Table of Contents

Topic Page
1.Statement of Comprehensive Income 2-3
2.Golden rule 4
3.Financial period 4
4. WANT/HAVE formula 4
5. Income received in advance 5-8
6. Prepaid expense 9-10
7. Accrued income 11-12
8. Accrued expense 12-13
9. Bad debts 14-15
10. Bad debts recovered 15-16
11. Provision for bad debt 16-18
12. Depreciation 19-21
13. Trading stock 21-22
14. Consumable stores 22-23
15. Interest income 23
16. Interest expense 24

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 Statement of Comprehensive Income

 The Statement of Comprehensive Income is used to determine the financial

performance/results of the business
 Income and expenses are the only elements used to compile the Statement of
Comprehensive Income
 Always focus on the nominal accounts section and consider adjustments

Sales – Sales returns Revenue/Net sales

Cost of sales

If cost of sales is not given, calculate them as follows:

Opening Inventory – given on the trial balance

+Purchases
+ Carriage costs such as:
• Carriage on purchases
• Custom tariffs /duties
• Delivery fee
• Import duties
• Shipping fee
• Railage cost
• Etc – any cost of bringing goods into the business
premises
-Purchases returns
-Goods taken owner/Goods donated
-Closing Inventory – given on the adjustment/additional
information

Gross profit
(Revenue/Net Sales minus Cost sales)

Other operating income – here we looking at the other

sources of income besides sales /trading

 Rent income
 Commission income
 Discount received
 Profit on sale of asset
 Bad debts recovered
 Provision for bad debts adjustment
 Trading stock surplus
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Gross operating income
(Gross profit + Other operating income)

Other operating expenses – all accounts on the debit side of

the nominal account section, the total should be in brackets

 Telephone
 Stationery
 Bad debts
 Discount allowed
 Insurance
 Packing material etc

The following expense are found on the adjustments

 Depreciation
 Trading stock deficit
 Provision for bad debt adjustment
 Loss on sale of an asset

Operating profit
(Gross operating income – Operating expenses)

Interest income
• Interest on investment/ fixed deposit
• Interest on credit bank balance/ favourable balance

Interest expense – amount should be in brackets

• Interest on loan
• Interest on debit bank balance / unfavourable

Net profit
(Operating profit + Interest income – Interest expense)

if you your total amount is negative, it will be net loss

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 Golden rule

 According to the Matching concept, income and expenses should be recorded

for the current year / 12 months
 Income should not be more or less
 Expenses should not be more or less
 If income/expense is more, deduct the surplus
 If income/expense is less, add the deficit

Adjustment ADD SUBTRACT

Income received in advance √

Prepaid expense √

Accrued income √

Accrued expense √

Financial period
 A financial period is a period that consist of 12 months
 In most of the examples/assessments they use March-February
 The beginning of the financial period is on the first day of that month and the year
end is the last day of the month before the beginning of the financial period
 For example. let’s say the beginning of the financial period is 1 March 2020, the end
of that period will be a month before March and a year after. Month before March?
February, year that follows 2020? 2021
 If you are given 30 June 2020 as year-end, the beginning will be a month AFTER
June and the year will be the previous year (1 July 2019)
 Your period should add up to 12 months

WANT/HAVE Formula
 This is a formula that will help you find what you WANT using what you HAVE
 WANT is always on top
 HAVE is always on the bottom
 Think of the things you want in life and the things you have
 You want R1m (above) and you have R1000 (below)
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 Income received in advance

 Income received in advance is an income that is received prior the delivery of

goods / service
 It’s a liability account because the business will be liable to deliver
goods/service

Scenario 1
Trial balance as at 29 February 2020
Rent income 140000

Adjustment
o Rent has been received up to 30 April 2020

Solution
 The financial year ends on the 29th of February 2020
 An amount received after the year end should be cut off because it
doesn’t belong to the current financial period
 Rent was received until 30 April 2020 and that means rent was received
for 14 months
 From 1 March 2019, the beginning of the financial year until 30 April
2020 its 14 months
 How much is rent per months? R140000/14=R10000
 How many months were received in advance? 2 months
 How much is the income received in advance? R10000 X2=R20000
 How much should be shown in the Statement of Comprehensive?
R140000-R200000=R120000

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Scenario 2
Trial balance as at 29 February 2017
Rent income 57070

Adjustment
o Rent for March 2017 has been received in advance

Solution
 Rent was received until March 2017 which one month after the closing
period
 It is clear that rent was received for 13 months
 March 2016 until march 2017= 13 months
 How much is the monthly rental income? R57070/13=R4390
 How much is income received in advance? only R4390 because it’s for
one month
 Statement of Comprehensive? R57070-R4390=R52680

Scenario 3
Trial balance as at 29 February 2020
Rent income 27000

Adjustment
o Rent has been received for March 2020. Note that the rent was increased by
R500 per month with the effect from 01 February 2020

Solution
 First remove the amount that was increased by from the total amount in
order to calculate the rental income before an increase(R27000-
R1000=R26000)
 Why R1000? Because the R500 only applied for 2 months, February and
March. The rest of the months didn’t have this R500, it’s only these 2
months
 Now that you have removed the R1000, how much is the rental income
before increase? R26000/13=R2000
 Why 13? because rent was received until March (March 2019 to March
2020)
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  Add the increment amount to the original amount (R2000+500=R2500)
 Rent income was received in advance by a single month (R2500)
 Statement of Comprehensive Income (R27000-R2500=R24500)
It all makes sense now because for 11 months rent was R2000(R2000X11 =R22000)
and for 2 months rent was R2500 (R2500X2=R5000). So R22000 plus R5000 is
equal to R27000 that was given to you.

Scenario 4
Trial balance as at 29 February 2015
Rent income 80400

Adjustment
o The tenant has already paid the rent for March 20.15. Note that the monthly
rental of R6 000 was increased by 10% with effect from 01 December 20.14.
Solution
 You have already been told how much is the monthly rental income
 From R6000 per month to R6600 (R6000+10%) but with the effect from 01
December 2014. That means March 2015 falls under the new rental
amount
 Rent income was received in advance by a single month
 It clear that income received in advance is R6600
 Statement of Comprehensive Income? R80400-R6600

I want to create a scenario where you are not told how much is the monthly rental
income
Assume this was the information given:
o The tenant has already paid the rent for March 20.15. Note that the monthly
rental was increased by 10% with effect from 01 December 20.14

How to deal with this one?

 The effect is on December 2014 and exits until March 2015 (4 months)
 The original amount existed for 9 months (March 2014 to November
2014)
 For 9 months rent was 100% pure, not increase (100X9=900)
 For 4 months’ rent was 110%(110X4=440)
 900+440=1340 total rent in total
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  R80400XWANT/HAVE
 I want to find out how much is the rent after an increase was made and I
have the total sum of the rent
 R80400X440/1340=R26400/4=R6600.Why divide by 4? Because the 440 is
for 4 months
 If I wanted to find the rent before increase, I was going to use 900 as my
numerator (R80400X900/1340=R54000/9=R6000)

Scenario 5
Trial balance as at 29 February 2020
Rent income 65000

Adjustment
o Rent income amounts to R5000 per month. Make the necessary adjustment.

Solution
 This one is simple because you been told how much is the rental
income every month
 The golden rule states that income should be relevant to the current
financial year/ should be for 12 months
 For 12 months, rent income should be R60000 (R5000X12)
 It is clear that rent was received in advance by R5000 because the
amount that was supposed to be received in R60000 and the amount
received in R65000

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 Prepaid expense

 Prepaid expense is an amount paid in advance for an expense

 This amount is paid by the business in advance prior the service is rendered
to them. The business pays in advance for future use
 Prepaid expense meets the recognition criteria of an asset because the
organization/ company that money was paid to will owe the business a
service, it’s more like a debtor

Scenario 1
Trial balance as at 29 February 2020
Insurance 9000

Adjustment
o The insurance amount includes the annual building insurance premium that
was paid for the period 01 June 2019 to 31 May 2020, R2400

Solution
 This insurance premium is for 12 months “annual”
 A portion of that premium belongs to the current period and another one
doesn’t belong to the current period
 From 1 June 2019 until the closing period of February 2020= 9 months
which is relevant to the current period
 If 9 months is relevant, it means that the rest of the period is irrelevant,
it’s for the next financial period
 March 2020 to May 2020= 3 months, this payment is for the new financial
period
 It is clear that insurance was paid in advance by three months
 R2400XWANT/HAVE
 I want 3 months that were paid in advance and I have been given the full
amount for 12 months
 R2400X3/12=R600
 Statement of Comprehensive Income? R9000-R600=R8400

Most students prefer this method

R2400/12=R200X3=R600

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Scenario 2
Trial balance as at 30 June 2015
Advertising 21000

Adjustment
o The advertising amount includes a contract for R1400 the period 1 June 2015
to 31 December 2015

Solution
 You need to be careful here because this payment is not for 12 months
 From June 2015 until 31 December 2015= 7 months
 The financial year ends on the 31 June 2015 and any payment made
after the closing date is a prepaid expense
 On this payment, its only June that is relevant
 So, if 1 month is relevant that means 6 months is irrelevant
 Calculate the monthly payment first (R1400/7=R200)
 How much is prepaid expense? R200X6=R1200
 Statement of Comprehensive income? R21000-R1200=R19800

Always pay attention to the information given. Most students would make
mistake with the period of payment

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 Accrued income

 Accrued income is the income that is outstanding/ not received

 It is owed to the business and therefore it is an asset

Scenario 1
Trial balance as at 28 February 2015
Rent income 52800

Adjustment
o Rent for February 2015 is still outstanding

Solution
 February 2015 is the 12th month
 If rent was not received for the 12th month it means that the total amount
for rent is for 11 months
 How much is the monthly rent income? R52800/11=R4800
 Rent income is outstanding for a single month and that means accrued
income will be R4800
 Statement of Comprehensive Income? R52800+R4800=R57600
We add because its outstanding and it must receive. Revise on the golden rule notes

Scenario 2
Trial balance as at 29 February 2020
Fixed deposit (6% p.a.) 150000
Interest on fixed deposit 6000

Adjustment
o Provide for outstanding interest on fixed deposit. The investment was made
on 1 June 2019

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Solution
 If the investment was made on 1st June 2019, the business needs to
receive an interest of 9 months (June 2019 to February 2020=9 months)
 R150000X9/12X6/100=R6750
 The business should have received an interest of R6750 on its
investment
 The interest on fixed deposit is outstanding by R750 (R6750-R6000)
 Statement of Comprehensive Income? R6750

Accrued expense

 Accrued expense is an expense that has not been paid, due/outstanding

expense
 Accrued expense is a liability account

Scenario 1
Trial balance as at 28 February 2020
Rent expense 28000
Telephone 5000

Adjustments
o The rental agreements signed with the lessor (landlord) are as follows:
R30000 for the period 01 January 2019 to 31 December 2019, and
R36000 for the period 01 January 2020 to 31 December 2020.
Make the necessary adjustments

o The telephone account for February 2020 was due to be paid on 02 March
2020, R700

Solution
1. Rent expense
 January 2019 and February 2019 has already expired and will not
be considered
 Count months from 1 March 2019 until February 2020, that is the
valid period
 From March 2019 to December 2019 (months) rent amount should
have been R25000 (R30000/12=R2500X10). Why 10 months?
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 Remember that on the first point I have excluded 2 months that
should not be part of the current year, so the only relevant
months are 10
 On the second lease agreement, only two months are relevant
(January 2020 and February 2020). The amount that should have
been paid is R6000 (R36000/12=R3000X2=R6000)
 The total amount of rent expense that should have been paid is
R310000 (R25000+R6000)
 The business only paid R28000 instead of R31000 so rent expense
is outstanding by R3000
 Statement of comprehensive Income? 28000+6000

2. Telephone
 R5000+R700= R5700 will be shown on the comprehensive income

Scenario 2

Trial balance as at 28 February 2020

Loan: Capitec (12% p.a.) 300000
Interest on loan 12000

Adjustments
o The loan from Capitec was obtained on 01 September 2019. Provide for
outstanding interest

Solution
 From 1 September 2019 until 28 February 2020= 6 months
 Interest for loan should be for 6 months
 R300000XWANT/HAVE
 I want the interest on loan for (6) months and I have the interest of
12% p.a. (12)
 R300000X6/12X12%=R18000
 Interest paid is R12000 and R18000 should have been paid
 Interest on loan is outstanding by R6000

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 Bad debts

 Bad debts is an amount owe by a debtor and that should be written off because
a debtor cannot pay anymore due to insolvency, bankruptcy or maybe a debtor
disappeared
 Bad debts are an expense

Scenario 1

Trial balance as at 30 September 2019

Bad debts 5600

Adjustments
o A debtor, A. Donald who owed R800, is declared insolvent. His estate paid
Ajax Traders a first and final dividend of 60 cents in the Rand. This has been
recorded. The balance of his account must now be written off.

Solution
 Donald owed R800 and was able to pay 60 cents of the total amount
 60 cents is the same as 60% because there are 100 cents in a rand
 If he was able to pay 60 cents it means that the remaining 40 cents
should be written off
 WANT/HAVE
 I want 40 cents and I have the full amount that he initially owed, 100
cents
 R800XWANT/HAVE
 R800X40/100=R320 should be written off as irrecoverable
 Statement of Comprehensive Income? 5600+320=5920

Scenario 2

Trial balance as at 30 June 2021

Bad debts 13400

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Adjustments
o A debtor, O. Mavovo was declared insolvent. His insolvent estate paid R600
which represented 40% of his debt. The balance of his account must now be
written off.
Solution
 In this example you have been told how much a debtor paid and the
percentage of his payment
 He paid 40% and you need to write off the remaining balance which is
60%
 WANT/HAVE
 I want 60% and I have 40%
 R600X60/40=R900
 Income statement? 13400+900=14300

TAKE NOTE!!!
There will be no calculations if on the adjustment you are given the exact
amount that should be written off without any portions (cents/percentages).
Let’s say for example you have been told that the account of Celeste who
owed R400 must be written off as irrecoverable, use that amount and add it to
the bad debts given to you

Bad debts recovered

 After a debtor’s debt has been written off as irrecoverable, there’s a possibility
that they might come back and settle it
 Bad debts recovered is an amount received from a debtor that was previously
written off
 Bad debts recovered is an income account

Example
On 28 February 20.15, a cheque of R500 was received from O. Henry whose
account was previously written off as irrecoverable. No entry has been made for this.

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Take note!!
Once you see the word “previously written off as irrecoverable” just know that
its bad debts recovered

Provision for bad debt

 An amount of money that is expected not to be received from debtors

 The business estimates how much it’s unlikely to collect from debtors
 Provision for bad debt is a contra asset account, it reduces the value of assets
just like accumulated depreciation. Some could say it’s a negative asset
 Provision for bad debt adjustment can be income or expense

1.Provision for bad adjustment – Income

 If the Provision on the trial balance is more than the one on the adjustment,
the difference will be treated as an income.
 This means the business provided more than it should have, therefore it must
reduce it
 It’s more like when you have budgeted R1000 to spend for 5 visitors and only
3 visitors come, you will save your money and it will be like income to you

Scenario 1

Trial balance as at 31 December 2020

Provision for bad debt 7000

Adjustment
o Provision for bad debt must be reduced to R6000

Solution
 The business provided R7000 and the adjustment says that the actually
amount that should have been provided is R6000
 The business provided more by R1000
 Statement of Comprehensive Income: Other operating income
(Provision for bad debt adjustment 1000)

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The word “to” is important because it tells you the exact amount that should
have been provided

Scenario 2

Trial balance as at 31 December 2020

Debtors control 31000
Provision for bad debt 2000

Adjustment
o The provision for bad debts must be adjusted to 5% of trade debtors
o Write off Gomes account for R1000 as irrecoverable

Solution
 Work out the trade debtors first
 Debtors control- Bad debts on the adjustment= Trade debtors
 R31000-R1000=R30000
 Provision for bad debt must be 5% of R30000
 R30000X5%=R1500
 R1500 should have been provided and yet R2000 was provided
 The business provided R500 more

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2.Provision for bad debts adjustment – Expense
 If the Provision on the trial balance is LESS than the one on the adjustment,
the difference will be treated as an expense.
 This means the business provided LESS than it should have, therefore it
must increase its provision
 It’s more like when you have budgeted R1000 to spend for 5 visitors and 10
visitors show up unexpectedly, it will be an expense to you because you will
have to use more money that you didn’t intend to use.

Scenario 1

Trial balance as at 30 September 2020

Provision for bad debt 9000

Adjustment
o Provision for bad debt must be increased by R700

Solution
 When the adjustment says “by” it means you need to add that amount to
the Provision for bad
 9000+700=9700

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 Depreciation

 Depreciation is a loss of value on the consumption of non-current assets

 It is treated as an expense account
 Depreciation is calculated using two methods; Straight-line method and
Diminishing balance method

1.Straight-line method/Cost price/Fixed instalment method

• According to this method, depreciation will be calculated on the cost price of
the non-current asset

Scenario 1

Trial balance as at 30 April 2019

Equipment 50000

o Depreciation should be provided at 10% p.a. on cost on equipment

Solution
 R50000X12/12X10%
 12/12 represent the full year, this asset existed for the full year
 You only need the cost price of the non-current asset

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2.Dimishing balance method/Declining/Reducing/Carrying value method
• Using this method, depreciation will be calculated on the carrying value of the
non-current asset
• Cost price- Accumulated depreciation = Carrying value X%X12/12

Scenario 1

Trial balance as at 30 November 2020

Vehicles 78000
Accumulated depreciation 2100

Adjustment
o Depreciation is provided annually on vehicles at 20% using the diminishing
balance method.

Solution
 Find the carrying value first
 R78000-R21000=R57000
 Calculate depreciation on the carrying value
 R57000X12/12X20%

NEW NON-CURRENT ASSET BOUGHT DURING THE YEAR

• When there’s new non-current asset bought during the year, depreciation will
be calculated from the day it was bought until the financial year-end

Example:
o A vehicle for R20000 was bought on 1 st September 2019
o Financial year-end: 29 February 2020
o Depreciation is provided at 20% p.a. on straight-line/diminishing

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Solution
 Count months from September 2019 until 29 February 2020(6 months)
 This vehicle existed for 6 months and therefore depreciation will be
calculated for 6 months
 R20000X6/12X20%
 Using both methods of depreciation, calculations will be the same

Trading stock

 At the end of the financial year-end, physical stock taking is conducted to

determine the value of stock
 Stock could be less/more in value as compared to the one recorded in the
trial balance

 Stock could be possibly more in value as compared to the one recorded

on the trial balance and that is called Trading stock surplus

1.Trading stock deficit

• When stock on the trial balance is more than the one on the adjustment, the
difference will be recorded as Trading stock deficit
• Trading stock deficit is an expense

Scenario 1

Trial balance as at 30 June 2020

Trading Inventory 70220

o According to physical stocktaking the following were on hand:

Merchandise 69000

Solution
 70220-69000=1220

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2.Trading stock surplus
• When stock on the trial balance is less than the one on the adjustment, the
difference will be recorded as Trading stock surplus
• Trading stock surplus is treated as income account

Scenario 1

Trial balance as at 30 June 2020

Trading Inventory 60000

o According to the stock taking, the value of inventory amounted to R70000

Solution
 70000-60000=10000

Consumables stores

 Consumable stores refer to all items that a business uses on daily operations
such as:
 Stationery
 Packing material
 Cleaning material
 Office supplies
 When consumable stores are on hand, it means the full items were not fully
used so the value of the amount on hand should be subtracted from the given
amount on the trial balance

Example
Trial balance shows stationery for 9000
Adjustment
o Stationery to the value of 500 were on hand

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Solution
 90000-500=85000 will be recorded as stationery on the income statement

Interest income

 Interest income is income that is generated from investment/fixed deposit or it

can be received from the bank on the favourable/credit bank balance
 Interest income is an income account
 Interest on fixed is an example of interest income

Scenario 1

Trial balance as at 29 February 2020

Fixed deposit (10%p.a.) 79000
Interest on fixed deposit 6000

Adjustment
o The investment in the fixed deposit was made on 01 March 2019. Provide for
the outstanding interest

Solution
 The investment was made on the beginning of the financial period and
that means interest on fixed deposit should be for 12 months/1 year
 R79000X10%X1=R7900
 Interest in outstanding by 1900
 Statement of Comprehensive Income (6000+1900)

Always count months from the day an investment was made until the end of
the financial period

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 Interest expense

 Expenses such as interest on loan/ unfavourable/debit bank balance

 It is treated as an expense

Scenario

Trial balance as at 29 February 2020

Mortgage loan (12% p.a) 320000
Interest on loan 33000

Adjustment
o Provide for outstanding interest on the mortgage loan for February 2020

Solution
 Find the interest for the full period
 R320000X12%=R38400
 Divide by 12 to get the monthly interest
 R38400/12=R3200
 Add the answer to the interest on loan provided
 R33000+R3200

The only time you can apply these steps is when the interest is outstanding by
a single month

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