ACCF111PVMEC2024

ACCF 111 EC
FINANCIAL ACCOUNTING
Faculty of Economic and Management Sciences
MOD compiled by: Mrs L van Staden, Mrs S Swart & Mrs L Cornelius
Copyright © 2019 edition. Review date 2024.
North-West University
No part of this MOD may be reproduced in any form or in any way without the written permission of the publishers.
It all starts here
• Ranked in the top 5% of universities globally by the QS-rankings
• Contributes the second largest number of graduates annually to the labour market
Dit begin alles hier

• As een van die top 5% universiteite wêreldwyd deur die QS-ranglys aangewys
• Lewer jaarliks die tweede meeste graduandi aan die arbeidsmark
Gotlhe go simolola fano

• Re beilwe mo gare ga diyunibesiti tse 5% tse di kwa godimo go ya ka peo ya maemo ya
QS
• Ngwaga le ngwaga go abelwa palo ya bobedi ka bogolo ya badiri mo maketeng ya badiri
Study unit 2
NORTH-WEST UNIVERSITY
Module information
Module code ACCF 111
Module name Financial accounting
credits
Module credits This implies that you must spend a total of hours to master
the outcomes of this module successfully. For total study
hours per study unit, refer to electronic study material.
NQF level
First semester
ACCF 111 Mathematics at school level 4 (50-59%)
Second semester
Prerequisites
ACCF 121 ACCF 111 (40%) or ACCC 121 (40%)
Second year
ACCF 211 ACCF 121 of ACCC 121 (40%)
Additional resources or
requirements to
complete module
successfully
Lecturer and contact information for every campus

Mafikeng Potchefstroom Vaal
Triangle
Name of
Mrs L Cornelius
lecturer(s)
Office telephone 018 – 299 1453
E-mail address Lynne.Cornelius@nwu.ac.za
Building and
E5-201
office number
Consulting hours See Work schedule
Additional
support
Study unit 2
Introduction
Purpose of the module:
A warm welcome to all new students at the North-West University and, especially, the
School for Accounting Sciences. It is our wish that your studies will be an enriching
experience resulting in a rewarding future.
Accounting will be of great value to you, irrespective of whether you want to follow a
career in accounting or you only need this subject to complete your degree in one of the
other B Comm disciplines.
Make no mistake; this course will demand a lot from you. You must be disciplined and
dedicated in your studies and honest to yourself when doing self-evaluation questions
and assignments. Remember that your studies are to improve yourself and to prepare
you for your career. With this goal in mind, the end result will by far outweigh the inputs
asked of you.
Teaching and learning in this module

Accounting is the recording of transactions and events in monetary terms. As you gain
more knowledge about the subject, you will realise that it involves far more than just that.
Accounting supplies information required by the management of the enterprise and a
number of users outside the enterprise that may need this information for economic
decisions.
Because this information is of such importance, it became necessary to lay down rules
and develop principles to govern the recording of the transactions and events in such a
manner that useful information is made available to the various users.
The knowledge of accounting will enable you to:

• Identify transactions with a monetary value;
• process these transactions according to generally accepted accounting practice
into useable information;
• communicate this information to the various users thereof; and
• analyse and interpret the financial information.
Apart from this, accounting also contributes towards basic education in

that:
• The logical nature and the orderliness required will influence your approach to all
other activities; and
• it will enable you to listen more intelligently to the daily economic news and
understand your environment and society better.
There are also opportunities for employment at various levels of expertise. Because
Accounting 1 gives you such comprehensive background knowledge of recording and
reporting requirements, you will, once you have completed Accounting 1 successfully,
already be equipped for employment that involves accounting procedures.
Study unit 2
Module plan:
A document containing the following will be distributed by the relevant lecturer at you first
contact session:
• The name and contact details of your lecturers and facilitators;
• time schedule for the contact sessions, tests and facilitation;
• module outcomes; and
• evaluation-related matters.
Study unit ACCC 112 ACCC 122 ACCF 111 ACCF 121
Introduction to accounting
1) The nature and function
of accounting X X
2) The Conceptual
Framework and other X X
basic concepts
3) The accounting equation X X
4) Accounting cycle:
• VAT
• Trasnactions, source X
documents and Do
(leave
journals X incomplete
incomplete
records
• Ledgers records)
• Incomplete records
• Trial balance
5) Completion of X X
accounting cycle: (leave
• Adjustments insurance)
• Closing transfers
• Insurance
• Financial statements
6) Accounting systems:
• Systems
X X
• Electronic data
processing
Study unit 2
Study unit ACCC 112 ACCC 122 ACCF 111 ACCF 121
Element of financial
statements
Current assets:
7.1) Trade and other debtors X X
7.2) Inventory X X X
7.3) Cash and cah X X X
equivalents
Non-current assets:
8.1) Property, plant and X X
equipment
8.2) Intangible assets X
Non-current liabilities:
X X
9) Non-current liabilities
Current liabilities:
10.1) Trade and other X X
creditors
10.2) Provisions X
Financial statements
11.1) Contingent assets and
X
liabilities
11.2) Events after balance
X
sheet date
11.3) Presentation of
financial statements X X X
(IAS 1)
12) The Framework and
X X
IAS 1 applications
Different entity forms
14) Companies X X
15) Group statements –
X X
introduction
Study unit 2
Study material
Throughout the study guide, reference is made to the following textbooks:
Compulsory study material:

• ACCOUNTING, AN INTRODUCTION. Myburg, Fouché, Cloete, Ngiba, Swart &
Manyaapelo. Newest edition. LexisNexis.
• AQS ACCOUNTING QUESTIONS FOR STUDENTS – Weyers & Cornelius.
Newest edition. LexisNexis.
Supplemental study material:

You will also need a financial non-programmable pocket calculator. The following
calculators are the ones most commonly used by the students at the school:
• SHARP EL 738
In your field of study, students are required to prepare and submit a limited number of
papers.
This has the effect that students think that the use of the library is not important.
The world of accounting is a dynamic one that means that changes and renewals are
implemented on a regular basis. It is therefore important that you should visit the library
on a regular basis and read about the relevant topics discussed in the following subject-
related periodicals:
• Accounting SA
• Journal of Accountancy (USA)
• Finansies en Tegniek
• Financial Mail
• Reading articles in the financial press, including the financial section of
newspapers, will also broaden your knowledge and understanding of the world of
commerce.
• There are numerous textbooks on financial accounting. Find them in the library and
read about the topics included in your syllabus. The more you read the better you
will understand.
How to study
Using the study guide
The study guide is developed in such a way that it guides the learning process. The
module is divided into STUDY UNITS which are divided into STUDY SECTIONS. Use
the study guide to guide you through the study material in the textbook (as well as that
which is presented in the study guide itself). Use the exposition of each section as criteria
for measuring your progress with the study material.
Ensure that you know all the outcomes you ought to achieve by studying it before you
start with each STUDY UNIT AND STUDY SECTION. This will give you an indication of
what the key elements of the section are.
During the contact session, regular reference will be made to the study guide. You will
also complete class examples in the study guide from time to time.
After you have completed a study unit, ensure that you have achieved the outcomes
presented to you. You should understand the work and be able to apply it. You can do
this by answering the self-evaluation questions and comparing your answers to the
proposed solutions. The assignments should only be completed when you are sure that
Study unit 2
you understand the work and that you are able to apply it. You are required to complete
all the assignments in legible handwriting.
It is very important that you make notes of any problems you might encounter and of any
part of the work that you do not clearly understand. Discuss these aspects with your
facilitator during the contact sessions.
In order to optimally utilise the study guide, you should focus on the following:
• Study material;
• icons used; and
• action verbs used.
Action verbs
Students often answer a question incorrectly because they do not understand the
meaning of certain key words used in the question’s instructions. The following key words
are used in the instructions of questions. Study them carefully and ensure that you
understand the meaning of each:
• Allocate
Divide among groups (e.g. cost to departments)
• Analyse
Investigate and discuss thoroughly
• Calculate/determine
Determine the value of
• Classify
Classify into a group or class
• Complete
Add information to data given
• Define
Give a complete definition of
• Describe
Give a thorough description of exact detail
• Develop/Create
Create a document/system from the information provided
• Differentiate/Distinguish
List the differences between
• Discuss
Give your meaning on
• Critically discuss
Give your own critical meaning of
• Value
Determine the value of
• Explain
Clarify or interpret in a fair manner
• Identify
Choose the correct description of an item
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• Journal
Write a transaction into journals
• List
List one by one or in order of importance
• Name
Only give the names of
• Postulate
Carry over information from the journals to the ledgers
• Prepare
Provide a statement or account in the correct format
• Journal/note/write up
Note the information on the source documents in the journals
Study techniques
Preparation and homework
The following tips would be valuable to you:
• Consult your schedule on the work you need to prepare for a specific period.
• Determine what the outcomes of the specific topic are by consulting the study
guide.
• Study the theory on the topic, taking into account the outcomes by referring to the
relevant paragraphs as included in the study guide.
• Study and work through examples in the textbook and study guide. These will guide
you on the method to be used to solve a particular problem.
• Note problems and questions you might experience during your preparation.
• Attend all contact sessions and ask questions.
• Complete the assignments in each study unit to familiarize yourself with which
aspects you need to look at again.
• You can follow the same steps in preparing for tests and examinations. Do,
however, not memorise a specific problem, but ensure that you understand the
methods and concepts and are able to apply them.
• Ensure that all work is your own. You will definitely reap the benefits of your
perseverance and honesty.
Examination technique
The following could assist you during tests and examinations:
• Know the topic.
• Briefly read through the paper and choose the question you think you know best.
Carefully read through the instructions and ensure that you understand what is
expected of you.
• Now read the question and make notes on the paper of all the important elements
and aspects relevant to the paper.
• According to the marks allocated to the question, you should not spend more than
the time allowed on each question. Return to an incomplete question after you
have answered all the other questions and still have time available.
Study unit 2
• Do not waste time to look for possible mistakes. Leave the question and return to
it if you still have time available.
Warning against plagiarism

Plagiarism is a serious offence and you should familiarise yourself with the
plagiarism policy of the NWU. http://library.nwu.ac.za/copyright-and-plagiarism
Please refer to the Policy on Academic Integrity which is found on the following website:
http://www.nwu.ac.za/sites/www.nwu.ac.za/files/files/i-governance-
management/policy/2P-2.4.3.2_Academic%20integrity_e.pdf\
Study unit 2
1 Introduction and background

1.1 Background
Study material
This study section is based on:
• Myburgh et al., Chapter 1
Time allocation
Refer to your work programme for the time you should allocate to this study section.
Individual exercises
Refer to your work programme for the assignments that have to be completed for this
study section. The programme shows those assignments that have to be prepared on a
specific day. Remember that these assignments may be taken in for evaluation at any
time.
Learning outcomes
After completing this study section, you should be able to:
• Demonstrate an understanding of the general business and accounting

environment;
• Identify the need for accounting; and
• Describe what information is communicated in the financial statements.
Introductory remarks
Answer each of the following questions:
1. An entrepreneur is granted the opportunity to buy a 50% share in a business (filling

station).
Which financial information does the entrepreneur need to obtain when deciding whether
or not to purchase the share?
2. A bank manager receives a loan application from a businessman who operates a

paint store. The businessman wants to utilise the funds to open another branch of
his store.
Which financial information does the bank manager need to obtain when deciding
whether or not to grant the loan?
3. Where (from what source) will the entrepreneur and bank manager obtain the
necessary information?
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Individual exercise
What is meant with the following concepts:
• Accounting and the sub-domains of financial and management accounting.

• Statement of financial position.
• Statement of profit or loss and other comprehensive income.
• IFRS.
1.2 Conceptual framework
Study material
• Conceptual Framework for the preparation of financial statements as published in
IFRS
Time allocation
time.
Learning outcomes
• Give the objectives if financial statements;

• Name and discuss the users of financial statements and their needs;
• Name and discuss the qualitative characteristics, enhancing qualitative
characteristics and underlying assumption of financial statements; and
• Discuss the elements of financial statements, including the recognition and
measurement thereof.
1.2.1 Objective of financial statements

To provide financial information about the reporting entity that is useful to existing and
potential investors, lenders and other creditors in making decisions about providing
resources to the entity, regarding the:
• Financial position
• Financial performance
Study unit 2
1.2.2 Users of financial statements

Introductory statements
• Investors
• Employees and unions
• Creditors and financiers
• Customers
• Government
• Public
1.2.3 Qualitative characteristics

Study material
• Myburgh et al., Chapter 2.6 for qualitative characteristics
• Myburgh et al., Chapter 2.7 for enhancing qualitative characteristics
1.2.4 Underlying assumption

GOING CONCERN – the financial statements are prepared on the assumption that an
entity is a going concern and will continue in operation for the foreseeable future (at least
1 year in the future).
Study material
• Myburgh et al., Chapter 2.5
1.2.5 Elements of financial statements

Individual exercise
What do the following concepts mean?
▪ Recognition
▪ Measurement
▪ Asset
▪ Liability
▪ Income
▪ Expense
▪ Equity
Study unit 2
Individual exercise
Complete the table:
Item Element in financial Debit or credit
statements
(Asset, Liability, Equity,
Income or Expense)
Sales Income Credit
Land and buildings
Creditors
Bank
Owner’s interest
Accumulated depreciation
Drawings
Cost of sales
Allowance for credit losses
Accrued expenses
Individual exercise
Charles Current, a second-year engineering student, operates a small electrical repair
business from home. He is doing very well and is able to pay for his university fees from
the cash generated from his business. His first financial year has just ended on
31 May 20x6 and he attempted to prepare a statement of profit or loss and other
comprehensive income and a statement of financial position which he wishes to discuss
with you. You meet him for a drink at the Boz and he gives you the financial statements
that he has prepared.
The conversation goes something like this:
1. You: I see that you have deducted your withdrawals of R8 500 from the business
as an expense on your statement of profit or loss and other comprehensive income.
Charles: Yes, as I work on my own, that is my salary. If I had employed an assitant,
his salary would have been shown as an expense. In addition, I am concerned that
my net profit might be high enough to attract income tax and therefore I want to
show the drawings as an expense on the statement of profit or loss and other
comprehensive income.
2. You: There is a revenue item of R12 000 on the statement of profit or loss and
other comprehensive income described as ‘cash received for contract work’. What
is it all about?
Charles: I do work for the Rugby Union, maintaining the lights at the stadium.
3. You: Last time I was at your house, you showed me a computer that you bought
for your business. I don’t see the computer on the statement of financial position.
Charles: I bought the computer on one of those instalment sale or hire purchase
agreements. On reading the small print, I saw that ownership of the computer will
not pass to me until the final instalment is paid, which will be only next year some
time.
Study unit 2
4. You: I see a relatively large item of R3 000 on the statement of profit or loss and
other comprehensive income for electrical cables and globes. It looks like you
rewired most of the rugby stadium!
Charles: Oh no, not at all – I bought these cables and globes for R3 500 in August 20x4
and I still have approximately R2 000 worth at home.
REQUIRED:
Give your response to Charles’s answers to your queries in the above dialogue. The dialogue
has been numbered to assist you in your answer. For each query, you must indicate the
following:
a) Whether you feel that Charles’s response is valid or not;
b) Your reason, supported by the relevant concept or definition; and
c) The correct treatment for each item.
Study unit 11
2 The accounting cycle and accounting

equation
Study material
This study unit is based on:
• Myburgh et al., Chapters 3 to 7
Time allocation
Refer to your work programme for the time you should allocate to this study unit.
study unit. The programme shows those assignments that have to be prepared on a
time.
Learning outcomes
After completing this study unit, you should be able to:
• Apply the accounting equation and double entry system; and
• Understand and describe the accounting cycle.
Study unit 11
2.1 Accounting equation

Study material

Study unit 11
Class exercise
ACCOUNTING EQUATION
Mrs Blue started a small paint business, New Blue Traders, on 1 July 20x0. During the
month of July, the following transactions took place:
1 Mrs Blue deposited R30 000 in a bank account in the name of the business. She
obtained a long-term loan of R15 000 from her rich aunt. Interest would be payable
monthly at the rate of 12% per annum. Repayment terms were not set.
3 Signed a three-year lease for office premises with an annual rental of R12 000.
Paid a deposit of R1 000 and three months’ rent in advance to secure the premises.
4 Employed an assistant, Helpful, at an agreed salary of R1 500 per month to be
paid on the 25th of each month.
5 Purchased paint for cash at R2 750 from Paint Wholesalers Ltd.
6 Bought office supplies (stationery etc) for R750 on account from Pen and Pencil.
7 Bought paint on credit from Paint Galore Ltd for R6 200.
8 Purchased office furniture at an auction for R3 300 cash.
10 Sold paint for R800 cash to Mr Fix-it (cost: New Blue R600).
15 Purchased a second-hand delivery vehicle from Trusty Motors Ltd for R7 500 and
paid R1 650 as deposit. The remainder of the money is to be paid in 3 equal
instalments over the next 3 months.
18 Made sales on credit to Hardy Ltd for R3 740 for paint that cost R2 900.
20 Bank cash sales for the day of R2 800. Cost to New Blue Ltd R2 200. Paid motor
vehicle expenses of R300 to a university friend, Jake, who gave the car a service.
25 Paid Helpful his salary for the month.
29 Received the money due from Hardy Ltd.
30 Paid R4 000 to Paint Galore Ltd in part settlement of the amount owing.
31 Paid the interest due to Mrs Blue’s aunt.
31 Office supplies on hand: R500.
REQUIRED:
Record the above transactions under the accounting equation. Indicate what account(s) should
be debited and credited. Also indicate whether equity, assets and liabilities increase (+) or
decrease (-) with each entry.
Study unit 11
2.2 Accounting cycle
Study material
• Myburgh et al., Chapters 4 to 7
Schematic representation of accounting cycle
Transaction
Source document
Analysis and journal entry
Posting to ledger
Balancing of accounts
Pre-adjustment trial balance
Adjustments
Post-adjustment trial balance
Closing off nominal accounts
Financial statements
Study unit 11
2.3 Correction of errors and sundry adjustments

Study material
• Myburgh et al., Chapters 5 and 6.
Time allocation
time.
Learning outcomes
• Find and correct errors by making use of amongst others, general journal entries;
• Define what a adjustment journal is;
• Explain why it is necessary to make adjustment;
• Calculate the amounts of the adjustments to be made, identify the accounts to be
adjusted, record the adjustments in the general journal and post to the general
ledger; and
• Make adjustments directly on the financial statements.
2.3.1 Correction of errors
Study material
• Myburgh et al., Chapter 5.6.3 to 5.6.5
Study the following

All errors found must be corrected. The action to be taken will depend on the type of
error and on the stage of the accounting process reached. Where possible, errors must
be corrected with entries in the general journal giving a detailed description for the reason
the entry was made.
To simply correct amounts that were incorrectly posted is a very dangerous practice that
may lead to fraudulent actions.
1. Errors that do not warrant an entry in the general journal:
• Addition errors of the accounts in the general ledger are normally corrected
in the account and the new balance calculated.
• If a column of the Trial Balance was added incorrectly, no journal entry is
required. Simply change the total of the column.
Study unit 11
• Account balances incorrectly transferred to the Trial Balance. Change the

amount or enter it in the correct column of the Trial Balance.
2. Errors that do warrant an entry in the general journal:
• A column in a book of original entry of a previous month was added
incorrectly.
Example
The total of the sales column of the debtors’ journal for March 20x3 is R 100 less than it
should be.
Debtors’ control account 100

Sales 100
Sales column of the March 20x3 Debtors’ Journal incorrectly
added
• Incorrect amount posted from a journal to the ledger account
Example
The total of the salaries column in the Cash Payments Journal for March 20x3, R 15 450,
was debited to the salaries account in the general ledger as R 15 050.
Salaries 400
Bank 400
Total of the salaries column in the March 20x3 Cash Payments
Journal incorrectly posted to the ledger account.
• Total of a column in a journal posted to the wrong side of the account in the
general ledger.
Example
The total of the sales column in the March 2023 Cash Receipts Journal, R550, was
posted to the debit side of the Sales account in the general ledger.
It is important to note that the transaction was correctly entered in the Cash Receipts
Journal. Only the posting of the total of the column to the general ledger account Sales
is incorrect. The other leg of this transaction, the debit to Bank account, is therefore
correct and needs no correction.
This means that a one-legged journal entry must be prepared. Sales must be credited
with double the amount incorrectly debited, that is R 1 100. (R550 to cancel the incorrect
debit and R550 to record the credit to the account.)
Study unit 11
----- 0
Sales 1 100
Total of the sales column in the March 20x3 Cash Receipts Journal
incorrectly posted to the debit side of the ledger account.
• The total of a column or of a transaction in the journal was posted to the wrong
ledger account.
Example
From the creditors’ journal, an amount of R3 450 being for repairs and maintenance to
buildings was debited to the account repairs and maintenance – vehicles in the general
ledger.
Repairs and maintenance – buildings 3 450

Repairs and maintenance – vehicles 3 450
Correction of incorrect posting in the general ledger.
These are only a few examples of possible errors and how they may be corrected.
2.3.2 Adjustments
Study material
• Myburgh et al., Chapter 6.1 and 6.2
Study the following

Adjustments have already been explained as sections of the following topics:
• Debtors
• Creditors
• Inventory
The aim of adjustments at year-end is to ensure that only income earned in a specific
period is recorded in that period for disclosure in the financial statements. The same
applies to expenses. Only expenses for a specific period may be disclosed in the
financial statements of that period.
a) Adjustments at the financial year-end
Study material
• Myburgh et al., Chapter 6.3 to 6.6
Study the following

With the adjustment of an income or an expense account, either a current asset or a
current liability is created.
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1. Income accounts
• Accrued income (income earned but not yet recorded): The balance of the
income account increases and is therefore credited, and a current asset
account is debited with a corresponding amount.
• Income received in advance (income not yet earned, but payment already
received): The balance of the income account decreases and is therefore
debited, and a current liability account is credited with a corresponding
amount.
2. Expense accounts
• Accrued expenses (expenses utilised and not yet recorded): The balance of
the expense account increases and is therefore debited and a current liability
account is credited with a corresponding amount.
• Prepaid expenses (payment made, but expense not utilised): If the expense
account was debited when the payment was made, the account will decrease
with the prepaid portion and is thus credited and the current asset account
will be debited with the same amount. If a current asset was debited when
the payment was made, the adjustments will cause that the current asset is
credited with the portion of the expense for the year and the expense account
will be debited with this amount.
Adjustments of a temporary nature are written back at the beginning of the new financial
year en recognition in the financial statements continues as normal.
There are a further three items that must be recorded in the general journal together with
the year-end adjustments, namely:
• the calculation and recording of depreciation in the general journal;
• the provision for doubtful debts on debtors’ balances outstanding at the end of
the financial year; and
• inventory surpluses and shortages.
b) Adjustments using six-column worksheets

Study material
• Myburgh et al., Chapter 7.1.5
Study the following

The six-column worksheet
The worksheet is only an aid used for the preparation of the adjusting and closing journal
entries. It can also be used for correcting trial balance errors.
Refer to the example below.
Columns 1 and 2 represent the debit and credit columns of the pre-adjustment trial
balance.
Columns 3 and 4 represent the debit and credit columns of the general journal for the
recording of the adjustments.
Columns 5 and 6 represent the debit and the credit columns of the post-adjustment trial
balance.
Study unit 11
Example
Do the following question. You must first answer the question and only then compare
your answer to the suggested solution.
The owner of Blits Distributors approached you with a request to assist him with the
preparation of his financial statements for the year ended 31 March 2001.
The following information is available:
Pre-adjustment Trial Balance on 31 March 20x3 Dr Cr

Capital account 30 000
Cash in bank 15 210
Drawings 5 400
Purchases 45 600
Debtors control 12 450
Allowance for credit losses 650
Inventories 1/4/20x2 5 780
Sales returns 670
Transport on purchases 2 390
Furniture at cost price 4 400
Accumulated depreciation – furniture 600
Vehicles at cost price 14 500
Accumulated depreciation – vehicles 4 250
Purchase returns 200
Rent paid 4 680
Creditors control 3 900
Commission paid 1 590
10 % long-term loan 15 000
Transport on sales 1 800
Sales . 59 870
114 470 114 470
Additional information
• It is the policy of the enterprise to maintain a constant gross profit percentage of
25%.
• No physical inventories count was done on 31/3/20x3.
• Inventories with a sales value of R 1 600 was stolen during the year. No entry was
made in the records in this regard.
• The owner took goods with a selling price of R600 for private use. No entry was
made in the records.
Study unit 11
• A debtor was declared insolvent, and his estate paid 30 cents in the rand. The final
settlement was received on 31/3/20x3 and amounts to R150. This transaction was
not entered into the records.
• The allowance for credit losses must be adjusted to 8% of the debtors outstanding
at year-end.
• In accordance with the rental agreement, the monthly rent was increased on 1 July
2000 with R15 to R315. On 1 March 20x3, the rent was paid in advance for four
months.
• Commission paid is a fixed amount per month. This amount was increased on
1/11/20x2 from R150 to R180. Commission for February and March was not paid
on 31 March 20x3.
• On 1 December 20x2, a vehicle originally purchased on credit for R3 000 on
1 January 20x0 was sold on credit for R1 720 to one of the employees. This
transaction was not recorded on 31 March 20x3.
• Depreciation must be calculated as follows:
Furniture – 10% per year according to the straight-line method.
Vehicles – 20% per year according to the reducing balance method.
• The loan was entered into on 1 January 20x3. Interest is payable on 30 June and
31 December of each year. The loan is repayable in five equal yearly instalments,
the first of which is payable on 30 June 20x3.
REQUIRED:
1. Record the necessary adjustments and corrections in a six-column worksheet.
Complete the worksheet.
2. Journalise corrections and adjustments (also cash transactions).
Solution
Calculations
1 Rent paid in advance 315 x 3 945
2 Commission due on 31/3/20x3 180 x 2 360
3 Vehicle sold 01/12/20x2:
Cost price 01/01/20x0 3 000
Depreciation 01/03/20x0 (3000 x 20% x 3/12) 150 (150)
Book value 31/3/20x0 2 850
Depreciation 31/3/20x1 (20% x 2850) 570 (570)
Book value 31/03/20x1 2 280
Depreciation 31/03/20x2 (20% x 2 280) 456 (456)
Book value 31/03/20x2 1 176 1 824
Depreciation 01/12/20x2 (20% x 1 824 x 8/12) 243 (243)
Book value 01/12/20x2 1 419 1 581
Return on credit sales (1 720)
Profit on sale (139)
Study unit 11
Depreciation – remaining vehicles: Acc

Cost Dep
Balance 31/03/20x2 14 500 4 250
Less vehicle sold 01/12/20x2 ( 3 000) (1 176)
11 500 3 074
Adjusted book value 31/03/20x2 8 426
Depreciation for the year (20% x 8 426) 1 685
Total depreciation on vehicles 243+1 685 1 928
4 Interest on loan
Amount outstanding 31/3/20x3 is R15 000 375
(10% x 15 000 x 3/12)
5 Inventories 31/3/20x2
Cost of inventories available for sale 51 920
Purchases (45 600 - 200 - 1 200 - 450) 43 750
Transport purchases 2 390
Cost of sales 44 400
(75% x Net sales) = {75% x 59 870 - 670)
Study unit 11
Worksheet
No Pre-adjustment Post-adjustment
Trial balance Adjustments Trial balance

Dr Cr Dr Cr Dr Cr
Capital account 30 000 30 000
Cash in bank 15 210 150 15 360
Drawings 5 400 450 5 850
Purchases 5 45 600 1 200 0
450
43 950
Debtors control 12 450 150 11 950
350
Allowance for credit
650 306 956
losses
Inventories 1/4/20x2 5 5 780 7 520 5 780 7 520
Sales returns 670 670
Transport on
2 390 2 390
purchases
Furniture at cost price 4 400 4 400
Accumulated
depreciation – 3 600 440 1 040
furniture
Vehicles at cost price 3 14 500 3 000 11 500
Accumulated
depreciation – 3 4 250 1 419 1 928 4 759
vehicles
Purchase returns 5 200 200
Rent paid 1 4 680 945 3 735
Creditors control 3 900 3 900
Commission paid 2 1 590 360 1 950
10% Long-term loan 15 000 15 000
Transport on sales 1 800 1 800
Sales 59 870 59 870
114 470 114 470
Inventory loss 5 1 200 1 200

Credit losses 350
306 656
Sundry debtors (rent) 1 945
Sundry debtors
3 1 720 2 665
(vehicle)
Sundry creditors
2 360
(commission)
Sundry creditors
4 375 735
(interest)
Profit sale of vehicle 3 139 139
Study unit 11
No Pre-adjustment Post-adjustment
Trial balance Adjustments Trial balance

Dr Cr Dr Cr Dr Cr
Depreciation –
3 1 928 1 928
vehicles
Depreciation –
3 440 440
furniture
Interest paid 4 375 375
Cost of sales 5 51 920 7 520 44 400 .
69 283 69 283 116 399 116 399
Journal entries
Loss of inventory 1 200
Purchases 1 200
Drawings 450
Purchases 450
Bank 150
Debtors control 150
Credit losses 350

Debtors control 350
Credit losses 306

Allowance for credit losses 306
(12 450 - 150 - 350 = 11 950 x 8 % = 956 - 650)
Sundry debtors (rent paid in advance) 945

Rent paid 945
Commission paid 360

Sundry creditors (accrued commission) 360
Sundry debtors 1 720

Asset disposal 1 720

Vehicles 3 000
Accumulated depreciation vehicles 1 419

Asset disposal 139

Profit or loss with sale of asset 139
Study unit 11
Depreciation vehicles 243

Accumulated depreciation – vehicles 243
Depreciation vehicles 1 685

Accumulated depreciation – vehicles 1 685
Interest paid 375

Sundry creditors (interest due) 375
Depreciation Furniture 440

Accumulated depreciation – furniture 440
Test your knowledge/insight

Do all the self evaluation questions at the end op the chapter.
Solutions
Read through the outcomes of the study unit. Have you mastered them? If not, revise
this study unit.
Individual excercise
QUESTION 2 (18 MARKS)
Becks Books’ gross profit margin is calculated as 30% on the selling price before taking
any settlement discount into account. A new bookkeeper was appointed during the year
and she provided the following trial balance:
Trial balance for the year ended 31 December 2021 Dr Cr

Sales 250 000
Purchases 170 000
Electricity 1000
Rental expense 9 000
Damaged books (liability) 1 000
Inventory (1 January 2021) 50 000
Furniture and equipment 70 000
Accumulated depreciation 20 000
Prepaid rent (31 December 2020) 3 000
Creditors control 2 000
Debtors control 50 000
Bank 500
Capital 75 000
Discount allowed 2 000
Depreciation 7 500
Investment 3 000
616 000 98 000
Study unit 11
The new bookkeeper (who is a good friend of yours) is aware of the fact that you have
accounting as a subject at university and she contacted you to help her with the trial balance.
She was dishonest on the CV she submitted when she applied for the job. It has, in fact, been
a very long time since she last did accounting. You decided to help her, out of the goodness
of your heart.
She supplied you with the following additional information pertaining to the financial year:
• According to the summary of the cash register, cash sales for the year amounted to
R150 000. Credit sales amounted to R100 000. Only a few clients make use of the
settlement discount option offered by the shop. R2 000 worth of settlement discount was
awarded during the year. The settlement discount is only awarded after the clients pays
on time. The bookkeeper incorrectly posted it to a discount allowed expense account.
• She cannot remember how the periodic inventory system works and therefore no entries
were made. The post-adjustment trial balance must show a cost of sales account.
• At the date that the trial balance was compiled, she had not yet received the electricity
bill for December 2021. But by the time you enquired about it, she had however since
received the bill and the amount outstanding amounted to R250. She has not yet paid it.
• The rental expense account only contains rent for 9 months. Her explanation for this was
that the rent for the other three months was already prepaid during the previous year.
The rent amounts to R1 000 per month.
• “Damaged books” is inventory that was purchased but with the delivery thereof to the
shop, the inventory purchased was damaged beyond repair. Becks Books carries the
risk of this damage and cannot claim it back from the supplier. The bookkeeper debited
the purchases account on receipt of the books and credited a liability (damaged books).
The payment still needs to be recorded.
• She has made no changes to the inventory account and she did not do a stock take on
31 December 2021.
• You found that depreciation is correctly calculated and correctly recorded.
• The total in the creditors journal was incorrectly calculated as R2 000 instead of R20 000.
At the end of last year there were no amounts due.
• Included in debtors is an amount of R10 000 that is irrecoverable. The bookkeeper
however believes that although the amount would not easily be collected, it is still an
asset and therefore she has made no entries into the accounting records.
• An allowance for credit losses to the amount of R5 000 should be created, but the
bookkeeper does not know what such an allowance entails or how it works.
REQUIRED:
a) Supply all the necessary journal entries to record the corrections and adjustments. You
may ignore VAT. (16.5)
b) Illustrate to the bookkeeper what the journal entry should have looked like, if she was
pretty sure that it will be probable that the client would make use of the settlement
discount, at the time of the sale. You can assume that the R2 000 discount represents
2% of the invoiced amount. Ignore VAT. (1.5)
Study unit 3
2.4 Closing off the nominal accounts
Study material
• Myburgh et al, Chapter 7
Time allocation
time.
Learning outcomes
• Prepare journal entries in the general journal to close the nominal accounts in the
general ledger at the end of a financial year;
• Calculate the profit of a service enterprise;
• Calculate the profit of a trading enterprise; and
• Calculate the profit of a manufacturing enterprise.
2.4.1 Introduction
Study material
Myburgh et al, Chapter 7.1.1
Nominal accounts are the income and expense accounts in the general ledger. In these
accounts information applicable to only the current financial year is collected and that
will be used to calculate the profit or loss for the current year. Nominal accounts are all
those accounts of which the balances are used in the income statement to calculate profit
or loss.
2.4.2 Closing the nominal accounts
Study material
• Myburgh et al, Chapter 7.1.3 and 7.1.4
Study the following

These accounts may only be closed off once all the necessary adjustments and
corrections are recorded.
Study unit 3
2.4.3 Using a 10-column worksheet
Study material
Myburgh et al, Chapter 7.1.5
Study the following

Please note that the worksheet is only an aid used for the preparation of adjusting and
closing journal entries. The basis is the same as the six-column worksheet.
Columns 1 and 2 represent the debit and credit columns of the pre-adjustment trial
balance.
Columns 3 and 4 represent the debit and credit columns of the general journal for the
recording of the adjustments.
Columns 5 and 6 represent the debit and the credit columns of the post-adjustment trial
balance.
Columns 7 and 8 represent the income statement. (Column 7 is a debit column for the
expense accounts, and column 8 is a credit column for the income accounts.
Columns 9 and 10 represent the balance sheet.
Column 9 is a debit column for the asset accounts and column 10 a credit column for the
owner’s equity and liability accounts.
Important information
Please note that:
• Cost of sales is calculated in the adjustment columns and transferred to the income
statement columns as a debit.
• Profit or loss for the year is calculated in the income statement columns and
transferred to the balance sheet columns (debit if a loss and credit if a profit).
• Very important, the last two columns are not financial statements. It is merely used
to compile the statements.
It is again advised that you should have a reference column to indicate the adjustments
and to reference your calculations.
Individual exercise
Work through Example 7.7 in the textbook and make sure you understand the workings
of a 10- column worksheet
Study unit 4
2.5 VAT
Study material
Time allocation
time.
Learning outcomes
• To account for transactions where VAT is applicable;

• Be able to explain when the company is obliged by law to register as a VAT
seller/supplier;
• Be able to explain the meaning of the term 'VAT included' and be able to calculate
an amount (VAT included); and
• To be able to explain what the meaning of 'excluding VAT' entails and to be able
to calculate an amount (excluding VAT).
Introduction to VAT
VAT is a tax levied on transactions (supply of goods or services).
Entities with an annual turnover of more than R1 million are obliged to register for VAT
and is referred to as VAT vendors. Entities may voluntarily register for VAT provided that
their turnover is at least R50 000 per year.
Levying of VAT (output tax)

A vendor must levy VAT at 15% on transactions as part of the selling price. This is called
output tax.
Suppose a vendor sells goods for R115 cash (including VAT):
Dr Bank 115
Cr Sales 100
Cr Output VAT 15
Study unit 4
Claiming of VAT (input tax)

When a vendor purchases goods/services from another vendor and there is VAT on the
transaction, the purchaser can claim the VAT from SARS.
Suppose vendor purchases goods for R57.50 cash (including VAT):
Dr Inventory 50.00
Dr Input VAT 7.50
Cr Bank 57.50
VAT Payable (or receivable)

= Output - Input
It follows that if Output VAT exceeds Input VAT, it represents VAT payable.
This is also calculated by way of a VAT control account.
Standard-rated, zero-rated and exempt supplies

Exempt supplies (no VAT on such items)
• Financial services such as interest, dividends and the issue of shares (bank
charges are not exempt since it is fee-based).
• Educational services.
• Passenger transport via road or rail.
• Letting of residential property.
Zero-rated supplies (VAT at 0%)

• Fuel (petrol, diesel, paraffin)
• Basic foodstuffs such as brown bread, vegetables, fruit, milk, rice, eggs etc.
• Export of goods
Standard-rated supplies (15%)

• Any other item.
• Also note that there are no VAT on salaries and wages.
Individual question
• Cool Traders (a VAT vendor) sells air conditioners.
• The entity has a 28 February financial year end and accounts for inventory using
the perceptual system (maintains profit margin of 30% on cost).
• The VAT control account had a credit balance of R42 800 on 1 February 20x3.
Study unit 4
The following transactions that occurred in February 20x3 have not been recorded:
Feb
1 A payment of R7 752 was made to Nashua in respect of the lease of a
photocopier for the next six months. The lease contract stipulates that the
monthly lease payment is increased with 20% on 1 April each year.
3 Inventory was purchased from Unitherm Suppliers on credit. A tax invoice for
R45 600 was received.
Unitherm has a policy of granting 10% discount if accounts are settled within
10 days. Cool Traders expects to receive this discount.
8 Sold air conditioners for R25 194 to local supermarket. This amount was
received after a 15% trade discount was granted to customer.
15 Pay the amount owed to Unitherm.
18 Buy equipment for R3 200 from KM Stores (KM is not registered for VAT).
25 Pay salaries R85 000 cash.
28 Settle the VAT due to SARS at the beginning of the month. SARS levied a
20% fine on this amount since this payment is late.
REQUIRED:
Provide the journal entries to record the transactions for February 20x3.
Journal narrations are not required.
All parties are registered VAT vendors, unless otherwise stated.
All amounts include VAT where applicable.
Study unit 5
3 Trade and other debtors/receivables

Study material
Time allocation
time.
Learning outcomes
• Correctly apply the accounting treatment of debtors;

• To know when an asset is classified as a current asset;
• Apply correct accounting treatment to discounts and credit losses (credit losses);
and
• Apply correct accounting treatment to prepaid expenses and accrued income.
3.1 Trade debtors/receivables
Study material
• Myburgh et al., Chapter 4, 6 and 11
Time allocation
time.
Study unit 5
Learning outcomes
• Record credit transactions between a business and its debtors;

• Explain why a debtors’ ledger and a debtors’ control accpint in the general ledger
must be maintained;
• Reconcile the total of the balances in the debtors’ ledger with the debtors’ control
account; and
• Disclose debtors and the related transactions correctly in the financial statements.
Study the following

In order to increase its turnover, an enterprise will sell its product or service on credit.
This does, however, involve additional costs, as the enterprise will have to keep a record
of the amounts outstanding and the cost of stationery and postage necessary to
distribute the monthly statements.
A credit transaction results from the sale or purchase of goods to be paid at a later date
i.e. receivables and debt is created. According to the accrual concept, income and
expenses must be brought into account when the transaction occurs and not when the
money changes hands.
Trade receivables (debtors) are current assets as they are expected to be realised within
the entities normal operating cycle.
3.1.1 Credit sales
Study the following

The first step for any enterprise that sells on credit is to develop a credit policy that will
incorporate control procedures such as:
• screening the creditworthiness of each customer that wants to buy on credit;
• setting standard credit terms and credit limits or credit terms and credit limits that
will be tailored to suit each individual customer;
• in general, credit terms are set between 30 days and 90 days: 30 days, usually, if
payment is due within 30 days from the date of the month-end statement, and 90
days, normally, if payment is due 90 days from the date of the invoice.
• determining whether interest will be charged on overdue accounts (accounts not
paid within the set credit period);
• determining the percentage of cash discount allowed on payments received from
debtors before it is due in terms of the credit policy or paid when due; and
• determining whether a provision for doubtful debts must be created and
maintained.
Once the customer has been screened and his/her application to buy on credit has been
approved, inventories may be sold to this customer on credit.
For every credit sale, a credit sale invoice is issued which will be debited to the personal
account of the debtor and to the debtors’ control account in the general ledger.
If the debtor should return inventories that is not according to order, a credit note will be
issued and credited to the personal account of the debtor and credited to the debtors’
control account in the general ledger.
Study unit 5
When payment is received from the debtor, the personal account of the debtor is credited
with the actual amount received, and if a discount was allowed, the account will also be
credited with the discount.
If the debtor does not pay its account on the due date, the enterprise may debit the
personal account of the debtor with interest calculated at a pre-determined rate. The
amount of the interest is also debited to the debtors’ control account.

Prepare general journal entries for the following transactions – assume a VAT
rate of 15%. Interest on overdue accounts is charged at 16% per annum. Also
prepare the debtors’ ledger and the debtors’ list.
1. Inv 10 – Sell goods to Mr X with a selling price of R1 200 excluding VAT.
2. Inv 11 – Sell goods to Mr Y with an invoice price of R741.
3. Credit note 7 – Goods with a VAT exclusive selling price of R200 are returned by
Mr Y.
4. Inv. 12 – Sell goods to Mr X with an invoice price of R456.
5. Credit note 8 – Mr X returns goods with an invoice price of R115.
6. Provide for interest on the closing balance of the account of Mr X for one month.
Solution
Compare your answers to the solutions given. It is important that you first do the
questions and then look at the solutions.
1. Dr Debtors Mr X 1 368
Cr VAT output 178
Cr Sales 1 190
2. Dr Debtors Mr Y 741
Cr VAT output 97
Cr Sales 644
3. Dr Sales returns 200

Dr VAT output 30
Cr Debtors Mr Y 230
4. Dr Debtors Mr X 456
Cr VAT output 59
Cr Sales 397
5. Dr Sales returns 100

Dr VAT output 15
Cr Debtors Mr X 115
Study unit 5
6. Dr Debtors Mr X 22.80
Cr Interest earned 22.80
3.1.2 Allowance for settlement discount
Study material
• Myburgh et al., Chapters 4.5.3 and 11.3.4
Study the following

Trade discount and cash discounts are removed from the invoice amount and is not
shown anywhere in the books.
Settlement discount should be estimated at the date of the sale of the goods. There are
four scenarios which can take place:
• With the sale it is estimated that the settlement discount will be taken, but it
is not taken.
• With the sale it is estimated that the settlement discount will be taken, and it
is taken.
• With the sale it is estimated that the settlement discount will not be taken, but
it is taken.
• With the sale it is estimated that the settlement discount will not be taken,
and it is not taken.
Settlement discount is not shown as an expense or an income in the statement
of profit or loss and other comprehensive income. It is deducted from sales if
it was allowed, or deducted from inventory if it was received.
An account named Allowance for settlement discount (a negative asset) is
used to account for the discount on the date of the sale.
Therefore where goods are sold for R100 000 and a settlement discount of
10% will probably be taken, the journal will be as follows:
Dr Debtors 100 000
Cr Sales 90 000
Cr Allowance for settlement discount 10 000
3.1.3 The collection of outstanding debtors accounts
Study the following

Debtors will normally tend to delay payment of outstanding amounts as long as possible.
The enterprise must therefore implement a system to control the collection of amounts
due. An age analysis could be of great help in this instance as it gives for each debtor
the amount outstanding spread over the various periods such as current month, 30 days,
60 days, 90 days and over 90 days.
If the enterprise operates with a 90-days credit term, the accounts for 90 days and over
90 days must be collected as soon as possible. It is normally on these accounts that
interest will be charged.
Study unit 5
Insufficient funds
If the debtor pays its account and does not have sufficient funds available in his bank
account, the bank will not honour the payment. The enterprise must now reverse all the
entries (including discount allowed) it originally processed when payment was made.

Prepare general journal entries for the following transactions: assume a 14% vat rate
1. Sell goods to Mr A on credit with an invoice price of R2 280. Trade discount allowed
on credit sales is 10%. R114 will probably be granted as a settlement discount.
2. Mr A settles his account for R1 938 via EFT, after settlement discount.
3. The bank reversed the payment of Mr A marked "R/D".
Solution
1. Dr Debtor 2 052 (2 280x90%)
Cr Sales 1 685 ((2052-114)/115x100)
Cr Vat output 268
Cr Allowance for settlement discount 99 (114/115x100)
2. Dr Bank 1 938
Dr Allowance for settlement discount 99*
Dr Vat output 15#
Cr Debtors 2 052
*(excluding VAT)
#
(99 * 15%)
3. Dr Debtors 2 052
Cr Sales 99
Cr Vat output 15
Cr Bank 1 938
Study unit 5
3.1.4 Credit losses (bad debts/irrecoverable debts)
Study material
• Myburgh et al., Chapters 6.6 and 11.3.5
Study the following

• Credit losses occur when a debtor is declared insolvent or disappears without
paying its debts.
• Note also the role of VAT in the recording of bad debt transactions.
• It can happen that an amount previously written off as a bad debt may be
recovered. In this instance, it will be recorded as other income since the debtor
does not exist anymore, i.e. debit bank and credit credit losses recovered.
Test knowledge/insight
Prepare general journal entries for the following transactions – assume the current SA
vat rate
a) Sell goods on credit to Mr Moss with an invoice price of R1 710
b) Receive a notification that Mr Moss has been declared insolvent and a final
dividend of 30 cents on the rand was received.
c) Six months later, Mr Moss makes a payment of R399.
Solutions
a) Dr Debtors 1 710
Cr Vat output 223
Cr Sales 1 487
b) Dr Bank (1 710x0.30) 513

Dr Vat output ((210x0.70)1.15x15%) 156
Dr Credit losses ((1 500x0.70)/1/15) 1 041
Cr Debtors 1 710
c) Dr Bank 399
Cr Vat output 52
Cr Credit losses recovered 347
3.1.5 Allowance for credit losses

Study material
• Myburgh et al., Chapter 6.6 and 11.3.5
You should be able to know and understand the following:

• the reasons why a allowance for credit losses must be created and maintained;
• the methods that may be used to determine the allowance for credit losses;
• the accounting entries for the recording of a allowance for credit losses; and
• that the allowance has no VAT influence.
Study unit 5

Prepare general journal entries for the following transactions – assume the current SA
vat rate:
Maggie Traders have an outstanding debtors balance of R127 000 in their records on
31 December 2x01. It is the policy of the entity to raise an allowance for credit losses at
year-end of 5% on outstanding debtors on that date. The pre-adjustment trial balance
indicated an allowance for credit losses as per 1 January 20x1 of R5 000.
Solutions
Dr Credit losses 522

Cr Allowance for credit losses 522
Calculation: R127 000x100/115x5% = R5 522 - R5 000
3.1.6 Reconciliation of debtors’ control account with debtors’ ledger
Study material
Study the following

The debtors’ list is a list of the balances of the debtors’ accounts in the debtors’ ledger.
The following mistakes may induce differences between the total of the debtors list and
the balance of the debtors’ control account:
1. Debtors' ledger and Debtors list

• The list was incorrectly added.
• Balances from the debtors’ ledger were incorrectly transferred to the debtors
list.
• Balances in the debtors’ ledger were not transferred to the debtors list.
• Amounts incorrectly posted from journals to the individual debtors’ accounts
in the debtors’ ledger.
• Transactions not posted from the journals to the individual debtors’ accounts
in the debtors’ ledger.
• Addition errors in debtors’ accounts or balances incorrectly calculated.
2. Debtors’ control account

• Addition errors in the debtors’ control account or the balances of the account
incorrectly calculated.
• Amounts incorrectly posted from journals to the debtors’ control account.
• Transactions not posted from journals to control account.
Study unit 5
3.1.7 Disclosure in the financial statements
Study material
Study the following

The following will be disclosed:
Statement of profit or loss and other comprehensive income

As a reduction of sales:
• Settlement discounts granted to debtors
As other income:
• Interest charged on overdue debtors accounts
• Credit losses recovered.
As expenses:
• Credit losses written off (including provision change). If the balance of the bad
debt expense results in a credit balance,after adjusting the allowance for credit
losses, the amount will be disclosed as other income.
Statement of financial position

As a current asset:
• Trade and other receivables less allowance for settlement discounts and allowance
for credit losses
• (Debtors with credit balances will be disclosed with creditors).
Notes to the financial statements

• Accounting policy for allowance for credit losses
• A note disclosing the details of the amount reflected in trade and other receivables
3.1.8 Summary
Do the questions at the end of chapter 11.
Solutions
Study unit 5
Credit losses
The debtors’ list of Hockenheim Traders indicates the following on 31 December 20x2:
J Verstappen 10 000
J Scheckter 15 000
L Hamilton 10 000
S Vettel 15 000
M Schumacher 20 000
JP Montoya 30 000
J Button (5 000)
TOTAL 95 000
Management does not expect debtor J Verstappen to settle his account.* There is
currently no balance in the allowance for credit losses account.
REQUIRED:
a) Show the journal entries on 31 December 20x2 to ensure that debtors are shown
at the correct amount in the financial statements. Journal narrations are not
required.
b) Indicate how debtors should be presented and disclosed in the financial statements
for the year ended 31 December 20x2.
c) Show the journal entry if J Verstappen is declared insolvent on 15 January 20x3
and management receives confirmation that he will not be able to settle his
account.
*Alternative: the allowance for credit losses should be adjusted to 10% of gross
debtors (excluding credit balances)
SETTLEMENT DISCOUNT (NO VAT)
Company A is a wholesaler of Apple iPads and supplies the product to various computer
stores.
The normal sales price is R6 500.

5% settlement discount is granted if clients pay within 30 days.
Provide the journal entries in the following cases (ignore VAT):

1. 100 iPads was sold to Loser Computers. Company A does not expect Loser
Computers to pay within 30 days. Loser Computers paid after 40 days.
2. 100 iPads was sold to Hopeful Computers. Company A does not expect Hopeful
Computers to pay within 30 days. Hopeful Computers paid after 20 days.
Study unit 5
3. 100 iPads was sold to Cool Computers. Company A expects Cool Computers
to pay within 30 days and Cool Computers paid after 10 days.
100 iPads was sold to Green Computers. Company A expects that Green Computers
will pay within 30 days and Green Computers pays after 60 days.
3.2 Accrued income and prepaid expenses

Study material
Time allocation
time.
Learning outcomes
• Be able to record and disclose transactions that relate to accrued income and
prepaid expenses.
3.2.1 Introductory remarks

Accrued income and prepaid expenses are assets. Refer to study unit 2 for the definition
of an asset.
These items are mostly current assets.
These items are often the result of applying the accrual basis of accounting.
In terms of this basis, income is recognised when it is earned and expenses are
recognised when they are incurred and not necessarily when payment in cash occurs.
3.2.2 Accrued income

This is income that has been earned, but not yet received in cash.
Dr Accrued Income (A)
Cr Income (I)
For example, the entity rents out a building, but has not yet received the final lease
payment for the last month of the financial year. Such lease payment is recognised in
income even though it has not yet been received.
Study unit 5
3.2.3 Prepaid expenses

These are expenses already paid, but not yet used/consumed.
Dr Prepaid expenses (A)
Cr Expense (E)
For example, an entity pays its telephone account for the first month in the subsequent
financial year in advance. The expense has already been paid, but is only recognised as
an expense in the following year (it is treated as an asset in the current year).
Study unit 6
4 Current liabilities
Study material
• Myburgh et al., Chapters 4 and 15
Time allocation
time.
Learning outcomes
After you have completed the study unit, you should be able to:
• Demonstrate your knowledge of the importance of control systems and the

operation thereof by being able to:
− do a creditors reconciliation;
− account for salaries and wage and related transactions; and
− take provisions into consideration in the accounting process..
4.1 Trade creditors (accounts payable)
Study material
Time allocation
time.
Study unit 6
Learning outcomes
• Record the transactions between a business and the creditor;

• Explain the reasons why a creditors' ledger and a creditors' control account are
kept in the general ledger;
• Reconcile the total of the balances in the creditors’ ledger with the creditors’ control
account; and
• Correctly disclose the results of transactions with creditors in the financial
statements.
4.1.1 Introduction
Study material
• Myburgh et al., Chapter 15.1.2, 15.2.2, 15.3.2 and 15.5.1
It may happen that because the enterprise is selling on credit, it may not have the
necessary cash available to buy the products or services needed for its trading activities.
The enterprise is therefore forced to purchase on credit.
This again involves additional costs, as the enterprise will have to keep a record of the
amounts payable. The enterprise is now the debtor of its supplier (the creditor).
4.1.2 Trade creditors

Study material
• Myburgh et al., Chapter 4.3.2, 4.3.6, 4.4.1, 4.4.8 and 5.2.2.3
Study the following

The enterprise enters into an agreement with the supplier in which the credit terms and
credit limit are clearly indicated.
The enterprise may now buy on credit from this supplier. The enterprise receives an
invoice from the supplier that must be recorded in the records of the enterprise.
The details of the invoice are recorded in the creditors’ journal, and from there, it is
credited to the creditors’ control account in the general ledger and the personal account
of the creditor in the creditors’ ledger.
If the enterprise returns goods to the supplier, it will receive a credit note from the supplier
that will be debited to the creditors’ control account in the general ledger and the personal
account of the creditor in the creditors’ ledger through the creditors’ returns journal.
Should the enterprise neglect to pay the account on due date, the supplier may forward
a debit note to the enterprise for interest charged to the account of the enterprise.
Study unit 6
If the enterprise pays the account before or on the due date, it may receive a cash
discount from the supplier.
All these transactions must be recorded in both the creditors’ control account in the
general ledger and the personal account of the creditor in the creditors’ ledger.
Example
The following is an example of the flow of transactions in the creditor’s cycle:
Transactions (VAT at 10% included in all transactions):

1. Purchase inventories on credit from ABC for R 11,000 (Inv 1, Order 1).
2. Purchase inventories on credit from ZZZ for R 5,500 (Inv 18, Order 2).
3. Return damaged goods to ABC, R 2,200 (DT note 3).
4. ZZZ charges interest of R 100.
More analysis columns may be added
Purchases (or creditors’) journal:

Doc. Date Description Fol Purchases VAT Total
Inv 1 1/1 ABC C1 10 000 1 000 11 000
Inv 18 2/1 ZZZ C2 5 000 500 5 500
15 000 1 500 16 500

N4 B10 B9
Purchase returns journal:

Doc. Date Description Fol Purchases VAT Total
DN 3 3/1 ABC C1 2 000 200 2 200
2 000 200 2 200

N4 B11 B9
Study unit 6
Creditors’ ledger
ABC C1 ZZZ C2
3/1 DN3 PRJ 2 200 1/1 Inv1 CJ 11 000 31/1 Balance b/f 5 600 2/1 Inv18 CJ 5 500
31/1 Balance b/f 8 800 4/1 Interest GJ 100
General ledger
Purchases N4
31/1 Creditors CJ 15 000 31/1 Creditors PRJ 2 000
31/1 Balance c/o 13 000
Creditor’s control B9
31/1 Purchases and VAT PRJ 2 200 31/1 Purchases and VAT CJ 16 500
31/1 Balance c/o 14 400 4/1 Interest GJ 100
VAT input B10

31/1 Creditors CJ 1 500
VAT output B11

31/1 Creditors PRJ 200
Interest N5
4/1 Creditors GJ 100
The creditors list
ABC 8 800
ZZZ 5 600
14 400
Study unit 6
4.1.3 Settlement discount
Study material
Study the following

Just like with debtors, settlement discounts can also occur under 4 scenarios, seeing
that debtors are the receivers of settlement discounts and creditors are the givers of the
discount. The discount in theory operates on the exact same principle as with debtor’s
discount, the only difference is that inventory is influenced and not sales.
Example
The following is an example of the journal entries when a creditor grants a settlement
discount:
ABC Traders has an agreement with mr Jan Bruwer, whereby mr Bruwer can purchase
inventory from ABC on credit and if mr Bruwer settles the debt before the 25 th day from
invoice date, ABC will grant him a settlement discount of 2% of the invoice price.
Mr Bruwer purchases goods to the value of R9 000 from ABC traders on 1 April 20.1
(ignore VAT).
Scenario 1: It is probable that he will take the discount, and on 20 April he settles
his account
Purchase
Dr Inventory 8 820
Dr Allowance for settlement discount 180
Cr Creditor’s control 9 000
Payment
Dr Creditor’s control 9 000
Cr Bank 8 820
Cr Allowance for settlement discount 180
Scenario 2: It is probable that he will take the discount, but he only settles his
account on 30 April
Purchase
Dr Inventory 8 820
Dr Allowance for settlement discount 180
Study unit 6
Payment
Dr Inventory 180
Cr Bank 9 000
Cr Allowance for settlement discount 180
Scenario 3: It is not probable that he will take the discount, but he settles his
discount on 19 April
Purchase
Dr Inventory 9 000
Payment
Cr Inventory 180
Cr Bank 8 820
Scenario 4: It is not probable that he will take the discount, and he only pays his
account on 29 April
Purchase
Dr Inventory 9 000
Payment
Cr Bank 9 000
All the above was recorded from Mr Bruwer’s point of view.
Settlement discount and VAT

Saltan Construction manufactures gates, palisades, burglar bars and any other type of
steel construction work their clients require. Saltan’s biggest supplier of steel is
Remington Steele and they have had a customer supplier relationship for over 10 years.
This has put Saltan in the privileged position of receiving trade and settlement discounts
under certain terms and conditions.
The terms stipulated in the supplier agreement include the following: Saltan has 60 day
to pay their account from statement date, however if payment is made within 15 days
from invoice date, a discount of 3% will be granted, if payment is made within 30 days of
the statement date, a discount of 1% will be granted. Discounts cannot be granted for
both requirements. The highest discount will be granted when both requirements are
met.
Study unit 6
Remington Steele sends out statements on the 29th of each month, including all
transactions up to the 25th of that specific month.
The following transactions occurred between the 3 months 1 Feb to 30 April:
• 3 Feb: Two tons of steel invoiced at R13 000. This invoice was still outstanding per
the supplier statement for February, it was however settled on the 15th of March.
• 10 Mar: 15 tons of steel was purchased. The value of the steel was R90 000,
however because of the large quantity, Remington Steele granted a 2% trade
discount. The invoice was paid on the 24th of March.
• 26 Apr: Saltan purchased 5 tons of steel for R35 000. The invoice was paid on the
29th of June.
You may assume that it will always be probable that Saltan would take the discount and
it is more probable that the 1% discount will be granted than the 3% discount. All amounts
are inclusive of 10% VAT.
REQUIRED:
Prepare the general journals for the above transactions.
4.1.4 Reconcile creditors’ control account with creditors’ ledger

Study material
Myburgh et al., Chapter 15.5.2
Study the following

At the end of each month, the creditor will send a statement to the enterprise reflecting
its record of the transactions with enterprise for that month.
The enterprise must reconcile this statement with the personal account of the creditor in
the creditors’ ledger of the enterprise. This works much like the bank reconciliation.
Study the following

The supplier of goods and/or services to an enterprise is called the creditor of that
enterprise.
With each delivery of goods and/or services, the enterprise receives a credit invoice from
the supplier. This credit invoice serves not only as a source document for the recording
of the transaction but is also necessary for the creditors’ reconciliation. It is to be used
together with the creditor’s monthly statement for the reconciliation of the creditor’s
account in the creditors’ ledger of the enterprise with the monthly statement of the
creditor. The creditor’s monthly statement is, in fact, a summary of the enterprise’s
account in the records of the creditor.
Because the enterprise must reconcile its records with information received from other
sources, it is necessary that the following steps should be followed:
Step 1
• Compare credit invoices, debit notes (for interest and corrections on invoices) and
credit notes (for discount granted and corrections on invoices) received form the
creditor during the month with the monthly statements received from the creditor.
• If any incorrect entries are found, the creditor must be notified in writing and
requested to do the necessary corrections.
Study unit 6
Step 2
• Compare the entries in the creditor’s account in records of the enterprise with the
entries on the creditor’s monthly statement.
• If there are entries which do not correspond, the reason for this must be found.
Two possibilities exist:
• The mistake is on the creditor’s monthly statement - The creditor has to be
notified in writing by sending a copy of the reconciliation together with the
payment to the creditor.
• The mistake is in the accounting records of the enterprise - If necessary; correct
the incorrect entries with the aid of the general journal.
After all the creditors’ accounts in the creditors’ ledger have been reconciled with the
creditors’ statements, prepare a list of creditors’ balances. The total of the creditors list,
as in the case of the debtors list, must be reconciled with the creditors’ control account.
CREDITOR’S RECONCILIATIONS
On 8 October 20x1 T Bone Rump, the owner of We MEAT YOUR NEEDS received a
statement dated 30 September 20x1 from one of his main suppliers, Sumptuous
Sausage. Because his bookkeeper was away, T Bone Rump immediately forwarded a
cheque for R3 780, this being the amount due per the creditor’s ledger account at
30 September 20x1.
Two days later he compared Sumptuous Sausage’s account in the creditor’s ledger with
the details on the statement and noted the following:
• The amount brought forward from the August statement, R1 300, was paid twice
in error. Both the payments were correctly recorded in the creditor’s ledger. The
statement reflects that the first payment was received on 20 September and the
second on 29 September.
• An invoice dated 12 September for R1 600 had been recorded as a credit note for
R610 on the supplier’s statement.
• The credit side of Sumptuous Sausage’s account in the creditor’s ledger had been
under cast by R1 850.
• An invoice for R270 shown on the supplier’s statement was for piano sausages
ordered by WE MEAT YOU NEEDS but supplied directly to T Bone Rump for his
private use. The bookkeeper had not recorded this transaction.
REQUIRED:
Calculate the balance as per the supplier’s statement at 30 September X1.
(Recognition: Financial Accounting The Question Book)
Study unit 6
4.2 Accrued expenses and income received in advance

Study material
• Myburgh et al., Chapter 6.2.1, 6.3.2 and 15.5.3
Time allocation
time.
4.3 Disclosure in the financial statements

Study material
Time allocation
time.
Example
An example of the disclosure of trade- and other payables:
Trade and other payables 20x3 20x2

R R
Trade payables X X
Income received in advance X X
Accrued expenses X X

Do the self-assessment questions at the end of the chapter (only relating to current
liabilities).
Solutions
Study unit 6
4.4 Employee benefits (salaries and wages)

Study material
Time allocation
time.
Learning outcomes
• Define shor- term employee benefits;

• Use salary scales;
• Distinguish between deductions and contributions;
• Record salaries and wages, deductions and contributions; and
• Prepare a payslip..
Employee benefits are all forms of consideration given by an entity in exchange for
services rendered by employees.
Short-term employee benefits are employee benefits that are due to be settled within
12 months after the end of the period in which the employees rendered the service such
as salaries and wages, overtime, bonuses.
According to IAS 19, short-term employee benefits must be recognised as an expense
in the period that the services are rendered.
If services are rendered but payment has not yet been made, it should be recognised as
a liability.
Salaries are usually paid on a monthly basis, whereas wages are paid on a weekly basis.
Salaries and wages are often determined with reference to a salary scale:
For example: the scale R36 000 x R3 000 - R42 000 x R4 000 - R50 000 means:
• Year 1 R36 000/12 = R3 000
• Year 2 R39 000/12 = R3 250
• Year 3 R42 000/12 = R3 500
• Year 4 R46 000/12 = R3 833
• Year 5 R50 000/12 = R4 167
Study unit 6
Deductions
Employers are often required to make deductions from employees' salaries
Certain deductions have to be made in terms of legislation such as PAYE and UIF.
Other deductions are made as a result of an agreement between employee and
employer such as pension fund and medical aid fund.
Net salary = gross salary - deductions
Important: the full gross salary is recognised as an expense, even if only a part of it is
paid to the employee. The rest is still incurred by the entity, but is paid to other parties
such as SARS and medical aid funds.
Examples of deductions
• PAYE (1/12 of income tax)
• UIF (1%)
• Medical aid contributions
• Pension fund contributions
• Repayment of loans by employees
Employer contributions
Employers often make additional contributions called employers' contributions.
For example, legislation requires that employers also contribute 1% to the UIF (capped
at R148.72).
Employers often make additional contributions to pension funds and medical aid funds.
Employer contributions are expenses.
Example of salary advice (payslip)

Study unit 6
Individual exercise
• Mr Hill has an annual salary of R120 000.
• The PAYE rate is 25%.
• The UIF rate is 1% (employer and employee).
• He contributed 7.5% of his salary to a pension fund and the employer contributes
R2 for each R1.
Show the journal entries for January 20x3.
Study unit 9
5 Inventory
Study material
• IAS 2
Time allocation
time.
Learning outcomes
• Explain what is meant by the term “inventory”;

• Explain the requirements of statement IAS 2 regarding inventories and the
disclosure thereof in the financial statements;
• Calculate the effect of VAT on production prices;
• Calculate the value of trading inventories using the different methods;
• Determine profits using the periodic and perpetual inventories systems; and
• Demonstrate your knowledge of unrealised profits and be able to calculate
unrealised profits from given information
5.1 Inventory - IAS 2
Study material
• IAS 2
Time allocation
Study unit 9
Individual exercise
time.
Learning outcomes
• Give a definition of inventory;

• Add the correct expenses to the purchase price in order to calculate the cost of
inventory;
• Identify conversion costs;
• Apply the techniques for the measurement of the cost of inventories;
• Identify the various cost formulas;
• Define net realisable value and be able to calculate net realisable value;
• Identify and apply when inventories may be recognised as an expense;
• Correctly disclose inventories in the financial statements;
• Calculate the amount of the inventories loss;
• Apply the averaging clause;
• Journalise inventory transactions and record them in the relevant accounts in the
general ledger;
• Calculate the selling price of a product; and
• Calculate the cost price of a product.
5.1.1 Introduction to IAS 2

Study material
• IAS 2, paragraphs 1 to 5
The introductory paragraphs of IAS 2 provide practical guidance on the determination of

cost and its subsequent recognition as an expense.
It also provides guidance on the cost formulas that are used to assign costs to
inventories.
This standard applies to financial statements prepared using the historical cost basis and
only for inventories not falling within the following categories:
• Work-in-progress relating to construction contracts;
• Inventories of mining products;
• Financial instruments; and
Study unit 9
• The farmer’s inventories of live-stock, agricultural and forest products.

The inventories referred to above are measured at net realisable value at certain stages
of production. These inventories are excluded from the scope of this standard.
5.1.2 Definitions
Study material
• IAS 2, paragraphs 6 to 8.

• Give the definition of inventory in terms of IAS 2.
• Memorise this definition for future reference.
Inventories are:
5.1.3 The measurement of inventories
Study material
• Myburgh et al., Chapter 12.3 to 12.3.3
Inventory cannot be recorded in the financial records if the cost thereof is not known.
Inventories are carried at the lower of cost or net realisable value. Make sure that you
understand paragraph 9 and then memorise its contents.
Individual exercise
List in each case the elements of the cost after you have studied the relevant paragraphs:
Elements of the cost of purchase

Paragraphs 11
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
Study unit 9
Elements of conversion costs

Paragraphs 12 to 14
Conversion costs are all the costs directly related to the manufacture of a product.
The manufacturing process may be:
• From raw material to the completed product
• The completion of a semi-completed product purchased.
Both these processes will involve labour and production overheads that form an integral
part of the cost of the product.
Other costs
Paragraphs 15 to 18
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
Costs specifically excluded

_____________________________________________________________________
_____________________________________________________________________
The cost of the inventories of the service provider

Paragraph 19
_____________________________________________________________________
_____________________________________________________________________
5.1.4 Cost formulas

Study material
• Myburgh et al., Chapter 12.3.3 to 12.3.4
Note the following:

The following methods for measurment/valuation of inventory exists:
• Retail method
• Standard cost method
The following is cost formulas by which the movement of inventory is recorded:

• Specific identification method
• The first-in, first-out method
• The weighted average method.
Study unit 9
5.1.5 Net realisable value
Study material
• IAS 2, paragraphs 28 to 33 IAS 2
Note the following:

• Assets should not be carried at a value in excess of the amounts that are expected
to be realised from their sale or use. That is normally the reason why inventories
are written down to net realisable value.
• Net realisable value = estimated selling price in the ordinary course of business -
the estimated costs of completion , less the estimated costs necessary to make
the sale.
5.1.6 Recognition as an expense

Study material
Note the following:

• The cost of inventories should be recognised as an expense in the period in which
it is sold (when the related revenue is recognised).
• The value of the write-down of inventory to net realisable value and all losses of
inventory should be recognised as an expense in the period the write-down or loss
occurs.
5.1.7 Inventories control systems and the recording of trading

inventories transactions
Study material
Myburgh et al., Chapter 7.3.3
Study the following

The type of inventories control system used by the enterprise will determine the format
of the journals.
There are two inventories control systems:
1. The perpetual inventory system
This is a system whereby a continuous record is kept of trading inventories.

• With the purchase of trading inventories, the cost price is debited to the
trading inventories account from the cash payments journal and creditors’
journal.
• With the sale of trading inventories, there are two transactions that must be
recorded:
− from the cash receipts journal and the debtors’ journal, the selling price
of cash or credit sales is credited to the sales account in the general
ledger.
Study unit 9
− from the cash receipts journal and the debtors’ journal, the cost
price (total of the cost of sales column) of the trading inventories
sold is credited to the trading inventories account and debited to
the expense account costs of sales, both in the general ledger.
− a physical count of trading inventories on hand is done on a
regular basis, valued, and the amount arrived at, is compared to
the balance of the trading inventories account in the general
ledger.
− this inventories control system requires that a cost of sales
column must be added to both the cash receipt journal and the
debtors’ journal.
− tcolumn is not an integral part of the cash receipts journal or the
debtors’ journal and is added for calculation purposes only. The
total of this column is debited to the account cost of sales and
credited to the trading inventories account.
− if there is a discrepancy between the balances of the inventories
account in the general ledger and the value of the physical
inventories count, the balance of the inventories account must be
adjusted with an entry in the general journal.
Example
The following information is available for the month of January 20x1:
• 1 January 20x1 – The balance of the trading inventories account in the general
ledger is R5 000.
• 31 January 20x1 – The total of the trading inventories column in the creditors’
journal is R80 000.
• 31 January 20x1 – The total of the trading inventories column in the cash payments
journal is R10 000.
• 31 January 20x1 – In the debtors’ journal, the total of the sales column is R50 000
and the total of the cost of sales column is R35 000.
• 31 January 20x1 – In the cash receipts journal, the total of the sales column is R 20
000 and the total of the cost of sales column is R15 000.
• 31 January 20x1 – A physical inventories count done on this date gives the
inventories value as R40 000.
From the cash receipts journal, the cash payments journal, the debtor’s journal and the
creditor’s journal, the totals of the given columns will be posted to the following accounts
in the general ledger:
Study unit 9
Trading inventories
Debit side Credit side

Date Detail Fol Amount Date Detail Fol Amount
1/1/2001 Balance b/d 5,000 31/1/2001 Cost of sales DJ1 35,000
31/1/2001 Creditors CJ1 80,000 31/1/2001 Cost of sales CRJ1 15,000
31/1/2001 Cash CPJ1 10,000 Inventories GJ 5,000
loss
. Balance c/d 40,000
95,000 95,000
1/2/2001 Balance b/d 40,000
Sales

31/1/2001 Debtors DJ1 50,000

31/1/2001 Cash CRJ1 20,000
70,000
Cost of sales

31/1/2001 Trading DJ1 35,000

Inventories
31/1/2001 Trading CRJ1 15,000
inventories
50,000
2. The periodic inventories control system
According to this system, no entries are posted to the trading inventories account and
the cost of sales account during the financial year.
• With the purchase of trading inventories, the cost price is debited to the purchases
account from the cash payments journal and creditors’ journal.
• With the sale of trading inventories, the selling price of cash (cash receipts journal)
or credit sales (debtors’ journal) is credited to the sales account in the general
ledger.
A physical count of trading inventories on hand is done only at year end, and the value
of the inventories on hand will be the closing inventories for the period.
Study unit 9
Example
By using the same information as in the previous example (with alterations), it will be possible
to determine the difference in recording in the general ledger of the two systems.
The following information is available for the month of January 2001:
Keep in mind that with the periodic inventories control system in operation, the debtors’ journal
and the cash receipts journal do not have cost of sales columns.
• 1 January 20x1 – The balance of the trading inventories account in the general ledger is
R5 000.
• 31 January 20x2 – The total of the purchases column in the creditors’ journal is R80 000.
• 31 January 20x1 – The total of the purchases column in the cash payments journal is
R10 000.
• 31 January 20x1 – In the debtors’ journal, the total of the sales column is R50 000.
• 31 January 20x1 – In the cash receipts journal, the total of the sales column is R20 000.
• 31 January 20x1 – A physical inventories count done on this date gives the inventories
value as R40 000.
From the cash receipts journal, the cash payments journal, the debtor’s journal and the
creditor’s journal, the totals of the given columns will be posted to the following accounts
in the general ledger:
Purchases Account (control account)

31/1/2001 Creditors CJ1 80 000 31/12/2001 Cost of GJ 90 000

sales
31/1/2001 Cash CPJ1 10 000 .
90 000 90 000
Sales Account
Date Detail Fol Amount Date Detail Fol Amoun
t
31/1/2001 Debtors DJ1 50 000

31/1/2001 Cash CRJ1 20 000
70 000
Study unit 9
Trading Inventory
1/1/2001 Balance b/d 5 000 31/1/2001 Cost of GJ 5 000

sales
31/1/2001 Cost of GJ 40 000
sales
Cost of sales
31/12/2001 Trading GJ 5 000 31/12/2001 Trading GJ 40 000

inventory inventory
Purchas GJ 90 000 Trade GJ 55 000
es account
95 000 95 000
Important information
Differences between the two inventories systems:
• According to the perpetual inventories system, cost of sales must be calculated

with every sale transaction. It is therefore necessary to provide for a cost of sales
column in the journals where the sale of trading inventories is recorded; that is, the
debtors’ journal and the cash receipts journal.
• According to the periodic inventories system, there is no need for a cost of sales
column in the debtors’ and the cash receipts journals. In this case, cost of sales
will be calculated in the Statement of Comprehensive Income of the enterprise.
• According to the perpetual inventories system, the purchase of trading inventories
is recorded in the trading inventories account at cost price.
• According to the periodic inventories system, no entries are posted to the trading
inventories account. All the trading inventories purchased is debited to the
purchases account at cost price.
• Note that the closing inventories value is the same, but that with the perpetual
system, it is not possible to determine the inventories loss. The loss is absorbed in
the cost of sales.
Study unit 9
Study material
Please note that the disclosure is not limited to the amounts to be disclosed in the body
of the Statement of Profit or Loss and other comprehensive income and the Statement
of Financial Position but also requires information to be disclosed in the notes to the
financial statements.
Study the following

Accounting policy
Inventories are stated at the lower of cost and estimated net realisable value. Cost is
calculated on a first-in-first-out basis. Estimated realisable value is the estimated selling
price in the ordinary course of trade, less any disposal costs.
STATEMENT OF FINANCIAL POSITION
ASSETS
Non-current assets
Current assets
Inventory
NOTE TO THE FINANCIAL STATEMENTS

Inventory
Consists of: 20x2 20x1
Finished goods xxx xxx
Consumables xxx xxx
Work in progress xxx xxx
Raw materials xxx xxx
5.1.9 Profit calculation
Study material
• Myburgh et al., Chapter 7.1.1. Note the differences between net and gross profit
between the different entity types.
You can also make use of the following diagrams. The application thereof will be
discussed during the next contact session.
Study unit 9
a) On cost price
CP
GP
SP
b) On selling price
CP
GP
SP
5.1.10 Correct valuation of inventory and Inventory losses
Study material
• Myburgh et al., 12.5 to 12.6 and 7.1.2.3(b)
Study the following

In order to be able to submit a claim against an insurance company, the enterprise must
have an insurance policy that covers the loss of inventories. Insurance claims arise when
an enterprise has losses as a result of flood damage or fire, et cetera.
It usually happens that the accounting records are also destroyed by the flood or fire.
The accountant must then use information from financial statements of previous years
and other limited information for the current year to calculate the amount of inventories
on hand on the date of the damage.
The purpose of this section is to determine what the closing inventory value was on
the date that the fire occurred. To determine such theoretical inventory value, we need
the following information:
• The gross profit percentage of the previous year (This will usually be calculated by
yourself)
• The current years’ opening inventory figure
• The current years’ purchase figure and also the sales figure from the beginning of
the year up to the date of the fire.
• The value of the inventory that was not destroyed in the fire on the date the damage
occurred, always at the cost price.
Study unit 9
Calculation of the inventory loss

Note the steps that must be followed:
1. Use the information of the immediate preceding financial year to calculate a gross
profit percentage under normal trading circumstances.
2. This gross profit percentage is now applied to the information of the current
financial year to calculate the cost of sales and also inventories value (cost) at
hand on the date of the damage.
3. Deduct the cost of inventories not damaged from the cost of inventory at hand on
the date of damage .
4. Apply the averaging clause.
5. Deduct the reduced selling price of damaged inventories sold at a reduced price
from the value determined in no. 4.
Average clause
Study the following
Note that every insurance policy for the loss of non-current assets and inventories or loss of
profit has an averaging clause. This clause comes into effect only when the amount of the
loss exceeds the insured amount (underinsured). Enterprises must therefore adjust the
insured amount on a regular basis to avoid loss as the result of being underinsured. Make sure
that you understand the formula.
When the loss is recorded, the following journal will be recorded.

Dr insurance Company (Amount receivable)
Dr Loss due to Fire (Water)
Cr Inventory account / Purchases (cost price of the inventory destroyed)
Cr VAT-output (with 14/114 of the claim, if applicable)
When we receive the money from the insurance company, the following journal is recorded:
Dr Bank
Cr insurance Company (Amount receivable)
5.1.11 Conclusion
Study material

Do the questions at the end of the chapter.
Solutions
Study unit 9
6 Cash and cash equivalents

Study material
Time allocation
time.
Learning outcomes
• Record cash transactions, prepare bank reconciliations and disclose cash and
cash equivalents in financial statements; and
• To be able to account for transactions to which VAT applies.
6.1 Cash and cash equivalents

Study material
Time allocation
time.
Study unit 9
Learning outcomes
• Conduct a bank reconciliation;

• Record cash and cash equivalents;
• Disclose cash and cash equivalents in the financial statements;
• Give an overview of internal controls over cash and cash equivalents; and
• Understand the impact of VAT on the accounting process and record VAT
transactions.
IAS 7 defines cash and cash equivalents as follows:
Cash comprises cash on hand and demand deposits (in other words immediately
negotiable and free from any restrictions).
Cash equivalents are short-term, highly liquid investments that are readily convertible
to known amounts of cash and which are subject to an insignificant risk of changes in
value.
Examples of cash and cash equivalents include:
• Petty cash and cash float
• Current account (cheque account)
• Savings accounts
• 32-day accounts
• Money market accounts
NB: Does not include a bank overdraft!!
Accounting cycle
Refer back to study unit 3 that deals with the accounting cycle and consider the following:
• Which transactions can occur that impacts on cash and cash equivalents?
• Which source documents will be used for cash and cash equivalents?
• Which journals will be used to record cash and cash equivalents?
Internal control
Cash and cash equivalents carry a high risk of theft and misappropriation.
It is necessary to implement relevant internal controls to ensure that all cash receipts are
recorded and that all payments are authorised.
Examples of internal control measures include (Myburgh paragraph 10.2.2):
• Segregation of duties
• Independent review
• Physical controls
Study unit 9
• Cash counts
• Daily deposit of cash
• Bank reconciliations
The purpose of the last control, bank reconciliations, is to:
Bank statement issued by bank reconcile Accounting records
You need the following to perform bank reconciliation:

1. Bank statement of previous month
2. Bank statement of current month
3. Current month’s bank records (CRJ, CPJ, cash book, general ledger)
4. Previous month’s bank reconciliation
Individual exercise
Overview
B&W manufactures footballs. In June 2010, the last month of the financial year, B&W’s
accountant left the company to pursue a career as a professional footballer. The owners
of the company have no accounting knowledge and are concerned about the difference
between the general ledger bank balance and the bank statement balance. On 30 June
2010, B&W’s general ledger bank account had a debit balance of R15 400.
Information
As the new accountant, you have been provided with the following information:
1. EFTs of R4 500 that were issued in May 20x1 appeared on the bank statement in
June 2010.
2. R1 200 interest was earned in the month of June 20x1 and appeared on the bank
statement on 1 July 20x1.
3. A debtor, Mellow Johnny, telephoned on 29 June 20x1 to say that he had deposited
R5 000 into the bank account of B&W. This R5 000 was recorded in the cash
general ledger on the same day but as at 30 June 20x1 was yet to appear on the
bank statement.
4. Cheques are recognised in the cash ledger when issued. The following cheques
were issued on the last day of June 20x1 to settle amounts due to creditors:
• EFT for R650
• EFT for R1 200
5. R25 000 of cash sales were made during the month of June 20x1. R2 000 of this
was only picked up at B&W’s store by the cash-in-transit vehicle on 29 June 20x1
and has not yet appeared in the bank statement. Cash picked up by the cash-in-
transit vehicle usually takes 5 working days to be credited to the company’s bank
account.
6. It became apparent that the previous accountant had made an unauthorised cash
transfer of R3 000 to his personal bank account in April 20x1. This had not been
accounted for in the company’s cash general ledger as at 30 June 20x1. This
Study unit 9
R3 000 had appeared as a reconciling item in bank reconciliations for the last 2
months with the description, ‘unallocated payment’.
7. On 30 June 20x1, B&W had R500 in its till at the store. This was recorded as ‘petty
cash’ and was included in the cash general ledger account.
REQUIRED:
Prepare the bank reconciliation for B&W on 30 June 20x1. If you think any of the above
items should not appear in the bank reconciliation, briefly justify the omission.
Study unit 9
7 Non-current assets
Study material
This study unit is based on
Time allocation
time.
Learning outcomes
• Explain what is meant by non-current assets and be able to classify and record it;
• Calculate the cost of non-current assets;
• Calculate depreciation on tangible non-current assets;
• Calculate the profit or loss on the disposal of non-current assets; and
• Disclose non-current assets correctly in the financial statements.
7.1 Property, plant and equipment
Study material
Time allocation
time.
Study unit 9
Learning outcomes
• Explain what is meant by the term “property, plant and equipment”;

• Depreciate PPE;
• Classify non-current assets;
• Calculate the cost of PPE;
• Record the transactions with the purchase and disposal of PPE;
• Demonstrate when and how to adjust the carryng value;
• Demonstrate how to calculate and disclose changes in estimate; and
• Disclose PPE correctly in the financial statements.
7.1.1 Classification of non-current assets

Study material
• Myburgh et al., Chapter 13.1 and 13.9. Give special attention to the following:
− The definition of an asset (also refer to the definition in the Conceptual
Framework as this is the official definition); and
− The difference between non-current assets and current assets.
Complete the following

Property, plant and equipment
Definition Example Measurement criteria (cost)
Individual exercise
In the space above, give the definition and an example of each of the non-current assets
mentioned above. Complete the measurement column after section 8.1.3.
7.1.2 Subsequent expenditure

Study material
Myburgh et al., Chapter 13.4. Note when subsequent expenditure is expensed and when
it is capitalised.
Study unit 9
7.1.3 Writing off the cost of PPE over its useful economic life
Study material
• Myburgh et al., Chapter 13.6.1 to 13.6.5, 13.6.7 to 13.6.9 and 13.8
The factors that will determine the amount of depreciation or amortisation to be written
off are:
• the cost of the asset;
• the useful economic life;
• the residual value; and
• the carrying amount.
Also memorise the journal entries for recording the depreciation and amortisation
amounts in the financial records:
• Depreciation is an expense.
• Accumulated depreciation is a negative asset.
Methods for determining the amount of depreciation on

property, plant and equipment
Study the following
• You must know how to calculate depreciation using each one of the methods
given in this paragraph. Write the formulas in the spaces provided below.
Formula – Fixed instalment method/Straight-line method

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Example
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Formula – Diminishing balance method/Reducing balance method

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Example
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Study unit 9
Formula – Production unit method

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Example
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7.1.4 The disposal of non-current assets
Study material
Example – Sale
Method
Step 1
Step 2
Step 3
Step 4
Transactions
1. Buy a delivery vehicle for R 11 000 at the beginning of the financial year (10% VAT
included).
2. Depreciation is 10% per annum on the straight-line method.
3. Sell the vehicle after 18 months for R5 500 cash.
4. Buy a new delivery vehicle for R22 000 on credit.
5. The business is registered for VAT.
Study unit 9
Example – Trade in
Method
Step 1
Step 2
Step 3
Step 4
Step 5
Transactions
1. Buy a delivery vehicle for R 12,100 at the beginning of the financial year (10% VAT
included). The residual value is estimated at R 1,000.
2. Depreciation is 10% per annum on the straight-line method.
3. After 18 months, the vehicle was given as a trade-in to cover the deposit of R 5,500
on a new vehicle.
4. Buy a new delivery vehicle for R 22,000 on credit.
5. The business is registered for VAT.
Study unit 9
Study material
Statement of financial position

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Note – Accounting policy

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Other notes to the financial statements

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Study unit 9
7.1.6 Loss of non-current assets
Study the following

In order to be able to submit a claim against an insurance company, the enterprise must
have an insurance policy that covers the loss of property, plant and equipment.
Insurance claims arise when an enterprise has losses as a result of flood damage or fire,
et cetera.
1. The value of the claim
• The value of motor vehicles, boats and other similar assets will be the market
value of the asset at the date of the loss.
• For all other non-current assets, the replacement value is used.
2. The averaging clause

• The average clause determines that, when property, plant and equipment is
not insured for the full value, the damage that was caused can also not be
paid in full.
• If the insured amount is less than the value of the asset, the averaging clause
will apply.
• The above is calculated as follows using either the market value or the
replacement value, depending on the asset:
Claim = Market value (replacement

Insured amount value) of asset destroyed
x
Market value (replacement 1
value) on date of loss
When the loss is recorded, the following journal entries will be recorded:
Dr Accumulated depreciation
Dr Asset realisation
Cr Machinery (cost price of the asset destroyed)
Dr Insurance Company (Amount receivable)

Cr Asset realisation (100/115 of the claim)
Cr VAT output (with 14/115 of the claim, if applicable)
Dr Loss with fire/water

Cr Asset realisation
When we receive the money from the insurance company, the following journal is
recorded:
Dr Bank
Cr Insurance company (amount receivable)
Study unit 9

Do the self-evaluation questions at the end of the chapter.
Solutions

TRADE-IN TRANSACTIONS + VAT
The company owned a Ford Bantam bakkie that was purchased on 1 January 20x1 for R136
800.
It is the company’s accounting policy to depreciate such delivery vehicles over a period of four
years with no residual value.
On 31 December 20x4, at the end of the bakkie’s useful life, the company traded in the Ford
Bantam for a new Chevrolet Corsa bakkie. The purchase price of the Chevrolet Corsa was
R159 600.
Cool Cat (Pty) Ltd issued a cheque of R102 600 to the Chevrolet dealer with respect to the
transaction.
REQUIRED:
Provide the journal entries to record the trade-in transaction on 31 December 20x4 (year-end
is 31 December). Amounts include VAT at 15% where applicable.
7.2 Financial assets

Study material
• This study guide
Time allocation
time.
Study unit 9
Learning outcomes
After you have completed this study section, you should be able to:
• Name the types of financial assets;

• Record financial assets in the accounting records;
• Calculate and record interest income and dividend income in the accounting
records; and
• Disclose financial assets and the related income correctly in the financial
statements.
Introduction
Financial assets refer to funds:
• That are invested for a period longer than 12 months at a financial institution in a
savings account or fixed deposit account on which interest is earned;
• That are lent to an external party for a period longer than 12 months;
• That are invested in another entity, for example, shares that were purchased in
that company and on which dividends are earned.
Any item which indicates the characteristics of an asset will be included in the statement
of financial position if it meets the criteria for recognition as an asset. More specifically,
it will be classified as a non-current asset if it meets the definition according to IAS1.
Non-current assets are divided into tangible assets (property, plant and equipment),
intangible assets and financial assets. Property, plant and equipment has already been
covered in the previous study section. This study section will focus on financial assets.
This study section is by no means extensive and complete. Such studies fall outside the
scope of your first-year studies.
Definition
Financial assets are defined as:
“Any asset that is cash, or any equity instrument of another entity, or a contractual right
to receive cash......etc.”
Measurement of financial assets

The initial cost price as well as all the expenses (transaction costs) relating to the
acquisition of a non-current asset, forms part of the cost price of non-current asset.
The cost price of the asset will include all transaction costs incurred, for example, agent
fees and commission.
The subsequent measurement of financial assets falls outside the scope of this study
section. For the purposes of your studies, we will make no adjustments to the future
increases in value of a financial investment. In other words, investments will be shown
at the cost price in every accounting period.
Study unit 9
Example
The historic cost of an investment will be:
R
Net purchase price of the investment 400 000
Plus: Agent’s fee 4 000
Taxes 400
Total cost price 404 400
Types of financial assets

Financial assets can be divided into:
• Cash investments
• Loans granted
• Investments in shares
a) Cash Investments
Each entity tries to invest their available funds at the most profitable way. Although cash
investments are not always the most profitable way of investing, it has the advantage
that funds could become easily available on short notice. The cash may be needed on a
specific future date.
Banks currently have many products available. The most common of these is a fixed
deposit.
Example
Mr A Adams invests R200 000 with ABC Bank on 2 January 20x2 at an interest rate of
12% per annum. Mr A Adams paid for this investment from his entity’s bank account.
The interest is paid into the bank account of the business each month.
The investment is an asset in Mr Adams’ records and an asset is accordingly increased
with a debit entry.
Bank is also an asset and, due to the fact that the business’s bank balance decreases,
the bank account is decreased with a credit entry.
Dr Fixed deposit – ABC Bank Cr

2/1/20x2 Bank 200 000
Dr Bank Cr
2/1/20x2 Fixed deposit 200 000
This investment account will remain in Mr Adams’ accounting records until he draws the
money. Should this happen, we will credit the investment account (the asset decreases)
and the bank account will be debited (an asset increases).
Study unit 9
Interest income
The purpose of any investment is to earn interest income. The agreement with the bank
will determine when this interest is paid. You will remember that, due to the accrual
principle, though interest income is earned with the passing of time, the actual payment
by the bank has no impact on the recognition of the interest income.
Interest is, in effect, the payment for the use of somebody’s money.
In order to calculate the interest, we need the following information:
• The capital amount
• The interest rate at which it was invested
• The period for which it was invested
It is also, furthermore, important to note that an interest rate is always shown as a
percentage per year. Therefore, you should always verify the number of months that the
funds were invested for. If money is invested for 10 months, we must calculate the
interest accordingly for 10 of the 12 months and not for all 12 months.
Calculation
Amount invested R24 000
Interest rate 12% per annum/year (or 0.12 or 12/100)
Period invested 1 March 201x - 31 December 20x1
The calculation would be:
= R24 000 x 12/100 x 10/12 months
= R2 880 x 10/12 months
= R2 400 interest earned for 10 months
Example
Mr A Adams invests R200 000 with ABC Bank op 2 January 20x2 at an interest rate of
12% per annum. Mr A Adams paid for this investment from his entity’s bank account.
The interest is paid into the bank account of the business each month. On 1 October
20x2, Mr Adams withdrew the investment.
Monthly interest earned:
= R200 000 x 12/100 x 1/12
= R2 000
For the period from 2 January 20x2 to 1 October 20x2, 9 months have passed.
Subsequently, the total interest income earned for the period is R18 000 (9 x R2 000).
Dr Fixed deposit – ABC Bank Cr

2/1/20x2 Bank 200 000 1/10/20x2 Bank 200 000
Study unit 9
Dr Bank Cr
31/1/20x2 Interest inc. 2 000 2/1/20x2 Fixed deposit 200 000
29/2/20x2 Interest inc 2 000
31/5/ 20x2 Interest inc 2 000
1/10/20x2 Fixed dep. 200 000
Dr Interest income Cr
31/1/20x2 Bank 2 000
29/2/20x2 Bank 2 000
31/3/20x2 Bank 2 000
30/4/20x2 Bank 2 000
31/5/20x2 Bank 2 000
30/6/20x2 Bank 2 000
31/7/20x2 Bank 2 000
31/8/20x2 Bank 2 000
30/9/20x2 Bank 2 000
18 000
From the above, you will note that ,as the months passed, the income accrued. When
the money is received, bank increases with a debit entry (Bank is an asset) and interest
income is credited (Income/Equity increases with a credit entry).
But let assume that the money is not received monthly. The bank only pays the funds at
a specific point in time. In such a case, we should provide for a debtor at year-end in
order to record the income in the correct accounting period. At year-end, someone owes
the business money (future economic benefits will flow to the entity).
Example
Mr B Badenhorst invests R10 000 at an interest rate of 15% per annum with CAPITEX
Bank on 1 July 20x0. Interest is paid half-yearly on 30 June and on 31 December by
CAPITEX Bank into a separate savings account.
Mr B Badenhorst’s financial year-end is 28 February 20x1.
REQUIRED:
Prepare the general ledger accounts in Mr B Badenhorst’s accounting records to indicate
the above-mentioned transactions for the year ended 28 February 20x1.
Study unit 9
Solution
Calculations:
Interest income in the bank account received for the period 1 July 20x0 – 31 December
20x0
= R10 000 x 15% x 6/12
= R750
Interest income earned (2 months have passed), but not yet received on 28 February
20x1.
= R10 000 x 15% x 2/12
= R250
Dr Fixed deposit – Capitex Bank Cr

1/7/20x0 Bank 10 000
Dr Bank – Cheque account Cr

30/6/20x0 Balance 100 000 1/7/20x0 Fixed deposit 10 000
Dr Bank – Savings account Cr

31/12/20x0 Interest inc. 750
Dr Interest income Cr
31/12/20x0 Bank – Savings 750
28/02/20x1 Debtor 250
1 000
Dr Accounts receivable (Debtor) Cr

28/2/20x1 Interest inc. 250
Please note
Due to the fact that the investment in a savings account can be withdrawn at any time
(within 12 months), it will be classified as a current asset.
Study unit 9
MR B BADENHORST
EXTRACT FROM THE STATEMENT OF FINANCIAL POSITION ON 28 FEBRUARY
20X1
ASSETS R
Non-current assets
Property, Plant and Equipment xxx
Intangible assets xxx
Financial assets 10 000
Current assets
Trade and other receivables 250
Cash and cash equivalents 90 750
b) Loans granted
Loans that are granted are accounted for exactly the same as cash deposits.
c) Investments in shares
A very popular form of investment is the purchase of shares in a listed company. The
income (proceeds) that is received from shares is called “dividends”.
Investments in shares can take two forms:
• Unlisted investments refer to shares that are purchased in a private company or
an unlisted public company, as well as investments in other entities, for example,
close corporations or joint ventures.
• Listed investments refer to shares that are held in ‘n listed public company.
Dividends that are earned on an investment in shares differ from interest income due to
the fact that interest usually is earned at a fixed rate over time (compulsory payment),
while dividends are earned when the company decides to declare a dividend (it not
compulsory). The calculation of dividend income differs also in the method of the
calculation of the income. Dividends are paid on the number of shares that a person
holds. The period for which you held the shares has no effect on the income.
Example
Me Lebo Dlamini buys 50 000 ordinary shares in SASOL Limited on 1 February 20x2.
On 29 February 20x2, SASOL Limited decides to declare a dividend of 12 cents for each
share that is held on 28 February 20x2. What amount of cash will Lebo receive as income
in her bank account?
Solution
= 50 000 shares x R0.12
= R6 000
Study unit 9
A dividend is earned to when it is declared (accrual principle). Dividends are usually paid
out after a long time, after they are declared. Dividends are earned on the date on which
they are declared. If we are entitled to a dividend at year-end due to the fact that it was
declared before year-end, but has not yet been paid, we need to provide for income
receivable. This figure will then be classified under current assets. The credit entry will
be journalised against the account “dividend income” in order to increase the income for
the year.
Example
Lebo Dlimini purchased 50 000 ordinary shares in SASOL Limited on 1 February 20x4
at a price of R50 per share.
She also currently has the following investments:
100 000 ordinary shares which she purchased on 31 March 20x1 in PnP Limited for R10
per share.
The opening balance in the Bank account on 1 March 20x3 is R100 000.
The following share declarations took place during the year:
• On 30 Augusts 20x3, PnP Limited declared and paid an interim dividend of 10 cent
for each ordinary share held on that date.
• Op 28 February 20x4, SASOL Limited declared an ordinary dividend of 12 cent for
each ordinary share held on that date. The dividend will be paid on 15 March 20x4.
• On 5 March 20x4, PnP Limited declared a final dividend of 8 cents per ordinary share
held on that date. The dividend will be paid on 30 March 20x4.
REQUIRED:
Prepare the general ledger accounts to account for the above transactions for the year
ending 28 February 2x42.
Dr Investment: PnP Limited Cr

1/3/20x3 Balance 1 000 000
Dr Investment: SASOL Limited Cr

1/2/20x4 Bank 2 500 000
Dr Bank Cr
1/3/20x3 Balance 100 000
30/8/20x3 Div. income 10 000
Dr Dividend income Cr
30/8/20x3 Bank 10 000
28/02/20x4 Income accrued 6 000
TOTAL 16 000
Study unit 9
Dr Receivable income / Accounts receivable Cr

(Debtors)
28/2/20x3 Div. income 6 000
Remarks
The dividend that was declared on 5 March 20x4 falls outside the accounting period;
hence the dividend will only be paid in the next financial year. We must account for the
income when it accrues to us and, in this example, the accrual falls outside the current
accounting period.
Disclosure of other financial assets and relating income

Disclosure has to do with where in the financial statements the amounts must be shown
and classified.
When we determine where it must be shown, it is furthermore important to determine if
it will be shown as a single line item and if a relating note will be prepared or if it may be
showed on the face of the statement profit or loss and other comprehensive income or
on the face of the statement of financial position.
In connection with other financial assets, it is important to distinguish between current
assets and non-current assets. Are you still able to remember the definitions of a current
assets and non-current assets?
Revise the definitions and complete the table below. Indicate if the asset is a current
asset or a non-current asset and state a reason for your answer.
Example Current asset or Reason?

non-current asset?
Fixed deposit at the bank.
Savings account.
Loan from a company payable in 4
years’ time
Loan from a company payable in 8
months’ time
Share investment in a listed
company
Income accrued
After you have determined if the asset is a current asset or a non-current asset, it is then
important to determine of it must be shown separately on the face of the statement of
profit or loss and other comprehensive income or on the face of the statement of financial
position. If we group the assets together, we must prepare a separate note that indicates
the detail of the line item.
Study unit 9
The following line items are relevant for financial assets:
COMPANY X
EXTRACT FROM THE STATMENT OF FINANCIAL POSITION
ON 28 FEBRUARY 20x2
ASSETS Note R
Non-current assets
Property, plant and equipment 2 xxx
Intangible assets 3 xxx
Financial assets (one line item is shown) 4 xxx
Current assets
Trade and other receivables xxx
Inventory xxx
Cash and cash equivalents xxx
NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDING 28 FEBRUARY 20x2
4. Financial assets
Listed shares
12 000 (number) ordinary shares in XXXX Limited R100 000
Unlisted shares
60 000 (number) ordinary shares in XXXX Limited R300 000
Loans and receivable amounts

Fixed deposit from CAPITEX Bank at 9% per annum that expires
on 30 September 20x5 R150 000
Loan receivable from XYT Limited. The loan is not secured and
carries interest at 12.5% per annum payable monthly. The loan is
payable in equal instalments until 31 March 20x6 R450 000
Study unit 9
8 Non-current liabilities
Study material
Time allocation
Refer to your work programme for the assignments that have to be completed for this study unit. The
programme shows those assignments that have to be prepared on a specific day. Remember that
these assignments may be taken in for evaluation at any time.
Learning outcomes
• Explain what is meant by non-current liabilities and be able to classify and record them;
• Calculate the cost of non-current liabilities; and
• Disclose non-current liabilities correctly in the financial statements.
8.1 Non-current liabilities

Study material
Time allocation
Refer to your work programme for the assignments that have to be completed for this study section.
The programme shows those assignments that have to be prepared on a specific day. Remember
that these assignments may be taken in for evaluation at any time.
Learning outcomes
• Calculate interest payments and be able to use an amortsation table;

• Classify non-current liabilities; and
• Disclose non-current liabilities correctly in the financial statements.
Study unit 9
A liability is a legally enforceable obligation that the enterprise has towards its creditors (long-term
or short-term).
Classification of non-current liabilities

A liability is classified as non-current (long-term) when the funds are made available to the enterprise
and the capital amount is redeemable over a period that exceeds 12 months. It may bear interest or
be interest free.
Non-current liabilities may be secured (a mortgage bond) or unsecured (an unsecured bank loan).
Examples
• Mortgage bond
• Instalment sale agreement
• Lease agreement
• Long-term loan from a financial institution
• Debentures
Classification of non-current liabilities

A liability is classified as current (short-term) when the funds are made available to the enterprise
and repayable over a period that does not exceed 12 months. Current liabilities may also be subject
to interest, depending in most instances on the term of repayment.
Examples
• Trade creditors
• Short-term bank loans (including bank overdraft)
• Short-term portion of long-term liabilities
• Tax liability at year end
• Dividends declared but not paid
• Arrear expenses
• Income received in advance
• Interest and redemption
Interest and repayment

Complete the following amortisation table.
Transaction
1. Buy a vehicle on credit for R10 000 on 1 January. The interest rate is 12% per annum.
2. The amount due is repayable in equal instalments of R4 163 per annum
2
Study unit 9
Amortisation table
Date Instalment Interest Capital Balance
redemption
From the amortisation table read the short-term portion of the long-term liability at the end of the first
year.
Amounts to be disclosed in the financial statements
ABC Traders
Statement of financial positions as at 31 December 20x3

Notes 20x3 20x2
R R
EQUITY AND LIABILITIES
Non-current liabilities
Long term loan 6 182 780 0
Current liabilities
Short- term portion of long-term loan 6 166 163 0
ABC Traders
Notes for the year ended 31 December 2023

Notes 20x3 20x2
R R
6. Long-term loans
Long-term loan 348 943 0
Less: Short-term portion of long-term loan -166 163 0
182 780 0
The loan carries interest at a rate of 10% and is repayable in annual instalments R201 057.40.
The last instalment is payable on 31 December 20x5.
Study unit 9

Do the self-evaluation questions at the end of the chapter.
Solutions
Compare your answers to the solutions given. It is important that you first do the questions and then
look at the solutions.
8.2 Financial statements of sole proprietor
Study material
Time allocation
Refer to your work programme for the assignments that have to be completed for this study section.
The programme shows those assignments that have to be prepared on a specific day. Remember
that these assignments may be taken in for evaluation at any time.
Learning outcomes
• Prepare the financial statements of a service entity, a trading entity and a manufacturing entity
according to the requirements of International Financial Reporting Standards (IFRS).
8.2.1 Introducing financial statements
Study material
• Myburgh et al., 7.1.4 to 7.2
Study the following

Financial statements are the final step in the accounting cycle. The disclosure of the various items
in the financial records must be done properly and correctly in order for the financial statements to
be of any use to the users thereof.
The financial statements of the sole trader consist of a statement of profit or loss and other
comprehensive income and a statement of financial position.
The statement of profit or loss and other comprehensive income reports on the results of the trading
activities of the enterprise for a specific period. Therefore, the heading is:
“Statement of profit or loss and other comprehensive income for the year ended
___________.”
From the post-adjustment trial balance, only the nominal (income and expense) accounts are used
to prepare the statement of profit or loss and other comprehensive income. The profit or loss
calculated in the statement of profit or loss and other comprehensive income is transferred to the
owner’s equity section of the statement of financial position.
4
Study unit 9
The statement of financial position reports on the financial position of the enterprise at a specific
date, normally the last day of the financial period. Therefore, the heading is:
“Statement of financial position at/on _____________”
From the post-adjustment trial balance, only the owner’s equity and asset and liability accounts are
used to prepare the statement of financial position.
8.2.2 The statements of profit or loss and other comprehensive income of

different types of enterprises
Study material
• Myburgh et al., Chapter 7.2 to 7.3 and 16.4.3
Study the following
Service enterprises Trading enterprises Manufacturing

enterprises
Revenue from Revenue (from Revenue (from
services rendered 125,000 products sold) 150,000 products sold) 200,000
Cost of sales (90,000) Cost of sales (120,000)
Opening 10,000 Opening 20,000
inventories inventories
Purchases 90,000 Manufacturing cost 115,000
Purchase 5,000
expenses (freight)
Available for sale 105,000 Available for sale 135,000
Closing inventories (15,000) Closing inventories (15,000)
Gross profit 60,000 Gross profit 80,000
Operating (85,000) Operating (45,000) Operating (55,000)
expenses expenses expenses
Profit before tax 40,000 Profit before tax 15,000 Profit before tax 25,000
i) The service enterprise

As shown in the example above, the statement of profit or loss and other comprehensive
income for the service enterprise consists of income and expenses. No calculation of cost of
sales is necessary as any products used when rendering the service are an expense for the
enterprise. In the statement of financial position, however, these inventories must be shown
as a current asset.
ii) The trading enterprise
A product is purchased for resale at a profit. It is, therefore, necessary to calculate the cost of
the products sold as demonstrated in the example above. The value of the opening and closing
inventories will be calculated using any one of FIFO or the weighted-average cost methods for
determining inventory value. The purchase price will, however, be used as the basis of the
calculation.
Study unit 9
iii) The manufacturing enterprise
The manufacturing enterprise does not buy the product for resale but manufactures the product
itself. The value of the opening and closing inventories will be calculated using any one of FIFO
or the weighted-average cost methods for determining inventory value. In this case, however,
the manufacturing cost per unit will be used in the calculation.

Do the following question.
Question
Cartoon Stores purchases a product for resale.
For the year ended 31 March 20x1, the following information is available:
Net sales for the period 337 000
Net purchases for the period 256 547
Purchase expenses for the period 1 550
Trading inventory (1 April 20x0) 25 670
Other operating income 387
Operating expenses 57 917
Income from financial assets 596
Trading inventory (31 March 20x1) 19 767
REQUIRED:
Prepare the statement of profit or loss and other comprehensive income for the enterprise.
Solution
Compare your answer to the following suggested solutions.
Cartoon Stores
Statement of profit or loss and other comprehensive
income for the year ended 31 March 2001
20x1 20x0
R R
Sales 337 000
Cost of sales: (264 000)
Inventory (1/4/20x0) 25 670
Purchases 256 547
Purchases expenses 1 550
Available for sale 283 767
Inventory (31/3/20x1) (19 767)
Gross profit 73 000
Other operating income 897
Operating expenses (57 917)
Operating profit 15 980
Interest income 596
Profit for the year 16 576
6
Study unit 9
8.2.3 Notes to the financial statements
Study material
• Myburgh et al., Chapters 7.3.4.3 and 16.4
Study the following

The financial statements are a summary of the financial information of an entity. To completely
understand the information, it is sometimes necessary to disclose further information. This is done
via the notes to the financial statements.
Example
Study example 16.6 in chapter 16 of the textbook. It is important that you know the accounting policy
of the following items:
• Property, plant and equipment
• Inventory
• Revenue
The following notes have already been discussed under the respective chapters:
• Property, plant and equipment
• Debtors
• Creditors
• Inventory
• Investments

Do the self-assessment questions at the end of the chapter.
Solutions
Compare your answers to the solutions given. It is important that you first do the questions and then
look at the solutions.
Revision
Read through the outcomes of the study unit. Have you mastered them? If not, revise this study unit.

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ACCF 111 EC

Dit begin alles hier

Gotlhe go simolola fano

Module name Financial accounting

Lecturer and contact information for every campus

Office telephone 018 – 299 1453

E-mail address Lynne.Cornelius@nwu.ac.za

Consulting hours See Work schedule

Teaching and learning in this module

The knowledge of accounting will enable you to:

Apart from this, accounting also contributes towards basic education in

Compulsory study material:

Supplemental study material:

Warning against plagiarism

1 Introduction and background

• Myburgh et al., Chapter 1

• Demonstrate an understanding of the general business and accounting

1. An entrepreneur is granted the opportunity to buy a 50% share in a business (filling

2. A bank manager receives a loan application from a businessman who operates a

• Accounting and the sub-domains of financial and management accounting.

1.2 Conceptual framework

• Give the objectives if financial statements;

1.2.1 Objective of financial statements

1.2.2 Users of financial statements

1.2.3 Qualitative characteristics

1.2.4 Underlying assumption

1.2.5 Elements of financial statements

2 The accounting cycle and accounting

• Myburgh et al., Chapters 3 to 7

2.1 Accounting equation

• Myburgh et al., Chapter 3

2.2 Accounting cycle

Schematic representation of accounting cycle

Analysis and journal entry

Pre-adjustment trial balance

Post-adjustment trial balance

Closing off nominal accounts

2.3 Correction of errors and sundry adjustments

2.3.1 Correction of errors

Study the following

• Account balances incorrectly transferred to the Trial Balance. Change the

Debtors’ control account 100

• Incorrect amount posted from a journal to the ledger account

Repairs and maintenance – buildings 3 450

Study the following

a) Adjustments at the financial year-end

Study the following

b) Adjustments using six-column worksheets

Study the following

Pre-adjustment Trial Balance on 31 March 20x3 Dr Cr

Depreciation – remaining vehicles: Acc

Depreciation for the year (20% x 8 426) 1 685

Total depreciation on vehicles 243+1 685 1 928

Trial balance Adjustments Trial balance

Inventory loss 5 1 200 1 200

Trial balance Adjustments Trial balance

Credit losses 350

Credit losses 306

Sundry debtors (rent paid in advance) 945

Commission paid 360

Sundry debtors 1 720

Asset disposal 3 000

Accumulated depreciation vehicles 1 419

Asset disposal 139