Professional Documents
Culture Documents
Accounting: All-in-1
6th Edition
L Cornelius
M Weyers
Accounting:
All-in-1
Sixth Edition
ACCOUNTING:
ALL-IN-1
Sixth Edition
L Cornelius
B Acc (NWU). HED (NWU), Honn B Com (NWU)
Honn BA (Bib Arch) (Unisa). MA (Bib Arch) (Umsa)
Senior Lecturer in Accounting
North-West University
M Weyers
B Acc (NWU). Honn B Com (NWU). M Com (NWU)
Senior Lecturer in Accounting
North-West University
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©2020
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publisher s written permission Any unauthorised reproduction of this work will constitute a copynght infringement
ond render the doer liable under both crvil and erm no I low
Whilst every effort has been made to ensure that the information published in this wok is accurate, the editors,
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reliance upon the information contained therein
This book was written with the purpose of ensuring that students who did not take accounting
at school level and who will not major in accounting are able to understand and apply the
basic principles and applications of accounting.
It is virtually impossible to conceive of a field in society where accounting does not play a
role. A basic knowledge of accounting is not only important in your career, but can be of
immense value in your personal life.
Accounting comprises the recording of transactions and events in monetary terms, with the
main purpose of providing reliable information to all users. This process involves the
collection, sorting and recording of accounting data that is required by the management of an
entity as well as several users outside the entity to enable them to make economic decisions.
Since this information is so important, rt is necessary to lay down rules and develop
principles so that transactions and events can be recorded in such a manner that useful
information is made available to users.
You must realise that this course will demand a great deal from you. You must be disciplined
and committed to your studies and honest when you do the self-evaluation assignments.
Remember that your studies will improve your knowledge and thereby enable you to prepare
for your career. Keeping this in mind will ensure that the final outcome will outweigh the input
you will need to make.
v
CONTENTS
Page
Chapter 1 Introduction and the conceptual framework.............................................. 1
1.1 Outcomes................................................................................................................... 1
1.2 Historical outline.......................................................................................................... 1
1.3 What is accounting used for?..................................................................................... 2
1.4 Domains of accounting............................................................................................... 3
1.5 Types of entities......................................................................................................... 4
1.6 The conceptual framework......................................................................................... 10
1.7 What comprises the financial statements?................................................................ 11
1.8 The elements of financial statements........................................................................ 12
1.9 Accrual accounting.................................................................................................... 12
1.10 Underlying assumption.............................................................................................. 12
1.11 Qualitative characteristics of financial statements.................................................. 13
Assignment 1.......................................................................................................................... 19
vii
Page
Assignment 1..................................................................................................................... 40
Assignment 2..................................................................................................................... 41
Assignment 3..................................................................................................................... 42
Assignment 4..................................................................................................................... 43
Assignment 5..................................................................................................................... 45
viii
Page
ix
Page
---------------------------------------------------------- xi ----------------------------------------------------------
Page
xii
Page
16.10 Practical example 2.............................................................................................. 300
Answer sheet....................................................................................................... 302
Assignment 1...................................................................................................................... 304
Assignment 2...................................................................................................................... 307
Assignments...................................................................................................................... 310
Assignment 4...................................................................................................................... 312
xiii
Page
Assignment 1........................................................................................................................ 363
Assignment 2........................................................................................................................ 365
Assignment 3........................................................................................................................ 367
Assignment 4........................................................................................................................ 368
Assignment 5........................................................................................................................ 370
Assignment 6........................................................................................................................ 372
Assignment 7........................................................................................................................ 374
xiv
Page
21.5 Gross earnings.............................................................................................................. 399
21.6 Net earnings.................................................................................................................. 399
21.7 Employer contributions................................................................................................ 400
21.8 Practical example.......................................................................................................... 402
Answer sheet............................................................................................................. 403
Assignment 1............................................................................................................................. 404
Assignment 2............................................................................................................................. 405
Assignment 3............................................................................................................................. 406
Assignment 4............................................................................................................................. 407
xv
Page
xvi
CHAPTER 1
1.1 OUTCOMES
• define accounting;
• define and discuss the following:
the purpose of accounting,
financial results, and
the financial period;
• define and discuss the users of financial statements;
• name and discuss the domains of accounting;
• name and discuss the different types of entities;
• name the reports that comprise the financial statements;
• name the five elements of financial statements;
• explain the accrual concept of accounting; and
• name and discuss the following:
the underlying assumption of accounting, and
the qualitative characteristics of financial statements.
InteVe^tinC/J'sd^
8000 BC
The city of Jericho was founded as a trade
centre for salt. Bartering was in use.
7500 BC
Agriculture was developed and stock counts
were conducted using clay balls, for example,
one clay ball represented one animal. Source Gary Giroux A Shod History of Accounting and Business
1
3200 BC
Writing was invented by bookkeepers.
Clay tablets on which markings were made were in use.
800 BC
Coins using an alloy of gold and silver were made. Counterfeiting originated!
1200-1350 AD
The double entry system was developed.
Luca Pacioli
A mathematician and friend of Leonardo da Vinci, he wrote
a book in 1494 that is regarded as the first complete
description of the double entry system.
1868
The current format of the trial balance was developed. Source James deSantis: A Brief History of
Accounting From Prehistory to the Information Age
Before WW II
The income statement was developed.
2
Entity an independent economic unit.
Users persons/entities who use the financial information to
make informed decisions.
The financial results of an entity are expressed in terms of the financial position and financial
performance:
Two domains of accounting, namely financial accounting and management accounting, are
relevant for this course.
• Financial accounting comprises the preparation of the formal financial statements for
study by external users.
• External users are persons/institutions who are not directly involved with the entity and
who desire to study the formal financial statements.
• Examples:
Controlling interests - owners and shareholders use the information to
determine if the funds they have invested in the
entity have been appropriately utilised and
managed.
3
Investors use the information to determine the profitability and
the financial state of affairs for possible further
investments and/or withdrawals.
Creditors - are interested in the financial results in order to
determine whether the entity will be able to pay its
debts.
Customers - want to be sure that the entity will be able to deliver
goods/services.
Employees - need job security with regard to remuneration and
career opportunities.
The community - is dependent on profitable entities for donations.
State institutions are dependent on the payment of taxations and
levies. The financial statements provide the
information on which the calculations are done.
4
1.5.1 Sole proprietors
This business form comprises one owner who supplies the capital for starting the business.
There are no legal formalities other than a licence to trade. The entity itself is not liable for
income tax, but the owner is taxed on the business profit in his/her personal name. A sole
proprietorship is not a legal person and therefore has no legal personality, in other words, the
owner runs all the risks related to the business and reaps all the rewards.
Advantages
Limitations
Advantages
5
Limitations
• Partners are jointly and severally liable, in other words, if the partnership is unable to
pay its debts, the partners will have to contribute from their personal assets. In the
event that a partner is unable to contribute his portion, the remaining partner/s will have
to make up the shortfall.
• Continuity ends the moment a partner withdraws or passes away, in other words, the
partnership must be dissolved and a new one formed if the remaining partners wish to
continue with the business.
A close corporation is a legal entity unique to South Africa and was originally
incorporated in terms of the Close Corporations Act (69 of 1984). However, since 1 May
2010, no new close corporations may be formed under the Companies Act and existing
companies will not be permitted to convert to close corporations. Existing close
corporations will continue indefinitely until they are deregistered or dissolved.
A close corporation may have between one and ten members who are mostly natural
persons and is required by law to display the letters “CC” after the name of the entity on
all documentation and signage. A close corporation is a separate legal entity or juristic
person, which means it may sue or be sued in its own right. In the Income Tax Act, a
close corporation is defined as a private company for income tax purposes at the rate
applicable to companies.
Advantages
• Registering a close corporation is a simple and relatively affordable option and there
are only a few regulations.
• A close corporation does not have any of the legal complications that a company has,
for example, audited financial statements are not required by law. However, banks,
creditors and the South African Revenue Services (SARS) may request audited
financial statements. A close corporation is also not required to hold annual general
meetings. This makes running a close corporation easier than running a company.
• A close corporation is regarded as a separate legal entity/person which means that the
continuity of a close corporation is not linked to the life of its members.
• Income distributed to the members of a close corporation is exempt from normal
income tax.
• A close corporation may give financial assistance to a member to acquire an interest in
the corporation.
6
• The amount of capital a close corporation is able to access is normally more than that
of the average sole trader or small business.
• The liability of members for the debts of the close corporation is limited except under
certain exceptional circumstances.
• It is easy and inexpensive to change the founding statement of a close corporation.
• There is no separate board of directors in a close corporation; management is the
responsibility of the members.
• A member’s interest in a close corporation does not need to be in proportion to his/her
contributions (capital), for example, a member may contribute less capital because
he/she has specific skills that are needed in the close corporation.
• A close corporation may acquire shares in a company. Take note that a company
may not acquire membership in a close corporation.
Limitations
• Since the maximum number of members allowed is ten, this could hamper the
growth and expansion of the close corporation.
• A member of a close corporation can be held personally liable for the debts of the
entity if a member acts carelessly or without skill.
• Financial institutions may require the financial documents of a close corporation to be
audited when the entity applies for a loan. Funds will not be released until the auditing
has been completed.
• All members must agree to dispose of a member’s interest. This could make it difficult
for members to leave the close corporation or to pay a member his/her portion.
• Every member acts as an agent of the close corporation and the entity is bound by the
actions of each member.
• It is not possible to sell a close corporation to a company. A close corporation can,
however, be converted to a company, which is a very time-consuming process.
• A close corporation may not become part of a group structure, for example, a close
corporation may not become a subsidiary of a company or another close corporation.
• Certain major decisions concerning the close corporation have to be made by a
member or members who own a membership of at least 75%. These decisions must,
however, be in compliance with the close corporation agreement.
• The most important disadvantage of a close corporation is that it is taxed as if it were a
company. The company tax rates are significantly higher than personal tax rates that
apply to partnerships and sole traders.
7
1.5.4 Private and public companies
These entities are formed under the Companies Act (61 of 1973). Two types of
companies may be formed and incorporated, namely, profit companies and non-profit
companies.
If only a limited number of people may buy shares in the company, the company is
termed a private company and has the letters “(Pty) Ltd” after its name. The “Pty" stands
for “proprietary” which means the ownership is limited to the shareholders. There are
between one and fifty shareholders in a private company.
If the public may buy shares in the company and it is listed on the Johannesburg
Securities Exchange (JSE), the company is known as a public company and has the
letters "Ltd" after its name. It may have a minimum of seven and an unlimited maximum
number of shareholders.
A company has all the legal powers and capacity of an individual and is a distinct and
separate legal entity apart from its shareholders. Shareholders enjoy limited liability, in
other words, unlike a sole trader and a partnership, the shareholders do not have to pay
the company’s debts if the company itself is unable to do so.
8
Advantages
• A public company can raise capital relatively easily by offering shares to the public.
• Shareholders do not have to be directly involved in running the business, which further
facilitates the raising of capital.
• A company is a separate legal entity/person, which means that the continuity of the
company is not linked to the life of its shareholders.The liability of shareholders is
therefore limited to the capital they invested in the company. The Act only imposes
personal liability on directors who knowingly carry on business in a fraudulent or
reckless manner.
• Transfer of ownership in a public company is simple - it merely involves the purchase
and sale of shares through a broker.
• Voting rights in a private company may be freely regulated in the Memorandum of
Incorporation; voting rights in a public company are proportional to the number of
shares a voter holds.
• A private company is not required to file its annual financial statements with the
Companies and Intellectual Property Commission (CIPC).
Limitations
• A company, particularly a public company, is difficult and expensive to establish as
there are many formalities to be followed in setting up and registering a company.
• A private company is prohibited from offering its shares to the public since it may not
be listed on the JSE. This restricts the transferability of its shares.
• A company is subject to a constant rate of tax, irrespective of the level of income.
• The profits of a company are subject to double taxation, firstly, in the form of normal
company taxation at company level and secondly, in the form of dividend tax at
shareholder level.
• The inclusion rate for capital gains tax is higher than that of individuals.
For the purposes of this course, we will concentrate only on the sole trader.
9
1.6 THE CONCEPTUAL FRAMEWORK
• We want to:
limit the differences and diversity between the financial statements of different
entities;
eliminate undesirable alternatives;
avoid being too strict; and
- achieve faithful presentation.
• People have different ways of doing things. It would cause confusion if each entity
prepared financial statements according to their own preferences. It is therefore
necessary that information which is provided to users is consistent and
understandable. The Conceptual Framework was thus established with the following
objective in mind:
FINANCIAL STATEMENTS
Quantative Qualitative
characteristics characteristics
Recognition
Measurement (Chapter 5-9)
10
1.7 WHAT COMPRISES THE FINANCIAL STATEMENTS?
The financial statements of an entity comprise four reports and the explanatory notes.
A professional golf player who occupies the 10th position on the world rankings decides he
wants to improve his position during the year. If he has improved to the seventh position by
the end of the year, then his position at the end of the year is number 7 on the world
rankings. In the same manner the financial position of an entity is determined on a specific
date.
An individual’s wealth is calculated by deducting the value of his debts (liabilities) from the
value of his possessions (assets). This wealth represents his equity and denotes his financial
position. The assets, liabilities and equity of an entity denote the financial position of the
entity and are shown in the statement of financial position. The elements assets, liabilities
and equity will be dealt with in depth in later chapters.
The above example of a professional golf player will be used here again. The golf player
improved his position on the world rankings from number 10 to number 7. His performance
for the year is thus indicated by the fact that he improved his position by three places. In the
same manner the financial performance of an entity is determined for a specific period.
The income and expenses of an entity determine the financial performance (profit or loss) of
the entity and are shown in the statement of profit or loss and other comprehensive income.
This statement represents the owner's interest, in other words his equity in the business. It
includes the profit or loss made by the entity for the financial period, any contributions
(capital) made by the owner to the entity and any withdrawals (drawings) made by the owner.
The notes to the financial statements consist of detailed information with regard to income,
expenses, equity, assets and liabilities as well as a declaration of the accounting policy of the
entity.
11
1.7.5 Statement of cash flow
This statement indicates the inflow and outflow of cash during a specific period.
Examples of the financial statements of a sole trader follow at the end of the chapter.
assets
liabilities
equity which consists of capital (amounts contributed by owner) and drawings
(amounts withdrawn by owner), as well as:
income
- which determine the profit or loss
expenses
According to the accrual concept, transactions must be recorded in the accounting records
when they occur, not necessarily when cash is received or paid. The transaction date is the
date on which the cash accrues, in other words, the date on which the transaction must be
recorded in the accounting records.
When preparing financial statements, it is assumed that an entity will continue to exist for the
foreseeable future and that a substantial portion of the activities of the entity will not be
discontinued.
If an entity is not a going concern, the elements of the financial statements must be
measured at liquidation values (cash values) and a note to this effect must be included in the
financial statements. Liquidation values of assets are usually less than their actual values
due to the fact that the entity is forced to sell its assets.
12
1.11 QUALITATIVE CHARACTERISTICS OF FINANCIAL
STATEMENTS
The primary purpose of accounting is to provide financial information about the reporting
entity. This information must be useful to the users of financial statements in order to enable
them to make financial decisions and is presented in the form of financial statements. The
information contained in the financial reports must possess certain qualitative characteristics
in order to be useful to users. These characteristics are divided into two groups, namely
fundamental and enhancing characteristics.
a) Relevance
Financial information should assist users to make the decisions they need to make; for
example, if a supplier wishes to supply goods to the entity, the financial statements should
provide sufficient information regarding the ability of the entity to pay its creditors. The
information contained in the financial statements is not useful and therefore not relevant if
these decisions cannot be made.
b) Faithful representation
The information contained in the financial statements must comply with the following
requirements:
13
1.11.2 Enhancing qualitative characteristics
a) Comparability
Financial statements should be comparable with previous periods as well with financial
statements of similar entities. Information should therefore be presented in a consistent
manner from one financial period to the next. This allows an entity to determine tendencies.
b) Verifiability
Users should be able to verify that the information contained in the financial statements
faithfully represents the state of affairs of an entity. This does not necessarily mean that
knowledgeable and independent observers may fully agree on whether a particular portrayal
is a faithful representation, but that they should be able to reach consensus. Examples of
verification include checking the balances of cash on hand (count the cash), debtors and
creditors (compare invoices and receipts with recorded amounts) and inventory (multiply
physical quantities with unit prices to check the calculation).
c) Timeliness
It is important that financial statements are released to users timeously to enable them to
make decisions while the information is still relevant. The longer it takes for information to
become available, the less useful it will be.
d) Understandability
The users of financial statements must be able to understand the financial statements. It is,
however, assumed that users will possess a reasonable knowledge of accounting and will
study the financial statements with diligence. Information must not be excluded solely
because it may not be understood by some users.
14
STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME
(SERVICE ENTITY)
| ML CONSULTANTS
Income:
Services rendered 285 238
15
STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME
(TRADING ENTITY)
| ML TRADERS
Income:
Rent received 55 40
285 238
Expenses: (147) (114)
Salaries 105 78
Telephone 6 5
Depreciation 36 31
Operating profit 138 124
Finance costs: (12) (12)
Interest received 3 2
Interest paid (15) (14)
Profit for the year 126 112
16
STATEMENT OF CHANGES IN EQUITY
| ML CONSULTANTS/TRADERS
17
STATEMENT OF FINANCIAL POSITION
I ML CONSULTANTS/TRADERS
ASSETS
Non-current assets: 68 58
Property, plant and equipment 60 50
Financial assets 8 8
Current assets: 60 49
Inventory 15 12
Trade and other debtors 43 36
Cash and cash equivalents 2 1
Total assets 128 107
Non-current liabilities: 1 2
Interest-bearing loan 1 2
Current liabilities: 26 17
Trade and other creditors 16 15
Short-term loan 2 1
Short-term portion of long-term loans 1 1
Bank overdraft 7 0
Total equity and liabilities 128 107
18
CHAPTER 1
ASSIGNMENT 1
1. Define accounting.
9. What is the underlying assumption that is made when financial statements are
prepared?
The suggested solution will be discussed during the next contact session. If you
W experience difficulty in completing the assignment, review chapter 1 again.
19
CHAPTER 2
THE ACCOUNT
2.1 OUTCOMES
• There are five elements in accounting, namely assets, liabilities, equity, income and
expenses.
• The financial performance of an entity is determined in terms of the profit or loss for a
specific financial period and is shown in the statement of profit or loss and other
comprehensive income.
• The financial position of an entity indicates the state of affairs on a specific date and is
shown in the statement of financial position.
An account is a formal record of the transactions of an entity with regard to a specific item.
The increases and decreases in each asset, liability, equity, income and expense item are
recorded in general ledger accounts. Management is responsible for the activities and assets
of an entity and will therefore scrutinise the movements in the individual accounts.
21
2.3.1 The classification of accounts
• assets
• liabilities
• equity:
- capital (amounts contributed by the owner)
- drawings (amounts withdrawn by the owner)
- income 1 the income and expense accounts
►
expenses J which are known as nominal accounts
The above classification of accounts is known collectively as the general ledger and is used
in the accounting records as well as in the financial statements. Each entity will determine
which accounts are necessary for its business.
There are two formats in which an account may be laid out, namely the three-column format
and the T-account format. For the purposes of this course, we will focus only on the
T-account format. Each account is set out in the form of a capital letter “T”. The left-hand side
and the right-hand side are identical. An account consists of the following sections:
NAME OF ENTITY
GENERAL LEDGER
DR ACCOUNT NAME ACCOUNT NUMBER CR
Date Detail Fol R Date Detail Fol R c
c
Year Year
Day Day
Month Month
DEBIT BALANCE OR TOTAL CREDIT BALANCE OR TOTAL
22
Transactions are first recorded in different journals (books of prime entry) in chronological
order. These journals will be discussed in chapter 3. The transactions are then posted from
the journals to the ledger accounts. These ledger accounts are a summary of the
transactions in the journals. Each journal has a reference number. This number is entered in
the folio column for each transaction in the ledger and serves as a cross-reference to
indicate from which journal the transaction originated.
An account is debited when an entry is made on the left-hand side of the account and is
credited when an entry is made on the right-hand side. A debit entry is thus an entry on the
left-hand side and a credit entry is an entry on the right-hand side of the account. The
balance of an account is the difference between the amounts on the debit side and the
amounts on the credit side. The account has a debit balance if the total of the amounts on
the debit side exceeds the total of the amounts on the credit side. The account has a credit
balance if the total of the amounts on the credit side exceeds the total of the amounts on the
debit side.
General ledger accounts are balanced at the end of each month. These balances are called
closing balances and are brought forward to the first day of the following month as opening
balances. There will be no opening balances for a new entity. However, opening balances
will be used from the beginning of the second month.
As already mentioned, a separate account is opened for each asset, liability and equity
(capital, drawings, income and expense) item. A name is given to each account, for example,
“Vehicles”. Each account also has an account number or code. Once an entity has decided
what accounts will be used, this code is allocated according to the chart of accounts. An
example of the allocation of account codes is provided in Diagram 2.1.
23
ASSETS LIABILITIES
Furniture B1
Equipment B2 Long-term loan L1
Vehicles B3
Creditors control L5
Bank B7
Debtors control B8
ASSETS B1 - B100
LIABILITIES L1 -L100
EQUITY E1 -E100
INCOME 11 -1100
EXPENSES U1 -U100
________________
EQUITY
Capital E1
Drawings E2
INCOME EXPENSES
Diagram 2.1
24
An example of a chart of accounts is shown below:
NAME OF ENTITY
LIST OF ACCOUNTS
Liabilities L1 -L100
Equity E1 -E100
Income 11 -1100
Expenses U1 -U100
Assets
Furniture B1
Equipment B2
Vehicles B3
Bank B7
Debtors control B8
Liabilities
Long-term loan L1
Creditors control L5
Equity
Capital E1
Drawings E2
Income
Services rendered 11
Rent received I2
Expenses
Stationery U1
Diagram 2.2
25
2.3.5 The duality concept
The duality concept determines that the financial position of an entity is defined in terms of
the accounting equation. Each transaction has a dual effect in order to ensure that the
accounting records comply with the duality concept. This means that the accounting equation
must always balance.
Another term for the duality concept is the double entry principle. This determines that each
transaction influences at least two accounts. One account is debited and the other is
credited:
INCREASE
If the left side of the accounting equation If the right side of the accounting equation
(assets) increases, we must debit the relevant (equity and liabilities) increases, we must credit
general ledger accounts. the relevant general ledger accounts.
DECREASE
If the left side of the accounting equation If the right side of the accounting equation
(assets) decreases, we must credit the relevant (equity and liabilities) decreases, we must debit
general ledger accounts. the relevant general ledger accounts.
26
2.4 THE ACCOUNTING PROCESS
The accounting process is the order in which a transaction that took place, is recorded in the
accounting records.
27
CHAPTER 2
ASSIGNMENT 1
1. Define an account.
The suggested solution will be discussed during the next contact session. If you
~W experience difficulty in completing the assignment, review chapter 2 again.
28
CHAPTER 3
3.1 OUTCOMES
• The duality concept determines that at least two accounts are influenced by each
transaction. One account is debited and the other is credited.
• Accounts are classified according to five main groups; namely assets, liabilities, equity,
income and expenses.
The first step in the accounting process is to record transactions on source documents. A
source document is concrete evidence that a transaction took place. All information
regarding the transaction is recorded on the source document, such as a receipt or cash
register slip. The second step is to enter the information from the source documents in the
accounting records. The information is recorded on a daily basis in subsidiary journals,
known as the books of prime entry. A journal is a chronological record of the daily
transactions of an entity. This process is known as journalising and an entry in a journal is
known as a journal entry. At the end of each month, the journals are posted to the different
ledgers.
29
Different subsidiary journals are used for different types of transactions:
Debtors journal
Debtors are clients to whom an entity sells goods or services on credit/account. These clients
owe money to the entity because they do not pay for the goods or services immediately -
they usually pay only at the end of the month. The entity opens an account for each debtor in
the accounting records. All debtors’ transactions for each month are also consolidated in a
general ledger account called the debtors control account.
30
Creditors journal
Creditors are suppliers who sell goods or services to the entity on credit/account; in other
words, the entity owes money to its suppliers. The entity also opens an account for each
creditor and all creditors’ transactions are consolidated in a general ledger account called the
creditors control account.
General journal
Transactions that are not recorded in any of the above journals are recorded in the GJ, for
example, adjustment journal entries (which will be dealt with in chapter 10). For the purposes
of this course, we will be focusing only on the general journal. Entries that are usually
recorded in the different subsidiary journals will therefore be recorded in the general journal.
• the heading;
• the reference number of the journal;
• the date of the transaction;
• the names and account codes of the accounts to be debited and credited (the account
codes are entered in the folio column)-
• the amounts to be debited and credited; and
• a short description of the transaction called the journal narration.
31
NAME OF ENTITY
GENERAL JOURNAL JOURNAL NO.
DATE DETAILS FOL DR CR
Year R c R c
Month Day Account debited xxx XX
Account credited xxx XX
Journal narration
EXAMPLE 3.1
The following transaction is used to illustrate a basic entry in the general journal:
Equipment was purchased by Collins Traders on 10 January 200X for R15 000 cash.
Use the account codes from the chart of accounts in chapter 2.
32
3.4 PRACTICAL EXAMPLE 1
We will now journalise the following transactions. Use the account codes from the chart of
accounts in chapter 2.
33
PRACTICAL EXAMPLE 1 - ANSWER SHEET
GENERAL JOURNAL J1
FOL DR CR
R R
34
KOALA PRUNING SERVICES
GENERAL JOURNAL J2
FOL DR CR
R R
35
3.5 VALUE-ADDED TAX
3.5.1 Introduction
Value-Added Tax (VAT) was implemented in South Africa on 30 September 1991. According
to the Act, VAT is an indirect tax on the consumption of goods and services in the economy.
In other words, it is a tax on the value-added or profit portion of sales. Revenue is raised for
the government by requiring certain businesses to register and to levy VAT on the taxable
supplies of goods and services. These businesses become VAT vendors who act as agents
for the government in collecting VAT.
VAT is charged at each stage of the production and distribution process and it is proportional
to the price charged for the goods and services. VAT is presently levied at the standard rate
of 15% on the supply of most goods and services and on the importation of goods. The VAT
on the importation of goods is collected by customs. There is a limited range of goods and
services which are subject to VAT at a zero rate or which are exempt from VAT.
Any person who carries on a business may register for VAT. The term “person” is not only
limited to companies but also includes, amongst others, individuals, partnerships, trust funds,
foreign donor-funded projects and municipalities. In order to register, an application form
must be completed and a specific process must be followed. It is mandatory for a person to
register for VAT if the taxable supplies made, or to be made, are in excess of R1 million in
any consecutive twelve-month period. A person may also choose to register voluntarily if the
taxable supplies made in the past period of twelve months exceeded R50 000. A person who
has registered for VAT is referred to as a “vendor”.
A vendor is required to submit VAT returns and make payments of the VAT owed or claim a
VAT refund in accordance with the tax period allocated to the vendor. The VAT returns and
payments are normally submitted/made on or before the 25th day after the end of the tax
period. Late payments of VAT will attract penalties and interest.
36
3.5.4 VAT rates
Most items attract VAT at the standard rate of 15% or at zero rate. Goods on which VAT is
charged at 15% are called standard-rate supplies. Some items, such as exported goods and
petrol, attract VAT at zero rate. These items are still taxable but at a rate of 0%. Some items
are exempt from VAT, for example, interest and salaries are not subject to VAT at all.
• exported goods;
• petrol;
• brown bread;
• maize meal;
• sale of a business.
Output tax is the VAT which the vendor charges on the supply of goods or services in the
course of business and is payable to SARS. Input tax is the VAT which the vendor has borne
in respect of goods or services supplied to him and can be claimed back from SARS.
37
3.5.6 Calculation of VAT
If a vendor sells goods or services, VAT at 15% on the transaction amount forms part of the
total price. The VAT portion is called output tax, for example:
A vendor sells goods for R115 cash (including VAT). The transaction will be recorded in the
accounting records as follows:
• Bank R115
Sales R100
Output VAT R 15
When a vendor purchases goods or services from another vendor and there is VAT levied
on the transaction, the purchaser may claim the VAT from SARS. This is called input tax,
for example:
A vendor purchases goods for R69 cash (including VAT). The transaction will be recorded in
the accounting records as follows:
• Purchases R60
Input VAT R 9
Bank R69
At month-end, the output and input VAT accounts are transferred to a VAT control account.
The difference between the debits and the credits in the control account will represent the
amount payable to or refundable by SARS. The above two transactions will be closed off to
the VAT control account as follows:
The difference between output VAT and input VAT is what SARS receives from (if output
VAT exceeds input VAT) or pays to (if input VAT exceeds output VAT) the vendor after the
submission of the VAT return.
38
3.6 PRACTICAL EXAMPLE 2
The following information was obtained with regard to VAT transactions. By using the same
format as below, we will calculate the unknown figures (amounts will be rounded off to the
nearest rand).
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
39
CHAPTER 3
ASSIGNMENT 1
On 1 February 200X Pharos Traders purchased a vehicle for R100 000 cash.
Use the account codes from the chart of accounts in chapter 2.
*-{LdR The suggested solution will be discussed during the next contact session. If you
W experience difficulty in completing the assignment, review chapter 3 again.
40
CHAPTER 3
ASSIGNMENT 2
Scroll Printing Services commenced business on 1 October 200X. The following transactions
took place during October 200X:
1 The owner, P. Scroll, deposited R200 000 into the bank account of the business as
his capital contribution.
3 Purchased furniture and paid by cheque, R60 000.
4 Purchased two computers and two printers from York Computers on credit, R30 000.
Purchased stationery and paid by cheque, R10 000.
5 Rendered services on credit. R10 000.
8 Rendered services for cash, R5 000.
Purchased stationery on credit from Office Suppliers. R7 000.
12 Rendered services for cash, R20 000.
18 Rendered services on credit, R6 000.
24 A debtor paid his account in part, R6 000.
25 Paid the water and electricity account by cheque, R3 000.
Paid the telephone account by cheque, R1 000.
28 Paid salaries by cheque, R7 000.
30 The owner withdrew R8 000 by cheque for personal use.
31 Paid R15 000 as part payment of York Computers’ account.
Record the above transactions in the general journal of Scroll Printing Services for
October 200X.
. The suggested solution will be discussed during the next contact session. If you
~W experience difficulty in completing the assignment, review chapters 2 and 3
again.
41
CHAPTER 3
ASSIGNMENTS
The suggested solution will be discussed during the next contact session. If you
~ experience difficulty in completing the assignment, review chapter 3 again.
42
CHAPTER 3
ASSIGNMENT 4
PART A
The new owner of Crash Builders Enterprises had to register for VAT since he expected to
achieve a turnover of more than R1 000 000 per annum. However, he is uncertain as to how
to treat the different kinds of income and the applicable VAT and asked you for advice.
Additional information:
The suggested solution will be discussed during the next contact session. If you
~W experience difficulty in completing the assignment, review chapter 3 again.
43
PART B
The new owner of Crash Builders Enterprises had to register for VAT since he expected to
achieve a turnover of more than R1 000 000 per annum. However, he is uncertain as to how
to treat the different kinds of expenses and the applicable VAT and asked you for advice.
Additional information:
The suggested solution will be discussed during the next contact session. If you
44
CHAPTER 3
ASSIGNMENTS
PART A
25 June ? 7 368 ?
29 June ? 1 842 ?
Complete the above subsidiary journals by filling in the omitted amounts. VAT is levied at the
prevailing rate.
NB: Round off to the nearest rand.
45
PART B
12 June 15 000 0 0 7 7
13 June 60 000 0 0 7 7
20 June 7 5 526 7
Complete the above subsidiary journals by filling in the omitted amounts. VAT is levied at the
prevai ing rate.
NB: The entity uses the periodic inventory system. Round off to the nearest rand.
The suggested solution will be discussed during the next contact session. If you
W experience difficulty in completing the assignment, review chapters again.
46
CHAPTER 4
4.1 OUTCOMES
• the general ledger which contains all the asset, liability and equity accounts of an
entity;
• the debtors ledger which contains all the debtors accounts; and
• the creditors /edger which contains all the creditors accounts.
47
The accounts in the debtors and creditors ledgers are usually displayed in the three-column
format. An account is opened for each debtor and creditor. Each account keeps a record of
the transactions with the relevant debtor or creditor and must be balanced at the end of each
month to determine how much a debtor owes or how much is owed to a creditor. At the end
of each month a list of debtors is prepared. This list contains the names of each debtor, the
account code and the balance (the amount still owed to the entity). In the same manner, a list
of creditors is prepared indicating the name and account code for each creditor and the
balance still owing to each creditor. At the same time, a debtors control account (asset) and
a creditors control account (liability) are maintained in the general ledger. Where a
computerised system is used to record transactions, each entry that is posted to the
individual debtor’s and creditor’s accounts is posted automatically to the control accounts. If
a manual system is used, these transactions must be posted to the control accounts by
hand. These control accounts serve as important control measures to ensure that all debtors
and creditors transactions have been recorded. The balance of the debtors control account
must therefore equal the total of the list of debtors and the balance of the creditors control
account must equal the total of the list of creditors.
For the purposes of this course, we will be focusing only on the general ledger.
4.3.1 Posting
The third step in the accounting process involves posting the journal entries to the different
ledgers. The ledger is a summary of all journal entries.
EXAMPLE 4.1
Equipment was purchased on 10 January 200X by Collins Traders for R15 000 cash.
The journal entry for this transaction is shown next:
48
4.3.2 Balancing an account
Entries can be made on the debit side of an account as well as on the credit side. When this
happens, it is necessary to balance the account. This is done at the end of each month in
order to calculate the balance of the account that must be brought forward to the following
month. The steps for balancing an account are as follows:
• Aggregate (total) the amounts on the debit side and write the total down in pencil.
• Aggregate (total) the amounts on the credit side and write the total down in pencil.
• Write the larger total in pen between the total lines in the amount columns on the debit
side and credit side.
49
• Deduct the smaller total from the larger total and write the difference (balance) in pen
above the total lines in the amount column on the side with the smaller total. In the day
column, write the last day of the month; in the details column, write the word “Balance”
and in the folio column, write “c/f (carried forward).
• Now write the balance below the total lines in the amount column on the opposite side
of the account. In the month column, write the following month; in the day column, write
the first day of the following month; in the details column, write the word "Balance” and
in the folio column, write “b/f (brought forward).
The balance of the bank account in Example 4.2 will be calculated as follows:
EXAMPLE 4.2
NAME OF ENTITY
50
4.4 PRACTICAL EXAMPLE 1
The general journal that we prepared in chapter 3 is shown below. We will now post these
journal entries to the general ledger.
FOL DR CR
200X R R
Jan 1 Bank B7 100 000
Capital E1 100 000
Capital contribution by owner
3 Furniture B1 30 000
Bank B7 30 000
Purchased furniture for cash
4 Equipment B2 10 000
Creditors control L5 10 000
Pruning equipment purchased on credit
8 Stationery U1 1 000
Bank B7 1 000
Stationery purchased for cash
11 Bank B7 3 000
Services rendered 11 3 000
Services rendered for cash
12 Debtors control B8 2 000
Services rendered 11 2 000
Services rendered on credit
18 Drawings E2 500
Bank B7 500
Owner withdrew cash for personal use
22 Water and electricity U2 2 000
Creditors control L5 2 000
Water and electricity account received
25 Bank B7 2 000
Debtors control B8 2 000
A Adam settled his account
26 Creditors control L5 10 000
Bank B7 10 000
Settled the account of Sand Pruning Equipment
51
PRACTICAL EXAMPLE 1 - ANSWER SHEET
DR CAPITAL E1 CR
200X
Jan 2 Bank J1
DR DRAWINGS E2 CR
200X
Jan 18 Bank J1
DR FURNITURE B1 CR
200X
Jan 3 Bank J1
DR EQUIPMENT B2 CR
200X
Jan 4 Creditors control J1
DR BANK B7 CR
200X 200X
26 Creditors control J1
31 Balance c/f
DR DEBTORS CONTROL B8 CR
200X 200X
Jan 12 Services rendered J1 Jan 25 Bank J1
52
DR CREDITORS CONTROL L5 CR
200X 200X
Water and
31 Balance c/f 22 J1
electricity
DR SERVICES RENDERED 11 CR
200X
Jan 11 Bank J1
12 Debtors control J1
DR STATIONERY U1 CR
200X
Jan 8 Bank J1
200X
Service entities earn income mainly from rendering services, while trading entities earn
income mainly by buying goods and selling them at a profit. This profit, called the gross
profit, is calculated by deducting the cost of the goods from their selling price. The cost
includes the purchase price as well as all subsequent costs incurred to bring the goods to the
location from where they will be sold, such as delivery costs (freight charges), import duties
and customs duties. The selling price is determined by adding a mark-up or profit margin to
the cost:
The goods purchased and sold can also be called trading stock or inventory. It is very
important for an entity to keep accurate records of inventory as this can affect the profitability
of the entity.
53
Two methods exist by which inventory can be accounted for, namely:
For the purposes of this course, we will focus only on the periodic inventory system.
According to the periodic inventory system, the value of inventory that an entity has on hand
is determined on a regular (periodic) basis, for example, at the end of each month.
Purchases of inventory are recorded in the purchases account, not in the inventory account.
The inventory account does not. therefore, show how much inventory is available at any
given time and cannot be used to determine whether inventory has been stolen or lost. The
inventory account is adjusted with the amount of physical inventory on hand only at the end
of a financial period
When a trading entity purchases inventory, the following entry is recorded when using the
periodic inventory system:
Debit Purchases
with the cost price of inventory purchased
Credit Bank or Creditors control
In contrast to the periodic inventory system, a purchases account does not appear in the
financial records when using the perpetual inventory system. All transactions relating to
inventory (purchases, sales and returns) are recorded in the inventory account which results
in the value of inventory being immediately available after each transaction.
When a trading entity purchases inventory, the following entry is recorded when using the
perpetual inventory system:
54
The following two entries are made when inventory is sold:
Debit Bank or Debtors control with the selling price of inventory sold
Credit Sales
And
When an asset (in this case inventory) is reduced, the owner's interest in the entity
decreases. This reduction in equity is represented by the cost of sales. Cost of sales is the
cost of the inventory that is sold during a specific period. When inventory is sold, the
inventory account should be reduced by the cost of that inventory. The second leg of the
transaction is to record the sales amount, in other words, the amount at which the inventory
is sold and which is either received in cash or charged to a customer's account.
If the periodic inventory system is used, the sales for the period must, therefore, be reduced.
The journal entry will be recorded as follows:
Debit Sales returns and allowances with the selling price of the
Credit Bank or Debtors control returned goods
55
If the perpetual inventory system is used, the original sales transaction must be reversed
and the goods must be returned to inventory. The journal entries will, therefore, be recorded
as follows:
• Debit Sales returns and allowances "1 with the selling price of inventory
• Credit Bank or Debtors control J received
And
If the periodic inventory system is used, the purchases for the period must be reduced by
means of the purchases returns and allowances account. The journal entry will be recorded
as follows:
If the perpetual inventory system is used, the original purchase transaction must be
reversed (the inventory account must indicate that less inventory is available for sale). The
journal entry will be recorded as follows:
56
These items will be recorded as follows if the periodic inventory system in use:
Although these items are each normally recorded in separate accounts, they are still part of
the cost of inventory. These accounts must, therefore, be closed off against the cost of sales
account at the end of each financial period as follows:
If the perpetual inventory system is used, the above additional costs will also be debited
against separate accounts:
These additional costs will also be closed off against the cost of sales account at the end of
each financial period as follows:
In order to determine the value of inventory on hand at the end of a financial period
according to the periodic inventory system (closing inventory), a stock count must be
conducted. Each inventory item is counted and the quantity entered on an inventory list. The
value of each item is also entered on the inventory list. Once the stock count has been
completed, the quantity of each item on hand is multiplied by its value. The values of all the
items are aggregated (added together) to provide a total value for inventory on hand at the
end of the period. The closing inventory figure is then recorded in the accounting records as
follows:
• Debit Inventory
• Credit Cost of sales
The value of closing inventory according to the perpetual inventory system is calculated by
balancing the inventory account since the inventory account is continuously debited or
credited with every purchases, sales and returns transactions. A physical stock count is,
however, also held when using the perpetual inventory system to compare the theoretical
closing inventory (in the inventory account) with the physical inventory so as to determine
57
whether the physical total is less (inventory shortage) or more (inventory surplus) than the
theoretical balance. In this case, the final balance of the inventory account must be adjusted
so that it is equal to the aggregate of the physical stock count. The difference between the
theoretical and physical inventories may be due to various reasons, such as accounting
entries that may not have been recorded, or incorrectly recorded, in the inventory and cost of
sales accounts or even physical inventory that may have been stolen.
If the physical total is less than the theoretical balance, the balance of the inventory account
must be adjusted with the difference between the theoretical and the physical inventory as
follows:
If the physical total is more than the theoretical balance, the balance of the inventory account
must be adjusted with the difference as follows:
• Debit Inventory
• Credit Cost of sales
The closing inventory on, for example, 31 March becomes the opening inventory on 1 April.
Let us assume that the inventory on hand on 31 March amounted to R10 000. The inventory
account in the general ledger for April will then appear as follows:
If the periodic inventory system is in use, the opening inventory balance of R10 000 must be
taken out of the account at the beginning of the financial period and this is done by means of
a journal entry as follows:
58
The general ledger accounts will now appear as follows:
NAME OF ENTITY
GENERAL LEDGER
DR INVENTORY B6 CR
DR COST OF SALES U3 CR
At the end of April, a physical stock count is once again performed to determine the value of
inventory on hand and the closing inventory value will be recorded by means of a journal
entry as already explained. Let us assume that the inventory on hand at the end of April
amounted to R15 000. This is the amount that must remain as a balance in the account at
the end of April. The general ledger accounts will appear as follows at the end of the financial
period:
NAME OF ENTITY
GENERAL LEDGER
DR INVENTORY B1 CR
25 000 25 000
DR COST OF SALES CR
If the perpetual inventory system is in use, the opening balance of inventory remains in the
inventory account and all further inventory transactions (purchases, sales and returns) during
the financial period are recorded in the inventory account, as explained above. The closing
balance of the inventory account, therefore, represents the closing inventory figure which
should be equal to the amount of the physical stock count. However, it can occur that
inventory is lost or stolen; the inventory account must then be adjusted with the difference
(see 4.5.6 above).
59
4.5.8 Determining gross profit
As already mentioned, the gross profit is calculated by deducting the cost of inventory from
its selling price. When using the periodic inventory system, the cost of inventory (cost of
sales) must be determined using the following formula:
Opening inventory
Add: Purchases
Net purchases
Less: Purchases returns
Add: Freight charges, etc.
Available for sale
Less: Closing inventory
Cost of sales
The cost of sales is the amount that the entity paid for the inventory that has been sold
during the relevant financial period. In order to calculate cost of sales, the purchases,
purchases returns, freight on purchases accounts and other accounts relating to inventory
must be closed off at the end of the financial period against the cost of sales account (the
opening and closing inventory accounts have already been closed off against the cost of
sales account).
If the perpetual inventory system is in use, cost of sales will be calculated merely by
balancing the cost of sales account since all sales and sales returns transactions are
recorded in the cost of sales account.
Net sales is calculated by deducting sales returns and allowances from sales.
Below is a schematic representation of the differences between the periodic and perpetual
inventory systems:
60
Transaction Periodic Perpetual
5. Inventory sales for cash Dr Bank Dr Bank
Cr Sales Cr Sales
Dr Purchases
Cr Cost of sales
8. Returns of inventory sold Dr Sales returns and allowances Dr Sales returns and allowances
on credit Cr Debtors Cr Debtors
Dr Purchases
Cr Cost of sales
9. Freight, etcetera paid in Dr Freight, etcetera Dr Freight, etcetera
cash Cr Bank Cr Bank
10. Freight, etcetera on Dr Freight, etcetera Dr Purchases
credit Cr Creditors Cr Creditors
11. Opening inventory Dr Cost of sales (Opening inventory balance remains in
Cr Purchases the inventory account)
12. Closing inventory Dr Purchases (with physical stock (Closing inventory balance is
count) calculated by balancing the inventory
Cr Cost of sales account)
Diagram 4.1
The periodic inventory system will now be explained by means of the following example. The
following transactions appeared in the books of Permec Traders during January 200X:
Record the above transactions in the general ledger of Permec Traders. The periodic
inventory system is in use.
61
PRACTICAL EXAMPLE 2 - ANSWER SHEET
PERMEC TRADERS
GENERAL LEDGER
BANK
TRADING INVENTORY
CREDITORS CONTROL
PURCHASES
FREIGHT ON PURCHASES
SALES
COST OF SALES
62
4.7 PRACTICAL EXAMPLE 3 (perpetual inventory system)
Use the same information provided in Practical Example 2, with the following additional
information:
Record the above transactions in the general ledger of Permec Traders. The perpetual
inventory system is in use.
PERMEC TRADERS
GENERAL LEDGER
BANK
TRADING INVENTORY
CREDITORS CONTROL
FREIGHT ON PURCHASES
SALES
63
COST OF SALES
Take note: The cost of sales will be the same for both the periodic and the perpetual
inventory systems.
You have already become acquainted with the double entry principle that determines that
each transaction influences at least two general ledger accounts. The trial balance is used to
test this principle. A trial balance is a two-column list of all the accounts in the general ledger
together with their balances. All the debit balances are entered in the debit column and all
the credit balances in the credit column. The trial balance must balance; in other words, the
totals of the debit and credit columns must be equal. If the trial balance does not balance,
then errors have been made. The trial balance is used to prepare the financial statements
and it is therefore important that these errors are traced and corrected.
The pre-adjustment trial balance is prepared before any adjustment journal entries are
recorded (adjustments will be explained in chapter 10);
The post-adjustment trial balance is prepared after any adjustment journal entries are
recorded; and
The post-closing trial balance is prepared after the nominal accounts have been closed
off and the profit or loss has been determined (closing transfers will be explained in
chapter 10).
64
4.9 PRACTICAL EXAMPLE 4
We will now use the general ledger balances from practical example 1 to prepare the pre
adjustment trial balance of Koala Pruning Services.
ON 31 JANUARY 200X
FOL DR CR
R R
Capital E1
Drawings E2
Furniture B1
Equipment B2
Bank B7
Creditors control L5
Services rendered 11
Stationery U1
Although the totals of the debit and credit columns of a trial balance may be equal, this does
not prove that no errors have occurred in the accounting records. It is necessary to
differentiate between two groups of errors, namely those that are revealed by a trial balance
and those that are not. When attempting to trace an error in a trial balance, the steps
followed in preparing the trial balance must be reversed. In other words, commence with the
last step (calculating the totals of each column) and work backwards.
Errors revealed by a trial balance may include one or more of the following:
65
• The ledger account balances have been incorrectly calculated.
• One or more postings from the general journal to the general ledger are incorrect, for
example, an amount has either been posted incorrectly or a debit amount has been
posted to the credit side of an account, or vice versa, or a journal entry has either been
completely omitted or it has been posted twice.
• The accounts or amounts of one or more journal entries may have been entered
incorrectly from the source documents.
In this case, the trial balance will still balance, but as mentioned previously, this does not
prove that the accounting records are free from errors. Errors not revealed by a trial balance
may include one or more of the following:
• Omission errors - this occurs when a complete journal entry has not been posted.
Since neither the debit nor the credit entries were posted, the debit and credit totals of
the trial balance will not be affected.
• Posting to the incorrect account, for example, a debit amount that has been posted to
the debit side of an incorrect account will not affect the debit total of the trial balance.
• Principle errors - as with errors of posting to an incorrect account, these errors will not
affect the totals of the trial balance, for example, when an amount in respect of
stationery purchased (a normal expense) was incorrectly debited to the purchases
account.
• Compensating errors - this occurs when one (debit) error has been inadvertently
compensated for by another (credit) error, while still resulting in a trial balance that
balances.
66
4.11 PRACTICAL EXAMPLE 5
The following trial balance of Tiger TV Services on 31 January 200X does not balance. The
periodic inventory system is in use.
I TIGER TRADERS
TRIAL BALANCE
ON 31 JANUARY 200X
FOL DR CR
R R
Prepare the corrected trial balance on 31 January 200X (show all calculations in brackets).
67
PRACTICAL EXAMPLE 5 - ANSWER SHEET
I TIGER TRADERS
TRIAL BALANCE
ON 31 JANUARY 200X
FOL DR CR
R R
Capital
Drawings
Buildings
Computer equipment
Bank overdraft
Trade debtors
Inventory
Trade creditors
Sales
Purchases
Wages
Stationery
Carriage on sales
Sundry expenses
68
CHAPTER 4
ASSIGNMENT 1
2. Why must a general ledger account be balanced at the end of each month?
QUEST CONSULTANTS
GENERAL JOURNAL J1
FOL DR CR
200X R R
Feb 1 Vehicles B3 100 000
Bank B7 100 000
Vehicle purchased for cash
6. Which account is debited when inventory is purchased if the periodic inventory system
is being used?
8. Is the Purchases Returns and Allowances account debited or credited when an entity
returns goods to a supplier?
The suggested solution will be discussed during the next contact session. If you
'W experience difficulty in completing the assignment, review chapter 4 again.
69
CHAPTER 4
ASSIGNMENT 2
The following balances were taken from the records of Rock Traders on 30 April 200X:
I ROCK TRADERS
TRIAL BALANCE
ON 30 APRIL 200X
DR CR
R R
70
19 Paid the telephone account by cheque, R2 000.
22 The owner took goods for personal use, R3 000.
26 Received R5 000 from a debtor.
27 Paid the water and electricity account by cheque, R3 000.
30 Paid salaries by cheque, R11 000.
Paid R13 000 in settlement of a creditor’s account.
31 Inventory on hand on 31 May 200X amounts to R25 000. The periodic system is in
use.
Record the above transactions in the general ledger of Rock Traders for May 200X and
prepare the trial balance on 31 May 200X.
The suggested solution will be discussed during the next contact session. If you
experience difficulty in completing the assignment, review chapters 1 to 4 again.
71
CHAPTER 4
ASSIGNMENTS
Bank R8 000
Capital R8 000
1. Record the above transactions in the general journal for September 200X.
2. Post the journal entries to the general ledger.
3. Prepare the trial balance on 30 September 200X.
The suggested solution will be discussed during the next contact session. If you
experience difficulty in completing the assignment, review chapters 1 to 4 again.
72
CHAPTER 4
ASSIGNMENT 4
The following trial balance was taken from the records of Xavier Dealers on
30 November 200X:
| XAVIER DEALERS
TRIAL BALANCE
ON 30 NOVEMBER 200X
FOL DR CR
R R
73
12 Rust Corner Shop settled their account.
15 Settled Zen Suppliers account by cheque.
17 Sold goods to M. MacDonald on credit for R4 200.
19 M. MacDonald returned damaged goods to the amount of R300.
21 The owner withdrew R2 000 cash for own use.
24 Paid the water and electricity account of R3 400 by cheque.
Paid salaries by cheque, R17 500.
29 Paid the insurance premium by stop order, R4 300.
31 Closing inventory amounted to R111 200. The periodic system is in use.
1. Record the above transactions in the general journal of Xavier Dealers for
December 200X.
2. Post the journal entries to the general ledger.
3. Prepare the trial balance on 31 December 200X.
The suggested solution will be discussed during the next contact session. If you
experience difficulty in completing the assignment, review chapters 1 to 4 again.
74
CHAPTER 4
ASSIGNMENTS
The following balances appeared in the records of ABC Agency on 1 July 200X:
Dr Cr
R R
Capital 17 700
Vehicles 15 000
Furniture and equipment 5 000
12% Long-term loan 6 000
Debtors 6 300
6% Savings account 5 000
Bank 3 500
Creditors 11 100
34 800 34 800
1. Record the above transactions in the general ledger of ABC Agency for July 200X.
2. Prepare the trial balance on 31 July 200X.
75
CHAPTER 4
ASSIGNMENTS
Additional information:
1. Record the above transactions in the following relevant accounts in the general ledger
of Xanadu Traders for March 200X by using, firstly, the periodic inventory system and,
secondly, the perpetual inventory system:
Trading inventory
Purchases
Purchases returns and allowances
Sales
Sales returns and allowances
Cost of sales
2. Calculate the gross profit for both methods.
j: The suggested solution will be discussed during the next contact session. If you
76
CHAPTER 4
ASSIGNMENT?
The following transactions took place in the accounting records of Ergo Traders for the
month ending 30 June 200X:
1. Purchased goods for cash and paid by cheque, R42 800.
2. Sold goods for cash, R88 800.
3. Purchased goods on credit for R52 200.
4. Returned damaged goods to the supplier, R1 800.
5. The owner withdrew inventory with a selling price of R8 640 for his personal use.
Additional information:
1. Record the above transactions in the inventory, sales and cost of sales accounts in the
general ledger of Ergo Traders for the month ending 30 June 200X.
2. Calculate the gross profit for the month ending 30 June 200X.
The suggested solution will be discussed during the next contact session. If you
experience difficulty in completing the assignment, review chapters 1 to 4 again.
CHAPTER 4
ASSIGNMENTS
The following information is available for Kolit General Dealers for the financial year ending
31 December 200X:
1. The value (at cost) of trading inventory is as follows:
1 January 200X R91 200 (as per general ledger)
31 December 200X R75 000 (as per physical stocktake)
2. Purchases for the year. R600 000.
3. Purchases returns for the year, R89 000.
4. Sales for the year, R650 000.
5. Sales returns for the year, R27 000.
6. The owner withdrew inventory with a selling price of R31 000 for his personal use.
Additional information:
1. Record the above transactions in the inventory and cost of sales accounts in the
general ledger of Kolit General Dealers for the year ending 31 December 200X
(assume all transactions were on credit).
2. Calculate the gross profit for the year ending 31 December 200X.
'% The suggested solution will be discussed during the next contact session. If you
78
CHAPTER 4
ASSIGNMENT 9
The following trial balance of Auto Garden Services on 31 January 200X does not balance.
The periodic inventory system is in use.
TRIAL BALANCE
ON 31 JANUARY 200X
FOL DR CR
R R
Capital 9 720
Drawings 720
Equipment 24 984
Bank 4 680
Debtors control 11 102
Inventory 3 902
Creditors control 7 074
Services rendered 53 121
Advertising costs 11
Rent expense 2 160
Salaries and wages 16 740
Water and electricity 691
64 990 69 915
The following errors were discovered after the totals in the trial balance were compared with
the ledger accounts and the balances as well as the original entries checked:
1. A cash withdrawal of R720 by the owner, correctly recorded in the bank account, was
recorded on the credit side of his capital account.
2. Total cash receipts of R36 340 was erroneously recorded as R36 430 on the debit side
of the bank account.
79
3. The bank balance shown was a further R360 short.
4. The balance of the advertising account of R110 was recorded as R11 in the trial
balance.
5. Sundry expenses of R876 were omitted from the trial balance.
6. A credit entry of R216 was not entered in the creditors control account.
7. Gocds with a cost price of R97, which were returned to a creditor, were erroneously
recorded on the credit side of the purchases account as R79.
8. Inventory purchased for R652 cash was credited to the purchases account.
9. A debit entry of R1 170 in the creditors control account was not taken into account
when calculating the closing balance.
Prepare a corrected trial balance on 31 January 200X (show all calculations in brackets).
' The suggested solution will be discussed during the next contact session. If you
■F experience difficulty in completing the assignment, review chapters 1 to 4 again.
80
CHAPTER 4
ASSIGNMENT 10
The total of the debit side of the trial balance of Titan Traders on 30 June 200X amounts to
R6 393 more than the total of the credit side. An investigation brought the following to light:
1. The unfavourable bank balance of R3 500 was recorded on the incorrect side of the
trial balance.
2. The balance of the debtors control account in the general ledger was R3 850 while it
was shown as R5 830 in the trial balance.
3. An amount of R525 in respect of creditors was excluded from the trial balance.
4. The balance of R263 in the rent income account was duplicated in the trial balance.
5. The credit side of the credit losses recovered account was overcharged with R1 202.
6. The carriage on sales of R1 094 was recorded on the incorrect side of the trial balance.
7. Salaries payable of R540 have not been included in the trial balance.
Prepare a supplementary trial balance on 30 June 200X to rectify the above errors.
Commence with the difference of R8 125.
. The suggested solution will be discussed during the next contact session. If you
~ experience difficulty in completing the assignment, review chapters 1 to 4 again.
81
CHAPTER 4
ASSIGNMENT 11
Donis Consultants opened its doors for business on 2 January 200X. The bookkeeper of the
entity had trouble balancing the trial balance of the entity on 31 December 200X. He
requested your assistance in finding the errors and provided the following trial balance:
I DONIS CONSULTANTS
TRIAL BALANCE
ON 31 DECEMBER 200X
FOL DR CR
R R
Capital 18 975
Drawings 4 770
Equipment 16 400
Bank 20 700
Debtors control 17 250
Long-term loan 19 700
Creditors control 9 830
Services rendered 42 725
Interest income 1 440
Advertising costs 4 370
Rent expense 4 025
Salaries and wages 25 300
1. The total of the cash receipts journal amounted to R34 210 and the total of the cash
payments journal amounted to R13 510 before the information below was taken into
account.
2. Receipts of R1 670 from debtors were correctly recorded in the cash receipts journal
and credited to the owner’s drawings account.
82
3. A withdrawal of R1 725 by the owner was debited to his capital account.
4. A posting error was made to a debtor’s account - an amount of R2 590 concerning
services rendered was recorded as R2 950.
5. The balance of the services rendered account was overcharged with R575.
6. Salaries of R1 670 were recorded in the cash receipts journal and credited to the
salaries and wages account.
7. An account for advertising for R3 680 was paid and erroneously recorded as R2 680.
The suggested solution will be discussed during the next contact session. If you
experience difficulty in completing the assignment, review chapters 1 to 4 again.
83
CHAPTER 4
ASSIGNMENT 12
The trial balance below was prepared by the inexperienced bookkeeper of Seaworld Dealers.
In attempting to balance the trial balance, he recorded the difference between the debits and
the credits against the balance of the capital account. The financial year-end is 31 July. The
periodic inventory system is in use. Ignore VAT.
I SEAWORLD DEALERS
TRIAL BALANCE
ON 31 JULY 200Y
FOL DR CR
R R
84
4. A personal insurance premium of the owner was paid with a business cheque and
posted to sundry expenses, R225.
5. The owner withdrew R4 500 cash for private use. This transaction was posted to the
salaries account.
6. Rent income should be R10 215.
7. An invoice for purchases of R560 was recorded as R650 in the purchases journal and
posted as such.
8. According to a stocktake conducted on 31 July 200Y, inventory on hand amounted to
R7 200. The periodic system is in use.
Prepare a corrected trial balance on 31 July 200Y and calculate the correct balance of the
capital account. Show all your calculations in brackets.
: The suggested solution will be discussed during the next contact session. If you
W experience difficulty in completing the assignment, review chapters 1 to 4 again.
85
CHAPTER 5
5.1 OUTCOMES
When a person starts a business, he or she usually makes funds (money) and other assets
available as an investment in the entity. These funds and assets that the prospective owner
invests in the entity are known as owners interest or equity (capital). The funds are
deposited in the bank account of the entity via cheques, internet transfers or cash, while all
other assets (for example vehicles, computers, and buildings) are recorded in the accounting
records by means of a journal entry. The owner of an entity may also invest additional capital
at any time during the duration of the entity, which is then recorded in the same manner.
87
The owner of an entity may, at a later stage, need to use these funds for private purposes.
Money is then withdrawn from the bank account of the entity and refunded to the owner. This
is known as drawings. The owner may also take inventory or other assets for his or her own
use and these entries are recorded in the accounting records by means of a journal entry.
These withdrawals are not regarded as an expense by the entity, but as a reduction of equity
(capital).
The owner of an entity is also entitled to share in the profits (or losses) of the entity at the
end of a financial period. The income and expenses that determine the profit or loss will be
specifically dealt with in chapter 9. The profit or loss is also part of the owner's interest
(capital) in the entity and is known as net profit or net loss.
Capital balance: initial capital deposited at the start of the entity or the balance at
the beginning of financial period
Add: additional capital invested during the financial period
Add/Less: net profit or loss for the financial period
Less: withdrawals made by the owner during the financial period
Is equal to: closing balance of owner’s interest/equity
This closing balance is transferred to the following year as an opening balance where the
whole process starts again.
The duality concept (double entry principle) determines that the financial position of an entity
is defined in terms of the accounting equation. In short, this means that every transaction will
alter the financial position, because one or more of the five elements, namely equity, assets,
liabilities, income and expenses, will change or show movement.
E = A-L
88
EXAMPLE 5.1
Peter Smith is a final year B. Com. Honours student and was approached by his friend,
William Jacobs, who wants to start a new business. William requires Peter’s services as an
accountant to assist him in the planning and the bookkeeping of his business, which will be
known as Enrom Traders. William invested R500 000 cash in the entity on 1 September
200X and contributed the buildings from which the entity will operate. He also contributed a
van to be used as a delivery vehicle. The buildings are valued at R2 500 000 and the value of
the delivery vehicle is R50 000.
On 21 September 200X, William withdrew a cheque for R100 000 for private use.
The following source documents, journal, ledger accounts and financial statements provide a
breakdown of all the various steps to be followed by Peter to record the above transactions in
the accounting records.
Assume that the bank account of the entity at Southern Bank has already been opened.
The following description explains the flow of entries starting with the source documents and
ending with the financial statements for the month ending 30 September 200X.
SOURCE DOCUMENTS
89
GENERAL JOURNAL (GJ)
ENROM DEALERS
GENERAL JOURNAL J1
FOL DR CR
R R
200X
Sep 1 Bank 500 000
Capital 500 000
W Jacobs deposited R500 000 as capital contribution
ENROM DEALERS
GENERAL LEDGER
DR CAPITAL (EQUITY) CR
200X
Sep 1 Bank J1 500 000
Land and buildings J1 2 500 000
Vehicles J1 50 000
3 050 000
DR DRAWINGS (EQUITY) CR
200X
Sep 18 Bank J1 100 000
90
DR VEHICLES (NON-CURRENT ASSET) CR
200X
Sep 1 Capital J1 50 000
DR BANK(CURRENT ASSET CR
200X 200X
Sep 1 Capital J1 500 000 Sep 21 Drawings J1 100 000
30 Balance c/f 400 000
500 000 500 000
Oct 1 Balance b/f 400 000
I ENROM DEALERS
ON 30 SEPTEMBER 200X
FOL DR CR
R R
91
STATEMENT OF FINANCIAL POSITION (SFP)
I ENROM DEALERS
Current liabilities:
Creditors NIL
TOTAL EQUITY AND LIABILITIES 2 950 000
5.4 SUMMARY
Equity represents the owner’s interest in the entity and includes the contribution that the
owner makes towards the entity in the form of capital. This capital remains the property of the
owner and is actually a liability for the entity because it is in fact owed by the entity to the
owner. It is, however, not grouped with liabilities, but is shown separately as Capital as it
remains part of the entity for the entire duration of the entity. The equity is only paid back to
the owner when the entity closes down or is sold.
92
5.5 PRACTICAL EXAMPLE
On 1 January 200X Mandu, the owner of a bicycle shop, deposited R100 000 via an internet
transfer as an additional capital contribution into the bank account of his bicycle shop,
Mandu's. He owns a new home computer that nobody uses and he decided to contribute it to
the enterprise as well. The value of the computer is R15 000. On 2 January 200X, Mandu
purchased bicycles (inventory) to the value of R25 000 by cheque. On 15 January 200X,
Mandu withdrew R30 000 by cheque for a deposit on his wife's new BMW. On the same day
he also took a new bicycle for his son as a birthday gift. The cost of the bike is R2 500.
Mandu contributed land and buildings valued at R500 000 and a delivery vehicle valued at
R200 000 as his capital contribution when he started the business two years ago.
SOURCE DOCUMENTS
1. Capital - funds:
2. Capital - computer: ____________________________________________________
3. Bicycles: ____________________________________________________
4. Drawings - funds: ____________________________________________________
5. Drawings-bicycle: ____________________________________________________
93
MANDU'S
GENERAL JOURNAL J1
FOL DR CR
200X R R
Jan 1 Bank
Capital
Mandu deposited R100 000 as his capital contribution
1 Computer equipment
Capital
Mandu contributed assets
1 Purchases
Bank
Purchased bicycles and paid by cheque
15 Drawings
Bank
Mandu withdrew R30 000 by cheque for private use
15 Drawings
Purchases
Mandu took a bicycle valued at R2 500 for own use
31 Cost of sales
Purchases
Transfer purchases to cost of sales
MANDU'S
GENERAL LEDGER
DR CAPITAL EQUITY) B1 CR
200X
Jan 1 Balance b/f
Bank J1
Computer
J1
equipment
DR DRAWINGS (EQUITY) CR
200X
Jan 1 Bank J1
Purchases J1
94
DR LAND AND BUILDINGS (NON-CURRENT ASSET) CR
200X
Jan 1 Balance b/f
DR VEHICLES (NON-CURRENT ASSET) CR
200X
Jan 1 Balance b/f
DR PURCHASES(EXPENSE) CR
200X 200X
Jan 1 Bank J1 Jan 15 Drawings J1
31 Cost of sales J1
DR COST OF SALES(EXPENSE) CR
200X
Jan 31 Purchases J1
I MANDU'S
R R
Capital
Drawings
Land and buildings
Vehicles
Computer equipment
Bank
Cost of sales
95
| MANDU'S
Current assets:
Inventory xxxxx
Debtors xxxxx
Bank
TOTAL ASSETS xxxxx
Current liabilities:
Creditors xxxxx
TOTAL EQUITY AND LIABILITIES xxxxx
96
CHAPTER 5
ASSIGNMENT 1
Ulandi Dealers trades as a supplier of antique furniture. The owner, Jani Nel, started the
business five years ago with a cash capital contribution of R750 000. On 1 January 200X, the
value of inventory was R450 000 and the bank account showed a favourable balance of
R300 000. Jani decided to expand the business in preparation for the Aardklop Arts Festival.
On 15 January 200X, work on a new building commenced and all work was completed by
31 August 200X. On 1 September 200X, Jani decided to pay for the total cost of the
alterations, which amounted to R350 000, with her personal cheque as an additional capital
contribution.
On 5 September 200X, Jani purchased antiques (inventory) to the value of R100 000 and
paid via an internet transfer. On the same date she also took two chairs and a coffee table
with a value of R17 500 for private use. On 15 September 200X, Jani transferred R25 000
via the internet from the bank account of the entity to her personal account in order to pay for
her vacation to Aardklop.
The suggested solution will be discussed during the next contact session. If you
W experience difficulty in completing the assignment, review chapters 1 to 5 again.
97
CHAPTER 6
NON-CURRENT ASSETS
6.1 OUTCOMES
Assets are possessions that an entity acquired as a result of transactions that took place in
the past and which should result in future benefits for the entity. We can distinguish between
two types of assets:
Non-current assets are assets with a long life expectancy. These assets usually have a
lifespan of more than one year. We can also say they are assets that are purchased for
purposes other than trade or resale.
99
EXAMPLES OF NON-CURRENT ASSETS
These assets are shown in the statement of financial position as Property, plant and
equipment and full disclosure is made in a note. We will specifically look at the disclosure of
Property, plant and equipment in chapter 12. For the purposes of this chapter, it is sufficient if
you can identify non-current assets and record the relevant transactions. The purchase of an
asset is recorded as follows:
The cost of an asset consists of the initial cost (excluding discounts or rebates) plus all other
costs incurred in bringing the asset to the required location and ensuring it is in the required
working condition. Examples of these costs are delivery and handling, import duties and
professional fees paid for the installation of the asset.
Since a non-current asset is used over a long period and the initial cost is not written off as
an expense, but is shown as an asset in the statement of financial position, the cost of the
asset is written off annually at a certain percentage or fixed amount over the expected useful
life of the asset. This accounting entry is known as depreciation. Depreciation is recorded as
follows:
For the purposes of this course, we will study two depreciation methods, namely:
100
6.3.1 Straight-line method
As the name indicates, the cost of the asset is written off at a fixed amount or percentage per
annum (per year). Keep in mind that there may be an expected residual value (residual value
is the value of the asset at the end of its useful life). To calculate depreciation, the residual
value is first deducted from the cost and then divided by the expected useful life.
FORMULA:
Depreciation amount per year = Cost less residual value
Expected useful life
EXAMPLE 6.1
A machine was purchased by Meg Dealers on 2 January 200X at a cost of R21 000. The
machine has a useful life of 5 years and a scrap (residual) value of R1 000. Provision must
be made for depreciation according to the straight-line method. The financial year of Meg
Dealers ends on 31 December.
= 21 000 - 1 000
5
= R4 000 p.a.
As the name indicates, depreciation is calculated on the reduced value of the asset each
year. In year 1, depreciation is calculated on the cost of the asset by multiplying the cost with
a fixed percentage. In year 2, depreciation for year 1 is deducted from the cost (this is known
as the carrying amount) and depreciation is then calculated at the same fixed rate on the
carrying amount. In year 3, the depreciation is calculated on the carrying amount of year 2,
and so on.
FORMULA:
Depreciation amount per year = Carrying amount x fixed rate
CALCULATION:
101
EXAMPLE 6.2
A machine with a useful life of 5 years, was purchased by Meg Dealers on 2 January 200X at
a cost of R20 000. Provision must be made for depreciation at 40% p.a. according to the
reducing balance method. The financial year of Meg Dealers ends on 31 December.
It is important to know that depreciation is written off only for the portion of the year that the
asset was available for use.
If the asset was in use for the full year, depreciation is written off for the full year. If an asset
was purchased, acquired or sold during the year, depreciation is written off only for the
portion of the year that the asset was in use. We call this pro rata depreciation. The number
of months the asset was in use is divided by 12 and multiplied by the depreciation amount for
the full year.
CALCULATION:
102
EXAMPLE 6.3
A machine was purchased by Meg Dealers on 30 September 200U at a cost of R21 000. The
machine has a useful life of 5 years and a scrap value of R1 000 at the end of its useful life.
Provision must be made for depreciation on the straight-line method. The financial year of
Meg Dealers ends on 31 December.
= 21 000 - 1 000
5
= R4 000 p.a.
Non-current assets may become obsolete or out-dated with the passage of time and the
entity may then decide to get rid of a specific asset by selling, scrapping or exchanging it.
The recording of such a transaction is simplified by using a realisation account. The cost of
the asset as well as all the accumulated depreciation and depreciation for the current year is
transferred to the realisation account. In effect, the balance of the realisation account at this
stage will equal the carrying amount of the asset. The amount that is received for the asset is
credited to the realisation account and the balance of the realisation account will then show
the profit or loss on the sale of the asset. This profit or loss is shown in the statement of profit
or loss and other comprehensive income as an income (in the case of a profit) or as an
expense (in the case of a loss).
103
The steps below should be followed when the sale of a non-current asset is recorded in the
accounting records:
1. Calculate the depreciation on the asset for the current financial period up to the
date of sale:
• debit Depreciation:
• credit Accumulated depreciation: “Name of asset".
Cost price
Less: Accumulated depreciation
Carrying amount
Less: Proceeds
Profit/Loss on sale of asset
104
EXAMPLE 6.4
The accumulated depreciation on a machine with a cost price of R100 000 amounted to
R60 000 on 1 January 200X. The machine was sold for R45 000 on 31 March 200X. The
financial year-end of the entity is 31 December and depreciation is provided for at 20% p.a.
on the reducing balance method.
Carrying amount x Depreciation rate = Depreciation for the current financial year
R40 000 x 20% x 3/12 = R2 000
EXAMPLE 6.5
The accumulated depreciation on a machine with a cost price of R80 000 amounted to R60
000 on 1 July 200X. The machine was sold for R3 000 on 31 March 200Y. The financial
year-end of the entity is 30 June and depreciation is provided for at 20% p.a. on the straight-
line method.
Cost price x Depreciation rate = Depreciation for the current financial year
R80 000 x 20% x 9/12 = R12 000
105
6.3.5 Investments
When a company makes enough profit, it is advisable to invest the surplus cash at a financial
institution in order to earn more interest.
These investments are also listed under non-current assets under the term Investments.
ASSETS
Non-current assets:
Property, plant and equipment: At carrying amount
E=A-L
EXAMPLE 6.6
For the past two years Rina Knop has run a very successful enterprise, Health Line
Distributors, trading in health products. On 1 January 200X the capital balance amounted to
R1 400 000, the opening inventory was valued at R120 000 and the bank showed a
favourable balance of R500 000. Computer equipment was valued at R200 000 and land and
buildings were worth R1 180 000. Retained earnings had a balance of R600 000.
The business has been so successful that Rina decided to expand the distribution
department.
106
The following transactions took place as a result of the expansion (all payments were made
on 1 December 200X):
Acquisition of land and buildings from Millennium Developers valued at R850 000. Payment
was made via an internet transfer.
New furniture was purchased from ©Furniture to the value of R125 000 and paid by cheque.
A new computer system was installed by Blitz Computers for R25 000 and paid by cheque.
Two new delivery vehicles were purchased from Cargo Motors for R145 000 each and paid
by cheque.
Rina also decided to make a fixed investment of R100 000 at Universal Bank in order to earn
more interest. The investment carries an interest rate of 15% per annum.
The following description explains the flow of entries starting with the source documents and
ending with the financial statements for the year ending 31 December 200X.
SOURCE DOCUMENTS
2. Furniture, computer and vehicles: Tax invoice, cheque counterfoil and receipt
107
GENERAL LEDGER (GL)
108
DR BANK (CURRENT ASSET) CR
200X 200X
Jan 1 Balance b/f 500 000 Dec 1 Land & buildings J1 850 000
Dec 31 Balance c/f 890 000 Furniture J1 125 000
Computer
J1 25 000
equipment
Vehicles J1 290 000
Investment J1 100 000
1 390 000 1 390 000
200Y
Jan 1 Balance b/f 890 000
R R
Capital 1 400 000
Land and buildings 2 030 000
Furniture 125 000
Vehicles 290 000
Computer equipment 225 000
Investment 100 000
Bank 890 000
Inventory 120 000
Retained earnings (Profit/Loss) 600 000
2 890 000 2 890 000
109
STATEMENT OF FINANCIAL POSITION (SFP)
I HEALTH LINE DISTRIBUTORS
Current assets:
Inventory 120 000
TOTAL ASSETS 2 890 000
Current liabilities:
Bank 890 000
Use the information from the previous assignment for Health Line Distributors and record the
transactions with regard to depreciation in the accounting records of Health Line Distributors
on 31 December 200X. Depreciation is provided for as follows (assume that furniture and
equipment was purchased on 1 January 200X):
Furniture: Straight-line method with a useful life of 5 years
Computer equipment: Straight-line method at 20% p.a.
Vehicles: Reducing balance method at 20% p.a.
110
Note: The calculation of depreciation is shown below. Computer equipment of R200 000 was
purchased two years ago and depreciation for these two years is shown as an opening
balance in the Accumulated depreciation: Computer equipment account. The contra entry is
brought into account in the Retained earnings account (net profit/loss). The income and
expense accounts will be more fully explained in chapter 9.
The calculation of depreciation for the year ending 31 December 200X is shown below:
111
PRACTICAL EXAMPLE - ANSWER SHEET
GENERAL JOURNAL J1
FOL DR CR
200X R R
Dec 31 Depreciation
112
DR COMPUTER EQUIPMENT (NON-CURRENT ASSET) CR
200X
Jan 1 Balance b/f 200 000
Dec 1 Bank J1 25 000
225 000
DR DEPRECIATION (EXPENSE) CR
200X
Dec 31 Acc. dep: Furniture J1
Acc. dep:
J1
Vehicles
Acc. dep:
Computer J1
equipment
113
| HEALTH LINE DISTRIBUTORS
R R
Capital 1 400 000
Land and buildings 2 030 000
Furniture 125 000
Accumulated depreciation: Furniture
Vehicles 290 000
Accumulated depreciation: Vehicles
Computer equipment 225 000
Accumulated depreciation: Computer equipment
Investment 100 000
Bank 890 000
Inventory 120 000
Depreciation
Retained earnings (Profit/Loss) 520 000
114
CHAPTER 6
ASSIGNMENT 1
Umfula Lodges (owner: Zac Lee) is an enterprise that, for the past two years, has specialised
in luxury housing in the Pilanesberg Nature Reserve. The abbreviated trial balance of Umfula
Lodges on 1 January 200X is submitted to you after Zac asked you to assist him in the
preparation of the financial statements for the year ending 31 December 200X.
Dr Cr
115
Additional information:
On 1 July 200X Zac decided to purchase a new Land Rover for the enterprise and
transferred R520 000 from the bank account of the entity to Bosveld Motors via the internet.
On the same day, Bosveld Motors undertook to purchase an old Landrover from Zac for
R50 000 by cheque. The cost of the Landrover was R100 000 and the accumulated
depreciation on 1 January 200X was R36 000. At a management meeting on 25 August
200X, a decision was taken to install new plasma screen televisions in the chalets and a
business cheque for R100 000 was drawn and deposited in the account of Pro TV on
1 September 200X. Zac also decided to invest a further R200 000 at and transferred the
amount electronically on 1 December 200X. No entries for depreciation for the year have yet
been recorded. The applicable rates are as follows:
The suggested solution will be discussed during the next contact session. If you
experience difficulty in completing the assignment, review chapters 1 to 6 again.
116
CHAPTER 7
CURRENT ASSETS
7.1 OUTCOMES
Current assets differ from non-current assets in the sense that they are used in the business
process and can easily be transformed into cash. These assets are usually temporary in
nature and their value is constantly changing - usually several times during the year.
117
EXAMPLES OF CURRENT ASSETS
Debtors Petty cash
Trading inventory Accrued income (refer chapter 10)
Consumable inventory Prepaid expenses (refer chapter 10)
Bank
These assets are disclosed in the financial statements as current assets and details thereof
are set out in notes. We will deal specifically with disclosure in Chapter 12. For the purposes
of this chapter, it is sufficient if you can identify current assets and record the relevant
transactions.
7.3.1 Debtors
Debtors are customers who purchase goods on credit from an entity and who still owe
money to the entity. These debts can be repaid monthly or as a once-off payment that may
lead to a discount if the client settles (pays) his account before a specific date.
Discount
It is important to distinguish between settlement discount, trade discount and cash discount.
Settlement discount may be granted to a debtor who settles his account before or on a
specific date (refer to Example 7.3), while trade discount is granted to customers who
purchase on credit. The discount is subtracted from the invoice price and only the net
amount is recorded as sales. Trade discount is therefore not recorded in the accounting
records (refer to Example 7.1). A cash discount may be granted on the selling price if a
customer pays immediately. This cash discount is treated in the same manner as trade
discount; in other words, it is not recorded in the accounting records (refer to Example 7.2).
,»• r'f'i’, The transaction must state very clearly that 'trade discount” or “cash discount" is
applicable, otherwise it is treated as settlement discount.
118
EXAMPLE 7.1
A trader sells goods for R300 on credit and allows 10% trade discount.
EXAMPLE 7.2
A trader sells goods for R500 cash and grants 10% cash discount.
EXAMPLE 7.3
A trader sells goods for R1 000 on credit and grants 10% trade discount as well as 5%
settlement discount if the debtor pays within 30 days. Assume that the debtor pays on time
and thus takes advantage of the settlement discount.
119
Step 2: Record the transaction on the day of receipt of payment
• Bank (current asset) R855
Discount allowed (expense) R 45
Debtors control (current asset) R900
An entity should make provision for clients who may not settle their accounts. Small entities
usually write these debts off as they occur (debit Credit losses and credit Debtors control).
However, larger entities create an allowance for credit losses as a percentage of outstanding
debtors at year-end wherein provision for possible future losses is made. Since the balance
of outstanding debtors differs at the end of each financial year, the allowance for credit
losses must be adjusted each year to conform to this balance. The amount of the allowance
is deducted from the outstanding debtors amount at year-end and only the net amount of
debtors is shown as a current asset in the statement of financial position.
EXAMPLE 7.4
On 31 December 200X, the last day of the financial year, the balance of the debtors control
account amounted to R151 000 and the balance of the allowance for credit losses amounted
to R2 000. The following transactions must still be brought into account on 31 December
200X:
• the account of a debtor who owes R1 000 must still be written off; and
• the allowance for credit losses must be adjusted to 2% of outstanding debtors.
Step 1: Calculate the amount of the adjusted allowance for credit losses
120
Step 2: Calculate the current balance of the allowance for credit losses
Balance of allowance for credit losses R2 000
Less: Amount still to be written off (R1 000)
Current balance of allowance for credit losses R1 000
Step 3: Calculate the increase or decrease in the allowance for credit losses
Current balance of allowance for credit losses R1 000
Balance should be R3 000
Increase the allowance with R2 000
Step 2: Record the increase in the balance of the allowance for credit losses
• Credit losses R2 000
Allowance for credit losses R2 000
Should the adjustment in the allowance for credit losses result in a decrease, the transaction
will be recorded as follows:
E = A-L
121
EXAMPLE 7.5
On 1 November 200X Zimbali Golf Club sold a set of golf clubs to a member, John
Rutherford, on credit. The selling price was R30 000, but because John is a member, he may
receive 5% settlement discount if he pays his account within three months. It is a new policy
of the club to make an allowance for credit losses at 3% of outstanding debtors at year-end.
The balance of debtors amounted to R420 000 at the beginning of the year (1 January
200X). John paid his account on 30 December 200X.
The following description explains the flow of entries starting with the source documents and
ending with the financial statements for the year ending 31 December 200X:
200X R R
Feb 1 Debtors control 30 000
Sales 30 000
Sale of a golf set
Dec 30 Bank (30 000 - 1 500) 28 500
Discount allowed (30 000 x 5%) 1 500
Debtors control 30 000
John paid his account and received 5% discount
31 Credit losses ((420 000 + 30 000 - 30 000) x 3%) 12 600
Allowance: Credit losses 12 600
Allowance for credit losses created at 3%
122
GENERAL LEDGER (GL)
DR SALES (INCOME) CR
200X
Nov 1 Debtors control J1 30 000
123
TRIAL BALANCE (TB)
I ZIMBALI GOLF CLUB
R R
Debtors control 420 000
Allowance: Credit losses 12 600
Bank 28 500
Sales 30 000
Discount allowed 1 500
Credit losses 12 600
xxxxx xxxxx
The trial balance and statement of financial position will not balance as only certain
accounts are shown for explanation purposes.
124
7.3.2 Inventory (refer also to chapter 3)
Trading inventory consists of all goods or raw materials purchased with the intention of re
selling them or using them to manufacture products that will be sold. It is necessary to keep
accurate records of inventory since it may represent substantial amounts. The FIFO (first-in-
first-out) basis is usually used to value inventory. This means that the goods that were
received first are sold or consumed first. For the purposes of this course, it is not necessary
to discuss all the other methods of valuation - we will only use the FIFO method. The value
of inventory at year-end is disclosed under current assets as trading inventory.
Another type of inventory that may be kept by a business is consumables. This inventory
should also, depending on the extent thereof, be disclosed separately. Examples include
stationery, refreshments and cutlery. Consumables are treated in the same manner as
trading inventory, but should be disclosed separately from trading inventory under current
assets.
E=A-L
EXAMPLE 7.6
Zimbali Golf Club purchases a large quantity of golf sets each year to make provision for the
golf tournament held in November. The club purchased inventory to the value of. R800 000
on 1 October 200X and paid via an electronic transfer on the same day. The club also
purchased large supplies of refreshments for the tournament on. 1 November 200X from the
local supermarket to the value of R210 000. On 31 December 200X, the following inventories
were on hand after a physical stock count was conducted:
Refreshments R 40 000
The following description explains the flow of entries starting with the source documents and
ending with the financial statements for the year ending 31 December 200X:
125
GENERAL JOURNAL (GJ)
200X R R
Oct 1 Purchases 800 000
Bank 800 000
Purchased inventory
Nov 1 Refreshments (expense) 210 000
Bank 210 000
Purchased refreshments
Dec 31 Trading inventory 350 000
Refreshments inventory 40 000
Cost of sales 350 000
Refreshments (expense) 40 000
Recording of closing inventories
31 Cost of sales 800 000
Purchases 800 000
Transfer purchases to cost of sales
126
DR PURCHASES (EXPENSE) CR
200x 200X
Oct 1 Bank J1 800 000 Dec 31 Cost of sales J1 800 000
DR REFRESHMENTS(EXPENSE) CR
200X 200X
Refreshments 40 000
Nov 1 Bank J1 210 000 Dec 31
inventory
Balance c/f 170 000
210 000 210 000
200Y
Jan 1 Balance b/f 170 000
DR COST OF SALES(EXPENSE) CR
200X 200X
Dec 31 Purchases J1 800 000 Dec 31 Trading inventory J1 350 000
Balance c/d 450 000
800 000 800 000
200Y
Jan 1 Balance b/f 450 000
R R
Trading inventory 350 000
Refreshments inventory 40 000
Bank 1 010 000
Cost of sales 450 000
Refreshments (expense) 170 000
xxxxx xxxxx
The trial balance will not balance as only certain accounts are shown for explanation
purposes.
127
STATEMENT OF FINANCIAL POSITION (SFP)
I ZIMBALI GOLF CLUB
(W 'J '•'? &ank has a Cradlt balance (overdraft) and will appear under current liabilities
(chapter 8).
7.3.3 Bank
For the purposes of this course, we will not prepare the CRJ and CPJ, but will concentrate
only on the bank account in the general ledger. The bank reconciliation will be discussed in
chapter 16. All payments, whether in cash or by cheque or electronic transfer, must appear in
the bank account. The closing balance of the bank account for the previous year will be
shown as the opening balance for the new year. During the year, when payments are made
or received, the bank account will be credited (payments made) or debited (payments
received). It is important, when the balance of the bank account is determined at year-end, to
distinguish between a credit balance and a debit balance. A credit balance indicates an
overdraft and will appear under current liabilities (refer to chapter 8); in other words, the
entity owes the bank money. A debit balance indicates a favourable balance and will appear
under current assets in the statement of financial position; in other words, the bank owes the
entity money.
128
7.3.4 Petty cash
Most businesses will use a petty cash since it may be necessary to pay small amounts of
cash on a regular basis. The petty cash serves as a “mini-bank” that is kept on the business
premises. Examples of petty cash expenses are milk, coffee, tea, stamps, envelopes and
other stationery for which writing out cheques for small amounts would be uneconomical.
The petty cash is usually a small cash container that is kept under the control of the petty
cash clerk or receptionist. A business cheque is written out for a specified amount and
cashed at the bank after which the cash, called a float, is placed in the petty cash container
by the person responsible for the petty cash. This float is then used whenever cash
payments need to be made. When the float is less than a certain amount (usually once or
twice per month), the expenses to date are recorded by means of a journal entry and posted
to the general ledger. A cheque is then written out for the total amount of the expenses and
cashed once again at the bank and the cash handed to the petty cash clerk. This is called
restoring the imprest. The general ledger accounts are shown below:
ABC TRADERS
GENERAL LEDGER
DR PETTY CASH CR
200X 200X
Jan 1 Balance b/d 5 000 Jan 31 Refreshments J1 1 200
31 Bank JI 1 550 Postage J1 350
Balance c/f 5 000
6 550 6 550
200X
Feb 1 Balance b/f 5 000
DR BANK CR
200X
Jan 31 Petty cash JI 1 550
E = A-L
129
7.4 PRACTICAL EXAMPLE
Lexi Enterprises does business selling electric motors. The opening balances on
1 January 200X are as follows:
On 3 December 200X, Lexi Enterprises purchased 20 new electric motors for R315 000 and
paid by cheque. They also ordered parts from Spares for Africa on the same day, amounting
to R85 000, and undertook to immediately transfer the amount electronically. The receptionist
purchased refreshments amounting to R6 000 on 12 December 200X for the upcoming
festive season and paid by cheque. On 15 December 200X, Potch Stationery held a sale and
she purchased stationery to the value of R5 000 and paid by cheque. On 20 December
200X, the entity sold electric motors amounting to R420 000 to a client, JL van Zyl. Half the
amount was paid on the same day, while the balance is to be paid on 31 January 200Y.
Mr van Zyl received 5% discount on the portion that was paid in cash. A new policy of the
entity is to make an allowance for credit losses at 5% of outstanding debtors at year-end. No
allowance was created during the previous financial year. The entity maintains a petty cash
float of R500. During December 200X, the following expenses were paid from petty cash:
• Stationery R 8 500
130
PRACTICAL EXAMPLE - ANSWER SHEET
LEXI ENTERPRISES
GENERAL JOURNAL JI
FOL DR CR
200X R R
Jan 1 Cost of sales
Trading inventory
Transfer opening inventory to cost of sales
Stationery (expense)
Stationery on hand
Transfer opening inventory to Stationery
Dec 3 Purchases (electric motors)
Purchases (parts)
Bank
Purchased trading inventory
12 Refreshments (expense)
Bank
Purchased refreshments for festive season
15 Stationery
Bank
Purchased stationery
20 Bank (R420 000 + 2 = R210 000 x 95%)
Debtors control (R420 000 -a- 2)
Sales
Sale of goods for cash and on credit. 5% cash discount
allowed on cash portion.
31 Credit losses (335 000 x 5%)
Allowance for credit losses
Create allowance for credit losses at 5% of outstanding
debtors
31 Refreshments
Donations
Petty cash
Expenses paid from petty cash
31 Petty cash
Bank
Petty cash imprest restored
131
LEXI ENTERPRISES
GENERAL JOURNAL J2
FOL DR CR
200X R R
Dec 31 Trading inventory
Stationery on hand
Cost of sales
Stationery (expense)
Transfer closing inventory and stationery balances
31 Cost of sales
Purchases
Transfer purchases to cost of sales
LEXI ENTERPRISES
GENERAL LEDGER
DR DEBTORS CONTROL (CURRENT ASSET) CR
200X
Jan 1 Balance b/f
Dec 20 Sales J1
200Y
Jan 1 Balance b/f
132
DR STATIONERY ON HAND (CURRENT ASSET) CR
200X 200X
Jan 1 Balance b/f Jan 1 Stationery J1
Dec 31 Stationery J2 Dec 31 Balance c/f
200Y
Jan 1 Balance b/f
200Y
Jan 1 Balance b/f
200Y
Jan 1 Balance b/f
DR SALES NCOME) CR
200X
Dec 20 Bank J1
Debtors control J1
DR PURCHASES (EXPENSE) CR
200X 200X
Dec 3 Bank J1 Dec 31 Cost of sales J2
133
DR STATIONERY (EXPENSE) CR
200X 200X
Jan 1 Stationery on hand J1 Dec 31 Stationery on hand J2
Dec 15 Bank J1 Balance c/f
200Y
Jan 1 Balance b/f
DR REFRESHMENTS (EXPENSE) CR
200X
Dec 12 Bank J1
31 Petty cash J1
DR DONATIONS (EXPENSE) CR
200X
Dec 31 Petty cash J1
200Y
Jan 1 Balance b/f
134
Ilexi enterprises
ABBREVIATED TRIAL BALANCE
ON 31 DECEMBER 200X
FOL DR CR
R R
Debtors control
Allowance: Credit losses
Trading inventory
Stationery on hand
Bank
3etty cash
Sales
Cost of sales
Stationery
Refreshments
Donations
Credit losses
xxxxx xxxxx
The trial balance will not balance as only certain accounts are shown for explanation
purposes.
135
CHAPTER 7
ASSIGNMENT 1
On 1 June 200X, the entity purchased new motorcycles for R600 000 and paid by cheque.
On 1 September 200X, the receptionist paid R5 000 to a local restaurant to do the catering
for the launch of the new motorcycles. On 15 September 200X, she purchased scarves,
amounting to R2 800, that would be distributed free of charge at the launch on 1 November
200X. These scarves were paid for from petty cash (the entity follows the imprest system).
Four motorcycles were sold on 1 November 200X. Two of the motorcycles, with a normal
selling price of R200 000 each, were each sold for R185 000 cash (R15 000 discount was
allowed per motorcycle). The other two motorcycles were sold on credit to the local mayor,
Mr De Goede, and his wife for R200 000 each. On 1 February 200Y, the entity was notified
that a debtor, Mr Amos, had been declared insolvent and would not be able to pay his
outstanding debt of R35 000. It is the policy of the entity to make an allowance for credit
losses at 5% of outstanding debtors at year-end. The allowance for the previous year
amounted to R50 000. The value of motorcycles on hand on 28 February 200Y, the end of
the financial year, amounted to R900 000.
1. Record the above transactions in the general journal for the year ending
28 February 200Y.
2. Post the journal entries to the general ledger and close the accounts off properly on
28 February 200Y.
3. Prepare the abbreviated trial balance on 28 February 200Y.
136
CHAPTER 8
LIABILITIES
8.1 OUTCOMES
8.3 LIABILITIES
Large amounts of money are often required to start and operate an enterprise. The owner
does not necessarily have all the financial funds and therefore it is sometimes necessary to
borrow money from banks or other institutions. Any money borrowed from a person or
institution that is not the owner of the entity, is a liability. Given the nature and size of
liabilities, it is necessary to distinguish between two types, namely, non-current liabilities and
current liabilities.
137
8.3.1 Non-current liabilities (long-term liabilities)
Long-term liabilities are loans that are refundable over a period of longer than one year -
usually over a number of years. An example is when the owner of an entity applies to a bank
for a loan to start a business or for a major capital project, and the loan is repayable over a
period of, for example, five years at an interest rate of 10% per annum.
The portion of a long-term loan that is repayable within 12 months after the end of the
financial year is known as the “short-term portion of long-term loan", and is shown
separately in the statement of financial position under current liabilities.
1. The portion that is not repayable within 12 months after year-end is shown under non-
current liabilities as a long-term loan.
2. The portion that is repayable within 12 months after year-end is shown under current
liabilities as "short-term portion of long-term loan”.
An entity often needs to purchase products or services and it may be necessary to purchase
on credit. The persons or entities to which an entity owes money are known as creditors.
This debt is payable within 12 months after the financial year-end and appears under current
liabilities in the statement of financial position. Given the extent of transactions, an entity may
not always have sufficient cash to make payments. The bank may then grant the entity an
overdraft facility. This will result in a credit bank balance which is shown under current
liabilities in the place of the normal debit balance which is shown under current assets.
We will specifically look at the disclosure requirements in chapter 12. For the purposes of this
chapter, it is sufficient if you can identify the liabilities and record the relevant transactions.
E = A-L
138
EXAMPLE 8.1
Kangaroo Travel is a new business that specialises in organising tours to Australia. Lizzy, the
owner, applied for a loan from the local bank on 2 January 200X. She opened a bank
account at Putnam Bank and deposited R40 000 as a capital contribution. On 15 January
200X, she purchased office furniture and equipment from Potch Office Equipment to the
amount of R90 000. She undertook to pay back R30 000 per month from the end of
November 200X. On 1 March 200X, Putnam Bank approved the loan and R100 000 was
transferred to the bank account of the entity. The loan is repayable in five equal instalments
starting from 1 December 200X (ignore interest on loan). On 1 February 200X, stationery
was purchased from Potch Office Equipment for R5 000 and is payable within 30 days.
The following description explains the flow of entries starting with the general journal and
ending with the financial statements for the year ending 31 December 200X.
KANGAROO TRAVEL
GENERAL JOURNAL
FOL DR CR
200X R R
Jan 2 Bank 40 000
Capital 40 000
Capital contribution by owner
15 Office furniture and equipment 90 000
Creditors control (Potch Office Equipment) 90 000
Office furniture and equipment purchased on credit
Feb 1 Stationery 5 000
Creditors control (Potch Office Equipment) 5 000
Stationery purchased on credit
Mar 1 Bank 100 000
Long-term loan: Putnam Bank 100 000
Obtained long-term loan from Putnam Bank
1 Creditors control (Potch Office Equipment) 5 000
Bank 5 000
Payment of stationery to Potch Office Equipment
Nov 30 Creditors control (Potch Office Equipment) 30 000
Bank 30 000
1 st instalment of furniture purchased on credit
139
KANGAROO TRAVEL
GENERAL JOURNAL J2
FOL DR CR
200X R R
Dec 1 Long-term loan: Putnam Bank (100 000 ▼ 5) 20 000
Bank 20 000
Payment of 1st instalment on long-term loan
31 Creditors control (Potch Office Equipment) 30 000
Bank 30 000
2nd instalment of furniture purchased on credit
KANGAROO TRAVEL
GENERAL LEDGER
DR CAPITAL CR
200X
Jan 2 Bank J1 40 000
DR BANK CR
200X 200X
Jan 2 Capital J1 40 000 Mar 1 Creditors control J1 5 000
Mar 1 Long-term loan J1 100 000 Nov 30 Creditors control J1 30 000
Dec 1 Long-term loan J2 20 000
31 Creditors control J2 30 000
Balance c/f 55 000
140 000 140 000
200Y
Jan 1 Balance b/f 55 000
140
DR CREDITORS CONTROL (POTCH OFFICE EQUIPMENT) CR
200X 200X
Office Furniture
Mar 1 Bank J1 5 000 Jan 15 J1 90 000
and Equipment
Nov 30 Bank J1 30 000 Feb 1 Stationery J1 5 000
Dec 31 Bank J2 30 000
Balance c/f 30 000
95 000 95 000
200Y
Jan 1 Balance b/f 30 000
DR STATIONERY CR
200X
Feb 1 Creditors control J1 5 000
The balance of R80 000 is shown in the statement of financial position as a long-term loan
of R60 000 (under non-current liabilities) and a short-term portion of R20 000 (under
current liabilities) as R20 000 is payable within 12 months.
R R
Capital 40 000
Office Furniture and Equipment 90 000
Long-term loan: Putnam Bank 80 000
Bank 55 000
Creditors control 30 000
Stationery 5 000
150 000 150 000
141
STATEMENT OF FINANCIAL POSITION (SFP)
I KANGAROO TRAVEL
The statement of financial position will not balance as only certain accounts are shown for
explanation purposes.
Fitness World is a new business that specialises in the sale of gym apparatus. Alex, the
owner, commenced business on 1 July 200X with a bank account at Antilles Bank in which
he deposited R100 000 as his capital contribution. He also applied for a loan of R150 000 at
the same bank. Alex purchased computer equipment on credit from Office Line to the value
of R50 000 on 15 August 200X. He undertook to pay back R10 000 per month from the end
of November 200X. The long-term loan was approved on 1 October 200X and R150 000 was
transferred to the bank account of the entity. The loan is repayable in ten equal annual
instalments from 1 December 200X. Inventory was purchased on credit from Genesis on
1 December 200X for R200 000. The account is payable on 31 January of the following year.
142
You are required to:
1. Record the above transactions in the general journal for the year ending 31 December
200X.
2. Post the journal entries to the general ledger and close the accounts off properly on
31 December 200X.
3. Prepare the abbreviated trial balance on 31 December 200X.
4. Identify the relevant accounts in the financial statements.
FITNESS WORLD
GENERAL JOURNAL 41
FOL DR CR
200X R R
Jul 1 Bank
Capital
Capital contribution by owner
Aug 15 Computer equipment
Creditors control (Office Line)
Computer equipment purchased on credit
Oct 1 Bank
Long-term loan: Antilles Bank
Long-term loan obtained from Antilles Bank
Nov 30 Creditors control (Office Line)
Bank
Payment of equipment purchased on credit: 1st
instalment
Dec 1 Long-term loan: Antilles Bank
Bank
1 st instalment on long-term loan
1 Purchases
Creditors control (Genesis)
Purchases of inventory on credit
31 Creditors control (Office Line)
Bank
2nd instalment on computer equipment
143
FITNESS WORLD
GENERAL LEDGER
DR CAPITAL CR
200X
Jul 1 Bank J1
DR COMPUTER EQUIPMENT CR
200X
Aug 15 Creditors control J1
200Y
Jan 1 Balance b/f
DR BANK CR
200X 200X
Jul 1 Capital J1 Nov 30 Creditors control J1
Long-term loan: Long-term loan:
Oct 1 J1 Dec 1 J1
Antilles Bank Antilles Bank
31 Creditors control
Balance c/f
200Y
Jan 1 Balance b/f
DR CREDITORS CONTROL CR
200X 200X
Computer
Nov 30 Bank J1 Aug 15 J1
equipment
Dec 31 Bank J1 Dec 1 Purchases J1
Balance c/f
200Y
Jan 1 Balance b/f
DR PURCHASES CR
144
| FITNESS WORLD
R R
Capital
Computer equipment
Long-term loan: Antilles Bank
Bank
Creditors control
Purchases
| FITNESS WORLD
Current assets:
Bank
TOTAL ASSETS xxxxx
Non-current liabilities:
Long-term loan: Antilles Bank
Current liabilities:
Creditors
Short-term portion of long-term loan
The statement of financial position will not balance as only certain accounts are shown for
explanation purposes.
145
CHAPTER 8
ASSIGNMENT 1
Dr Francelle Ladikos is a plastic surgeon in Pretoria. After her practical year, she decided to
start her own practice in Sandton. On 2 January 200X, she deposited R500 000 as her
capital contribution in the new bank account of the entity at Walters Bank. On 2 January
200X, Dr Ladikos paid the rent for the full year amounting to R120 000 and purchased
stationery to the value of R10 000, and paid by cheque. On 15 January 200X, she received
R5 000 000 from her father, Mr Ladikos, as a loan to purchase new medical equipment. She
agreed to repay R1 000 000 on the 1st of December of each year (ignore interest). On
15 January 200X, Dr Ladikos received the new equipment valued at R3 700 000, but
transferred only R3 500 000 electronically because she was promised R200 000 trade
discount if the payment was made within 7 days of delivery. On 1 February 200X, medical
supplies were purchased on credit from Medical Supplies for R25 000 and again on
1 December 200X for R35 000. The account is payable on the last day of the month following
the invoice date.
Trade discount is not shown in the accounting records! It is deducted from the original
purchase price and no further recording is necessary.
1. Record the above transactions in the general journal for the year ending 31 December
200X.
2. Post the journal entries to the general ledger and close the accounts off properly on
31 December 200X.
3. Prepare the abbreviated trial balance on 31 December 200X.
The suggested solution will be discussed during the next contact session. If you
experience difficulty in completing the assignment, review the previous chapters
again.
146
CHAPTER 9
9.1 OUTCOMES
9.3.1 Income
Income is earned when goods are sold or services are rendered. Income increases the
owner’s equity. Certain enterprises, such as attorneys and accountants, receive income by
rendering a service. Other enterprises purchase products or raw materials and sell the
products at a profit or manufacture goods from the raw materials in order to sell them. These
entities are known as trading and manufacturing entities, for example, a clothing retailer and
a furniture or cheese factory. All of these entities can also earn income that is not primarily
concerned with the sale of goods or services, for example, rent income earned by leasing
property or interest received on an investment. There are several types of “other income” that
will become more evident in the examples and assignments that follow.
147
In short we can say Income is the:
EXAMPLES OF INCOME
9.3.2 Expenses
Expenses are incurred when goods are purchased by an entity or services are delivered to
the entity. Expenses such as telephone, electricity, salaries and wages, and stationery all
form part of the monthly expenses of an entity. In the case of a trading entity, an additional
expense known as cost of sales also forms part of the monthly accounts. Cost of sales
represents the cost of products purchased by the entity that will be sold at a profit. Cost of
sales is shown separately in the statement of profit or loss and other comprehensive income.
Opening inventory
Add: Net purchases (total purchases less purchases returns = net purchases)
148
EXAMPLES OF EXPENSES
EXAMPLE 9.1
The Bee’s Knees is an enterprise that trades in the buying, processing and distribution of
honey. The opening inventory on 1 January 200X amounted to R200 000. During the
financial year, the entity made the following purchases in respect of honey:
10 January 200X R 35 000
1 March 200X R 40 000
20 May 200X R 70 000
1 November 200X R 30 000
Freight on purchases for the year amounted to R20 000 and was paid on 1 December 200X.
The following description explains the flow of entries starting with the general journal and
ending with the financial statements for the year ending 31 December 200X.
149
GENERAL JOURNAL (GJ)
200X R R
Jan 1 Cost of sales 200 000
Inventory 200 000
Transfer opening inventory to cost of sales
10 Purchases 35 000
Bank 35 000
Inventory purchased
31 Bank 100 000
Sales 100 000
Cash sales of inventory
Mar 1 Purchases 40 000
Bank 40 000
Inventory purchased
May 20 Purchases 70 000
Bank 70 000
Inventory purchased
Jun 30 Bank 120 000
Sales 120 000
Cash sales of inventory
Sep 30 Bank 80 000
Sales 80 000
Cash sales of inventory
Nov 1 Purchases 30 000
Bank 30 000
Inventory purchased
Dec 1 Freight on purchases 20 000
Bank 20 000
Payment for freight on purchases
1 Salaries and wages 180 000
Telephone 12 000
Stationery 5 000
Rent received 160 000
Interest received 20 000
Bank 17 000
Recording of income and expenses
31 Bank 140 000
Sales 140 000
Sales of inventory
31 Inventory 130 000
Cost of sales 130 000
Transfer closing inventory to inventory account
31 Cost of sales 175 000
Purchases 175 000
Transfer purchases to cost of sales
150
GENERAL LEDGER (GL)
THE BEE'S KNEES
GENERAL LEDGER
DR BANK CR
200X 200X
Jan 31 Sales J1 100 000 Jan 10 Purchases JI 35 000
Jun 30 Sales J1 120 000 Mar 1 Purchases J1 40 000
Sep 30 Sales J1 80 000 May 20 Purchases J1 70 000
Dec 1 Rent received J1 160 000 Nov 1 Purchases J1 30 000
Interest received J1 20 000 Dec 1 Freight costs J1 20 000
Salaries and
31 Sales J1 140 000 wages J1 180 000
Telephone J1 12 000
Stationery J1 5 000
31 Balance c/f 228 000
620 000 620 000
200Y
Jan 1 Balance b/f 228 000
DR INVENTORY CR
200X 200X
Jan 1 Balance b/f 200 000 Jan 1 Cost of sales J1 200 000
Dec 31 Cost of sales J1 130 000 Dec 31 Balance c/f 130 000
330 000 330 000
200Y
Jan 1 Balance b/f 130 000
DR SALES CR
200X
Jan 31 Bank J1 100 000
Jan 30 Bank J1 120 000
Sept 30 Bank J1 80 000
Dec 31 Bank J1 140 000
440 000
DR PURCHASES CR
200X 200X
Jan 10 Bank J1 35 000 Dec 31 Cost of sales J1 175 000
Mar 1 Bank J1 40 000
May 20 Bank J1 70 000
Nov 1 Bank J1 30 000
175 000 175 000
DR FREIGHT ON PURCHASES CR
200X
Dec 1 Bank J1 20 000
151
DR TELEPHONE CR
200X
Dec 1 Bank J1 12 000
DR STATIONERY CR
200X
Dec 1 Bank J1 5 000
DR RENT RECEIVED CR
200X
Dec 1 Bank JI 160 000
DR INTEREST RECEIVED CR
200X
Dec 1 Bank J1 20 000
DR COST OF SALES CR
200X 200X
Jan 1 Inventory J1 200 000 Dec 31 Inventory J1 130 000
Dec 31 Purchases J1 175 000 Balance c/f 245 000
375 000 375 000
200Y
Jan 1 Balance b/f 245 000
R R
Bank 228 000
Inventory 130 000
Sales 440 000
Cost of sales 245 000
Freight on purchases 20 000
Salaries and wages 180 000
Telephone 12 000
Stationery 5 000
Rent received 160 000
Interest received 20 000
xxxxx xxxxx
The trial balance will not balance as only certain accounts are shown for explanation
purposes.
152
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME (SPLOCI)
Freight on purchases for the year amounted to R7 000 and was paid on 31 December 200X
per cheque.
153
Sales for the year were as follows:
31 January 200X R 50 000
30 June 200X R 40 000
30 September 200X R 55 000
31 December 200X R 70 000
Other income and expenses for the year were as follows (assume that all payments and
receipts were made on 31 December 200Xy.
Rent paid R 60 000
Interest received R 10 000
Salaries and wages R 40 000
Telephone R 5 000
Advertising cost R 5 000
1. Record the above transactions in the general journal for the year ending 31 December
200X.
2. Post the journal entries to the general ledger and close the accounts off properly on
31 December 200X.
3. Prepare the abbreviated trial balance on 31 December 200X.
4. Identify the relevant accounts in the financial statements.
CUPPA
GENERAL JOURNAL J1
FOL DR CR
200X R R
Jan 1 Cost of sales
Inventory
Transfer opening inventory to cost of sales
31 Purchases
Bank
Cash purchases of inventory
154
CUPPA
GENERAL JOURNAL JI
FOL DR CR
200X R R
Jan 31 Bank
Sales
Cash sales of inventory
Mar 31 Purchases
Bank
Cash purchases of inventory
May 31 Purchases
Rank
Cash purchases of inventory
Jun 30 Bank
Sales
Cash sales of inventory
Sep 30 Bank
Sales
Cash sales of inventory
Nov 30 Purchases
Bank
Cash purchases of inventory
Dec 31 Freight on purchases
Bank
Paid freight on purchases
31 Salaries and wages
Telephone
Advertising cost
Rent paid
Interest received
Bank
Income and expenses for the year
31 Bank
Sales
Cash sales of inventory
31 Inventory
Cost of sales
Transfer closing inventory to inventory account
31 Cost of sales
Purchases
Transfer purchases to cost of sales
155
CUPPA
GENERAL LEDGER
DR INVENTORY CR
200X 200X
Jan 1 Balance b/f Jan 1 Cost of sales J1
Dec 31 Cost of sales J2 Dec 31 Balance c/f
200Y
Jan 1 Balance b/f
DR BANK CR
200X 200X
Jan 31 Sales J2 Jan 31 Purchases J1
Jun 30 Sales J2 Mar 31 Purchases J2
Sep 30 Sales J2 May 31 Purchases J2
Dec 31 Interest received J2 Nov 30 Purchases J2
Sales J2 Dec 31 Freight costs J2
Advertising cost J2
Salaries and wages J2
Telephone J2
Rent paid J2
Balance c/f
200Y
Jan 1 Balance b/f
DR SALES CR
200X
Jan 31 Bank J2
Jun 30 Bank J2
Sep 30 Bank J2
Dec 31 Bank J2
DR PURCHASES CR
200X 200X
Jan 31 Bank J1 Dec 31 Cost of sales J2
Mar 31 Bank J2
May 31 Bank J2
Nov 30 Bank J2
DR FREIGHT ON PURCHASES CR
200X
Dec 31 Bank J2
156
DR TELEPHONE CR
200X
Dec 31 Bank J2
DR ADVERTISING COST CR
200X
Dec 31 Bank J2
DR RENT PAID CR
200X
Dec 31 Bank J2
DR INTEREST RECEIVED CR
200X
Dec 31 Bank J2
DR COST OF SALES CR
200X 200X
Jan 1 Inventory J1 Dec 31 Inventory J2
Dec 31 Purchases J2 31 Balance c/f
200Y
Jan 1 Balance b/f
| CUPPA
R R
Inventory
Bank
Sales
Cost of sales
Freight on purchases
Salaries and wages
Telephone
Advertising costs
Rent paid
Interest received
xxxxx xxxxx
The trial balance will not balance as only certain accounts are shown for explanation
purposes.
157
| CUPPA
Closing Inventory
Gross profit
Other income
Expenses:
Salaries and wages
Telephone
Advertising costs
Rent paid
Profit before interest
Interest received
Profit for the year
158
CHAPTER 9
ASSIGNMENT 1
Freight on purchases for the year amounted to R90 000. R50 000 was paid on 1 April 200X
and R40 000 on 1 September 200X.
Other income and expenses for the year were as follows (assume that all payments and
receipts were made on 31 December 200X) :
159
You are required to:
1. Record the above transactions in the general journal for the year ending 31 December
200X.
2. Post the journal entries to the general ledger and close the accounts off properly on
31 December 200X.
3. Prepare the abbreviated trial balance on 31 December 200X.
k The suggested solution will be discussed during the next contact session. If you
160
CHAPTER 10
10.1 OUTCOMES
10.3 ADJUSTMENTS
One of the characteristics of financial statements requires that the information contained in
the financial statements must be accurate. This implies, inter alia, that only income and
expenses with respect to the current financial period may be recognised as income and
expenses during the current financial period. The purpose of adjustments is thus to ensure
that income and expenses, and consequently the profit or loss, for the relevant financial
period are accurately reported.
161
All the entries posted to the income and expense accounts in the general ledger are
examined at the end of each financial period to ensure that all amounts for the relevant
financial period are included in those ledger accounts and all amounts for other financial
periods are transferred to either current asset accounts or current liabilities accounts. Any
adjustments are made by means of journal entries which are then posted to the general
ledger.
The following adjustments are made at the end of each financial period:
Income received in advance represents income for the following financial period that has
already been received during the current financial period. This income cannot be recognised
as income during the current period because it has not yet been earned. However, the
accrual principle requires that the transaction must still be recorded. Consequently, this
income is not shown as income for the current period, but as income received in advance
under current liabilities in the statement of financial position. An example follows:
• Steel Dealers rented office space to a legal firm for the period from 1 January 200X to
31 December 200X (the end of the financial year) at R1 000 per month. Rent to the
amount of R13 000 was received during the current financial year and was credited to
the Rent received account.
• The office space was rented for the full financial year, thus the income earned for the
current financial year amounts to R12 000 (R1 000 x 12 months). However, R13 000
was received.
162
R1 000 (R13 000 - R12 000) represents income received for the following financial
year and must be deducted from the Rent received account and transferred to the Rent
received in advance account (current liability).
STEEL DEALERS
GENERAL JOURNAL J1
FOL DR CR
200X R R
Accrued income represents income that has already been earned but is still owed to the
entity for the current financial period and must therefore be recognised as income. However,
the entity must also create a debtor (current asset) to indicate that money is owed to the
entity. An example follows:
• Kipp Consultants invested R50 000 in a fixed deposit earning 8% interest per annum.
Interest was still outstanding for the 12 months ending 31 December 200X.
• The outstanding interest amounts to R4 000 (R50 000 x 8% x 12/12).
KIPP CONSULTANTS
GENERAL JOURNAL J1
FOL DR CR
200X R R
163
10.3.3 Prepaid expenses
Prepaid expenses represent expenses for the following financial period that have already
been paid during the current financial period. These amounts cannot be recognised as
expenses during the current period because they have not yet been incurred. As already
mentioned, the accrual principle requires that these transactions must still be recorded.
Consequently, the portion of the expenses that has been paid in advance is shown as
prepaid expenses under current assets in the statement of financial position. An example
follows:
• Included in the insurance expense of R3 000 for the financial year ending 31 March
200X is an amount of R2 400 in respect of an insurance policy for the period from
1 January 200X to 31 December 200X.
• The insurance policy of R2 400 is for a period of 12 months, three of which fall within
the current financial period (1 January 200X - 31 March 200X) and the other nine in
the next financial period (1 April 200X - 31 December 200X).
• The prepaid portion amounts to R1 800 (R2 400 12 = R200 per month x 9 months)
and must be deducted from the insurance expense account and transferred to the
prepaid insurance account (current asset).
FALCON TRADERS
GENERAL JOURNAL J1
FOL DR CR
200X R R
Accrued expenses represent expenses that have been incurred but must still be paid by the
entity for the current financial period and must therefore be recognised as expenses.
However, the entity must also create a creditor to indicate that money is owed by the entity.
Accrued expenses are shown under current liabilities in the statement of financial position.
An example follows:
164
The water and electricity account of R750 for December 200X had not yet been
received by the end of the financial period (31 December 200X).
200X R R
Dec 31 Water and electricity 750
Accrued water and electricity 750
Water and electricity for December still owing
I ARCHER DEALERS
R R
Capital 41 800
Drawings 6 000
Land and buildings 12 000
Furniture at cost 10 000
Accumulated depreciation: Furniture (1/1/200X) 7 000
Vehicles at cost 12 500
Accumulated depreciation: Vehicles (1/1/200X) 5 000
Inventory (1/1/200X) 14 000
Purchases 34 000
Purchases returns 2 000
Sales 46 000
Sales returns 3 000
Freight on purchases 1 500
Rent income 3 900
Salaries and wages 5 500
Commission received 500
Water and electricity 500
Bank 6 400
Debtors control 2 900
Allowance: Credit losses 200
Creditors control 1 900
108 300 108 300
165
The following items were not taken into account in the preparation of the above trial balance:
Journalise the adjustments for the financial year ending 31 December 200X.
ARCHER DEALERS
GENERAL JOURNAL J1
FOL DR CR
200X R R
Jan 1 Cost of sales
Inventory
Transfer opening inventory to cost of sales
Dec 31 Inventory
Cost of sales
Closing inventory adjustment
31 Depreciation
Accumulated depreciation: Furniture (10 000 x 10%)
Accumulated depreciation: Vehicles (12 500 x 12%)
Depreciation written off
31 Rent received
Rent received in advance
Rent received for January 200Y
31 Salaries and wages
Salaries and wages accrued
Salaries and wages outstanding
31 Water and electricity paid in advance
Water and electricity
Water and electricity paid in advance
166
ARCHER DEALERS
GENERAL JOURNAL J1
FOL DR CR
200X R R
Dec 31 Commission receivable
Commission received
Commission income outstanding
31 Allowance: Credit losses
Debtors control
Credit losses written off
31 Credit losses
Allowance: Credit losses
Allowance adjusted to 5% of debtors
Once the adjusting journal entries have been journalised, they must be posted to the general
ledger. The relevant general ledger accounts must then be balanced to determine the new
balances. The post-adjustment trial balance is prepared once all the adjustments have been
processed.
We will now prepare the post-adjustment trial balance for Archer Dealers using the
information from Practical Example 1.
167
PRACTICAL EXAMPLE 2 - ANSWER SHEET
I ARCHER DEALERS
R R
Capital
Drawings
Land and buildings
Furniture at cost
Accumulated depreciation: Furniture
Vehicles at cost
Accumulated depreciation: Vehicles
Inventory
Cost of sales
Purchases (account has not yet been closed to cost of sales)
Purchases returns
Sales
Sales returns
Freight on purchases
Rent income
Salaries and wages
Commission received
Water and electricity
Depreciation
Credit losses
Bank
Debtors control
Allowance: Credit losses
Creditors control
Rent received in advance
Salaries and wages accrued
Water and electricity paid in advance
Commission receivable
168
10.7 CLOSING JOURNAL ENTRIES
The recording of adjustments ensures that each income and expense account includes only
entries with respect to the current financial period. At the end of each financial period, the
income and expense accounts, also called nominal accounts, must be closed off in order to
determine the profit or loss for the period. In other words, the balances must be reduced to
zero. This is done by means of journal entries in the general journal. You learnt in chapter 4
how to calculate cost of sales and gross profit or loss. All the accounts with respect to sales
and purchases, which are used to calculate gross profit or loss, are closed off against the
trading accountant all the other income and expense accounts, which are used to calculate
profit or loss for the year, are closed off against the profit and loss account (see Diagram
10.1). Once the profit or loss for the year has been calculated, it is transferred to the capital
account. The balance of the drawings account may either be transferred to the capital
account or shown separately in the statement of financial position. If drawings are transferred
to the capital account, the new balance of the capital account will represent the owner’s
interest in the entity at the end of the year.
Profit or loss for the year (Gross profit + Income - Expenses) Capital account
Drawings Capital account or separately
Diagram 10.1
We will now close off the nominal accounts for Archer Dealers in the general journal (the
periodic inventory system is in use).
169
PRACTICAL EXAMPLE 3 - ANSWER SHEET
ARCHER DEALERS
GENERAL JOURNAL J1
FOL DR CR
200X R R
Dec 31 Cost of sales
Purchases
Freight on purchases
Closing transfer
31 Purchases returns
Cost of sales
Closing transfer
31 Trading account
Cost of sales
Closing transfer (2 000 + 35 500 - 2 000)
31 Sales
Trading account
Closing transfer
31 Trading account
Sales returns
Closing transfer
31 Trading account
Profit and loss account
Transfer gross profit to profit and loss
(46 000 - 35 500 - 3 000)
31 Profit and loss account
Salaries and wages
Water and electricity
Depreciation
Credit losses
Closing transfer
31 Rent income
Commission received
Profit and loss account
Closing transfer
31 Profit and loss account
Capital
Transfer profit for the year to capital
31 Capital
Drawings
Transfer drawings to capital account
170
10.9 THE POST-CLOSING TRIAL BALANCE
Once the closing journal entries have been journalised, they must be posted to the general
ledger and the nominal accounts closed off. The post-closing trial balance is prepared once
all the closing entries have been processed.
We will now prepare the post-closing trial balance of Archer Dealers on 31 December 200X.
R R
Capital
Land and buildings
Furniture at cost
Accumulated depreciation: Furniture
Vehicles at cost
Accumulated depreciation: Vehicles
Inventory
Bank
Debtors control
Allowance: Credit losses
Creditors control
Rent received in advance
Salaries and wages accrued
Water and electricity paid in advance
Commission receivable
The above trial balance includes only real accounts”. I.e. accounts that appear in the
statement of financial position. AH the nominal accounts have been closed off - as
these balances are now zero, they are not shown in the post-closing trial balance.
171
CHAPTER 10
ASSIGNMENT 1
7. Why are the nominal accounts closed off at the end of a financial period?
8. Which trial balance is prepared after the adjustments have been processed?
9. Which trial balance is prepared after the closing journal entries have been processed?
k The suggested solution will be discussed during the next contact session. If you
172
CHAPTER 10
ASSIGNMENT 2
The following trial balance was taken from the records of Rex Dealers on 31 December
200X:
[ REX DEALERS
ON 31 DECEMBER 200X
DR CR
R R
173
Additional information:
1. The following were on hand on 31 December 200X (the periodic inventory system is in
use):
Inventory R28 000
Stationery R 2 000
2. Depreciation must still be provided for as follows:
Vehicles at 10% p.a. - straight-line method, and
Equipment at 20% p.a. - straight-line method.
3. A debtor’s account of R1 000 must still be written off as irrecoverable and the
allowance for credit losses must be adjusted to 4% of outstanding debtors at year-end.
4. The amount received for rent was for 13 months.
5. The fixed deposit was made in the previous financial year. Interest on the investment is
still outstanding.
6. Salaries of R4 000 was still outstanding for December 200X.
7. The water and lights account of R2 000 for January 200Y has already been paid.
8. The long-term loan was obtained on 1 July 200X. Interest on the loan has not yet been
paid.
9. Ignore VAT.
The suggested solution will be discussed during the next contact session. If you
~ W experience difficulty in completing the assignment, review the previous chapters
M again.
174
CHAPTER 11
11.1 OUTCOMES
• The elements of the financial statements consist of assets, liabilities, equity, income
and expenses. Equity includes capital, profit or loss which is determined by income and
expenses, and drawings.
• Assets represent possessions which have value.
• Liabilities represent debts.
• Equity represents the interest of the owner in the entity.
• Income is earned when goods are sold or services are rendered and increases the
owner’s interest (equity) in the entity.
• Expenses are incurred when goods are purchased by the entity or services are
delivered to the entity and decrease the owner’s interest (equity) in the entity.
The duality concept has already been explained to you in chapter 2. Let us recap:
The duality concept determines that the financial position of an entity is defined in terms of
the accounting equation. The financial position is thus calculated as follows:
175
An owner’s interest (equity) in the business is therefore represented by the excess of his
possessions (assets) over his debts (liabilities). Each transaction has a dual effect in order to
ensure that the accounting records comply with the duality concept. This means that the
accounting equation must always balance.
We will record each of the following transactions in the accounting equation. The financial
year-end is 31 December 200X. The periodic inventory system is in use.
7. Withdrawal by owner
The owner of Crocodile Traders withdrew R1 000 cash for personal use.
176
9. Purchase goods on credit
Crocodile Traders purchased goods for R5 000 on credit.
12. Inventory
Opening inventory on 1 January 200X amounted to R9 000 and closing inventory
amounted to R11 000 on the last day of the financial year.
13. Depreciation
Depreciation must be provided for as follows:
Furniture at 10% p.a. on the cost price of R15 000, and
Vehicles at 12% p.a. on the cost price of R20 000.
177
PRACTICAL EXAMPLE - ANSWER SHEET
■ ■ ■ ■ ■■
178
ASSETS s EQUITY + LIABILITIES
■■ ■ ■ ■■
179
CHAPTER 11
ASSIGNMENT 1
An extract from the trial balance of Fest Traders on 31 July 200Y appears below:
| FEST TRADERS
TRIAL BALANCE
ON 31 JULY 200Y
DR CR
R R
Vehicles 150 000
Accumulated depreciation: Vehicles (01/06/200X) 75 000
Equipment 70 000
Accumulated depreciation: Equipment (01/06/200X) 52 500
Debtors control (01/06/200X) 8 500
Allowance: Credit losses 1 200
Inventory (01/06/200X) 29 000
Rent received 18 000
Interest received 2 000
Interest on loan 1 125
Stationery 4 000
Water and electricity 6 000
Fest Traders concluded the following transactions, amongst others, during July 200Y. The
financial year-end is 31 July 200Y and the entity uses the periodic inventory system:
180
9. Paid the telephone account by cheque, R1 500.
10. Paid the water and electricity account by cheque, R2 000.
11. Received R7 000 from a debtor as part payment of his account.
12. Paid salaries by cheque, R8 000.
13. Paid R10 000 in settlement of a creditor’s account.
14. The following were on hand on 31 July 200Y:
Inventory R31 000, and
Stationery R 1 000.
15. Depreciation must be provided for as follows:
Equipment at 15% p.a. on the cost price, and
Vehicles at 25% p.a. on the cost price.
16. A debtor’s account of R500 must still be written off as irrecoverable and the allowance
for credit losses must be adjusted to 6% of the outstanding debtors balance at the
beginning of the year.
17. Storage space was rented to a furniture removal firm for the period from 1 January
200Y to 31 December 200Y at R1 500 per month.
18. R60 000 was invested in a fixed deposit at Exel Bank on 1 February 200Y and earns
interest at 8% p.a.
19. Salaries of R7 000 were still outstanding for July 200Y.
20. The amount for water and electricity includes R1 200 paid for August 200Y.
21. A long-term loan for R90 000 was obtained from Smart Bank on 1 June 200X. The loan
bears interest at 15% p.a.
Record the above transactions in the accounting equation for Fest Traders for the year
ending 31 July 200Y in the following format (ignore VAT):
ACCOUNT
DEBIT
ACCOUNT
CREDIT ASSETS = EQUITY + LIABILITIES
DR CR DR CR DR CR
+ — — + — +
1.
The suggested solution will be discussed during the next contact session. If you
experience difficulty in completing the assignment, review the chapter again.
181
CHAPTER 11
ASSIGNMENT 2
The following transactions took place during the first month of business for Lisa’s Boutique
(the entity uses the periodic inventory system):
1. Opened a bank account in the name of the entity and deposited R250 000 in the
account.
2. Entered into an agreement with the owners of River Mall to rent a shop in the Mall. The
rent amounts to R5 000 per month.
3. Purchased inventory for R55 000 on credit from Boutique Supplies.
4. Brought office furniture and equipment valued at R5 000 from her home to be used in
the boutique.
5. Cash sales, R4 500.
6. Credit sales, R5 500.
7. A client returned goods that she purchased on credit, R500.
8. Returned some of the inventory that was purchased, R1 500.
9. Paid salaries for the month, R3 500.
10. Paid the rent for the first month.
11. Purchased inventory to the amount of R25 000 and paid by cheque.
12. Withdrew R10 000 cash for personal use.
13. Received a notice that a client who owes R500 is unable to pay the amount. The
amount must be written off as irrecoverable.
14. Provide depreciation on equipment of R200.
15. Paid the telephone bill of R500.
16. Received the account for municipal charges for the month to the amount of R1 200.
The amount is payable before the end of the following month.
The suggested solution will be discussed during the next contact session. If you
experience difficulty in completing the assignment, review the chapter again.
182
CHAPTER 12
12.1 OUTCOMES
On completion of this chapter, you should be able to:
• discuss the structure and contents of financial statements;
• name and discuss the general features of financial statements;
• discuss the accounting policy and other information required to be disclosed in the
notes to the financial statements;
• journalise adjustments in the general journal: and
• prepare the financial statements of a sole trader.
12.2 INTRODUCTION
Everything you have previously studied in the textbook guides you to this point, where you
will learn how to prepare financial statements. The schematic diagram of the accounting
183
Every transaction involves at least one of the five elements (income, expenses, assets,
liabilities and equity). These elements form the basis of the financial statements. Income and
expenses determine the financial performance, i.e. the profit or loss of an entity and are
included in the statement of profit or loss and other comprehensive income. Assets, liabilities
and equity determine the financial position of an entity and are included in the statement of
financial position. Equity forms such an integral part of the entity as it represents the interest
of the owner in the business. As such, the total equity of an entity can be determined in the
statement of changes in equity before being included in the statement of financial position.
In chapter 1 you learnt that there are certain characteristics that financial statements must
possess in order to ensure reliability. In this chapter, you will learn further features of
financial statements and how these must be taken into consideration when preparing
financial statements. The format of financial statements will also be studied as it forms the
basis of the consistency and comparability characteristics. It is recommended that you revise
chapter 1 before continuing with this chapter.
The objective of financial statements is to provide information about the financial position,
financial performance and cash flow of an entity that is useful to a wide range of users in
making economic decisions.
The presentation of financial statements is set out in the International Financial Reporting
Standards (IFRS), which focus on the structure and content of general purpose financial
statements. General purpose financial statements are prepared for the needs of common
users, such as owners and creditors, who do not have specific requirements regarding
financial statements. The aim of these standards is to ensure that the financial statements of
an entity are comparable with those of previous periods as well as with those of other
entities. According to these standards, the headings of the financial statements must include
the following:
• name of entity;
• title of financial statement;
• date or period of financial statement;
• currency unit used (e.g. R); and
• the extent to which figures are rounded off (e.g. 000).
*
184
The statement of profit or loss and other comprehensive income, statement of changes in
equity, statement of financial position and statement of cash flow must each be presented on
a single page and the details of amounts shown in these statements must be disclosed in the
notes to the financial statements. Financial statements must be prepared at least on an
annual basis and must be issued to users within six months of the financial yearend.
The following features should be taken into consideration when preparing financial
statements:
The primary purpose of accounting is to provide information on the financial performance and
financial position of an entity to its users, therefore all information provided in the financial
statements must be a fair presentation of the financial performance and position. In other
words, the information must reflect the true state of affairs of the entity. This can be achieved
by meeting the requirements of the IFRSs. Where the financial statements of an entity
comply with IFRS, an explicit statement of such compliance must be made in the notes to the
financial statements.
If the exclusion of information would influence the financial decisions of a user, then such
information is considered to be material. Materiality is subject to the nature or extent of an
item. Where individual items fall into the same category, for example entertainment expenses
that may consist of refreshments and accommodation expenses, such items may be
aggregated and disclosed as a single amount on the face of the statement of profit or loss
and other comprehensive income. Where items fall into different categories, for example
telephone expenses and stationery expenses, these items may not be aggregated, but must
be disclosed separately. In cases where items are aggregated, a decision must be made as
to whether these items are sufficiently material to warrant separate disclosure in the notes to
the financial statements.
12.4.3 Offsetting
Assets and liabilities as well as income and expenses may not be offset against each other,
but must be disclosed separately.
185
12.4.4 Comparative information
Information for the previous financial period must be disclosed together with information for
the current financial period. The purpose of comparative information is to assist an entity to
determine trends.
The presentation of financial statements must remain consistent from year to year, unless:
Where a change is necessitated, the comparative amounts must be presented in the same
manner as the figures for the current year.
• the reason why the financial year is not a full 12 months; and
• the fact that the information is therefore not comparable with that of the previous year.
When preparing financial statements, it is assumed that an entity will continue to exist for the
foreseeable future and that a substantial portion of the activities of the entity will not be
discontinued.
If an entity is not a going concern, the elements of the financial statements must be
measured at liquidation values (cash values) and a note to this effect must be included in the
financial statements. Liquidation values of assets are usually less than their actual values
due to the fact that the entity is forced to sell its assets.
186
12.4.8 Accrual basis
According to the accrual concept, transactions must be recorded in the accounting records
when they occur, not necessarily when cash is received or paid. The transaction date is the
date on which the cash accrues, in other words, the date on which income is earned or
expenses are incurred.
The statement of profit or loss and other comprehensive income (SPLOCI) consists of two
sections, namely, the profit or loss for the year and other comprehensive income for the year.
These two sections may be presented in two separate financial statements or may be
combined in one financial statement.
The profit or loss section includes all the income and expenses that are applicable for the
relevant financial year. Any income and expenses that do not fall within the relevant financial
year must be excluded by means of adjusting journal entries (refer to chapter 10).
Other comprehensive income includes income or expenses that may not be recognised in
profit or loss, for example, a revaluation surplus on property. For the purposes of this course,
only the profit or loss section will be dealt with.
Information to be presented in the profit or loss section or in the statement of profit or loss
includes the following:
• revenue;
• cost of sales;
• other income;
• operating expenses:
• profits or losses arising from the sale of non-current assets;
• finance costs; and
• profit or loss for the year.
187
EXAMPLE 12.1
The following incomplete statement of profit and loss and other comprehensive income was
prepared by the owner, Isabella Ferreira of Bella’s. She asked you to assist her with the
preparation of the financial statements for the year ended 31 December 200X.
| BELLA’S
Additional information:
1. Only the cash sales have been included in the above figures. Credit sales for the
period amounted to R340 000.
2. Rent income was earned at R5 000 per month for the full 12 month period.
3. Water and electricity was paid until 31 March 200X.
4. On 31 March 200X, stationery to the value of R250 was still on hand.
188
5. The telephone account has not yet been paid for November and December 200X.
6. The rent expense amounts to R1 500 per month. The entity was liable to pay rent from
1 April 200X.
7. On 1 October 200X, ten new workers were employed. They each earn a salary of
R2 500 per month. These entries have not yet been recorded.
The correct statement of profit or loss and other comprehensive income for Bella’s for the
financial year ending 31 December 200X is shown below (the periodic inventory system is in
use). VAT has been ignored and amounts have been rounded off to the nearest rand.
BELLA’S
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 200X
200X 200X
R R
Sales (2 800 000 + 340 000) 3 140 000
Less: Cost of sales (875 000)
Opening inventory 1 000 000
Purchases 460 000
Freight on purchases 15 000
1 475 000
Less: Closing inventory (600 000)
Gross profit 2 265 000
Other income:
Rent income 60 000
2 325 000
Operating expenses: (157 000)
Water and electricity (4 200/3 x 12) 16 800
Telephone (5 500/10 x 12) 6 600
Insurance 16 000
Stationery (750 - 250) 500
Printing cost 2 500
Postage 300
Rent expense (1 500 x 9) 13 500
Salaries and wages (25 000 + (2 500 x 10 x 3)) 100 000
Bank charges 800
Operating profit 2 268 000
Finance cost (30 000)
Interest income 50 000
Profit for the year 2 188 000
189
12.6 STATEMENT OF FINANCIAL POSITION
IAS 1 stipulates that non-current assets, current assets, non-current liabilities and current
liabilities should be presented separately in the statement of financial position (SFP). An
asset must be classified as a current asset if it complies with the following criteria:
• it is expected to be realised, or is intended for sale or consumption, in the entity’s
normal operating cycle;
• it is held primarily for the purpose of being traded;
• it is expected to be realised within twelve months after the end of the reporting period;
or
• it is cash or a cash equivalent.
The following is the minimum information that must be presented in the statement of financial
position:
• property, plant and equipment;
• financial assets (investments);
• inventories;
• trade and other receivables (debtors);
• cash and cash equivalents;
• non-current liabilities; and
• trade and other payables (creditors).
The final section to appear in the statement of financial position is equity. This section may
be presented in detail in the statement of financial position or it may be presented in the
statement of changes in equity with the closing balance appearing as a line item in the
statement of financial position.
190
EXAMPLE 12.2
The following statement of financial position of De Vette Fish has been provided to you for
the financial period ended 31 May 200Y:
I DE VETTE FISH
Non-current liabilities:
Loan: ABBA at 20% 3 500 000
191
The following information has not yet been included in the above figures:
1. On 31 October 200X, a new vehicle was purchased on credit for R280 000.
2. On 1 December 200X, a photocopier was sold for cash. The following details regarding
the transaction are available:
• cost price, R100 000;
• accumulated depreciation to date of sale, R70 000;
• selling price, R25 000.
3. Interest on the fixed deposit must still be recorded for five months.
4. Credit sales of R260 000 for the last two months is not included in the above figure.
5. Rent income amounts to R2 500 per month. Rent for six months is still outstanding.
6. Insurance of R800 was paid for the period from 1 September 200X to 31 August 200Y.
This payment has been included in the calculation of the profit for the year.
7. The owner contributed additional capital of R500 000.
8. Interest must still be recorded in the accounting records for the following:
• the loan from ABBA; and
• at 5% on the bank overdraft.
10. The rent expense amounts to R5 000 per month. Only the first three months’ payment
has been recorded in the accounting records.
11. Depreciation has already been recorded for the year.
The relevant journal entries and the correct statement of financial position on 31 May 200Y
are shown below. VAT has been ignored and amounts have been rounded off to the nearest
rand.
192
DE VETTE FISH
GENERAL JOURNAL J1
FOL DR CR
200X R R
Oct 31 Vehicles 280 000
Creditors 280 000
New vehicle purchased on credit
Dec 1 Bank 25 000
Loss on sale of equipment 5 000
Accumulated depreciation: Equipment 70 000
Equipment 100 000
Photocopier sold at a loss
200Y
May 31 Interest receivable (1 850 000 x 10% x 5/12) 77 083
Interest income 77 083
Interest on fixed deposit still outstanding
31 Debtors 260 000
Sales 260 000
Credit sales not yet recorded
31 Rent receivable (2 500 x 6) 15 000
Rent income 15 000
Rent income outstanding for six months
31 Prepaid insurance (800 x 3/12) 200
Insurance 200
Insurance paid for 3 months in advance
31 Bank 500 000
Capital 500 000
Owner contributed additional capital
31 Finance cost (110 000 x 5% + 3 500 000 x 20%) 705 500
Accrued finance cost 705 500
Interest on bank overdraft and loan still outstanding
31 Rent expense (5 000 x 9) 45 000
Accrued rent expense 45 000
Rent expense outstanding for nine months
193
I DE VETTE FISH
Non-current liabilities:
Loan: ABBA at 20% 3 500 000
Equity represents the owner’s interest in the entity. If the entity chooses to prepare a
separate statement of changes in equity (SCE), the following information should be shown:
• opening balance for the financial period (closing balance from the previous period);
• profit or loss for the current financial period;
• drawings for the current financial period; and
• closing balance for the current financial period.
194
EXAMPLE 12.3
The following financial information was obtained from JCC Enterprises for the year ended
31 March 200Y:
DR CR
Sales 2 300 000
Cost of sales ?
Gross profit 9
Other income: 509 000
Services delivered 485 000
Rent income 24 000
Other operating expenses:
Salaries and wages ?
Rent expense 36 000
Water & electricity 5 000
Telephone 2 500
Stationery 1 800
Depreciation 35 000
Credit losses 14 000
Finance cost 15 000
Profit for the year ?
An extract from the statement of financial position of JCC Enterprises on 31 March 200Y is
provided below:
Equity R
Capital 2 500 000
Drawings (60 000)
Additional information:
1. The owner made an additional cash contribution of R500 000 on 31 October 200X.
2. The gross margin percentage on sales is maintained at 10%.
3. The entity has the following employees:
• two managers who each earn a salary of R12 000 per month; and
• three temporary workers who only worked for 3 months at R1 800 each per
month.
The statement of changes in equity for the year ended 31 March 200Y is shown below. VAT
has been ignored and amounts have been rounded off to the nearest rand.
195
I JCC ENTERPRISES
The notes to the financial statements comprise any additional information required to ensure
fair presentation. Each note is cross-referenced to the relevant item disclosed on the face of
the financial statements. The following notes are usually provided:
196
12.8.1 Accounting policy
197
12.10 EXAMPLE OF THE NOTES TO THE FINANCIAL STATEMENTS
I ML CONSULTANTS/DEALERS
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDING 31 DECEMBER 200Y____________________________________________________
1. Accounting policy
Unless otherwise indicated, the financial statements have been compiled on the historical cost basis in
accordance with International Financial Reporting Standards. The accounting policy, unless otherwise
stated, is consistent with that of the previous year, and is as follows:
1.1 Property, plant and equipment
Property, plant and equipment are initially recognised at cost. Land and buildings are not
depreciated. Plant and equipment are subsequently measured at cost less accumulated
depreciation and are depreciated over their expected useful lives. The depreciation rates and
methods used are as follows:
Equipment: 20% per annum according to the reducing balance method.
Vehicles: 25% per annum according to the straight-line method.
1.2 Inventory
Inventory is initially measured at cost and subsequently valued at the lowest of cost and net
realisable value. The first-in-first-out formula is used. Net realisable value is the estimated selling
price in the normal course of business less estimated selling costs.
1.3 Revenue
Revenue from the sale of goods consists of the total net invoiced sales. Revenue from the rendering
of services is recognised with reference to the stage of completion at reporting date. Revenue
excludes value-added tax (VAT).
1.4 Allowance for credit losses
Allowance for credit losses is calculated at 5% of outstanding debtors.
Land and buildings, purchased on 1 January 200X, are situated on stand 1025, Potchefstroom and were
provided as security for the interest-bearing loan (refer note 6).
198
I ML CONSULTANTS/DEALERS
6. Interest-bearing loans
The long-term loan is secured by a mortgage bond on land and buildings
(refer note 2). The capital amount is repayable in 10 equal instalments of
R20 000 p.a. Interest at 15% p.a. on the outstanding amount is paid
annually.
Outstanding loan 2 000 3 000
Less: Current portion transferred to current liabilities (1 000) (1 000)
1 000 2 000
199
12.11 PRACTICAL EXAMPLE 1
The following post-adjustment trial balance was prepared on 31 December 200X from the
accounting records of Zanzi Dealers, a general dealer trading in Pretoria:
200X
R
Capital 80 000
Drawings 50 000
Land and buildings at cost price 120 000
Vehicles at cost price 55 000
Accumulated depreciation: Vehicles 33 000
6% Fixed deposit: Capex Bank 50 000
Inventory 35 300
Debtors 9 000
Allowance for credit losses 300
Prepaid insurance 3 400
Accrued interest on investment 500
Bank (favourable) 25 000
15% Loan: Prestige Bank 150 000
Creditors 12 500
Accrued interest on loan 22 500
Cost of sales (31 200 - 35 300) 4 100
Sales 282 360
Sales returns and allowances 4 500
Interest on investment 3 000
Purchases 95 000
Purchases returns and allowances 1 300
Salaries and wages 60 500
Rent expense 6 500
Advertising 1 500
Insurance 23 800
Electricity 15 360
Depreciation 11 000
Interest on loan 22 500
Credit losses 200
Additional information:
1. Opening inventory amounted to R31 200. This amount has already been taken into
account in the above trial balance. The first-in-first-out formula is used to calculate the
value of inventory. The entity uses the periodic inventory system.
2. Land and buildings are not depreciated. Vehicles are depreciated at 20% per annum
on the cost price.
3. The allowance for credit losses is maintained at 3!4% of outstanding debtors.
4. Ignore VAT.
200
You are required to:
Prepare the financial statements and appropriate notes of Zanzi Dealers for the year ending
31 December 200X.
Income:
Interest on investment
Operating expenses:
Salaries and wages
Rent expense
Advertising
Insurance
Electricity
Depreciation
Interest on loan
Credit losses
Profit for the period 49 900
201
I ZANZI DEALERS
Less: Drawings
Balance at end of period 79 900
I ZANZI DEALERS
Current assets:
Inventory 3
Trade and other debtors 4
Bank 5
TOTAL ASSETS 264 900
Non-current liabilities:
15% Loan: Prestige Bank
Current liabilities:
Trade and other creditors 6
TOTAL EQUITY AND LIABILITIES 264 900
202
I ZANZI DEALERS
203
I ZANZI DEALERS
The following balances appeared in the records of Stone Traders, a general dealer trading in
Johannesburg, on 28 February 200Y:
200Y
R
204
200Y
R
Purchases 157 000
Purchases returns and allowances 5 044
Salaries and wages 11 440
Rent expense 3 480
Advertising 1 200
Insurance 960
Electricity 1 280
Sundry expenses 240
Sales 190 000
Sales returns and allowances 3 000
Additional information:
1. Prepare the statement of profit or loss and other comprehensive income for the year
ending 28 February 200Y.
2. Prepare the statement of changes in equity for the year ending 28 February 200Y.
3. Prepare the statement of financial position on 28 February 200Y.
4. Show the notes to the financial statements for the year ending 28 February 200Y.
205
PRACTICAL EXAMPLE - ANSWER SHEET
I STONE TRADERS
Operating expenses:
Salaries and wages
Rent expense (3 480 - 1 000)
Advertising
Insurance (960 - 160)
Electricity
Sundry expenses
Credit losses (1 000 - 400)
Depreciation (150 + 1 229)
Profit for the period 34 425
I STONE TRADERS
Less: Drawings
Balance at end of period 88 425
206
I STONE TRADERS
Current assets:
Inventory 3
Trade and other debtors 4
Bank 5
TOTAL ASSETS 129 425
Current liabilities:
Trade and other creditors 6
TOTAL EQUITY AND LIABILITIES 129 425
I STONE TRADERS
207
| STONE TRADERS
1
208
CHAPTER 12
ASSIGNMENT 1
1. Which standard provides the guideline for the presentation of general purpose financial
statements?
3. List the information that must be included in the headings of all financial statements.
4. Within how many months after the financial year-end must financial statements be
issued?
The suggested solution will be discussed during the next contact session. If you
209
CHAPTER 12
ASSIGNMENT 2
Dr (R) Cr (R)
Capital 45 000
Garden equipment at cost 16 500
Accumulated depreciation: Garden equipment 2 475
Vehicles at cost 89 000
Accumulated depreciation: Vehicles 13 350
Debtors control 9 845
Insurance paid in advance 1 125
Bank overdraft: Finance Bank 9 595
Creditors control 2 848
Fees received in advance for services rendered 936
Accrued wages 750
Accrued interest on overdraft 141
Services rendered 89 814
Salaries and wages 19 188
Fuel 8 812
Maintenance: Garden equipment 2 832
Sundry expenses 516
Insurance 1 125
Depreciation (Garden equipment) 2 475
Depreciation (Vehicles) 13 350
Interest on overdraft 141
Additional information:
Prepare the financial statements and appropriate notes of Flower Landscapers for the year
ending 30 June 200Y.
210
CHAPTER 12
ASSIGNMENTS
The following post-adjustment trial balance was prepared from the accounting records of
Techno Dealers, a sole proprietor trading in technical equipment in George, on 30 June
200Y, the end of the accounting period:
R
Capital (88 700)
Drawings 37 800
Long-term loan: Moose Finance (10 000)
Vehicles at cost 36 000
Equipment at cost 31 300
Accumulated depreciation: Vehicles (16 700)
Accumulated depreciation: Equipment (8 155)
Trading inventory 58 900
Stationery on hand 60
Debtors control 47 800
Allowance: Credit losses (2 390)
Prepaid interest on loan 350
Bank overdraft (7 360)
Cash on hand 130
Creditors control (34 950)
Accrued rent expense (650)
Sales (330 540)
Cost of sales (62 490 - 58 900) 3 590
Purchases 247 200
Profit on sale of asset (1 500)
Credit losses 1 450
Carriage on purchases 3 660
Rent expense 14 400
Interest on loan 1 500
Stationery expense 390
Wages 4 560
Depreciation (Vehicles) 9 700
Depreciation (Equipment) 2 155
Additional information:
1. Trading inventory and stationery on hand on 1 July 200X amounted to R62 490 and
R80 respectively. These balances have already been taken into account in the above
trial balance. The entity uses the periodic inventory system.
2. A vehicle with a cost price of R25 000 and accumulated depreciation of R20 000 on
1 July 200X was sold on 31 December 200X for R4 000 cash. This transaction has
already been recorded in the accounting records.
211
3. A new cash register was purchased on 1 April 200Y for R5 000 cash. This transaction
has already been recorded in the accounting records.
4. Depreciation for the year has already been provided for as follows:
Vehicles at 20% p.a. on the straight-line method, and
Equipment at 10% p.a. on the reducing balance method.
5. Interest on the long-term loan is payable monthly at a rate of 15% p.a. The loan is
unsecured and is redeemable in ten equal annual instalments of R5 000 payable on
30 June each year. All payments have been made on time.
6. The entity has an unsecured overdraft facility of R20 000 at Prospect Bank that carries
interest at 22% p.a. (ignore interest on bank overdraft).
7. It is policy for the entity to maintain the allowance for credit losses at 5% of outstanding
debtors.
8. Ignore VAT.
1. Prepare the statement of profit or loss and other comprehensive income for the year
ending 30 June 200Y.
2. Prepare the statement of changes in equity for the year ending 30 June 200Y.
3. Prepare the statement of financial position on 30 June 200Y.
4. Show the appropriate notes to the financial statement for the year ending 30 June
200Y.
The suggested solution will be discussed during the next contact session. If you
. experience difficulty in completing the assignment, review the previous chapters
JL. again.
212
CHAPTER 12
ASSIGNMENT 4
The following post-adjustment trial balance was prepared from the accounting records of
Walt Traders, a sole trader trading in sports equipment in Durban:
Walt Traders
Post-adjustment trial balance
On 28 February 200Y
Dr (R) Cr (R)
Capital 226 000
Drawings 14 949
Land and buildings 191 500
Vehicles at cost 97 500
Furniture at cost 56 250
Accumulated depreciation: Vehicles 42 656
Accumulated depreciation: Furniture 18 282
Fixed deposit: Lex Bank 37 500
Mortgage bond: Hardy Bank 75 000
Trading inventory 57 000
Stationery on hand 190
Debtors control 15 660
Allowance: Credit losses 1 566
Prepaid advertising 225
Prepaid insurance 90
Bank 7 325
Petty cash 375
Creditors control 42 985
Rent received in advance 1 800
Accrued telephone 260
Interest on investment received in advance 2 620
Accrued interest on loan 6 750
Sales 289 500
Sales returns 1 240
Cost of sales (46 785 - 57 000) 10215
Purchases 80 585
Carriage on purchases 1 875
Rent income 25 200
Interest received 3 000
Interest on loan 6 750
Water and electricity 3 550
Credit losses 2316
Telephone 13 760
Insurance 10 785
Rent expense 30 000
Salaries and wages 56 250
Advertising 9 525
Rates and taxes 19 500
Consumables 1 910
Stationery expense 2 505
Depreciation (Furniture) 8 438
Depreciation (Vehicles) 18 281
745 834 745 834
213
Additional information:
1. Prepare the statement of profit or loss and other comprehensive income, and the
statement of changes in equity, for the year ending 28 February 200Y.
2. Prepare the statement of financial position on 28 February 200Y.
3. Show the appropriate notes to the financial statements for the year ending
28 February 200Y.
NB: Round off to the nearest rand.
The suggested solution will be discussed during the next contact session. If you
214
CHAPTER 12
ASSIGNMENTS
Cherry Dot started a nail parlour, Cherry Blossom, on 1 March 200X. The following balances
were taken from the accounting records on 28 February 200Y, the end of the first year of
business:
R
Capital 113 730
Drawings 1 000
Land and buildings at cost 50 000
Furniture at cost 30 000
Debtors control 3 750
Bank (favourable) 27 900
Creditors control 2 885
Services rendered 22 285
Consumables (expense) 12 200
Rent income 2 900
Interest received 130
Water and electricity 1 730
Telephone 1 200
Salaries and wages 13 500
Stationery 650
Additional information:
215
5. Land and buildings, purchased on 1 February 200X, are situated on Stand 2226,
Knysna and are not depreciated. Depreciation on furniture must still be provided for at
20% per annum on the cost price. The furniture was also purchased on 1 February
200X.
6. The owner increased her capital contribution by contributing a computer to the value of
R10 000 on 1 December 200X. This entry has not yet been recorded. Depreciation on
computer equipment must be provided for at 25% on the reducing balance method.
7. Ignore VAT.
k The suggested solution will be discussed during the next contact session, if you
216
CHAPTER 12
ASSIGNMENTS
The following balances were taken from the accounting records of Betula Traders, a general
dealer in Johannesburg, on 31 May 200Y, the end of the accounting period:
Dr Cr
R R
Capital 114 620
Drawings 12 000
Land and buildings at cost 66 700
Vehicles at cost 52 000
Equipment at cost 30 000
Accumulated depreciation: Vehicles (1 June 200X) 10 400
Accumulated depreciation: Equipment (1 June 200X) 8 130
Trading inventory (1 June 200X) 8 000
Debtors control 5 200
Allowance: Credit losses 500
Bank (favourable) 4 900
Petty cash 100
Creditors control 22 200
Sales 202 770
Purchases 95 130
Sales returns 2 420
Water and electricity 3 550
Credit losses 300
Telephone 2 450
Carriage on purchases 2 200
Rent expense 30 000
Salaries and wages 36 300
Bank charges 100
Rates and taxes 4 800
Consumables 1 800
Stationery 670
217
Additional information:
1. A physical stock count conducted on 31 May 200Y showed the following inventories on
hand (the first-in-first-out formula is used):
Trading inventory R10 000
Stationery R 130
Consumables R 530
The entity uses the periodic inventory system.
2. On 24 May 200Y, the owner took goods for his personal use to the value of R200. No
entry has yet been made in the accounting records.
3. A debtors account to the value of R200 must still be written off as irrecoverable.
4. The allowance for credit losses must be adjusted to 5% of outstanding debtors.
5. Land and buildings, purchased on 1 June 200W, are situated on Stand 1001,
Johannesburg, and are not depreciated. Depreciation on other assets must still be
provided for as follows:
Vehicles at 20% p.a. on the straight-line method, and
Equipment at 10% p.a. on the reducing balance method.
6. Ignore VAT.
The suggested solution will be discussed during the next contact session. If you
experience difficulty in completing the assignment, review the previous chapters
again.
218
CHAPTER 12
ASSIGNMENT?
You are provided with the following extracts from the accounting records of Juda Traders on
31 December 200X:
Dr Cr
Capital 864 500
Land and buildings 500 000
Vehicles at cost price 450 000
Accumulated depreciation on vehicles (1 Jan 200X) 100 000
Equipment at cost price 12 345
Trade debtors 5 000
Trade creditors 20 000
Bank 46 000
Inventory 15 000
Operating expenses 56 805
Allowance for credit losses 650
Gross profit 100 000
1 085 150 1 085 150
Additional information:
1. The accountant prepared the following journals, which have not yet been taken into
account in the preparation of the trial balance above:
Dr Cr
Allowance for credit losses 500
Debtors control 500
Irrecoverable debt written off
Depreciation 45 823
Accumulated depreciation: Vehicles 45 000
Accumulated depreciation: Equipment 823
Depreciation for the year
Drawings 3 000
Bank 3 000
The owner took cash for personal use
219
2. Land and buildings were purchased three years ago for R500 000 and are situated on
Stand 101, Potchefstroom. The property is not depreciated.
3. Vehicles are depreciated at 20% per annum on the reducing balance method and
equipment is depreciated at 10% per annum on the cost price. Assume that the above-
mentioned amounts for depreciation have been correctly calculated.
4. Inventory is valued at the lowest of cost or net realisable value. The first-in-first-out
formula is used. The periodic inventory system is in use.
5. Ignore VAT.
The accountant asked you to assist him with the following transactions:
1. The allowance for credit losses should be adjusted to 5% of outstanding debtors at
year-end.
2. Accrued expenses amount to R620 for the current financial year and have not yet been
recorded.
3. Equipment of R12 345 was purchased during the current financial year. This
transaction has already been journalised.
4. Vehicles:
a) The cost price of vehicles amounted to R400 000 on 1 January 200X. On the
same day, a vehicle with a carrying amount of R50 000 and accumulated
depreciation of R50 000 was sold.
b) An additional vehicle was purchased on 1 January 200X in order to replace the
vehicle that was sold.
c) Both these transactions were correctly taken into account in the records of Juda
Traders.
'f- The suggested solution will be discussed during the next contact session. If you
220
CHAPTER 13
NON-PROFIT ENTITIES
13.1 OUTCOMES
On completion of this chapter, you should be able to:
• record the relevant transactions in the different fund accounts in the general ledger;
• reconstruct the membership fees account; and
• prepare the following:
- statement of receipts and payments;
- statement of income and expenditure;
- statement of changes in funds; and
- statement of financial position.
13.3 BACKGROUND
Non-profit entities are established, not for the purpose of making a profit, but to provide a
service in the interest of their members or to serve the community. The following are
examples of non-profit entities:
• sports clubs;
• churches;
• educational organisations;
• cultural organisations;
• welfare organisations;
• professional societies; and
• government bodies.
221
These entities do not trade in the strict sense of the word, but they do earn income and incur
expenses which will result in a profit being realised or a loss being incurred. Where a profit is
realised, this is known as a “surplus" and a loss is known as a “deficit”. Surpluses may not be
distributed to the members, but must be applied for the benefit of the members. Since the
purpose of non-profit entities is not to make a profit, these entities are exempt from income
tax. Non-profit entities incur the same expenses as trading entities, such as telephone,
stationery, water and electricity, depreciation, salaries and wages. The following are
examples of the different sources of income for non-profit entities:
• membership fees;
Membership fees are the main source of income for a number of non-profit entities. The
constitution of the entity will stipulate the amount of membership fees per member as well as
the rules regarding admission and resignation of members. When new members are
admitted, they are required to pay a once-off entrance fee plus the membership fee for the
year. The transaction for the receipt of membership fees is recorded as follows:
Entrance fees and donations received are not normally regarded as income as they do not
form the main source of income for a non-profit entity. They must thus be capitalised; in other
words, the amounts received in respect of entrance fees and donations during a specific year
are added to equity in the statement of financial position and not included in the statement of
income and expenditure. For the purposes of this course, the question will specifically
stipulate whether entrance fees and donations received must be capitalised. The entry for
entrance fees is as follows:
222
The entry for donations/bequests received is as follows:
Membership fees are regarded as income in the same manner as services rendered by a
trading entity. In practice, it may happen that, at the end of a financial year, some members
still owe membership fees and others have paid their membership fees for the following year
in advance. Membership fees still owing to the entity are treated as membership fees
accrued (current asset) and membership fees that have been received for the following
financial year are treated as membership fees received in advance (current liability). Any
membership fees still owing or received in advance must be transferred from the
membership fees to the respective current asset or current liability account. Where a
member is unable to pay membership fees, the entity will write the outstanding fees off as
follows:
223
HIGHLANDS TENNIS CLUB
GENERAL LEDGER
200Y 200Y
Jan 1 Balance b/f 4 400 Jan 2 Membership fees J1 4 400
(200X)
Dec 31 Membership fees J10 1 650 Dec 31 Balance C/f 3 850
(200X)
31 Membership fees 2 200
(200Y)
8 250 8 250
200Z
Jan 1 Balance b/f 3 850
200Y 200Y
Jan 2 Membership fees J1 1 540 Jan 1 Balance b/f 1 540
(200Y)
Dec 31 Balance c/f 500 Dec 31 Membership fees J10 500
(200Z)
2 040 2 040
200Z
Jan 1 Balance b/f 500
200Y 200Y
Jan 2 Membership fees J1 4 400 Jan 2 Membership fees J1 1 540
accrued received in advance
Dec 31 Membership fees J10 500 Dec 31 Bank(200X) J10 1 650
received in advance
(200Z) 31 Bank (200Y) J10 166 760
224
13.4.2 Income-generating projects
Even though it is not the aim of non-profit entities to make a profit, they do need to generate
income in order to enjoy a continued existence. As already mentioned, fund-raising or
income-generating projects are a possible source of income available to non-profit entities.
Such projects may be on-going or a single event and will usually result in a profit, or in some
instances a loss, for the entity. This profit or loss is calculated using a trading account or
trading statement. Once calculated, the profit or loss from the project is transferred to the
general statement of income and expenditure. An example of the trading account for the
restaurant/bar that is operated as an income-generating project by The Royal Tennis Club is
shown below:
200X 200X
Jan 1 Inventory (opening) J1 9 000 Dec 31 Sales J15 31 000
Dec 31 Purchases J15 22 000 31 Inventory (closing) J15 11 000
31 Salaries J15 5 000
31 Water and electricity J15 3 500
Income and
31 J15 2 500
expenditure (note)
42 000 42 000
Note: The amount of R2 500 represents the profit for the year made by the restaurant/bar
which must be transferred to the general income and expenditure account. The
income and expenditure account serves the same purpose as the profit and loss
account of a trading entity.
Persons who are responsible for the management of a non-profit entity are appointed by the
members. They are responsible for the day-to-day activities and for reporting on these
activities to the members and other interested parties in the form of financial statements.
Funds that are given to a non-profit entity with stipulations regarding the use of those funds
must be properly managed. This is achieved by means of fund accounting. When income is
225
received from a specific source, a separate fund account is opened in the general ledger in
order to keep track of the income received and the expenses incurred with respect to the
source of income. The following are the different types of funds used by non-profit entities:
Each non-profit entity will have a general or accumulated fund which serves the same
purpose as the capital account of a trading entity. At the end of each financial period, the
surplus (profit) or deficit (loss) for the period is transferred to the general/accumulated fund in
the same manner as the profit or loss made by a trading entity is transferred to the capital
account. As already mentioned, entrance fees and donations received are also added to the
general/accumulated fund. At the end of a financial period, the general/accumulated fund
may show the following information:
Opening balance
Add/Less: Net surplus/deficit
Add: Entrance fees received
Add: Donations received
Is equal to: Closing balance
Non-profit entities often receive donations, subsidies or bequests with the stipulation that
these funds are to be applied for a specific purpose or project. A separate investment
account is opened at a financial institution and these funds are then deposited into this
account. Interest is earned on the investment and is usually reinvested. The stipulation by
the donor of the funds may state that the capital as well as the income (interest earned) must
be used for the specific purpose or that the capital must remain intact and only the income
may be used. Special funds may not be used for general running expenses unless the donor
stipulates otherwise. It is important to determine what stipulations have been made by the
donor. The following journal entry will apply when income that is received from, for example,
Mr X for a specific purpose is deposited in a fixed deposit investment account:
226
EXAMPLE 13.3 Capital and income to be employed for a specific
purpose
On 2 January 200X, R Goosen donated R100 000 to Eagle Wing Golf Club, with the
condition that the capital as well as the income be used for purchasing golf carts. The
amount was invested on the same day at Newark Bank in a fixed deposit account. Interest at
10% p.a. is earned every six months. On 30 June 200X, a golf cart was purchased for
R39 000. On 31 December 200X, a second golf cart was purchased for R43 000. The
balance is reinvested at the end of each six-month period at the same interest rate.
GENERAL LEDGER
200X
Jun 30 Special fund: J10 39 000
R Goosen (note 3)
Dec 31 Special fund: J10 43 000
R Goosen (note 3)
200X 200X
Jun 30 Accumulated fund J10 39 000 Jan 2 10% Fixed deposit J1 100 000
(note 3)
30 Balance c/f 66 000 Jun 30 10% Fixed deposit J10 5 000
(interest)
69 300 69 300
200Y
Jan 1 Balance b/f 26 300
227
DR 10% FIXED DEPOSIT (NON-CURRENT ASSET) A1 CR
200X 200X
Jan 2 Special fund: J1 100 000 Jun 30 Bank (note 1) J10 39 000
R Goosen
Jun 30 Special fund: J10 5 000 30 Balance c/f 66 000
R Goosen (interest)
69 300 69 300
200Y
Jan 1 Balance b/f 26 300
82 000
200X 200X
Jun 30 10% Fixed deposit J10 39 000 Jun 30 Equipment (note 2) J10 39 000
(note 1)
Dec 31 10% Fixed deposit J10 43 000 Dec 31 Equipment (note 2) J15 43 000
(note 1)
Notes:
1. The amounts paid for the golf carts must be transferred from the fixed deposit account to
the bank account of the club (Bank is debited) so that a cheque may be made out (Bank
is credited) in favour of the seller.
2. The purchase of golf carts represents an increase in the assets of the club, therefore
when the seller is paid, Equipment is debited and Bank is credited.
3. Funds from the special fund have been used to purchase equipment, therefore the
amount must also be transferred from the special fund to the general/accumulated fund;
the balance of the special fund will thus decrease.
228
EXAMPLE 13.4 Income for a specific purpose
On 3 January 200W, the Yellow Creek Golf Club received R50 000 from the estate of
B. Jones with the condition that the income from the fund be used each year to sponsor club
members who wish to play professional golf to enable them to take part in the annual
qualifying championships for the pro tour. The amount was invested on the same day at
Hyper Bank in a fixed deposit account at 10% per annum. Interest is received annually and
the qualifying tournament takes place during the third weekend of January each year. On
3 January 200X, one club member was sponsored to the amount of R4 000 and on
3 January 200Y, a second club member was sponsored to the value of R5 000. The balance
of the income is reinvested annually at the same interest rate. The financial year-end of the
club is 31 December.
GENERAL LEDGER
200X 200W
Jan 3 Bank J1 4 000 Jan 3 Fixed J1 50 000
(note 2) deposit
Dec 31 Balance c/f 1 000 50 000 200X
Jan 3 10% Fixed J1 5 000
deposit
(interest)
200Y 200Y
Jan 3 Bank J1 5 000 Jan 1 Balance b/f 1 000 50 000
(note 2)
Dec 31 Balance c/f 1 100 50 000 3 10% Fixed J1 5 100
deposit
(interest)
200Z
Jan 1 Balance b/f 1 100 50 000
229
DR 10% FIXED DEPOSIT (NON-CURRENT ASSET) A1 CR
Income Capital Income Capital
200W 200X
Jan 3 Special J1 50 000 Jan 3 Bank J1 4 000
fund (note 1)
200X
Jan 3 Special J1 5 000 Dec 31 Balance c/f 1 000 50 000
fund
(interest)
5 000 50 000 5 000 50 000
200Y 200Y
Jan 1 Balance b/f 1 000 50 000 Jan 3 Bank J1 5 000
(note 1)
Jan 3 Special J1 5 100 Dec 31 Balance c/f 1 100 50 000
fund
(interest)
6 100 50 000 6100 50 000
200Z
Jan 1 Balance b/f 1 100 50 000
Notes:
1. The amount paid on behalf of the sponsored club member must be transferred from the
fixed deposit account to the bank account of the club (Bank is debited) so that funds are
available for payment to the organisers.
2. A club member is being sponsored - a cheque must be made out in favour of the
tournament organisers (Bank is credited) and the special fund account must be debited.
230
13.6 FINANCIAL STATEMENTS
The statement of receipts and payments is a summary of all the cash transactions of a non
profit entity. The opening balance of the bank account of the entity, all cash income received,
all cash payments, as well as the closing balance of the bank account for the relevant
financial year are shown. This statement is the simplest report that is prepared by a non
profit entity.
The statement of income and expenditure is similar to the statement of profit or loss and
other comprehensive income of a trading entity. The same information is disclosed in the
statement of income and expenditure, namely all income and expenses for the relevant
financial year. However, since the aim of a non-profit entity is not to make a profit, the
purpose of the statement of income and expenditure is to determine the surplus (profit) or
deficit (loss) for the financial year. As already mentioned, this surplus or deficit is transferred
to the general/accumulated fund in the same manner as the profit or loss of a trading entity.
The statement of changes in funds shows all the movements in the general/accumulated
fund and any other special funds the entity may use. The opening balances of each fund
account, the entrance fees and donations received, the surplus or deficit made by the entity,
and any interest reinvested are shown.
The statement of financial position for a non-profit entity is similar to that of a trading entity.
The only difference is that the equity in the case of a trading entity is replaced by the funds of
the non-profit entity.
231
STATEMENT OF RECEIPTS AND PAYMENTS
Receipts: 45 200
Entrance fees: 200X 200
200Y 3 000
Membership fees: 200X 2 000
200Y 24 000
200Z 1 000
Green fees 15 000
232
STATEMENT OF INCOME AND EXPENDITURE
Income: 46 000
Membership fees 26 000
Green ’’ees 15 000
Nel profit; Reslauraril/Bar 5 000
233
STATEMENT OF CHANGES IN FUNDS
234
STATEMENT OF FINANCIAL POSITION
Current liabilities:
Trade and other creditors 12 400
TOTAL FUNDS AND LIABILITIES 686 400
235
13.7 PRACTICAL EXAMPLE
The following information was obtained from the records of Sambati Golf Club for the year
ending 31 December 200Y:
R
Membership fees received for 200X 17 600
Membership fees received for 200Y 192 000
Membership fees received for 200Z 9 600
Sales - Golf accessories 29 200
Purchases - Golf accessories 13 200
Salaries and wages 52 800
Rates and taxes 7 200
Depreciation for the year 120 840
Insurance 3 920
Accumulated fund (1 January 200Y) 581 440
Admission fees received 38 400
Land and buildings at cost 298 400
Office equipment at cost 483 360
Accumulated depreciation: Office equipment (1 January 200Y) 241 680
Membership fees received in advance (1 January 200Y) 2 800
Accrued membership fees for 200X (1 January 200Y) 23 600
Accrued membership fees (31 December 200Y) 13 600
Bank - favourable (1 January 200Y) 21 440
Golf accessories (1 January 200Y) 4 000
Golf accessories (31 December 200Y) 3 830
Creditors control 4 880
Honorarium paid — 3 500
Cormance fonus
Additional information:
1. R3 200 should be provided for bonuses at the end of the year.
2. R1 200 of the rates and taxes was for the year 200Z.
3. Admission fees should be capitalised.
4. Included in accrued membership fees on 31 December 200Y is R6 000 with respect to
the previous year which must be written off.
236
You are required to:
1. Prepare the membership fees account and the trading account for golf accessories in
the general ledger for the year ending 31 December 200Y and close them off properly.
2. Prepare the statement of receipts and payments for the year ending 31 December
200Y.
3. Prepare the financial statements for the year ending 31 December 200Y.
GENERAL LEDGER
DR MEMBERSHIP FEES (INCOME) 11 CR
200Y 200Y
Jan 2 Membership fees Jan 2 Membership fees
accrued received in advance
Dec 31 Membership fees Dec 31 Bank(200X)
received in advance
(200Z) 31 Bank(200Y)
200Y 200Y
Jan 1 Inventory (opening) Dec 31 Sales
Dec 31 Purchases 31 Inventory (closing)
Income and
31
expenditure
33 030 33 030
237
I SAMBATI GOLF CLUB
238
I SAMBATI GOLF CLUB
239
CHAPTER 13
ASSIGNMENT 1
4. Why are entrance fees and donations received normally not regarded as income?
6. Name the different reports that make up the financial statements of a non-profit entity.
The suggested solution will be discussed during the next contact session. If you
240
CHAPTER 13
ASSIGNMENT 2
The following balances were obtained from the accounting records of Trail Climbing and
Hiking Club for the year ending 31 December 200Y:
R
The following amounts were received and paid during the year ending 31 December 200Y:
R
Wages 1760
Stationery 252
Water and electricity 716
Telephone 168
Interest on loan 5120
Admission fees received 1560
Donations received 4560
Interest received 624
Membership fees received 13104
First aid course income 1400
Sales: Climbing and hiking accessories 4416
Purchases: Climbing and hiking accessories 2920
First aid course expenses 840
Refreshments purchased 1120
Equipment purchased on 1 May 200Y 3000
Paid creditors 4400
Paid instalment on long-term loan 4000
241
Additional information:
1. On 31 December 200X, the club had 260 members. On 2 January 200Y, 65 members
joined the club. Admission fees and membership fees for these members were
received in full. Admission fees are R24 per member and must be capitalised.
2. Membership fees are R48 per member per year. R144 of the membership fees owing
on 31 December 200X was received. The remainder must be written off and the
membership of the non-payers must be terminated as from 1 January 200Y. One
member has already paid membership fees for 200Z. while some membership fees for
200Y were still outstanding.
3. Donations received must be capitalised.
4. A honorarium of R220 was awarded to the club secretary, but has not yet been paid.
5. Inventories on hand on 31 December 200Y:
Climbing and hiking accessories R480
Refreshments R180
Stationery R 30
6. Depreciation on office equipment must be provided for at 10% p.a. according to the
reducing balance method.
1. Prepare the membership fees account and the trading account: climbing and hiking
accessories in the general ledger for the year ending 31 December 200Y and close
them off properly.
2. Prepare the statement of receipts and payments for the year ending 31 December
200Y.
3. Prepare the statement of income and expenditure for the year ending 31 December
200Y.
4. Prepare the statement of financial position on 31 December 200Y.
NB: Round off to the nearest rand.
The suggested solution will be discussed during the next contact session. If you
experience difficulty in completing the assignment, review this chapter again.
242
CHAPTER 13
ASSIGNMENTS
The following balances were obtained from the accounting records of Duncan Chess Club for
the year ending 31 December 200Y:
243
Additional information:
1. Six new members joined the club during the year. Entrance fees of R260 per member
are included in the amount of membership fees received and must be capitalised.
2. Membership fees accrued on 31 December 200Y: R1 040
Membership fees received in advance on 31 December 200Y: R1 690
3. Inventory on hand on 31 December 200Y:
Refreshments R390
4. The capital portion of the Matel Maintenance Fund has been invested at Capex
Finance and earns interest at 8% p.a. The income may only be used for the main
tenance of the club buildings. Income not expended must be reinvested.
5. Depreciation on furniture must still be provided for at 10% p.a. according to the
reducing balance method.
6. The bank account had an unfavourable balance of R1 755 on 1 January 200Y.
1. Prepare the following general ledger accounts for the year ending 31 December 200Y
and close them off properly:
Matel maintenance fund;
Accumulated fund;
Investment;
Bank;
Interest on investment; and
Maintenance: Buildings.
2. Prepare the trading statement for refreshments for the year ending 31 December
200Y.
3. Prepare the statement of receipts and payments for the year ending 31 December 200Y.
4. Prepare the statement of income and expenditure for the year ending 31 December
200Y.
5. Prepare the statement of changes in funds for the year ending 31 December 200Y.
6. Prepare the statement of financial position on 31 December 200Y.
NB: Round off to the nearest rand.
The suggested solution will be discussed during the next contact session. If you
experience difficulty in completing the assignment, review this chapter again.
244
CHAPTER 13
ASSIGNMENT 4
The following balances were obtained from the accounting records of Timbuli Golf Club:
The following cash transactions took place during the year ending 31 December 200Y:
Receipts R
245
Payments R
Additional information:
1. The club has 84 members and membership fees amount to R1 200 per member
per annum.
2. Outstanding membership fees for 200X must be written off.
3. Inventory on hand on 31 December 200Y:
Refreshments R 360
Golfballs R2100
4. Wages of R1 800 is still outstanding.
5. Used equipment with a cost price of R6 000 and accumulated depreciation of R4 800
on 1 January 200Y was sold for cash at the carrying amount on 3 January 200Y.
6. Depreciation on equipment must still be provided for at 20% p.a. according to the
reducing balance method.
7. The income from the special fund may only be used for the payment of championship
entrance fees of members who wish to qualify for the professional tour.
8. Donations received must be capitalised.
246
CHAPTER 13
ASSIGNMENTS
The following information was extracted from the accounting records of The Bingo Club on
30 June 200Y:
Dr Cr
Accumulated fund 29 850
Furniture and equipment at cost 52 500
Refreshments on hand (1 July 200X) 2 775
Bank 14813
Membership fees received 48 750
Refreshment sales: Cafeteria 36 750
Annual dance income 5 250
Refreshment purchases: Cafeteria 22 500
Annual dance expenses 4 650
Honorarium: Treasurer 1 575
Rent expense 5 250
Wages: Cafeteria 4 500
Water and electricity 1 987
Sundry expenses 10 050
120 600 120 600
Additional information:
1. Refreshments on hand on 30 June 200Y amounted to R3 075.
2. Membership fees accrued on 30 June 200Y: R 750
Membership fees received in advance on 30 June 200Y: R1 350
3. Rent was paid only for seven months, but the building was rented for the full financial
period.
4. All the furniture and equipment was purchased on 1 July 200X. Depreciation must still
be provided for at 10% per annum on cost.
247
CHAPTER 14
14.1 OUTCOMES
The accounting information included in the first twelve chapters is applicable to this chapter.
Ensure that you understand the work and can apply it.
14.3 INTRODUCTION
The activities of an entity are planned in advance and the entity is controlled and managed in
accordance with these plans. Management also needs information on a regular basis
regarding the cash position of the entity in order to determine whether the entity will be able
to meet its financial obligations. This information cannot be obtained directly from the
statement of profit or loss and other comprehensive income and the statement of financial
position. It is therefore necessary to prepare a statement of cash flow that shows the entity's
ability to generate funds (cash) from operating and financing activities. The statement of cash
flow indicates the movement of cash; in other words, the extent to which the bank balance
increased or decreased. The statement of cash flow may also be used to indicate errors
relating to the acquisition and utilisation of funds. The most important purpose, however, is to
enable investors, creditors and the management of the entity to determine how much cash is
available for the payment of interest, dividends, loans and amounts owed to creditors, and if
any cash is available for potential new investments.
249
A statement of cash flow involves CASH only.
• Cash refers to available cash, in the bank, petty cash and savings account.
• Investment activities refer to activities involving the acquisition and sale of non-
current assets and investments.
• Operating activities include all transactions and other events that make up income
and expenses; in other words, all transactions excluding investment and financing
activities, and is calculated as follows:
NB: The movement of cash in respect of credit transactions such as debtors and creditors is
determined as follows:
Creditors Debtors
250
The table below will assist you in understanding the format and exposition of the statement of
cash flow:
Current liabilities
Operating activities
Expenses
251
| ABC TRADERS
It is necessary to disclose the detail of amounts that are aggregated under one
item in the statement of cash flow, in a note. Expenses such as administrative
expenses and selling expenses (see above format) will be disclosed as follows:
252
| ABC TRADERS
2. Selling expenses
Sales commission XX
Other selling expenses XX
XX
The statement of cash flow is prepared using information obtained from the statement of
profit or loss and other comprehensive income and the statement of financial position. The
following example will serve to explain the application of the statement of cash flow:
The financial statements of Dwergma Traders for 200Y are shown below. Mr Dwergma is
concerned about the cash position of his enterprise. He is especially concerned that the cash
position deteriorated in spite of his additional capital contribution of R49 500. The enterprise
is, in his opinion, insolvent (bankrupt). Mr Dwergma has asked you for advice.
253
| DWERGMA TRADERS
254
| DWERGMA TRADERS
ASSETS
Non-current assets: 52 500 67 500
Equipment at carrying amount 52 500 67 500
Prepare the statement of cash flow for the year ending 31 December 200Y for Dwergma
Traders in order to determine the cash position of the entity.
255
PRACTICAL EXAMPLE - ANSWER SHEET
I DWERGMA TRADERS
256
I DWERGMA TRADERS
257
CHAPTER 14
ASSIGNMENT 1
The financial information for Postma Traders is shown below. The owner, Mr Postma, asked
you for your assistance in preparing the statement of cash flow.
258
| POSTMA TRADERS
REMEMBER:
259
CHAPTER 14
ASSIGNMENT 2
Mr Vic Mere, the owner of Mervic Traders, asked you for advice regarding the cash flow of
his enterprise. He is concerned about the ability of the entity to pay its debts. You decided to
prepare a statement of cash flow in order to determine the cash position of the entity.
Mr Mere provided the following financial information for the past financial year:
Equipment was purchased during the year for R75 000 and depreciation on equipment for
the year amounted to R22 000.
I MERVIC TRADERS
260
| MERVIC TRADERS
Prepare the statement of cash flow for the year ending 31 December 200B of Mervic Traders
in order to determine the cash position of the business.
The suggested solution will be discussed during the next contact session. If you
experience difficulty in completing the assignment, review this chapter again.
261
CHAPTER 14
ASSIGNMENTS
The following annual financial statements are presented to you by Elsa Blom, the owner of
Elsa Fashions:
I ELSA FASHIONS
Non-current liabilities:
Bank loan 12 500
262
| ELSA FASHIONS
Elsa is concerned about the deterioration in her cash position during the past year. She
explained that, apart from the net profit of R39 500 made by the business, she also
contributed additional capital amounting to R33 000. Before making a final decision on
whether to close her business, she approached you for advice.
1. Prepare the statement of cash flow for Elsa Fashions for the year ending
31 December 200Y.
2. Give advice regarding the cash position of the entity.
The suggested solution will be discussed during the next contact session. If you
experience difficulty in completing the assignment, review this chapter again.
263
CHAPTER 14
ASSIGNMENT 4
I PAGE DEALERS
Other income:
Profit on sale of equipment 6 000
123 600
Operating expenses: (98 400)
Depreciation: Equipment 36 000
Depreciation: Vehicles 10 800
Loss on sale of vehicle 1 200
Credit losses 900
Discount allowed 800
Sundry exper ses 48 700
Operating profit 25 200
Interest and finance costs: (1 200)
Interest received 6 000
Interest paid (7 200)
Profit for the year 24 000
264
| PAGE DEALERS
Non-current liabilities:
Long-term loan 72 000 —
265
Additional information:
1. Equipment with a cost price of R60 000 and a carrying value of R36 000 was sold
during the year and new equipment was purchased to replace the old equipment.
2. A vehicle with a cost price of R12 000 and a carrying value of R3 600 was sold during
the year and a new vehicle was purchased to replace the old one.
The suggested solution will be discussed during the next contact session. If you
experience difficulty in completing the assignment, review this chapter again.
266
CHAPTER 14
ASSIGNMENTS
I PEPSI DEALERS
Other income:
Dividends received 5 100
Profit on sale of vehicle 1 200
78 300
Operating expenses: (15 720)
Discount allowed 2 400
Credit losses 960
Accountant's fees 1 800
Depreciation 10 200
Sundry expenses 360
Operating profit 62 580
Interest and finance costs: (5 400)
Interest on fixed deposit 3 600
Interest on mortgage bond (9 000)
Profit for the year 57 180
267
| PEPSI DEALERS
Non-current liabilities:
Mortgage bond 60 000 72 000
268
Additional information:
A vehicle with a cost price of R14 400 and accumulated depreciation of R7 200 was sold
during the year.
The suggested solution will be discussed during the next contact session, ff you
experience difficulty in completing the assignment, review this chapter again.
269
CHAPTER 15
15.1 OUTCOMES
15.3 INTRODUCTION
The purpose of financial statements is to provide reliable information to users and the
management of an entity. This information is used to make financial decisions. However,
these decisions can only be made once the information contained in the financial statements
has been measured and analysed. This process is known as the "analysis and interpretation"
of financial statements and involves the analysing of the contents of the financial statements
in order to obtain certain information so that conclusions may be drawn regarding the
performance, financial potential, stability and growth of the entity.
271
Take note: It is important to remember that the financial statements contain
information about a financial period that has already passed. Investors must
therefore keep in mind that ratio analysis is conducted on past results, but that
these results can still give an indication of what can be expected in the future.
The users of financial statements and ratio analysis include investors, employees,
management, lenders of funds, creditors, the government and the public and are explained
as follows:
• Management: The management of an entity requires ratio analysis for planning and
budgeting purposes, in order to make financial decisions and to help it fulfil its managerial
responsibilities.
• Owners: No matter the type of entity, the owner, partners or shareholders of an entity will
be interested in the financial welfare, performance and prosperity of the entity.
• Investors: Investors are concerned about the return on their investment and it is
therefore necessary for them to know in a timely manner if an investment becomes too
risky or if the entity will not be able to meet its interest and dividend obligations.
• Employees: Employees are interested in the profitability and stability of the entity as this
will determine whether their salaries, pensions and bonuses are secure.
• Lenders of funds (Banks): Banks require ratio analysis in order to determine whether
the entity will be able to meet its financial obligations regarding the repayment of loans
and the payment of interest on loans.
• Creditors and suppliers: Creditors require information that will help them determine
whether the entity will be able to pay its debts to them. This will also influence future
transactions with the entity.
• Clients: The information is especially important to clients who rely on the entity on a
long-term basis for the provision of goods/services. Some clients also have
responsibilities that are directly related to the provision of goods/services by the entity
and the ability of the entity to continue to exist.
• Local authorities and the government: Authorities are concerned about the utilisation
of resources as well as the payment of taxes and service fees (e.g. refuse removal) by
the entity.
272
A thorough analysis of an entity’s financial statements involves not only the calculation of
ratios and the interpretation of those ratios. A review of the financial statements and the
analysis of the flow of funds must be done before ratio analysis is conducted. The statement
of cash flow was fully explained in the previous chapter. For the purposes of this chapter, it
will be sufficient if you master the ratios and terms mentioned in the outcomes at the
beginning of this chapter.
The general norm of 2:1 indicates that the entity will be able to meet its short-term
obligations.
EXAMPLE 15.1
Total current assets amount to R24 000 and total current liabilities amount to R8 000.
Current ratio = Current assets : Current liabilities
= R24 000 : R8 000
= 3:1
The current ratio is above the norm of 2:1. This means that the entity will be able to pay its
short-term debts (creditors) and also that the entity collects the outstanding debts from its
debtors in a timely manner. This will result in the entity having no difficulty when purchasing
inventory or paying for other expenses.
273
15.5.2 Acid test ratio
If an entity’s current assets consist mainly of inventory, then the current ratio mentioned
above may lead to a misrepresentation of the liquidity of the entity. The result will then
appear to be above the norm, but in reality is not, because the largest portion of current
assets is made up of inventory. To combat this, the "acid test ratio", which excludes
inventory, is used. This ratio looks specifically at assets which can easily be converted into
cash (e.g. debtors, bank and deposits) in relation to current liabilities (e.g. creditors).
EXAMPLE 15.2
Total current assets amount to R24 000 and total current liabilities amount to R8 000. The
inventory included in current assets amounts to R14 000.
The minimum acceptable standard for the acid test ratio is 1:1. However, 2:1 is preferable.
The above ratio is within the acceptable limits which mean that the entity should not
experience problems in paying its short-term debts.
It is important to make a thorough analysis of the gross profit percentage of an entity in order
to determine if the percentage is comparable with other similar entities and if it is acceptable
for the type of business. The gross profit indicates the profit made by the entity when taking
only the sales and purchases figures into consideration. No other income or expenses are
included in the calculation. It is therefore a good indication of whether the prices an entity
asks for its products are sufficient and whether the price paid for inventory is perhaps too
high. The trading section of the statement of profit or loss and other comprehensive income
is shown below:
274
Net sales xxx
Less: Cost of sales (xxx)
Opening inventory xxx
Net purchases xxx
Carriage on purchases XX
Customs duty XX
Available for sale xxx
Less: Closing inventory (xxx)
Gross profit xxx
Gross profit percentage = Gross profit (R) + Net sales (R) x 100
Take note: As a rule the gross profit percentage is calculated on net sales (R).
It may also be calculated on cost of sales (R). but the question must then
indicate clearly that the percentage must be calculated on cost of sales. The
formula will then be as follows:
Gross profit percentage (COS) = Gross profit (R) -r Cost of Sales (R) x 100
275
R R
Net sales xxx
Less: Cost of sales (xxx)
Opening inventory XXX
Net purchases XXX
Carriage on purchases XX
Customs duty XX
Available for sales XXX
Less: Closing inventory (xxx)
Other income XX
Rent received XX
Commission received XX
276
Take note: This ratio compares net profit after interest and tax with the capital
investment made by owners. In this course, taxation is excluded from the
calculation of return on capital because a sole trader is not subject to taxation. In
the case of partnerships, close corporations and companies who do pay tax but
whose tax rates differ, the net profit after interest and finance costs, but before tax,
may be used.
Return on capital =
Net profit after interest and tax (R) + Total capital (R) x 100
If the percentage of profit that an owner earns on his capital is more than the percentage he
would have earned if he had instead invested the capital at a bank or financial institution,
then we can assume that the return is sound. Where the return is significantly lower, the
reason for this must be determined; for example, expenses may be too high or selling prices
may be too low.
There are two formulas that are used to determine the movement of inventory:
277
2. Months/weeks/days of inventory on hand
The number of months, weeks or days of inventory on hand provides an indication of the
length of time for which the entity has inventory available for the future.
It is evident that the period between the point at which a product is sold on credit and the
point at which payment is received from the debtor is of the utmost importance to the cash
flow of an entity. This ratio gives an indication of the average period that an entity must wait
to receive payment for goods sold on credit. The shorter the period, the better the cash flow
of the entity.
An acceptable collection period depends on the type of entity. For one entity, it may be
1,5 months and for another, it may be 4 months, but both are acceptable for the particular
type of entity.
As with debtors, the period between purchasing a product on credit and paying the creditor is
of the utmost importance for the cash flow of an entity. This ratio gives an indication of the
average time that the entity takes to pay its creditors. The longer the payment period, the
more advantageous it is for the entity’s cash flow, but only if interest is not levied on late
payments of outstanding amounts.
278
The creditors payment period (in months/weeks/days) is calculated as follows:
An acceptable collection period depends on the type of entity. For one entity, it may be
1 month and for another, it may be 3 months, but both are acceptable for the particular type
of entity.
The financial statements of entities are prepared in a format that discloses the financial
results of the current year as well as those of the previous year. It is generally accepted that
the financial ratios are calculated for the current year as well the previous year so that
comparisons may be made between the two periods. By comparing the two periods, the
improvement or deterioration in the ratios can be determined. This practice makes it possible
for management to identify problems and correct them timeously. You may therefore be
required to calculate ratios for both periods and give advice on the results.
Summary of formulas
279
15.7 PRACTICAL EXAMPLE
The following example serves to explain the application of ratio analysis and interpretation:
The financial statements of Dynamo Traders, a cell phone trader, for 200Y have been
presented to you. Mr Dynamo is concerned about the financial situation of his business and
approached you for advice.
| DYNAMO TRADERS
280
| DYNAMO TRADERS
281
PRACTICAL EXAMPLE - ANSWER SHEET
Formulas
Current ratio = Current assets : Current liabilities
Acid test ratio = Current assets - Inventory : Current liabilities
Gross profit percentage = Gross profit (R)-r Net sales (R) x 100
Net profit percentage = Net profit after interest and tax (R) Net sales (R) x 100
Return on capital = Net profit after interest and tax (R) -? Total Capital (R) x 100
Inventory turnover rate = Cost of sales Average inventory = Number of times per year
Debtors collection period = Average debtors Credit sales x 365 = Number of days
Creditors payment period = Average creditors Credit purchases/Cost of sales x 365
= Number of days
2. Report
282
CHAPTER 15
ASSIGNMENT 1
We will use the same question as in chapter 14 (Assignment 3). The following annual
financial statements have been presented to you by Elsa Blom, the owner of Elsa Fashions:
I ELSA FASHIONS
Non-current liabilities:
Long-term loan — 12 500
283
| ELSA FASHIONS
Elsa is concerned about the deterioration in her cash position during the past year. She
explained that, apart from the net profit of R39 500 made by the enterprise, she also
contributed additional capital amounting to R33 000. Before making a final decision on
whether to close her enterprise, she approached you for advice. Credit sales amount to 80%
of total sales.
The suggested solution will be discussed during the next contact session. If you
W experience difficulty in completing the assignment, review this chapter again.
284
CHAPTER 15
ASSIGNMENT 2
The following financial statements of OZ Traders for the year ending 31 December 200Y
have been presented to you by their bookkeeper:
I OZTRADERS
Non-current liabilities:
Long-term loans 500 000
285
| OZTRADEIRS
Additional information:
Plant and equipment to the value of R800 000 was purchased for cash during 200Y. Plant
and equipment with a cost price of R500 000 and accumulated depreciation of R150 000 was
sold for cash during 200Y at a loss of R50 000. The owner of OZ Traders does not
understand why the cash position deteriorated while the financial statements showed a profit
for the year. He approached you for your opinion. Credit sales amount to 90% of total sales.
The following financial ratios in respect of the previous financial year are available:
200X
Current ratio 1,1 : 1
Acid test ratio 0,9 : 1
Debtors collection period (days) 67
Creditors payment period (days) 55
Inventory turnover rate (days) 58
Gross profit percentage 29,4%
Net profit percentage 5,1%
286
You are required to:
The suggested solution will be discussed during the next contact session. If you
287
CHAPTER 15
ASSIGNMENTS
Nicci is the owner of Picasso Art Shop. She has approached you for advice concerning her
business. The following annual financial statements were handed to you:
288
| PICASSO ART SHOP
Additional information:
1. Equipment with a cost price of R10 000 and accumulated depreciation of R2 000 was
sold for R7 500 cash during the year. New equipment was purchased for R10 000 to
replace the old equipment and paid for by cheque.
2. Nicci contributed an additional R11 000 capital and withdrew R37 000 cash during the
year.
Nicci is concerned about the weakened cash position of the enterprise. She explained that, in
spite of the net profit of R20 000 and the additional capital contribution, the bank account
decreased by R30 000. She approached you for advice.
~W The suggested solution will be discussed during the next contact session. If you
experience difficulty in completing the assignment, review this chapter again.
289
CHAPTER 16
BANK RECONCILIATION
16.1 OUTCOMES
16.3 INTRODUCTION
An entity and its bank conduct, on a daily basis, transactions that concern each other but
which take place independently of each other. For example, the entity writes cheques in
favour of suppliers. The bank is not aware of these transactions until the suppliers present
these cheques to their banks for payment, perhaps days or weeks later. This passage of time
may stretch over the end of a business month which will result in those cheque payments
291
being included in the accounting records of the entity, but not in the accounting records of the
bank. Cheques which have not yet been presented to the bank for payment by the end of
each month are called outstanding cheques. Cheques are valid for a period of six months.
After this, the cheque becomes stale and must be cancelled. An entity also usually deposits
cash on a daily basis. Cash deposits normally take two days and cheque deposits 10 to
14 days to be processed by the bank. This will result in deposits made by the entity close to
the end of the month appearing only on the next bank statement. These are called
outstanding deposits.
In the same manner, a debtor may make a direct payment into the bank account of the entity.
The entity will normally only be aware of this once the bank statement has been received
from the bank. Other items such as bank interest, R/D cheques, bank charges, etc. appear
only on the bank statement which the entity receives from the bank once or twice a month.
When an entity accepts a cheque from a customer, it runs the risk of the customer not having
sufficient funds in his/her bank account to cover the amount of the cheque. When this
happens, the customer’s cheque is returned to him/her marked "R/D" (return to drawer). The
entity must then debit the customer’s account and credit the bank account because the
customer still owes the entity. The bank will usually charge a fee for processing the R/D
cheque.
Bank interest may also appear on the bank statement. Interest is received by the entity if the
bank balance is favourable and paid if the bank account is overdrawn. These transactions
must appear in the accounting records of the entity as interest received and interest paid.
Bank charges are fees which the bank charges for cash and cheque deposits and any other
administrative services.
Debit orders are authorisations given by an entity to a third party giving them permission to
deduct a fixed amount every month from the bank account of the entity in favour of the third
party.
Stop orders are authorisations from an entity to its bank requesting it to pay a third party
every month.
292
As a result of these differences, it is necessary for the entity to:
• adjust the bank account in the general ledger with the additional transactions which were
recorded by the bank on the bank statement; and
The bank reconciliation thus explains the differences between the balance of the bank
account in the general ledger and the balance on the bank statement.
16.4 DIAGRAM
Bank reconciliation
* Compare *
Steps
293
16.5 DIFFERENCES
The differences between the bank statement and the bank account in the general ledger may
be summarised as follows:
• amounts in the bank account but not yet on the bank statement:
cheques not yet presented to the bank;
deposits made after the bank’s cut-off time or date; and
errors made by the business.
• amounts on the bank statement but not yet in the bank account in the ledger:
R/D cheques;
interest paid;
interest received;
bank charges levied;
errors made by the bank;
amounts paid by debit order/stop order; and
direct payments made by clients.
16.6 STEPS
2. Bank account:
• compare the credit column of the bank statement with the debit side of the bank
account;
• compare the debit column of the bank statement with the credit side of the bank
account;
• tick corresponding items off; and
• follow up on unticked items (errors and missing information).
294
4. Prepare the bank reconciliation statement and include the following:
• errors made by the bank; and
• missing information on the bank statement (unticked items in the ledger and on
the previous bank reconciliation statement).
5. Begin the bank reconciliation statement with “debit/credlt balance as per bank
statement” in the relevant column (use the closing balance on the bank
statement) and include the following:
• write outstanding deposits in the credit column;
write outstanding cheques in the debit column; and y Two-column format
entries to correct errors made by the bank must be
written in the relevant column.
6. End the bank reconciliation statement with “debit/credit balance as per bank
account in the ledger”.
Example
XTe aae ABC *
B* -
27 Olifarts Road m 141
Emmarentia
Johannesburg ^2?nnesburg
2195 ***
Bank Statement Ho. 5 Page 1 of 1 Date of Statement: 01 April 2005
B ank Statementf<
* thepefiod 01 M.wch 2005 to 31 Match 2005
Date Transaction Description Debit Credit Balance
01 March 2005 Balance brought donn 3193 00
01 March 2005 Deposit D5000 5 000 00 8193 00
16 March 2005 Deposit D5001 3 000 00 11 193 00
31 March 2005 Cheque 106 342 00 10 851 00
31 March 2005 Cheque 107 570 00 10 281 00
31 March 2005 Cheque 108 750 00 9 53100
31 March 2005 Cheque 109 150 00 9 38100
31 March 2005 Cheque 110 285 00 9 09600
31 March 2005 Cheque 111 100 00 8 99600
31 March 2005 Service Fee SF 45 00 8 95100
Interest Unpaid Bank
Definition of Codes Deposits Cheques Other Debits
Received Cheques Charges
CO Commission 8 000 00 0 00 2197 00 000 0 00 45.00
DO Debit Order
IMPORTANT NOTICE
INT Interest
Statements are accepted as correct unless quened within 30 days Any cheques reflected on this
SF Service Fee
statement, which are n« attached will be included with your ne
* statement
UC Unpaid Cheque
(Source: www.turbocash.net/developer/digidan/web/websa/helpeng/images/inputbankreconbankstatement01.gif )
295
16.8 FORMAT OF THE BANK RECONCILIATION STATEMENT
There is no fixed format for a bank reconciliation statement. However, the following are two
of the most common formats. Both are correct. You may decide which format you would
prefer to use.
I XYZ ENTERPRISES
R R
| XYZ ENTERPRISES
296
16.9 PRACTICAL EXAMPLE 1
The bank reconciliation is best explained by means of an example. The following information
is presented to you:
R R
A post-dated cheque is dated for a date in the future and may only be
deposited on the date which appears on the cheque and not
beforehand. A post-dated cheque that has been accidentally
deposited before the stipulated date must be corrected by the
business on the bank reconciliation statement as well as by the bank
on the next bank statement.
m I Take note: The above bank reconciliation statement was prepared at the end of
>\,-J the PREVIOUS month. The bank statement for the current month must FIRST be
compared with this bank reconciliation statement to tick off outstanding items at
the end of the previous month. Any items not ticked off must AGAIN be included
in the bank reconciliation statement for the current month.
297
Additional information for the month ending 31 March 200X:
1. Cheque 310 was issued to a welfare organisation which has since been dissolved.
2. The bank statement for March 200X shows a credit balance of R470,60.
3. The following entries appear on the bank statement but not in the ledger:
a. Debit entries:
i. Error corrected by the bank, R480.00.
ii. Stop order for R285.00 in favour of FNS Bank for monthly interest on loan.
iii. R/D cheque for R569.00 received from B Bruce in settlement of his account
of R590,00.
iv. Cheque 495, R793,00.
v. Cheque 217, R476.00, was incorrectly debited to the bank account of the
business instead of to the account of another client.
vi. Bank charges, R361,35.
vii. Bank interest, R46.45.
— Bank charges include: commission, cheque book fees and other administrative
expenses. Bank interest (received or paid) must be shown separately.
b. Credit entries:
i. Deposit, R864.50.
ii. Post-dated cheque, R325.00.
iii. Deposit, R647,00. This amount was deposited on 25 March in the current
account of “The Sport Zone”, but was incorrectly deposited in the account
of ‘The Sport Shop" by the bank.
iv. Cheque incorrectly debited, R754.00.
v. Deposit, R870.00. This amount was deposited into the bank account of the
entity by a tenant.
4. The following entries appear in the bank account in the ledger but not on the bank
statement:
a. Deposit, R1 590,60.
b. Cheque 503, R642.50 (dated 29 March 200X).
c. Cheque 514, R265.40 (dated 14 April 200X - post-dated cheque).
298
5. The following errors were traced:
Cheque 510 for R340.00 issued on 16 March 200X to The Herald for advertising, was
entered in the bank account in the ledger as R304.00.
6. Pencil totals of the amount columns in the bank account in the ledger:
a. Debit: R7 678,40.
b. Credit: R6 940,30.
1. Complete and balance the bank account in the general ledger on 31 March 200X.
2. Prepare the bank reconciliation statement on 31 March 200X.
R R
Credit balance as per bank statement
Outstanding deposits
Outstanding cheques: No 476
503
514
Credit cheque 217 incorrectly debited
Debit deposit incorrectly credited
Debit balance as per bank account in the ledger
2 537,20 2 537,20
299
16.10 PRACTICAL EXAMPLE 2
I DN DEALERS
R R
DN DEALERS
GENERAL LEDGER
DR BANK CR
200X
Feb 1 Balance b/f 1 610
I DN DEALERS
R
Feb 200X
10 Debtors 15 400
15 Sales 20 300
19 Sales 7 000
21 Capital 14 000
28 Debtors 16 100
72 800
300
| DN DEALERS
R
Feb 200X
3 1021 Creditors 16 800
7 1022 Rent 12 600
15 1023 Purchases 18 900
21 1024 Freight on purchases 2 800
22 1025 Creditors 18 200
26 1026 Salaries 32 200
101 500
R R R
1 Balance (2 520I
Deposit 6 300 3 780
Correction 2 380 6 160
2 Cheque 1006 700 5 460
5 R/D cheque 1 120 4 340
10 Deposit 15 400 19 740
16 Deposit 20 300 40 040
Interest 40 40 000
19 Deposit 7 000 47 000
21 Cheque 1023 18 900 28 100
22 Cheque 1018 1 330 26 770
23 Cheque 1024 2 800 23 970
Commission 30 23 940
26 Deposit 14 000 37 940
Cheque 1021 16 800 21 140
27 Deposit (rent) 4 900 26 040
Cheque 4001 1 400 24 640
28 Debit order (insurance) 4 200 20 440
Cheque 1026 23 200 (2 760l
Bank charges 140 (2 900)
Additional information:
301
You are required to:
1. Record the necessary entries in the relevant cash receipts and cash payments
journals, commencing with the preliminary totals of the journals, and determine the new
totals.
2. Post the totals of the cash journals to the bank account in the general ledger and
calculate the bank balance on 28 February 200X.
3. Prepare the bank reconciliation statement on 28 February 200X.
R
Feb
28 Total
Rent received
| DN DEALERS
R
Feb
28 Total
Debtors (R/D cheque)
Insurance (debit order)
Bank charges (30 + 140)
Bank interest
302
DN DEALERS
GENERAL LEDGER
DR BANK CR
200X 200X
Feb 1 Balance b/f Feb 28 Total payments CPJ1
28 Total receipts CRJ1
Balance c/f
| DN DEALERS
R R
303
CHAPTER 16
ASSIGNMENT 1
The following information relating to the cash transactions for Marco Polo for November
200X is presented to you:
a) Bank statement
R R R
304
b) Cash receipts
1 Sales 1 600
2 Debtors 900
5 Debtors 400
10 Sales 2 310
15 Debtors 800
29 Sales 1 300
Interest received 500
7 810
c) Cash payments
R R
305
Additional information:
1. Cheque number 71 was issued to a creditor on 30 May 200X for the payment of credit
purchases.
2. The correct amount of cheque 111 is R180.
3. A debtor, R Uzzi, made a direct deposit of R100 during November 200X in Marco
Polo's bank account.
4. The cash sales on 10 November 200X amounted to R2 310 and not R3 210.
5. The stop order is for the owner. Mr Polo's, personal insurance.
6. Mark Potter Traders issued cheque 712.
7. The bank credited the owner's personal bank account with the R400 deposit on
5 November 200X instead of the entity's bank account.
8. The R/D cheque on the bank statement was for a debtor, Mr R Guess.
1. Complete the bank account in the general ledger of Marco Polo for November 200X
and close it off properly.
2. Prepare the bank reconciliation statement on 30 November 200X.
The suggested solution will be discussed during the next contact session. If you
306
CHAPTER 16
ASSIGNMENT 2
The following information in respect of the cash transactions for Carlo’s Traders for June
200X is presented to you:
R R R
Balance (31 May 200X) 2 826,50
1 Deposit 1 232,00 4 058,50
Cheque 185 900.00 3 158,50
Service fees 4.50 3 154,00
3 Cheque 183 935,00 2 219,00
Service fees 4.50 2 214,50
5 Deposit 800.00 3 014,50
11 Deposit 1 700,00 4 714,50
Service fees 7,00 4 707,50
12 Cheque 187 1 414.00 3 293,50
Service fees 7,00 3 286,50
16 Deposit 2 100,00 5 386,50
17 Cheque 188 440,00 4 946,50
Service fees 4,00 4 942,50
Deposit: Rent 500,00 5 442,50
26 Deposit 1 500,00 6 942,50
27 R/D cheque - P Comara 1 200.00 5 742,50
Service fees 6,00 5 736,50
28 Cheque 189 1 134,00 4 602,50
Service fees 6.00 4 596,00
307
b) Cash receipts and payments for June 200X
Receipts
Date Details Amount
4 Deposit 800,00
10 Deposit 1 700,00
15 Deposit 2100,00
25 Deposit 1 500,00
30 Deposit 1 100,00
7 200,00
Payments
Date Details Amount
c) The bank balance in the general ledger on 1 June 200X was as follows:
Favourable bank balance. R2 353.50.
I CARLO’S TRADERS
308
You are required to:
1. Prepare the bank account in the general ledger in order to calculate the correct balance
on 30 June 200X.
2. Prepare the bank reconciliation statement on 30 June 200X.
-.Jjr REMEMBER: There are different formats for a bank reconciliation statement. The
answer sheet for this assignment makes provision for the two most common
( J formats. Please prepare both formats.
The suggested solution will be discussed during the next contact session. If you
309
CHAPTER 16
ASSIGNMENTS
R R R
1 Balance 19 863 19 863
2 Deposit 1 050 20 913
Cheque 797 375 20 538
4 Cheque 828 324 20 214
Deposit 480 20 694
5 Cheque 829 441 20 253
10 Cheque 831 1 110 19 143
13 Cheque 830 120 19 023
Cheque 832 942 18 081
15 Deposit 820 18 901
18 Cheque 834 417 18 484
22 Deposit 765 19 249
28 Cheque 835 510 18 739
Deposit 726 19 465
29 D Dent (R/D cheque) 72 19 393
30 Direct transfer (interest on investment) 1 800 21 193
Bank charges 18 21 175
The following cash receipts and payments for October 200X appeared in the bank account in
the ledger of Lynell Traders:
b) Cash receipts
Date Details Amount
R
3 A Adam (debtor) 480
14 Cash sales 820
22 B Brooks (debtor 765
26 Cash sales 726
29 C Cooper (debtor) 380
3 171
310
c) Cash payments
R
4 Telkom 828 324
5 E Edam (creditor) 829 441
6 F Foose Traders 830 120
10 G Gain (creditor) 831 1 110
H Hoop Ltd 832 942
12 I Impi (creditor) 833 230
17 Z Zulch 834 417
27 J Joss (creditor) 835 510
29 K Krane 836 87
4 181
Additional information:
1. Lynell Traders reconciled the balance of the bank account in the ledger with the bank
statement balance on 30 September 200X. The following outstanding items were
noted:
Cheque 794 R 243
Cheque 797 R 375
Deposit R1 050
2. The balance of the bank account in the trial balance on 30 September 200X was
R20 295 (favourable).
3. The transfer to the current account on 30 October 200X was for interest on investment.
1. Amend the cash receipts and cash payments journals for October 200X.
2. Complete the bank account in the general ledger of Lynell Traders for October 200X.
3. Prepare the bank reconciliation statement of Lynell Traders on 31 October 200X.
•"wT' The suggested solution will be discussed during the next contact session. If you
W experience difficulty in completing the assignment, review this chapter again.
311
CHAPTER 16
ASSIGNMENT 4
| HANSIE DEALERS
R R
Additional information:
1. Preliminary totals of the bank columns in the subsidiary journals on 31 July 200X are
as follows:
Cash receipts journal (CRJ) R125 700
Cash payments journal (CRJ) R103 430
2. The comparison of the subsidiary journals with the previous bank reconciliation
statement and the current bank statement indicated the following differences:
• The deposit of R12 080 appears on the bank statement for July 200X.
• Cheque nos. 276 and 280 were processed by the bank during July 200X.
• The bank corrected the bank error of R440.
3. An amount of R2 000 appears on the bank statement as a deposit. On closer
inspection, the deposit was incorrectly credited to the entity's bank account. It was
meant for the personal account of the owner.
4. A stop order for R500 with respect to advertisements has been cancelled. However, a
payment had already been recorded in the cash receipts journal.
312
5. The bank statement was debited with the following amounts:
• bank charges, R35;
• bank interest, R325;
• cheque no. 277 for R1 500 appears twice on the bank statement;
• a personal cheque of the owner for R600: and
• a monthly stop order for R122 with respect to insurance.
6. Cheque no. 274, issued as payment of the telephone account, was lost in the post and
must be cancelled. A new cheque (no. 300) was issued in replacement thereof.
7. The follow ng cheques were still outstanding on 31 July 200X:
• no. 295 (refreshments), R600: and
• no. 299 (advertising), R1 800.
8. A deposit for R9 012 first appeared on the bank statement for August 200X.
9. Cheque no. 293, in respect of the purchase of stationery, was recorded in the cash
payments journal as R360. The correct amount is R630.
10. H. Cronje, a debtor, paid R320 directly into the entity's bank account.
11. A cheque for R1 200, which was received from a debtor and was deposited in the bank
account, was returned by the bank marked R/D.
12. The balance as per bank statement on 31 July 200X amounted to R15 224
(unfavourable).
1. Commence with the preliminary totals of the cash receipts and cash payments journals,
record the necessary entries in the relevant journals and determine the new totals.
2. Post the totals of the cash journals to the bank account in the general ledger and
calculate the bank balance on 31 July 200X.
3. Prepare the bank reconciliation statement on 31 July 200X.
The suggested solution will be discussed during the next contact session. If you
experience difficulty in completing the assignment, review this chapter again.
313
CHAPTER 17
17.1 OUTCOMES
17.2 INTRODUCTION
“Costing” may be described as the value placed on the use of resources with the purpose of
making a profit. Cost includes all costs incurred to purchase a product or to manufacture a
product or render a service. The management of an entity requires this information to enable
it to determine the profit margins - these profit margins are then added to the cost to
determine the selling prices of products or services. In order to remain competitive, an entity
must be able to provide products or services at prices lower than its competitors. It is
therefore vitally important that management knows the cost of each product it sells or each
service it renders.
315
17.3 TERMS AND CONCEPTS
• Direct material is the material used during the manufacturing process to manufacture
finished products and forms an integral part of the manufactured product, for example,
milk used in the manufacturing of cheese.
• Direct labour is the labour cost directly related to the manufacturing of finished
products, for example, the labour cost of the workers directly involved in the
manufacturing process at the cheese factory.
• Primary cost is the cost of material and labour directly related to the manufacturing of
a product (= direct material + direct labour).
• Overheads are all other costs (excluding direct materials and labour) incurred in the
manufacturing process that are difficult to allocate to a specific product. These may
include the following:
Indirect material which consists of supplementary materials, for example,
cleaning products, colouring matter, glue, screws, lubricants, waste products and
other material requirements.
Indirect labour which includes all wages and salaries that are not directly related
to the manufacturing process, for example, employer contributions that increase
labour costs (pension, medical, unemployment insurance, and workmen’s
compensation), wages of cleaning staff, casual labour, overtime, shift expenses,
leave pay, bonuses, salary of factory foremen, wages of security personnel, etc.
Other overheads which include all other manufacturing costs, for example,
depreciation, leasing of equipment, insurance, property tax, electricity, water,
telephone, etc.
• Work-in-progress consists of incompleted products that are at different stages of
production at any given moment.
• Finished goods are products that have been through the manufacturing process and
are ready for sale.
• Conversion cost is the cost of converting raw material to a finished product (= direct
labour + overheads).
• Total manufacturing cost is the sum of direct material, direct labour and overheads.
• Manufactured cost of finished goods is the total manufacturing cost plus opening
inventory of work-in-progress less closing inventory of work-in-progress.
316
• Factory profit is added to the manufactured cost of finished goods before these
products are transferred from the production department to the sales department.
• Cost of finished goods transferred (to sales department) is the cost at which
finished goods are transferred from the production department to the sales department.
It therefore includes the factory profit (= manufactured cost of finished goods plus
factory profit).
• Cost of sales is the cost of finished goods that have already been sold and is
calculated as follows:
Opening balance: Finished goods
Plus: Cost of finished goods transferred
Equals: Cost of goods available for sale
Less: Closing balance: Finished goods
Equals: Cost of sales
• Allocated overheads are overheads allocated by some manufacturing entities to the
manufacturing process at a pre-determined rate. This rate is based on past activities
and results.
• Under/over-allocated overheads: under-allocated overheads result in allocated
overheads being less than the actual overheads incurred. The profit of the entity will
then be reduced by the difference between the allocated and actual overheads. Over
allocated overheads result in actual overheads being less than the allocated
overheads. This will lead to an increase in the profit of the entity. For the purposes of
this course, the amounts for under/over-allocated overheads will be given in the
assignments.
In previous chapters of this workbook, the accounting principles relating to service and
trading entities were discussed. Service entities earn income mainly from the rendering of
services and as a result, the trading inventory and cost of sales accounts are not necessary.
Trading entities earn income mainly by purchasing finished goods/inventory and selling them
at a profit. The cost of sales and inventory accounts are therefore necessary to a trading
entity. A third type of entity, namely the manufacturing entity, purchases raw material which it
uses to manufacture products that it sells at a profit. This manufacturing process results in
additional costs that serve as a basis for the calculation of the manufacturing cost of finished
goods. As the manufacturing process takes place in steps, the products that are being
manufactured will be at different stages of production at any given moment.
317
These different stages of completion may be differentiated as follows:
As the name indicates, a manufacturing cost statement is a summary of all the costs incurred
in the manufacturing process. The purpose of this statement, which is prepared using the
information contained in the manufacturing cost account in the general ledger, is to provide
financial information to management regarding the manufacturing costs of the entity. All the
manufacturing costs, i.e. direct material, direct labour and overheads (refer to the diagram
below), are debited against the manufacturing cost account (work-in-progress account). As
with the other types of entities, these transactions are first recorded in the relevant journal
(book of first entry) and then posted to the manufacturing cost/work-in-progress account. The
manufacturing cost statement is then prepared from the manufacturing cost account and
serves as an aid for management. The practical examples later in the chapter will deal with
the preparation of the manufacturing cost statement.
The following diagram shows the different costs involved in the manufacturing process:
318
DIAGRAM 17.1
Manu
Work-in Work-in factured
progress progress cost of
(opening) (closing) finished
goods
Cost of
Manufactured
finished
cost of
goods
finished goods
transferred
Cost of
Finished Finished
finished
goods goods
Cost of
goods (opening) (closing) sales
transferred
319
As indicated in the preceding diagram, the total cost of finished goods is calculated by adding
the manufacturing profit to the total cost of finished goods that have been manufactured. This
manufacturing (factory) profit must be included in the statement of profit or loss and other
comprehensive income. However, a problem arises if all the finished goods, the profit of
which has been included (as factory profit) in the statement of profit or loss and other
comprehensive income, have not been sold by the end of the financial period. This means
that the portion of the factory profit related to the unsold finished goods, has not yet been
realised. Since the financial statements must provide a fair presentation of the state of affairs
of an entity, the factory profit included in the statement of profit or loss and other
comprehensive income must be reduced by the unrealised portion of the profit.
This unrealised portion of the profit is calculated using the profit margin at which finished
goods are transferred from the production department to the sales department. To do this, a
“provision for unrealised profit” is created by means of a journal entry:
320
17.7 CALCULATIONS
• Cost of finished goods transferred:
Profit margin for finished goods transferred to sales department x Rand value of
100 + mark-up closing inventory
of finished goods
321
17.8 RECORDING OF TRANSACTIONS
EXAMPLE 17.1
The following information with respect to Smart Enterprises for the year ending
28 February 200Y is presented to you:
322
Additional information:
323
Provision for unrealised profit included in inventory of finished goods:
Profit margin for finished goods transferred to sales department x Rand value of inventory
100 + mark-up of finished goods
GENERAL JOURNAL J1
FOL DR CR
Cash transactions R R
200Y
28 Overheacs 4 600
Bank 4 600
Overheacs paid
324
SMART ENTERPRISES
GENERAL JOURNAL J2
FOL DR CR
R R
200Y
Feb 28 Rent paid: Factory 4 200
Rent paid: Offices 2 700
Bank 6 900
Rent paid
28 Insurance 4 000
Bank 4 000
Insurance paid
28 Telephone 3 900
Bank 3 900
Telephone paid
28 Work-in-progress 3 000
Direct material 3 000
Direct material issued
28 Overheads 1 500
Indirect material 1 500
Indirect material issued
28 Overheads 3 200
Indirect labour 3 200
Transfer indirect labour to overheads
28 Overheads 9 520
Water and electricity (3 600 x 70%) 2 520
Rent paid: Factory 4 200
Insurance (4 000 x 70%) 2 800
Allocation of expenses to overheads
28 Work-in-progress 18 820
Overheads 18 820
Transfer overheads to work-in-progress
28 Finished goods 18 000
Work-in-progress 18 000
Transfer finished goods to inventory
325
SMART ENTERPRISES
GENERAL JOURNAL J3
FOL DR CR
R R
200Y
•
Feb 28 Finished goods 5 164
Factory profit 5 164
Add factory profit to cost of finished goods
•
28 Cost of sales 30 984
Finished goods 30 984
Transfer cost of finished goods sold to cost of sales
•
28 Provision for unrealised profit 1 303
Factory profit 1 303
Transfer movement in unrealised profit to factory profit
If goods are transferred to the sales department at manufacturing cost, i.e. there is no factory
profit, the last three journal entries above (marked with *) would differ as follows:
• No journal entries for factory profit and provision for unrealised profit would be
necessary.
• The amount transferred from finished goods to cost of sales would be R25 820 (see
example of these two ledger accounts at the end of Example 17.1).
SMART ENTERPRISES
GENERAL LEDGER
DR FINISHED GOODS CR
200X 200Y
Mar 1 Balance b/f 16 820 Feb 28 Cost of sales J3 30 984
200Y Balance c/f 9 000
Feb 28 Work-in-progress J2 18 000
Factory profit J3 5 164
39 984 39 984
326
DR WORK-IN-PROGRESS CR
200X 200Y
Mar 1 Balance b/f 2 500 Feb 28 Finished goods J2 18 000
200Y Balance c/f 11 320
Feb 28 Direct labour J2 5 000
Direct material J2 3 000
Overheads J2 18 820
29 320 29 320
DR DIRECT MATERIAL CR
200X 200Y
Mar 1 Balance b/f 5 000 Feb 28 Work-in-progress J2 3 000
200Y Balance c/f 6 000
Feb 28 Bank J1 4 000
9 000 9 000
DR INDIRECT MATERIAL CR
200X 200Y
Mar 1 Balance b/f 1 000 Feb 28 Overheads J2 1 500
200Y Balance c/f 3 000
Feb 28 Bank J1 3 500
4 500 4 500
DR BANK CR
200X 200Y
Mar 1 Balance b/f 40 000 Feb 28 Work-in-progress J1 4 000
Direct labour J1 5 000
Indirect material J1 3 500
Indirect labour J1 3 200
Overheads J1 4 600
Water and J1 3 600
electricity
Rent: Factory J2 4 200
Rent: Offices J2 2 700
Insurance J2 4 000
Telephone J2 3 900
Balance c/f 1 300
40 000 40 000
327
DR PREPAID INSURANCE CR
200X 200Y
Mar 1 Balance b/f 800 Feb 28 Insurance 800
DR TELEPHONE ACCRUED CR
200Y 200X
Feb 28 Telephone 300 Mar 1 Balance b/f 300
DR DIRECT LABOUR CR
200Y 200Y
Feb 28 Bank J1 5 000 Feb 28 Work-in-progress J2 5 000
I
DR INDIRECT LABOUR CR
200Y 200Y
Feb 28 Bank J1 3 200 Feb 28 Overheads J2 3 200
DR OVERHEADS CR
200Y 200Y
Feb 28 Bank J1 4 600 Feb 28 Work-in-progress J2 18 820
Indirect material J2 1 500
Indirect labour J2 3 200
Water and J2 2 520
electricity
Rent: Factory J2 4 200
Insurance J2 2 800
18 820 18 820
328
DR INSURANCE CR
200Y 200Y
Feb 28 Bank J2 4 ODO Feb 28 Overheads J2 2 800
Prepaid insurance 800 Balance c/f 2 000
4 800 4 800
DR TELEPHONE CR
200Y 200Y
Feb 28 Bank J2 3 900 Feb 28 Telephone 300
accrued
Balance c/f 3 600
3 900 3 900
DR FACTORY PROFIT CR
200Y
Feb 28 Provision: J3 1 303
Unrealised profit
Finished goods J3 5 164
6 467
DR COST OF SALES CR
200Y
Feb 28 Finished goods J3 30 984
200Y 200X
Feb 28 Factory profit J3 1 303 Mar 1 Balance b/f 2 803
(2 803 - 1 500)
Balance c/f 1 500
2 803 2 803
200Y
Mar 1 Balance b/f 1 500
If goods are transferred to the sales department at manufacturing cost, i.e. there is no factory
profit, the factory profit and provision for unrealised profit accounts would fall away and the
finished goods and cost of sales accounts would be shown as follows:
329
SMART ENTERPRISES
GENERAL LEDGER
DR FINISHED GOODS CR
200X 200Y
Mar 1 Balance b/f 16 820 Feb 28 Cost of sales J3 25 820
200Y Balance c/f 9 000
Feb 28 Work-in-progress J2 18 000
34 820 34 820
DR COST OF SALES CR
200Y
Feb 28 Finished goods J3 25 820
330
17.10 PRACTICAL EXAMPLE 1 (without factory profit & allocated overheads)
The following post-adjustment trial balance was prepared from the accounting records of
Minima Manufacturers on 28 February 200Y:
R
Inventory on hand (1 March 200X):
Finished goods 7700
Direct raw materials 13900
Work-in-progress (unfinished goods) 15 000
Raw materials purchased 74000
Sales (finished goods) 180000
Wages: Manufacturing 40000
Administrative 7000
General manufacturing overheads 900
Factory machinery at cost 36000
Repairs to factory machinery 650
Rent and property tax (manufacturing = 70%) 6500
Freight on purchases of raw materials 2500
Electricity (manufacturing = 80%) 5000
Salaries: Administrative 8100
Travelling costs and commission 2000
Advertising 6000
Stationery: Administrative 2200
Depreciation (7 200 + 180) 7380
Credit losses 1950
Factory equipment at cost 2000
Trade debtors 26000
Allowance for credit losses (7,5%) 1950
Trade creditors 12815
Accrued salaries 2 100
Accumulated depreciation:
Factory machinery 14400
Factory equipment 380
Bank overdraft 53135
Additional information:
331
You are required to:
1. Prepare the manufacturing cost statement for Minima Manufacturers for the year
ending 28 February 200Y.
2. Prepare the statement of profit or loss and other comprehensive income for Minima
Manufacturers for the year ending 28 February 200Y.
332
I MINIMA MANUFACTURERS
Sales
Less: Cost of sales
Add: Opening inventory - Finished goods
Cost of finished goods transferred
Operating expenses:
Credit losses
Electricity
Rent and property tax
Salaries
Stationery
Advertising
Wages
Travelling and commission
Profit for the year
The following balances have been extracted from the trial balance of Kaya Manufacturers on
31 December 200X:
R
Inventory on hand (1 January 200X):
Finished goods 6900
Direct material 14 500
Work-in-progress (unfinished goods) 15 600
Material purchased 75200
Sales (finished goods) 195200
Manufacturing wages accrued (1 January200X) 10000
Manufacturing wages paid 35000
Administrative wages 6500
General manufacturing overheads 1200
Salary of factory foreman 5000
Indirect material consumed 2000
Factory machinery at cost 42000
Repairs to factory machinery 1150
Rent and property tax (manufacturing = 70%) 8400
Freight on purchases of material 2700
Electricity (manufacturing = 80%) 5400
333
R
Salaries of administrative personnel 6 000
Travelling and commission 2 200
Delivery costs on sales 2 000
Factory equipment at cost 20 000
Stationery: Administrative 4 300
Trade debtors 32 000
Trade creditors 14 700
Bank overdraft 56 850
Provision for unrealised profit (1 January 200X) 900
Accumulated depreciation (1 January 200X):
Factory machinery 8 400
Factory equipment 2 000
Additional information:
1. Inventory on hand on 31 [December 200X:
Finished goods R 5 750
Direct material R 7 500
Work-in-progress R11 995
Stationery R 80
2. Depreciation must still be provided for as follows:
Factory machinery at 20% p.a. on the straight-line method, and
Factory equipment at 10% p.a. on the reducing balance method.
3. Accrued manufacturing wages on 31 December 200X amounted to R5 000.
4. Create an allowance for credit losses at 6% of outstanding debtors.
5. Under-allocated manufacturing overheads amounted to R1 980.
6. All finished goods are transferred to the sales department at manufacturing cost plus a
factory profit of 15%.
334
PRACTICAL EXAMPLE 2 - ANSWER SHEET
I KAYA MANUFACTURERS
MANUFACTURING COST STATEMENT
FOR THE YEAR ENDING 31 DECEMBER 200X
200X
R
Direct material consumed:
Opening inventory
Add: Purchases
Add: Freight
Calculations:
1. Depreciation
Factory machinery
Factory equipment
2. Unrealised profit
Unrealised profit in opening inventory of finished goods (given)
Unrealised profit in closing inventory of finished goods
4. Conversion costs
335
I KAYA MANUFACTURERS
Sales
Less: Cost of sales
Opening inventory: Finished goods
Add: Cost of finished goods transferred
Operating expenses:
Administrative wages
Rent and property tax
Electricity
Salaries
Travelling and commission
Delivery costs
Stationery
Credit losses
Profit for the year
336
CHAPTER 17
ASSIGNMENT 1
You are presented with the following information from the accounting records of GHI
Manufacturers:
R
Inventory on hand (1 July 200X):
Direct raw material 18 000
Work-in-progress (unfinished goods) 75000
Finished goods 440000
Sales 1 443 750
Direct materials consumed 400000
Direct labour paid 280000
Manufacturing overheads 130 000
Sundry operating expenses 366250
Inventory on hand (30 June 200Y):
Direct raw material 12 000
Work-in-progress (unfinished goods) 100 000
Finished goods 312 500
1. Compile the following ledger accounts for the year ended 30 June 200Y:
Direct raw material
Work-in-progress
Finished goods
2. Prepare the manufacturing cost statement of GHI Manufacturers for the year ending
30 June 200Y.
3. Prepare the statement of profit or loss and other comprehensive income of GHI
Manufacturers for the year ending 30 June 200Y.
The suggested solution will be discussed during the next contact session. If you
experience difficulty in completing the assignment, review this chapter again.
337
CHAPTER 17
ASSIGNMENT 2
The following balances have been extracted from the trial balance of Kegg Manufacturers on
30 June 200Y:
R
Sales 4 200 350
Capital (1 July 200X) 2 265 775
Drawings 341 000
Property, plant and equipment at cost 2 950 000
Accumulated depreciation: Property, plant and equipment 760 500
Trade creditors 332 114
Mortgage bond over fixed property: BankNed 1 371 000
Trade debtors 234 675
Bank (favourable) 97 439
Inventory on hand (1 July 200X):
Direct raw material 54 000
Finished goods 920 000
Work-in-progress 615 000
Direct raw material purchased 1 200 000
Direct manufacturing wages paid 840 000
Manufacturing overheads 407 500
Sundry operating expenses 1 098 750
Interest expense 171 375
Additional information:
1. Inventory on hand on 30 June 200Y was as follows:
Direct raw material R 36 000
Work-in-progress R300 000
2. The inventory records pertaining to the physical inventory of finished goods on hand on
30 June 200Y had disappeared. The sales department adds 50% to the cost of goods
received from the manufacturing department to determine the selling price.
338
You are required to:
1. Prepare the manufacturing cost statement of Kegg Manufacturers for the year ending
30 June 200Y.
2. Prepare the statement of profit or loss and other comprehensive income of Kegg
Manufacturers for the year ending 30 June 200Y.
3. Prepare the statement of financial position of Kegg Manufacturers on 30 June 200Y.
The suggested solution will be discussed during the next contact session. If you
W experience difficulty in completing the assignment, review this chapter again.
339
CHAPTER 17
ASSIGNMENTS
Viva Manufacturers manufactures alarms and sells them at R370 each to the public.
The direct cost of raw material per unit amounts to R100 and the conversion cost amounts to
150% of direct raw materials. Direct labour costs amount to 75% of the conversion cost.
During April 200X, 410 alarms were manufactured and transferred to the sales department at
cost.
The following information is available from the accounting records of Viva Manufacturers:
1. Prepare the manufacturing cost statement of Viva Manufacturers for the month ending
30 April 200X.
2. Prepare the statement of profit or loss and other comprehensive income of Viva
Manufacturers for the month ending 30 April 200X.
The suggested solution will be discussed during the next contact session. If you
W experience difficulty in completing the assignment, review this chapter again.
340
CHAPTER 17
ASSIGNMENT 4
The following balances have been extracted from the trial balance of Maxima Manufacturers
on 28 February 200Y:
R
Inventory on hand (1 March 200X):
Finished goods 7700
Direct raw material 13900
Work-in-progress (unfinished goods) 15000
Raw material purchased 74000
Sales (finished goods) 190 000
Wages: Manufacturing 40000
Administrative 7000
General manufacturing overheads 900
Factory machinery at cost 36000
Repairs to factory machinery 650
Rent and property tax (manufacturing = 70%) 6500
Freight on purchases of raw material 2500
Electricity (manufacturing = 80%) 5000
Salaries of administrative personnel 6000
Travelling and commission 2000
Advertising 6000
Factory equipment at cost 2000
Trade debtors 26000
Trade creditors 12815
Land and buildings at cost 45000
Stationery: Administrative 2200
Bank (favourable) 1800
Provision for unrealised profit (1March 200X) 700
Capital 89235
Accumulated depreciation (1 March 200X): Factory machinery 7200
Factory equipment 200
341
Additional information:
The suggested solution will be discussed during the next contact session. If you
342
CHAPTER 17
ASSIGNMENTS
Success Products manufactured 1 000 units during the year ending 31 December 200X. The
following information has been taken from the accounting records of the business:
The suggested solution will be discussed during the next contact session. If you
experience difficulty in completing the assignment, review this chapter again.
343
CHAPTER 17
ASSIGNMENTS
Dr Cr
R R
Inventory on hand on 1 January 200X:
Direct material 83 400
Work-in-progress (unfinished goods) 90 000
Finished goods 67 200
Direct material purchased 444 000
Manufacturing wages paid 210 000
Administrative wages 42 000
Salary of factory foreman 30 000
Indirect material consumed 9 000
Customs duty: Direct material 15 000
Indirect material 3 000
Delivery costs of sold goods 9 000
General manufacturing overheads 5 400
Factory machinery at cost 216 000
Repairs to factory machinery 3 900
Rent and property tax (manufacturing - 70%) 39 000
Electricity (manufacturing = 70%) 30 000
Salaries of administrative personnel 36 000
Travelling and commission 15 000
Factory equipment at cost 12 000
Trade debtors 38 000
Stationery: Administrative 13 200
Cash and cash equivalents 45 600
Manufacturing wages accrued (1 January 200X) 30 000
Accumulated depreciation (1 January 200X):
Factory machinery 43 200
Factory equipment 1 200
Sales (finished goods) 1 080 000
Capital (1 January 200X) 223 300
Long-term loan 56 000
Trade creditors 23 000
1 456 700 1 456 700
344
Additional information:
1. Answer the following multiple-choice questions (round off to the nearest rand):
1.1 What is the amount of direct material consumed?
a) R414 030 c) R548 970
b) R503 970 d) R992 940
1.2 What are the direct labour costs for the year?
a) R180 000 c) R282 000
b) R240 000 d) R312 000
1.3 What is the depreciation for the year?
a) R35 640 c) R44 280
b) R35 760 d) R44 400
1.4 What are the actual manufacturing costs for the year?
a) R 93 360 c) R135 360
b) R101 880 d) R179 880
1.5 What are the allocated manufacturing overheads for the year?
a) R132 000 c) R176 520
b) R138 720 d) R182 140
345
1.6 What are the primary manufacturing costs for the year?
a) R683 970 c) R785 970
b) R743 970 d) R815 970
1.7 What are the conversion costs for the year?
a) R315 360 c) R375 360
b) R318 720 d) R378 720
1.8 What is the cost of sales for the year ending 31 December 200X?
a) R540 000 c) R720 000
b) R544 500 d) R726 000
1.9 What is the cost price of unsold finished goods at the end of the year?
a) R356 006 c) R350 006
b) R536 006 d) None of the above
1.10 What was the unrealised profit in the inventory of finished goods at the end of the
previous year?
a) R 6 720 c) R10 080
b) R 8 064 d) R7 200
1.11 What is the balance of the provision of unrealised profit on 31 December 200X?
a) R37 501 c) R57 429
b) R38 144 d) None of the above
1.12 How much is the factory profit for the year ending 31 December 200X?
a) R 96 506 c) R108 086
b) R105 923 d) None of the above
1.13 What is the influence of the change in the unrealised profit in unsold inventory on
the net profit for the year ending 31 December 200X?
a) Increases closing inventory of finished goods and thus increases the net
profit.
b) Decreases closing inventory of finished goods and thus increases the net
profit.
c) Decreases the net profit.
d) No influence.
346
1.14 What is the influence of over-allocated overheads on the net profit?
a) Decreases the net profit.
b) Increases the net profit.
c) Decreases the actual overheads and thus increases the net profit.
d) No influence.
1.15 What is the amount that must be disclosed as closing inventory of finished goods
in the statement of financial position of Lola Manufacturers on 31 December
200X?
a) R356 006
b) R313 285
c) R312 505
d) R317 862
2. Prepare the manufacturing cost statement of Lola Manufacturers for the year ending
31 December 200X.
3. Prepare the statement of profit or loss and other comprehensive income for the year
ending 31 December 200X.
4. Prepare the statement of financial position on 31 December 200X.
The suggested solution will be discussed during the next contact session. If you
experience difficulty in completing the assignment, review this chapter again.
347
CHAPTER 18
BUDGETS
18.1 OUTCOMES
18.2 INTRODUCTION
In order to ensure that an entity is effectively managed, planning, control and budgeting are
of cardinal importance. A budget may be defined as the forecasting and planning of the
financial activities and results of an entity for a future period. The needs of the entity will
determine the period for which budgets must be prepared, which may be weekly, monthly or
annually. Budgets are based on current information which is used to determine future trends.
The activities of the entity must be compared with the budgets on a regular basis to
determine whether the entity is operating within the framework of the budgets. Any variances
between the actual figures and budgeted figures must be investigated and corrected if
possible. There are a number of budgets; however, for the purposes of this course, only the
budgets as laid out in the following diagram below will be dealt with:
349
18.3 BUDGET DIAGRAM
Sales
budget
Production
budget
Manufacturing
cost budget
Cost of sales
budget
Administrative
budget
\_________________________ .
Cash
budget
350
18.4 TYPES OF BUDGETS
The sales budget deals with the projected number (volume) of units of products that will be
sold at a specific price. The volume of sales per period for the current year is used as a basis
for the projection of expected sales. Factors such as the economic situation, availability of
raw materials and competition must be taken into consideration when the budget is prepared.
The monthly sales budget for February 200X is shown below (the financial year of the
business is from 1 January 200X to 31 December 200X):
The production budget indicates the number and value of units that must still be
manufactured to comply with the expected sales. The opening balance of inventory of
finished goods, manufacturing costs and closing balance of inventory of finished goods are
used to prepare the production budget. The total number of products required for expected
sales are also taken into consideration. If, for example, there are no opening and closing
balances for inventory of finished goods, then the number of units required for the sales
budget will be the number of units that must still be manufactured. The calculation is shown
next:
351
PRODUCTION BUDGET (FINISHED GOODS): FEBRUARY 200X
Product A Product B Product C
When preparing the budget for manufacturing costs, a distinction must be made between the
three elements, i.e. direct materials, direct labour and overheads. The direct materials
budget indicates the quantity and cost of all raw materials that must be purchased for the
manufacturing process. The calculation is shown below:
The direct labour budget is the projected amount that will have to be paid for wages and
salaries for employees involved in the manufacturing process. The number of units that must
be manufactured, the standard number of hours required to manufacture a product and the
standard rate per hour form part of the calculation. The budget should also indicate the total
number of hours required and the total labour costs. The calculation is as follows:
352
DIRECT LABOUR BUDGET: FEBRUARY 200X
Product A Product B Total
The overheads budget (indirect manufacturing costs) includes all other manufacturing costs
for the budget period that do not form part of direct material and direct labour, but are still
part of the manufacturing process. The related expenses for the previous year are usually
used as a basis. Below are a few examples of factory expenses that are classified as
overheads:
Overheads: R R R R
Indirect material 2 000 4 000 2 000 8 000
Indirect labour 4 000 2 000 1 500 7 500
Rent expense: Manufacturing 3 000 5 000 2 000 10 000
Water and electricity: Manufacturing 2 000 10 000 7 000 19 000
Insurance: Manufacturing 1 500 1 500 1 500 4 500
Telephone: Manufacturing 500 800 300 1 600
Depreciation: Manufacturing 3 000 4 800 2 200 10 000
Security expense: Manufacturing 2 000 2 000 2 000 6 000
Employer contributions: Manufacturing 3 500 4 500 4 000 12 000
Leave pay and bonuses: Manufacturing 12 000 8 000 5 000 25 000
Total overheads 33 500 42 600 27 500 103 600
When preparing the cost of sales budget, it is important to differentiate between two different
types of entities, i.e. manufacturing entities and trading entities. The cost of sales for a
manufacturing entity will include the following:
Direct material,
Direct labour, and
Overheads,
353
Cost of finished goods transferred:
Cost of sales:
Opening inventory
Add: Net purchases
Freight on purchases
Less: Closing inventory
Equals: Cost of sales
The selling price is then determined by adding a profit margin to the cost of sales, for
example:
354
18.4.5 Administrative budget
This budget shows all other income and expenses that have not already been taken into
consideration in the manufacturing budgets and includes all income and expenses for the
offices and other non-manufacturing departments such as the administrative, personnel and
security departments. The administrative budget is shown below:
Expenses:
Wages 20 000
Salaries 30 000
Rent paid 50 000
Water and electricity 15 000
Insurance 5 000
Telephone 10 000
Depreciation 30 000
Security expense 5 000
Employer contributions 15 000
Leave pay and bonuses 20 000
Total expenses 200 000
When a cash budget is prepared, only the projected inflow and outflow of cash is taken into
consideration. This budget is of the utmost importance as it assists management in
determining whether the entity will be capable of paying its short-term obligations (creditors,
loans, operating expenses, salaries and wages and inventory purchases). The budget also
enables management to determine in advance whether a problem regarding cash flow may
arise and to act accordingly. The cash budget indicates the bank balance at the beginning of
the period, budgeted cash receipts, budgeted cash payments and the budgeted balance of
the bank account at the end of the period.
355
Don't
FOrGeT;
Depreciation, discounts, and credit losses are only book entries and do not
constitute cash flow!
The following table shows examples of the inflow and outflow of cash for an entity:
Take note: The budgets for the statement of profit or loss and other
comprehensive income, statement of financial position and any other required
budgets may be prepared from the information contained in the above budgets.
356
3. Direct materials required to produce one unit of each product:
Mo - Material A: 2 kg Mo - Material B: 3 kg
Jo - Material A: 4 kg Jo - Material B: 6 kg
4. Projected purchase price of direct materials for 200Y:
Material A: R10 per kg Material B: R6 per kg
5. Projected opening and closing inventory of direct materials for 200Y:
Material A - opening: 9 600 kg Material B - opening: 14 000 kg
Material A - closing: 20 800 kg Material B - closing: 31 200 kg
6. Hours required to produce one unit of each product and rate per hour:
Mo: 6 hours at R4,00 per hour
Jo: 9 hours at R5,00 per hour
7. Overheads are projected at a rate of R3,00 per direct labour hour.
8. No work-in-progress is expected to be on hand at the beginning or at the end of the
year.
9. Finished goods are transferred to the sales department at manufacturing cost plus
10%.
Mo
Jo
TOTAL
357
2. Production budget (units)
Mo Jo
Closing inventory
Add: Required for sales
Total required
Less: Opening inventory
Required production
Kg R Kg R
Material A Material B
Kg R Kg R
Closing balance
Add: Required for production
Total required
Less: Opening balance
Required purchases
358
5. Overheads budget
Mo Jo Mo Jo Total
Hours Hours R R R
R R R
Calculation 1 Mo Jo Total
R R R
Primary costs
Plus: Overheads
359
Calculation 2 Mo Jo
360
5. Creditors accounts are settled as follows:
90% in the month of purchase
10% in the following month
6. The following expenses are paid in cash each month:
Wages amounting to R12 000 per month.
Total overheads amounting to R16 000 (including depreciation of R4 000) per
month.
7. Taxation of R6 000 must be paid in August 200X.
8. Proceeds of R50 000 from the sale of a non-current asset will be received in
September 200X.
Prepare the cash budget for Robus Ltd for July, August and September 200X.
August 200X
September
200X
361
Payments to creditors R
July 200X
August 200X
September
200X
Cash budget
July August September
200X 200X 200X
R R R
362
CHAPTER 18
ASSIGNMENT 1
Rosewood Enterprise manufactures two products, “Chair” and “Pedestal”, from the raw
materials "wood” and “steel”. The following information with respect to the 200Y budget is
presented to you:
363
You are required to:
Prepare the following budgets for the year ending 31 December 200Y:
1. Sales budget (units and rand).
2. Production budget (units).
3. Direct materials budget (units and rand).
4. Direct labour budget (hours and rand).
5. Overheads budget (rand).
6. Cost of sales budget.
■ The suggested solution will be discussed during the next contact session. If you
experience difficulty in completing the assignment, review this chapter again.
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CHAPTER 18
ASSIGNMENT 2
The following information has been taken from the accounting records of Planet
Manufacturers:
3. Purchases:
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6. Depreciation is projected at R800 per month.
7. Actual wages for February 200X amounted to R15 000. Wages for March 200X are
projected at the same amount. However, wages will increase by 10% from 1 April
200X.
8. A portion of the office building is rented to a legal firm for R500 per month.
9. Interest at a rate of 6% p.a. on an investment of R12 000 is received monthly.
10. A debtor whose account of R250 was written off during the previous year, paid the
outstanding amount in full with a cheque, post-dated for 31 May 200X.
11. Planet Manufacturers plans to purchase a delivery vehicle with a cost price of R67 500.
The amount will be payable in three equal instalments starting on 31 March 200X.
12. Overheads and administrative expenses are paid in cash each month. Total overheads
(including depreciation) and administrative expenses are as follows:
Prepare the cash budget for Planet Manufacturers for March, April and May 200X.
The suggested solution will be discussed during the next contact session. If you
experience difficulty in completing the assignment review this chapter again.
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CHAPTER 18
ASSIGNMENTS
Wilde West Enterprises manufactures cowboy hats. The following information with respect to
the 200Y budget is presented to you:
1. Projected sales for 200Y: 600 000 units at R18 per unit.
2. Projected opening and closing inventory of finished goods for 200Y:
Opening: 6 000 units (R159 000)
Closing: 7 200 units
3. Direct materials required to produce one hat: 1 meter at R2.10 per meter.
4. Projected opening and closing inventory of direct materials for 200Y:
Opening: 12 000 m
Closing: 14 100 m
5. Hours required to produce one hat and direct labour rate per hour. 2 hours at R3,00 per
hour.
6. Projected overheads are R1 503 000 and are allocated on the basis of direct labour
hours.
7. No work-in-progress is expected to be on hand at the beginning or at the end of the
year.
8. Finished goods are transferred to the sales department at manufacturing cost plus
10%.
Prepare the following budgets for the year ending 31 December 200Y:
1. Sales budget (units and rand).
2. Production budget (units).
3. Direct materials budget (units and rand).
4. Direct labour budget (hours and rand) .
5. Overheads budget (rand).
6. Cost of sales budget.
The suggested solution will be discussed during the next contact session. If you
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CHAPTER 18
ASSIGNMENT 4
The following information has been taken from the statement of financial position of Spruce
Manufacturers on 30 June 200X:
Additional information:
Sales Purchases
Actual Budgeted Actual Budgeted
R R R R
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7. The long-term loan carries interest at a rate of 15% p.a. and is payable each year on
30 September. The loan is repayable in ten equal instalments payable on the same
date as the interest.
8. Administrative expenses are paid in cash each month and are as follows:
Administrative expenses
Actual Budgeted
R R
Prepare the cash budget for Spruce Manufacturers for July, August and September 200X.
The suggested solution will be discussed during the next contact session. If you
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CHAPTER 18
ASSIGNMENTS
The following information regarding Bailey Manufacturers for the year ending
31 December 200Y is presented to you:
370
You are required to:
Prepare the monthly cash budget for January, February and March 200Y.
suggested solution will be discussed during the next contact session. If you
experience difficulty in completing the assignment, review this chapter again.
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CHAPTER 18
ASSIGNMENTS
Rawco, a trading entity, made the following information available to you and requested your
help in compiling the cash budget:
Sales for May and June were equal amounts and the debtors balance in the statement
of financial position represents the outstanding amounts for May and June sales. The
same pattern of collection was followed as in point 1.
4. Purchases of merchandise from 1 June 200Y will be done in such a way that the
closing inventory of any month will equal 75% of the following month’s sales
requirements. Payment for purchases incurred are as follows:
50% (less 5% discount) is paid during the month of purchase and the rest the
following month. Creditors in the statement of financial position are only for
purchases of merchandise.
5. Additional cash expenses for sales and administration costs amount to R20 000 per
month plus 10% of sales. This expense is paid in the month following the incurrence
thereof.
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7. Overdue rent to the amount of R10 000 will be paid during July.
8. Non-current assets to the value of R50 000 will be purchased and paid for in July.
Rawco
Statement of financial position
On 30 June 200Y
200Y 200Y
ASSETS R R
Non-current assets
Property, plant and equipment: 230 000
Cost price 280 000
Accumulated depreciation (50 000)
Current assets 260 000
Inventory 99 000
Debtors 110 000
Bank 51 000
TOTAL ASSETS 490 000
Prepare the cash budget for Rawco for July and August 200Y. Round amounts off to the
nearest rand.
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CHAPTER 18
ASSIGNMENT?
Sass Enterprises is currently planning the entity’s busiest sales period. Management is
concerned about the cash flow of the entity since the peak period will result in a drastic
increase in advertising costs and sales commission. In order to be able to do cash planning
as well as arrange for an overdraft facility with the bank, you decided to prepare a cash
budget for the peak period.
• The opening balance of the current account on 1 November 200X will be R143 800. It
is the policy of the entity to maintain a minimum balance of R20 000 in the current
account.
• Budgeted sales:
— August 200X: R212 500
— September 200X: R350 000
— October 200X: R450 000
— November 200X: R580 000
— December 200X: R550 000
— January 200Y: R450 000
Debtors collection: According to the debtors clerk. 15% of a month’s sales represents
cash sales and the balance credit sales. Debtors are collected as follows: 20% during
the month in which the sales transaction took place, 70% during the month following
the sales transaction, 8% in the second month after the sales transaction and the
balance is seen as uncollectible.
Mark-up percentage: The entity uses a mark-up percentage of 331/3% on the cost of
inventory.
Budgeted inventory purchases: The entity has implemented the following purchasing
policy: 50% of a month’s sales requirements are purchased during the month prior to
the sales, while the balance is purchased at the beginning of the month of the sales. All
inventory is purchased on credit.
374
Creditors payments: According to the creditors clerk, 50% of creditors are paid in full
during the month in which the purchases were incurred, while the remainder is paid
during the following month. An average discount of 2!4% is granted by suppliers for
settling accounts within the month in which purchases took place.
Other costs:
Administration costs: R660 000 per annum (fixed)
Advertising costs: October R60000
November R65 000
December R70 000
Sales commission: 5% of sales
All the costs above are paid as they are incurred.
- Depreciation amounts to R87 000 per annum. This amount is included in the
R660 000 administration cost.
Equipment was purchased and paid for in October 200X for R12 000.
Bank loans and interest: Loans may be obtained and paid back in quantities of
R1 000. Loans are made at the beginning of the month while payments are made at
the end of the month. These loans are subject to an interest rate of 14% per annum.
Interest payments take place together with the capital repayments and are calculated
on the capital amount being paid back.
Prepare the cash budget for Sass Enterprises for October, November and December 200X.
Round amounts off to the nearest rand.
: The suggested solution will be discussed during the next contact session. If you
W experience difficulty in completing the assignment, review this chapter again.
375
CHAPTER 19
COST-VOLUME-PROFIT ANALYSIS
19.1 OUTCOMES
19.2 INTRODUCTION
• Fixed cost is the cost that remains fixed no matter how many units of a product are
manufactured, for example, rent expense.
• Variable cost is the cost that varies depending on the number of units of a product that
are manufactured, for example, raw material.
377
• Marginal income/Contribution margin is the income after all variable costs have
been taken into account. It is calculated by deducting the variable cost from sales and
indicates the contribution towards fixed cost and profits.
• Marginal income ratio is the marginal income divided by sales expressed as a
percentage.
• Break-even point in rand indicates the rand value of sales required to generate a
profit that will be sufficient to cover total costs, i.e. Sales = Total cost.
• Break-even point in units indicates the lowest sales volume required to cover total
(fixed and variable) cost.
• Cost structure indicates the ratio between the fixed and variable costs of an entity.
• Margin of safety in rand is the amount by which the sales value exceeds the break
even point and indicates the amount whereby sales may decline before a loss is
suffered (may also be calculated in units).
When calculating marginal income, it is important to note that fixed costs and variable costs
are shown separately.
Sales (units x R)
Less: Variable cost (units x R)
Equals: Marginal income (Contribution margin)
Less: Fixed costs
Equals: Profit/Loss for the year
The main objective of an entity is to make a profit. In order to achieve this, sales must be
sufficient to cover variable and fixed costs. Once the variable costs have been recovered, the
marginal income contributes towards fixed costs. Once the fixed costs have been recovered,
the entity can begin to make a profit. If the fixed costs exceed the contribution margin, the
entity makes a loss.
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19.5 BREAK-EVEN POINT
At the break-even point, marginal income (contribution margin) equals fixed cost and no
profit is generated. The graph below illustrates the fixed costs, variable costs, sales and
break-even point:
80000
70000
60000
50000
Rand 40000
30000
20000
10000
Units
379
Break-even point in rand = Fixed costs ■? Contribution margin ratio
or = Break-even quantity x Selling price per unit
The margin of safety is the amount by which sales exceed the break-even point and
indicates the amount/units whereby sales may decline before a loss is suffered by the entity.
CVP analysis enables the management of an entity to predict the effect of future decisions.
Selling prices and volumes, and variable and fixed costs do not remain constant for
indeterminate periods. By applying CVP analysis, management is able to determine the
effect that these changes in sales and costs will have on profits.
EXAMPLE 19.1
380
You are required to:
1. Calculate the number of units that must be sold to achieve a profit of R1 000.
2. Calculate the break-even point (rand and units) if the sales volume increases to 200
units.
3. Calculate the break-even point (rand and units) if the selling price increases by 10%.
4. Calculate the break-even point (rand and units) if the variable cost increases by 20%.
5. Calculate the break-even point (rand and units) if the fixed cost increases by R200.
R R/unit
Number of units = (Fixed costs + Planned profit) - Contribution margin per unit
= (R500 + R1 000) R5 = 300 units
R R/unit R R/unit
381
Break-even point (rand) = Fixed costs 4- Contribution margin ratio
= R300 4- 50% = R600
or = Break-even quantity x Selling price per unit
= 60 units x R10 = R600
R R/unit R R/unit
382
4. Increase in variable cost
CURRENT (R5.00) AFTER INCREASE (R6.00)
R R/unit R R/unit
R R/unit R R/unit
383
Break-even point (units) = Fixed costs 4- Contribution margin per unit
= R500 4- R5 = 100 units
or = Break-even value 4- Selling price per unit
= R1 000 4- R10= 100 units
R R/unit
384
PRACTICAL EXAMPLE - ANSWER SHEET
OR
= Break-even quantity x Selling price per unit
OR
= Break-even value Selling price per unit
3. Number of units to achieve planned = (Fixed costs + Planned profit) Contribution margin per unit
profit
R R/unit R R/unit
385
Break-even point (rand) = Fixed costs -r Contribution margin ratio
OR
= Break-even quantity x Selling price per unit
OR
= Break-even value 4- Selling price per unit
386
CHAPTER 19
ASSIGNMENT 1
One Golf Products have manufactured a new driver (golf club), Model RX2, to replace their
current driver. Model RX1, which sells at R1 200 per unit. The average number of units sold
(RX1) is 50 units per month, fixed costs amount to R30 000 per month and variable costs
amount to R450 per unit. The selling price of the new driver will be R1 500 per unit and the
entity estimates that they will sell 80 units per month. Fixed costs for the new driver will
increase by 60%, while variable costs per unit will increase by 20%.
The suggested solution will be discussed during the next contact session. If you
experience difficulty in completing the assignment, review this chapter again.
387
CHAPTER 19
ASSIGNMENT 2
Hatch Ltd manufactures and sells bird cages. The marginal statement of profit or loss and
other comprehensive income for the year ending 31 December 200X is shown below:
The suggested solution will be discussed during the next contact session. If you
W experience difficulty in completing the assignment, review this chapter again.
388
CHAPTER 19
ASSIGNMENTS
Slice Ltd manufactures and sells pocket knives. The following information is provided to you:
1. Prepare the marginal statement of profit or loss and other comprehensive income for
Slice Ltd (rand and units).
2. Calculate the current contribution margin ratio.
3. Calculate the current break-even point in rand and units.
4. How many units will have to be sold to earn a minimum profit of R50 000?
5. Determine the effect on the following:
• marginal income;
• contribution margin ratio;
• break-even point (rand and units); and
• margin of safety ratio, if:
- the sales volume decreases by 20%;
- the selling price (per unit) increases by 37,5%; and
- the variable cost per unit and the fixed cost increase by 10%.
flA»
The suggested solution will be discussed during the next contact session. If you
W experience difficulty in completing the assignment, review this chapter again.
389
CHAPTER 20
ETHICS
20.1 OUTCOMES
20.2 INTRODUCTION
Ethics is a system of moral principles applied in the commercial world. It can also be defined
as written and unwritten codes of moral values and principles that govern decisions and
actions within an organisation. The organisation’s culture sets the standards involved in
decision-making and behaviour-concerning problems that arise in a business environment -
what could be considered as ethically right and ethically wrong and how that distinction
becomes blurred in the case of ethical dilemmas. Ethics provide guidelines for acceptable
behaviour in a business strategy formulation and the day-to-day operations. It applies to all
aspects, such as medical, marketing, client, environmental, technical and legal ethics of
business conduct of individuals and organisations as a whole. Organisations have a moral
responsibility towards their owners or shareholders as well as towards the societies in which
they operate.
391
Ethics will be defined
around three
concepts:
Ethics includes:
• Morality
• Values
• Moral dilemmas
The term “ethics” originated from the Greek word ethikos (Latin: moralis). The common origin
of the term explains why it has become fashionable to use the two terms interchangeably.
The focus of ethics is the kind of person that someone (self) is (character) and how that
person interacts with others (manner) as well as the quality of interaction between the “self”
and “others”. The third essential concept is “good”. The three concepts of “good”, “self’ and
“others” form the definition of ethics.
392
Behaviour is classified as ethical when:
Selfish behaviour, when a person is interested only in what is good for the self without caring
for others, is the opposite of ethical behaviour. However, this does not imply that ethical
behaviour is to act selflessly.
People have different values due to a variety of factors, such as religion, culture, age,
gender, economic status, etc. These values determine ethical judgments. They also
determine what is important to a person and may influence the manner in which decisions
are made.
STANDARDS to
Freedom, Human dignity. Equality, Honesty
determine it action is
good tor selt and others
393
20.5 MORAL DILEMMAS
A moral dilemma occurs when an ethical evaluation of a situation produces two or more
conflicting judgments which result in a personal or social dilemma.
(-------------------------------------------------------- \
PERSONAL DILEMMA
X_________________________________ /
0
Judgement occurs within one person Judgement does not occur within one
person, but between people or in a group
The fact that people differ from one another in ethical judgments of situations or actions does
not mean that ethical dilemmas cannot be resolved.
Business ethics focuses on what is good and right in economic activities, in other words, the
economic activity always has an ethical dimension. The moral evaluation of business
activities occurs at three levels:
Business ethics, as an academic field, is the study of the ethical dimension of economic
activities on systematic, organisational and intra-organisational levels.
394
20.7 PERSONAL AND ORGANISATIONAL ETHICS
Business ethics are not just about personal moral decisions and actions in business, but also
about the ethics of economic systems and organisations. The biggest mistake is to focus
only on personal ethics and ignore the ethics of organisations. Unethical behaviour in
organisations leads to unethical individuals (“bad apples”). Individuals can influence
organisations, but organisations can also influence individuals since individuals are affected
by their social settings. Ethical behaviour should, therefore, be addressed not only at the
individual level, but also on the systematic and organisational levels.
AN UNETHICAL
ORGANISATION
(and vice versa)
• personal ethics;
• professional ethics; and
• organisational ethics.
In a perfect world, all three sets of ethical standards should coincide, but sometimes a moral
dilemma occurs and a choice between the three is made.
395
20.9 DECISION-MAKING
All professional people exercise professional discretion and make decisions daily that have
certain implications. Ethical principles that should be followed include integrity, objectivity,
competence, care and confidentiality. The ethical challenge that all professional people in
business have is to ensure that they avoid or restrict the negative impact that their decisions
have on others. Consequently, professionals need to make decisions in a manner that will
ensure that the interests of all affected parties are covered. The decision-making procedure
must ensure that business and professional decisions are made with ethical sensitivity and
should meet the following criteria:
• Is it legal?
• Does it meet company standards?
• Is it fair to all parties concerned?
• Can it be disclosed?
396
CHAPTER 21
PAYROLL ACCOUNTING
21.1 OUTCOMES
21.2 INTRODUCTION
The cost of labour represents a substantial portion of the expenses of an entity. In addition,
the accounting of payroll expenses is made complex by legislation, which requires employers
to maintain certain payroll records, collect and pay taxes and levies timeously and comply
with the minimum requirements regarding the amount of compensation and the number of
hours worked. In order to ensure compliance with legislation and accounting standards, a
proper payroll system that forms part of the overall accounting system is a necessity.
397
• Overtime is the wage that is earned for time worked over and above normal time.
Overtime worked during the week is normally paid at 11/2 times the normal rate while
overtime worked over weekends and on public holidays is paid double the normal rate.
• Employee deductions are amounts that are deducted from an employee’s salary.
Certain deductions, such as unemployment insurance (UIF), skills development levy
(SDL) and employees’ tax (PAYE) are required to be made in terms of legislation.
Other deductions, such as pension fund and medical aid fund, are made as a result of
the agreement between an employer and an employee.
• Employer contributions comprise compulsory contributions, such as the skills
development levy and unemployment insurance as well as voluntary contributions,
such as pension and medical aid fund contributions.
• Retirement funding income (RFI) is the total amount of earnings used in the
calculation of pension fund contributions. The earnings to be used in the calculation will
depend on the rules of the specific pension fund and include basic salary, but may also
include bonuses and overtime.
398
- public servants;
foreigners working on contract;
retired employees who receive a monthly State pension; or
employees who earn only a commission.
The amount in respect of salaries and wages that must be recorded as an expense in the
accounting records of an entity is the gross earnings. Employee deductions, in no way,
decrease an employer’s expense. The various components of gross earnings are paid to
different bodies, namely, SARS (employees’ tax. unemployment insurance and the skills
development levy), the pension fund, the medical aid fund and the employee.
Net earnings is the actual compensation paid to an employee after amounts for employees’
tax, unemployment insurance, pension fund contributions and medical aid fund contributions
have been deducted.
399
21.7 EMPLOYER CONTRIBUTIONS
• Skills Development Levy (SDL) - this is a levy imposed by the Skills Development
Levy Act on an employer and is used to develop and improve the skills of employees.
Employers who expect their total salaries to exceed R500 000 over the next twelve
months become liable to pay SDL and must then register for SDL. 1% of an
employee’s gross monthly salary, including overtime, leave pay, bonuses and
commissions, must be paid by an employer to SARS. This levy may not be deducted
from an employee’s salary. The levy is paid to SARS using the same form that is
submitted for PAYE and UIF, in other words, these three deductions are all paid to
SARS by the employer. 20% of the skills development levy is paid to the Skills
Development Fund, which is used for training, and 80% is paid to the Sector Education
and Training Authorities (SETAs). If an employer provides training for his/her
employees, a refund may be obtained from the SETAs.
• UIF contributions - an employer is also required to make a UIF contribution. An
amount equal to an employee’s UIF contribution is paid by the employer, thus making a
total contribution amounting to 2% of an employee’s monthly remuneration. The
employer’s contribution, however, is not deducted from the employee’s remuneration,
but is paid by the employer out of the funds of his/her business. This amount is also
capped at R148,72.
400
The following contributions are not compulsory for employers:
• Pension and medical aid contributions - employers often also make additional
contributions to employees’ pension and medical aid funds. The amounts of these
contributions depend on the agreement between the employer and employee.
EXAMPLE 21.1
An employee works a normal week of 40 hours at R50 per hour. For the week ending
28 February 200X, the employee worked a total of 45 hours, which included 3 hours overtime
on Thursday and 2 hours overtime on Saturday. The employee’s gross wage for the week
will be calculated as follows:
EXAMPLE 21.2
An employee earns an annual salary of R300 000. The employee also earned R12 000 in
overtime for the year and received a bonus of R20 400. The employee contributes R600 per
month to a medical aid fund and the employer contributes an equal amount on behalf of the
employee. The employee contributes 7,5% of his salary to a pension fund while the employer
contributes R2 for each rand. The pension fund rules state that only the basic salary must be
taken into account in calculating the pension fund contributions. Assume that the employer is
registered for SDL and the PAYE rate is 25%. The calculations are shown below:
401
Employee's net earnings:
Basic salary 25 000 (300 000/12)
Overtime 1 000 (12 000/12)
Bonus 1 700 (20 400/12)
Gross earnings 27 700
Less Deductions:
PAYE (6 250) (27 700 x 25%)
UIF (277) (27 700 x 1%)
Pension (1 875) (25 000 x 7.5%:
Medical aid (600)
18 698
Employer contributions:
UIF 277 (27 700 x 1%)
Pension 3 750 (1 875 x 2)
Medical aid 600
SDL 277 (27 700 x 1%)
4 904
ABS Enterprises contributes an amount equal to the employee’s contributions to the pension
fund and the medical aid fund and is registered for SDL.
402
PRACTICAL EXAMPLE - ANSWER SHEET
403
CHAPTER 21
ASSIGNMENT 1
Sophie works a normal week of 40 hours at R82.50 per hour. Her overtime rate during the
week is 11/2 times the normal rate and double over weekends and on public holidays. During
the week under review, she worked 4 hours overtime during the week and 4 hours overtime
on Saturday. She contributes R160 per week to a medical aid fund and 7,5% of her basic
wage to a pension fund. Her PAYE rate is 18%. Her employer contributes an equal
proportion to the pension fund. Assume that the employer is registered for SDL.
k Tne suggested solution will be discussed during the next contact session. If you
404
CHAPTER 21
ASSIGNMENT 2
Tlokwe Hospital submitted the following information relating to the earnings of two of its
employees for the week ending 31 March 200X:
Rina Desmond
Basic rate per hour R100,00 R 150,00
Normal hours worked 40 40
Overtime hours worked: 11/2 5 6
Overtime hours worked: Double 3 2
PAYE rate 21% 22%
Pension fund contribution (based on basic rate) 7,5% 7,5%
Medical aid contribution (per week) R120 R200
UIF 1% 1%
Additional information:
• The employer contributes an equal proportion to the pension fund and medical aid
fund.
• Assume that the employer is registered for SDL.
Calculate the following for the week ending 31 March 200X in respect of each employee as
well as in total:
1. Gross earnings.
2. Deductions.
3. Net earnings.
4. Employer’s contributions.
5. Cost to employer.
The suggested solution will be discussed during the next contact session. If you
405
CHAPTER 21
ASSIGNMENTS
Ms Jones is employed by the Northern University. She receives a salary of R20 000 per
month and contributes 7,5% of this to a pension fund and R1 200 per month to a medical aid
fund. Her PAYE rate is 21%. Other deductions include her membership of a union (R25 per
month) and an insurance premium (R156 per month). Her mortgage bond instalment of
R1 100 is also deducted from her salary. The university contributes 8% to the pension fund
and an equal proportion to the medical aid fund and is also registered for SDL.
The suggested solution will be discussed during the next contact session. If you
experience difficulty in completing the assignment, review this chapter again.
406
CHAPTER 21
ASSIGNMENT 4
John receives a basic monthly salary of R32 000 as well as a commission of 8% of any sales
that he generates. His total sales for April 200X amounted to R15 000. He also received a
bonus of R5 000 during the month. John’s retirement funding income includes his basic
salary and bonus. The following deductions are made against his salary:
PAYE 25%
UIF 1%
Pension fund 7,5%
Medical aid R1 500
John’s employer contributes equal portions to the pension and medical aid funds and is
registered for SDL.
The suggested solution will be discussed during the next contact session. If you
experience difficulty in completing the assignment, review this chapter again.
407
APPENDIX
PRACTICAL EXAMPLE 1
R R
200X
Jan 2 Bank B7 100 000
Capital E1 100 000
Capital contribution by owner
3 Furniture B1 30 000
Bank B7 30 000
Purchased furniture for cash
4 Equipment B2 10 000
Creditors control L5 10 000
Purchased pruning equipment on credit
8 Stationery U1 1 000
Bank B7 1 000
Purchased stationery for cash
11 Bank B7 3 000
Services rendered 11 3 000
Services rendered for cash
12 Debtors control B8 2 000
Services rendered 11 2 000
Services rendered on credit
18 Drawings E2 500
Bank B7 500
Owner withdrew cash for personal use
22 Water and electricity U2 2 000
Creditors control L5 2 000
Received water and electricity account
25 Bank B7 2 000
Debtors control B8 2 000
A Adam settled his account
26 Creditors control L5 10 000
Bank B7 10 000
Settled account of Sand Pruning Equipment
411
CHAPTER 3
PRACTICAL EXAMPLE 2
412
CHAPTER 4
PRACTICAL EXAMPLE 1
DR DRAWINGS E2 CR
200X
Jan 18 Bank J1 500
DR FURNITURE E2 CR
200X
Jan 3 Bank J1 30 000
DR EQUIPMENT B2 CR
200X
Jan 4 Creditors control J1 10 000
DR BANK B7 CR
200X I 200X
DR DEBTORS CONTROL B8 CR
200X 200X
Jan 12 Services rendered J1 2 000 Jan 25 Bank J1 2 000
413
DR CREDITORS CONTROL L5 CR
200X 200X
Jan 26 Bank J1 10 000 Jan 4 Equipment J1 10 000
12 000 12 000
Feb 1 Balance b/f 2 000
DR SERVICES RENDERED 11 CR
200X
Jan 11 Bank J1 3 000
12 Debtors control J1 2 000
5 000
DR STATIONERY U1 CR
200X
Jan 8 Bank J1 1 000
414
CHAPTER 4
PRACTICAL EXAMPLE 2
PERMEC TRADERS
GENERAL LEDGER
BANK
Purchases returns and allowances 2 000 Purchases 10 000
Sales 20 000 Freight on purchases 1 000
Sales returns and allowances 2 000
TRADING INVENTORY
Balance 15 000 Cost of sales 15 000
Cost of sales 14 000 Balance 14 000
29 000 29 000
Balance 14 000
CREDITORS CONTROL
Purchases 5 000
PURCHASES
Creditors control 5 000 Cost of sales (closing transfer) 15 000
Bank 10 000
15 000 15 000
FREIGHT ON PURCHASES
Bank 1 000 Cost of sales (closing transfer) 1 000
SALES
Bank 20 000
415
COST OF SALES (CL OSING TRANSFERS)
Trading inventory (opening) 15 000 Trading inventory (closing) 14 000
Purchases 15 000 Purchases returns and allowances 2 000
Freight on purchases 1 000 Balance 15 000
31 000 31 000
Balance 15 000
416
CHAPTER 4
PRACTICAL EXAMPLE 3
PERMEC TRADERS
GENERAL LEDGER
BANK
Inventory (purchases returns) 2 000 Inventory (purchases) 10 000
Sales 20 000 Freight on purchases 1 000
Sales returns and allowances 2 000
TRADING INVENTORY
Balance 15000 Bank (purchases returns) 2 000
Creditors (credit purchases) 5 000 Cost of sales (sales) 16 667
Bank (cash purchases) 10 000 Balance 14 000
Cost of sales (sales returns) 1 667
Cost of sales (difference) 1 000
32 667 32 667
Balance 14000
CREDITORS CONTROL
Inventory (purchases) 5 000
FREIGHT ON PURCHASES
Bank 1 000 Cost of sales (closing transfer) 1 000
SALES
Bank 20 000
COST OF SALES
Trading inventory (sales) 16 667 Trading inventory (sales returns) 1 667
Freight on purchases 1 000 Trading inventory (difference) 1 000
Balance 15 000
17 667 17 667
Balance 15 000
417
CHAPTER 4
PRACTICAL EXAMPLE 4
ON 31 JANUARY 200X
FOL DR CR
R R
418
CHAPTER 4
PRACTICAL EXAMPLE 5
I TIGER TRADERS
TRIAL BALANCE
ON 31 JANUARY 200X
FOL DR CR
R R
419
CHAPTER 5
PRACTICAL EXAMPLE
SOURCE DOCUMENTS
MANDU'S
GENERAL JOURNAL J1
FOL DR CR
200X R R
Jan 1 Bank 100 000
Capital 100 000
Mandu deposited R100 000 as his capital contribution
1 Computer equipment 15 000
Capital 15 000
Mandu contributed assets
1 Purchases 25 000
Bank 25 000
Purchased bicycles and paid by cheque
15 Drawings 30 000
Bank 30 000
Mandu withdrew R30 000 by cheque for private use
15 Drawings 2 500
Purchases 2 500
Mandu took a bicycle valued at R2 500 for own use
31 Cost of sales 22 500
Purchases 22 500
Transfer purchases to cost of sales
420
MANDU'S
GENERAL LEDGER
DR CAPITAL EQUITY CR
200X
Jan 1 Balance b/f 700 000
Bank J1 100 000
Computer
J1 15 000
equipment
815 000
DR DRAWINGS (EQUITY) CR
200X
Jan 15 Bank J1 30 000
Purchases J1 2 500
32 500
421
DR PURCHASES CR
200X 200X
Jan 1 Bank J1 25 000 Jan 15 Drawings J1 2 500
31 Cost of sales J1 22 500
25 000 25 000
DR COST OF SALES CR
200X
Jan 31 Purchases J1 22 500
| MANDU'S
ABBREVIATED TRIAL BALANCE
ON 31 JANUARY 200X
FOL DR CR
R R
Capital 815 000
Drawings 32 500
Land and buildings 500 000
Vehicles 200 000
Computer equipment 15 000
Bank 45 000
Cost of sales 22 500
815 000 815 000
422
| MANDU’S
Current liabilities
Creditors xxxxx
TOTAL EQUITY AND LIABILITIES xxxxx
423
CHAPTER 6
PRACTICAL EXAMPLE
200X R R
Dec 31 Depreciation 47 333
Accumulated depreciation: Computer equipment 40 417
Accumulated depreciation: Furniture 2 083
Accumulated depreciation: Vehicles 4 833
Depreciation for the year
424
DR VEHICLES (NON-CURRENT ASSET) CR
200X
Dec 1 Bank J1 290 000
425
DR DEPRECIATION (EXPENSE) CR
200X
Dec 31 Acc. dep:
Furniture J1 2 083
Acc. dep:
Vehicles J1 4 833
Acc. dep:
Computer
equipment J1 40 417
47 333
R R
Capital 1 400 000
Land and buildings 2 030 000
Furniture 125 000
Accumulated depreciation: Furniture 2 083
Vehicles 290 000
Accumulated depreciation: Vehicles 4 833
Computer equipment 225 000
Accumulated depreciation: Computer equipment 120 417
Investment 100 000
Bank 890 000
Inventory 120 000
Depreciation 47 333
Retained earnings (profit/loss) 520 000
2 937 333 2 937 333
426
CHAPTER 7
PRACTICAL EXAMPLE
LEXI ENTERPRISES
GENERAL JOURNAL J1
FOL DR CR
R R
200X
Jan 1 Cost of sales 385 000
Trading inventory 385 000
Transfer opening inventory to cost of sales
Stationery (expense) 12 500
Stationery on hand 12 500
Transfer opening inventory to stationery
Dec 3 Purchases (electric mctors) 315 000
Purchases (parts) 85 000
Bank 400 000
Purchased trading inventory
12 Refreshments (expense) 6 000
Bank 6 000
Purchased refreshments for festive season
15 Stationery 5 000
Bank 5 000
Purchased stationery
20 Bank (R420 000 4- 2 = R210 000 x 95%) 199 500
Debtors control (R420 000 -r 2) 210 000
Sales 409 500
Sale of inventory for cash and on credit. 5% cash
discount allowed on cash portion.
31 Credit losses (R335 0C0 x 5%) 16 750
Allowance: Credit losses 16 750
Create allowance for credit losses at 5% of outstanding
debtors
31 Refreshments 200
Donations 50
Petty cash 250
Expenses paid from petty cash
31 Petty cash 250
Bank 250
Petty cash imprest restored
427
LEX ENTERPRISES
GENERAL JOURNAL J2
FOL DR CR
R R
200X
Dec 31 Trading inventory 435 000
Stationery on hand 8 500
Cost of sales 435 000
Stationery (expense) 8 500
Transfer closing inventories to inventory accounts
31 Cost of sales 400 000
Purchases 400 000
Transfer purchases to cost of sales
LEXI ENTERPRISES
GENERAL LEDGER
DR DEBTORS CONTROL (CURRENT ASSET) CR
200X
Jan 1 Balance b/f 125 000
Dec 20 Sales J1 210 000
335 000
428
DR BANK (CURRENT ASSET) CR
2O3X 200X
Jan 1 Balance b/f 480 000 Jan 3 Purchases J1 400 000
Dec 31 Sales J1 199 500 Dec 12 Refreshments J1 6 000
15 Stationery J1 5 000
31 Petty cash J1 250
Balance c/f 268 250
679 500 679 500
203Y
Jan 1 Balance b/f 268 250
DR SALES (INCOME) CR
200X
Dec 20 Bank J1 199 500
Debtors control J1 210 000
409 500
DR PURCHASES (EXPENSE) CR
203X 200X
Bank
Dec 3 J1 400 000 Dec 31 Cost of sales J2 400 000
(315 000 + 85 000)
DR STATIONERY (EXPENSE) CR
20DX 200X
J1 12 500 Stationery on J2 8 500
Jan 1 Stationery on hand Dec 31
hand
Dec 15 Bank J1 5 000 Balance c/f 9 000
18 500 18 500
203Y
Jan 1 Balance b/f 9 000
429
DR REFRESHMENTS(EXPENSE) CR
200X
Dec 12 Bank J1 6 000
31 Petty cash J1 200
6 200
DR DONATIONS (EXPENSE) CR
200X
Dec 31 Petty cash J1 50
DR COST OF SALES CR
200X 200X
Jan 1 Trading inventory J1 385 000 Dec 31 Trading inventory J2 435 000
Dec 31 Purchases J2 400 000 Balance c/f 350 000
785 000 785 000
200Y
Jan 1 Balance b/f 350 000
430
| LEXI ENTERPRISES
R R
Debtors control 335 000
Allowance: Credit losses 16 750
Trading inventory 435 000
Stationery on hand 8 500
Bank 268 250
Petty cash 500
Sales 409 500
Cost of sales 350 000
Stationery 9 000
Refreshments 6 200
Donations 50
Credit losses 16 750
xxxxx xxxxx
The trial balance will not balance as only certain accounts are shown for explanation
purposes.
431
CHAPTER 8
PRACTICAL EXAMPLE
FITNESSWORLD
GENERAL JOURNAL J1
FOL DR CR
200X R R
Jul 1 Bank 100 000
Capital 100 000
Capital contribution by owner
Aug 15 Computer equipment 50 000
Creditors control (Office Line) 50 000
Computer equipment purchased on credit
Oct 1 Bank 150 000
Long-term loan: Antilles Bank 150 000
Long-term loan obtained from Antilles Bank
Nov 30 Creditors control (Office Line) 10 000
Bank 10 000
Payment of equipment purchased on credit:
1st instalment
Dec 1 Long-term loan: Antilles Bank 15 000
Bank 15 000
1 st instalment on long-term loan
1 Purchases 200 000
Creditors control (Genesis) 200 000
Purchases of inventory on credit
31 Creditors control (Office Line) 10 000
Bank 10 000
2nd instalment on computer equipment
432
FITNESSWORLD
GENERAL LEDGER
DR CAPITAL CR
200X
Jul 1 Bank J1 100 000
DR COMPUTER EQUIPMENT CR
200X
Aug 15 Creditors control J1 50 000
DR BANK CR
200X 200X
Jul 1 Capital JI 100 000 Nov 30 Creditors control J1 10 000
Oct 1 Long-term loan: Dec 1 Long-term loan:
Antilles Bank JI 150 000 Antilles Bank J1 15 000
31 Creditors control J1 10 000
Balance c/f 215 000
250 000 250 000
200Y
Jan 1 Balance b/f 215 000
DR CREDITORS CONTROL CR
200X 200X
Aug 15 Computer
Nov 30 Bank J1 10 000
equipment J1 50 000
Dec 31 Bank J1 10 000 Dec 1 Purchases J1 200 000
Balance c/f 230 000
250 000 250 000
200Y
Jan 1 Balance b/f 230 000
433
DR PURCHASES CR
200X
Dec 1 Creditors control J1 200 000
The balance of R135 000 is shown in the statement of financial position as a long-term
loan of R120 000 (under non-current liabilities) and a short-term portion of R15 000 (under
current liabilities) as R15 000 is payable within 12 months.
| FITNESSWORLD
R R
Capital 100 000
Computer equipment 50 000
Long-term loan: Antilles Bank 135 000
Bank 215 000
Creditors control 230 000
Purchases 200 000
465 000 465 000
434
I FITNESSWORLD
435
CHAPTER 9
PRACTICAL EXAMPLE
CUPPA
GENERAL JOURNAL J1
FOL DR CR
R R
200X
Jan 1 Cost of sales 50 000
Inventory 50 000
Transfer opening inventory to cost of sales
31 Purchases 15 000
Bank 15 000
Cash purchases of inventory
31 Bank 50 000
Sales 50 000
Cash sales of inventory
Mar 31 Purchases 10 000
Bank 10 000
Cash purchases of inventory
May 31 Purchases 12 000
Bank 12 000
Cash purchases of inventory
Jun 30 Bank 40 000
Sales 40 000
Cash sales of inventory
Sep 30 Bank 55 000
Sales 55 000
Cash sales of inventory
Nov 30 Purchases 5 000
Bank 5 000
Cash purchases of inventory
Dec 31 Freight on purchases 7 000
Bank 7 000
Paid freight on purchases
31 Salaries and wages 40 000
Telephone 5 000
Advertising cost 5 000
Rent paid 60 000
Interest received 10 000
Bank 100 000
Income and expenses for the year
436
CUPPA
GENERAL JOURNAL J1
FOL DR CR
200X R R
31 Bank 70 000
Sales 70 000
Cash sales of inventory
31 Inventory 40 000
Cost of sales 40 000
Transfer closing inventory to inventory account
31 Cost of sales 42 000
Purchases 42 000
Transfer purchases to cost of sales
31 Cost of sales 7 000
Freight on purchases 7 000
Transfer freight on purchases to cost of sales
CUPPA
GENERAL LEDGER
DR INVENTORY CR
200X 200X
Jan 1 Balance b/ff 50 000 Jan 1 Cost of sales J1 50 000
Dec 31 Cost of sales J1 40 000 Dec 31 Balance c/f 40 000
90 000 90 000
200Y
Jan 1 Balance b/f 40 000
437
DR BANK CR
200X 200X
Jan 31 Sales J1 50 000 Jan 31 Purchases J1 15 000
Jun 30 Sales J1 40 000 Mar 31 Purchases J1 10 000
Sep 30 Sales J1 55 000 May 31 Purchases J1 12 000
Dec 31 Interest received J1 10 000 Nov 30 Purchases J1 5 000
Sales J1 70 000 Dec 31 Freight costs J1 7 000
Advertising costs J1 5 000
Salaries and wages J1 40 000
Telephone J1 5 000
Rent paid J1 60 000
Balance c/f 66 000
225 000 225 000
200Y
Jan 1 Balance b/f 66 000
DR SALES CR
200X
Jan 31 Bank J1 50 000
Jun 30 Bank J1 40 000
Sep 30 Bank J1 55 000
Dec 31 Bank J1 70 000
215 000
DR PURCHASES CR
200X 200X
Jan 31 Bank J1 15 000 Dec 31 Cost of sales J1 42 000
Mar 31 Bank J1 10 000
May 31 Bank J1 12 000
Nov 30 Bank JI 5 000
42 000 42 000
DR FREIGHT ON PURCHASES CR
200X 200X
Dec 31 Bank JI 7 000 Dec 31 Cost of sales J1 7 000
438
DR TELEPHONE CR
200X
Dec 31 Bank J1 5 000
DR ADVERTISING COST CR
200X
Dec 31 Bank J1 5 000
DR RENT PAID CR
200X
Dec 31 Bank J1 60 000
DR INTEREST RECEIVED CR
200X
Dec Bank J1 10 000
DR COST OF SALES CR
200X 200X
Jan 1 Trading inventory J1 50 000 Dec 31 Trading inventory J1 40 000
Dec 31 Purchases J1 42 000 Balance c/f 59 000
Freight on
7 000
purchases
99 000 99 000
200Y
Jan 1 Balance b/f 59 000
| CUPPA
R R
Inventory 40 000
Bank 66 000
Sales 215 000
Cost of sales 59 000
Salaries and wages 40 000
Telephone 5 000
Advertising costs 5 000
Rent paid 60 000
Interest received 10 000
xxxxx xxxxx
439
| CUPPA
440
CHAPTER 10
PRACTICAL EXAMPLE 1
ARCHER DEALERS
GENERAL JOURNAL J1
FOL DR CR
200X R R
Jan 1 Cost of sales 14 000
Inventory 14 000
Transfer opening inventory to cost of sales
Dec 31 Inventory 12 000
Cost of sales 12 000
Closing inventory adjustment
31 Depreciation 2 500
Accumulated depreciation: Furniture
1 000
(10 000 x 10%)
Accumulated depreciation: Vehicles
1 500
(12 500 x 12%)
Depreciation written off
31 Rent received 300
Rent received in advance 300
Rent received for January 200Y
31 Salaries and wages 500
Salaries and wages accrued 500
Salaries and wages outstanding
31 Water and electricity paid in advance 50
Water and electricity 50
Water and electricity overpaid
31 Commission receivable 40
Commission received 40
Commission income outstanding
31 Allowance: Credit losses 100
Debtors control 100
Credit losses written off
31 Credit losses 40
Allowance: Credit losses 40
Allowance adjusted to 5% of debtors
441
CHAPTER 10
PRACTICAL EXAMPLE 2
I ARCHER DEALERS
Capital 41 800
Drawings 6 000
Land and buildings 12 000
Furniture at cost 10 000
Accumulated depreciation: Furniture 8 000
Vehicles at cost 12 500
Accumulated depreciation: Vehicles 6 500
Inventory 12 000
Cost of sales (14 000 - 12 000) 2 000
Purchases 34 000
Purchases returns 2 000
Sales 46 000
Sales returns 3 000
Freight on purchases 1 500
Rent income 3 600
Salaries and wages 6 000
Commission received 540
Water and electricity 450
Depreciation 2 500
Credit losses 40
Bank 6 400
Debtors control 2 800
Allowance: Credit losses 140
Creditors control 1 900
Rent received in advance 300
Salaries and wages accrued 500
Water and electricity paid in advance 50
Commission receivable 40
111 280 111 280
442
CHAPTER 10
PRACTICAL EXAMPLE 3
ARCHER DEALERS
GENERAL JOURNAL J1
FOL DR CR
200X R R
Dec 31 Cost of sales 35 500
Purchases 34 000
Freight on purchases 1 500
Closing transfer
31 Purchases returns 2 000
Cost of sales 2 000
Closing transfer
31 Trading account 35 500
Cost of sales 35 500
Closing transfer (2 000 + 35 500 - 2 000)
31 Sales 46 000
Trading account 46 000
Closing transfer
31 Trading account 3 000
Sales returns 3 000
Closing transfer
31 Trading account 7 500
Profit and loss account 7 500
Transfer gross profit to profit and loss
(46 000 - 35 500 - 3 000)
31 Profit and loss account 8 990
Salaries and wages 6 000
Water and electricity 450
Depreciation 2 500
Credit losses 40
Closing transfer
31 Rent income 3 600
Commission received 540
Profit and loss account 4 140
Closing transfer
31 Profit and loss account 2 650
Capital 2 650
Transfer net profit to capital
(7 500 + 4 140 - 8 990)
31 Capital 6 000
Drawings 6 000
Transfer drawings to capital account
443
CHAPTER 10
PRACTICAL EXAMPLE 4
I ARCHER DEALERS
444
CHAPTER 11
PRACTICAL EXAMPLE
445
ASSETS s EQUITY + LIABILITIES
DR CR DR CR DR CR
+ — — + — +
Acc. Dep:
13. Furniture
-1 500 Depreciation
Acc. Dep: -3 900
Vehicles
-2 400
Rent
Rent income received in
14.
-300 advance
+300
Accrued
Salaries and
salaries and
15. wages
wages
-500
+500
Prepaid
Water and
water and
16. electricity
electricity
+50
+50
Interest Interest
17. receivable income
+100 +100
Allowance:
Debtors
Credit
18. control
losses *
-100
+100
Allowance:
Credit Credit losses
19. losses
* -40
-40
150 950 = 145 210 + 5 740
* The allowance for credit losses as well as accumulated depreciation do not comply with the requirements for
the definition of a liability - they are merely valuation adjustments and are therefore shown together with the
assets.
446
CHAPTER 12
PRACTICAL EXAMPLE 1
I ZANZI DEALERS
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDING 31 DECEMBER 200X
200X
Notes R
Net sales: 277 860
Gross sales 282 360
Less: Sales returns and allowances (4 500)
Less: Cost of sales (89 600)
Opening inventory 31 200
Add: Purchases 95 000
Less: Purchases returns and allowances (1 300)
Available for sale 124 900
Less: Closing inventory (35 300)
Gross profit 188 260
Income 3 000
Interest on investment
447
| ZANZI DEALERS
| ZANZI DEALERS
Non-current liabilities
15% Loan: Prestige Bank 150 000
Current liabilities
Trade and other creditors 6 35 000
TOTAL EQUITY AND LIABILITIES 264 900
448
| ZANZI DEALERS
449
| ZANZI DEALERS
450
CHAPTER 12
PRACTICAL EXAMPLE 2
| STONE TRADERS
451
| STONE TRADERS
| STONE TRADERS
Current liabilities
Trade and other creditors 6 41 000
TOTAL EQUITY AND LIABILITIES 129 425
452
| STONE TRADERS
200Y
R R R
Equipment Vehicles Total
453
| STONE TRADERS
454
CHAPTER 13
PRACTICAL EXAMPLE
GENERAL LEDGER
200Y 200Y
Jan 2 Membership fees 23 600 Jan 2 Membership fees 2 800
accrued received in advance
Dec 31 Membership fees 9 600 Dec 31 Bank(200X) 17 600
received in
advance(200Z) 31 Bank(200Y) 192 000
200Y 200Y
Jan 1 Inventory (opening) 4 000 Dec 31 Sales 29 200
Dec 31 Purchases 13 200 31 Inventory (closing) 3 830
Income and
31 15 830
expenditure
33 030 33 030
455
I SAMBATI GOLF CLUB
456
I SAMBATI GOLF CLUB
FUNDSAND LIABILITIES
Funds
Accumulated fund 641 810
457
CHAPTER 14
PRACTICAL EXAMPLE
| DWERGMA TRADERS
458
| DWERGMA TRADERS
459
CHAPTER 15
PRACTICAL EXAMPLE
200Y 200X
1. Financial ratios
a) Current ratio 4,56:1 2,82:1
b) Acid test ratio 2,78:1 1,73:1
c) Gross profit percentage 25%
d) Net profit percentage 9,88%
e) Return on capital 20%
f) Inventory turnover 4 times p.a.
g) Debtors collection period 61 days
h) Creditors payment period 47 days
2. Report
a) Ratios (a), (b) and (c) are excellent.
b) Ratio (d) indicates that expenses are too high. Expenses must be scrutinised to
determine how they can be reduced.
c) Ratio (e) is sound, the return on capital is better than external ratios (currently
.%).
d) Ratios (f) and (g) are too high. Attention should be given to the collection period and
inventory should be better managed. Slow-moving inventory must be identified and
corrected. A clearance sale should be considered.
e) Ratio (h) is acceptable.
460
CHAPTER 16
PRACTICAL EXAMPLE 1
R R
461
CHAPTER 16
PRACTICAL EXAMPLE 2
| DN DEALERS
R
Feb
28 Total 72 800
Rent received 4 900
77 700
| DN DEALERS
R
Feb
28 Total 101 500
Debtors (R/D cheque) 1 120
Insurance (debit order) 4 200
Bank charges (30 + 140) 170
Bank interest 40
107 030
DN DEALERS
GENERAL LEDGER
DR BANK CR
200X 200X
Feb Balance b/f 1 610 Feb 28 Total payments CPJ1 107 030
Total receipts CRJ1 77 700
Balance c/f 27 720
107 030 107 030
Mar 1 Balance 27 720
462
| DN DEALERS
R R
463
CHAPTER 17
PRACTICAL EXAMPLE 1
| MINIMA MANUFACTURERS
464
I MINIMA MANUFACTURERS
465
CHAPTER 17
PRACTICAL EXAMPLE 2
| KAYA MANUFACTURERS
466
Calculation R
1. Depreciation
Factory machinery (42 000 x 20%) 8 400
Factory equipment ((20 000 - 2 000) x 10%) 1 800
10 200
2. Unrealised profit
Unrealised profit in opening inventory of finished goods (given) 900
Unrealised profit in closing inventory of finished goods (5 750 x 15/115) 750
467
I KAYA MANUFACTURERS
468
CHAPTER 18
PRACTICAL EXAMPLE 1
1. Sales budget
UNITS PRICE R
Mo (36 800 units) 2 73 600 10.00 736 000 3 110 400 6.00 662 400
Jo (6 800 units) 4 27 200 10.00 272 000 6 40 800 6,00 244 800
Material required 100 800 1 008 000 151 200 907 200
469
MATEIRIAL A MATE RIALB
Kg R Kg R
5. Overheads budget
MO JO MO JO TOTAL
Hours Hours R R R
Overheads (R3,00 per hour) 220 800 61 200 662 400 183 600 846 000
R R R
Opening inventory of finished goods 700 000 870 000 1 570 000
Add: Cost of goods transferred (calc. 1) 2 808 960 1 536 480 4 345 440
Available for sale 3 508 960 2 406 480 5 915 440
Less: Closing inventory of finished goods (calc. 2) (1 100 000) (888 000) (1 988 000)
Cost of sales 2 408 960 1 518 480 3 927 440
470
Calculation 1 MO JO TOTAL
R R R
Manufactured cost of finished goods 2 553 600 1 396 800 3 950 400
Factory profit (10%) 255 360 139 680 395 040
Cost of finished goods transferred 2 808 960 1 536 480 4 345 440
Calculation 2 MO JO
471
CHAPTER 18
PRACTICAL EXAMPLE 2
August 200X
September 200X
472
Payments to creditors R
July 200X
August 200X
September 200X
Cash budget
July 200X August 200X September 200X
R R R
473
CHAPTER 19
PRACTICAL EXAMPLE
3. Number of units to achieve planned = (Fixed costs + Planned profit) 4- Contribution margin per unit
profit = (R160 000 + R60 000) 4- R20
= 11 000 units
R R/unit R R/unit
Sales (16 000/18 000 units) 800 000 50,00 1 080 000 60,00
Variable cost (480 000) (30,00) (540 000) (30,00)
Marginal income (contribution margin) 320 000 20.00 540 000 30,00
Fixed cost (160 000) (10.00) (180 000) (10,00)
Profit for the year 160 000 10,00 360 000 20,00
Contribution margin ratio 40% 50%
474
Contribution margin ratio = (Sales - Variable costs) Sales x 100
= (R1 080 000 - 540 000) + R1 080 000 x 100
= 50%
475
CHAPTER 21
PRACTICAL EXAMPLE
Net earnings: R
Basic salary (Gross earnings) 15 000,00
Pension fund contribution (15 000 x 7,5%) (1 125,00)
Medical aid fund contribution (1 200,00)
Unemployment insurance fund contribution (15 000 x 1%, capped at R148,72) (148,72)
Employees’ tax (15 000 x 20%) (3 000,00)
9 526,28
Employer contributions:
Pension fund contribution 1 125,00
Medical aid fund contribution 1 200,00
Unemployment insurance fund contribution (15 000 x 1%, capped at R 148.72) 148,72
Skills development levy (15 000 x 1%) 150,00
2 623,72