200
22 025 Vertec BK 5 750 5 750
29 027 Paintware 3 100 3 100
c/c 15 350 15 350
17 - 35
BANK STATEMENT FOR JUNE 20X3
Date Particulars Debit Credit Balance
R R R
Jun 01 Balance -2 000
01 Deposit 4 750 2 750
01 Error rectified 1 450 4 200
10 Deposit 2 900 7 100
13 Deposit 1 500 8 600
13 Interest levied 20 8 580
17 Deposit 2 500 11 080
19 EFT 023 3 800 7 280
22 EFT 024 200 7 080
23 Commission 20 7 060
24 Deposit 3 000 10 060
25 Deposit 5 000 15 060
26 EFT 025 5 750 9 310
28 Direct deposit 650 9 960
28 EFT 021 2 500 7 460
29 EFT 546 830 6 630
30 Stop order 1 050 5 580
30 EFT 027 1 300 4 280
1. All the items on the bank statement are correct, except for the under mentioned
and other obvious mistakes.
2. Electronic payment number 546 was a payment made by another client of the
bank.
3. The stop order was paid in respect of the insurance premium for June 20x3.
4. The correct amount of electronic payment number 027 is R1 300.
5. A debtor, M. Meyer, deposited the amount of R650 owed by him directly into the
entity’s bank account on 28 June 20x3.
YOU ARE REQUIRED TO
(a) show the bank account in the general ledger of the entity on 30 June 20x3.
(b) compile the bank reconciliation statement on 30 June 20x3.
17 - 36
QUESTION 17.7
Brightminds is an entity that trades in computer software. The bookkeeper compiled

the following ledger accounts in respect of June 2000:
Sales returns (SRJ) 1 003 Opening balance b/d 48 938
Bank (CPJ) 19 674 Sales (SJ) 22 275
Bad debts recovered 129 Bad debts written off 529
Interest levied on debtors 66
Balance c/f 50 780
71 742 71 742
Balance b/d 50 780
Debtors’ control
Opening balance b/d 61 267 Purchase returns (PRJ) 899
Purchases (PJ) 15 271 Interest levied by creditors 101
Allowance for credit losses of 819 Bad debts recovered 173
debtors Bank (CRJ) (Gross) 21 893
Bank (EFT from debtor
returned) 404
Balance c/f 53 179
77 357 77 357
Balance b/d 53 179
1. A sales invoice to F. Gouws for R1 007 was recorded incorrectly as R1 070 in the
correct journal and posted as such to the correct ledger accounts.
2. A purchase invoice from Software Traders for R683 in respect of purchases of
inventory was recorded in the sales journal as sales of inventory for that amount.
3. A sales invoice to S. Moos for R449 was recorded as R499 in the correct journal
and posted as such to the correct ledger accounts.
4. A sales invoice to P. Nel for R267 was recorded in the purchase journal as
purchases of inventory for that amount.
5. The ledger account of a creditor, Hardware Traders, in the creditors’ ledger was
added incorrectly on the debit side with R24 too much.
6. The ledger account of a debtor, D. Scott, in the debtors’ ledger was added
incorrectly on the debit side with R39 too little.
7. The total column in the sales journal was added incorrectly with R88 too little.
8. The total column in the purchase journal was added incorrectly with R72 too
much.
YOU ARE REQUIRED TO
compile supplementary debtors’ and creditors’ control accounts in which only the
entries that were made to rectify any mistakes are shown. (Commence the
supplementary ledger accounts with the incorrect balances of R50 780 and R53 179
respectively, as given above.)
17 - 37
QUESTION 17.8
The bookkeeper of an entity compiled a trial balance on 30 April 20x6 that did not
balance. Assume a periodic inventory system. While scrutinising the accounting
records, you establish, amongst other things, the following:
1. The total of the total column in the cash payment journal amounting to R19 235
was posted to the credit side of the creditors’ control account.
2. The total of the discount column in the cash receipt journal amounting to R97
was posted to the debit side of the creditors’ control account.
3. A purchase invoice to the amount of R266 in respect of purchases of inventory

was recorded in the sales journal as a sale of inventory and posted as such to
the relevant ledger accounts.
4. The total of the total column in the purchase journal amounting to R17 674 was
posted to the credit side of the debtors’ control account.
5. A purchase invoice in respect of purchases of inventories to the amount of

R232 was recorded in the purchase journal as R323 and posted as such to the
relevant ledger accounts.
6. A sales invoice in respect of sales of inventory to the amount of R497 was

recorded in the sales journal as R479 and posted as such to the relevant ledger
accounts.
YOU ARE REQUIRED TO
general ledger. Journal dates and narrations are not required.
17 - 38
QUESTION 17.9
Mika Music Traders is an entity that trades in CDs and DVDs. The following ledger
accounts appeared, amongst other, in the general ledger in respect of September
2007:
Debtors’ control
Opening balance b/d 141 987 Bank (CRJ) 23 185
Purchase returns (PRJ) 2 217 Purchases (PJ) 29 883
Bad debts recovered (GJ) 570 Interest levied on debtors (GJ) 202
Closing balance c/f 91 540
144 774 144 774
Balance b/d 91 540
Bank (CPJ) 25 753 Opening balance b/d 101 485
Sales returns (SRJ) 2 212 Sales (SJ) 41 233
Interest levied by creditors (GJ) 301 Bad debts written off (GJ) 1 301
144 109 144 109
Balance b/d 115 573
1. The total of the list of creditors amounted to R103 791 and the total of the list of
debtors amounted to R156 758 on 30 September 2007.
2. A purchase invoice of Freshly Ground Records to the amount of R12 305 in
respect of purchases of CDs were recorded in the sales journal as sales of
inventory for that amount and posted as such to the relevant ledger accounts.
3. A sales invoice to J. Blunt to the amount of R1 365 was recorded as R1 635 in
the correct journal and posted to the correct ledger accounts.
4. The debit side of a creditor, C.B. Rae’s account in the relevant ledger, was
added with R56 too little.
5. The list of creditors was added with R87 too little.
6. The debtors’ column in the cash receipt journal was added with R112 too much.
7. A purchase invoice of K. Tunstall to the amount of R961 was recorded as R619
in the correct journal and posted to the correct ledger accounts.
8. The total column in the purchase journal was added with R123 too little.
9. An electronic payment to the amount of R494, received from a debtor, A
Winehouse, was recorded in the correct journal without taking into account cash
discount of 5% allowed which was deducted by the debtor from the payment.
10. The total column in the sales journal was added with R78 too much.
YOU ARE REQUIRED TO
compile supplementary debtors’ and creditors’ control accounts as well as the

corresponding supplementary lists of the individual debtors’ and creditors’ ledger
accounts, properly closed-off on 30 September 2007 showing only the entries made
to the rectify any mistakes.
17 - 39
QUESTION 17.10
Active Sports is an entity that trades in sports equipment. They purchase all sports
equipment from Allfit Suppliers on the following basis:

- A cash discount of 2% is allowed on all payments received within one month
from the end of the month in which the relevant purchases were made.
- Interest of 1% is levied monthly on all payments received after one month from
the end of the month in which the relevant purchases were made.
The following monthly statement of Allfit Suppliers was received on

5 September 2007:
Date
Debit Credit
2007 Details R R
Jul 27 Amount due 5 825

28 Invoice C42 596
Aug 03 Receipt K232 2 769
05 Invoice C53 1 038
06 Invoice C86 2 338
16 Invoice C112 2 475
18 Invoice C118 872
19 Invoice C125 1 054
28 Invoice C167 1 907
29 Amount due 11 608
15 657 15 657
The following ledger account for August 2007 appeared amongst other things in the
creditors’ ledger of Active Sports:
Allfit Suppliers
Aug 03 CPJ (EFT 444) 2 826 Aug 01 Balance b/f 6 249
28 Invoice C167 1 907 05 Invoice C53 1 038
29 CPJ (EFT 729) 3 423 06 Invoice C86 2 338
31 Balance c/f 7 164 09 Debit note 102 396
16 Invoice C112 2 475
18 Invoice C118 782
23 Invoice C132 910
24 Invoice C177 1 042
15 320 15 320
Sept 01 Balance b/f 7 164
17 - 40
1. Apart from the following and other obvious errors, the monthly statement is
correct in respect of all other items.
2. Invoice C42 was added with R38 too little.
3. Receipt K232, in respect of EFT 444, after deduction of cash discount, was sent
to Active Sports and received by them on 3 August 2007. The EFT was issued
in payment of the balance due of R2 826 due on 30 June 2007. Allfit Suppliers
did not take into account any cash discount.
4. Invoice C53 includes an item with a net price of R600 on which trade discount of
20% was allowed.
5. Credit note 32 was issued in respect of equipment purchased from Allfit

Suppliers on 9 August 2007, but which was returned to and accepted by them.
6. Invoice C125 was issued in respect of equipment purchased by Active Gear.
7. Invoice C132 and C177 was issued in respect of equipment purchased from
Allfit Suppliers.
8. EFT 729 was made to Allfit Suppliers on 29 August 2007 in payment of the
amount due on 31 July 2007. The electronic payment was received by Allfit
Suppliers in their bank account on 30 August 2007.
YOU ARE REQUIRED TO
(a) compile a supplementary ledger account for Allfit Suppliers for August 2007 in
the books of Active Sports in order to correct the account. (Commence with the
balance of R7 164, as given.)
(b) compile a settlement statement to Allfit Suppliers, showing the amount that
Active Sports will have to pay on 30 September 2007 in respect of the amount
due on 31 August 2007. (Commence with the balance of R11 608, as given)
17 - 41
QUESTION 17.11
The accountant of an entity, Heroes Ltd., prepared the following bank reconciliation
statement on 30 April 2007:
R
Balance according to bank statement (favourable) 2 430
Add: Outstanding deposit 602
Add: Debit order incorrectly on bank statement 198
Balance according to bank account (favourable) 3 230
1. The bank statement for May 2007 shows a debit balance of R986 on
31 May 2007.
2. The bank rectified all its errors of April 2007 during May 2007.
3. The totals of the bank columns in the journals, as indicated, were as follows on
31 May 2007:
- Cash payment journal: R93 288
- Cash receipt journal: R90 273
4. The bank statement for May 2007 shows the following items not recorded in the
entity’s accounting records:
- Commission and cost levied: R94 - Stop order: R322
- Interest on debit balances: R24 - Interest on credit balances: R34
5. EFT 241 to the amount of R64 appears incorrectly as R46 on the bank
statement.
6. EFT 263 to the amount of R49 appears incorrectly as R94 in the ledger account.
7. EFT 273 to the amount of R214 appears on the bank statement as a credit.
8. The bank statement does not show the deposit to the amount of R1 286 made
on 31 May 2007.
YOU ARE REQUIRED TO
(a) show the bank account in the general ledger of the entity for the month ended
31 May 2007.
(b) prepare a bank reconciliation statement on 31 May 2007. (Commence the bank
reconciliation statement with the balance according to the bank statement.)
17 - 42
QUESTION 17.12
B-Bong Clothing is an entity that manufactures T-shirts. They purchase all their
fabric from Fabric & Textile on the following basis:

- A cash discount of 2½% is allowed on all payments received within one month
after the end of the month in which the relevant purchases were made.
- Interest of 1% per month is levied on amounts outstanding for more than one
month after the end of the month in which the relevant purchases were made.
The following monthly statement was received from Fabric & Textile on 7 July 2008:
R R
2008
May 26 Amount owing 6 993
31 Invoice C66 896
Jun 02 Receipt K343 3 159
07 Invoice C109 1 907
10 Invoice C117 2 394
15 Invoice C152 875
21 Invoice AF22 909
24 Invoice C202 1 216
25 Amount owing 10 349
14 436 14 436
The following ledger account for June 2008 appeared in the creditors’ ledger of
B-Bong Clothing:
Fabric & Textile

Date Particulars Particulars
Amount Date Amount
Jun 02 CPJ (EFT 817) 3 240 Jun 01 Balance b/d 7 680
24 Invoice C202 1 216 07 Invoice C109 1 907
29 CPJ (EFT 1009) 4 329 09 Debit note D121 399
30 Balance c/f 6 271 10 Invoice C117 2 394
15 Invoice C152 785
23 Invoice GH66 1 204
30 Invoice C303 543
14 192 14 192
Jun 30 Balance b/d 6 271
17 - 43
1. Apart from the following and other obvious errors, the monthly statement is
correct in respect of all other items.
2. Invoice C109 was added incorrectly with R138 too much.
3. Receipt K343, in respect of EFT 817, after deduction of cash discount, was made
to Fabric & Textile and received by them on 2 June 2008. The EFT was made in
payment of the amount of R3 240 due on 30 April 2008. Fabric & Textile did not
allow any cash discount.
4. Credit note 68 was issued in respect of fabric purchased from Fabric & Textile on
7 June 2008, but which was returned to them as a result of weak spots in the
texture of the fabric.
5. Trade discount of only 10% was taken into account in respect of Invoice C117.
6. Invoice AF22 was issued in respect of fabric purchased by T-Bong.
7. EFT 1009 was issued to Fabric & Textile on 29 June 2008 as payment of the
amount of R4 440 due on 31 May 2008, according to B-Bong Clothing. The EFT
was received by Fabric & Textile on 30 June 2008.
8. Invoices C202 and C303 were issued in respect of fabric that had been
purchased from Fabric & Textile by B-Bong Clothing.
YOU ARE REQUIRED TO
(a) prepare an additional ledger account for Fabric & Textile for June 2008 in the
books of B-Bong Clothing in order to correct the account. (Commence the ledger
account with the balance of R6 271, as given.)
(b) prepare a settlement statement to Fabric & Textile showing the amount that
B-Bong Clothing will pay before 31 July 2008 in respect of the amount due on
30 June 2008. (Commence the statement with the balance of R10 349, as given.)
17 - 44
CHAPTER 18
STATEMENT OF CASH FLOWS
Page
18.1 The outcomes for the chapter 18 - 2
18.2 Purpose 18 - 2
18.3 Background 18 - 3
18.4 Schematic representation 18 - 4
18.5 Cash and cash equivalents 18 - 5
18.6 Cash flow from operating activities 18 - 5
18.7 Cash flow from investing activities 18 - 6
18.8 Cash flow from financing activities 18 - 7
18.9 Disclosure 18 - 7
18.10 Layout of the statement of cash flows 18 - 9
18.11 Method 18 - 10
Questions 18 - 28
Template 18 - 46
18 - 1
18.1 THE OUTCOMES FOR THE CHAPTER ARE TO:
- explain the purpose of the statement of cash flows;
- prepare a statement of cash flows from appropriate information so that it
complies with IAS 7;
- interpret a statement of cash flows for management information purposes.
18.2 PURPOSE
The purpose of a statement of cash flows is to:
 provide useful information to users of financial statements relating to the

source and the application of all financial resources (cash resources)
during the accounting period,
 provide information to the users of the financial statements relating to the

timing and certainty of generating cash. Cash is crucial to conduct the
operations of the entity, to pay its obligations and to provide a return to
its investors, and
 indicate the ability of the entity to generate cash from profits.
Excellent cash flows are an important factor to the success of an entity; more
so than a good turnover or a good statement of financial position.
The activities of an entity can be divided into three main categories:
1. operating activities: all the income-generating activities
2. investing activities: activities necessary to support and expand the

income-generating activities for example investment in property, plant
and equipment; and
3. financing activities: activities organising the financing needs of the entity
18 - 2
18.3 BACKGROUND
A statement of cash flows works with the cash and cash equivalent resources
of the entity. It can be viewed as a report that summarises the movements in
cash and bank balances for all activities during the accounting period.
However, it would take too much time to summarise all the transactions of the
entity for the year again, in the preparation of the statement of cash flows.
An easier method to compile the statement of cash flows is to use the following
financial statements of an entity that are already prepared:
 the statement of financial position,

 the statement of comprehensive income, and
 the statement of changes in equity.
Information from these three components can easily be used to determine the
cash flow situation for the period. Cash flows for the period are then disclosed
under one of the following three categories:
 Operating activities
 Investing activities
 Financing activities
Therefore, if no cash changes hands during a transaction, it will not appear in

the statement of cash flows.
18 - 3
18.4 SCHEMATIC REPRESENTATION
Bank and cash Statement of cash flows
Cash and cash equivalents

(opening balance)
Cash effect of transactions for

the year (money that moves Direct
through the bank and other method*
cash accounts) i.e.
Cash generated from
operations
Debtors pay their debt Indirect
Creditors are settled method
Cash resulting from interest,
Interest is paid / received
dividends and taxation
Dividends are paid / received
Taxation is paid / refunded
Assets are purchased or sold Long-term assets

Investments are made or
redeemed Cash flow from investment activities
Shares are issued or redeemed Investments

Loans are granted or repaid Cash flow from financing activities
Cash and cash equivalents

(closing balance)
* Only the direct method is used in FR188
18 - 4
18.5 CASH AND CASH EQUIVALENTS
Cash refers to cash at hand, bank balances and demand deposits.
Cash equivalents refer to highly liquid short-term investments that can be

converted to cash fairly easy and are subject to an insignificant market risk.
This is held to meet short-term obligations rather than for investment purposes.
The most general example is the “bank and cash at hand” in the statement of
financial position of the entity.
18.6 CASH FLOW FROM OPERATING ACTIVITIES
Cash flow from operating activities is primarily generated from the main
income-generating activity of the entity. This is generally derived from the
transactions and events that determine the profit or loss of the entity. It also
includes activities that are not investment or financing activities.
Examples of operating activities include:
 Cash receipts from the sale of goods

 Cash payments to suppliers for goods and services
 Cash payments to and on behalf of employees
 Cash payments to or receipts from the South African Revenue Service
The amount for cash flows from operating activities gives an indication of the
extent to which the operations of the entity have generated sufficient cash
flows to repay loans, maintain the operating capability of the entity, pay
dividends and make new investments without having to resort to external
sources of financing.
Cash generated from operations is calculated in one of two ways:

 Direct method
 Indirect method
IAS 7 encourages entities to use the direct method, but it remains the entity’s
choice. The indirect method will be discussed in FA389.
The difference in the methods lies in the treatment of cash generated from
operations and can be explained as follows:
18.6.1 Cash generated from operations: indirect method
The indirect method determines cash generated from operations by adjusting

profit before tax for non-cash transactions, changes in working capital and
items disclosed separately.
18 - 5
18.6.2 Cash generated from operations: direct method
In terms of the direct method “Cash generated from operations” is disclosed

as the difference between:
Gross cash receipts from customers, and

Gross cash paid to employees and suppliers
A reconciliation between profit before tax and cash generated from operations
is disclosed as a calculation. The reconciling items are non-cash transactions,
items disclosed separately and changes in working capital.
18.6.3 Cash from interest, dividends and taxation
Any cash flow in respect of interest and dividends received or paid must be
disclosed separately on the statement of cash flows. As there is no consensus
regarding the classification of these items, consistency in the treatment of
these items as operating, investing or financing activities is encouraged. In
this course it will be treated as operating activities.
Any cash flow in respect of tax must be disclosed separately on the statement
of cash flows. IAS 7 states that taxes paid are normally shown as cash flows
relating to operating activities. However, when it is practicable to identify the
tax cash flow with an individual transaction classified as an investing or
financing activity, the tax cash flow should also be classified as such.
18.7 CASH FLOW FROM INVESTING ACTIVITIES
Investing activities with respect to the acquisition and sale of long-term assets
and investments are disclosed here.
Examples of cash flows from investing activities include:
 Cash payments to acquire property, plant and equipment

 Cash receipts from the sale of property, plant and equipment
 Cash payments for the acquisition of investments
 Cash received from the redemption / maturity of investments
Note: It is important for users of the financial statements to know whether the
company reinvests sufficient cash back in the entity to maintain or increase the
trading capacity. Therefore, if cash is used for investing activities (buying
PPE), it must be disclosed separately as replacement or the expansion of
property, plant and equipment.
18 - 6
18.8 CASH FLOW FROM FINANCING ACTIVITIES
Financing activities are those activities that lead to changes in the extent and
composition of the equity and long-term liabilities of an entity.
Examples of financing activities are:
 Cash received from the issue of shares

 Cash paid for the redemption or repurchase of shares
 Cash received on new loans
 Cash paid with the repayment of loans
18.9 DISCLOSURE
On the face on the statement of cash flows:
o Cash flow from operating activities, with separate disclosure of:
 cash generated from operations (by using either the direct or the
indirect method)
 interest paid / received
 tax paid / received
 dividends paid / received
o Cash flow from investing activities
 acquisition of property, plant and equipment (divided between assets

acquired to maintain current assets or expand)
 proceeds on the sale of property, plant and equipment
 acquisition of investments
 proceeds on the sale of investments
o Cash flow from financing activities
 proceeds from the issue of share capital

 proceeds/repayment of long-term loans incurred
 redemption of debentures
18 - 7
In the notes/calculations:
o The components of cash and cash equivalents
o A reconciliation between the amount of cash and cash equivalents shown

in the statement of cash flows and the amount shown in the statement of
financial position
o Reconciliation of cash generated from operations with profit before tax
o Any significant cash and cash equivalent balances not available for use,
with management commentary
o Specific disclosure around the acquisition and sale of subsidiaries (FA389)
Note: Remember that comparative figures must always be shown to ensure

compliance with IFRS. For purposes of this course only the current year’s figures will
be required.
18 - 8
18.10 LAYOUT OF THE STATEMENT OF CASH FLOWS
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED………………..

R
Cash flow from operating activities xxxxx
Cash receipts from customers
Cash paid to employees and suppliers ( )
Cash generated from operations
Interest paid ( )
Interest received
Dividends paid ( )
Dividends received
Tax paid ( )
Tax received
Cash flow from investing activities xxxxx

Acquisition of property, plant and equipment ( )
Replacement of ……………. (maintain) ( )
Expansion of ……………….. (expand) ( )
Proceeds on the sale of property, plant and equipment
Acquisition of investments ( )
Proceeds on the sale of investments
Cash flow from financing activities xxxxx

Proceeds from the issue of share capital
Proceeds from the long-term loans incurred
Redemption of debentures ( )
Net increase in cash and cash equivalents xxxxx

Cash and cash equivalents at beginning of year xxxxx
Cash and cash equivalents at end of year xxxxx
CALCULATIONS TO THE STATEMENT OF CASH FLOWS

Reconciliation of profit before tax with cash generated from operations
Profit before tax
Adjusted for:
Depreciation
Profit on the sale of property, plant and equipment ( )
Interest expense
Interest income ( )
Dividend income ( )
Working capital changes:

(Increase) / Decrease in inventory
(Increase) / Decrease in receivables
Increase / (Decrease) in payables
18 - 9
18.11 METHOD
18.11.1 Basic movements
The movement from the opening balance to the closing balance of all the statement of
financial position accounts should be analysed to determine which of the movements
had a cash flow effect, for example:
Non-current liabilities 20x3 20x2

Long-term loans 60 000 40 000
The loan increased with R18 000. This implies that the company borrowed money
from the bank. The journal entry to record this transaction would be as follows:
Debit Credit
Bank 20 000
Long-term loans 20 000
It is clear that the transaction resulted in an inflow of cash, as the bank account was
debited (and thus increased). This was the extra amount that the company borrowed,
and the bank deposited the money into the company’s account. This is a financing
activity, as funds were acquired to meet the other obligations of the company. The
effect on the statement of cash flows is as follows:

Long-term loan acquired 20 000
The amount on the statement of cash flows is positive as it is an INFLOW of cash.
Assume the loan was repaid during the year and the statement of financial position is
as follows:
Non-current liabilities 20x3 20x2

The journal entry would be as follows:

Debit Credit
Long-term loans 30 000
Bank 30 000
There is an outflow of cash from the company’s account as the loan was repaid. The
effect on the statement of cash flows is as follows:

Long-term loan repaid (30 000)
The amount on the statement of cash flows is negative as it is an OUTFLOW of cash.
18 - 10
18.11.2 Non-cash movements
Some transactions have no effect on a company’s cash, for example where a company
issues shares in exchange for a building.
The journal entry for such a transactions would be as follows:
Debit Credit
Buildings 100 000
Assume the statement of financial position is as follows:
Non-current assets 20x3 20x2

Buildings 780 000 350 000
Equity and reserves

Ordinary share capital 300 000 150 000
The movement on the buildings and the share capital accounts must now be analysed,
taking into account the above mentioned transaction. The easiest way is to do it with
the help of T-accounts.
Step 1: Enter the opening and closing balances as given:
Buildings
Opening balance c/d 350 000
Ordinary share capital
18 - 11
Step 2: Add the transaction as provided:
(This step is the same for cash AND non-cash transactions. For cash transactions
one entry will just be to the bank account.)
Buildings

Share capital 100 000

Buildings 100 000
Step 3: Balance the account with the missing transaction. Assume it was a
cash transaction if no further information is provided:
Buildings

Bank 330 000 Closing balance c/f 780 000
780 000 780 000
It is clear that additional buildings were purchased for cash, to get to the closing
balance of R780 000. The purchase of the R100 000 building which was paid for with
shares does not appear in the statement of cash flows at all, as there was no entry to
the bank account with regard to that transaction. However, it must still be taken into
account as it forms part of the movement from the opening to the closing balance. This
is an investing activity as the buildings are part of the assets that support the income
generating activities of the company.
The effect on the statement of cash flows is therefore as follows:
Cash flow from investing activities

Purchase of building (expansion) (330 000)
The amount on the statement of cash flows is negative as it is an OUTFLOW of cash.

It is only the entry for which the contra-account is “Bank”.
18 - 12

Buildings 100 000
Closing balance c/o 300 000 Bank 50 000
300 000 300 000
It is clear that additional shares were issued for cash, to get to the closing balance of
R300 000. The issue of the R100 000 shares does not appear in the statement of cash
flows at all, as there was no entry to the bank account with regard to that transaction.
However, it must still be taken into account as it forms part of the movement from the
opening to the closing balance. This is a financing activity, as the shares were issued
to acquire funds for the company’s other activities.
The effect on the statement of cash flows is therefore as follows:

Issue of ordinary shares 50 000
The amount on the statement of cash flows is positive as it is an INFLOW of cash. It

is only the entry for which the contra-account is “Bank”.
18.11.3 Profit or cash received
The profit in the statement of comprehensive income is not necessarily the same as
the cash that the company earned from its income generating activities.
Example 18.1
Assume the following profit calculation:
SOCI
Sales 1 000
Purchases (400)
Repairs and maintenance (50)
Depreciation (100)
Other income 70
Profit 520
The question is: Was there a cash inflow from operating activities of R520?
The following information is also available:

1. At the end of the year there are debtors of R400.
2. The repairs and maintenance account has not been paid yet.
3. Depreciation is written off on equipment.
18 - 13
Consider the effect of the above mentioned on the cash flow from the transaction. The
journal entries would have been as follows:
1. Debit Credit
Debtors 400
Bank 600
Sales 1 1 000
(Received only R600 = cash flow)
2.
Repairs and maintenance 50
Creditors 50
(No payment thus no entry to Bank)
3.
Depreciation 100
Accumulated depreciation 100
(No payment thus no entry to Bank)
The cash generated from the ordinary activities is therefore only R270.
SOCI Cash
Sales 1 000 600
Purchases (400) (400)
Repairs and maintenance (50) -
Depreciation (100) -
Other income 70 70
Profit 520 270
Instead of redoing the statement of comprehensive income on a cash flow basis, profit
is used as a starting point, and is adjusted to calculate the cash generated from
operations. Therefore you start at R520 and work back to get the R270. This
calculation is as follows:
Profit before tax 520

Adjusted for:
Depreciation 100
620
Increase in receivables * (400)
Increase in payables ** 50
Cash generated from operations 270
* The fact that receivables increased, implies that not everyone paid for the goods that
were sold to them. The cash inflow is less than sales. The R400 is therefore deducted
in the reconciliation. Effectively it is deducted from the R1 000 sales figure that is
included in the R520 profit. This result in the R600 that was actually received in cash
being included in the R270.
18 - 14
** The fact that payables increased, implies that an expense in the SOCI was not
actually paid for (see journal above). Included in the profit is a deduction of R50 for
the repairs and maintenance expense. The R50 increase in payables is added to the
profit, and effectively cancels out the R50 expense. The net effect is thus “0” (included
in the R270) on the cash flow of the company.
Inventory was not included in the example above, but would be treated as follows: if
inventory increased it would be deducted from the profit, and if inventory decreased it
would be added to the profit.
18.11.4 Reconciliation calculation
The reconciliation calculates the amount of cash generated from operations. It adjusts
the profit to get to the amount of cash received / paid. This cash generated from
operations is shown on the face of the statement of cash flows under operating
activities.
The reconciliation starts with profit before tax as it appears in the statement of
comprehensive income. It is then adjusted with the following:
 All non-cash flow items included in the calculation of profit, for example:
- Depreciation
- Movement in allowance for credit losses
- Profit/loss on sale of assets the selling price received represents the
cash flow and appears on the face of the statement of cash flows under
investing activities
 All items that are shown separately on the face on the statement of cash flows,
for example:
- Interest income and expenses
- Dividend income
These adjustments exclude:
 Tax – the reconciliation starts with profit BEFORE tax

 Dividends declared – this is not an expense in the SOCI, but a distribution of
profit. It is not included in profit before tax.
Tax paid / received, and dividends paid are calculated and disclosed directly on the
face of the statement of cash flows (refer example 18.2 #).
After the adjustments above are done, the working capital changes are taken into
account (refer example 18.1 * and **). This is the movement between the opening and
closing balances of each of the following items:
 Inventory
 Receivables
 Payables
18 - 15
Example 18.2
CALCULATIONS
1. Reconciliation of profit before tax with cash generated from operations

Profit before tax (Revenue 400 000 – All other items 350 000) 50 000
Adjusted for:
Interest expense (SOCI)** 4 000
Dividend income (SOCI) (3 500)
50 500
Increase in receivables (5 000)
Cash generated from operations 45 500

Cash receipts from customers (400 000 – 5 000) 395 000
Cash paid to suppliers and employees (balancing) (349 500)
Interest paid (cash paid) (4 000)

Dividends received (cash received) 3 500
# Dividends paid (1 200)
# Tax paid (2 000)
41 800
**Interest expense was originally subtracted in the SOCI and now the amount is added
back in the reconciliation due to the fact that it should be disclosed separately on the
face of the statement of cash flows.
The amount of interest expense shown in the reconciliation can differ from the amount
of interest paid on the face of the statement (for interest and dividends received as
well). This will be the case where not all the interest was paid during the year and
there is a balance for interest payable on the statement of financial position.
Note that investing and financing activities have no effect on the reconciliation
note.
Example 18.3
STATEMENT OF COMPREHENSIVE INCOME

20x3 20x2
xxx xxx
Other income (dividends received) 5 000 -
Finance costs (12 000) -
Profit before tax 36 000 -
18 - 16
STATEMENT OF FINANCIAL POSITION
20x3 20x2
Current assets
Dividends receivable 3 200 1 500
Current liabilities
Interest payable 1 400 5 000
Dividends receivable
Opening balance c/d 1 500 Bank 3 300

Dividend income 5 000
(SOCI) Closing balance c/f 3 200
6 500 6 500
Interest payable
Bank 15 600 Opening balance c/d 5 000

Finance costs 12 000
Closing balance c/f 1 400 (SOCI)
17 000 17 000

Cash receipts from customers xxx
Cash paid to suppliers and employees xxx
Interest paid (cash paid) (15 600)

Dividends received (cash received) 3 300
30 700
CALCULATIONS

Adjusted for:
Interest expense (SOCI) 12 000
Dividend income (SOCI) (5 000)
43 000
xxx xx
18 - 17
18.11.5 Allowance for credit losses
Debtors are shown as an asset in the SFP as an amount that will be recovered. If there
is, after bad debt has been written off, still an amount that can possibly not be
recovered from debtors, the debtors must be tested for impairment.
The test for impairment identifies the amount for which there is uncertainty about the
recoverability. It is important that any random amount is not used. The method to be
followed is to work through the list of debtors and to identify specific debtors that have
not gone bad yet, but where the collection is doubtful. After the list of debtors has been
reviewed and all doubtful debtors have been identified, an amount, specifically based
on these debtors, is provided as an allowance for credit losses, and is deducted from
the gross debtors in the SFP. The allowance for credit losses is only an estimate of the
decrease in the value of debtors, and should be revised annually.
Although the amount of the allowance for credit losses is based on specific debtors,
the accounting entry is made for debtors in general. The allowance for credit losses
only indicates a possibility that the amount owed by the debtor will not be recovered in
full in the future, and is thus not written off against the amount owed by the debtor.
There is therefore no entry in the debtors’ ledger.
For disclosure purposes, the allowance for credit losses is deducted from the
value of the debtors and the net amount is presented in the SFP.
Example 18.4
At year-end the debtors amount to R100 000. The allowance for credit losses amounts
to R4 000 at the beginning of the year and R5 000 at the end of the year.
Allowance for credit losses (SFP)

Balance 20x2 4 000
Movement for 20x3 1 000
Balance 20x3 5 000
Movement in allowance for credit losses (SOCI)

Movement for 20x3 1 000
The allowance for credit losses at the beginning of the year must be increased to
R5 000. The journal to record the movement will be as follows:
Dr Movement in allowance for credit losses (SOCI) 1 000

Cr Allowance for credit losses (SFP) 1 000
The net movement in the allowance for credit losses (R1 000) is an increase (debit)
and will be recognised as an expense in the SOCI. The total of the allowance for credit
losses (R5 000) will be netted off against the debtors for disclosure purposes. The
debtors will thus be presented as R95 000 (100 000 – 5 000) in the SFP.
18 - 18
This movement in the allowance for credit losses is a non-cash movement, as there
was no entry in the bank account. This transaction will not appear on the face of the
statement of cash flows. The movement in allowance for credit losses will be shown
in the reconciliation calculation as a non-cash flow item.
18.11.6 Bad debts written off
Bad debts are specific debtors that are written off, because proof exists that the debtors
will most probably not be able to pay their debts.
Example 18.5
An entity has the following debtors:
A Brink 15 300
B Coetzee 10 000
C Davel 19 600
D Els 15 100
60 000
B Coetzee is declared insolvent and will not be able to pay his outstanding debts.
The write-off of bad debt will be recorded as follows:
Dr Bad debts 10 000

Cr Debtors 10 000
The bad debt will be written off in the SOCI and the debtors will decrease. The debtors’
control account will decrease and the debtors’ ledger will also decrease.
This movement in debtors is also a non-cash movement, as there was no entry in the
bank account. This transaction will thus also not appear on the face of the statement
of cash flows. The write-off of bad debt will be shown in the reconciliation calculation
as a non-cash flow item.
18.18.7 Cash receipts from customers and receivables
The cash receipts from customers is calculated by adding/subtracting the change in

debtors to revenue for the year. The calculation of the change in debtors is affected
by both the allowance for credit losses as well as bad debts written off. An increase in
debtors is deducted from revenue as the debtors still owe the money and therefore
some of the revenue was not received in cash. A decrease in debtors is added to
revenue. This implies that debtors that were outstanding the previous year paid their
debt, and all revenue was received in cash as well.
18 - 19
This change in debtors (closing balance – opening balance) should be calculated on
the gross amount (before subtracting allowance for credit losses) of debtors, as this
represents the amount of sales that should be received by the company. The debtors
figure in the statement of financial position, however, is shown after deducting the
allowance for credit losses. This allowance for credit losses has no cash flow effect as
it is only an accounting adjustment to the value of debtors.
Example 18.6
20x3 20x2
Gross debtors 100 000 80 000
Less: Allowance for credit losses (SFP) (5 000) (4 000)
Net debtors (as on face of SFP) 95 000 76 000
The increase in debtors that should be deducted in the reconciliation is R20 000
(100 – 80). The increase of R1 000 in the allowance for credit losses will be recorded
as an expense in the SOCI, and therefore added back in the reconciliation as a non-
cash flow item.
Furthermore, the effect of writing off bad debts should also be taken into account when
calculating the change in debtors that should be used in the statement of cash flows.
The write-off decreases the opening balance of debtors, but it is not a cash receipt.
Example 18.7
The following extract from the SFP of ABC Ltd. is provided to you:
Note 20x3 20x2

ASSETS R R
Debtors 1, 2 30 400 23 750
1. The allowance for credit losses is maintained at 5% of the outstanding debtors

at year-end.
2. An insolvent debtor’s debt to the amount of R8 000 was written off during the
year.
3. Income per the SOCI for the year amounted to R750 000.
Required:
Disclose the cash receipts from clients in the statement of cash flows and the change
in working capital as it would be disclosed in the reconciliation calculation to the
statement of cash flows.
18 - 20
Example 18.7 – Suggested solution
Approach:
1. Calculate gross debtors as it will appear in the general ledger:

a. 20x2 – 23 750 / 0.95 = 25 000
b. 20x3 – 30 400 / 0.95 = 32 000
2. Prepare the debtors’ control general ledger account and calculate the change:
Debtors control
Opening balance c/d 25 000 Bad debts written off 8 000
Change ① 15 000
Closing balance c/o 32 000
40 000 40 000
A debit change in the debtors control general ledger account represents an increase
in debtors. This increase in debtors is subtracted from both the cash receipts from
clients on the face of the statement of cash flows as well as in the reconciliation
calculation to the cash flow statement. A credit change in the debtors control general
ledger represents a decrease in debtors and will be added to the cash receipts from
clients in the cash flow statement, as well as in the note to the statement of cash flows.
3. Calculate the movement in allowance for credit losses from the beginning of the
year until the end of the year:
Allowance for credit losses (SFP)

Opening balance c/d #1 250
Movement 350
Closing balance c/o ##1 600
1 600 1 600
# 25 000 (as calculated in 1 above) – 23 750 (net debtors given)

OR
# 25 000 x 5% = 1 250
## 32 000 (gross debtors) – 30 400 (net debtors)

OR
## 32 000 x 5% = 1 600
18 - 21
Extract from statement of cash flows:
ABC LTD.
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 20x3
R
Cash receipts from customers (750 000 – 15 000 ①) 735 000
① 25 000 – 8 000 – 32 000 or as calculated in the debtors’ control ledger account
Extract from the calculation to the statement of cash flows:
CALCULATION TO THE STATEMENT OF CASH FLOWS

Profit before tax xxx
Adjusted for:
Bad debts 8 000
Movement in allowance for credit losses 350
xxx
Increase in debtors (O/b – Bad debts written off) – C/b (15 000)
18 - 22
Example 18.8
On 31 December 20x2, the accountant of BARS Ltd. prepared the following financial
statements:
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER
20x2 20x1
R R
ASSETS
Non-current assets
Property at cost price 90 000 92 000
Equipment 15 000 10 000
Cost price 40 000 30 000
Accumulated depreciation 25 000 20 000
Investment: Shares in DAL Ltd. 10 000 10 000
Current assets 32 000 33 000

Inventory 10 000 18 000
Debtors 12 000 8 000
Cash and cash equivalents 10 000 7 000
Total assets 147 000 145 000

Equity attributable to shareholders
Retained earnings 20 000 15 000
Total equity 120 000 95 000
Current liabilities 24 000 10 000

Creditors 16 000 4 000
Dividends payable 8 000 6 000
Total equity and liabilities 147 000 145 000
18 - 23
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED
31 DECEMBER 20x2
Note R
Revenue 100 000
Gross profit 52 000
Other income 1 1 000
Other expenses 2 (5 000)
Income from other financial assets 3 1 000
Finance costs (4 000)
Income tax expense (20 000)
Other comprehensive income, net of tax -
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED

31 DECEMBER 20x2
R
Balance as at 31 December 20x1 15 000
Dividends (20 000)
Balance as at 31 December 20x2 20 000
Supplementary notes:
R
1. Other income
- Profit with sale of land 1 000
2. Other expenses
- Depreciation on equipment 5 000
3. Income from other financial assets
- Listed investment: dividends 1 000
1. No equipment was sold during the year. Equipment to the value of R6 000
was purchased to maintain operations.
2. There was no tax outstanding either on 31 December 20x2 or 31 December
20x1.
3. On 31 August 20x2, ordinary dividends of R12 000 were declared and paid to
shareholders. On 31 December 20x2, dividends of R8 000 were declared but
have not been paid.
prepare the statement of cash flows for BARS Ltd. for the year ended 31 December
20x2 in terms of IAS 7. Comparative figures are not required.
18 - 24
Example 18.8: Solution
BARS LTD.
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 20x2
Note R
Cash receipts from customers (100 000– 4 000) ① 96 000
Cash paid to employees and suppliers (Balancing) (28 000)
Interest paid (4 000)

Dividends paid ② (18 000)
Tax paid ③ (20 000)
27 000

Acquisition of property, plant and equipment (10 000)
Replacement of equipment (maintenance) ⑤ (6 000)
Addition to equipment (expansion) ⑤ (4 000)
Proceeds from sale of property ④ 3 000
(7 000)

Long-term loan redeemed ⑦ (37 000)
Proceeds from issue of shares ⑥ 20 000
(17 000)
Net increase in cash and cash equivalents 3 000

Cash and cash equivalents at beginning of the year 7 000
Cash and cash equivalents at end of the year 10 000
CALCULATION TO THE STATEMENT OF CASH FLOWS

Adjusted for:
Depreciation (given) 5 000
Profit on sale of property, plant and equipment ④ (1 000)
Interest expense (given) 4 000
Dividend income (given) (1 000)
52 000
Decrease in inventory 8 000
Increase in receivables (4 000)
Increase in payables 12 000
18 - 25
Calculations:
① Debtors
Opening balance 8 000 Bank 96 000

Income 100 000 Closing balance 12 000
108 000 108 000
Opening balance 12 000
② Dividends payable
Bank 18 000 Opening balance 6 000

Closing balance 8 000 Dividends declared 20 000
26 000 26 000
③ Tax payable
Bank 20 000 Opening balance -

Closing balance - Tax expense 20 000
20 000 20 000
Opening balance -
④ Property
Opening balance 92 000 Realisation account 2 000

Closing balance 90 000
92 000 92 000
④ Realisation account
Property 2 000 Bank 3 000

Profit on sale of land 1 000
3 000 3 000
Property (realisation account in alternative manner): Cost price 2 000

Acc. Depr. -
Carrying amount 2 000
+/- Profit / (loss) 1 000
Proceeds 3 000
18 - 26
⑤ Equipment - Cost price

Bank (purchases - given) 6 000
Bank 4 000 Closing balance 40 000
40 000 40 000
⑥ Ordinary share capital

Closing balance 100 000 Bank 20 000*
100 000 100 000
*Note: Shares can also be issued by means of a capitalisation issue or exchange

transaction. In this case, there will not be any cash flow effect.
(Dr Retained earnings / Cr Share capital)
⑦ Long-term loans
Bank 37 000 Opening balance 40 000

Closing balance 3 000
40 000 40 000
18 - 27
CHAPTER 18
QUESTIONS
Page
Question 18.1: Operating and financing activities 18 - 29
Question 18.2: Investing activities 18 - 30
Question 18.3: Basic statement of cash flows 18 - 31
Question 18.4: Bad debts, revaluation 18 - 32
Question 18.5: Allowance for credit losses 18 - 34
Question 18.6: Preference dividends 18 - 36
Question 18.7: Property revaluation 18 - 38
Question 18.8: Preference dividends 18 - 40
Question 18.9: Capitalisation issue 18 – 42
Question 18.10: Basic statement of cash flows 18 – 44
Question 18.11: Basic statement of cash flows 18 – 45
18 - 28
QUESTION 18.1
The following statement of financial position balances of Lyon Ltd. as at 30 June are
presented to you:
20X2 20X1
R R
Trade receivables 178 500 161 500
Inventory 80 000 100 000
Ordinary share capital (300 000) (210 000)
Retained earnings (570 000) (400 000)
Long-term loan (60 000) (70 000)
Trade payables (140 000) (50 000)
Taxation payable (80 000) (50 000)
1. The following items appear amongst others, in the statement of comprehensive

income and statement of changes in equity for the year ended 30 June 20X2:
R
Revenue 800 000
Bad debts 12 000
Interest paid on bank overdraft 1 500
2. An allowance for credit losses was maintained at 15% of trade debtors.
3. On 30 April 20X2 a piece of land was purchased to expand the factory, at a cost
price of R40 000. The purchase price was settled by issuing ordinary shares.
4. During the year a capitalisation issue of R20 000 was made.
5. The long-term loan bears interest at a rate of 10% per annum. The loan is
repayable in equal annual instalments on 1 January each year. Interest is
payable monthly on the last day of the month. All instalments and interest are
paid up to date.
Prepare only the operating and financing activities sections of the statement of cash
flows for the year ended 30 June 20X2 in compliance with the requirements of IAS 7.
The reconciliation between profit before tax with cash generated from operations is
required.
18 - 29
QUESTION 18.2
The following statement of financial position balances of Lyon Ltd. as at 30 June are
presented to you:
20X2 20X1
R R
Property (revalued) 390 000 200 000
Equipment (cost price) 188 000 180 000
Equipment (accumulated depreciation) (77 000) (60 000)
Vehicles (cost price) 180 000 140 000
Vehicles (accumulated depreciation) (50 000) (40 000)
Investments 120 000 -
Revaluation reserve (100 000) -
1. The following items appear in the statement of comprehensive income for the
year ended 30 June 20X2:
R
Depreciation – equipment ?
2. No investments or fixed property were sold during the year ended 30 June 20X2.
3. Fixed property was revalued on 1 January 20X2. This was the only revaluation
during the year.
4. On 30 April 20X2 a piece of additional land was purchased to expand the factory,
at a cost price of R40 000. The purchase price was settled by issuing ordinary
shares.
5. Equipment with a cost price of R20 000 and accumulated depreciation of R15 000
on date of sale, was sold for R4 000. Equipment was also bought during the year
(40% of the equipment was bought to expand operations).
6. On 1 March 20X2, a vehicle was bought for R60 000. The vehicle was bought to
maintain present operations. This was the only vehicle purchase during the year.
7. On 1 August 20X1 Lyon Ltd. sold a vehicle to Provence Ltd. The purchase price
was settled with Provence Ltd. shares worth R13 000 and R6 000 cash.
prepare the investing activities section of the statement of cash flows for the year
ended 30 June 20X2 in compliance with the requirements of IAS 7. The reconciliation
between profit before tax with cash generated from operations is required.
18 - 30
QUESTION 18.3
Ronaldo Ltd. manufactures soccer balls. Their accountant approached you to assist in
compiling the statement of cash flows. The following trial balances for the years ended
31 December 20X3 and 20X2 were provided to you:
Note 20X3 20X2

Debit balance R R
Property 3 1 200 000 300 000
Bank 256 500 300 000
Debtors (gross) 63 000 60 000
Equipment – cost price 4 1 080 000 750 000
Inventory 90 000 94 500
2 689 500 1 504 500
Credit balances
Tax payable 42 000 27 000
Creditors 114 000 105 000
Long-term loan 1 684 800 750 000
Accumulated depreciation - equipment 525 000 450 000
Allowance for credit losses 13 100 11 900
2 689 500 1 504 500
1. Income amounted to R600 000 for the year ended 31 December 20X3.
2. The tax expense amounted to R58 334 for the year ended 31 December 20X3.
3. Property with a cost price of R450 000 was sold for R750 000 during the year.
The new property was purchased to expand Ronaldo’s manufacturing capacity.
4. Ronaldo Ltd. sold equipment for R165 000 during the year. The equipment’s
original cost price was R300 000 and a total of R150 000 depreciation was written
off until the date of sale. Equipment was purchased in its place.
prepare the statement of cash flows for the year ended 31 December 20X3 that will
comply with the requirements of IAS 7. The reconciliation of profit before tax with
cash generated from operations is required.
18 - 31
QUESTION 18.4
The following financial statement of Mall Ltd. are presented to you:
STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20X2
R'000 R'000
ASSETS 20X2 20X1
Non-current assets
Property 2 600 2 405
Plant and equipment 360 250
Unlisted investments 64 44
3 024 2 699
Current assets
Debtors 959 574
Inventory 1 750 159
Bank 279 620
2 988 1 353
Total assets 6 012 4 052

Equity and reserves
Revaluation reserve 170 120
3 082 2 462
Long-term loans 1 510 630
Current liabilities
Creditors 670 310
Dividends payable 150 180
Tax payable 600 470
1 420 960
STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 30 SEPTEMBER 20X2
R’000
Revenue 5 000
Gross profit 1 750
Other income 72
Other expenses (105)
Finance costs (88)
Income tax expense (800)
Profit for the year 829
18 - 32
1. Profit before tax was calculated after the following was inter alia taken into
account:
R
Profit on the disposal of property, plant and equipment 54 000
Bad debts 5 000
Depreciation on plant 100 000
2. Property at a cost price of R90 000 was sold. One of the company’s buildings
was revalued during the year. This was the only fixed asset that was revalued
during the year.
3. Plant: 20X2 20X1

R R
Cost price 590 000 420 000
360 000 250 000
Plant with a carrying amount of R140 000 was sold during the year at a profit of
R4 000. There were no other disposals or scrapings of property, plant and
equipment.
4. New plant was bought to replace the plant sold whilst additional property was
bought to expand current operating activities.
5. There were no disposals of unlisted investments during the year ended

30 September 20X2.
6. The following items were inter alia listed in the statement of changes in equity for
the year ended 30 September 20X2:
R
Surplus – revaluation of property 50 000
Ordinary dividends 280 000
prepare the statement of cash flows for the year ended 30 September 20X2 that will
comply with the requirements of IAS 7. The reconciliation of profit before tax with cash
generated from operations is required.
18 - 33
QUESTION 18.5
Below is a list of statement of financial position accounts of Superslim Ltd. as at

31 December 20X2. Superslim Ltd. owns a few office buildings and their only form of
business is the letting of office space.
Notes 20X2 20X1

R R
Office buildings 1 2 000 000 1 000 000
Equipment 2 100 000 110 000
Investments 3 15 000 17 000
Interest receivable 2 500 1 500
Debtors 4 55 000 42 000
Bank 4 500 -
TOTAL 2 177 000 1 170 500
Ordinary share capital 6 1 760 000 900 000

Preference shares 6 58 000 58 000
Revaluation reserve on office buildings 50 000 -
Retained earnings 5 19 400 16 300

Creditors 3 000 2 400
Bank overdraft - 1 200
TOTAL 2 177 000 1 170 500
1. All new buildings were bought for expansion.
2. The equipment consist of:

20X2 20X1
R R
Cost price 200 000 200 000
Carrying amount 100 000 110 000
During the year equipment at a cost price of R40 000 was sold for R30 000. All
new equipment was bought as replacement.
3. An investment of R10 000 was acquired during the year.
4. An allowance for credit losses of R5 000 for 20X2 and R2 000 for 20X1
respectively is included in the debtors balance.
18 - 34
5. The following items, among others, appear in the statement of comprehensive
income for the year ended 31 December 20X2:
R
Tax expense 23 500
Depreciation 25 000
Profit from the disposal of investment 8 000
Rental income from office buildings 750 000
6. Preference dividends of R2 500 for the year were declared and paid on
31 December 20X2. Ordinary dividends of 10c per share were declared and paid
on 31 December 20X2. On that date 825 000 ordinary shares have already been
issued.
prepare the statement of cash flows for the year ended 31 December 20X2 that will
comply with the requirements of IAS 7. The reconciliation of profit before tax with cash
generated from operations is required.
18 - 35
QUESTION 18.6
The accountant drafted the following abridged trial balance of Winkel Ltd. as at
31 March 20X2 and 20X1.
20X2 20X1
R R
Ordinary share capital (91 000) (51 000)
Preference share capital (20 000) (10 000)
Revaluation reserve (80 000) (30 000)
Retained earnings (296 000) (187 000)
Long-term loan (long and short-term portions) (60 000) (70 000)
Tax payable (10 000) (6 000)
Creditors (70 000) (65 000)
Dividends payable (3 000) (8 000)
Bank overdraft (32 000) (36 000)
Fixed property (revalued) 300 000 200 000
Motor vehicles at carrying amount 113 000 50 000
Cost price 150 000 90 000
Accumulated depreciation (37 000) (40 000)
Listed investments at cost price 60 000 45 000
Inventory 80 000 70 000
Debtors 104 000 95 000
1. The company trades in food products.
2. The company was registered on 1 March 1995 with an authorised share capital
of:

- 20 000 Preference shares which earn dividends of 10c each per year
3. Depreciation was only calculated on motor vehicles, at 20% per annum according
to the straight-line method.
4. Preference dividends are payable semi-annually on 30 September and 31 March

of each year. 10 000 Preference shares have already been issued at
1 April 20X1.
5. The long-term loan bears interest at a rate of 20% per annum. The loan is
repayable in equal annual instalments on 30 September each year. Interest is
payable monthly on the last day of the month. All instalments and interest are
paid to date.
6. The allowance for credit losses amounted to R5 000 on 31 March 20X1 and
R6 000 on 31 March 20X2 respectively and is already included in the debtors
balance in the trial balance.
18 - 36
7. No investments or fixed property were sold during the year ended 31 March 20X2.
8. On 1 May 20X1, property was acquired for a parking area at a cost price of
R50 000. The purchase price was settled by the issuing of 10 000 preference
shares at R1 each and the balance by the issue of 20 000 ordinary shares.
9. A motor vehicle with an original cost price of R50 000 was sold during the year
for R30 000 and replaced with a new vehicle at a cost price of R60 000. A new
vehicle was also acquired. No further vehicles were bought or sold during the
year ended 31 March 20X2.
10. The statement of comprehensive income and statement of changes in equity for
the year ended 31 March 20X2 included inter alia the following items:
R
Income 1 000 000
Current tax - provision 49 000
Dividends declared in respect of ordinary shares 15 000
Interest expense on bank overdraft 3 000
Profit on the disposal of motor vehicle 5 000
Depreciation 22 000
11. Profit before tax for the year ended 31 March 20X2 amounted to R174 917.
prepare the statement of cash flows for the year ended 31 March 20X2 that will comply
with the requirements of IAS 7.
Note:
Try to attempt the question if depreciation (R22 000) and profit before tax (R174 917)
were not provided.
18 - 37
QUESTION 18.7
The following statement of financial position of Sentrum Ltd. was prepared as at

30 June 2012 and 30 June 2011.
2012 2011
ASSETS R R
Non-current assets
Property, plant and equipment 300 000 210 000
Investments 150 000 120 000
450 000 330 000
Current assets
Debtors 90 000 81 000
Inventory 50 000 40 000
Bank 30 000 27 000
170 000 148 000
Total assets 620 000 478 000

Equity and reserves
Revaluation reserve 50 000 -
460 000 305 000
9% Loan 70 000 80 000
Current liabilities
Creditors 50 000 60 000
90 000 93 000
1. On 1 January 2012, 50 000 ordinary shares were issued at R1.10 each.
2. Finance costs paid for the current year amounted to R7 200 and dividends
received amounted to R15 000.
3. The amounts due as at 30 June 2011 in respect of dividends and tax were paid
during September 2011.
4. On 1 January 2011 and 1 January 2012, provisional tax of R10 000 and R15 000
respectively was paid to SARS.
5. On 31 December 2011, an interim dividend of 10 cents per share was declared

and paid. 100 000 Ordinary shares were issued as at 1 July 2011.
18 - 38
6. Property, plant and equipment consist of:
2011 Cost price Accum Carrying

depreciation amount
Property 100 000 - 100 000
Equipment 90 000 30 000 60 000
Vehicles 70 000 20 000 50 000
260 000 50 000 210 000
2012 Cost price Accum Carrying

depreciation amount
Property (Revalued) 170 000 - 170 000
Equipment 94 000 24 000 70 000
Vehicles 90 000 30 000 60 000
354 000 54 000 300 000
6.1 No property was disposed of during the year. The purchase of property was
made to expand activities. A building was revalued on 1 January 2012. This was
the only revaluation that was made during the year.
6.2 Equipment at a cost price of R20 000 and an accumulated depreciation of

R15 000 as at 1 July 2011 was sold on 31 March 2012 for R5 000. Equipment
was also bought during the year (50% of equipment bought was to expand
activities).
6.3 Depreciation of equipment and vehicles for the financial year ended as at 30 June
2012 amounted to R10 500 and R16 000 respectively.
6.4 On 1 March 2012, a vehicle was bought for R30 000. The vehicle was bought to
maintain present activities. This was the only purchase during the year.
6.5 On 30 June 2012, a vehicle was sold for a cash price of R6 000. This was the
only sale during the year.
6.6 Provision is made for depreciation on equipment at 10% per annum and on
vehicles at 20% per annum, both according to the straight-line method.
7. On 1 April 2012, an investment with a carrying amount of R10 000 was sold for
R12 500.
8. The allowance for credit losses was maintained at 10% of debtors.
9. Income for the year ended 30 June 2012 amounted to R400 000.
prepare the statement of cash flows for the year ended 30 June 2012 that will comply
with the requirements of IAS 7.
18 - 39
QUESTION 18.8
During the annual Calvinia Meat Festival, you visit your friend Boerseun. He is a sheep
farmer in the Hantam district and he wants to expand his farming activities by buying
the neighbouring farm. He asked you to assist him by drawing-up a statement of cash
flows for his business, Boerseun Ltd. You are provided with the following information:
BOERSEUN LTD.
STATEMENT OF FINANCIAL POSITION ON 30 JUNE
2012 2011
ASSETS R R
Non-current assets
Fixed property at cost 1 460 900 1 375 000
Vehicles 146 400 19 500
Cost price 183 000 65 000
Investment - Hantam Butchery Ltd. 68 000 -
1675 300 1 394 500
Current assets
Inventory 526 090 500 200
Debtors 324 700 311 000
Dividends receivable 1 900 0
Cash and cash equivalents 163 310 37 660
1 016 000 848 860
Total assets 2 691 300 2 243 360

Equity and reserves
Preference share capital 150 000 150 000
1 578 600 1 214 420
Long term loan 1 044 700 940 000
Current liabilities
Creditors 30 000 35 890
68 000 88 940
Total equity and liabilities 2 691 300 2 243 360
18 - 40
1. The company’s main activity is trading in sheep wool and meat.
2. Authorised share capital
 500 000 Ordinary shares

 200 000 Cumulative preference shares which earn dividends of 20c per share
per year.
3. 150 000 Preference shares have already been issued. The preference dividend
is paid annually on 30 June. Dividends declared on ordinary shares for 2012 was
R9 000.
4. All instalments and interest on the long-term loan are paid up to date. On
31 May 2012 the long-term loan was increased by R30 000, to finance current
expenses.
5. No investment or property was sold during the year ended 30 June 2012.
6. On 1 August 2011 a piece of additional pasture land was acquired, at a cost price
of R85 900.
7. On 1 July 2011 Boerseun Ltd. sold the only vehicle it owned to Hantam Butchery
Ltd. The purchase price was paid by issuing Hantam Butchery Ltd. shares worth
R15 000 and R10 000 cash.
8. A new vehicle was purchased on the same day, at a cost price of R183 000. As
payment, Boerseun Ltd. issued 50 000 ordinary shares to the motor dealer, at a
value of R1.50 per share. The outstanding balance was paid in cash.
9. The statement of comprehensive income for year ended 30 June 2012 includes
the following:
R
Sales 500 000
Normal tax – provision for current year 30 000
Interest expense on long term loan 10 000
Interest income on positive bank balance 20 097
Profit on sale of motor vehicle 5 500
10. During the year a capitalisation issue of R50 000 was made.
prepare the statement of cash flows for the year ended 30 June 2012 that will comply
with the requirements of IAS 7. The reconciliation of profit before tax with cash
generated from operations is required
18 - 41
QUESTION 18.9
A Ltd.’s accountant approached you to assist in compiling the statement of cash flows.
He provided you with the following statements of financial position for the years ended
31 July:
2018 2017
R R
ASSETS
Non-current assets
Property (revalued) 750 000 375 000
Vehicles (carrying amount) 346 875 187 500
Cost price 675 000 468 750
Current assets
Bank 106 775 199 850
Debtors 31 350 30 400
Inventory 56 250 68 125
1 291 250 860 875
Equity and reserves

Revaluation reserve 50 000 -
Long-term loan 450 000 500 000
Current liabilities
Creditors 30 000 15 000
Current portion of long-term loan 50 000 50 000
1 291 250 860 875
1. The long-term loan bears interest at 12% per annum and is repayable in equal
annual instalments on 1 January each year. Interest is payable monthly on the
last day of the month. All instalments and interest are paid up to date.
18 - 42
2. The following items, amongst others, are included in the statement of
comprehensive income and statement of changes in equity for the year ended
31 July 2018:
R
Revenue 1 500 000
Loss on sale of vehicle 25 000
Bad debt written off 1 000
3. An allowance for credit losses is maintained at 5% of the outstanding debtors at

year-end.
4. A Ltd. sold one vehicle with a carrying amount of R33 000 for R8 000. Vehicles
were also purchased during the year (40% of vehicle additions were to maintain
current operations).
5. No property was disposed of during the financial year. The purchase of property
was made to expand activities. A building was revalued on 1 August 2017. This
was the only revaluation that was made during the financial year.
6. A capitalisation issue to the value of R10 000 was made during the 2018 financial
year.
prepare the statement of cash flows of A Ltd. for the year ended 31 July 2018 that will
comply with the requirements of IAS 7. The note on the reconciliation of profit before
tax with cash generated from operations is required.
18 - 43
QUESTION 18.10
TMO is a retailer trading in watches. Their accountant approached you to assist in

compiling the statement of cash flows. The following trial balances for the financial
years ended 30 September 2018 and 2017 were provided to you:
Note 2018 2017

Debit balances R R
Property 3 450 000 600 000
Bank 90 000 111 000
Debtors (gross) 26 000 48 000
Equipment at cost price 4 780 000 820 000
Inventory 48 500 59 500
1 394 500 1 638 500
Credit balances
Creditors 75 000 77 000
Long-term loan 1 000 000 750 000
Equipment - accumulated depreciation 45 000 37 500
Allowance for credit losses 3 255 3 200
1 394 500 1 638 500
1. Sales amounted to R1 600 000 for the financial year ended 30 September 2018.
2. The tax expense amounted to R125 000 for the financial year ended
30 September 2018.
3. Property with a cost price of R250 000 was sold for R200 000 during the 2018
financial year. New property was also purchased during the 2018 financial year.
4. TMO sold equipment for R260 000 during the 2018 financial year. The
equipment’s original cost price was R324 000 and a total of R44 000 depreciation
was written off until the date of sale. Equipment was purchased in its place during
the 2018 financial year.
5. TMO did not declare or pay out any dividends during the current or previous
financial year. There were no share issue costs incurred during the current
financial year.
YOU ARE REQUIRED TO

prepare the statement of cash flows for the financial year ended 30 September 2018
that will comply with the requirements of IAS 7 in accordance with the direct method.
The reconciliation of profit before tax with cash generated from operations is required.
Show all calculations. Ignore VAT.
18 - 44
QUESTION 18.11
CashConnections is a retailer trading in second-hand goods. Their accountant

approached you to assist in compiling the statement of cash flows. The following trial
balances for the financial years ended 30 June 2018 and 2017 were provided to you:
Note 2018 2017

Debit balances R R
Property 3 6 000 000 5 000 000
Bank 250 000 960 000
Debtors (gross) 145 000 164 000
Equipment at cost price 4 99 000 172 000
Inventory 12 500 13 000
6 506 500 6 309 000
Credit balances
Share capital 154 000 154 000
Retained earnings 1 191 500 722 500
Creditors 600 000 605 000
Long-term loan 4 500 000 4 750 000
Equipment - accumulated depreciation 39 000 36 000
Allowance for credit losses of debtors 10 000 12 500
6 506 500 6 309 000
1. Sales amounted to R750 000 for the financial year ended 30 June 2018.
2. The tax expense amounted to R47 000 for the financial year ended 30 June 2018.
3. Property with a cost price of R990 000 was sold for R1 250 000 during the
2018 financial year. The new property was purchased to expand
CashConnections’ premises.
4. CashConnections sold equipment for R65 000 during the 2018 financial year.
The equipment’s original cost price was R90 000 and a total of R25 000
depreciation was written off until the date of sale. New equipment was purchased
in its place.
5. During the 2018 financial year there were no dividends declared, shares issued
or share issue costs incurred.
YOU ARE REQUIRED TO
prepare the statement of cash flows for the financial year ended 30 June 2018 that
will comply with the requirements of IAS 7 in accordance with the direct method. The
reconciliation of profit before tax with cash generated from operations is required.
Show all calculations. Ignore VAT.
18 - 45
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED ____________________
Cash flow from operating activities Notes R

Cash receipts from customers
Cash paid to suppliers and employees
Interest received
Interest paid
Dividends paid
Tax paid
Nett cashflow from operating activities

Purchase of property, plant and equipment
- Expansion to property, plant and equipment
- Replacement of property, plant and equipment
Proceeds on disposal of property and equipment

__________ in long-term loans
Issue of shares
Net __________ in cash and cash equivalents

Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
CALCULATIONS TO THE STATEMENT OF CASH FLOWS

R
Profit before tax
Adjusted for:

_________ in receivables
_________ in inventory
_________ in payables
18 - 46
CHAPTER 19
PARTNERSHIPS
Page
19.1 Definition and characteristics 19 - 3
19.2 Advantages and disadvantages 19 - 3
19.3 The partnership agreement 19 - 4
19.4.1 Capital accounts

19.4.2 Current accounts
19.4.3 Withdrawals
19.4.4 Loans and advances
19.4.5 Profit sharing
19.4.6 Goodwill
19.4.7 Reserves
19.5 Financial statements of a partnership 19 - 12
19.6 Change in owner combination 19 - 16
19.6.1 Admission of a partner

19.6.2 Retirement/death of a partner
19.6.3 Simultaneous retirement of a partner and entry of a new
partner
19.7 Treatment of policies 19 - 19
Questions 19 – 21
19 - 1
- identify the characteristics, advantages and disadvantages of a

partnership
- apply the accounting treatment of a partnership
- prepare the financial statements of a partnership
- account for a change in the owner combination of a partnership
19 - 2
19.1 Definition and characteristics
A partnership is a legal relationship that originates as a result of an agreement between at

least 2 or more persons. Each person must contribute capital and/or labour and/or
competencies to a legal entity with the objective of showing a profit.
The reasons for establishing a partnership is the merging of capital, labour and
competencies of individual persons who, independent of each other, do not have the
necessary capital, labour and competencies to run an entity with profit as objective.
There is no specific legislation to control partnerships. Partnerships are controlled in terms

of a partnership agreement and the principles of the common law are applied. The
partnership is not a separate legal entity and the partners own any assets jointly and are
jointly and separately liable for obligations.
The characteristics of a partnership are set out below:

 at least 2 or more partners
 valid agreement with legal objectives
 each partner must make a contribution, whether capital, labour or competencies
 the business must be operated with the objective of making profit to the benefit of
all the partners
 the partnership is not a separate legal entity
 the partnership’s assets are the joint property of the partners
 partners are jointly and separately liable for the obligations of the partnership.
19.2 Advantages and disadvantages
Partnerships have the following advantages:

 It is relatively simple to establish or to dissolve
 changes in the owner composition or capital structure can be introduced by mutual
agreement
 a larger capital amount can jointly be brought together by the partners
 technical competency and knowledge can be used to the advantage of the partners
 collective decision-making by more than one person can minimise business risks
Partnerships have the following disadvantages:

 the partners are jointly and separately liable for the obligations of the partnership
 the continuity of the partnership as a going concern is directly dependent on the
personal relationships and the life expectancy of the mutual partners
 transferability of ownership is limited
 the conduct of one partner has the power to bind the partnership
19 - 3
19.3 The partnership agreement
The partnership agreement does not have to be in writing, but can be established orally or
even silently. The terms of a partnership agreement are stipulated by the drafters of the
agreement. The following essential aspects can be addressed in the partnership
agreement.
 the nature of the business undertaken

 aspects relating to the daily management of the partnership
 the contribution of each partner (financial and otherwise)
 the way in which profits and losses should be distributed
 stipulations with regard to capital changes in future
 withdrawals that partners can make
 interest receivable/payable on capital and/or withdrawals
 stipulations with regard to loans and advances to/from partners
 duties and remuneration of partners
 stipulations with regard to insurance policies
 procedures for the settlement of disputes between partners
 procedures to follow when partners join and retire
 procedures to follow when the partnership dissolves
19.4 Accounting for a partnership
19.4.1 Capital accounts
The funds invested by the owner of any entity are shown in a capital account in the books
of the entity. The balance on this account represents the interest of the owner in the entity.
In the case of the partnership there are more owners and for each owner a capital account
should be opened. The amounts on the different capital accounts represent the interest of
each partner in the assets of the partnership.
Capital contributions can be in the form of cash and/or other assets. Contributions as
capital usually stay in the entity permanently. If the partners make a contribution, the
capital account will be credited and the cash/assets will be debited. If the partners should
withdraw capital, the entries will be the opposite, namely credit cash/assets (cash
decreases) and debit capital accounts (their claim against the partnership decreases).
The capital accounts remain unchanged during the year unless the partners contribute
capital or withdraw capital. Capital accounts will always have a credit balance and is
shown as equity in the partnership’s statement of financial position.
19 - 4
(a) Contributions in the form of cash
Example 19.1
On 2 January 20X7 A and B decided to form a partnership. In terms of the partnership

agreement A must invest R100 000 and B R200 000 in cash as capital in the entity
(AB Traders).
The journal entry in the records of AB Traders will be as follows:
General journal of AB Traders
02/01 Cash 300 000

Capital account A 100 000
Capital account B 200 000
(Capital contribution of partners)
(b) Contributions in the form of assets
Example 19.2
A and B decided to amalgamate their different entities in a partnership known as

AB Traders from 2 January 20X7. The capital contribution of each partner will consist of
the assets and liabilities as on every entity’s statement of financial positions on 31
December 20X6.
A Traders’ summarised balances on 31 December 20X6 was as follows:
Non-current assets 80 000 Capital 100 000

Inventory 100 000 Creditors 150 000
Debtors 50 000
Cash 20 000
250 000 250 000
B Traders’ summarised balances on 31 December 20X6 was as follows:
Non-current assets 80 000 Capital 200 000

Inventory 150 000 Creditors 100 000
Debtors 60 000
Cash 10 000
300 000 300 000
19 - 5
The journal entry in the records of AB Traders will be as follows:
General journal of AB Traders
02/01 Non-current assets 160 000

Inventory 250 000
Debtors 110 000
Cash 30 000
Creditors 250 000
Capital account A 100 000
Capital account B 200 000
(Capital contribution of partners)
19.4.2 Current accounts
Additional to the capital account it is customary to open a current account in the books of
the partnership for each partner. All transactions, except for capital contributions, capital
withdrawals, loans and advances which a partner incurred with the partnership, are
recorded in the current account. The following are examples of items that will be recorded
in the current account:
 Profit share of partners

 Salaries and bonuses paid to partners
 Withdrawals (cash or goods) by partners
 Interest on capital and current accounts granted to partners
 Interest on withdrawals charged from partners
A current account can have a credit or debit balance. A credit balance on the current
account indicates the amount due to the partner by the partnership, i.e. the partner’s
withdrawals (excluding capital withdrawals) have been less than the total of his profit share
apportioned to him and any salary or bonus he received. A debit balance on the current
account indicates the amount due to the partnership by the partner, i.e. the partner’s
withdrawals (excluding capital withdrawals) exceeds the total of his profit share
apportioned to him and any salary or bonus he received. Current accounts are shown as
equity in the partnership’s statement of financial position (a current account with a debit
balance is shown as negative equity). The details of the current account and the profit
distribution will also be set out in the statement of changes in equity.
19 - 6
19.4.3 Withdrawals
The following withdrawals can be made by partners during the year:
 Capital withdrawals (exceptional cases)

 Cash withdrawals
 Withdrawal of goods at cost price
Capital withdrawals will be debited against the capital account and any other withdrawals
will be debited against a withdrawals account and closed-off to the current accounts. Thus
withdrawals do not form part of the distribution of profit.
The various withdrawal transactions will be recorded in the general journal as follows:
(1) Capital withdrawals
Dr Capital
Cr Bank
(2) Cash withdrawals
Dr Withdrawals
Cr Bank
Dr Current account
Cr Withdrawals
(3) Withdrawals of goods at cost price (periodical inventory system)
Dr Withdrawals
Cr Cost of sales
Dr Current account
Cr Withdrawals
(4) Withdrawals of goods at cost price (perpetual inventory system)
Dr Withdrawals
Cr Inventory
Dr Current account
Cr Withdrawals
19 - 7
19.4.4 Loans and advances
A loan or advance made by a partner to the partnership in his own capacity is regarded as
part of the creditors of the entity and does not form part of the partner’s capital
contribution. The reason is that a loan over a specific period at a specific interest rate is
repayable while capital is not repayable unless differently agreed by the partners.
The partners can mutually agree to convert such advances in capital when circumstances
force them to. The interest payable on the loan must be regarded as an expense in the
normal course of events and not as a distribution of profit.
19.4.5 Distribution of profits
The partnership profit is periodically calculated in the statement of other comprehensive

income as in any other form of entity. As there are more owners sharing in the
profits/losses on a negotiated basis, a distribution of profits/losses has to be done.
The way in which the profits/losses are distributed between the partners, should be
stipulated in the partnership agreement. When there is no agreement regarding profit
distribution, the profits/losses are distributed in relation to the capital of the partners.
Profits and losses (as calculated in the profit and loss account) are distributed after the
interest on capital, interest on current accounts and interest on withdrawals have been
taken into account. The most general methods of distribution are the following:
(a) Fixed ratio for example 3:2 or 50:50.

(b) In the ratio of the capital contribution of each partner.
(c) Interest on capital plus a fixed ratio.
(d) Salary plus a fixed ratio.
(e) Salary plus interest on capital plus a fixed ratio.
Distributions to partners are not normal expenses, but rather a distribution of profits. The
distribution of profits is done in a convenience account, namely the distribution account.
The profit of the partnership as calculated in the profit and loss account is closed-off to the
distribution account, by debiting the profit and loss account and crediting the distribution
account. The entries of distributions to partners involve the distribution account and the
current account. The distribution account is debited and the current account credited
except in the case of interest on withdrawals and interest on current accounts with debit
balances, where the distribution account is credited and the current account debited. The
distribution of profits will be disclosed in the statement of changes in equity.
19 - 8
Example 19.3
Information:
The following information regarding AB Traders for the year ending 30 June 20X7 is
submitted to you.
Net profit for the year ending R500 000

Capital - A R100 000
Capital - B R200 000
Current account - A R150 000 (Cr)
Current account - B R 50 000 (Dr)
Required:
Show the distribution account of AB Traders if profits are repeatedly distributed as follows:
(a) Fixed ratio of 2:3 regarding partners A and B
Distribution account
30/06 Profit share – A (2/5) 200 000 30/06 Profit and loss 500 000
Profit share – B (3/5) 300 000
500 000 500 000
(b) In relation to the capital of partners A and B, after allowing for interest on capital and
interest on current accounts of respectively 10% and 15%.
30/06 Interest on Cap - A 10 000 30/06 Profit and loss 500 000
Interest on Cap - B 20 000 Interest on CA - B 7 500
Interest on CA - A 22 500
Profit share – A (1/3) 151 667
507 500 507 500
(c) Partner B earns a salary of R150 000 per year, partner A earns a bonus of R100 000
and thereafter the profits are distributed equally.
30/06 Salary - B 150 000 30/06 Profit and loss 500 000
Bonus - A 100 000
Profit share - A 125 000
Profit share - B 125 000
500 000 500 000
19 - 9
19.4.6 Goodwill
It is the aspiration of any trade entity to build a good reputation. This reputation can be
based on the quality of the products or service delivered, the efficiency of good
management, the possession of valuable patent rights and agencies and the fact that the
business premises is central and situated conveniently.
The “value” of the intangible asset, which is gradually built up by an entity, is usually not
reflected in the financial statements, since it has not been paid for. In accounting
terminology such an asset is called goodwill. In cases where a business is purchased and
goodwill is valued, it is shown in the statements because it was purchased at a certain
price. Only purchased goodwill is recorded.
Goodwill is usually calculated when the purchase price/selling price of a business is

determined as well as with a change in the capital structure of a partnership. There is
several ways to calculate the goodwill. In partnerships a subjective valuation is usually
required.
In the case of a partnership goodwill is calculated as part of the value of the partnership
that will be used to determine the purchase price when a new partner is admitted. Mostly
the goodwill will be written back after the admittance of the new partner due to the fact that
the partners are reluctant to show an asset with a subjective element in the records of a
partnership. In companies this value is discounted in the market value of the share.
The journal entry to record goodwill when the value of the old partnership is determined
before the new partner is admitted will be as follows:
Dr Goodwill
Cr Capital A (old profit sharing ratio)
Cr Capital B (old profit sharing ratio)
The journal entry to write back the goodwill if it should not be shown in the new
partnership’s records (after the admittance of the new partner) will be as follows:
Dr Capital A (new profit sharing ratio)

Dr Capital B (new profit sharing ratio)
Dr Capital C (new profit sharing ratio)
Cr Goodwill
It can also happen that a new partner brings goodwill into the partnership. In such a case
there should be an agreement on the value of the goodwill and it will be debited together
with the other assets which are brought in, with a credit to the partner’s capital account.
19 - 10
19.4.7 Reserves
Any entity’s aspiration is to grow and to perform better. To expand an entity needs
additional capital. They can get hold of such capital in different ways, e.g.:
 the partners can contribute more capital

 money can be borrowed from a third party or a partner or
 reserves can provide finance
(1) Unrealised profits/losses
With a change in the capital structure of a partnership, all the assets of the partnership are
re-valued (before the calculation of any goodwill) to determine the actual value of the
partnership. The unrealised profits/losses that result from the revaluation of the assets are
distributed to the capital accounts of the partners, in accordance to their old profit sharing
ratios.
The journal entry to record unrealised profits will be as follows:
Dr Asset
Cr Capital A
Cr Capital B
The recording of unrealised losses will be the opposite of abovementioned journal.
19.5 Financial statements of a partnership
The financial statements of a partnership differ very little from the financial statements of a
sole-proprietor.
 the statement of comprehensive income is the same,

 the statement of financial position is the same, except for the composition of equity (the
partnership’s equity includes capital and current accounts)
 the partnership has a statement of changes in equity, which includes a distribution
account
19 - 11
Example 19.4
The following information regarding AB Traders for the year ending 30 June 20X7 is
submitted to you:
Debit Credit
Capital - A 150 000

Capital - B 200 000
Current account – A (01/07/20X6) 50 000
Current account – B (01/07/20X6) 45 000
Withdrawals - A 15 000
Withdrawals - B 5 000
Accumulated depreciation on equipment 180 000
Investment at cost price 200 000
Debtors 50 000
Creditors 25 000
Bank 75 000
Inventory 30 000
Sales 430 000
Rent paid 24 000
Interest paid 10 000
Salaries of employees 55 000
1 150 000 1 150 000
 Depreciation of R100 000 must still be written off for the year ending 30 June 20X7.
 Partners A and B distribute profits and losses in the ratio 3:2
 Partner B is entitled to a salary of R50 000, no entry has been made in respect of the
salary.
 Interest on capital and interest on current accounts are 5% and 10% per year
respectively.
 Interest on withdrawals must be levied as follows:
- Partner A: R920
- Partner B: R580
19 - 12
The distribution and current accounts of the partners will be prepared as follows:
30/06 Interest on Cap - A 7 500 30/06 Profit and loss 125 000
Interest on Cap - B 10 000 Interest on CA - A 5 000
Interest on CA - B 4 500 Interest on wdr - A 920
Salary - B 50 000 Interest on wdr - B 580
Profit share – A (3/5) 35 700
131 500 131 500
Current account – A
01/07 Balance 50 000 30/06 Interest on Cap 7 500
30/06 Interest on CA 5 000 Profit share 35 700
Withdrawals 15 000
Interest on withdr 920 30/06 Balance b/f 27 720
70 920 70 920
01/07 Balance b/f 27 720
Current account – B
30/06 Withdrawals 5 000 01/07 Balance 45 000
Interest on withdr 580 30/06 Interest on Cap 10 000
Interest on CA 4 500
Salary 50 000
30/06 Balance b/f 127 720 Profit share 23 800
133 300 133 300
01/07 Balance b/f 127 720
19.6 Change of ownership of a partnership
19.6.1 Admission of a partner
With the approval of the existing partners a new partner may enter the partnership in one
of two ways:
(a) By purchasing an interest directly from one or more of the partners.
(b) By contributing cash and/or assets to the partnership for the acquisition of an
interest.
As soon as a new partner has been admitted, the old partnership legally does not exist
anymore. It is not necessary to close-off the books of the partnership in such a case, as
the partnership entity is still in existence as a going concern. It is only necessary to do the
entries to give effect to the change in capital structure with the admittance of the new
partner.
19 - 13
(a) Admittance by means of the direct purchase of an interest of a partner(s)
When a partner is admitted in this way, no entry in the asset and liability accounts of the
partnership is necessary. An adjustment must however be made to the capital accounts.
Example 19.5
On 31 December 20X6, A and B distributing profits in the ratio 2:3, decided to admit C to
the partnership as from 1 January 20X7. On 31 December 20X6 the balances on the
capital accounts of A and B were R210 000 and R300 000 respectively. C is admitted on
condition that he purchases one half of B’s interest for R250 000 cash which he pays B,
and not the partnership, directly.
One half of B’s interest = R150 000 (½ x R300 000).
The journal entry will be as follows:
Dr Capital B 150 000

Cr Capital C 150 000
(Admittance of C as new partner)
After C’s admittance the capital will appear in the statement of financial position as follows:
Capital: A 210 000
B 150 000 (300 000 - 150 000)
C 150 000
Note that the book value (carrying amount) of B’s interest was R300 000; C was prepared
to pay R250 000 for half of the interest. This is an indication that goodwill was present and
that B allowed for it in the valuation of his interest. The goodwill is not recorded as C
purchased the interest directly from B and did not contribute directly to the capital of the
partnership. The capital remains unchanged at R510 000.
No entry in respect of the R250 000 is made, as it is a personal transaction between B and
C. Although C purchased one half of B’s interest, it does not necessarily mean that the
portion of the profits (losses) is being accrued to him. The profit sharing ratio is a matter on
which to agree specifically.
Assume the agreement is that B also yields one half of his profit share to C.
The new profit sharing ratio will then be as follows:

A 4/10 (2/5)
B 3/10 (3/5 - (½ x 3/5))
C 3/10 (½ x 3/5)
19 - 14
Example 19.6
The same circumstances as in example 19.5, but C pays R250 000 for one third of A’s
interest plus one third of B’s interest, i.e. C purchases one third interest in the partnership
from A and B.
The journal entry will be as follows:
Dr Capital A (1/3 x 210 000) 70 000

B (1/3 x 300 000) 100 000
Cr Capital C 170 000
(Admittance of C as new partner)
In this case A and B must agree on how much of the R250 000 has to be paid to each of
them, the payment is a personal transaction between C, A and B respectively – no
payment goes to the partnership – and no entry regarding assets and liabilities is
necessary in the partnership’s records.
The capital will appear in the statement of financial position as follows:

A 140 000 (210 000 - 70 000)
B 200 000 (300 000 - 100 000)
C 170 000
The capital remains unchanged at R510 000.
If it is accepted that C also acquires one third of the profit share, the new profit sharing
ratio will be as follows:
A 4 (2/3 x 2/5) = 4/15
B 6 (2/3 x 3/5) = 6/15
C 5 (1/3) = 5/15
(b) Acquisition of interest by contributing to the capital of the partnership
If a new partner brings cash and/or other assets into the partnership, the journal entry
would be: debit assets and credit the new partner’s capital account
The actual value of the partnership should be calculated, i.e. assets should be re-valued to
calculate unrealised profits/losses. Where goodwill is involved, it must first be determined
and credited to the “old” partners in the “old” profit sharing ratio as the intangible asset
forms part of their capital in the entity.
19.6.2 Retirement/death of a partner
At the retirement/death of a partner the accounting procedure is basically the same as in

the case of the admittance of a partner. The partner’s interest in the entity is valuated and
if goodwill is present, it is credited to the partners’ capital accounts.
19 - 15
The interest of the retiring or late partner must be compensated to him in one or another
agreed way. If it is not paid out in cash, it will be transferred to a loan account and paid
back according to agreement.
The remaining partners’ profit sharing ratio stays in the same mutual ratio as it was before
the death or retirement of a partner unless the partners agree on another profit sharing
ratio.
Example 19.8
On 31 December 20X7, A decided to retire from the partnership. The goodwill is estimated
at R150 000. It is agreed that the amount due to A will be placed on a loan account,
repayable in 5 annual instalments at 10% interest per year. In future the remaining
partners will distribute profits/losses in their old mutual profit sharing ratio.
On 31 December 20X7 the capital balances were as follows:
A – 250 000
B – 350 000
C – 300 000
The goodwill must first be distributed between the partners before the capital of A is paid
out. Journal entries are as follows:
Dr Goodwill 150 000

Cr Capital A (4/15) 40 000
Cr Capital B (6/15) 60 000
Cr Capital C (5/15) 50 000
(Goodwill at retirement of A)
Dr Capital A 290 000

Cr Loan account A 290 000
(Transfer of amount due to A to a loan account)
In future B and C will share profits/losses in the ratio 6:5, as they previously shared profits
in the ratio 6/15 and 5/15.
Example 19.9
Similar circumstances as in the preceding example 19.8, but the remaining partners
decide that goodwill must not be shown in the books.
The journal entries remain the same, but the following additional entries must be made.
Dr Capital B (6/11) 81 819
Dr Capital C (5/11) 68 181
Cr Goodwill 150 000
(Write back of goodwill)
19 - 16
19.6.3 Simultaneous retirement of a partner and entry of a new partner
At simultaneous retirement and admission of partners the accounting procedure stays the
same as at the single retirement or single admission, but it is preferable to first process the
old partnership’s matters separately and then to make the entries for the new partnership.
19.7 Treatment of policies
If a partner dies, the remaining partners may have serious cash flow problems as they
have to pay his capital account (his share in the partnership) to his estate. Partners thus
take out policies on their own lives and cede it to the other partners, so that cash is
available for the remaining partners, after the death of a partner, to pay his estate.
The following concepts are very important with regard to policies:
 Joint life policy are taken out on the lives of all the partners:
o One policy is jointly taken out on the lives of all the partners and if one of
them dies the policy is paid out. Only one premium is paid as there is only
one policy.
 Separate life policies are taken out on the life of the partners:
o Each partner has his/her own policy and a separate premium is paid on each
of the partners' policies.
 Pay-out /endowment value of policy:

o Amount that the insurer pays out at the death of a partner.
 Surrender value of a policy:

o Amount that the insurer pays out if a policy is cancelled before the death of
the partner whose life was insured.
 Carrying amount of a policy:

o If premiums are treated as an expense, the carrying amount of the policy
account is nil.
o If premiums are treated as an asset, the carrying amount of the policy
account is the total of all the premiums paid up to date.
19 - 17
CHAPTER 19
QUESTIONS
Question 19.1 Profit & loss account, current accounts and distribution
account
Question 19.2 Distribution account and current accounts
19 - 18
QUESTION 19.1
The following post-adjustment balances appeared in the general ledger of Jajo Sport on 30
June 20x6, the end of its financial year:
R
Capital account - James 500 000
- Jonah 600 000
Current accounts on 1 July 20x5 - James 20 000 (Dt)
- Jonah 50 000 (Cr)
Withdrawals - James 180 000
- Jonah 200 000
Long-term loan owing to Jonah @ 12% per year interest 400 000
Debtors 710 000
Creditors 410 000
Equipment at cost 700 000
Accumulated depreciation 77 200
Depreciation 47 250
Increase in allowance for credit losses of debtors 6 500
Bad debts recouped (in respect of previous year) 1 050
Inventory on 1 July 20x5 805 000
Interest on long-term loan 48 000
Sales of products 2 750 000
Purchases of products 2 005 000
Stationery consumed 5 000
Salaries and wages - Employees 65 000
1. No long-term loans were acquired or repaid during the year.

2. The cost price of the inventory on 30 June 20x6 amounted to R610 000.
3. The partnership agreement stipulates the following:
- Interest is earned on capital accounts at 9% per annum.
- Interest is earned or levied on the opening balances of current accounts at 7% per
annum.
- Jonah is entitled to a salary of R60 000 per annum.
- James is entitled to a bonus of 10% of the distributable profit after taking the above
items into account.
- Remaining profits or losses are shared equally.
YOU ARE REQUIRED TO
(a) compile the profit and Loss account and the distribution account on 30 June 20x6,
after all the closing entries had been made.
(b) compile the current accounts of James and Jonah for the year ended
30 June 20x6.
19 - 19
QUESTION 19.1
Suggested solution

Bad debts 3 000 Gross profit (b/d from T/acc) 550 000
Increase in allowance for credit 6 500 Bad debts recouped 1 050
losses of debtors
Interest paid on loan (Jonah) 48 000
Depreciation 47 250
Stationery used 5 000
Net profit (c/f to Distrib acc) 356 300
551 050 551 050
357 700 357 700
Current account - James

Balance b/f 20 000
Balance c/f 49 040

201 400 201 400
Balance b/f 49 040
Current account - Jonah

Balance b/f 50 000
Balance c/f 55 340

255 340 255 340
Balance b/f 55 340
19 - 20
QUESTION 19.2
Tom en Jerry are partners in an enterprise. The following balances amongst other
appeared in the ledger of the enterprise on 28 February 20x5, the accounting date, after
the closing journal entries had already been made
R
Capital accounts - Tom 280 000
- Jerry 250 000
Current accounts on 1 March 20x4 - Tom 20 000 (Dt)
- Jerry 30 000 (Cr)
Withdrawals - Tom 72 000
- Jerry 60 000
Profit and loss account (Net profit) 165 000
The partnership agreement stipulates the following:
1. Partners earn interest on their capital accounts at 10% per annum. Both capital
accounts were unchanged during the year.
2. Interest is earned or levied on the opening balances of the current accounts at 12% per
annum.
3. Interest is levied on withdrawals. The interest for the year ended 28 February 20x5
amounted to R1 700 for Tom and R1 500 for Jerry.
4. Tom is entitled to a salary of R4 000 per month and Jerry to a salary of R65 000 per
year.
5. Tom is entitled to a commission of 10% of the net profit for the year.
6. Remaining profits or losses are distributed in the ratio 4:3 for Tom en Jerry
respectively.
YOU ARE REQUIRED TO
show the following ledger accounts for the year ended 28 February 20x5, properly closed-
off:
- The distribution account

- The partners' currents accounts
19 - 21
QUESTION 19.2
Suggested solution
Current account - Tom

Current account - Jerry

19 - 22
QUESTION 19.3
Charles and Hennie are partners in the enterprise. The partnership agreement stipulates
amongst other things the following:
1. Interest is earned on capital accounts at 10% per annum.

2. Interest is earned or levied on current accounts at 12% per annum on the opening
balances at the beginning of the year of those particular accounts.
3. Interest is levied on withdrawals. For the year ended 30 June 20x1, it amounted to R5
000 for Charles and to R4 000 for Hennie.
4. Charles will receive a bonus of R80 000
5. Hennie will receive a salary of R100 000 per annum.
6. Hennie will receive commission of R20 000 per annum.
7. Remaining profits or losses will be shared equally.
The following balances amongst other appeared in the ledger of the enterprise on
30 June 20x1, the end of the financial year:
R
Capital accounts - Charles 700 000
- Hennie 500 000
Current accounts on 1 July 20x0 - Charles 40 000 (Ct)
- Hennie 30 000 (Dt)
Drawings - Charles 400 000
- Hennie 300 000
1. Charles invested a further R300 000 Capital on 1 May 20x1.

2. Hennie did not invest further capital during the year ended 30 June 20x1.
YOU ARE REQUIRED TO
show the following ledger accounts for the year ended 30 June 20x1, properly closed-off:
a) The distribution account.

b) The current accounts of Charles and Hennie.
19 - 23
QUESTION 19.4
Shaun and Tandi are partners in an enterprise.
The following balances appeared amongst other in the ledger of the enterprise on 28
February 20x2, the end of the financial year:
R
Capital accounts - Shaun 125 000
- Tandi 80 000
Current accounts - Shaun (1 March 20x1) 4 600 (Ct)
- Tandi (1 March 20x1) 2 200 (Dt)
Withdrawals – Shaun 55 000
– Tandi 48 000
The partnership agreement amongst other things stipulates the following:
1. Interest is earned or levied on capital and current accounts at 10% per annum. Interest
is calculated on the opening balances of the current accounts. Shaun contributed a
further R5 000 as capital on 1 December 20x1. Tandi made no further contributions as
capital during the financial year.
2. Shaun is entitled to an annual salary of R32 000.
3. Tandi is entitled to an annual bonus of 10% of the net profit for the year.
4. The remaining profits and losses are distributed in the ratio of 3/5 for Shaun and 2/5 for
Tandi.
1. The interest levied on Shaun and Tandi’s withdrawals amounted to R1 100 and R955
respectively for the year ended 28 February 20x2.
YOU ARE REQUIRED TO
show the following ledger accounts for the year ended 28 February 20x2, properly closed-
off:
(a) The distribution account

(b) The current accounts of Shaun and Tandi
(c) The capital account of Shaun
19 - 24
CHAPTER 20
VALUE-ADDED TAX
Page
20.1 Introduction 20 - 3
20.2 The mechanics of VAT 20 - 3
Questions 20 - 14
20 - 1
- distinguish between input VAT and output VAT
- understand the mechanics of VAT
- apply the accounting treatment of VAT
20 - 2
20.1 Introduction
Value-Added Tax (abbreviated VAT) is an indirect system of taxation that was introduced
on 30 September 1991 and is regulated by the Value-Added Tax Act No 89 of 2091. VAT
replaced General Sales Tax (GST).
VAT is currently levied at 15% on the value of the majority of goods and services (not
money) supplied by vendors. VAT is also collected by the Department of Customs and
Excise on all imports of goods.
VAT is basically a tax on goods and services used in the RSA. Only people registered as
VAT vendors are required to levy VAT on goods and services.
There are some exemptions from VAT and also certain deemed supplies of goods and
services, but for the purposes of Financial Accounting 188 it can be accepted that VAT will
be paid on all services, goods and fixed assets acquired from registered vendors (as well
as all imports of goods and services) and that VAT will be levied on all services rendered,
goods and fixed assets sold by registered vendors (except exports), except were the
question states differently.
20.2 The mechanics of VAT
VAT payable by or refundable to a registered vendor is the difference between output and
input taxes.
Output tax is the tax that the vendor charges on the delivery of goods or services in the
execution of an operation. Input tax is the tax paid by the vendor in respect of goods or
services delivered.
VAT is levied at 15% on the selling price. A seller would have to ask the purchaser R115 in
order to make a R100 sale. R15 is payable to SARS and is known as output tax. The
remaining R100 is the sales amount.
The price paid for purchases includes VAT. The VAT can be calculated as 15/115 x price.
The VAT is the input tax and can be claimed back from SARS.
Assume a truck is purchased for R230 000. 15/115 x R230 000 = R30 000 is VAT paid to
the seller. The remaining R200 000 (R230 000 x 100/115) is the cost price of the truck on
which depreciation can be written off.
The purchaser pays the R30 000 over to the seller and the purchaser can claim it back
from the Receiver. The VAT on the truck does not “cost” him anything. The seller receives
the R30 000 from the purchaser, but it is not his money. He received it on behalf of the
Receiver of Revenue and should pay it over to the Receiver. He has neither made nor lost
money with regards to the VAT.
If an entity is registered for VAT purposes he is purely a collecting agent of VAT on behalf
of the Receiver of Revenue. All the VAT he receives on behalf of the Receiver he pays
over and all VAT he pays, he claims back from the Receiver.
20 - 3
VAT is levied at each point in the production and distribution channels. In the example
illustrated on the next page, you may assume that all four entities are registered for VAT
purposes and all four entities must therefore collect VAT on behalf of SARS on all goods
sold by the entities. However, all four can also claim back from SARS the VAT paid on their
purchases.
ILLUSTRATION
TRANSACTIONS VAT RETURN VAT OWING

TO SARS
1. MANUFACTURER
Sales 100 Tax on Sales 15
VAT 15 (Output tax)
R115 LESS
Tax on Purchases
(Input tax) (0)
VAT payable R15 15
2. WHOLESALER
VAT 60 (Output tax)
R460 LESS
Tax on purchases
(Input tax) (15)
VAT payable R45 45
3. RETAILER
VAT 90 (Output tax)
R690 LESS
Tax on purchases
(Input tax) (60)
VAT payable R30 30
4. SHOP
VAT 135 (Output tax)
R1035 LESS
Tax on purchases
(Input tax) (90)
VAT payable R45 45
R135
20 - 4
EXPLANATION
1. The manufacturer wants to earn R100 on the sale of goods to the wholesaler. The
manufacturer is registered for VAT and is required to charge 15% VAT output tax on
the selling price and must therefore sell the goods for R115. The wholesaler owes the
manufacturer R115.
The transaction will be recorded as follows in the records of the manufacturer:
Dr Wholesaler (debtor) 115

Cr Sales 100
Cr VAT-control 15
The VAT does not belong to the manufacturer and must be paid over to SARS. The
credit balance on the VAT-control account therefore represents a liability in the records
of the manufacturer until this amount is paid over to SARS.
2. As the wholesaler is registered for VAT purposes, the entity is entitled to claim back all
VAT he paid on purchases as input tax.
The wholesaler records this purchase transaction in the books as follows:
Dr Purchases 100
Dr VAT-control 15
Cr Creditors 115
The R15 debit balance on the VAT-control account represents the VAT that SARS
should pay back to the wholesaler.
3. The wholesaler wants to earn R400 on the sale of goods to the retailer. The wholesaler
must also charge VAT on the sale of goods and therefore the goods sell at R460 to the
retailer.
The sales transaction is recorded as follows in the records of the wholesaler:
Dr Retailer (debtor) 460

Cr Sales 400
Cr VAT-control 60
VAT-control account in the wholesaler’s books

Input VAT 15 Output VAT 60
Balance 45
60 60
Balance 45
The R45 credit balance on the VAT-control account represents the net amount that the
wholesaler owes SARS.
20 - 5
Another way to think about the debits and credits of the VAT-control account is to think
of input VAT as an asset. I have already paid the money and someone (SARS) owes
the money to me in other words it is an asset to me. An asset always has a debit
balance.
When I receive output VAT on behalf of the Receiver of Revenue for services rendered
or goods sold, I received the money on behalf of someone (SARS) and I owe the
money to SARS; it is therefore a liability to me. A liability always has a credit balance.
If the VAT-control account has a debit balance at the end of the period it means that in
total there were more inputs than outputs. It is an asset (debit balance) to me and
SARS owes the money to me.
If the VAT-control account has a credit balance at the end of the period it means that in
total there were more outputs than inputs. It is a liability (credit balance) to me and I
owe the money to SARS.
4. As above, the credit balance on the VAT-control account of the retailer will be R30 and
this amount will be paid over to SARS.
The credit balance on the VAT-control account of the shop will be R45 and represents
the amount owed to SARS.
5. The final consumer pays R135 VAT to the shop, which is equal to the total VAT paid
over to SARS by all the different vendors. The final consumers are ordinary persons
who buy the goods in the shop. They are not registered for VAT purposes, they pay the
VAT when they buy the goods but cannot claim back the VAT.
It is important to realise that if a business is registered for VAT, the VAT is not a tax that is
charged on the business. The business is only acting as a collecting agent for SARS. On a
regular basis (monthly, two-monthly, half-yearly or annually) the business will calculate the
difference between the VAT collected on sales (output tax) and the VAT paid on purchases
(input tax), complete a VAT-return and pay over or claim back the net amount from SARS.
The balance on the VAT-control account represents the net amount that should be paid
over or claimed back.
The final consumer is the person that actually pays the tax.
20 - 6
20.3 Accounting treatment
In all the books of first recording a column for VAT is added. The total of every VAT column
is transferred to the VAT-control account at the end of the month. This account can be a
current asset or liability depending on the balance. The balance represents the net amount
payable to or receivable from SARS.
20.3.1 Purchases
Each purchase transaction (of goods and services) is recorded in the purchase journal
from the goods receipt note and/or invoice. If an entity is registered for VAT, a VAT column
will be inserted in the purchase journal (if cash purchase transactions are recorded directly
in the CPJ, a VAT column will also be inserted in the CPJ).
The total purchase price (inclusive of VAT) of a transaction is recorded in the total column
of the purchase journal. The purchase price (excluding the VAT portion) is recorded in the
column of the asset/expense purchases, e.g. Inventory/Purchases. The VAT portion of the
purchase price is recorded in the VAT column.
The total of the total column of the purchase journal is credited to the creditors’ control
account. Each individual transaction is credited to the different creditor accounts in the
creditors’ ledger with the total purchase price (including VAT). The asset/expense (e.g.
Inventory/Purchases) column is debited to the asset/expense account and the VAT
column’s total is debited to the VAT-control account (this is the input tax).
Trade discount received from suppliers is not recorded at all. The reduced purchase price
is used as the purchase price and purchases will be recorded in the records at this lower
value. VAT is levied on the reduced purchase price.
Journal entry – Purchase transactions:
Dt Expense/asset with purchase price (VAT excluded) 100

Dt VAT-control (with VAT input tax) 15
(R115 *15/115 or R100 *15%)
Cr Creditors’ control (with total purchase price including VAT) 115
20 - 7
It is important to know when to multiply with 15% and when to multiply with 15/115 to
calculate the VAT.
The expense, income and asset are always net of VAT and the debtor, creditor and bank
always include VAT.
Expense, Income, Asset + VAT = Debtor, creditor and bank

100 + 15 = 115
The principle is always to take what you have and to multiply it with what you need and
then to divide it again with what you have.
If you have the price = R230, what is the VAT?
R230 X 15/115 = R30
If you have the net price = R200, what is the VAT?
R200 x 15/100 (15%) = R30
Purchase returns are recorded in the purchase returns journal. A VAT column is also
inserted in this journal. The transfer from this journal to the general ledger accounts is the
opposite of the original purchase transaction.
Journal entry – Purchase returns transactions:
Dt Creditors’ control (with total purchase price included VAT of the goods returned) 115
Cr Expense/asset with purchase price (VAT excluded) 100
Cr VAT-control (with VAT portion of purchase price) 15
The outstanding debt equals the purchase transaction. The debt is equal to the purchase
price of the goods that include VAT and is redeemed by payment to the creditor.
No VAT is levied on the payment of the money to creditors.
Journal entry – Redemption of legal claim of creditor:
Dt Creditors’ control (with total purchase price including VAT) 115

Cr Bank (with total purchase price including VAT) 115
20 - 8
20.3.2 Sales
All sales transactions are recorded from the sales invoices in the sales journal. If an entity
is registered for VAT, VAT must be charged on all sales transactions and a VAT column
should therefore be inserted in the sales journal (if cash sale transactions are recorded
directly in the CRJ, a VAT column will also be inserted in the CRJ).
The total selling price, including VAT, is recorded in the total column. The sales price,
excluding VAT is recorded in the sales column and the VAT portion in the VAT column.
The total of the total column of the sales journal is debited against the debtors’ control
account. Individual sales transactions are debited at the total sales price (VAT included)
against the relevant debtors in the debtors’ ledger. The sales column’s total is credited
against sales and that of the VAT column total is credited against the VAT-control account.
Trade discount granted to clients is not recorded at all. The reduced selling price is used as
the actual selling price and sales will be recorded at the reduced value. VAT is levied on
the reduced selling price.
Journal entry – Sales transactions:
Dt Debtors (with total selling price including VAT) 115

Cr Income with selling price (excluding VAT) 100
Cr VAT-control (with VAT output tax) 15
Sales returns are recorded in the sales returns journal. A VAT column is also inserted in
the sales returns journal. The entries in the ledger accounts are the opposite of the entries
of the original sales transaction.
Journal entry – Sales returns transactions:
Dt Sales Returns with selling price (VAT excluded) 100

Dt VAT-control (with VAT portion of selling price) 15
Cr Debtors (with total selling price of goods returned that includes VAT) 115
The redemption of debt is recorded from the receipt to the cash receipt journal. No VAT is
levied on the receipt of money.
Journal entry – Redemption of the liability by the debtor:
Dt Bank (with total selling price including VAT) 115

Cr Debtors (with total selling price including VAT) 115
20 - 9
Example 20.1
Transactions of XYZ during May 20x9 (all prices include VAT of 15% on cost price):
1. Purchase inventory for R1 725 on credit from A.
2. Pay cash for inventory to the value of R2 300.
3. Return inventory to the value of R287.50 to A.
4. Purchase inventory for R2 875 on credit from B.
5. Purchase a delivery vehicle for R57 500 on credit from C.
6. Pay repairs of R12 075 cash.
7. Pay B's account in full.
8. Pay C R57 500.
9. Sell inventory for R3 910 cash.
10. Sell an unused computer for R1 150 on credit to D.
11. Sell inventory of R1 035 on credit to E.
12. E returns inventory to the value of R460 and settles his account in full.
REQUIRED
Record the abovementioned transactions.
20 - 10
GENERAL LEDGER
Purchase return journal 287.50 Purchase journal 62 100
Bank 60 375 (1725+2875+57500)
(2875+57500)
Balance 1 437.50
62 100 62 100
Balance 1 437.50
Purchases
Creditors 4 000 Returns 250
(1 500 + 2500)
Bank 2 000 Balance 5 750
6 000 6 000
Balance 5 750
Debtors’ control
Sales 2 185 Returns 460
(1150+1035) Bank 575
(1035 – 460)
Balance 1 150
2 185 2 185
Balance 1 150
Sales
Debtors 400 Debtors 900
Balance 3 900 Bank 3 400
4 300 4 300
Balance 3 900
VAT-control
Sales returns (Input) 60 Debtors (Output) 285
(150+135)
Purchases (Input) 8 100 Bank (Output) 510
(225+375+7500)
Bank (Input) 1 875 Purchase returns (Output) 37.50
(300+1575)
Balance 9 202.50
10 035 10 035
Balance 9 202.50
20 - 11
CREDITORS’ LEDGER
A
Returns 287.50 Purchases 1 725
Balance 1 437.50
1 725 1 725
Balance 1 437.50
B
Bank 2 875 Purchases 2 875
2 850 2 850
C
Bank 57 500 Vehicle 57 500
57 000 57 000
DEBTORS LEDGER
D
Computer 1 150
E
Sales 1 035 Returns 460
Bank 575
1 035 1 035
20 - 12
CHAPTER 20
QUESTIONS
Page
Question 20.1 Treatment of VAT 20 - 14
20 - 13
QUESTION 20.1
Spiga Ltd. is a registered VAT vendor with a 30 September 20X8 financial year-end. The
VAT rate is 15%. The enterprise utilises a perpetual inventory system. All sales and
purchases of inventory are done on credit.
The following balances, amongst others, appeared in the general ledger of Spiga Ltd. on
1 October 20x7:
R
VAT-control (amount receivable) 2 000
Creditor’s control 37 000
Spiga Ltd. incurred the following transactions during the financial year ended
30 September 20X8, all amounts, where applicable, include VAT:
1. Sales of inventory of R386 400.

2. Purchases of inventory of R322 000.
3. Purchase returns of R8 050.
4. Payments from debtors of R376 200.
5. Payments to creditors of R339 720.
YOU ARE REQUIRED TO
a) show the VAT-control account in the general ledger of Spiga Ltd. on

30 September 20X8.
b) calculate the balance of the Creditors’ control account as it will appear in the
financial statements of Spiga Ltd. on 30 September 20X8.
20 - 14

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FINANCIAL

© STELLENBOSCH UNIVERSITY 2023

Learning outcomes 1-2

1.1 Nature and objective of accounting 1-3

1.2 Background to accounting standards 1-4

1.3 Users of accounting information 1-5

1.4 Forms of entities 1-6

- understand the nature and objective of financial accounting

- define the users of accounting information and their information

- identify the various forms of entities

Accounting is a measurement process and can therefore be defined as the recording

Accounting as a measurement process, as discussed in this book, is presented as a

The management of an entity will require the following information, at a minimum:

The International Accounting Standards Committee (IASC) was established in 1973.

Financial information is an important role player in economic decision making for a

An entity is any enterprise that conducts activities and engages in business

Sole proprietor Partnership Close Company

1 Owner 2 or more Partners 1 -10 Members Shareholders

Not a separate Not a separate Separate Separate

No acts No acts Close Corporation Companies Act

Profits belong to Profits are Profits are Profits belong to

Chapter 1 – 14 Chapter 19 Chapter 16 Chapter 14 & 15

BEGINNING OF PERIOD END OF PERIOD

FINANCIAL TRANSACTIONS FINANCIAL REPORTING

- How much profit did I make?

(1) Capturing of data on source documents

Learning outcomes 2-2

2.1 The objective of the conceptual framework 2-3

2.2 Scope of the conceptual framework 2-3

2.2.1 Objective of general purpose financial reporting

2.2.2 Qualitative characteristics of useful financial information

2.2.3 Underlying assumptions

2.2.4 Elements of financial statements

2.2.5 Recognition of the elements of financial statements

2.2.6 Measurement of the elements of financial statements

2.3 The entity concept 2 - 10

- understand the conceptual framework

- identify and define the elements of financial statements

- apply the recognition and measurement principles of the elements of

- understand the entity concept

The objective of the conceptual framework (hereafter refered to as the framework) is

2.2 Scope of the framework

2.2.1 Objective of general purpose financial reporting

The objective of general purpose financial reporting is to provide financial information

2.2.2 Qualitative characteristics of useful financial information

Qualitative characteristics are features that make information in financial statements

Financial information is useful, when it is relevant and a faithful representation of

Information can be used by users to make their own predictions.

Information provides feedback (confirms or changes) about previous

Financial statements represent economic phenomena in word and numbers, to be

Information is neutral as it is presented not to achieve a predetermined result.

 Freedom from error

The usefulness of financial information is enhanced if it has the following

Information must be reasonably understandable to users. For this purpose it is

2.2.2.3 The cost constraint on useful financial reporting

2.2.3.1 Accrual basis*

2.2.3.2 Going concern

2.2.4 Elements of financial statements

The framework explains elements as follows:

An asset is a present economic resource controlled by the entity as a result of past

The future economic benefits of an asset, is the potential to contribute directly or

Assets are divided into 2 broad groups namely:

 Non-current assets (e.g. property, plant, equipment, vehicles, patents,

A liability is a present obligation of the entity to transfer an economic resource as a