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© 2017 University of South Africa
All rights reserved
Printed and published by the
University of South Africa
Muckleneuk, Pretoria
FAC1501/1/2018
70548943
InDesign
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FAC1501
INTRODUCTORY
FINANCIAL ACCOUNTING
Introductory Financial
Accounting
Preface
CONTENTS
Page
4
LEARNING UNIT 1:
LEARNING UNIT 2:
LEARNING UNIT 3:
LEARNING UNIT 4:
LEARNING UNIT 5:
LEARNING UNIT 6:
LEARNING UNIT 7:
LEARNING UNIT 8:
LEARNING UNIT 9:
LEARNING UNIT 10:
LEARNING UNIT 11:
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THE NATURE AND PURPOSE OF FINANCIAL ACCOUNTING
THE ACCOUNTING EQUATION: FINANCIAL POSITION
THE ACCOUNTING EQUATION: FINANCIAL PERFORMANCE
BUSINESS DOCUMENTS: CASH TRANSACTIONS
THE RECORDING OF CASH TRANSACTIONS
CREDIT TRANSACTIONS
INVENTORY
BANK RECONCILIATION STATEMENTS
TRIAL BALANCE
FINAL ACCOUNTS
FINANCIAL STATEMENTS OF A SOLE TRADER
iv
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9
35
61
115
191
235
259
279
297
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FAC1501
LEARNING UNIT 1
THE NATURE AND
PURPOSE OF
FINANCIAL ACCOUNTING
Introductory Financial
Accounting
FAC1501/1
OVERVIEW
2
Learning outcomes������������������������������������������������������������������������������������������������������������������������������ 2
Key concepts��������������������������������������������������������������������������������������������������������������������������������������� 2
Assessment criteria����������������������������������������������������������������������������������������������������������������������������� 3
1.1
Introduction��������������������������������������������������������������������������������������������������������������������������������� 3
1.2
What is financial accounting?����������������������������������������������������������������������������������������������������� 3
1.3
The objective of financial accounting������������������������������������������������������������������������������������������ 4
1.4
The nature of financial accounting���������������������������������������������������������������������������������������������� 4
1.5
International Financial Reporting Standards (IFRSs)����������������������������������������������������������������� 5
1.6
The objective of financial statements������������������������������������������������������������������������������������������ 6
1.7
Users of financial statements������������������������������������������������������������������������������������������������������ 6
1.8
Exercises and solutions�������������������������������������������������������������������������������������������������������������� 7
Self-assessment���������������������������������������������������������������������������������������������������������������������������������� 8
LEARNING OUTCOMES
After studying this learning unit you should be able to:
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1
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zz
zz
zz
zz
zz
zz
define financial accounting
explain the objective of financial accounting
explain the nature of financial accounting
list the steps involved in the financial accounting cycle
explain the difference between financial accounting and bookkeeping
explain the acronym IFRSs
identify the users of financial accounting information in the financial statements and the reasons
why they need the financial information
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1
KEY CONCEPTS
zz
zz
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zz
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Transaction
Financial accounting
Objective of financial accounting
Financial accounting cycle
Bookkeeping
International Financial Reporting Standards (IFRSs)
Users of financial statements
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ASSESSMENT CRITERIA
zz
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1.1
The concept “financial accounting” is explained.
The nature and objective of financial accounting is explained.
The specific and general functions of financial accounting are explained.
The processing of basic transactions is explained.
The meaning of International Financial Reporting Standards (IFRSs) and
its application to the preparation and presentation of financial information
are explained.
The overall objective of financial statements to meet the needs of the users of
financial information is explained.
Information useful to the users of financial information is determined according
to the specific users’ needs.
INTRODUCTION
Every day all over the world literally millions of transactions take place. A transaction is an action
where money is paid and in return an item or service, that the buyer needs, is obtained. Think about
buying a loaf of bread – something that most of us do on a daily basis. For us as individuals it is quite
easy to remember what transactions we concluded for a particular day, but for a big entity, it would be
impossible to know what transactions took place during a day if proper records were not kept. It would
even become impossible for an individual to remember what transactions were concluded a month
ago if he/she does not have a proper recordkeeping system in place.
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1.2
WHAT IS FINANCIAL ACCOUNTING?
Financial accounting can be defined as the orderly and systematic identification and recording of the
monetary values of financial transactions of an individual or business entity, and the reporting of the
results of these transactions by way of the preparation and presentation of financial statements to
enable the users to use the information obtained in these financial statements as a basis for decisionmaking. Financial accounting is a specialised method used to communicate financial information about
an entity and its activities to those persons or entities that have an interest in the activities of the entity.
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Financial accounting is a process that involves three activities, namely:
zz
zz
zz
Identification – selecting those events that are evidence of economic activity (transactions) relevant
to the particular entity.
Recording the monetary value of the economic events (transactions) so as to provide a permanent
history of the financial activities of the entity. Recording consists of keeping a chronological diary
of measured events in an orderly and systematic manner. Recording implies that economic events
are also classified and summarised.
The third activity encompasses the communication of the recorded information to interested users.
The information is communicated through the preparation and distribution of accounting reports,
the most common of which are known as financial statements, that consist of:
——
——
——
——
——
a statement of financial position;
a statement of profit or loss and other comprehensive income;
a statement of changes in equity;
a statement of cash flows;
notes, comprising of a summary of significant accounting policies and other explanatory notes.
An entity does not necessarily refer to business entities. It can also refer to an educational institution,
a religious institution or a private household.
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NOTE:
Do not be concerned if you do not understand all the terminology on the following few pages, as
they will all be explained in learning units 1 and 2.
1.3
THE OBJECTIVE OF FINANCIAL ACCOUNTING
The objective of financial accounting is to enable the users of financial information to ascertain readily
what the financial results and financial position of the entity is. With this statement we mean:
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(a)
(b)
(c)
(d)
(e)
(f)
1.4
Did the entity trade at a profit or loss?
What was the income of the entity and what were the expenses incurred in producing that income?
How much does the entity owe to other entities?
How much do customers owe to the entity?
What is the nature and amount (in value) of the various kinds of property and other assets the
entity possesses?
What is the amount of the entity’s capital (equity)?
THE NATURE OF FINANCIAL ACCOUNTING
Financial accounting functions as an information system: far-reaching decisions are taken on the
basis of the results reported in financial statements and business transactions have to be measured,
classified, summarised and recorded continuously. We call these actions the financial accounting
cycle. This cycle is demonstrated in the following diagram.
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Diagram 1: The financial accounting cycle
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TRANSACTION
DATA
10
INPUT
record on
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SOURCE
DOCUMENTS
12
prepare
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SUBSIDIARY
JOURNALS
14
15
post to
update
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PROCESSING
17
GENERAL
LEDGER
SUBSIDIARY
LEDGERS
extract
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TRIAL
BALANCES
19
prepare
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OUTPUT
22
FINANCIAL
STATEMENTS
ANALYSIS
AND
INTERPRETATION
DECISION MAKING
BY
MANAGEMENT
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Financial accounting is the systematic recording of the financial transactions of an entity in such a
manner that any information required by the entity is readily available. The systematic recording of
the financial information is called a financial accounting cycle, which consists of the elements listed
in diagram 1.
25
The processing stage entails the recording of transactions and this process is known as bookkeeping.
The ultimate goal of the input stage and the processing stage is to prepare financial statements.
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1.5
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSS)
It would be problematic if each entity kept individualised records of its transactions as this would make
it difficult to compare the performance of an entity with those of other similar entities. To prevent this
from happening, the financial accounting profession has standardised the way in which entities are
required to keep record of their transactions.
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In South Africa the recording and reporting of financial information are governed by international
financial reporting standards as set by the Financial Reporting Standards Council (FRSC) in
South Africa. The purpose of these financial accounting standards will to a great extent ensure
that the same type of transaction is recorded by different entities in more or less the same way.
This will eventually ensure that the financial statements of different entities conducting the
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FAC1501/1
same type of business are comparable and that an entity’s financial statements will also be
comparable to those prepared in previous years.
In South Africa we have to comply with International Financial Reporting Standards (IFRSs) which can
be regarded as the “rules for financial accounting”.
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1.6
THE OBJECTIVE OF FINANCIAL STATEMENTS
The objective of financial statements is to provide information about the financial position, performance
and changes in the financial position of an entity that is useful to a wide range of users in making
economic decisions.
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1.7
USERS OF FINANCIAL STATEMENTS
Financial statements are prepared and presented at least once a year and are directed towards
the common information needs of a wide range of users.
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The following categories of users, and their need for accounting information, have been identified:
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User
Information needs
Clients
to assess the ability of the entity to continue as a going concern.
Employees
to assess the ability of their employer to provide stable employment and
remuneration.
Government
to regulate activities of the enterprise, compile statistics and determine
resource allocation and tax policies.
Investors
to assess the risk and return on an investment in the enterprise.
Lenders
to assess the ability of the enterprise to pay interest on a loan and to
repay loans.
Suppliers and other
creditors
to assess the ability of the enterprise to pay amounts owing
Management
● planning, that is determining future actions to be taken;
or
● exercising control, that is evaluating the current situation and taking
corrective steps
Although employees are considered to be part of the organisation, they do not have the same, unlimited
access to the accounting records of the entity.
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1.8
EXERCISES AND SOLUTIONS
REQUIRED
3
Answer the following questions:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
4
What is a transaction?
How will you define financial accounting?
What is the objective of financial accounting?
What is the nature of financial accounting?
List the steps in the financial accounting cycle.
What does bookkeeping entail?
What does IFRSs stand for?
List the categories of users of financial accounting information.
Name the reasons why management need financial accounting information.
What is the objective of financial statements?
SOLUTION
(a) A transaction is an action where money is paid and, in return, an item or service, that the buyer
needs is obtained.
(b) Financial accounting is the orderly and systematic identification and recording of the monetary
values of financial transactions of an individual or business entity, and the reporting of the results
of these transactions by way of the preparation and presentation of financial statements to enable
the users to use the information as a basis for decision making.
(c) To enable the users of financial information to ascertain readily what the financial results and
financial position of the entity is.
(d) ● to identify events that are evidence of economic activity relevant to the particular entity,
zz to record the monetary value of economic events so as to provide a permanent history of the
financial activities of the entity,
zz to communicate the recorded information to interested users.
(e) Transactions source documents journals general ledger and subsidiary ledgers trial
balances final accounts and financial statements
(f) Bookkeeping is the systematic recording of transactions.
(g) International Financial Reporting Standards.
(h) ● Clients
zz Employees
zz Government
zz Investors
zz Lenders
zz Suppliers and other creditors
zz Management
(i)
Information to be used for decisions directed at
zz
zz
planning, that is determining future actions to be taken, or
exercising control, that is evaluating the current situation and take corrective steps.
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(j)
The objective of financial statements is to provide information about the financial position,
performance and changes in the financial position of an entity that is useful to a wide range of
users in making economic decisions.
SELF-ASSESSMENT
5
After you have worked through this learning unit, are you
able to:
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zz
zz
zz
zz
zz
zz
zz
zz
35
If you have marked all J you may continue to the next learning unit .
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define financial accounting?
explain the objective of financial accounting?
explain the nature of financial accounting?
list the steps involved in the financial accounting cycle?
explain what the acronym IFRSs stands for?
list the users of financial statements?
explain what information different users of financial
statements will be interested in?
explain the main objective of financial statements?
If you have marked any K you have to revise that specific section.
If you have marked any L you have to re-study that specific section.
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J
J
J
J
J
J
K
K
K
K
K
K
L
L
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L
L
L
J
J
K
K
L
L
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FAC1501
LEARNING UNIT 2
THE ACCOUNTING
EQUATION: FINANCIAL
POSITION
Introductory Financial
Accounting
FAC1501/1
OVERVIEW
2
Learning outcomes���������������������������������������������������������������������������������������������������������������������������� 10
Key concepts������������������������������������������������������������������������������������������������������������������������������������� 10
Assessment criteria��������������������������������������������������������������������������������������������������������������������������� 11
2.1
Introduction���������������������������������������������������������������������������������������������������������������������������� 11
2.2
Types of business entities������������������������������������������������������������������������������������������������������ 11
2.3
South African forms of business ownership��������������������������������������������������������������������������� 12
2.4
Characteristics of a sole trader���������������������������������������������������������������������������������������������� 12
2.5
The elements of financial statements������������������������������������������������������������������������������������� 13
2.6
The double-entry principle����������������������������������������������������������������������������������������������������� 14
2.7
The accounting equation: Financial position�������������������������������������������������������������������������� 14
2.8
The statement of financial position����������������������������������������������������������������������������������������� 23
2.9
Exercises and solutions��������������������������������������������������������������������������������������������������������� 30
Self-assessment�������������������������������������������������������������������������������������������������������������������������������� 34
LEARNING OUTCOMES
1
After studying this learning unit you should be able to:
1
zz
zz
zz
zz
zz
zz
list the basic business forms found in South Africa
explain the characteristics of a sole trader
understand the accounting equation concerning assets, equity and liabilities
explain the effects of financial accounting entries concerning assets, equity and liabilities on the
accounting equation
prepare entries in general ledger accounts for assets, equity and liabilities
prepare a statement of financial position for a service entity.
1
KEY CONCEPTS
zz
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Service entity
Retailing entity
Manufacturing entity
Forms of business
Sole trader
Double-entry principle
T-account
Debit
Credit
Accounting equation
Assets
Liabilities
Equity
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Income
Expenses
Statement of financial position
Balancing off of accounts
Debtors
Creditors
ASSESSMENT CRITERIA
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2.1
The processing of accounting information by different types of business entities
because of the difference in operating activities is explained.
The form of business ownership according to the capital needs of an entity
is explained.
The characteristics of a sole trader are explained.
The elements of the general purpose financial statements are explained.
Accounting terminology is explained and examples of their use are given.
The principle of debits and credits are explained.
Business transactions concerning assets, liabilities and equity are explained
with reference to appropriate examples.
Accounting policy is demonstrated according to the right methods and procedures
when recording in the accounting equation format and in the ledger accounts.
Assets, liabilities and equity are defined and classified for recognition in the
statement of financial position.
INTRODUCTION
In the previous learning unit you learned that financial accounting is an information system
that communicates financial information to the users of financial accounting information. But who
exactly needs to keep financial accounting records? The answer to this question is simple: everybody
who earns an income!
2
The average salary earner needs accommodation, food, clothes, and has to pay (for example) the
telephone account, school fees and groceries. They would possibly open a clothing account and pay
the school fees in monthly instalments. Salary earners would also have a bank account into which
their salaries are deposited every month. How would they be able to keep track of what has been paid,
what they still owe and how much money they have left without some form of financial accounting
system?
3
2.2
TYPES OF BUSINESS ENTITIES
The processing of financial accounting information (that is, bookkeeping) will be determined by the
operating activities of an entity and should be adapted to provide the information that is applicable to
the specific operating activities. The operating activities of an entity are those activities from which it
tries to make a profit. The objective of every entity is to earn as large a profit as possible.
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Let’s consider the following example:
Mr Bongile Sithole, a qualified electrician, has his own business which he runs from his home.
Mr B Sithole trades as BS Electrical and installs electrical cables and repairs electrical faults. In order
for him to deliver his services he needs his tools. His clients must supply any cabling or wiring required
for the job, which they buy from the hardware store. The hardware store buys these items from an
engineering company that manufactures them.
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zz
Mr Bongile Sithole therefore runs
——
——
——
zz
a commercial entity
which sells
a service to his clients.
The hardware store is
——
——
——
a commercial entity
which buys and sells
goods to their customers.
Commercial entities can be retail entities that will sell goods to the public, or wholesalers that only sell
goods to retailer entities.
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zz
The engineering entity is
——
——
——
a manufacturing entity
which manufactures and sells
goods to their customers.
Each of these types of entities will make use of financial accounting records that are suitable to their
own needs. The minimum information that must be available from these financial accounting records
is prescribed by International Financial Reporting Standards (IFRSs).
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2.3
SOUTH AFRICAN FORMS OF BUSINESS OWNERSHIP
Mr Bongile Sithole’s entity, the hardware store entity as well as the engineering entity may be conducted
in one of a number of business forms. In order to start any business, money is needed. This money
is referred to as capital. Some types of businesses require more capital than others. For example,
the engineering entity would need machines, an electrician would need his toolbox and the hardware
store will need hardware inventory. The amount of capital needed to start and continue business
operations would largely influence the form of the business.
9
For financial accounting purposes we distinguish between the following forms of business ownership:
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zz
zz
zz
zz
sole traders
partnerships
close corporations
companies
In South Africa two types of companies can be formed, namely a profit company and a nonprofit company.
11
In this module you will concentrate on the financial accounting records required by different operating
activities (that is sales and services) of a sole trader and we will not venture into any aspects of the
other forms of business ownership.
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2.4
zz
zz
CHARACTERISTICS OF A SOLE TRADER
This entity belongs to one person only. In the case of BS Electrical the entity belongs to
Mr Bongile Sithole.
It is suitable for smaller types of entities that do not need big amounts of capital to start.
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zz
zz
zz
zz
zz
All decisions regarding the entity are taken by the owner and all the profits and losses accrue to
the owner. Mr Bongile Sithole will take all decisions regarding BS Electrical and all the profit and
losses will accrue to him as owner.
Mr Bongile Sithole is the sole owner and disposer of the assets of the business.
The sole trader is not a legal entity distinct from its owner. Mr Bongile Sithole will conclude any
contracts applicable to his entity in his own name and he will be liable in his personal capacity for
the debts of the entity.
As the sole trader is not a legal entity, the profits of the entity will be taxed in the hands of the
owner. Mr Bongile Sithole will declare the profits in his personal income tax return and he will be
taxed on the amount.
If Mr. Bongile Sithole dies, the entity ceases to exist. If the business activities are taken over by
someone else, a new sole trader entity comes into being.
To be able to do Mr Bongile Sithole’s books it is necessary to look at the accounting equation.
13
2.5
THE ELEMENTS OF FINANCIAL STATEMENTS
Every entity implements a financial accounting system according to the minimum financial accounting
standards and practices when it draws up financial statements that are used in making economic
decisions. Financial statements will reflect the financial effects of transactions by grouping them into
broad classes according to their economic characteristics, namely assets, equity, liabilities, income
and expenses. Assets, equity, liabilities, income and expenses are called the elements of financial
statements.
14
The elements directly related to the measurement of financial position at a given time in the statement
of financial position are assets, liabilities and equity.
15
Assets are all the resources controlled by the entity (whether they are owned by the entity
or not), for example land and buildings, vehicles, furniture, equipment, trading inventory,
debtors, bank and petty cash.
Remember, not all assets controlled by the entity are owned by the entity. If, for
example, the entity bought a vehicle on credit, it does not belong to the entity until the final instalment
is paid.
Liabilities are the debts of the entity (all the money owed to third parties), for example
long-term loans, mortgage bonds, bank overdrafts and creditors.
Equity refers to the amount that the owner invested in the entity and is made up mainly of
capital. It is an indication of the assets that actually belong to the owner and is referred to
as the owner’s net worth.
Profit or loss is frequently used as a measure of performance. The elements directly related
to the measurement of financial performance for a period in the statement of profit or loss and
other comprehensive income are income and expenses.
Income less expenses = profit for the year
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Income is the income earned by the entity through its normal everyday business activities
for the financial accounting period (normally a year), for example sales, rent income,
interest income and credit losses recovered.
Expenses are the running expenses of the entity for the financial accounting period
(normally a year) necessary to earn the income, for example purchases, rent expenses,
telephone expenses, water and electricity, salaries and wages.
To be able to record transactions correctly it is necessary to have a look at the process of
recording transactions.
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2.6
THE DOUBLE-ENTRY PRINCIPLE
Bookkeeping is the part of financial accounting that is concerned with the recording of transactions.
The transactions are recorded in an account.
17
An account consists of a left-hand side and a right-hand side and is presented in a “T”
format. The left-hand side is referred to as the debit side and the right-hand side is
referred to as the credit side. The name of the “T” account is written across the centre at
the beginning of each account.
This can be illustrated as follows:
Dr (debit side)
Left-hand side (LHS)
……. Account
(credit side) Cr
Right-hand side (RHS)
For each asset, liability, equity, expense and income there will be a “T” account in the books of the
entity. All these “T” accounts together are called the general ledger.
18
The double-entry principle provides a logical method of recording transactions. In using the doubleentry system the monetary (money value) of each transaction must be entered on the debit side of
one ledger account as well as on the credit side of another ledger account. The entry in one ledger
account refers to the corresponding entry in the other ledger account.
19
As the entries in the two ledger accounts have been entered on opposite sides, the use of the double
entry system allows for cross references. Each transaction is entered in two separate accounts on
opposite sides, and it is therefore possible to check and control the arithmetical and accounting
accuracy of the work. If each transaction is recorded so that the debit and credit entries are equal, the
same sum of all the debits to the account must equal the sum of all the credits. This can be explained
by way of the accounting equation.
20
2.7
THE ACCOUNTING EQUATION: FINANCIAL POSITION
The logical method of recording transactions by way of the accounting equation is used to process
transaction data. Transactions may:
21
zz
zz
affect assets and/or equity and/or liabilities.
generate income or give rise to expenditure
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The accounting equation states that:
22
ASSETS
A
=
EQUITY
+
LIABILITIES
= E
+ L
=
–
OR
23
EQUITY
ASSETS
E = A
LIABILITIES
– L
The equity equals all the assets in the entity less all the claims against those assets (liabilities).
The accounting equation is a mathematical equation that should always balance. The financial
position of an entity is indicated by this equation.
24
For the accounting equation to always balance it requires the involvement of two accounts for each
transaction. The accounting equation is, therefore, based on the double-entry accounting system.
25
Basic requirements for the accounting equation:
zz A minimum of two accounts must be used for each transaction.
zz The equation must remain in balance after each transaction. In other words the debit
side (A) is equal to the credit side (E + L).
26
27
Consider the following example of transactions that affect assets and/or equity and/or liabilities:
Before the entity starts to do business, the accounting equation will look like this:
Debit side
=
Credit side
A
=
E
+
L
Possessions the entity
owns
=
Amounts owed to the
owner of the entity
+
Amounts owed
to third parties
What the entity owns
=
What the entity owes
0
=
0
Note that the recording of transactions is done from the point of view of the business entity independent from its owner, Mr Bingole Sithole.
15
FAC1501/1
Every entity for which separate financial records are kept is a financial accounting entity. It is extremely
important to see the entity as separate from its owner: transactions entered into by the entity have to
be dealt with from the point of view of the entity whose books are being done.
28
Transaction 1:
29
Mr Bingole Sithole, a qualified electrician, started a small service business, BS Electrical on
1 January 20.6. He decided to deposit R40 000 in the entity’s bank account to start the business.
30
Explanation:
31
The entity received R40 000 in cash and the money was deposited in a bank account opened in the
name of the entity. It cannot be Mr B Sithole’s bank account. The entity must have its own bank
account. The money (bank account) is an asset because it is a resource controlled by the entity (it can
be used by the entity to do business). The assets increased because it was “0” before this transaction.
The owner deposited the money into the entity’s bank account. Any amount received from the owner
is called capital and this increases equity. The entity now owes Mr B Sithole R40 000. Both the lefthand side of the equation (A) and the right-hand side of the equation (E + L), now equals R40 000.
32
33
The effect of this transaction on the accounting equation can be illustrated as follows:
A
=
E
Bank
Capital
R
R
+ 40 000 =
+ 40 000
+
L
R
+
–
NOTE:
The plus sign shows an increase of an element of the accounting equation and a minus shows a
decrease in an element of the accounting equation.
34
Transaction 2:
On 1 January 20.6 BS Electrical bought a toolbox and tools to be used by Mr B Sithole on credit from
Big Builders for R7 000.
35
36
Explanation:
Tools and equipment are a resource controlled by the entity (it can be used by the entity to do
business). It is an asset, so the assets increased. The entity owed money to Big Builders, a creditor,
so the liabilities would increase.
37
A creditor is a person or entity to which the entity, BS Electrical, owes money. This debt is
usually paid back within one year.
38
16
FAC1501/1
The effect of this transaction on the accounting equation can be illustrated as follows:
39
A
=
E
+
L
Bank
Tools and
equipment
Capital
Big Builders
(creditor)
R
R
R
R
+ 40 000
+ 40 000
+ 7 000
40 000
+ 7 000
7 000
=
40 000
+
7 000
Transaction 3:
40
On 1 January 20.6 BS Electrical bought a ladder from Ladders (Pty) Ltd and paid for it by cheque,
R1 200.
41
Explanation:
42
Money (bank account) is a resource controlled by the entity (it can be used by the entity to do business).
Assets decreased because money was paid by the entity. Tools and equipment, another resource
controlled by the entity (it can be used by the entity to do business), increased, thus assets increased.
Assets increased and decreased with R1 200, leaving us with a nil effect. The left-hand side of the
equation (A) = right-hand side of the equation (E + L) [R47 000 = R40 000 + R7 000].
43
The effect of this transaction on the accounting equation can be illustrated as follows:
44
A
=
E
+
L
Bank
Tools and
equipment
Capital
Big Builders
(creditor)
R
R
R
R
+ 40 000
+ 40 000
+ 7 000
+ 7 000
- 1 200 + 1 200
38 800 + 8 200
45
=
40 000 +
7 000
Transaction 4:
On 1 January 20.6 BS Electrical borrowed R50 000 from Uni Bank at an interest rate of 10% per
annum repayable over 60 months. The R50 000 was transferred to the bank account of the entity.
46
Explanation:
47
The money received from Uni Bank increased the bank account. Bank is an asset and therefore
the assets increased with the money received from Uni Bank. The entity however owed Uni Bank
48
17
FAC1501/1
R50 000. This is an obligation (liability) to pay and the liabilities increased. The left-hand side of the
equation (A) = the right-hand side of the equation (E + L) [R97 000 = R40 000 + R57 000].
BS Electrical owes Uni Bank, who provided the long-term loan, the money. Uni Bank is a
creditor (financing creditor) of BS Electrical. This long-term debt is usually not paid back
within one year (in this case it will only be paid back over a period of 5 years (60 months)).
The effect of this transaction on the accounting equation can be illustrated as follows:
Bank
R
+ 40 000
– 1 200
+ 50 000
+ 88 800
49
A
Tools and
equipment
=
R
+
R
+ 40 000
+ 7 000
+ 1 200
+ 8 200
E
Capital
=
+ 40 000
L
Big Builders Uni Bank
(creditor)
(long-term
loan)
R
R
+ 7 000
+
+ 7 000
+ 50 000
+ 50 000
The following rules can be applied:
Dr (debit side)
+ (increase)
Asset accounts
(credit side) Cr
– (decrease)
Dr (debit side)
– (decrease)
Liability accounts
(credit side) Cr
+ (increase)
Dr (debit side)
– (decrease)
Equity account
(credit side) Cr
+ (increase)
For you as a learner of financial accounting the reality is that the double-entry rules are not
one of those concepts that you can try to understand – you have to learn them!
50
When analysing a transaction, the following four questions need to be asked:
zz
zz
zz
zz
Which two accounts are involved in the transaction?
Do the accounts form part of assets, equity or liabilities?
Did the assets, equity or liabilities increase or decrease?
Which one of the accounts must be debited and which one must be credited?
18
FAC1501/1
51
Let’s consider the transactions of BS Electrical again:
Transaction 1:
52
Mr Bingole Sithole, a qualified electrician, starts a small service business, BS Electrical, on
1 January 20.6. He decided to deposit R40 000 in the entity’s bank account to start the business.
53
The effect of this transaction on the accounting equation can be illustrated as follows:
54
A
=
E
L
Bank
Capital
Liabilities
R
R
R
+ 40 000 =
55
+
+ 40 000 +
–
Explanation (detailed explanation of the accounting equation transaction 1):
56
1. Bank account (an asset) increased; and must therefore be debited.
Dr (debit side)
+ (increase)
2.
57
(credit side) Cr
– (decrease)
Capital account (equity) increased; and must therefore be credited.
Dr (debit side)
– (decrease)
58
Assets
Equity
(credit side) Cr
+ (increase)
The above transaction will be recorded in the ledger accounts as follows:
(a)
The debit-side of the bank account:
Dr
Date
Details
Bank
Fol
R
Date
Details
1
Fol
Cr
R
20.6
Jan 1
59
Capital (name of
account to be
credited)
40 000
A few things to remember:
zz
zz
zz
The date of the transaction (date). The transaction took place on 1 January 20.6.
A description of the other account affected by the transaction to make cross-referencing easier
(details). The account to be debited is bank account and the account to be credited is capital account.
Cross-referencing to the folio number of the other account affected (fol). (It will be discussed in a
later learning unit .)
19
FAC1501/1
zz
(b)
Recording the amount of the transaction. The amount of the transaction is R40 000. (Bank account
is debited with R40 000, and capital account is credited with R40 000.)
The credit-side of the capital account:
Dr
Date
Details
Fol
Capital
R
Date
20.6
Jan 1
60
2
Fol
Details
Bank (name of
account to be
debited)
Cr
R
40 000
Debit side = Credit side = R40 000
Transaction 2:
61
On 1 January 20.6 BS Electrical bought a toolbox and tools to be used by Mr Bingole Sithole on credit
from Big Builders for R7 000.
62
63
The effect of this transaction on the accounting equation can be illustrated as follows:
A
=
E
+
L
Bank
Tools and
equipment
Capital
Big Builders
(creditor)
R
R
R
R
+ 40 000
+ 40 000
+ 7 000
40 000
+ 7 000
7 000 =
40 000 +
7 000
Explanation (detailed explanation of the accounting equation transaction 2):
64
1. Tools and equipment account (an asset) increased and must therefore be debited.
65
Dr (debit side)
+ (increase)
Assets
(credit side) Cr
– (decrease)
2. Big Builders’ account (a liability) increased and must therefore be credited.
66
Dr (debit side)
– (decrease)
Liabilities
67
20
(credit side) Cr
+ (increase)
FAC1501/1
68
The above transaction will be recorded in the ledger accounts as follows:
(a)
The debit-side of the tools and equipment account:
Dr
Date
Tools and equipment
Fol
R
Date
Details
Details
3
Fol
R
Cr
Details
4
Fol
R
20.6
Jan
(b)
1
Big Builders (name
of account to be
credited)
7 000
The credit-side of Big Builders’ account:
Dr
Date
Big Builders
Fol
R
Date
Details
Cr
20.6
Jan
7 000
1 Tools and equipment
(name of account
to be debited)
Debit side = Credit side = R7 000
69
Transaction 3:
70
On 1 January 20.6 BS Electrical bought a ladder from Ladders (Pty) Ltd and paid for it by cheque,
R1 200.
71
The effect of this transaction on the accounting equation can be illustrated as follows:
72
A
Bank
R
+ 40 000
– 1 200
+ 38 800
Tools and
equipment
R
=
E
+
Capital
R
+ 40 000
+ 7 000
+ 1 200
+ 8 200 =
+ 40 000 +
L
Big Builders
(creditor)
R
+ 7 000
+ 7 000
Explanation (detailed explanation of the accounting equation transaction 3):
73
74
1. Tools and equipment account (an asset) increased and must therefore be debited.
Dr (debit side)
+ (increase)
Assets
21
(credit side) Cr
– (decrease)
FAC1501/1
75
2.
Bank account (an asset) decreased and must therefore be credited.
Dr (debit side)
+ (increase)
76
Assets
(credit side) Cr
– (decrease)
The above transaction will be recorded in the ledger accounts as follows:
77
(a)
The debit-side of the tools and equipment account:
You will have only one ledger account for each asset, liability and equity item. Use the same tools and
equipment account as created in transaction 2.
78
Dr
Date
Tools and equipment
Fol
R
Date
Details
Details
3
Fol
Details
1
Fol
Cr
R
20.6
Jan
79
(b)
1
7 000
1 200
Big Builders
Bank (name of
account to be
credited)
The credit-side of the bank account:
Use the same bank account created in transaction 1.
80
Dr
Date
Bank
Fol
R
Date
Details
20.6
Jan
81
Cr
R
20.6
1
Capital
40 000 Jan
1 200
1 Tools and equipment
(name of account to
be debited)
Transaction 4:
On 1 January 20.6 BS Electrical borrowed R50 000 from Uni Bank at an interest rate of 10% per
annum repayable over 60 months. The R50 000 was transferred to the bank account of the entity.
82
83
The effect of this transaction on the accounting equation can be illustrated as follows:
A
=
E
+
L
Bank
Tools and
equipment
Capital
Big Builders
(creditor)
Uni Bank
(long-term
loan)
R
R
R
R
R
+ 40 000
– 1 200
+ 50 000
+ 88 800
+ 40 000
+ 7 000
+ 1 200
+ 8 200
=
+ 40 000
22
+ 7 000
+
+ 7 000
+ 50 000
+ 50 000
FAC1501/1
84
Explanation (detailed explanation of the accounting equation transaction 4):
1.
85
Bank account (an asset) increased and must therefore be debited.
Dr (debit side)
+ (increase)
2.
Assets
Long-term loan: Uni Bank account (a liability) increased and must therefore be credited.
Dr (debit side)
– (decrease)
86
Liabilities
(credit side) Cr
+ (increase)
The above transaction will be recorded in the ledger accounts as follows:
(a)
87
(credit side) Cr
– (decrease)
The debit-side of the bank account:
Use the same bank account created in transaction 1 and used in transaction 3.
Dr
Date
Details
Fol
Bank
R
Date
(b)
1
Fol
Cr
R
20.6
20.6
Jan 1
Details
Capital account
Long-term loan:
Uni Bank (name of
account to be
credited)
40 000 Jan
1
Tools and equipment
1 200
50 000
The credit-side of the long-term loan: Uni Bank account:
Dr
Date
Details
Long-term Loan: Uni Bank
Fol
R
Date
Details
5
Fol
Cr
R
20.6
Jan
1
Bank (name of
account to be
debited)
50 000
The accounting equation is, therefore, based on the double-entry accounting system, and is used for
preparing the statement of financial position at a specific point in time.
88
2.8
THE STATEMENT OF FINANCIAL POSITION
The statement of financial position reflects the financial position of an entity in terms of the basic
accounting equation on a specific date. It is a statement of balances at a specific date.
89
90
23
FAC1501/1
The statement of financial position of BS Electrical prepared as at 1 January 20.6 is as follows:
91
BS ELECTRICAL
STATEMENT OF FINANCIAL POSITION AS AT 1 JANUARY 20.6
ASSETS
Bank
Tools and equipment
R
EQUITY AND LIABILITIES
R
88 800
Capital
40 000
8 200
Creditor
7 000
Long-term loan
97 000
50 000
97 000
At this stage it is necessary to have a look at the ways assets can be used:
92
zz
zz
Some assets are used time and time again in the business to earn an income. The tools and
equipment used by Mr Bingole Sithole are examples of such assets. These assets are classified
as non-current assets.
Some assets have a short life span, and continually change in value in the normal course of business,
for example, money in the bank. These assets are classified as current assets.
93
24
FAC1501/1
Let’s have a look at the difference between non-current assets and current assets.
94
ASSETS
Assets are resources controlled (used)
by the entity, as a result of past events
(asset was bought), and from which
future economic benefits (income) are
expected to flow to the entity.
CURRENT
NON-CURRENT
An asset shall be classified as
current when it satisfies any of the
following criteria:
All other assets (thus being assets
that are not classified as current
assets will be classified as noncurrent).
zz
It is expected to be converted into
money (realised), or is intended for
sale or consumption, in the entity’s
normal operating cycle.
Non-current assets include tangible,
intangible and financial assets of a
long-term nature. (In this module we
will only concern ourselves with tangible non-current assets.)
zz
It is held primarily for the purpose
of being traded.
It is not the intention of the entity to
sell non-current assets, but to use
these assets over the long-term in its
business operations to earn an
income.
zz
It is expected to be converted
into money (realised) within
twelve months of the statement of
financial position date.
Non-current assets are those assets
with a useful life of longer than one
year.
Examples of current assets are:
zz
zz
zz
zz
zz
zz
zz
zz
Trading inventories
Consumable stores on hand
Debtors (trade receivables)
Accrued income
Pre-paid expenses
Bank (positive balance)
Cash float
Petty cash
Examples of non-current assets are:
zz
zz
zz
zz
zz
25
Land and buildings
Vehicles
Furniture
Equipment
Machinery
FAC1501/1
95
Liabilities can also be non-current or current, depending on when the liability must be settled:
zz
Some liabilities are payable more than one year after financial year end, that is, they are not payable
within the next financial year. These liabilities are classified as non-current liabilities.
zz
Liabilities payable within the next financial year are classified as current liabilities.
96
Let’s have a look at the difference between current and non-current liabilities:
LIABILITIES
Liabilities are present obligations
(debts) of an entity as a result of past
events (borrowing or purchasing) and
represent a potential outflow of cash
(payment) from the entity.
CURRENT
NON-CURRENT
A liability shall be classified as
current when it satisfies any of the
following criteria:
All other liabilities (thus being liabilities that are not classified as current
liabilities will be classified as noncurrent).
zz
It is expected to be settled in the
entity’s normal operating cycle
(usually one year).
Are long-term debts, and have to be
settled after one year of the statement
of financial position date.
zz
It is held primarily for the purpose
of being traded.
zz
It is due to be settled within twelve
months after the statement of
financial position date.
Examples of current liabilities are:
zz
zz
zz
zz
zz
zz
Creditors (trade payables)
Bank overdrafts
Current portion of long-term
borrowings
Short-term borrowings
Accrued expenses
Income received in advance
Examples of non-current liabilities are:
zz
zz
zz
26
Long-term loans
Mortgage
Debentures
FAC1501/1
According to these principles the correct statement of financial position for BS Electrical is as follows:
97
BS ELECTRICAL
STATEMENT OF FINANCIAL POSITION AS AT 1 JANUARY 20.6
ASSETS
R
Non-current assets
Tools and equipment
Current assets
Bank
EQUITY AND LIABILITIES
Equity
Capital
Non-current liabilities
Long-term loan
Current liabilities
Creditor
8 200
88 800
Total assets
R
40 000
50 000
7 000
97 000 Total equity and liabilities
97 000
The rules that need to be followed when the double-entry accounting is applied can be derived from
the statement of financial position. (The correct vertical format will be discussed later.)
98
99
To summarise the ledger accounts in the general ledger:
Dr
Date
Details
Fol
Bank
R
Date
1
Fol
Cr
R
20.6
20.6
Jan 1
Details
Capital
Long-term loan:
Uni Bank
40 000
Jan 1
Tools and equipment
1 200
50 000
The bank account has transactions on the debit side and the credit side. To determine what the net
result is (ie how much money is left in the bank account) the account must be balanced.
100
An account with entries on both the debit and the credit sides, have to be balanced (to
balance is to find the final amount on the account).
To balance the bank account:
zz
zz
zz
zz
zz
Add the debit side of the bank account and write down the total in pencil: R40 000 +
R50 000 = R90 000.
Add the credit side of the bank account and write down the total in pencil: R1 200.
The debit total of the bank account is more than the credit total. To make the two sides
equal the credit side needs an amount of R90 000 – R1 200 = R88 800. This is the balancing
amount and is recorded on the side of the T-account that is the smallest, in this case,
the credit side. It is shown as a balance c/d.
The account is then totalled (the biggest total in pencil, that is the debit side total of
R90 000) and the balance is b/d on the debit side.
The bank has a debit balance because the entity has an amount of R88 800 left in the
bank account – which represents an asset of the entity.
27
FAC1501/1
Dr
Bank
Date
Details
20.6
Jan 1 Capital
Long-term loan:
Uni Bank
Fol
1
R
Date
Details
20.6
40 000 Jan 1 Tools and equipment
31 Balance
50 000
Fol
c/d
90 000
Feb
1
Balance
b/d
Dr
Details
Fol
R
1 200
88 800
90 000
88 800
2
Capital
Date
Cr
R
Date
Details
Fol
Cr
R
20.6
Jan
Dr
1 Bank
40 000
Tools and equipment
Date
Details
Fol
R
Date
3
Details
Fol
Cr
R
20.6
Jan
1
Big Builders
Bank
7 000
1 200
8 200
To balance an account with only debit transactions, you only have to add the debit side,
that is, R7 000 + R1 200 = R8 200. If there is only one amount in an account it is left as is.
Dr
Date
Big Builders
Details
Fol
R
4
Date
Details
Fol
20.6
Jan 1 Tools and equipment
Dr
Date
Long-term loan: Uni Bank
Details
Fol
R
Date
Cr
R
7 000
5
Details
Fol
Cr
R
20.6
Jan
28
1
Bank
50 000
FAC1501/1
According to the balances on the ledger accounts in the general ledger of the assets,
liabilities and equity, it can be recognised in the statement of financial position as follows:
101
BS ELECTRICAL
STATEMENT OF FINANCIAL POSITION AS AT 1 JANUARY 20.6
ASSETS
Non-current assets
Tools and equipment
Current assets
Bank
Note
R
8 200
8 200
88 800
88 800
Total assets
EQUITY AND LIABILITIES
Equity
Capital
Non-current liabilities
Long-term loan: Uni Bank
Current liabilities
Creditor (Big Builders)
40 000
40 000
50 000
50 000
7 000
7 000
Total equity and liabilities
97 000
97 000
The statement of financial position is now shown in its vertical format and this is the correct format
that must be used in future.
102
29
FAC1501/1
2.9
EXERCISES AND SOLUTIONS
EXERCISE 1
3
(a) Define the concept of an accounting entity.
(b) Describe the financial position of an entity in terms of the accounting equation.
(c) Explain the nature of
(i) assets
(ii) equity
(iii) liabilities
(d) Name two sources of financing.
(e) What is meant by the double-entry principle?
4
SOLUTION: EXCERCISE 1
(a) An accounting entity is any entity for which separate financial records are kept.
(b) ASSETS =
EQUITY
+
LIABILITIES
(c) (i) Assets are the possessions of the entity.
(ii) Equity is the interest which the owner has in the business and which the entity therefore
owes to him.
(iii) Liabilities are creditors’ interest or interests of parties other than the owner(s). Liabilities are
therefore the debts of the entity.
(d) The owner and creditors.
(e) In principle it means that every transaction has a dual effect on the elements of the accounting
equation and that after every transaction the accounting equation must remain in balance.
5
103
EXERCISE 2
The assets of Maxi Services amount to R30 000 and its liabilities (creditors) to R5 000.
6
REQUIRED
Calculate the equity.
7
SOLUTION: EXCERCISE 2
Use the accounting equation. The amounts which are given are substituted for the appropriate symbol
and the value of the unknown symbol is calculated.
104
A
=
E +
L
E
=
A –
L
E
=
R30 000
R5 000
E
=
R25 000
105
106
107
108
–
30
FAC1501/1
EXERCISE 3
8
T Tom is the owner of Zebra Services which offers a carpet cleaning service. On 30 November 20.6
Zebra Services owns equipment amounting to R100 000. Clients owe R40 000 for services rendered
and Zebra Services owes R20 000 to a supplier for parts purchased. Zebra Services also has R10 000
in cash in the bank.
109
9
REQUIRED
Show the accounting equation and determine the equity.
10
110
SOLUTION: EXCERCISE 3
Step 1:
Identify the assets:
111
112
113
114
Step 2:
=
R100 000
Debtors
=
R40 000
Cash
=
R10 000
Identify the liabilities:
Creditors control
115
116
117
Equipment
= R20 000
Substitute these amounts into the equation:
A
=
E +
L
E
=
A –
L
E
=
R(100 000 + 40 000 + 10 000)
–
R20 000
E
=
R150 000 –
R20 000
E
=
R130 000
118
119
120
121
31
FAC1501/1
Zebra Service’s financial position can also be presented in the form of a statement of financial position
as follows:
122
ZEBRA SERVICES
STATEMENT OF FINANCIAL POSITION AS AT 30 NOVEMBER 20.6
ASSETS
R
100 000
40 000
10 000
Equipment
Debtors
Cash in bank
EQUITY AND LIABILITIES
Equity
Creditors
150 000
EXERCISE 4
Calculate the missing figures using the accounting equation:
R
= 4 000
Vehicles
= 5 000
Equipment
= 7 000
Equity
=
(b) Equity
=
?
150 000
Loan
= 50 000
Bank
=
Machinery
=
(c) Bank
?
190 000
= 5 000
Debtors
= 15 000
Buildings
=
Furniture
= 40 000
Creditors
= 50 000
Equity
=
(d) Equity
100 000
?
= 60 000
Loan
= 10 000
Creditors
= 6 000
Assets
=
130 000
20 000
150 000
11
(a) Bank
R
?
32
FAC1501/1
SOLUTION: EXCERCISE 4
12
(a) A
=
E
+
L
E
=
A
–
L
E
=
R(4 000 + 5 000 + 7 000)
–
R0
E
=
R16 000
+
L
(b) A
R190 000
+
=
E
Bank
= R150 000
+
R 50 000
Bank
=
R200 000
–
R190 000
Bank
=
R 10 000
(c) A
=
E
+
L
E
=
A
–
L
E
=
R(5 000 + 15 000 + 100 000 + 40 000)
–
R50 000
E
=
R160 000
–
R50 000
E
=
R110 000
(d) A
=
E +
L
A
=
R60 000
R(10 000 + 6 000)
A
=
R76 000
+
33
FAC1501/1
13
SELF-ASSESSMENT
After you have worked through this learning unit, are you
able to:
123
zz
zz
zz
zz
zz
zz
zz
zz
zz
zz
zz
zz
zz
zz
classify the different elements of financial statements correctly?
define an asset?
define a liability?
define income?
define expenses?
explain the difference between (and give examples of)
non-current assets and current assets?
explain the difference between (and give examples of)
non-current liabilities and current liabilities?
explain the difference between (and give examples of)
income and expenses?
list the rules for debiting and crediting different type of
accounts concerning assets, equity and liabilities?
correctly classify any given account concerning assets,
equity and liabilities?
correctly enter any given transaction concerning assets,
equity and liabilities into the accounting equation?
correctly apply the accounting equation to any given
transaction concerning assets, equity and liabilities?
correctly enter any given transaction concerning assets,
equity and liabilities in the ledger accounts?
prepare a statement of financial position?
If you have marked all J you may continue to the next learning unit .
124
If you have marked any K you have to revise that specific section.
125
If you have marked any L you have to re-study that specific section.
34
J
J
J
J
J
K
K
K
K
K
L
L
L
L
L
J
K
L
J
K
L
J
K
L
J
K
L
J
K
L
J
K
L
J
K
L
J
J
K
K
L
L
1
FAC1501
LEARNING UNIT 3
THE ACCOUNTING
EQUATION: FINANCIAL
PERFORMANCE
Introductory Financial
Accounting
FAC1501/1
OVERVIEW
2
Learning outcomes���������������������������������������������������������������������������������������������������������������������������� 36
Key concepts������������������������������������������������������������������������������������������������������������������������������������� 36
Assessment criteria��������������������������������������������������������������������������������������������������������������������������� 37
3.1
Introduction���������������������������������������������������������������������������������������������������������������������������� 37
3.2
The accounting equation: Financial performance������������������������������������������������������������������ 37
3.3
The trial balance�������������������������������������������������������������������������������������������������������������������� 46
3.4
The profit or loss account������������������������������������������������������������������������������������������������������� 47
3.5
The statement of profit or loss and other comprehensive income����������������������������������������� 50
3.6
Summary�������������������������������������������������������������������������������������������������������������������������������� 51
3.7
Exercises and solutions��������������������������������������������������������������������������������������������������������� 53
Self-assessment�������������������������������������������������������������������������������������������������������������������������������� 60
LEARNING OUTCOMES
After studying this learning unit you should be able to:
1
1
zz
zz
zz
zz
zz
zz
understand the accounting equation concerning income and expenses
explain the effects of financial accounting entries concerning income and expenses on the accounting equation
prepare entries in general ledger accounts of income and expenses
prepare a trial balance for a service entity
prepare a profit or loss account for a service entity
prepare a statement of profit or loss and other comprehensive income for a service entity
KEY CONCEPTS
zz
zz
zz
zz
zz
zz
Income
Expenses
Debtors
Trial balance
Profit or loss account
Statement of profit or loss and other comprehensive income
36
FAC1501/1
ASSESSMENT CRITERIA
zz
zz
zz
3.1
Business transactions concerning income and expenses are explained with
appropriate examples.
Accounting policy is demonstrated according to the right methods and procedures
when recording in the accounting equation format and in the ledger accounts.
Expenses and income and gains and losses are defined and classified for
recognition in the statement of profit or loss and other comprehensive income.
INTRODUCTION
The objective of every entity is to earn as large a profit as possible. It is therefore necessary to determine
the financial performance of the entity by calculating the financial result over a specific period.
2
3.2
THE ACCOUNTING EQUATION: FINANCIAL PERFORMANCE
The financial result of an entity is measured in terms of the profit or loss which the entity has made
over a specific period. This period is known as the financial period and is usually one year.
3
An entity makes a profit when the income it has earned from its business activities is more
than the expenditure it has incurred in generating or producing that income.
An entity makes a loss when the expenditure it has incurred in generating or producing
income is more than the income it has earned.
PROFIT/LOSS FOR THE YEAR = INCOME – EXPENSES
An entity must earn an income to be able to pay its expenses. Profit for the year is the owner’s reward
for the capital invested and the entrepreneurial spirit shown.
4
Profit (gains) or income is credited because it increase the equity (capital) amount owed to
the owner of the entity. If equity increases the account must be credited.
Dr (debit side)
– (decrease)
Capital
(credit side) Cr
+ (increase)
The following rule can be applied to profit/income:
5
Dr (debit side)
Profit/income
– (decrease)
37
(credit side) Cr
Always credited
+ (increase)
FAC1501/1
INCOME
Profit/income is the increase in
economic benefits of an entity during an
accounting period which results in an
increase in equity. Such an increase can
be the result of an increase in assets or
a decrease in liabilities.
REVENUE
PROFIT/GAINS
Revenue earned from the entity’s
normal activities (daily operating
activities), for example:
zz
fees earned
zz
sales
zz
interest income
zz
rental income
zz
commission income
zz
credit losses recovered
Gains are increases in economic
benefits, which do not arise from the
normal activities of the entity, for
example:
zz
profit on sale of non-current asset
Expenses are incurred to earn income.
6
Losses or expenses are debited because it decreases the equity (capital) amount owed
to the owner of the entity. If equity decreases the losses or expense accounts must be
debited.
Dr (debit side)
– (decrease)
Capital
(credit side) Cr
+ (increase)
The following rule can be applied to losses/expenses:
7
Dr (debit side)
Always debited
+ (increase)
Losses/expenses
(credit side) Cr
– (decrease)
38
FAC1501/1
EXPENSES
Losses/expenses are the outflow of
economic benefits (payments/losses)
during the accounting period, which
results in a decrease in equity. Such a
decrease can be the result of a decrease
in assets or an increase in liabilities.
EXPENSES
Expenses are incurred in the normal
course of the entity’s activities. They
arise from the generation of income,
for example:
zz
Cost of sales
zz
Rental expenses
zz
Interest expenses
zz
Wages and salaries
zz
Advertising
zz
Credit losses
zz
Insurance
zz
Repairs and maintenance
zz
Telephone expenses
zz
Water and electricity
zz
Postage
zz
Rates and taxes
zz
Stationery
zz
Consumables
zz
Packing materials
zz
Bank charges
zz
Depreciation
zz
Administrative expenses
LOSSES
Losses are decreases in economic
benefits, which do not arise from
the normal activities of the entity, for
example:
zz
39
Loss on sale of non-current asset
FAC1501/1
Let’s consider a few more transactions of Mr Bingole Sithole for the 20.6 financial year that generate
income or give rise to expenditure. The financial year ends annually on 31 December.
8
Transaction 5:
9
Mr Bingole Sithole rendered a service on 15 January, for cash, to a client for the amount of R60 000.
10
11
Explanation:
Received money for services
increases and must be debited.
12
Dr (debit side)
rendered,
therefore
the
bank
Assets
account
(an
asset)
(credit side) Cr
+ (increase)
– (decrease)
Services rendered are an income that increases the profit for the year. Therefore, equity increased
and services rendered account must be credited. You will now see that the double entry principle
has been adhered too.
13
Dr (debit side)
Profit/income
(credit side) Cr
– (decrease)
+ (increase)
The effect of the transaction on the accounting equation can be illustrated as follows:
14
=
A
+
E
Bank
Tools and
equipment
Capital
Income/
expenditure
R
R
R
R
88 800
8 200
148 800
Big Builders Uni Bank
(creditor)
(long-term
loan)
R
40 000
+ 60 000
L
R
7 000
50 000
7 000
50 000
+ 60 000
8 200
=
40 000
15
40
60 000
+
FAC1501/1
The above transaction will be recorded in the ledger accounts as follows:
16
17
1. The debit-side of the bank account:
Dr
Date
Details
Fol
Bank
R
Date
18
Cr
R
20.6
20.6
Jan
1
Fol
Details
1 Capital
Long-term loan: Uni
Bank
15 Services rendered
(account to be
credited)
40 000 Jan
1 Tools and equipment
1 200
50 000
60 000
2. The credit-entry in the services rendered account:
Dr
Date
Details
Services rendered
Fol
R
Date
2
Fol
Details
Cr
R
20.6
Jan 15 Bank (account to be
debited)
60 000
Transaction 6:
19
Mr Bingole Sithole rendered a service on 16 January, on credit, to M Beauty for the amount of R20 000.
20
21
Explanation:
Clients owe BS Electrical money. These clients are called debtors (resource controlled by the entity), as
a result of past events (rendering of services), and from which future economic benefits are expected
(money to be received). Therefore, it is an asset. Assets increased and M. Beauty (a debtor) must
be debited.
22
A person who owes money to the entity is a debtor (asset).
Dr (debit side)
+ (increase)
Assets
(credit side) Cr
- (decrease)
Services rendered is an income that increases the profit for the year. Therefore, equity
increased and services rendered account must be credited.
23
Dr (debit side)
– (decrease)
Profit/income
24
41
(credit side) Cr
+ (increase)
FAC1501/1
The effect of the transaction on the accounting equation can be illustrated as follows:
25
A
Bank
R
=
E
Tools and M. Beauty
equipment (debtor)
R
88 800
R
8 200
Capital
Income/
expenditure
R
R
Big
Uni Bank
Builders (long-term
(creditor)
loan)
R
R
7 000
50 000
7 000
50 000
+ 60 000
+ 20 000
148 800
27
L
40 000
+ 60 000
26
+
8 200
+ 20 000
20 000 =
40 000
80 000 +
The above transaction will be recorded in the ledger accounts as follows:
1. The debit-side of M Beauty’s account:
Dr
Date
Details
M. Beauty
Fol
R
Date
Details
6
Fol
R
Cr
Details
7
Fol
R
20.6
Jan 16 Services rendered
(account to be
credited)
28
2.
20 000
The credit-entry in the services rendered account:
Dr
Date
Details
Services rendered
Fol
R
Date
Cr
20.6
Jan 15 Bank
16 M. Beauty (account
to be debited)
29
60 000
20 000
Transaction 7:
30
On 28 January the business’s telephone account for January was paid by cheque, R1 200.
Explanation:
31
Telephone expenses is an expense that decreases the profit for the year. Therefore, equity
decreased and the telephone expense account must be debited.
32
Dr (debit side)
+ (increase)
Losses/expenses
42
(credit side) Cr
– (decrease)
FAC1501/1
Paid money for the telephone account, therefore the bank account (an asset) decreases and must
be credited. To complete the double entry the appropriate expense account must be debited.
33
Dr (debit side)
+ (increase)
Assets
(credit side) Cr
– (decrease)
The effect of the transaction on the accounting equation can be illustrated as follows:
34
A
Bank
R
88 800
=
E
Tools and M Beauty
equipment (debtor)
R
Capital
Income/
expenditure
R
R
R
8 200
L
Big
Uni Bank
Builders (long-term
(creditor)
loan)
R
R
7 000
50 000
7 000
50 000
40 000
+ 60 000
+ 60 000
+ 20 000
+ 20 000
– 1 200
147 600
+
– 1 200
8 200
20 000
=
40 000 78 800
+
The above transaction will be recorded in the ledger accounts as follows:
35
36
1. The entry on the debit-side of the telephone expenses account:
Dr
Date
Details
Telephone expenses
Fol
R
Date
Details
8
Fol
Cr
R
Details
1
Fol
R
20.6
Jan 28 Bank (account to be
credited)
37
2.
1 200
The credit-entry in the bank account:
Dr
Date
Details
Fol
Bank
R
Date
20.6
20.6
Jan
Cr
1 Capital
Long-term loan: Uni
Bank
15 Services rendered
40 000 Jan
50 000
60 000
38
43
1 Tools and equipment
28 Telephone expenses
(account to be
debited)
1 200
1 200
FAC1501/1
39
Transaction 8:
40
On 31 January the receptionist’s salary for January was paid by cheque, R6 000.
Explanation:
41
Salaries account is an expense that decreases the profit for the year. Therefore, equity
decreased and salaries account must be debited.
42
Dr (debit side)
+ (increase)
Losses/expenses
(credit side) Cr
– (decrease)
Paid the salary of the receptionist, therefore the bank account (an asset) decreases and must
be credited. To complete the double entry the appropriate expense account must be debited.
43
Dr (debit side)
+ (increase)
44
Assets
(credit side) Cr
– (decrease)
The effect of the transaction on the accounting equation can be illustrated as follows:
A
Bank
R
88 800
=
E
Tools and M. Beauty
equipment (debtor)
R
Capital
Income/
expenditure
R
R
R
8 200
40 000
+ 60 000
46
Big
Uni Bank
Builders (long-term
(creditor)
loan)
R
R
7 000
50 000
7 000
50 000
+ 20 000
– 1 200
– 1 200
– 6 000
– 6 000
141 600
L
+ 60 000
+ 20 000
45
+
8 200
20 000
=
40 000
72 800 +
The above transaction will be recorded in the ledger accounts as follows:
1. The debit-side of the salaries account:
Dr
Date
Details
Salaries
Fol
R
Date
20.6
Jan 31 Bank (account to be
credited)
6 000
47
44
Details
9
Fol
Cr
R
FAC1501/1
48
2.
The credit-entry in the bank account:
Dr
Date
Details
Fol
R
Date
20.6
Jan
49
1
Bank
Details
Fol
Cr
R
20.6
40 000 Jan
1 Capital
Long-term loan: Uni
Bank
15 Services rendered
50 000
60 000
1 200
1 200
6 000
1 Tools and equipment
28 Telephone expenses
31 Salaries (account to
be debited)
A summary of all the ledger accounts in the general ledger, at the end of January 20.6 are as follows:
50
The bank account must be balanced off.
BS ELECTRICAL
51
52
Dr
Date
Details
Fol
GENERAL LEDGER
Bank
R
Date
1
Fol
Cr
R
20.6
20.6
Jan
Details
40 000 Jan
1 Capital
15 Long-term loan: Uni
Bank
Services rendered
50 000
60 000
1 Tools and equipment
28 Telephone expenses
31 Salaries
Balance
c/d
150 000
Feb
Dr
Date
1 Balance
Details
b/d
Fol
1 200
1 200
6 000
141 600
150 000
141 600
Capital
R
Date
Details
2
Fol
Cr
R
20.6
Jan
Dr
Date
Details
Tools and equipment
Fol
R
Date
20.6
Jan
1 Big Builders
Bank
1 Bank
7 000
1 200
8 200
53
45
40 000
Details
3
Fol
Cr
R
FAC1501/1
Dr
Date
Big builders
Fol
R
Date
Details
Details
4
Fol
Cr
R
20.6
Jan
Dr
Date
1 Tools and equipment
Long-term loan: Uni Bank Account
Details
Fol
R
Date
Details
7 000
5
Fol
Cr
R
20.6
Jan 1
Dr
Date
Bank
M Beauty
Fol
R
Date
Details
50 000
Details
6
Fol
Cr
R
Details
7
Fol
R
20.6
Jan 16 Services rendered
Dr
Date
Details
20 000
Fol
Services rendered
R
Date
Cr
20.6
Jan 15 Bank
16 M Beauty
Dr
Date
Details
Fol
Telephone expenses
R
Date
60 000
20 000
Details
8
Fol
R
Cr
Details
9
Fol
R
20.6
Jan 28 Bank
Dr
Date
1 200
Details
Salaries
Fol
R
Date
Cr
20.6
Jan 31 Bank
6 000
The ledger accounts in the general ledger numbered from 1 to 6 are asset accounts, liability accounts
and equity accounts. These balances will appear in the statement of financial position. The ledger
accounts in the general ledger numbered from 7 to 9 are all income/profit accounts and expense/loss
accounts. The arithmetical correctness of the recording of transactions in the general ledger must be
tested on a regular basis. This usually takes place once all transactions up to and including a certain
date (in this case for the month of January) have been recorded in the general ledger and before
any final financial statements are prepared. A trial balance will be compiled to check the arithmetical
correctness of the recording of transactions in the general ledger.
54
3.3
THE TRIAL BALANCE
The total of all the debit balances on the ledger accounts should be equal to the total of all the
credit balances on the ledger accounts, because all the transactions should have been recorded
55
46
FAC1501/1
in accordance with the double-entry principle. To determine whether this is so, the balances of all
accounts are determined and recorded in a statement known as the trial balance.
A trial balance is a list of all the balances of all the accounts in the general ledger on a
particular date.
The names and balances are recorded in the trial balance in the order in which they appear in the
general ledger. There are two columns in which debit balances and credit balances are recorded. The
final totals of the two columns should always be the same.
56
BS ELECTRICAL
TRIAL BALANCE AS AT 31 JANUARY 20.6
Debit
R
141 600
Bank
Capital
Tools and equipment
Big Builders
Long-term loan: Uni Bank
M. Beauty
Services rendered
Telephone expenses
Salaries
8 200
20 000
1 200
6 000
177 000
Credit
R
40 000
7 000
50 000
80 000
177 000
The errors which may be revealed by a trial balance will be discussed in detail in a later learning unit.
The debit balances total is equal to the credit balances total and the profit or loss account can now
be compiled.
57
3.4
THE PROFIT OR LOSS ACCOUNT
If Mr Bingole Sithole wants to determine after one month whether it is worthwhile for him to carry on
the business, the profit/income accounts and losses/expense accounts must be closed off to the profit
or loss account so that the profit for the month can be calculated.
58
The financial result of an entity is measured in terms of the profit or loss which the entity has made
over a specific period. This period is known as the financial period and is usually one year.
59
At the end of the financial period (usually a year) all expense/loss accounts and income/
profit accounts of a service entity must be closed off to a profit or loss account which
forms the basis for the preparation of a statement of profit or loss and other comprehensive income.
60
47
FAC1501/1
Explanation of the transfer of income to the profit or loss account:
61
To close off the services rendered account (income), the services rendered account must be debited
with R80 000, which is equal to the total of the amounts on the credit side (R60 000 + R20 000). There
is no total on the debit side. To balance off the ledger account the total amount of R80 000 will be
entered on the debit side. The name of the account that must be credited to complete the double-entry
is profit or loss account. The services rendered account will now balance off.
62
The profit or loss account is credited with R80 000. This is done to adhere to the doubleentry principle.
63
Dr
Date
Details
Services rendered
Fol
R
Date
20.6
7
Fol
Cr
R
20.6
Jan 31 Profit or loss (account
to be credited)
64
Details
80 000 Jan 15 Bank
16 M. Beauty
60 000
20 000
80 000
80 000
Explanation of the transfer of expenditure to the profit or loss account:
To close off the telephone expense account (an expense), the telephone expenses account must be
credited with R1 200 which is equal to the total amount on the debit side, R1 200. There is no balance
on the telephone expense account because the total amount is taken to the profit or loss account.
65
The profit or loss account is debited with R1 200. This is done to adhere to the double-entry principle.
66
Dr
Date
Details
Fol
Telephone expenses
R
Date
20.6
Jan 28 Bank
Details
8
Fol
Cr
R
20.6
1 200
Jan 31 Profit or loss (account
to be debited)
1 200
1 200
1 200
The same principle is applicable to the closing off of the salaries account (an expense) to the profit or
loss account.
67
The salaries account must be credited with R6 000, the total of the amount on the debit side, R6 000.
There is no balance on the salaries account because the total amount is taken to the profit or loss
account.
68
69
The profit or loss account is debited with R6 000. This is done to adhere to the double-entry principle.
70
48
FAC1501/1
Dr
Date
Details
Fol
Salaries
R
Date
20.6
Details
9
Fol
Cr
R
20.6
Jan 31 Bank
6 000 Jan 31 Profit or loss (account
to be debited)
6 000
6 000
6 000
The profit or loss account is a final account in the general ledger and the statement of profit or loss and
other comprehensive income is one of the financial statements an entity has to prepare. It uses the
same information, but the one is an account while the other is a statement (no debit side or credit side).
71
72
The profit or loss account is as follows:
Dr
Date
Details
Fol
Profit or loss
R
Date
20.6
Jan 31 Telephone expenses
(account to be
credited)
Salaries (account to
be credited)
Capital (Profit for the
month) (account to
be credited)
Details
10
Fol
Cr
R
20.6
1 200 Jan 31 Services rendered
(account to be
debited)
6 000
80 000
72 800
80 000
80 000
An entity makes a profit when the income it has earned is more than the expenditure it has incurred
in generating or producing that income. BS Electrical has made a profit for the month because the
income earned, R80 000, is more than the expenses incurred in generating the income, R1 200 +
R6 000 = R7 200. The income earned (profit) is R80 000 – R7 200 = R72 800.
73
To calculate the profit or loss for the month (the same as calculating the
balance c/d):
zz
zz
zz
zz
zz
Add the debit side of the profit or loss account and write down the total in pencil: R1 200
+ R6 000 = R7 200.
Add the credit side of the profit or loss account and write down the total in pencil: R80 000.
The credit total of the profit or loss account is more than the debit total. To make the
two sides equal the debit side needs an amount of R80 000-R7 200 = R72 800. This is
the balancing amount and is recorded on the side of the profit or loss account that is
the smallest in this case, the debit side. It is a profit because the income is greater than
than the expenses.
The account is then totalled (the biggest total in pencil, that side is the credit side total
of R80 000).
The capital account will be credited, therefore the reference on the debit side of the profit
or loss account will be capital account (profit for the month).
49
FAC1501/1
The last transfer is the entry for the profit for the period that must be credited to the capital account
(profit or loss account is debited) because BS Electrical owes the profit to the owner, Mr B. Sithole.
The profit for the month is the owner’s reward for the capital he has invested and the entrepreneurial
spirit he has shown. It therefore increases the equity.
74
Dr
Date
Details
Fol
Capital
R
Date
Details
2
Fol
Cr
R
20.6
Jan
1 Bank
31 Profit or loss (profit
for the month)
(account to be
debited)
40 000
72 800
112 800
A statement of profit or loss and other comprehensive income will now be compiled using the
information included in the profit or loss account.
75
3.5 THE STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME
The aim of the statement of profit or loss and other comprehensive income is to reflect the financial
performance (profit/loss) for a financial period.
76
77
The statement of profit or loss and other comprehensive income is as follows:
BS ELECTRICAL
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE MONTH ENDED 31 JANUARY 20.6
Notes
R
Services rendered
80 000
Distribution, administrative and other expenses
(7 200)
Telephone expenses
1 200
Salaries
6 000
Profit for the month
Other comprehensive income for the month*
Total comprehensive income for the month
78
72 800
—
72 800
* Other comprehensive income for the month falls outside the scope of the FAC1501 syllabus.
Notes fall outside the scope of this module.
79
In order to complete the set of financial statements the statement of financial position will also
be compiled.
80
81
50
FAC1501/1
The statement of financial position is as follows:
BS ELECTRICAL
STATEMENT OF FINANCIAL POSITION AS AT 31 JANUARY 20.6
Notes
ASSETS
Non-current assets
Tools and equipment
Current assets
Debtors control
Bank
R
8 200
8 200
161 600
20 000
141 600
Total assets
EQUITY AND LIABILITIES
Equity
Capital
Non-current liabilities
Long-term loan: Uni Bank
Current liabilities
Creditors control
169 800
Total equity and liabilities
169 800
112 800
112 800
50 000
50 000
7 000
7 000
Learning unit 2 and 3 are the most important learning units in financial accounting. Please make sure
you understand the rules concerning assets, liabilities, equity, profit/income accounts and losses/
expense accounts. You will have no problems with financial accounting in future if you understand
these rules and know how to apply them.
82
3.6
SUMMARY
The table below presents a useful overview of the accounting equation and the related sub-categories
of the elements of financial statements. Examples of relevant ledger accounts are provided under
each category.
83
84
85
51
CURRENT ASSETS
Trading inventory
Debtors control
Prepaid expenses
Accrued income
Bank
Petty cash
Cash float
Investments (financial)
Goodwill
Machinery
NON-CURRENT ASSETS
Land and buildings
Equipment
Vehicles
Furniture
ASSETS
Debit (+) Credit (–)
=
EXPENSES
Cost of sales
Rental expenses
Interest expense
Wages and salaries
Advertising
Insurance expenses
Repairs and maintenance
Telephone expenses
Water and electricity
Credit losses
Postage
Rates and taxes
Stationery
Consumables
Packaging materials
Loss on sale of a non-current
asset
* DRAWINGS
INCOME
Sales
Rental income
Interest income
Dividend income
Commision income
Credit losses recovered
Profit on sale of a noncurrent asset
* CAPITAL
EQUITY
Debit (–) Credit (+)
+
CURRENT LIABILITIES
Short-term loans
Creditors control
Bank overdraft
Current portion of long-term
loans
Accrued expenses
Income received in advance
Long-term loans
Mortgage
NON-CURRENT LIABILITIES
LIABILITIES
Debit (–) Credit (+)
FAC1501/1
52
FAC1501/1
3.7
EXERCISES AND SOLUTIONS
EXERCISE 1
3
(a)
(b)
(c)
(d)
(e)
(f)
4
How is the financial result calculated in financial accounting terms?
Which financial report reflects the financial result?
Give three examples of income.
Give three examples of expenditure.
How is profit/loss determined for a financial period?
Does a loss increase or decrease the equity of the owner?
SOLUTION: EXCERCISE 1
(a) PROFIT FOR THE YEAR
=
INCOME
–
EXPENDITURE
(b) The statement of profit or loss and other comprehensive income for the year ended …
(c) ● fees earned
zz sales
zz interest income
zz rental income
zz commission income
zz credit losses recovered
(d) ● cost of sales
zz rental expenses
zz interest expense
zz wages and salaries
zz advertising
zz credit losses
zz insurance
zz repairs and maintenance
zz telephone expenses
zz water and electricity
zz postage
zz rates and taxes
zz stationery
zz consumables
zz packing materials
zz bank charges
zz depreciation
zz administrative expenses
(e) PROFIT FOR THE YEAR
=
INCOME
–
EXPENDITURE
(f) A loss decreases income and profits and therefore also decreases the equity.
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FAC1501/1
EXERCISE 2
5
86
87
The financial position of T Payn, an attorney, at 28 February 20.6 is as follows:
A =
R50 000
=
E +
R30 000
+
88
89
L
R20 000
For the year ended 28 February 20.7 he had the following income and expenditure:
R
180 000
100 000
20 000
10 000
Fees earned
Salaries
Administrative expenses
Insurance expenses
REQUIRED
6
Calculate T Payn’s equity as at 28 February 20.7.
7
SOLUTION: EXCERCISE 2
Income
=
Fees earned R180 000
Expenditure
=
alaries R100 000 + Administrative expenses R20 000 + Insurance
S
expenses R10 000
=
R130 000
=
Income
–
Expenses
=
R180 000
–
R130 000
=
R50 000
Equity
=
Capital
+
Profit for the year
E
=
R30 000 (20.6)
+
R50 000 (20.7)
E
=
R80 000
90
91
92
93
Profit for the year
8
9
EXERCISE 3
REQUIRED
List each of the following ledger accounts under one of the categories in the table
below. “Furniture” is inserted as an example.
ASSETS
Non-current
assets
Current assets
EQUITY
Capital
Income
Furniture
94
54
LIABILITIES
Expenditure
Non-current
liabilities
Current
liabilities
FAC1501/1
95
Ledger accounts to be classified:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
land and buildings
mortgage
petty cash
postage
interest income
vehicles
salaries
debtors
creditors
bank overdraft
fees earned
electricity deposit
subscriptions
SOLUTION: EXCERCISE 3
10
ASSETS
Non-current
assets
(a)
EQUITY
Current
assets
Capital
Income
LIABILITIES
Expenditure
mortgage
(c)
petty cash
(d)
postage
(e)
interest
income
vehicles
(g)
(h)
salaries
debtors
(i)
creditors
(j)
bank
overdraft
(k)
(l)
fees
earned
electricity
deposit *
(m)
96
Current
liabilities
land and
buildings
(b)
(f)
Non-current
liabilities
subscriptions
* Electricity deposit is an amount paid by the entity to serve as security for the payment of the electricity account. The
amount will be paid back to the entity if they sell the land and buildings and will no longer make use of the electricity;
therefore it is not an expense but a current asset.
55
FAC1501/1
EXERCISE 4
11
D Paulus started a television antenna installation service on 1 June 20.6. The following transactions
took place during the first month:
97
98
Transactions:
99
June
100
101
102
103
1
2
Cash in the bank deposited as opening capital, R25 000.
D Paulus made his private equipment available to the business, R9 000.
3
Additional equipment purchased and paid for by cheque, R12 000.
4
Installation fees for work done on account for Kannadrift Municipality,
R4 200.
6
Vehicle purchased on credit from Virginia Cars Limited, R22 400.
17
104
Kannadrift Municipality paid R2 200 on their account.
28
Wages paid, R4 000.
30
Paid R9 000 to Virginia Cars Limited in part settlement of the
entity’s account.
105
106
12
REQUIRED
Use the accounting equation to analyse the above mentioned transactions as follows:
107
NB: (1) Show the effect of each transaction on the accounting equation with a plus sign (+) for an
increase and a minus sign (–) for a decrease.
108
Example:
On 1 July 20.6 D Paulus received R2 000 in cash for an installation done for Cook
Financing Corporation.
Accounting equation
Date
Assets
=
Equity
+ Liabilities
20.6
July
1
+ R2 000
+ R2 000
0
Cash received will increase the bank, therefore assets increased.
109
The cash was for installation fees, an income, therefore equity increased.
110
111
56
FAC1501/1
SOLUTION: EXCERCISE 4
13
Date
Accounting equation
Assets
20.6
June 1
2
3
4
6
17
28
30
=
+ R25 000
+ R 9 000
+ R12 000
– R12 000
+ R 4 200
+ R22 400
+ R 2 200
– R 2 200
– R 4 000
– R 9 000
+
Liabilities
+ R25 000
+ R 9 000
+ R 4 200
– R 4 000
R47 600
112
Equity
R34 200
+ R22 400
– R 9 000
R13 400
Assets (R47 600) = Equity (R34 200) + Liabilities (R13 400)
EXERCISE 5
14
The following transactions relate to Witblits Electricians:
113
114
Transactions:
115
Oct
1 W Blits, the owner, deposited as opening capital, R10 000.
Obtained a loan from SA Bank, R6 000.
3 Bought equipment on credit from Sparks Dealers, R1 000.
9 Issued a cheque for an advertisement in a local newspaper, R200.
12 Paid the telephone account by cheque, R75.
13 Received a cheque from H House for services rendered, R500.
24
As an additional capital contribution W Blits transferred his motor
vehicle to the business, R9 000.
27 Paid salaries by cheque, R2 000.
30 Issued a cheque to SA Bank as a repayment on the loan, R1 500.
116
117
118
119
120
121
122
123
REQUIRED
15
Prepare the appropriate general ledger accounts which reflect the above transactions in the books
of Witblits Electricians. The general ledger accounts must be properly balanced at 31 October 20.6.
124
NB:
Indicate the correct contra general ledger account.
57
FAC1501/1
SOLUTION: EXCERCISE 5
16
125
WITBLITS ELECTRICIANS
126
Dr
Date
GENERAL LEDGER
Capital
Fol
R
Date
Details
Details
1
Fol
Cr
R
20.6
Oct
1 Bank
24 Motor vehicles
10 000
9 000
19 000
Dr
Date
Details
Fol
Bank
R
Date
20.6
Oct
Details
2
Fol
Cr
R
20.6
Oct
10 000
1 Capital
Long-term loan:
SA Bank
13 Services rendered
6 000
500
Advertisements
Telephone expenses
Salaries
Long-term loan: SA
Bank
31 Balance
200
75
2 000
9
12
27
30
c/d
16 500
Nov
1 Balance
Dr
Date
Details
b/d
16 500
12 725
Long-term loan: SA Bank
Fol
R
Date
Details
20.6
3
Fol
Cr
R
20.6
Oct 30 Bank
31 Balance
c/d
1 500 Oct
4 500
1
Bank
6 000
6 000
6 000
Nov 1
Dr
Date
1 500
12 725
Details
Equipment
Fol
R
Date
Balance
b/d
4 500
Details
4
Fol
Cr
R
Details
5
Fol
R
20.6
Oct 3
Dr
Date
Sparks Dealers
Details
1 000
Motor vehicles
Fol
R
Date
20.6
Oct 24 Capital
9 000
58
Cr
FAC1501/1
Dr
Date
Details
Sparks Dealers
Fol
R
Date
Details
6
Fol
Cr
R
20.6
Oct
Dr
Date
Details
3
Equipment
Services rendered
Fol
R
Date
Details
1 000
7
Fol
Cr
R
20.6
Oct 13 Bank
Dr
Date
20.6
Details
Telephone expenses
Fol
R
Date
Oct 12 Bank
Dr
Date
500
Details
8
Fol
Cr
Details
9
Fol
R
Details
10
Fol
R
R
75
Details
Salaries
Fol
R
Date
Cr
20.6
Oct 27 Bank
Dr
Date
2 000
Details
Fol
Advertisements
R
Date
20.6
Oct
9
Bank
200
127
59
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FAC1501/1
17
SELF-ASSESSMENT
After you have worked through this learning unit, are you
able to:
128
zz
zz
zz
zz
zz
zz
zz
zz
zz
zz
zz
129
If you have marked all J you may continue to the next learning unit .
130
131
define income?
define expenses?
explain the difference between (and give examples of)
income and expenses?
explain the rules for debiting and crediting different types
of profit/income and losses/expense accounts?
correctly classify any given profit/income and losses/expense account?
correctly enter any given transaction considering profit/
income and losses/expense into the accounting equation?
correctly apply the accounting equation to any given
transaction considering profit/income and losses/expense?
correctly enter any given transaction concerning profit/
income and losses/expense in the ledger accounts?
prepare a trial balance?
prepare a profit or loss account?
prepare a statement of profit or loss and other comprehensive income?
If you have marked any K you have to revise that specific section.
If you have marked any L you have to re-study that specific section.
60
J
J
K
K
L
L
J
K
L
J
K
L
J
K
L
J
K
L
J
K
L
J
J
J
K
K
K
L
L
L
J
K
L
1
FAC1501
LEARNING UNIT 4
BUSINESS DOCUMENTS:
CASH TRANSACTIONS
Introductory Financial
Accounting
FAC1501/1
OVERVIEW
2
Learning outcomes���������������������������������������������������������������������������������������������������������������������������� 62
Key concepts������������������������������������������������������������������������������������������������������������������������������������� 62
Assessment criteria��������������������������������������������������������������������������������������������������������������������������� 63
4.1
Introduction���������������������������������������������������������������������������������������������������������������������������� 63
4.2
The financial accounting cycle����������������������������������������������������������������������������������������������� 63
4.3
Cash transactions������������������������������������������������������������������������������������������������������������������ 63
4.4
Business documents�������������������������������������������������������������������������������������������������������������� 64
4.5
Starting a business entity������������������������������������������������������������������������������������������������������� 64
4.6
Value Added Tax (VAT)���������������������������������������������������������������������������������������������������������� 65
4.7
Comprehensive example������������������������������������������������������������������������������������������������������� 69
4.8
Exercises and solutions��������������������������������������������������������������������������������������������������������� 93
Self-assessment�������������������������������������������������������������������������������������������������������������������������������114
LEARNING OUTCOMES
1
After studying this learning unit you should be able to:
1
zz
zz
zz
zz
zz
define cash transactions
define source documents
explain the difference between internal source documents and external business documents
explain the applicable source documents involved in different cash transactions
complete different business documents
KEY CONCEPTS
zz
zz
zz
zz
zz
zz
zz
zz
zz
zz
zz
zz
zz
zz
zz
zz
Cash transactions
Source documents
Internal source documents
External source documents
Cash slips
Cash register rolls
Duplicate cash invoices
Original cash invoices
Duplicate receipts
Original receipts
Duplicate cash sales invoices
Cheque counterfoils
Cheques
Original delivery note
Duplicate delivery note
Petty cash voucher
62
FAC1501/1
zz
zz
zz
zz
zz
zz
zz
zz
zz
zz
Original credit card slip
Duplicate credit card slip
Bank statement
Original deposit slip
Duplicate deposit slip
Internet banking: Notice of payment
Value Added Tax (VAT)
Sales
Purchases
Cash discount
ASSESSMENT CRITERIA
zz
zz
zz
zz
zz
4.1
The concept “source documents” is explained and source documents applicable
to cash transactions are identified using appropriate examples from entities.
The principles of VAT and the calculation thereof is explained with examples
to verify the ability to calculate VAT.
The ability to complete business documents applicable to cash transactions
from relevant financial data is demonstrated.
The ability to apply the accounting equation when recording cash transactions
is demonstrated.
The ability to record cash transactions of a sole proprietor in various ledgers
from source documents is demonstrated.
INTRODUCTION
In learning units 2 and 3 you learned how to analyse transactions and to determine their effect on
the accounting equation. The principle of the double-entry system was also explained as well as the
recording of all the transactions in the various ledger accounts. This created a framework within which
you now must study the processing of accounting data in greater detail.
2
4.2
THE FINANCIAL ACCOUNTING CYCLE
Accounting data is processed within a definite framework which is known as the financial accounting
cycle. The financial accounting cycle was explained in learning unit 1.
3
You will remember that, according to the financial accounting diagram, there must first be a transaction
and then there must be proof that a transaction did take place. The proof that a transaction did take
place takes the form of a source document. There are different business documents for different
transactions that serve as proof that transactions did take place. In this learning unit the source
documents for cash transactions will be discussed.
4
4.3
CASH TRANSACTIONS
The transaction of an entity can be either in cash or on credit or a mixture of both. In this learning unit
only business documents applicable to cash transactions will be discussed. Cash transactions always
affect the bank account, petty cash or cash float. That means that, when cash transactions take place,
the entity will either receive or pay out money. The type of source document used to record cash
transactions will depend on the type of transaction that took place.
5
63
FAC1501/1
4.4
BUSINESS DOCUMENTS
When a cash transaction takes place, it is necessary to record it on a business document. These
business documents are necessary to keep record of the large number of transactions that an entity
is engaged in during a business day. It is not practical to record each transaction directly into the
books of the entity. These business documents serve as proof that a transaction between the entity
and another party took place and constitute a record for the further processing of the data on the
business document. The information on the business document gives details of the transaction, which
includes the date, the amount, the type of transaction, and with whom the transaction has taken place.
These documents are referred to as source documents because they are used to record transactions
in the accounting records (books) of an entity. They are thus the source of information to record
the transaction.
6
There are two types of source documents, namely:
7
zz
Internal source documents
Internal source documents are those documents prepared by the entity itself to record transactions with external clients. Source documents are usually drawn up in duplicate. The original will
be given to the other party to the transaction and the duplicate will remain with the entity to
enable the entity to record the transaction in their accounting records. Examples of internal source
documents are:
——
——
——
——
——
——
——
——
zz
cash register rolls
duplicate cash sales invoices
duplicate receipts
cheque counterfoils
petty cash vouchers
duplicate bank deposit slips
internet banking: notice of payment
signed credit card slip
External source documents (also referred to as supporting documents)
External source documents are the documents prepared by the other party to the transaction
and received by the entity as proof that the transaction did take place. The entity will receive the
original source document and the entry into the books is recorded from this original source
document received. Examples of external source documents are:
——
——
——
——
4.5
original cash purchases invoices
original receipts
cheques
cash slips
STARTING A BUSINESS ENTITY
Mr Bingole Sithole, a qualified electrician, starts a small service entity, BS Electrical, from home on
2 January 20.6.
8
Before BS Electrical can start with its business operations, a current bank account must be opened in
the name of the entity, BS Electrical. During the process of opening this current bank account, it must
be determined who the person or persons are who are authorised to sign the cheques issued by the
business entity. Mr B Sithole decided that he would sign the cheques, but because he will not always
be available, he also wants Mrs S Peterson, his newly appointed bookkeeper, to be authorised to sign
9
64
FAC1501/1
the cheques. Mrs S Peterson must accompany Mr B Sithole to Helping Bank Limited because the
bank wants a sample of the signatures of both Mr B Sithole and Mrs S Peterson.
Helping Bank Limited opened a current bank account with the number 9000–123456 in the name
of the entity, BS Electrical, and Mr B Sithole as well as Mrs S Peterson are authorised to sign the
cheques of the business entity.
10
BS Electrical also applied for:
11
zz
zz
zz
zz
zz
Internet banking with Helping Bank Limited. Mrs S Peterson will then be able to make payments
for BS Electrical, via the internet, instead of making payments by cheque. The payments are done,
via the internet, directly into the bank account of the other party. Payments can also be made by
other parties, via the internet, directly into the bank account of BS Electrical.
A business credit card with Helping Bank Limited to be able to do the necessary purchases for
the entity.
A credit card machine (this machine can also be used for debit card transactions) with Helping
Bank Limited. The banks bear the costs of processing the information and collecting outstanding
amounts and also absorb any losses arising from credit losses. For these services, banks charge
entities a fee based on a percentage of the credit card sale (2% to 5%). BS Electrical settled at a
fee of 3% on the credit card sales with Helping Bank Limited.
A business telephone with Telkom.
A VAT number with the South African Revenue Service (SARS).
4.6
VALUE ADDED TAX (VAT)
If a person carries on an entity and the total value of his taxable supplies exceeds or is likely to exceed
R1 000 000 for a twelve-month period, it is compulsory for him or her to register as a vendor. It is
important to note that a person, in the above case Mr B Sithole, is registered as a vendor and not
an entity.
12
Once registered every vendor will fall within a particular category that will determine his or her tax period
(that is, how often a tax return must be completed and submitted to SARS). These categories are:
13
zz
Category A
Vendors whose tax periods are periods of two months ending on the last day of the months of
January, March, May, July, September and November of the calendar year fall in this category.
These are vendors whose taxable supplies for the twelve months do not exceed R30 million or for
farmers whose taxable supplies exceed R1,5 million.
zz
Category B
Vendors whose tax periods are periods of two months ending on the last day of the months of
February, April, June, August, October and December of the calendar year fall in this category.
These are vendors whose taxable supplies for the twelve months do not exceed R30 million or for
farmers whose taxable supplies exceed R1,5 million.
zz
Category C
Vendors whose tax periods are periods of one month ending on the last day of each of the
12 months of the calendar year fall in this category. These are vendors whose taxable supplies for
a twelve month period exceed or are likely to exceed R30 million or for vendors who have specifically applied in writing for a monthly basis.
65
FAC1501/1
zz
Category D
This category is for vendors whose tax periods are periods of six months ending on the last day of
February and August of the calendar year or, where any vendor falling within this category makes
written application, therefore, on the last day of such other months as the Commissioner may approve. These are vendors whose entities consist of farming activities and whose taxable supplies
do not or are not likely to exceed R1,5 million.
zz
Category E
Vendors whose tax periods are periods of twelve months ending on the last day of their year of
assessment fall in this category. These are vendors who are either a company or trust fund which
meet the following criteria:
——
——
——
——
zz
The vendor’s entity entails solely of one or more activities consisting of the letting of fixed
property or the renting of movable goods to or the administration or management of companies
which are connected person in relation to the vendor.
The recipients of these supplies are all registered vendors entitled to the deduction of the full
amount of input tax in respect of the supplies.
Tax invoices are issued once a year and the payments for these supplies only become due
once a year at the end of the year of assessment.
A written application to be placed in this category is made to the Commissioner.
Category F
This category contain vendors whose tax periods are periods of four months ending on the last
day of the months of June, October and February. These are vendors who qualify as small entities
and whose total value of taxable supplies do not exceed or are not likely to exceed in a period of
twelve months R1,5 million, or vendors that has made a written application to SARS to be placed
in this category.
Because we are dealing with small entities in this module, we will look at categories A and B (with
two-month VAT periods).
14
Value added tax (VAT) is a tax levied whenever a product is sold or service is rendered. The VAT is
added to the selling price that a trader expects for goods and the goods are marked at a price inclusive
of VAT. The rate of VAT is decided by the government and is changed from time to time. The current
VAT rate is 14%. A vendor will pay input tax – that is the tax which a vendor himself has borne in
respect of goods or services supplied to him. This amount can be claimed back from SARS. A vendor
will also levy output tax – that is the tax which a vendor charges on the supply of goods or services
rendered. This amount must be paid over to SARS. After two months, the value added tax payable
or refundable by a registered vendor must be calculated. In other words, the difference between the
vendor’s output tax and input tax must be determined. If the input tax is bigger than the output tax the
vendor will claim the amount of the difference from SARS (it is refundable). If the output tax is bigger
than the input tax, the difference is payable to SARS.
15
The following ledger accounts must be opened:
16
zz
zz
zz
a VAT input account
a VAT output account
at the end of every second month a VAT control account, to determine the amount refundable by
or payable to SARS.
The VAT input account and the VAT output account will be closed off to the VAT control account at the
end of every second month.
17
66
FAC1501/1
The amounts of all the transactions will therefore always be the amount excluding VAT.
18
The completed VAT return must be submitted, with payment if required, to SARS on or before the
25th of the month following the end of the tax period. If a vendor is registered on e-filing it must be
submitted, with payment if required, on or before the last day of the month following the end of the tax
period. A penalty of an amount equal to 10% of the tax is payable for late submission of a VAT return.
19
The calculation of the tax payable for a particular tax period will be determined by the accounting
basis used by the vendor. The vendor is allowed to choose between two bases, namely:
20
zz
The invoice basis
In terms of the invoice basis the output tax and the input tax are accounted for, in general, on the
issue of an invoice or on a receipt of payment whichever occurs first.
zz
The payments basis
In terms of the payments basis the output tax is accounted for, in general, when payments are
received and the input tax is accounted for when payments are made. This basis may not be
used automatically, but the vendor must state reasons on the VAT registration form as to why the
payments basis is to be used. The payments basis may also only be used if the total value of the
vendors’ taxable supplies does not exceed R2,5 million for a twelve month period or are not likely
to exceed such amount and the vendor is a natural person.
The debtors’ and creditors’ payment policy applied will determine which basis has the most favourable cash-flow advantage for the vendor. Say the payments basis is applied, then, if a vendor grants credit to his customers, output tax need only be accounted for in the tax period when
payment is received from the debtor. However, if the payments basis is applied and the vendor
acquires goods and services on credit, he or she will only be able to claim the input tax deduction
in respect of the VAT on the transaction in the tax period when payment to the creditor is made.
To be able to claim an input tax deduction the vendor must be in possession of a tax invoice or a debit
or credit note in the legal or trading name of the vendor. A tax invoice is also issued by a registered
vendor when delivering supplies to a client. Tax invoices differ from normal invoices because they
contain particular information.
21
zz
for supplies under R50 (including VAT)
The issuing of tax invoices is optional.
zz
for supplies between R50 (including VAT) and R5 000 (including VAT)
An abridged tax invoice with the following information must be issued:
——
——
——
——
zz
the words “tax invoice”, which must be printed in a prominent place on the invoice
the name, address and VAT registration number of the supplier
an individual serialised number as well as the date upon which the tax invoice is issued
a full and proper description of the goods or services supplied
either:
——
——
the value of the supplies, the amount of tax charged and the consideration for the supplies
(price including VAT); or
where the tax charged is calculated by applying the tax fraction (14⁄114) to the consideration (price
including VAT), the consideration for the supplies and either the amount of tax charged or a
statement that the consideration includes a charge in respect of tax; the rate of tax charged
may be reflected on the tax invoice.
67
FAC1501/1
zz
for supplies exceeding R5 000 (including VAT)
A full tax invoice as prescribed above with the following additional information must be issued:
——
——
the name and address of the recipient and with effect from 1 March 2005, the VAT registration
number of the recipient
the quantity or volume of the goods or services supplied
All tax invoices must be issued with amounts stated in the currency of South Africa.
22
Debit and credit notes can also be issued if:
23
zz
zz
zz
zz
the supply of goods or services were cancelled
the nature of the supply of goods or services has been fundamentally varied or altered
the consideration (price including VAT) of the goods or services has been altered by agreement
with the recipient
goods or services supplied have been returned
These credit notes issued must contain the following information:
24
zz
zz
the amount by which the value of the supply shown on the tax invoice has been reduced as well
as the amount of the excess tax
where the tax charged is calculated by applying the tax fraction (14⁄114) to the
consideration (price including VAT), the amount by which the consideration has been reduced
and either:
——
——
zz
the amount of the excess tax; or
a statement that the reduction includes tax and the rate of tax applied
the reason for the issuing of the credit note with sufficient information to identify it with reference
to the original supply
Some products are zero-rated supplies, which will be indicated in the transaction, for example, certain
bread products, certain milk products and certain maize meal. An input tax (14%) can be claimed on
these products, but no output tax because it is zero-rated (0%) – that means no tax can be levied on
the final product for human consumption.
25
Supply of financial services, especially interest received and interest paid as well as educational
services by the State, is exempt from VAT. Neither input nor output tax can be claimed on these services.
26
zz
How to calculate the VAT amount when the VAT inclusive amount is given
Below is an explanation of how to calculate the VAT amount when the VAT inclusive amount is given.
27
28
VAT exclusive
VAT
VAT inclusive
=
=
=
29
30
32
33
35
36
100%
14%
114%
31
34
37
38
VAT inclusive amount
14
VAT amount
=
x
1
114
39
40
When you are given for example the VAT inclusive amount of R6 612 and asked to calculate the VAT
amount, then it would be done as follows:
41
42
43
R6 612
14
x
= R812
1 114
44
68
FAC1501/1
45
Therefore the VAT exclusive amount will be R6 612 - R812 = R5 800.
zz
How to calculate the VAT amount when the VAT exclusive amount is given
Below is an explanation of how to calculate the VAT amount when the VAT exclusive amount is given.
46
VAT exclusive
VAT
VAT inclusive
=
=
=
47
48
50
51
53
54
100%
14%
114%
49
52
55
56
VAT exclusive amount
14
VAT amount
=
x
1
100
57
58
When you are given for example the VAT exclusive amount of R5 800 and asked to calculate the VAT
amount, then it would be done as follows:
59
60
61
R5 800
14
x
= R812
1 100
62
63
Therefore the VAT inclusive amount will be R5 800 + R812 = R6 612.
You will use the same methods to calculate VAT output and VAT input.
64
4.7
COMPREHENSIVE EXAMPLE
Consider the following transactions by BS Electrical:
65
66
Transaction 1:
Mr B Sithole decided to deposit R100 000 in the entity’s bank account to start the business.
Mr B Sithole gave Mrs S Peterson a cheque for R100 000 to deposit into the current bank account of
BS Electrical.
67
Explanation:
68
Money is received. Therefore, the bank account (an asset) increases and must be debited. The money
is received from the owner, Mr B Sithole, and the entity owes the money to him. Therefore, the capital
account (equity) increases and must be credited.
69
Source documents:
70
(a)
Duplicate receipt
BS Electrical received the cheque from Mr B Sithole and Mrs S Peterson, the bookkeeper, must complete
a receipt in duplicate by using carbon paper. The original receipt was handed to Mr B Sithole for the
money received. Mrs S Peterson, the bookkeeper, used the duplicate in the book of receipts to do the
entry in the books of BS Electrical.
71
72
69
FAC1501/1
No. 0001
Received from:
(b)
Date: 2 January 20.6
Mr B Sithole
Amount:
Rand
Hundred thousand rand only
Cent:
For:
None
Capital contribution by the owner
Signature:
S Peterson
R
(cheque)
100 000
c
00
BS Electrical
Duplicate deposit slip
The deposit slip provided by the bank was completed in duplicate. The bank kept the original deposit slip
and Mrs S Peterson received the duplicate deposit slip. The bank deposit slip is a supporting document.
73
The cheque was deposited into the bank account of BS Electrical. If it is not a bank guaranteed
cheque: the money deposited cannot be withdrawn immediately because BS Electrical must wait
for the bank to clear the cheque. That means the bank first has to determine whether Mr B Sithole
had the amount of money available in his current bank account when he wrote out the cheque. The
clearance period of a cheque is 10 working days. Mrs S Peterson could ask for a special clearance,
which means that the clearance period is shorter.
74
75
70
FAC1501/1
Helping Bank Limited
Cheque Account Deposit Slip
Helpende Bank Beperk
Credit
Tjekrekeningdepositostrokie
Acc no
Date
Krediteer Rek nr 9 0 0 0 - 1 2 3 4 5 6
Name/Naam BS Electrical
Bank notes
Banknote
Nickel
Nikkel
Bronze
Brons
Money and postal
Poswissels en posorders
orders
SUBTOTAL/SUBTOTAAL
1
2
3
4
5
6
7
Drawer’s name
Trekker se naam
Bank
Branch no
Taknr
Mr B Sithole
Helping Bank
Limited
90–00–00
Datum 2 January 20.6
100 000 00
Total/Totaal
100 000 00
Cheques etc, as above, for collection to be available as cash when * For bank
paid. While acting in good faith and exercising responsible care, use
the Bank will not accept responsibility for ensuring that depositors/
* Vir bank
account holders have lawful title to cheques, etc collected.
gebruik
Tjeks ens, soos bo, ingehandig vir invordering wat na betaling as kontant beskikbaar sal wees. Alhoewel die Bank in goeie trou handel
en alle redelike voorsorgmaatreëls tref, sal die Bank nie die verantwoordelikheid aanvaar om te verseker dat deposante/rekeninghouers
regmatige titel op ingevorderde tjeks, ens het nie.
Deposited by/Gedeponeer deur: S Peterson
Transaction 2:
76
On 2 January 20.6 BS Electrical bought a toolbox and tools to be used by Mr B Sithole from Big
Builders for R10 000 (VAT inclusive) and paid by cheque number 0001.
77
Explanation:
78
Tools and equipment (an asset) increases and must be debited.
Paid by cheque; bank (an asset) decreases and must be credited.
79
80
A cheque is an instruction to the bank to pay a sum of money to a certain person or entity. The amount of money in the current bank account is reduced by the amount of each
cheque that is written out.
71
FAC1501/1
Source documents:
81
(a)
Cheque counterfoil
Mrs S Peterson issued a cheque to Big Builders. The cheque was handed over to the cashier at Big
Builders and the cheque counterfoil remained in the chequebook. The cheque counterfoil was used
by Mrs S Peterson to do the entry in the books of BS Electrical.
82
To avoid fraud there are usually two persons responsible for the signing of cheques in an entity.
Mrs S Peterson has to sign the cheque and Mr B Sithole will have to authorise the payment for Big
Builders by also signing the cheque.
83
Another way of avoiding fraud is to cross a cheque. Crossing a cheque means Mrs S Peterson has to
draw two parallel lines and write the words “NOT TRANSFERABLE” between the lines. The words “or
Bearer” are also crossed out. This means the cheque must be deposited into the bank account of Big
Builders only and nobody else’s account and that the cheque cannot be exchanged for cash.
84
Date
NOT TRANSFERABLE
02/01/20.6
90–00–00–01
To
Big Builders
Helping Bank Limited
For
Tools and
equipment
Pretoria
Date: 2 January 20.6
Balance
R
Deposit
R
Pay: Big Builders
or Bearer
Subtotal
R
The sum of: Ten thousand rand only
10 000,00
This cheque R10 000,00
Balance
R
B Sithole
S Peterson
For: BS Electrical
0001
(b)
0001:900000•:9000 123456!!• 01
Original cash invoice
Mrs S Peterson received the cash invoice from Big Builders after payment for the tools and equipment
bought. The cash invoice is a supporting document.
85
86
72
FAC1501/1
BIG BUILDERS
900 Narrow Drive
PRETORIA
Tel (012) 333–1615
Date:
VAT registration number
5590223986
TAX INVOICE
2 January 20.6
To:
BS Electrical
499 Tshwane Drive
Pretoria
VAT registration number 8960225750
Code
IBM1334
IBM2043
IBM6033
P O Box 2176
PRETORIA 0001
Fax (012) 333–1616
No: 0273
Payment method
Cheque/debit card
Cash
Credit card
Account
Description
Qty
1
1
1
Tool box
Electrician tool kit
Screw driver
Total price
4 626,75
4 000,00
1 4 5,1 8
8 771,93
1 228,07
Vat @ 14%
Invoice total
10 000,00)
Amount tendered
10 000,00)
Change
0,00)
VAT included @ 14%
1 228,07)
E & OE*
* E & OE = Errors and omissions excluded. The entity has the right to make corrections and to inform the client
thereof, if any error or omission were to be made on the invoice.
87
Calculation:
88
VAT on R8 771,93
R8 771,93
1
89
x 14 = R1 228,0702 = R1 228,07
100
The amount of R1 228,0702 must be rounded off to the nearest cent. In the case of the amount of
R1 228,0702 we must decide whether the 7 must change to a 8 or will remain a 7 to get rid of the
extra 02.
90
The general rules for the rounding off of an amount are:
zz
zz
If the number after the amount you have to round off is equal to 5 or is greater than 5
the amount that must be rounded off must be changed to the next amount. For example,
R4,567 must be rounded off to R4,57
If the number after the amount you have to round off is smaller than 5 the amount that
must be rounded off will remain the same.
91
73
FAC1501/1
In this case the second rule for rounding of an amount applies because the 0 is smaller than 5 and the
7 must therefore remain a 7. The amount is now R1 228,07.
92
Transaction 3:
93
On 2 January 20.6 BS Electrical bought a cash register for R3 349,50 (VAT inclusive) by cheque
number 0002, from Wiseman Traders. Received cash invoice number 0578 from Wiseman Traders
to be retained for guarantee purposes. Mrs S Peterson negotiated for a discount of 10% because the
cash register was paid for by cheque.
94
Explanation:
95
Tools and equipment (an asset) increases and must be debited.
96
Paid by cheque; bank (an asset) decreases and must be credited.
97
98
Source documents:
(a)
Cheque counterfoil
Mrs S Peterson issued a cheque to Wiseman Traders. The cheque was handed over to the cashier
at Wiseman Traders and the cheque counterfoil remained in the chequebook. The cheque counterfoil
was used by Mrs S Peterson to effect the entry in the books of BS Electrical. The cheque amount
is the original price of the cash register (R3 349,50) less the cash discount (R3 349,50 x 10% =
R334,95), that is R3 349,50 – R334,95 = R3 014,55.
99
90–00–00–01
NOT TRANSFERABLE
Date
02/01/20.6
To
Wiseman Traders
Helping Bank Limited
For
Tools and
equipment
Pretoria
Date: 2 January 20.6
Balance
R
Deposit
R
Pay: Wiseman Traders
or Bearer
Subtotal
R
The sum of: T
hree thousand and fourteen Rand
and fifty five Cents
3 014,55
This cheque R3 014,55
Balance
R
B Sithole
S Peterson
For: BS Electrical
0002
(b)
0002:900000•:9000 123456!!• 01
Original cash invoice
Mrs S Peterson received the original cash invoice after payment of the cash register (equipment)
bought. The cash invoice is a supporting document. Only the price paid after the cash discount will be
entered into the books of BS Electrical.
100
74
FAC1501/1
If an entity gets a cash discount, the discount is subtracted from the original price payable and only the final amount (original amount less cash discount) will be entered into the
books of the entity. The cash discount will not be shown in the books of the entity.
WISEMAN TRADERS
700 Straight Drive
PRETORIA
Tel (012) 335–1515
Date:
2 January 20.6
To:
Cash
TAX INVOICE
No: 0578
Payment method
Cheque/debit card
Cash
Credit card
Account
Code
FCR1268
P O Box 1165
PRETORIA 0001
Fax (012) 335–1629
VAT registration number
6702336097
Description
Qty
1
Fancy cash register
-10% discount
Total price
2 938,16)
(293,82)
2 644,34)
370,21)
VAT @ 14%
Invoice total
3 014,55))
Amount tendered
3 014,55))
Change
0,00))
VAT included @ 14%
370,21))
E & OE
Calculations:
101
Selling price (VAT exclusive)
102
R3 349,50 x 100
1
114
103
= R2 938,16
Cash discount
104
105
R2 938,16 x 10
= R293,816 = R293,82
1
100
The amount of R293,816 must be rounded off to the nearest cent. That means in the amount of
R293,816 we must decide whether the 1 must change to a 2 or will remain a 1 to get rid of the extra 6.
106
In this case the first rule for rounding of an amount applies because the 6 is greater than 5 and the 1
must be changed to a 2. The amount is now R293,82.
107
108
75
FAC1501/1
109
VAT on R2 644,34
R2 644,34 x 14
= R370,2076 = R370,21
1
100
110
Transaction 4:
111
On 3 January 20.6 Mrs S Peterson issued cheque number 0003 for R300 as the cash float for the
cash register. The cheque was cashed for small change to be kept in the cash register.
112
Explanation:
113
Cash float (an asset) increases and must be debited.
114
Paid by cheque; bank (an asset) decreases and must be credited.
115
Source documents:
116
(a)
Cheque counterfoil
A cash cheque was issued by Mrs S Peterson. She has taken the cheque to Helping Bank Limited to
cash it in. She asked them to pay out the R300 in small change of:
117
zz
zz
zz
zz
zz
zz
zz
zz
zz
zz
1 x R50
2 x R20
5 x R10
10 x R 5
10 x R 2
20 x R 1
40 x 50c
100 x 20c
200 x 10c
200 x 5c
= R50
= R40
= R50
= R50
= R20
= R20
= R20
= R20
= R20
= R10
R300
At the end of each day the cash float will be restored and kept in the cash register for the next day.
118
Mrs S Peterson used the cheque counterfoil to do the entry in the books of BS Electrical.
119
A cash cheque cannot be crossed. If an unauthorised person gets hold of a cash cheque they can
cash it (ie exchange it for cash at a bank). An entity should try and avoid the issuing of cash cheques.
The words “or Bearer” can also not be crossed out on a cash cheque.
120
121
76
FAC1501/1
Date
90–00–00–01
03/01/20.6
To
Cash
Helping Bank Limited
For
Cash float
Pretoria
Date: 3 January 20.6
Balance
R
Deposit
R
Pay: Cash
or Bearer
Subtotal
R
The sum of: Three hundred rand only
300,00
This cheque R300,00
Balance
R
B Sithole
S Peterson
For: BS Electrical
0003:900000•:9000 123456!!• 01
0003
122
Transaction 5:
The company received an invoice from Mr B Sithole for the rent for January. The rent of R2 000 (VAT
inclusive) for occupying part of a building situated on Mr B Sithole’s land was paid by issuing cheque
number 0004 on 4 January 20.6.
123
124
Explanation:
Rent paid is an expense that decreases the profit for the year therefore equity decreases and rent paid
account must be debited.
125
126
Paid money for rent; therefore the bank account (an asset) decreases and must be credited.
Source documents:
127
(a)
Cheque counterfoil
NOT TRANSFERABLE
90–00–00–01
Date
04/01/20.6
To
Mr B Sithole
Helping Bank Limited
For
Rent paid
Pretoria
Date: 4 January 20.6
Balance
R
Deposit
R
Pay: Mr Bingole Sithole
or Bearer
Subtotal
R
The sum of: Two thousand rand only
This cheque
R2 000,00
Balance
R
B Sithole
2 000,00
S Peterson
For: BS Electrical
0004
128
0004:900000•:9000 123456!!• 01
Transaction 6:
On 10 January 20.6, Mr B Sithole rendered services to three different clients, Mr P Lucky, Mrs V Happy
and Mr T Busy. Original sales invoices number 0001, 0002 and 0003 were issued to them respectively.
They have paid the amounts and receipt number 0002 and 0003 were issued to Mr P Lucky and
129
77
FAC1501/1
Mrs V Happy respectively. Mrs S Peterson only deposited these amounts into the bank account on
11 January 20.6.
Explanation:
130
Received money for services rendered. Therefore, the bank account (an asset) increases and must
be debited.
131
Services rendered are an income that increases the profit for the year. Therefore, equity increases
and the services rendered account must be credited.
132
Source documents:
133
(a)
Duplicate cash sales invoices
Mr B Sithole issued original cash sale invoices to the customers after he finished the jobs.
Mrs S Peterson kept copies of these cash invoices and used it to do the entries in the books of
BS Electrical.
134
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
Date:
10 January 20.6
To:
Cash
TAX INVOICE
No: 0001
Payment method
Cheque/debit card
Cash
Credit card
Account
Code
SR001
P O Box 392
PRETORIA 0001
Fax (012) 429–3424
VAT registration number
8960225750
Description
Qty
2 hours
Electrical services
-10% cash discount
Total price
1 140,36)
(114,04)
1 026,32)
VAT @ 14%
143,68)
Invoice total
1 170,00)
Amount tendered
1 200,00)
Change
30,00)
VAT included @ 14%
143,68)
E & OE
Calculations:
135
Cash discount
136
R1 140,36
1
137
x 10
100
= R114,036 = R114,04
78
FAC1501/1
VAT on R1 026,31
138
R1 026,31
1
139
x 14 = R143,6834 = R143,68
100
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
Date:
10 January 20.6
To:
Cash
TAX INVOICE
Description
Total price
2 850,88)
(285,09)
2 565,79)
359,21)
Invoice total
2 925,00)))
Amount tendered
2 925,00)))
Change
0,00)))
VAT included @ 14%
359,21)))
E & OE
Calculations:
140
Cash discount
141
R2 850,88 x 10
= R285,088 = R285,09
1
100
142
VAT on R2 565,79
144
Qty
5 hours
Electrical services
-10% cash discount
VAT @ 14%
143
No: 0002
Payment method
Cheque/debit card
Cash
Credit card
Account
Code
SR001
P O Box 392
PRETORIA 0001
Fax (012) 429–3424
VAT registration number
8960225750
R2 565,79
1
x
14
= R359,2106 = R359,21
100
79
FAC1501/1
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
Date:
10 January 20.6
To:
Cash
TAX INVOICE
No: 0003
Payment method
Cheque/debit card
Cash
Credit card
Account
Code
SR001
P O Box 392
PRETORIA 0001
Fax (012) 429–3424
VAT registration number
8960225750
Description
Qty
6 hours
Electrical services
-5% Cash discount
Total price
3 421,05)
(171,05)
3 250,00)
455,00)
VAT @ 14%
Invoice total
3 705,00)))
Amount tendered
3 705,00)))
Change
0,00)))
VAT included @ 14%
455,00)))
E & OE
Calculations:
145
Cash discount:
146
R3 421,05 x
5
= R171,0525 = R171,05
1
100
147
148
VAT on R3 250,00
R3 250,00
1
149
(b)
x 14 = R455,00
100
Duplicate receipts
Mrs S Peterson issued receipts to Mr P Lucky, who paid cash and Mrs V Happy, who paid per cheque.
The original receipts were given to Mr P Lucky and Mrs V Happy and Mrs S Peterson used the
duplicates to do the entries in the books of BS Electrical.
150
151
80
FAC1501/1
No. 0002
Received from:
Amount:
Rand
Cent
For
Date: 10 January 20.6
Mnr P Lucky
R
c
1 170
00
One thousand one hundred and seventy rand only
None
Services rendered
(cash)
BS Electrical
Signature
S Peterson
No. 0003
Received from:
Date: 10 January 20.6
Mrs V Happy
R
Amount:
Rand
Cent
Vir
c
Two thousand nine hundred and twenty five rand only
None
Services rendered
2 925
00
(cheque)
BS Electrical
Signature
(c)
S Peterson
Credit card slip
Mr T Busy paid by credit card. The transaction was automatically processed by the bank and the
money was transferred to BS Electrical’s account from Mr T Busy’s account. Only 5% discount was
granted to Mr T Busy because the bank charges a fee, a negotiated 3% of the sales amount, for this
service. The cost will appear on the bank statement that BS Electrical will receive at the end of the
month from Helping Bank Limited. Mrs S Peterson will keep the original credit card transaction slip
signed by Mr T Busy and the copy of the credit card transaction slip was given to Mr T Busy.
152
81
FAC1501/1
CARD TRANSACTION
Pretoria
BS Electrical
NO.:
************20.7 0 EXP DATE: 04/10
AMOUNT:
R3 705,00
CARD NAME: LIVING BANK VISA CARD
10/03/20.6
9:30 AUTH: 641055
EPS No. 173
0415 017 8044288 0039
T Busy
CUSTOMER SIGNATURE
(d)
Duplicate deposit slip
The money received from Mr P Lucky and Mrs V Happy were deposited in the bank account of
BS Electrical by Mrs S Peterson. The cashier at Helping Bank Limited kept the original deposit slip and
handed the duplicate to Mrs S Peterson. The duplicate deposit slip is a supporting document.
153
82
FAC1501/1
Helping Bank Limited
Helpende Bank Beperk
Cheque Account Deposit Slip
Tjekrekeningdepositostrokie
Credit
Acc no
Krediteer Rek nr 9 0 0 0 - 1 2 3 4 5 6
Name/Naam BS Electrical
Bank notes
Banknote
Nickel
Nikkel
Bronze
Brons
Money and postal
Poswissels en posorders
orders
SUBTOTAL/SUBTOTAAL
1
2
3
4
5
6
7
Drawer’s name
Trekker se naam
Bank
Branch no
Taknr
Mrs V Happy
Growing Bank
Limited
90–05–60
Date
Datum 11 January 20.6
1 170
00
1 170
00
2 925
00
Total/Totaal
4 095 00
Cheques etc, as above, for collection to be available as cash when * For bank
paid. While acting in good faith and exercising responsible care, the use
Bank will not accept responsibility for ensuring that depositors/account
* Vir
holders have lawful title to cheques, etc collected.
bankgebruik
Tjeks ens, soos bo, ingehandig vir invordering wat na betaling as
kontant beskikbaar sal wees. Alhoewel die Bank in goeie trou handel
en alle redelike voorsorgmaatreëls tref, sal die Bank nie die verantwoordelikheid aanvaar om te verseker dat deposante/rekeninghouers
regmatige titel op ingevorderde tjeks, ens het nie.
Deposited by/Gedeponeer deur: S Peterson
154
Transaction 7:
On 15 January 20.6 Mr B Sithole decided that he would buy the different types of cables and other
fittings necessary for the services he renders and keep it in BS Electrical’s inventory. Clients could
then buy the necessary cable and fittings from BS Electrical and Mr B Sithole could advise them on
what is needed for a specific service rendered. BS Electrical would get a 20% discount if the entity
buys at bulk from Huge Wholesalers.
155
156
Mr B Sithole handed Mrs S Peterson the following list of items she has to order from Huge Wholesalers:
zz
zz
zz
zz
zz
1 000 m of two-phase electric cable
1 000 m of three-phase electric cable
1 box of 100 rolls of insulation tape
2 boxes of 100 light fittings each
1 box of 100 fluorescent light fittings
83
FAC1501/1
2 boxes of 100 light switches each
2 boxes of 100 plug switches each
zz
zz
The total amount of the order was R48 125,10 before discount. This amount includes VAT at 14%.
Mrs S Peterson placed an order and made an internet payment of R38 500,08 directly into the bank
account of Huge Wholesalers. After she faxed the proof in the form of a notice of payment through to
Mr P Moodley, the sales manager at Huge Wholesalers, they delivered the goods ordered.
157
The delivered goods were checked by Mrs S Peterson and she signed the delivery note. The original
delivery note and original cash invoice were handed to her and the delivery man kept the duplicate,
signed delivery note and cash invoice.
158
Explanation:
159
Anything bought by BS Electrical to be sold, that is trading inventory, is called “purchases”.
We refer to this type of transaction as the purchase of merchandise, goods or inventory.
Purchases are an expense that decreases the profit for the year. Therefore, equity
decreases and purchases account must be debited.
Purchases is an expense that decreases the profit for the year therefore equity decreases and the
Purchases account must be debited. (This will depend on the inventory system used; in this case the
periodic inventory system. These inventory systems will be discussed in detail in a later learning unit
.) Paid by internet, bank (an asset) decreases and must be credited.
160
Source documents:
161
(a)
Delivery note
Huge Wholesalers will send a detailed delivery note when they deliver the goods to make it possible
for Mrs S Peterson to check whether everything was delivered. She will then sign the delivery note
and keep the original delivery note. The delivery man will take the duplicate of the signed delivery note
back to Huge Wholesalers.
162
84
FAC1501/1
HUGE WHOLESALERS
1167 Marine Drive
PRETORIA
Tel (012) 336–3433
Date:
P O Box 1550
PRETORIA 0001
Fax (012) 336–3434
VAT registration number
5591223986
15 January 20.6
DELIVERY NOTE
No: SP6058
Supplied to: B
S Electrical
P O Box 392
PRETORIA
0001
499 Tshwane Drive
Pretoria
Code
Description
Qty
EC1002
EC1003
IT1001
LF1002
FLF1002
LS1002
PS1002
Two-phase electric cable
Three-phase electric cable
Insulation tape
Light fittings
Fluorescent light fittings
Light switches
Plug switches
1 000 m
1 000 m
1 box
2 boxes
1 box
2 boxes
2 boxes
Unit price
(excl VAT)
10
13
300
3 245
7 999
998
1 215
VAT @ 14%
Total
VAT included @ 14%
00
00
00
00
00
00
00
Total price
10 000
13 000
300
6 490
7 999
1 996
2 430
00)
00)
00)
00)
00)
00)
00)
42 215
5 910
00)
10
48 125
10
5 910
10
Checked
√
√
√
√
√
√
√
Note:
Discount of 20% applicable
Checked by : Mrs S Peterson Signature: S Peterson
Date: 15 January 20.6
E &OE
Calculations:
163
VAT on R42 215
164
165
R42 215,00
1
(b)
x
14
= R5 910,10
100
Original cash invoice
If the delivery note was correct, an original cash invoice for the final amount payable would have been
handed to Mrs S Peterson. The original cash invoice was used to read in the different inventory items
into the computer. The cash register is linked to the computer and the computer would “control” the
trading inventory because it would automatically subtract the number of goods sold from the number
of goods purchased; it can even alert buyers as to when the next order is due.
166
85
FAC1501/1
HUGE WHOLESALERS
1667 Marine Drive
PRETORIA
Tel: (012) 336-343
Date:
VAT registration number
5591223986
TAX INVOICE
15 January 20.6
To:
BS Electrical
499 Tshwane Drive
Pretoria
VAT registration number 8960225750
Code
No: 5996
Payment method
Cheque/debit card
Cash
Credit card
Account
Description
Qty
1 000 m
1 000 m
1 box
2 boxes
1 box
2 boxes
2 boxes
Two-phase electric cable
Three-phase electric cable
Insulation tape
Light fittings
Fluorescent light fittings
Light switches
Plug switches
EC1002
EC1003
IT1001
LF1002
FLF1002
LS1002
PS1002
P O Box 1550
PRETORIA 0001
Fax (012) 336–3434
Total price
10 000,00)
13 000,00)
300,00)
6 490,00)
7 999,00)
1 996,00)
2 430,00)
42 215,00)
(8 443,00)
-20% cash discount
33 772,00)
4 728,08)
VAT @ 14%
Invoice total
38 500,08)
Amount tendered
38 500,08)
Change
0,00)
VAT included @ 14%
4 728,08)
E & OE
167
Calculations:
Cash discount
168
169
170
171
R10 000,00 + R13 000,00 + R300,00 + R6 490,00 + R7 999,00 + R1 996,00 + R2 430,00 = R42 215,00
R42 215,00
1
x
20
= R8 443,00
100
VAT on R33 772,00
172
R33 772,00
1
(c)
x
14
100
= R4 728,08
Internet banking: notice of payment
Mrs S Peterson printed a notice of payment after she paid Huge Wholesalers via the internet, and
faxed it through to Huge Wholesalers. This notice of payment was used by Mrs S Peterson to do the
173
86
FAC1501/1
entries in the books of BS Electrical. Mrs S Peterson received an SMS as confirmation of the payment
made to Huge Wholesalers.
Mrs S Peterson will create a creditor (name of entity to be paid) on the internet banking system of
BS Electrical, for Huge Wholesalers. If she wants to pay them she will just have to click on the name
for the bank details to appear; she then enters the amount to be paid. On the bank statement of BS
Electrical, received from Helping Bank Limited at the end of the month, the name Huge Wholesalers
will appear together with the amount paid to them.
174
The bank statement received from Helping Bank Limited is a summary of all the cash transactions
(payment and receipts) that went through the current bank account of BS Electrical during the month.
175
The internet bank transaction was done only as an example but it will not be discussed further during
this course.
176
HELPING BANK LIMITED
Internet Banking: Notice of Payment
15 January 20.6
Dear BS Electrical
Subject: Notice of Payment: Huge Wholesalers
Please be advised that a payment has been made as indicated below.
.
Transaction number:
Payment date:
Payment made by:
Payment made to:
Beneficiary account number:
For the amount of:
Reference on beneficiary statement:
905520X611363667435578
20.6/01/15
BS Electrical
Huge Wholesalers
9000522968
R38 500,08
BS Electrical
Please remember that the following apply to internet banking payments on non Helping bank
accounts
zz Payments made on weekdays before 15:30 will be credited to the receiving bank account by midnight
of the same day.
zz Payments made on weekdays after 15:30 will be credited by midnight the following day.
zz Payments made on a Saturday, Sunday or public holiday will be credited to the account by midnight
of the 1st following weekday.
If you need more information or assistance, please call Helping Bank Limited on 08600 08600
or +27 11 276 7900 (international calls).
Yours sincerely
General Manager: Digital Channel
This document is intended for use by the addressee and is privileged and confidential. If the
transmission has been misdirected to you, please contact us immediately. Thank you.
Helping Bank Limited, Reg No 19X0/005959/05
177
Transaction 8:
On 16 January 20.6, Mrs S Peterson issued a cash cheque number 0005 for R200 as the impress amount
to start the petty cash float of BS Electrical. The cheque was cashed and the money was kept by Mrs S
Peterson who acted as petty cashier.
178
87
FAC1501/1
Explanation:
179
An entity may need to pay cash for certain smaller items such as postage, day-workers’
wages and cleaning materials. For this, most entities keep a petty cash float. Petty cash is
the same as cash on hand and is an asset.
A cheque for a predetermined amount known as a petty cash float is drawn and cashed
for this purpose. The float is then kept entirely separate from the monies received by the
entity in the normal course of its business. Usually the petty cash float is restored to its
original balance at the end of the month.
Petty cash (an asset) increases and must be debited.
Paid by cheque, bank (an asset) decreases and must be credited.
180
181
182
Source documents:
(a)
A cheque counterfoil
A cash cheque was issued by Mrs S Peterson. She took the cheque to Helping Bank Limited to cash
it in. Mrs S Peterson used the cheque counterfoil to do the entry in the books of BS Electrical.
183
90–00–00–01
Date
16/01/20.6
To
Cash
Helping Bank Limited
Pretoria
Date: 16 January 20.6
or Bearer
For
Petty cash
Balance
R
Deposit
R
Pay: Cash
Subtotal
R
The sum of: Two hundred Rand only
This cheque R200,00
Balance
200,00
R
B Sithole
S Peterson
For: BS Electrical
0005
0005:900000•:9000 123456!!• 01
Transaction 9:
184
On 17 January 20.6, Mrs S Peterson bought postage stamps and took R50 (VAT inclusive) out of petty
cash to pay for it.
185
Explanation:
186
Postage is an expense that decreases the profit for the year, therefore equity decreases and postage
account must be debited.
187
188
Petty cash (an asset) decreases and must be credited.
88
FAC1501/1
Source documents:
189
(a)
Petty cash voucher
Mrs S Peterson will complete a petty cash voucher (not in duplicate) for the postage amount of R50.
The petty cash voucher is the only source document that is not completed in duplicate. Mr B Sithole
must authorise this payment. Mrs S Peterson will then attach the cash slip received from the Post
Office to the petty cash voucher as proof that she actually bought the stamps with the R50 taken from
petty cash.
190
To avoid fraud there are usually two persons responsible for the cash in an entity; that is why
Mr B Sithole will authorise the payment for the postage stamps out of petty cash.
191
PETTY CASH VOUCHER
Date: 17 January 20.6
Required for:
Postmaster – postage stamps
No.
001
Amount
R
c
50
00
Signature:
S Peterson
Authorised by: B Sithole
Transaction 10:
192
On 17 January 20.6, Mr T Wiseman bought electric cables and fittings to be installed by Mr B Sithole
in his new home. He purchased:
193
zz
zz
zz
zz
zz
zz
50 m two phase electric cable, R712,50
4 rolls insulation tape, R17,10
27 plug switches, R233,93
20 light switches, R142,27
20 light fittings, R924,77
3 fluorescent light fittings, R341,96
Mr B Sithole delivered and installed the electric cables and fittings. Original tax invoice number 0004
was issued to Mr T Wiseman. Mr T Wiseman paid the amounts for the equipment and the service by
cheque (Growing Bank Limited – branch code 90–05–60). Mrs Peterson issued receipt number 0005.
The amount was deposited into the current bank account on 18 January 20.6.
194
Explanation:
195
Any trading inventory (inventory bought to be sold) sold is called sales. Sales is an income that increases the profit for the year. Therefore, equity increases and sales account
must be credited.
Received money, therefore the bank account (an asset) increases and must be debited with the total
amount of R2 372,53 (cables and fittings) + R9 750,00 (services rendered) = R12 122,53.
196
89
FAC1501/1
Sales is an income that increases the profit for the year. Therefore, equity increases and the sales
account must be credited with R2 081,17.
197
Services rendered is an income that increases the profit for the year. Therefore, equity increases and
services rendered account must be credited with R8 552,63.
198
Source documents:
199
(a)
Cash register roll
The cash slip given to Mr T Wiseman is illustrated below. The cash slip will be given to Mr Wiseman
as proof of payment and only the cash register roll in the cash register, with a copy of each cash slip,
remains for Mrs S Peterson to do the entry in the books of BS Electrical.
200
Usually only one entry for the total cash sales of the specific day will be entered in the books of
BS Electrical. At the end of the day the cash register roll will indicate the total cash sales for the day
and Mrs S Peterson will enter this in the books of BS Electrical.
201
Cheque fraud is on the increase and most entities will only accept bank guaranteed cheques or
cheques from people they know well.
202
In big businesses each cashier will have their own password and code as well as their own cash
floats. At the end of the cashiers shift the cash register will add all the sales by the specific cashier.
The total of the sales must correspond with the cash less the amount for the cash float in the cash
register of the cashier. One of the ways in which fraud can be eliminated is by keeping each cashier
responsible for their own cash register.
203
90
FAC1501/1
BS ELECTRICAL
17/01/20.6
Till 01
Two-phase electric cable
50 m @ R14,25
EC1002
712,50
Insulation tape
4 @ R4,275
IT1001
17,10
Plug switches
27 @ R8,664
PS1002
233,93
Light switches
20 @ R7,1136
LS1002
142,27
Light fittings
20 @ R46,2384
LF1002
924,77
Fluorescent light fittings
3 @ R113,9886
FLF1002
341,96
TOTAL
2 372,53
Cash
2 372,53
Change
0,00
14% VAT
R291,36
Slip no 0001
VAT no 8960225750
Thank you
Calculation:
204
205
VAT
206
14
R2 372,53 x 114
= R291,36
207
(b)
Duplicate cash invoice
Mr B Sithole issued original cash sale invoices to the customers after he finished the jobs. Mrs S
Peterson kept copies of these cash invoices and used it to do the entries in the books of BS Electrical.
208
91
FAC1501/1
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
VAT registration number
8960225750
P O Box 392
PRETORIA 0001
Fax (012) 429–3424
TAX INVOICE
No: 0004
Date: 17 January 20.6
To:
Mr T Wiseman
Payment method
Cheque/debit card
Cash
Credit card
Account
25 Park Street
Pretoria
VAT registration number 4301235678
Code
Description
SR001
Qty
Electrical services
VAT @ 14%
Total
price
15hrs
8 552,63
1 197,37
Invoice total
9 750,00
Amount tendered
9 750,00
Change
0,00
VAT included @ 14%
1 197,37
E & OE
(c)
Duplicate receipt
Mrs S Peterson issued a receipt to Mr Wiseman who paid by cheque. The original receipt was given
to Mr Wiseman and Mrs Peterson used the duplicate to do the entries in the books of BS Electrical.
On the receipt the till slip number as well as the invoice number for which the payment were made
must be indicated.
209
No. 0005
Received from:
Date: 17 January 20.6
Mr T Wiseman
R
Amount:
Rand
Twelve thousand one hundred and twenty two rand
Cent:
For:
Fifty three cents
Inventory (Cash slip no 0001 – R2 372,53)
Services rendered (Cash invoice no 0004 – R9 750,00)
(cheque)
Signature
(d)
c
12 122 53
BS Electrical
S Peterson
Duplicate deposit slip
The deposit slip, provided by the bank, was completed in duplicate. The bank kept the original deposit
slip and Mrs S Peterson received the duplicate deposit slip.
210
92
FAC1501/1
Helping Bank Limited
Helpende Bank Beperk
Cheque Account Deposit Slip
Tjekrekeningdepositostrokie
Credit
Acc no
Krediteer Rek nr 9 0 0 0 - 1 2 3 4 5 6
Name/Naam BS Electrical
Bank notes
Banknote
Nickel
Nikkel
Bronze
Brons
Money and postal
Poswissels en posorders
orders
SUBTOTAL/SUBTOTAAL
1
2
3
4
5
6
7
Drawer’s name
Trekker se naam
Bank
Branch no
Taknr
Mr T Wiseman
Growing Bank
Limited
90–05–60
Date
Datum 18 January 20.6
12 122
53
Total/Totaal
12 122 53
Cheques etc, as above, for collection to be available as cash when * For bank
paid. While acting in good faith and exercising responsible care, the use
Bank will not accept responsibility for ensuring that depositors/account
*V
ir bank
holders have lawful title to cheques, etc collected.
gebruik
Tjeks ens, soos bo, ingehandig vir invordering wat na betaling as
kontant beskikbaar sal wees. Alhoewel die Bank in goeie trou handel
en alle redelike voorsorgmaatreëls tref, sal die Bank nie die verantwoordelikheid aanvaar om te verseker dat deposante/rekeninghouers
regmatige titel op ingevorderde tjeks, ens het nie.
Deposited by/Gedeponeer deur: S Peterson
4.8
EXERCISES AND SOLUTIONS
EXERCISE 1
3
211
Consider the following transactions of BS Electrical:
(1) On 16 January 20.6 BS Electrical bought a computer for R16 269 (VAT inclusive) and paid by
cheque number 0006. They received TAX invoice number B145 from Computer World.
212
93
FAC1501/1
COMPUTER WORLD
590 Delphi Drive
PRETORIA
Tel (012) 435–1615
Date:
VAT registration number
7704337090
TAX INVOICE
16 January 20.6
To:
BS Electrical
499 Tshwane Drive
Pretoria
VAT registration number 8960225750
Code
Invoice No: B145
Payment method
Cheque/debit card
Cash
Credit card
Account
Description
C755
P O Box 5116
PRETORIA 0001
Fax (012) 435–1639
Qty
Compy 755 computer
VAT @ 14%
Total price
1
14 271,05
1 997,95
Invoice total
16 269,00
Amount tendered
16 269,00
Change
0,00
VAT included @ 14%
1 997,95
E & OE
(2) On 16 January 20.6 the entity bought an accounting computer program to manage their inventory
from IT Perfect for R15 600 (VAT inclusive). They received original tax invoice number 1569 from
IT Perfect and paid IT Perfect by cheque number 0007.
IT PERFECT
730 Windows Drive
PRETORIA
Tel (012) 997–1010
Date:
VAT registration number
6805736098
TAX INVOICE
16 January 20.6
To:
BS Electrical
499 Tshwane Drive
Pretoria
VAT registration number 8960225750
Code
PE101
P O Box 1069
PRETORIA 0001
Fax (012) 997–1111
No: 1569
Payment method
Cheque/debit card
Cash
Credit card
Account
Description
Qty
Point of sales inventory programme
VAT @ 14%
1
Total price
1 3 684,21
1 915,79
Invoice total
15 600,00
Amount tendered
15 600,00
Change
0,00
VAT included @ 14%
1 915,79
E & OE
(3) On 18 January 20.6 Mr B Sithole rendered services to Mrs B Mini and issued original tax invoice
number 0005 to her. Mrs B Mini paid R2 600 (VAT inclusive) cash and receipt number 0006 was
issued to her. Mrs S Peterson deposited the money received into the bank account on 19 January 20.6.
(4) On 20 January 20.6 Mr S Big bought electric switches, fittings and insulation tape. He has purchased:
zz
zz
zz
zz
5 rolls of insulation tape (IT1001) @ R4,275 per roll
10 plug switches (PS1002) @ R8,664 per switch
6 light switches (LS1002) @ R7,1136 per switch
6 light fittings (LF1002) @ R46,2384 per fitting
94
FAC1501/1
He paid R430 cash, which will be deposited by Mrs S Peterson on 21 January 20.6.
(5) On 21 January 20.6 Mr B Strong bought electric cable and fittings to be installed in his new home.
He purchased:
zz
zz
zz
zz
zz
zz
40 m of three-phase cable (EC1003) @ R18,525 per meter
10 rolls of insulation tape (IT1001) @ R4,275 per roll
50 plug switches (PS1002) @ R8,664 per switch
45 light switches (LS1002) @ R7,1136 per switch
30 light fittings (LF1002) @ R46,2384 per fitting
10 fluorescent light fittings (FLF1002) @ R113,9886 per fitting
Mr B Sithole installed the electric cable and fittings in Mr B Strong’s new home and issued original tax invoice number 0006 to him for R2 600,00. Mr B Strong paid the amount for the electric
cable and fittings, R4 064,10 and the service rendered, R2 600,00 cash and receipt number 0007
was issued to him. The money will be deposited on 22 January 20.6.
(6) On 22 January 20.6 the entity ordered some fittings and switches from Huge Wholesalers. Since
the first payment was made via the internet and it was for the significant amount of R38 500,08,
they will now accept cheques from BS Electrical. Mrs S Peterson received the following delivery
and paid by cheque number 0008.
HUGE WHOLESALERS
1667 Marine Drive
PRETORIA
Tel (012) 336–3433
Date:
P O Box 1550
PRETORIA 0001
Fax (012) 336–3434
VAT registration number
5591223986
22 January 20.6
DELIVERY NOTE
No: SP6058
Supplied to: BS Electrical
499 Tshwane Drive
Pretoria
Code
Description
P O Box 392
PRETORIA
0001
Qty
Unit price
(excl.)
Total price
300
6 490
7 999
1 996
2 430
00
00
00
00
00
19 215
2 690
00
10
Total
21 905
10
VAT included @ 14%
2 690
10
IT1001
LF1002
FLF1002
LS1002
PS1002
Insulation tape
Light fittings
Fluorescent light fittings
Light switches
Plug switches
1 box
2 boxes
1 box
2 boxes
2 boxes
300
3 245
7 999
998
1 215
VAT @ 14%
00
00
00
00
00
Checked
√
√
√
√
√
Note:
Discount of 20% if paid on delivery.
Checked by: Mrs S Peterson
Signature: S Peterson
E & OE
95
Date: 22 January 20.6
FAC1501/1
HUGE WHOLESALERS
1667 Marine Drive
PRETORIA
Tel (012) 336–3433
Date:
TAX INVOICE
22 January 20.6
To:
BS Electrical
499 Tshwane Drive
Pretoria
VAT registration number 8960225750
Code
IT1001
LF1002
FLF1002
LS1002
PS1002
P O Box 1550
PRETORIA 0001
Fax (012)336-3434
VAT registration number
5591223986
No: 5996
Payment method
Cheque/debit card
Cash
Credit card
Account
Description
Qty
1 box
2 boxes
1 box
2 boxes
2 boxes
Insulation tape
Light fittings
Fluorescent light fittings
Light switches
Plug switches
Total price
300,00))
6 490,00))
7 999,00))
1 996,00))
2 430,00))
-20% cash discount
19 215,00))
(3 843,00))
VAT @ 14%
15 372,00))
2 152,08))
Invoice total
17 524,08))
Amount tendered
17 524,08))
Change
0,00))
VAT included @ 14%
2 152,08))
E & OE
(7) On 23 January 20.6 Mrs S Peterson took R56 from the petty cash to buy stationery from Pen
and Pencils.
213
PEN AND PENCILS
23/01/20.6
Till 02
Pens
2 @ R14.00
BPI1001
28,00
Printing paper
PP1003
28,00
TOTAL
56,00
Cash
56,00
Change
0,00
14% BTW
R6,88
Slip no 0012
VAT no 5690233875
Thank you
96
FAC1501/1
(8) On 25 January Mrs S Peterson’s salary was paid to her by issuing cheque number 0009 for
R12 300.
(9) On 29 January Mrs S Peterson issued cheque number 0010 for R106 to restore the petty cash
impress amount to R200.
Internal documents to be completed:
214
90–00–00–01
Date
To
Helping Bank Limited
For
Pretoria
Date:
or Bearer
Balance
R
Deposit
R
Pay:
Subtotal
R
The sum of:
This cheque R
Balance
R
B Sithole
S Peterson
For: BS Electrical
0006:900000•:9000 123456!!• 01
0006
90–00–00–01
Date
To
Helping Bank Limited
For
Pretoria
Date:
or Bearer
Balance
R
Deposit
R
Pay:
Subtotal
R
The sum of:
This cheque R
Balance
R
B Sithole
S Peterson
For: BS Electrical
0007:900000•:9000 123456!!• 01
0007
90–00–00–01
Date
To
Helping Bank Limited
For
Pretoria
Date:
or Bearer
Balance
R
Deposit
R
Pay:
Subtotal
R
The sum of:
This cheque R
Balance
R
B Sithole
S Peterson
For: BS Electrical
0008
0008:900000•:9000 123456!!• 01
97
FAC1501/1
90–00–00–01
Date
To
Helping Bank Limited
For
Pretoria
Date:
or Bearer
Balance
R
Deposit
R
Pay:
Subtotal
R
The sum of:
This cheque R
Balance
R
B Sithole
S Peterson
For: BS Electrical
0009:900000•:9000 123456!!• 01
0009
90–00–00–01
Date
To
Helping Bank Limited
For
Pretoria
Date:
or Bearer
Balance
R
Deposit
R
Pay:
Subtotal
R
The sum of:
This cheque R
Balance
R
B Sithole
S Peterson
For: BS Electrical
00010:900000•:9000 123456!!• 01
00010
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
Date:
TAX INVOICE
To:
Code
P O Box 392
PRETORIA 0001
Fax (012) 429–3424
VAT registration number
8960225750
No: 0005
Payment method
Cheque/debit card
Cash
Credit card
Account
Description
Qty
Invoice total
Amount tendered
Change
VAT included @ 14%
E & OE
98
Total price
FAC1501/1
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
Date:
TAX INVOICE
To:
Code
P O Box 392
PRETORIA 0001
Fax (012) 429–3424
VAT registration number
8960225750
No: 0006
Payment method
Cheque/debit card
Cash
Credit card
Account
Description
Qty
Total price
Invoice total
Amount tendered
Change
VAT included @ 14%
E & OE
215
No. 0006
Received from:
Date:
R
c
Amount:
Rand
Cent:
For:
BS Electrical
Signature
216
99
FAC1501/1
No. 0007
Received from:
Date:
R
c
Amount:
Rand
Cent:
For:
BS Electrical
Signature
217
Helping Bank Limited
Helpende Bank Beperk
Cheque Account Deposit Slip
Tjekrekeningdepositostrokie
Credit
Acc no
Krediteer Rek nr
Name/Naam
Bank notes
Banknote
Nickel
Nikkel
Bronze
Brons
Money and postal
Poswissels en posorders
orders
SUBTOTAL/SUBTOTAAL
1
2
3
4
5
6
7
Drawer’s name
Trekker se naam
Date
Datum
Branch no
Taknr
Bank
Total/Totaal
Cheques etc, as above, for collection to be available as cash when * For bank
paid. While acting in good faith and exercising responsible care, use
the Bank will not accept responsibility for ensuring that depositors/
*V
ir bank
account holders have lawful title to cheques, etc collected.
gebruik
Tjeks ens, soos bo, ingehandig vir invordering wat na betaling as
kontant beskikbaar sal wees. Alhoewel die Bank in goeie trou handel
en alle redelike voorsorgmaatreëls tref, sal die Bank nie die verantwoordelikheid aanvaar om te verseker dat deposante/rekeninghouers
regmatige titel op ingevorderde tjeks, ens het nie.
Deposited by/Gedeponeer deur:
100
FAC1501/1
Helping Bank Limited
Helpende Bank Beperk
Cheque Account Deposit Slip
Tjekrekeningdepositostrokie
Credit
Acc no
Krediteer Rek nr
Name/Naam
Bank notes
Banknote
Nickel
Nikkel
Bronze
Brons
Money and postal
Poswissels en posorders
orders
SUBTOTAL/SUBTOTAAL
1
2
3
4
5
6
7
Drawer’s name
Trekker se naam
Date
Datum
Branch no
Taknr
Bank
Total/Totaal
Cheques etc, as above, for collection to be available as cash when * For bank use
paid. While acting in good faith and exercising responsible care, the
*V
ir bank
Bank will not accept responsibility for ensuring that depositors/acgebruik
count holders have lawful title to cheques, etc collected.
Tjeks ens, soos bo, ingehandig vir invordering wat na betaling
as kontant beskikbaar sal wees. Alhoewel die Bank in goeie trou
handel en alle redelike voorsorgmaatreëls tref, sal die Bank nie
die verantwoordelikheid aanvaar om te verseker dat deposante/
rekeninghouers regmatige titel op ingevorderde tjeks, ens het nie.
Deposited by/Gedeponeer deur:
218
101
FAC1501/1
Helping Bank Limited
Helpende Bank Beperk
Cheque Account Deposit Slip
Tjekrekeningdepositostrokie
Credit
Acc no
Krediteer Rek nr
Name/Naam
Bank notes
Banknote
Nickel
Nikkel
Bronze
Brons
Money and postal
Poswissels en posorders
orders
SUBTOTAL/SUBTOTAAL
1
2
3
4
5
6
7
Drawer’s name
Trekker se naam
Date
Datum
Branch no
Taknr
Bank
Total/Totaal
Cheques etc, as above, for collection to be available as cash when * For bank use
paid. While acting in good faith and exercising responsible care,
*V
ir bank
the Bank will not accept responsibility for ensuring that depositors/
gebruik
account holders have lawful title to cheques, etc collected.
Tjeks ens, soos bo, ingehandig vir invordering wat na betaling as
kontant beskikbaar sal wees. Alhoewel die Bank in goeie trou handel
en alle redelike voorsorgmaatreëls tref, sal die Bank nie die verantwoordelikheid aanvaar om te verseker dat deposante/rekeninghouers
regmatige titel op ingevorderde tjeks, ens het nie.
Deposited by/Gedeponeer deur:
102
FAC1501/1
BS ELECTRICAL
Till 01
TOTAL
Cash
Change
14% VAT
Slip no 0002
VAT no: 8960225750
Thank you
BS ELECTRICAL
Till 01
TOTAL
Cash
Change
14% VAT
Slip no 0003
VAT no: 8960225750
Thank you
PETTY CASH VOUCHER
Date:
Required for:
No.
Amount
R
c
Signature:
Authorised by:
103
FAC1501/1
REQUIRED
4
After considering the above transactions by BS Electrical you must give an explanation
of the transaction and complete the internal source documents of BS Electrical.
5
219
SOLUTION: EXERCISE 1
1.
220
221
Explanation:
Computer equipment (an asset) increases and must be debited.
Paid by cheque; bank (an asset) decreases and must be credited.
90–00–00–01
NOT TRANSFERABLE
Date
16/01/20.6
To
Computer World
Helping Bank Limited
For
Computer
equipment
Pretoria
Date: 16 January 20.6
Balance
R
Deposit
R
Pay: Computer World
or Bearer
Subtotal
R
The sum of: S
ixteen thousand two hundred and
sixty nine rand only
16 269,00
This cheque R16 269,00
Balance
R
B Sithole
S Peterson
For: BS Electrical
0006:900000•:9000 123456!!• 01
0006
2.
222
223
224
Explanation:
Computer equipment (an asset) increases and must be debited.
Paid by cheque; bank (an asset) decreases and must be credited.
Date
90–00–00–01
NOT TRANSFERABLE
16/01/20.6
To
IT Perfect
Helping Bank Limited
For
Computer
equipment
Pretoria
Date: 16 January 20.6
Balance
R
Deposit
R
Pay: IT Perfect
or Bearer
Subtotal
R
The sum of: F
ifteen thousand six hundred rand only
15 600,00
This cheque R15 600,00
Balance
R
B Sithole
S Peterson
For: BS Electrical
0007
0006:900000•:9000 123456!!• 01
104
FAC1501/1
225
3.
Explanation:
Received money for services rendered, therefore the bank account (an asset) increases and must
be debited.
226
Services rendered is an income that increases the profit for the year. Therefore, equity increases and
services rendered account must be credited.
227
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
Date:
18 January 20.6
To:
Cash
VAT registration number
8960225750
TAX INVOICE
No: 0005
Payment method
Cheque/debit card
Cash
Credit card
Account
Code
SR001
P O Box 392
PRETORIA 0001
Fax (012) 429–3424
Description
Electrical services
VAT @ 14%
Qty
Total price
4 hrs
2 280,70
319,30
Invoice total
2 600,00
Amount tendered
2 600,00
Change
0,00
VAT included @ 14%
319,30
E & OE
228
Calculations:
VAT on R2 280,70
229
230
R2 280,70 x 14
= R319,30
1
100
No. 0006
Received from:
Date: 18 January 20.6
Mrs B Mini
R
Amount:
Rand
Two thousand six hundred rand only
Cent:
For:
None
Services rendered
c
2 600 00
(cash)
BS Electrical
Signature
S Peterson
105
FAC1501/1
Helping Bank Limited
Helpende Bank Beperk
Cheque Account Deposit Slip
Tjekrekeningdepositostrokie
Credit
Acc no
Krediteer Rek nr 9 0 0 0 - 1 2 3 4 5 6
Name/Naam BS Electrical
Bank notes
Banknote
Nickel
Nikkel
Bronze
Brons
Money and postal
Poswissels en posorders
orders
SUBTOTAL/SUBTOTAAL
1
2
3
4
5
6
7
Drawer’s name
Trekker se naam
Date
Datum 19 January 20.6
2 600
00
2 600
00
Branch no
Taknr
Bank
Total/Totaal
2 600
00
Cheques etc, as above, for collection to be available as cash when * For bank use
paid. While acting in good faith and exercising responsible care, the
*V
ir bank
Bank will not accept responsibility for ensuring that depositors/acgebruik
count holders have lawful title to cheques, etc collected.
Tjeks ens, soos bo, ingehandig vir invordering wat na betaling as
kontant beskikbaar sal wees. Alhoewel die Bank in goeie trou handel
en alle redelike voorsorgmaatreëls tref, sal die Bank nie die verantwoordelikheid aanvaar om te verseker dat deposante/rekeninghouers regmatige titel op ingevorderde tjeks, ens het nie.
Deposited by/Gedeponeer deur: S Peterson
231
106
FAC1501/1
4.
Explanation:
232
Received money; therefore the bank account (an asset) increases and must be debited.
233
Sales are an income that increases the profit for the year. Therefore, equity increases and sales
account must be credited.
234
BS Electrical
20/01/20.6
Till 01
Insulation tape
5 @ R4,275
IT1001
21,38
Plug switches
10 @ R8,664
PS1002
86,64
Light switches
6 @ R7,1136
LS1002
42,68
Light fittings
6 @ R46,2384
LF1002
277,43
TOTAL
428,13
Cash
430,00
Change
1,87
14% VAT
R52,58
Slip no 0002
VAT no 8960225750
Thank you
235
Calculations:
(a)
(b)
(c)
(d)
236
5
10
6
6
R4,275
R8,664
R7,1136
R46,2384
=
=
=
=
R21,375
R86,64
R42,6816
R277,4304
= R21,38
= R42,68
= R277,43
VAT
R428,13
1
237
x
x
x
x
x
14
114
= R52,5774 = R52,58
107
FAC1501/1
Helping Bank Limited
Helpende Bank Beperk
Cheque Account Deposit Slip
Tjekrekeningdepositostrokie
Credit
Acc no
Krediteer Rek nr 9 0 0 0 - 1 2 3 4 5 6
Name/Naam BS Electrical
Bank notes
Banknote
Nickel
Nikkel
Bronze
Brons
Money and postal
Poswissels en posorders
orders
SUBTOTAL/SUBTOTAAL
1
2
3
4
5
6
7
Drawer’s name
Trekker se naam
Date
Datum 21 January 20.6
420
8
0
00
00
13
428
13
Branch no
Taknr
Bank
Total/Totaal
428
13
Cheques etc, as above, for collection to be available as cash when * For bank use
paid. While acting in good faith and exercising responsible care,
* Vir bank
the Bank will not accept responsibility for ensuring that depositors/
gebruik
account holders have lawful title to cheques, etc collected.
Tjeks ens, soos bo, ingehandig vir invordering wat na betaling as
kontant beskikbaar sal wees. Alhoewel die Bank in goeie trou handel
en alle redelike voorsorgmaatreëls tref, sal die Bank nie die verantwoordelikheid aanvaar om te verseker dat deposante/rekeninghouers regmatige titel op ingevorderde tjeks, ens het nie.
Deposited by/Gedeponeer deur: S Peterson
The amount of R428,13 consist of notes of R420,00, nickel of R8,00 (1 x R5, 1 x R2 and 1 x R1) and
13 cents bronze (1 x 10c, 1 x 2c and 1x 1c). Most of the cash registers will round the amount off to the
nearest 5c because 1c and 2c are not available anymore. The amount will be R428,10.
238
5.
239
Explanation:
Received money, therefore the bank account (an asset) increases and must be debited with the total
amount of R4 064,10 + R2 600,00 = R6 664,10.
240
Sales is an income that increases the profit for the year. Therefore, equity increases and sales account
must be credited with R3 565,00.
241
Services rendered is an income that increases the profit for the year. Therefore, equity increases and
services rendered account must be credited with R2 280,70.
242
243
108
FAC1501/1
BS Electrical
21/01/20.6
Till 01
Three-phase electric cable 40 m
@ R18,525
EC1003
741,00
Insulation tape
10 @ R4,275
IT1001
42,75
Plug switches
50 @ R8,664
PS1002
433,20
Light switches
45 @ R7,1136
LS1002
320,11
Light fittings
30 @ R46,2384
LF1002
1 387,15
Fluorescent light fittings
10 @ R113,9886
FLF1002
1 139,89
TOTAL
4 064,10
Cash
4 064,10
Change
0,00
14% VAT
R499,10
Slip no 0003
VAT no 8960225750
Thank you
244
Calculations:
(a)
(b)
(c)
(d)
(e)
(f)
40 x R18,525
10 x R4,275
50 x R8,664
45 x R7,1136
30 x R46,2384
10 x R113,9886
=
=
=
=
=
=
R741,00
R42,75
R433,20
R320,1120
R1 387,1520
R1 139,886
=
=
=
R320,11
R1 387,15
R1 139,89
VAT
245
R4 064,10
1
246
x 14 = R499,10
114
247
109
FAC1501/1
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
Date:
21 January 20.6
To:
Cash
VAT registration number
8960225750
TAX INVOICE
No: 0006
Payment method
Cheque/debit card
Cash
Credit card
Account
Code
SR001
P O Box 392
PRETORIA 0001
Fax (012) 429–3424
Description
Electrical services
VAT @ 14%
Qty
Total price
4 hrs
2 280,70
319,30
Invoice total
2 600,00
Amount tendered
2 600,00
Change
0,00
VAT included @ 14%
319,30
E & OE
No. 0007
Received from:
Date: 21 January 20.6
Mr B Strong
R
c
Amount:
Rand
Six thousand six hundred and sixty four rand
Cent:
For:
Ten cents
Inventory (Cash slip no. 0003 – R4 064,10)
6 664 10
Services rendered (Cash invoice no 0006 –
R2 600,00) (cash)
BS Electrical
Signature
S Peterson
248
110
FAC1501/1
Helping Bank Limited
Helpende Bank Beperk
Cheque Account Deposit Slip
Tjekrekeningdepositostrokie
Credit
Acc no
Krediteer Rek nr 9 0 0 0 - 1 2 3 4 5 6
Name/Naam BS Electrical
Bank notes
Banknote
Nickel
Nikkel
Bronze
Brons
Money and postal
Poswissels en posorders
orders
SUBTOTAL/SUBTOTAAL
1
2
3
4
5
6
7
Drawer’s name
Trekker se naam
Date
Datum 22 January 20.6
6 660
4
0
00
00
10
6 664
10
Branch no
Taknr
Bank
Total/Totaal
6 664
10
Cheques etc, as above, for collection to be available as cash when * For bank use
paid. While acting in good faith and exercising responsible care, the
*V
ir bank
Bank will not accept responsibility for ensuring that depositors/acgebruik
count holders have lawful title to cheques, etc collected.
Tjeks ens, soos bo, ingehandig vir invordering wat na betaling
as kontant beskikbaar sal wees. Alhoewel die Bank in goeie trou
handel en alle redelike voorsorgmaatreëls tref, sal die Bank nie
die verantwoordelikheid aanvaar om te verseker dat deposante/
rekeninghouers regmatige titel op ingevorderde tjeks, ens het nie.
Deposited by/Gedeponeer deur: S Peterson
249
6.
Explanation:
Purchases is an expense that decreases the profit
decreases and the purchases account must be debited.
250
251
for
Paid by cheque; bank (an asset) decreases and must be credited.
252
111
the
year.
Therefore,
equity
FAC1501/1
Date
90–00–00–01
NOT TRANSFERABLE
22/01/20.6
To
Huge Wholesalers Helping Bank Limited
For
Trading inventory
Balance
R
Deposit
Subtotal
Pretoria
Date: 22 January 20.6
R
Pay: Huge Wholesalers
or Bearer
R
The sum of: S
eventeen thousand five hundred
and twenty four rand and eight cents
17 524,08
This cheque R17 524,08
Balance
R
B Sithole
S Peterson
For: BS Electrical
0008:900000•:9000 123456!!• 01
0008
253
7.
Explanation:
Stationery is an expense that decreases the profit for the year. Therefore, equity decreases and the
stationery account must be debited.
254
Petty cash (an asset) decreases and must be credited.
255
PETTY CASH VOUCHER
No. 002
Date: 23 January 20.6
Amount
Required for:
R
Pen and Pencils – stationery
Signature:
c
56 00
S Peterson
Authorised by: B Sithole
8.
256
Explanation:
Salary is an expense that decreases the profit for the year. Therefore, equity decreases and salaries
account must be debited.
257
Paid by cheque; bank (an asset) decreases and must be credited.
258
259
112
FAC1501/1
Date
NOT TRANSFERABLE
25/01/20.6
90–00–00–01
To
Mrs S Peterson
Helping Bank Limited
For
Salary
Pretoria
Date: 25 January 20.6
Balance
R
Deposit
R
Pay: Mrs S Peterson
or Bearer
Subtotal
R
The sum of: T
welve thousand three hundred
rand alone
12 300,00
This cheque R12 300,00
Balance
R
B Sithole
S Peterson
For: BS Electrical
0009:900000•:9000 123456!!• 01
0009
260
9.
Explanation:
Petty cash (an asset) increases and must be debited.
261
262
Paid by cheque; bank (an asset) decreases and must be credited.
90–00–00–01
Date
29/01/20.6
To
Cash
Helping Bank Limited
For
Petty Cash
Pretoria
Date: 29 January 20.6
Balance
R
Deposit
R
Pay: Cash
or Bearer
Subtotal
R
The sum of: Hundred and six rand only
This cheque R106,00
Balance
106,00
R
B Sithole
S Peterson
For: BS Electrical
0010
0010:900000•:9000 123456!!• 01
EXERCISE 2
6
(a)
(b)
(c)
(d)
(e)
(f)
(g)
Define a cash transaction.
Define a source document.
Name two types of source documents.
Define internal source documents.
Give examples of internal source documents.
Define external source documents.
Give examples of external source documents.
113
FAC1501/1
SOLUTION: EXERCISE 2
7
(a) When transactions take place the entity will either receive or pay out money.
(b) When a transaction takes place it is necessary to have a document as proof of the transaction,
indicating details of the transaction.
(c) Internal source documents and external source documents
(d) Internal source documents are the documents prepared by the entity itself to record transactions
with external clients.
(e) Cash register rolls
Duplicate cash sales invoices
Duplicate receipts
Cheque counterfoils
Duplicate petty cash vouchers
Duplicate bank deposit slips
Telephone banking: Notice of payment
Signed credit card slip
(f)
External source documents are the documents prepared by the other party to the transaction and
received by the entity as proof that the transaction did take place.
(g) Original cash purchases invoices
Original receipts
Cheques
Cash slips
8
SELF-ASSESSMENT
After you have worked through this learning unit, are you
able to:
263
zz
zz
zz
zz
zz
zz
zz
zz
zz
define a cash transaction?
define a source document?
name two types of source documents?
define internal source documents?
give examples of internal source documents?
define external source documents?
give examples of external source documents?
explain the applicable source documents involved in different cash transactions?
complete different internal source documents?
If you have marked all J you may continue to the next learning unit .
264
If you have marked any K you have to revise that specific section.
265
266
If you have marked any L you have to re-study that specific section.
114
J
J
J
J
J
J
J
K
K
K
K
K
K
K
L
L
L
L
L
L
L
J
J
K
K
L
L
1
FAC1501
LEARNING UNIT 5
THE RECORDING OF
CASH TRANSACTIONS
Introductory Financial
Accounting
FAC1501/1
OVERVIEW
1
Learning outcomes���������������������������������������������������������������������������������������������������������������������������116
Key concepts������������������������������������������������������������������������������������������������������������������������������������116
Assessment criteria��������������������������������������������������������������������������������������������������������������������������117
5.1
Introduction���������������������������������������������������������������������������������������������������������������������������117
5.2
The financial accounting cycle����������������������������������������������������������������������������������������������117
5.3
Books of first entry: Journals�������������������������������������������������������������������������������������������������117
5.4
Cash journals������������������������������������������������������������������������������������������������������������������������118
5.5
Posting to the general ledger����������������������������������������������������������������������������������������������� 158
5.6
Exercise and solution����������������������������������������������������������������������������������������������������������� 162
Self-assessment������������������������������������������������������������������������������������������������������������������������������ 189
LEARNING OUTCOMES
After studying this learning unit you should be able to:
1
1
zz
zz
zz
zz
prepare a cash receipts journal
prepare a cash payments journal
prepare a petty cash journal
post from the cash receipts journal, cash payments journal and petty cash journal to the general
ledger
KEY CONCEPTS
zz
zz
zz
zz
zz
zz
zz
zz
zz
Books of first entry
Cash journals
Cash receipts journal
Cash payments journal
Petty cash journal
Posting to the general ledger
Grouping of general ledger accounts
Drawings
Split cheque
116
FAC1501/1
ASSESSMENT CRITERIA
zz
zz
5.1
The ability to record the cash transactions of a sole proprietor, in various journals
applicable to cash transactions from source documents, is demonstrated.
The ability to post to the general ledger accounts, after the journals applicable
to cash transactions are closed off, is demonstrated.
INTRODUCTION
So far you have learned that financial accounting data are processed within a definite framework,
which is known as the financial accounting cycle. For each transaction specific source documents
are completed to do the necessary entries in the books of an entity. These documents must, after use,
be filed for reference purposes for at least five years. These activities form part of the input activity of
the financial accounting cycle.
2
3
The next step in the financial accounting cycle is the processing of data by recording the transactions.
5.2
THE FINANCIAL ACCOUNTING CYCLE
According to the diagram in learning unit 1 there must first be a transaction and then there must be
proof that a transaction did take place, which must take the form of a source document. The source
documents are used to record transactions in the books of first entry, namely the subsidiary journals.
This is the first step in the processing phase. At the end of each month the subsidiary journals are
closed off and posted to the applicable ledger accounts in the general ledger. In this learning unit we
will focus on the processing of transaction data for cash transactions.
4
5.3
BOOKS OF FIRST ENTRY: JOURNALS
Although the ledger is the most important book in financial accounting for recording daily transactions,
it would be impossible for an entity to enter every transaction directly into the ledger. This will make
the ledger very bulky and unmanageable. In a manual system it also means that only one person can
write up the books.
5
Therefore a system of subsidiary books, called books of first entry, is used. These subsidiary books
enable a number of clerks to record transactions simultaneously on a daily basis from the source
documents into the different subsidiary books. From these subsidiary books (called journals) data is
posted daily or monthly to the appropriate ledger accounts.
6
All transactions are sorted and recorded in the relevant subsidiary book, for example cash transactions
together, credit sales transactions together and credit purchases transactions together.
7
One of the principles of accounting is that no entry is made in the ledger unless it has first been
entered in a subsidiary book. An entry in the ledger will therefore always have its origin in one of
the subsidiary books. Even if a computerised system is used the transactions are first recorded in
subsidiary journals before it is posted to the ledger.
8
In this learning unit you will concentrate on the subsidiary journals for cash transactions only. For cash
transactions you will need:
9
zz
zz
zz
cash receipts journal for the receipt of money
cash payment journal for the payment of money
petty cash journal for the cash payment of small expenses within the entity
117
FAC1501/1
5.4
CASH JOURNALS
Consider the transactions with source documents discussed in learning unit 4. Determine whether the
transaction is a receipt or a payment in the bank or the petty cash to determine whether it must be
entered into the cash receipt journal, cash payment journal or petty cash journal.
10
11
Transaction 1:
Mr B Sithole decided to deposit R100 000 in the entity’s bank account to start the business. Mr B
Sithole gave Mrs S Peterson a cheque for R100 000 to deposit into the current bank account of BS
Electrical.
12
Explanation:
13
Money is received and therefore the bank account (an asset) increases and must be debited.
14
The money is received from the owner, Mr B Sithole, and the entity owes the money to him. Therefore,
the capital account (equity) increases and must be credited.
15
Money received; therefore this transaction will be entered into the cash receipts journal.
16
Source documents:
zz
Duplicate receipt
17
No. 0001
Received from: Mr B Sithole
Date: 2 January 20.6
Amount: Hundred thousand rand only
Rand
Cent: None
For: Capital contribution by the owner (cheque)
R
100 000 00
BS Electrical
Signature: S Peterson
118
c
FAC1501/1
zz
Duplicate deposit slip
Helping Bank Limited
Helpende Bank Beperk
Cheque Account Deposit Slip
Tjekrekeningdepositostrokie
Credit
Acc no
Krediteer Rek nr 9 0 0 0 - 1 2 3 4 5 6
Name/Naam BS Electrical
Bank notes
Banknote
Nickel
Nikkel
Bronze
Brons
Money and postal
Poswissels en posorders
orders
SUBTOTAL/SUBTOTAAL
1
2
3
4
5
6
7
Drawer’s name
Trekker se naam
Bank
Branch no
Taknr
Mr B Sithole
Helping Bank
Limited
90–00–00
Date
Datum 2 January 20.6
100 000 00
Total/Totaal
100 000 00
Cheques etc, as above, for collection to be available as cash when * For bank use
paid. While acting in good faith and exercising responsible care, the
* Vir bank
Bank will not accept responsibility for ensuring that depositors/acgebruik
count-holders have lawful title to cheques, etc collected.
Tjeks ens, soos bo, ingehandig vir invordering wat na betaling as
kontant beskikbaar sal wees. Alhoewel die Bank in goeie trou handel
en alle redelike voorsorgmaatreëls tref, sal die Bank nie die verantwoordelikheid aanvaar om te verseker dat deposante/rekeninghouers
regmatige titel op ingevorderde tjeks, ens het nie.
Deposited by/Gedeponeer deur: S Peterson
18
Transaction 2:
On 2 January 20.6 BS Electrical bought a toolbox and tools to be used by Mr B Sithole from Big
Builders for R10 000 (VAT inclusive) and paid by cheque number 0001.
19
20
21
Explanation:
Tools and equipment (an asset) increases and must be debited.
22
Paid by cheque; bank (an asset) decreases and must be credited.
Paid by cheque; therefore this transaction will be entered into the cash payments journal.
119
FAC1501/1
Source documents:
23
zz
Original cash invoice
BIG BUILDERS
900 Narrow Drive
PRETORIA
Tel (012) 333–1615
VAT registration number
5590223986
Date: 2 January 20.6
TAX INVOICE
To: B
S Electrical
499 Tshwane Drive
Pretoria
VAT registration number 8960225750
Code
No: 0273
Payment method
Cheque/debit card
Cash
Credit card
Account
Description
Qty
Total price
4 626,75
4 000,00
1 4 5,1 8
1
1
1
Tool box
Electrician tool kit
Screw driver
IBM1334
IBM2043
IBM6033
P O Box 2176
PRETORIA 0001
Fax (012) 333–1616
8 771,93
1 228,07
VAT @ 14%
Invoice total
10 000,00
Amount tendered
10 000,00
Change
0,00
VAT included @ 14%
1 228,07
E & OE
zz
Cheque counterfoil
NOT TRANSFERABLE
90–00–00–01
Date
02/01/20.6
To
Big Builders
Helping Bank Limited
For
Tools and
equipment
Pretoria
Date: 2 January 20.6
Balance
R
Deposit
R
Pay: Big Builders
or Bearer
The sum of: Ten thousand rand only
Subtotal
R
This cheque
R10 000,00
Balance
R
B Sithole
10 000,00
S Peterson
For: BS Electrical
0001
24
0001:900000•:9000 123456!!• 01
Transaction 3:
On 2 January 20.6 BS Electrical bought a cash register for R3 349,50 (VAT inclusive) by cheque
number 0002, from Wiseman Traders and received cash invoice number 0578 from Wiseman Traders
25
120
FAC1501/1
to be retained for guarantee purposes. Mrs S Peterson negotiated for a discount of 10% because the
cash register was paid by cheque.
Explanation:
26
Tools and equipment (an asset) increases and must be debited.
27
Paid by cheque; bank (an asset) decreases and must be credited.
28
Paid by cheque; therefore this transaction will be entered into the cash payments journal.
29
Source documents:
zz
Original cash invoice
WISEMAN TRADERS
700 Straight Drive
PRETORIA
Tel (012) 335–1515
VAT registration number
6702336097
Date: 2 January 20.6
TAX INVOICE
To: Cash
No: 0578
Payment method
Cheque/debit card
Cash
Credit card
Account
Code
FCR1268
P O Box 1165
PRETORIA 0001
Fax (012) 335–1629
Description
Fancy cash register
– 10% discount
Qty
1
Total price
2 938,16)
(293,82)
2 644,34)
370,21)
VAT @ 14%
Invoice total
3 014,55
Amount tendered
3 014,55
Change
0,00
VAT included @ 14%
370,21
E & OE
121
FAC1501/1
zz
Cheque counterfoil
NOT TRANSFERABLE
Date
02/01/20.6
To
Wiseman Traders Helping Bank Limited
For
Tools and
equipment
Balance
R
Deposit
90–00–00–01
Pretoria
Date: 2 January 20.6
R
Pay: Wiseman Traders
or Bearer
Subtotal
R
The sum of: T
hree thousand and fourteen rand
and fifty-five cents
This cheque
R3 014,55
Balance
R
B Sithole
3 014,55
S Peterson
For: BS Electrical
0002:900000•:9000 123456!!• 01
0002
Transaction 4:
30
On 3 January 20.6 Mrs S Peterson issued cheque number 0003 for R300 to be the cash float for the
cash register. The cheque was cashed for small change to be kept in the cash register.
31
Explanation:
32
Cash float (an asset) increases and must be debited.
33
Paid by cheque; bank (an asset) decreases and must be credited.
34
Paid by cheque; therefore this transaction will be entered into the cash payments journal.
Source documents:
35
zz
Cheque counterfoil
90–00–00–01
Date
03/01/20.6
To
Cash
Helping Bank Limited
Pretoria
Date: 3 January 20.6
or Bearer
For
Cash float
Balance
R
Deposit
R
Pay: Cash
The sum of: Three hundred rand only
Subtotal
R
This cheque
R300,00
Balance
R
B Sithole
300,00
S Peterson
For: BS Electrical
0003
0003:900000•:9000 123456!!• 01
122
FAC1501/1
36
Transaction 5:
Received an invoice from Mr B Sithole for the rent for January. The rent of R2 000 (VAT inclusive) for
occupying part of a building situated on Mr B Sithole’s land was paid by issuing cheque number 0004
on 4 January 20.6
37
Explanation:
38
Rent paid is an expense that decreases the profit for the year. Therefore, equity decreases and rent
paid account must be debited.
39
40
Paid money for rent, therefore, the bank account (an asset) decreases and must be credited.
Paid by cheque; therefore this transaction will be entered into the cash payments journal.
41
Source documents:
zz
Cheque counterfoil
Date
04/01/20.6
To
Mr B Sithole
NOT TRANSFERABLE
90–00–00–01
Helping Bank Limited
Pretoria
Date: 4 January 20.6
For
Rent paid
Balance
R
Deposit
R
Pay: Mr B Sithole
Subtotal
R
The sum of: Two thousand rand only
This cheque
R2 000,00
Balance
R
B Sithole
or Bearer
2 000,00
S Peterson
For: BS Electrical
0004
0004:900000•:9000 123456!!• 01
Transaction 6:
42
On 10 January 20.6, Mr B Sithole rendered services to three different clients, Mr P Lucky, Mrs V
Happy and Mr T Busy. Original sales invoices number 0001, 0002, and 0003 were issued to them
respectively. They have paid the amounts and receipt numbers 0002 and 0003 were issued to
Mr P Lucky and Mrs V Happy respectively. Mrs S Peterson only deposited these amounts into the
bank account on 11 January 20.6.
43
Explanation:
44
Received money for services rendered. Therefore, the bank account (an asset) increases and must
be debited.
45
Services rendered is an income that increases the profit for the year. Therefore, equity increases and
services rendered account must be credited.
46
123
FAC1501/1
Money received; therefore this transaction will be entered into the cash receipts journal.
47
Source documents:
zz
Duplicate cash sales invoices
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
VAT registration number
8960225750
Date: 10 January 20.6
TAX INVOICE
To: Cash
No: 0001
Payment method
Cheque/debit card
Cash
Credit card
Account
Code
SR001
P O Box 392
PRETORIA 0001
Fax (012) 429–3424
Description
Electrical services
– 10% cash discount
Qty
2
hours
Total price
1 140,36)
(114,04)
1 026,32)
143,68)
VAT @ 14%
Invoice total
1 170,00)))
Amount tendered
1 200,00)))
Change
30,00)))
VAT included @ 14%
143,68)))
E & OE
48
124
FAC1501/1
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
VAT registration number
8960225750
Date: 10 January 20.6
TAX INVOICE
To: Cash
No: 0002
Payment method
Cheque/debit card
Cash
Credit card
Account
Code
SR001
P O Box 392
PRETORIA 0001
Fax (012) 429–3424
Description
Electrical services
– 10% cash discount
Qty
5
hours
Total price
2 850,88)
(285,09)
2 565,79)
359,21)
VAT @ 14%
Invoice total
2 925,00)))
Amount tendered
2 925,00)))
Change
0,00)))
VAT included @ 14%
359,21)))
E & OE
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
VAT registration number
8960225750
Date: 10 January 20.6
TAX INVOICE
To: Cash
No: 0003
Payment method
Cheque/debit card
Cash
Credit card
Account
Code
SR001
P O Box 392
PRETORIA 0001
Fax (012) 429–3424
Description
Electrical services
– 5% cash discount
Qty
6
hours
Total price
3 421,05)
(171,05)
3 250,00)
455,00)
VAT @ 14%
Invoice total
3 705,00)))
Amount tendered
3 705,00)))
Change
0,00)))
VAT included @ 14%
455,00)))
E & OE
125
FAC1501/1
zz
Duplicate receipts
No. 0002
Received from: Mr P Lucky
Date: 10 January 20.6
R
Amount: One thousand one hundred and seventy rand
Rand
only
Cent: None
For: Services rendered (cash)
c
1 170 00
BS Electrical
Signature: S Peterson
No. 0003
Received from: Mrs V Happy
Date: 10 January 20.6
Amount: Two thousand nine hundred and twenty five rand
Rand
only
Cent: None
For: Services rendered (cheque)
Credit card slip
CARD TRANSACTION
Pretoria
BS Electrical
NO.:
c
2 925 00
BS Electrical
Signature: S Peterson
zz
R
************20.7 0 EXP DATE: 04/10
AMOUNT:
R3 705,00
CARD NAME:
LIVING BANK VISA CARD
10/03/20.6
9:30
AUTH: 641055
EPS No. 173
0415 017 8044288 0039
T Busy
CUSTOMER SIGNATURE
126
FAC1501/1
zz
Duplicate deposit slip
Helping Bank Limited
Helpende Bank Beperk
Cheque Account Deposit Slip
Tjekrekeningdepositostrokie
Credit
Acc no
Krediteer Rek nr 9 0 0 0 - 1 2 3 4 5 6
Name/Naam BS Electrical
Bank notes
Banknote
Nickel
Nikkel
Bronze
Brons
Money and postal
Poswissels en posorders
orders
SUBTOTAL/SUBTOTAAL
1
2
3
4
5
6
7
Drawer’s name
Trekker se naam
Bank
Branch no
Taknr
Mrs V Happy
Growing Bank
Limited
90–05–60
Date
Datum 11 January 20.6
1 170 00
1 170 00
2 925 00
Total/Totaal
4 095 00
Cheques etc, as above, for collection to be available as cash when * For bank use
paid. While acting in good faith and exercising responsible care, the
* Vir bank
Bank will not accept responsibility for ensuring that depositors/acgebruik
count holders have lawful title to cheques, etc collected.
Tjeks ens, soos bo, ingehandig vir invordering wat na betaling as
kontant beskikbaar sal wees. Alhoewel die Bank in goeie trou handel
en alle redelike voorsorgmaatreëls tref, sal die Bank nie die verantwoordelikheid aanvaar om te verseker dat deposante/rekeninghouers regmatige titel op ingevorderde tjeks, ens het nie.
Deposited by/Gedeponeer deur: S Peterson
49
Transaction 7:
On 15 January 20.6 Mr B Sithole decided that he would buy the different types of cables and other
fittings necessary for the services he is rendering and keep it in the entity’s inventory. Clients could
then buy the necessary cable and fittings from BS Electrical and Mr B Sithole could advise them on
what is needed for a specific service rendered. BS Electrical would get 20% discount if the entity buys
at bulk from Huge Wholesalers.
50
51
Mr B Sithole handed Mrs S Peterson the following list of items she had to order from Huge Wholesalers:
zz
zz
zz
1 000 m of two-phase electrical cable
1 000 m of three-phase electrical cable
1 box of 100 rolls of insulation tape
127
FAC1501/1
zz
zz
zz
zz
2 boxes of 100 light fittings each
1 box of 100 fluorescent light fittings
2 boxes of 100 light switches each
2 boxes of 100 plug switches each
The total amount of the order was R48 125,10 before discount. This amount included VAT at 14%.
Mrs S Peterson placed an order and made an internet payment of R38 500,08 directly into the bank
account of Huge Wholesalers. After she had faxed the proof in the form of a notice of payment through
to Mr P Moodley, the sales manager at Huge Wholesalers, they delivered the goods ordered.
52
The delivered goods were checked by Mrs S Peterson to see if everything was delivered and she
signed the delivery note. The original delivery note and original cash invoice were handed to her and
the delivery guy kept the duplicate signed delivery note and cash invoice.
53
Explanation:
54
Purchases is an expense that decreases the profit for the year. Therefore, equity decreases and
purchases account must be debited.
55
Paid by internet; bank (an asset) decreases and must be credited.
56
Paid by internet; therefore this transaction will be entered into the cash payments journal.
57
128
FAC1501/1
Source documents:
58
zz
Original delivery note
HUGE WHOLESALERS
1667 Marine Drive
PRETORIA
Tel (012) 336–3433
P O Box 1550
PRETORIA 0001
Fax (012) 336–3434
VAT Registration number
5591223986
Date: 15 January 20.6
DELIVERY NOTE
No: SP6058
Supplied to:
BS Electrical
499 Tshwane Drive
Pretoria
Code
EC1002
EC1003
IT1001
LF1002
FLF1002
LS1002
PS1002
Description
Two-phase eletrical cable
Three-phase electrical cable
Insulation tape
Light fittings
Fluorescent light fittings
Light switches
Plug switches
P O Box 392
PRETORIA
0001
Qty
1 000 m
1 000 m
1 box
2 boxes
1 box
2 boxes
2 boxes
Unit price
(VAT excl.)
10
13
300
3 245
7 999
998
1 215
00
00
00
00
00
00
00
Total price
Checked
10 000
13 000
300
6 490
7 999
1 996
2 430
00
00
00
00
00
00
00
42 215
5 910
00
10
Total
48 125
10
VAT included @ 14%
5 910
10
VAT @ 14%
Note:
Discount of 20% applicable
Checked by: Mrs S Peterson
Signature: S Peterson
E & OE
59
129
Date: 15 January 20.6
√
√
√
√
√
√
√
FAC1501/1
zz
Original cash invoice
HUGE WHOLESALERS
1667 Marine Drive
PRETORIA
Tel (012) 336–3433
VAT registration number
5591223986
Date: 15 January 20.6
TAX INVOICE
To: B
S Electrical
499 Tshwane Drive
Pretoria
VAT registration number 8960225750
Code
EC1002
EC1003
IT1001
LF1002
FLF1002
LS1002
PS1002
P O Box 1550
PRETORIA 0001
Fax (012) 336–3434
No: 5996
Payment method
Cheque/debit card
Cash
Credit card
Account
Description
Two-phase eletrical cable
Three-phase eletrical cable
Insulation tape
Light fittings
Fluorescent light fittings
Light switches
Plug switches
Qty
1 000 m
1 000 m
1 box
2 boxes
1 box
2 boxes
2 boxes
Total price
10 000,00))
13 000,00))
300,00))
6 490,00))
7 999,00))
1 996,00))
2 430,00))
– 20% cash discount
42 215,00))
(8 443,00))
VAT @ 14%
33 772,00
4 728,08
Invoice total
38 500,08
Amount tendered
38 500,08
Change
0,00
VAT included @ 14%
4 728,08
E & OE
130
FAC1501/1
zz
Internet banking: Notice of payment
HELPING BANK LIMITED
Internet Banking: Notice of Payment
15 January 20.6
Dear BS Electrical
Subject: Notice of Payment: Huge Wholesalers
Please be advised that a payment has been made as indicated below.
Transaction number:
Payment date:
Payment made by:
Payment made to:
Beneficiary account number:
For the amount of
Reference on beneficiary statement:
905520X611363667435578
20.6/01/15
BS Electrical
Huge Wholesalers
9000522968
R38 500,08
BS Electrical
Please remember that the following apply to internet banking payments to non-Helping bank
accounts.
zz Payments made on weekdays before 15:30 will be credited to the receiving bank account by
midnight of the same day.
zz Payments made on weekdays after 15:30 will be credited by midnight the following day.
zz Payments made on a Saturday, Sunday or Public holiday will be credited to the account by
midnight of the 1st following weekday.
If you need more information or assistance, please call Helping Bank Limited on 08600 08600
or +27 11 276 7900 (International calls).
Yours sincerely
General Manager: Digital Channel
This document is intended for use by the addressee and is privileged and confidential. If the
transmission has been misdirected to you, please contact us immediately. Thank you.
Helping Bank Limited, Reg No 19X0/005959/05
60
Transaction 8:
On 16 January 20.6, Mrs S Peterson issued cheque number 0005 for R200 as the impress amount
to start the petty cash float of BS Electrical. The cheque was cashed and the money is kept by Mrs S
Peterson who acted as petty cashier.
61
Explanation:
62
63
Petty cash (an asset) increases and must be debited.
Paid by cheque; bank (an asset) decreases and must be credited.
64
Money received – petty cash; therefore this transaction will be entered into the petty cash
journal.
131
FAC1501/1
Paid by cheque; therefore this transaction will be entered into the cash payments journal.
65
Source documents:
zz
Cheque counterfoil
Date
To
For
Balance
Deposit
Subtotal
This cheque
Balance
0005
66
16/01/20.6
Cash
Petty cash
R
R
R
R200,00
R
90–00–00–01
Helping Bank Limited
Pretoria
Pay: Cash
The sum of: Two hundred rand only
Date: 16 January 20.6
or Bearer
200,00
B Sithole S Peterson
For: BS Electrical
0005:900000•:9000 123456!!• 01
Transaction 9:
On 16 January 20.6 BS Electrical bought a computer worth R16 269 (VAT included) for which it paid
by cheque number 0006 and received tax invoice number B145 from Computer World.
67
68
69
70
Explanation:
Computer equipment (an asset) increases and must be debited.
Paid by cheque; bank (an asset) decreases and must be credited.
Paid by cheque; therefore this transaction will be entered into the cash payments journal.
71
132
FAC1501/1
Source documents:
72
zz
Original cash invoice
COMPUTER WORLD
590 Delphi Drive
PRETORIA
Tel (012) 435–1615
Date: 16 January 20.6
TAX INVOICE
To: B
S Electrical
499 Tshwane Drive
Pretoria
VAT registration number 8960225750
Code
No: B145
Payment method
Cheque/debit card
Cash
Credit card
Account
Description
C755
P O Box 5116
PRETORIA 0001
Fax (012) 435–1639
VAT registration number
7704337090
Qty
Compy 755 computer
VAT @ 14%
Total price
1
14 271,05
1 997,95
Invoice total
16 269,00
Amount tendered
16 269,00
Change
0,00
VAT included @ 14%
1 997,95
E & OE
zz
Cheque counterfoil
Date
90–00–00–01
NOT TRANSFERABLE
16/01/20.6
To
Computer World
Helping Bank Limited
For
Computer
equipment
Pretoria
Date: 16 January 20.6
Balance
R
Deposit
R
Pay: Computer World
or Bearer
Subtotal
R
The sum of: Sixteen thousand two hundred and
sixty nine rand only
This cheque
R16 269,00
Balance
R
B Sithole
16 269,00
S Peterson
For: BS Electrical
0006
0006:900000•:9000 123456!!• 01
133
FAC1501/1
Transaction 10:
73
On 16 January 20.6 the entity bought an accounting computer program to manage their inventory
from IT Perfect for R15 600 (VAT included). It received original tax invoice number 1569 from IT
Perfect and paid IT Perfect by cheque number 0007.
74
Explanation:
75
76
Computer equipment (an asset) increases and must be debited.
77
Paid by cheque; bank (an asset) decreases and must be credited.
Paid by cheque; therefore this transaction will be entered into the cash payments journal.
78
Source documents:
zz
Original cash invoice
IT PERFECT
730 Windows Drive
PRETORIA
Tel (012) 997–1010
VAT registration number
6805736098
Date: 16 January 20.6
TAX INVOICE
To: B
S Electrical
499 Tshwane Drive
Pretoria
VAT registration number 8960225750
Code
PE101
P O Box 1069
PRETORIA 0001
Fax (012) 997–1111
No: 1569
Payment method
Cheque/debit card
Cash
Credit card
Account
Description
Point of sales inventory programme
VAT @ 14%
Qty
1
Total price
1 3 684,21
1 915,79
Invoice total
15 600,00
Amount tendered
15 600,00
Change
0,00
VAT included @ 14%
1 915,79
E & OE
79
134
FAC1501/1
zz
Cheque counterfoil
90–00–00–01
NOT TRANSFERABLE
Date
16/01/20.6
To
IT Perfect
Helping Bank Limited
For
Computer
equipment
Pretoria
Date: 16 January 20.6
Balance
R
Deposit
R
Pay: IT Perfect
or Bearer
Subtotal
R
The sum of: Fifteen thousand six hundred rand
only
This cheque
R15 600,00
Balance
R
B Sithole
15 600,00
S Peterson
For: BS Electrical
0007:900000•:9000 123456!!• 01
0007
80
Transaction 11:
On 17 January 20.6, Mrs S Peterson bought postage stamps and took R50 (VAT inclusive) out of petty
cash to pay for it.
81
Explanation:
82
Postage is an expense that decreases the profit for the year. Therefore, equity decreases and postage
account must be debited.
83
Petty cash (an asset) decreases and must be credited.
84
Money paid cash – petty cash; therefore this transaction will be entered into the petty
cash journal.
Source documents:
85
zz
Petty cash voucher
PETTY CASH VOUCHER
Date: 17 January 20.6
Required for:
Postmaster – postage stamps
Signature: S Peterson
Authorised by: B Sithole
135
No.
001
Amount
R
c
50 00
FAC1501/1
86
Transaction 12:
On 17 January 20.6, Mr T Wiseman bought electrical cables and fittings to be installed by Mr B Sithole
in his new home. He purchased:
87
zz
zz
zz
zz
zz
zz
50 m two phase electrical cable, R712,50
4 rolls insulation tape, R17,10
27 plug switches, R233,93
20 light switches, R142,27
20 light fittings, R924,77
3 fluorescent light fittings, R341,96
Mr B Sithole delivered and installed the electrical cables and fittings. Original tax invoice number 0004
was issued to Mr T Wiseman. Mr T Wiseman paid both amounts by cheque (Growing Bank Limited –
branch code 90–05–60). Mrs S Peterson issued receipt no 0005. The amount was deposited into the
current bank account on 18 January 20.6.
88
89
Explanation:
Received money; therefore the bank account (an asset) increases and must be debited with the total
amount of R2 372,53 + R9 750,00 = R12 122,53.
90
Sales is an income that increases the profit for the year. Therefore, equity increases and sales account
must be credited with R2 081,17.
91
Services rendered is an income that increases the profit for the year. Therefore, equity increases and
services rendered account must be credited with R8 552,63.
92
Money received; therefore this transaction will be entered into the cashreceipts journal.
136
FAC1501/1
Source documents:
93
zz
Cash register roll
BS ELECTRICAL
17/01/20.6
Till 01
Two-phase electrical cable
50 m
EC1002
712,50
Insulation tape
4 rolls
IT1001
17,10
Plug switches
27
PS1002
233,93
Light switches
20
LS1002
142,27
Light fittings
20
LF1002
924,77
Fluorescent light fittings
3
FLF1002
341,96
TOTAL
2 372,53
Cash
2 372,53
Change
0,00
14% VAT
R291,36
Slip no 0001
VAT no 8960225750
Thank you
137
FAC1501/1
zz
Duplicate cash sales invoice
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
VAT registration number
8960225750
Date: 17 January 20.6
TAX INVOICE
To: M
r T Wiseman
25 Park Street
Pretoria
VAT registration number 4301235678
Code
SR001
P O Box 392
PRETORIA 0001
Fax (012) 429–3424
No: 0004
Payment method
Cheque/debit card
Cash
Credit card
Account
Description
Electrical services
VAT @ 14%
Qty
Total price
15hrs
8 552,63
1 197,37
Invoice total
9 750,00
Amount tendered
9 750,00
Change
VAT included @ 14%
1 197,37
0,00
E & OE
zz
Duplicate receipt
No. 0005
Received from: Mr T Wiseman
Date: 17 January 20.6
Amount: Twelve thousand one hundred and twenty two rand
Rand
Cent: Fifty three cents
For: Inventory
(Cash slip no. 0001 – R2 372,53)
Services rendered
(Cash invoice no. 0004 – R9 750,00) (cheque)
Signature: S Peterson
138
R
c
12 122 53
BS Electrical
FAC1501/1
zz
Duplicate deposit slip
Helping Bank Limited
Helpende Bank Beperk
Cheque Account Deposit Slip
Tjekrekeningdepositostrokie
Credit
Acc no
Krediteer Rek nr 9 0 0 0 - 1 2 3 4 5 6
Name/Naam BS Electrical
Bank notes
Banknote
Nickel
Nikkel
Bronze
Brons
Money and postal
Poswissels en posorders
orders
SUBTOTAL/SUBTOTAAL
1
2
3
4
5
6
7
Drawer’s name
Trekker se naam
Bank
Branch no
Taknr
Mr T Wiseman
Growing Bank
Limited
90–05–60
Date
Datum 18 January 20.6
12 122 53
Total/Totaal
12 122 53
Cheques etc, as above, for collection to be available as cash when * For bank use
paid. While acting in good faith and exercising responsible care, the
* Vir bank
Bank will not accept responsibility for ensuring that depositors/acgebruik
count holders have lawful title to cheques, etc collected.
Tjeks ens, soos bo, ingehandig vir invordering wat na betaling
as kontant beskikbaar sal wees. Alhoewel die Bank in goeie trou
handel en alle redelike voorsorgmaatreëls tref, sal die Bank nie
die verantwoordelikheid aanvaar om te verseker dat deposante/
rekeninghouers regmatige titel op ingevorderde tjeks, ens het nie.
Deposited by/Gedeponeer deur: S Peterson
94
Transaction 13:
On 18 January 20.6 Mr B Sithole rendered services to Mrs B Mini and issued original tax invoice
number 0005 to her. Mrs B Mini paid R2 600 (VAT inclusive) cash and Mrs S Peterson issued
receipt number 0006 to her. Mrs S Peterson deposited the money received into the bank account on
19 January 20.6.
95
96
Explanation:
Received money for services rendered; therefore the bank account (an asset) increases and must
be debited.
97
139
FAC1501/1
Services rendered is an income that increases the profit for the year. Therefore, equity increases and
services rendered account must be credited.
98
Money received; therefore this transaction will be entered into the cash receipts journal.
99
Source documents:
zz
Duplicate cash sales invoice
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
VAT registration number
8960225750
Date: 18 January 20.6
TAX INVOICE
To: Cash
No: 0005
Payment method
Cheque/debit card
Cash
Credit card
Account
Code
SR001
P O Box 392
PRETORIA 0001
Fax (012) 429–3424
Description
Electrical services
VAT @ 14%
Invoice total
Qty
Total price
4hrs
2 280,70
319,30
Amount tendered
2 600,00
2 600,00
Change
0,00
VAT included @ 14%
319,30
E & OE
100
140
FAC1501/1
zz
Duplicate receipt
No. 0006
Received from: Mrs B Mini
Date: 18 January 20.6
R
Amount: Two thousand six hundred rand only
Rand
Cent: None
For: Services rendered (cash)
2 600 00
BS Electrical
Signature: S Peterson
zz
c
Duplicate deposit slip
Helping Bank Limited
Helpende Bank Beperk
Cheque Account Deposit Slip
Tjekrekeningdepositostrokie
Credit
Acc no
Krediteer Rek nr 9 0 0 0 - 1 2 3 4 5 6
Name/Naam BS Electrical
Bank notes
Banknote
Nickel
Nikkel
Bronze
Brons
Money and postal
Poswissels en posorders
orders
SUBTOTAL/SUBTOTAAL
1
2
3
4
5
6
7
Drawer’s name
Trekker se naam
Date
Datum 19 January 20.6
2 600 00
2 600 00
Branch no
Taknr
Bank
Total/Totaal
2 600 00
Cheques etc, as above, for collection to be available as cash when * For bank use
paid. While acting in good faith and exercising responsible care, the
* Vir bank
Bank will not accept responsibility for ensuring that depositors/acgebruik
count holders have lawful title to cheques, etc collected.
Tjeks ens, soos bo, ingehandig vir invordering wat na betaling
as kontant beskikbaar sal wees. Alhoewel die Bank in goeie trou
handel en alle redelike voorsorgmaatreëls tref, sal die Bank nie
die verantwoordelikheid aanvaar om te verseker dat deposante/
rekeninghouers regmatige titel op ingevorderde tjeks, ens het nie.
Deposited by/Gedeponeer deur: S Peterson
141
FAC1501/1
Transaction 14:
101
On 20 January 20.6, Mr S Big bought electric switches, fittings and insulation tape. He purchased:
102
zz
zz
zz
zz
5 rolls of insulation tape (IT1001) for a total of R21,38
10 plug switches (PS1002) for a total of R86,64
6 light switches (LS1002) for a total of R42,68
6 light fittings (LF1002) for a total of R277,43
He paid with R430 cash and the money was deposited by Mrs S Peterson on 21 January 20.6.
103
Explanation:
104
Received money; therefore the bank account (an asset) increases and must be debited.
105
Sales is an income that increases the profit for the year. Therefore, equity increases and sales account
must be credited.
106
Money received; therefore this transaction will be entered into the cash receipts journal.
107
Source documents:
zz
Cash register roll
BS ELECTRICAL
20/01/20.6
Till 01
Insulation tape
5 rolls
IT1001
Plug switches
10
PS1002
Light switches
6
LS1002
Light fittings
6
LF1002
TOTAL
Cash
Change
14% VAT
Slip no 0002
VAT no 8960225750
Thank you
142
21,38
86,64
42,68
277,43
428,13
430,00
1,87
R52,58
FAC1501/1
Note: In practice, due to the fact that 2 cent coins and 1 cent coins are not part of our currency
anymore, entities round down or round up an amount to the nearest 5 cents to make it possible to
give change when paid in cash. We will however not adopt this principle in this module.
zz
Duplicate deposit slip
Helping Bank Limited
Helpende Bank Beperk
Cheque Account Deposit Slip
Tjekrekeningdepositostrokie
Credit
Acc no
Krediteer Rek nr 9 0 0 0 - 1 2 3 4 5 6
Name/Naam BS Electrical
Bank notes
Banknote
Nickel
Nikkel
Bronze
Brons
Money and postal
Poswissels en posorders
orders
SUBTOTAL/SUBTOTAAL
1
2
3
4
5
6
7
Drawer’s name
Trekker se naam
Date
Datum 21 January 20.6
*
*
*
420 00
8 00
0 13
428 13
Branch no
Taknr
Bank
Total/Totaal
428 13
Cheques etc, as above, for collection to be available as cash when * For bank use
paid. While acting in good faith and exercising responsible care, the
* Vir bank
Bank will not accept responsibility for ensuring that depositors/acgebruik
count holders have lawful title to cheques, etc collected.
Tjeks ens, soos bo, ingehandig vir invordering wat na betaling as
kontant beskikbaar sal wees. Alhoewel die Bank in goeie trou handel
en alle redelike voorsorgmaatreëls tref, sal die Bank nie die verantwoordelikheid aanvaar om te verseker dat deposante/rekeninghouers regmatige titel op ingevorderde tjeks, ens het nie.
Deposited by/Gedeponeer deur: S Peterson
*Note: These can vary as long as the subtotal is R428,13.
143
FAC1501/1
108
Transaction 15:
On 21 January 20.6, Mr B Strong bought electrical cable and fittings to be installed in his new home.
He purchased:
109
zz
zz
zz
zz
zz
zz
40 m of three-phase electrical cable (EC1003) for R741,00
10 rolls of insulation tape (IT1001) for R42,75
50 plug switches (PS1002) for R433,20
45 light switches (LS1002) for R320,11
30 light fittings (LF1002) for R1 387,15
10 fluorescent light fittings (FLF1002) for R1 139,89
Mr B Sithole installed the electrical cable and fittings in Mr B Strong’s new home and issued original
tax invoice number 0006 to him for R2 600,00. He paid the amount of R4 064,10 for the electrical
cable and fittings, and the service rendered for R2 600,00 cash. Mrs S Peterson issued receipt
number 0007 to him. The money was deposited on 22 January 20.6.
110
Explanation:
111
Received money; therefore the bank account (an asset) increases and must be debited with the total
amount of R4 064,10 + R2 600,00 = R6 664,10.
112
Sales is an income that increases the profit for the year. Therefore, equity increases and sales account
must be credited with R3 565,00.
113
Services rendered is an income that increases the profit for the year. Therefore equity increases and
services rendered account must be credited with R2 280,70.
114
Money received; therefore this transaction will be entered into the cash receipts journal.
115
144
FAC1501/1
Source documents:
116
zz
Cash register roll
BS ELECTRICAL
21/01/20.6
Till 01
Three-phase electrical cable
40m
EC1003
Insulation tape
10 rolls
IT1001
Plug switches
50
PS1002
Light switches
45
LS1002
Light fittings
30
LF1002
Fluorescent light fittings
10
FLF1002
TOTAL
Cash
Change
14% VAT
Slip no 0003
VAT no 8960225750
Thank you
145
741,00
42,75
433,20
320,11
1 387,15
1 139,89
4 064,10
4 064,10
0,00
R499,10
FAC1501/1
zz
Duplicate cash sales invoice
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
VAT registration number
8960225750
Date: 21 January 20.6
TAX INVOICE
To: Cash
No: 0006
Payment method
Cheque/debit card
Cash
Credit card
Account
Code
SR001
P O Box 392
PRETORIA 0001
Fax (012) 429–3424
Description
Electrical services
Qty
Total price
4hrs
2 280,70
VAT @ 14%
319,30
Invoice total
2 600,00
Amount tendered
2 600,00
Change
0,00
VAT included @ 14%
319,30
E & OE
zz
Duplicate receipt
No. 0007
Received from: Mr B Strong
Date: 21 January 20.6
R
Amount: Six thousand six hundred and sixty four rand
Rand
Cent: Ten cents
For: Inventory (Cash slip no. 0003 – R4 064,10)
Services rendered (Cash invoice no. 0006 –
R2 600,00) (cash)
Signature: S Peterson
146
c
6 664 10
BS Electrical
FAC1501/1
zz
Duplicate deposit slip
Helping Bank Limited
Helpende Bank Beperk
Cheque Account Deposit Slip
Tjekrekeningdepositostrokie
Credit
Acc no
Krediteer Rek nr 9 0 0 0 - 1 2 3 4 5 6
Name/Naam BS Electrical
Bank notes
Banknote
Nickel
Nikkel
Bronze
Brons
Money and postal
Poswissels en posorders
orders
SUBTOTAL/SUBTOTAAL
1
2
3
4
5
6
7
Drawer’s name
Trekker se naam
Date
Datum 22 January 20.6
6 660 00
4 00
0 10
6 664 10
Branch no
Taknr
Bank
Total/Totaal
6 664 10
Cheques etc, as above, for collection to be available as cash when * For bank use
paid. While acting in good faith and exercising responsible care,
* Vir bank
the Bank will not accept responsibility for ensuring that depositors/
gebruik
account holders have lawful title to cheques, etc collected.
Tjeks ens, soos bo, ingehandig vir invordering wat na betaling as
kontant beskikbaar sal wees. Alhoewel die Bank in goeie trou handel
en alle redelike voorsorgmaatreëls tref, sal die Bank nie die verantwoordelikheid aanvaar om te verseker dat deposante/rekeninghouers regmatige titel op ingevorderde tjeks, ens het nie.
Deposited by/Gedeponeer deur: S Peterson
Transaction 16:
117
On 22 January 20.6 the entity ordered some fittings and switches from Huge Wholesalers. Since the
first payment was made via the internet and it was for a significant amount of R38 500,08 they will
now accept cheques from BS Electrical. Mrs S Peterson received the following delivery and paid per
cheque number 0008.
118
119
Explanation:
Purchases is an expense that decreases the profit for the year. Therefore, equity decreases and
purchases account must be debited.
120
121
Paid by cheque; bank (an asset) decreases and must be credited.
147
FAC1501/1
Paid by cheque; therefore this transaction will be entered into the cash payments journal.
122
Source documents:
zz
Original delivery note
HUGE WHOLESALERS
1667 Marine Drive
PRETORIA
Tel: (012) 336–3433
Date: 22 January 20.6
P O Box 1550
PRETORIA 0001
Fax (012) 336–3434
VAT Registration number
5591223986
DELIVERY NOTE
No: SP6068
Supplied to:
BS Electrical
499 Tshwane Drive
Pretoria
P O Box 392
PRETORIA
0001
Code
Description
Qty
Unit price
(VAT excl.)
IT1001
LF1002
FLF1002
LS1002
PS1002
Insulation tape
Light fittings
Fluorescent light fittings
Light switches
Plug switches
1 box
2 boxes
1 box
2 boxes
2 boxes
300
3 245
7 999
998
1 215
00
00
00
00
00
Total price
300
6 490
7 999
1 996
2 430
00
00
00
00
00
19 215
2 690
00
10
Total
21 905
10
VAT included @ 14%
2 690
10
VAT @ 14%
Checked
Note:
Discount of 20% applicable
Checked by: Mrs S Peterson
Signature: S Peterson
E & OE
123
148
Date: 22 January 20.6
√
√
√
√
√
FAC1501/1
zz
Original cash invoice
HUGE WHOLESALERS
1667 Marine Drive
PRETORIA
Tel (012) 336–3433
P O Box 1550
PRETORIA 0001
Fax (012) 336–3434
VAT registration number
5591223986
Date: 22 January 20.6
TAX INVOICE
To: B
S Electrical
499 Tshwane Drive
Pretoria
VAT registration number 8960225750
Code
No: 6096
Payment method
Cheque/debit card
Cash
Credit card
Account
Description
IT1001
LF1002
FLF1002
LS1002
PS1002
Insulation tape
Light fittings
Fluorescent light fittings
Light switches
Plug switches
Qty
Total price
300,00))
6 490,00))
7 999,00))
1 996,00))
2 430,00))
1 box
2 boxes
1 box
2 boxes
2 boxes
– 20% cash discount
19 215,00))
(3 843,00))
VAT @ 14%
15 372,00))
2 152,08))
Invoice total
17 524,08))
Amount tendered
1 7 524,08))
Change
0,00))
VAT included @ 14%
2 152,08))
E & OE
zz
Cheque counterfoil
Date
22/01/20.6
To
Huge
Wholesalers
90–00–00–01
NOT TRANSFERABLE
Helping Bank Limited
Pretoria
Date: 22 January 20.6
For
Trading inventory
Balance
R
Deposit
R
Pay: Huge Wholesalers
Subtotal
R
The sum of: Seventeen thousand five hundred
and twenty four rand and eight cent
This cheque
R17 524,08
Balance
R
B Sithole
or Bearer
17 524,08
S Peterson
For: BS Electrical
0008
0008:900000•:9000 123456!!• 01
149
FAC1501/1
124
Transaction 17:
On 23 January 20.6 Mrs S Peterson took R56 from the petty cash to buy stationery from Pen
and Pencils.
125
Explanation:
126
Stationery is an expense that decreases the profit for the year. Therefore, equity decreases and
stationery account must be debited.
127
128
Petty cash (an asset) decreases and must be credited.
Money paid cash – petty cash; therefore this transaction will be entered into the petty
cash journal.
Source documents:
129
zz
Cash slip
PEN AND PENCILS
23/01/20.6
Till 02
Pens
2 @ R14,00
BPI1001
28,00
Printing paper
PP1003
28,00
TOTAL
56,00
Cash
56,00
Change
0,00
14% VAT
R6,88
Slip no 0012
VAT no 5690233875
Thank you
zz
Petty cash voucher
PETTY CASH VOUCHER
Date: 23 January 20.6
Required for:
Pen and Pencils – stationery
No.
002
Amount
R
c
56 00
Signature: S Peterson
Authorised by: B Sithole
150
FAC1501/1
Transaction 18:
130
On 25 January Mrs S Peterson’s salary was paid to her by issuing cheque number 0009 for R12 300.
131
132
Explanation:
Salary is an expense that decreases the profit for the year. Therefore, equity decreases and salaries
account must be debited.
133
Paid by cheque; bank (an asset) decreases and must be credited.
134
Paid by cheque; therefore this transaction will be entered into the cash payments journal.
135
Source documents:
zz
Cheque counterfoil
Date
25/01/20.6
To
Mrs S Peterson
NOT TRANSFERABLE
90–00–00–01
Helping Bank Limited
Pretoria
Date: 25 January 20.6
For
Salary
Balance
R
Deposit
R
Pay: Mrs S Peterson
Subtotal
R
The sum of: Twelve thousand three hundred
rand only
This cheque
R12 300,00
Balance
R
B Sithole
or Bearer
12 300,00
S Peterson
For: BS Electrical
0009
136
0009:900000•:9000 123456!!• 01
Transaction 19:
On 29 January Mrs S Peterson wrote out cheque number 0010 for R106 to restore the petty cash
impress amount to R200.
137
138
Explanation:
Petty cash (an asset) increases and must be debited.
139
140
Paid by cheque; bank (an asset) decreases and must be credited.
Money received – petty cash; therefore this transaction will be entered into the petty cash
journal.
Paid by cheque; therefore this transaction will be entered into the cash payments journal.
151
FAC1501/1
Source documents:
141
zz
Cheque counterfoil
Date
90–00–00–01
29/01/20.6
To
Cash
Helping Bank Limited
For
Petty cash
Pretoria
Date: 29 January 20.6
Balance
R
Deposit
R
Pay: Cash
or Bearer
Subtotal
R
The sum of: Hundred and six rand only
This cheque
R106,00
Balance
R
B Sithole
106,00
S Peterson
For: BS Electrical
0010
5.4.1
0010:900000•:9000 123456!!• 01
Cash receipts journal
The cash receipts journal is a subsidiary book in which the cash receipts of an entity are recorded. All
moneys received are recorded in the cash receipts journal. At the end of the month only one amount,
which represents the entire month’s cash receipts, is debited to the bank account in the general ledger.
142
Different columns are used to analyse the different types of receipts and to find the total of each for
a certain period. The number and headings of these columns will be determined by the type of entity
and the frequency of transactions that can be grouped together. It is, however, not possible to provide
individual columns for every type of receipt. Therefore, the less frequent receipts (once or twice a
month) will be entered in a column for sundry accounts.
143
144
Entries in the cash receipts journal are recorded from:
zz
zz
zz
zz
zz
duplicates of receipts issued (when money was received)
the cash register roll (when cash was received for sales)
the duplicate deposit slip (when money was deposited at the bank)
the original credit card/debit card slip (money will be automatically banked by the bank on our account)
internet banking: notice of payment faxed to self (money deposited directly into bank account)
Provision is made for a VAT output column in the cash receipts journal (tax collected by the entity on
behalf of the South African Revenue Service). See paragraph 4.6 for a discussion of VAT.
145
146
147
152
BS ELECTRICAL
150
149
Mr B Sithole
12 122,53
CRR0003
21 Cash sales
6 664,10
428,13
R0006
CRR0002 20 Cash sales
Mr T Wiseman
17
18
R0005
3 705,00
2 925,00
1 170,00
N2
6 021,72
129 614,76
B2
3 565,00
375,55
2 081,17
R
Sales
6 664,10
428,13
2 600,00
12 122,53
3 705,00
4 095,00
100 000,00
R
R
100 000,00
Bank
Analysis
of
receipts
2 600,00
Mr T Busy
Fol
Mrs B Mini
Mrs V Happy
R0004
10 Mr P Lucky
2
Details
R0003
R0002
R0001
Doc No. Day
CASH RECEIPTS JOURNAL – JANUARY 20.6
148
N1
19 956,14
2 280,70
2 280,70
8 552,63
3 250,00
2 565,79
1 026,32
R
Services
rendered
B7
3 636,90
818,40
52,58
319,30
1 488,73
455,00
359,21
143,68
R
VAT
output
Fol
100 000,00
100 000,00 B1 Capital
R
Amount
Details
Sundry accounts
CRJ1
FAC1501/1
153
FAC1501/1
zz
zz
zz
zz
zz
zz
zz
zz
The folio numbers B2, N2, N1, B7 and B1 are for reference purposes and will be discussed in
paragraph 5.5.
At the end of the month the cash receipts journal is closed off by totalling each column.
The analysis of receipts column does not have a total because all the cash, cheques and credit
card payments received have been deposited as soon as possible. The amount is entered into the
analysis of receipts column when the money is received and it will be entered into the bank column
when it is deposited. If two amounts are deposited together, the amounts are added and only the
total of the deposit slip will be entered in the bank column.
The internet payments received will be entered directly into the bank column because it is deposited
automatically into the bank account of the entity.
On the 17th and 21st the VAT of the sales and the services rendered were added and only one
amount was entered in the VAT column.
The sales amount and services rendered amounts are the total amounts on the invoices less the
VAT received because the VAT has to be paid over to the South African Revenue Service.
The total of the bank column must be equal to the sum of the totals of the other
columns, that is R6 021,72 + R19 956,14 + R3 636,90 + R100 000 = R129 614,76.
The totals of the columns must be posted to the appropriate accounts in the general ledger at the
end of the month. Each transaction in the sundry accounts column will be posted individually to the
appropriate account identified in the details column in the general ledger at the date of the transaction.
5.4.2
Cash payments journal
The cash payments journal is a subsidiary book in which the cash payments of an entity are recorded.
All payments are made by cheque, via the internet or by credit card and each amount must be recorded
in the bank column as well as in one of the analysis columns.
151
Different columns are used to analyse the different types of payment and to find the total of each for
a certain period. The number and heading of these columns will be determined by the type of entity
and will include those transactions that occur frequently during the month. It is, however, not possible
to provide individual columns for every type of payment. Therefore, the less frequent payments (once
or twice a month) will be entered in the column for sundry accounts.
152
Entries in the cash payments journal are made from:
153
zz
zz
cheque counterfoils (payments made by cheque)
internet banking: notice of payment send to them (money paid directly into the bank account of
another person or entity)
Provision is made for a VAT input column in the cash payments journal to record any input VAT
associated with purchases.
154
zz
zz
zz
zz
The folio numbers B2, N3, B8, B3, B4, N4, B5, N5 and PCJ1 are for reference
purposes and will be discussed in paragraph 5.5.
At the end of the month the cash payments journal is closed off by totalling each column.
The purchases amount, tools and equipment amount and computer equipment amount are the
total amounts on the invoices less the VAT paid because the VAT input are claimed back from the
South African Revenue Service.
The amount entered in the bank column is the total amount paid (price + VAT).
154
BS ELECTRICAL
155
157
Mr B Sithole
Huge Wholesalers
Cash
4
15
16
0004
BS01
Huge Wholesalers
25
29
0008
0009
0010
155
Cash
Mrs S Peterson
IT Perfect
22
0007
Computer World
0006
0005
Cash
3
0003
Big Builders
Wiseman Traders
2
Name of payee
0002
0001
Doc No. Day
Fol
B2
115 813,71
106,00
12 300,00
17 524,08
15 600,00
16 269,00
200,00
38 500,08
2 000,00
300,00
3 014,55
N3
49 144,00
15 372,00
33 772,00
R
R
10 000,00
Purchases
Bank
CASH PAYMENTS JOURNAL – JANUARY 20.6
156
B8
12 637,79
2 152,08
1 915,79
1 997,95
4 728,08
245,61
370,21
1 228,07
R
VAT input
B3
11 416,27
2 644,34
8 771,93
R
Tools and
equipment
B4
27 955,26
13 684,21
14 271,05
R
Computer
equipment
N4
12 300,00
12 300,00
R
Salaries
N5
B5
Fol
Rental expenses
Cash float
Details
2 360,39
106,00 PCJ1 Petty cash
200,00 PCJ1 Petty cash
1 754,39
300,00
R
Amount
Sundry accounts
CPJ1
FAC1501/1
FAC1501/1
zz
zz
zz
The total of the bank column must be equal to the sum of the totals of the other
columns, that is R49 144,00 + R12 637,79 + R11 416,27 + R27 955,26 + R12 300,00 + R2 360,39
= R115 813,71.
The total of the columns must be posted to the appropriate accounts in the general ledger at the
end of the month. Each transaction in the sundry accounts column will be posted individually to the
appropriate account identified in the details column in the general ledger at the date of the transaction.
If more than one person was paid a salary, a salaries journal must be opened to record all the
salaries. Only the total amount for salaries will then be posted to the cash payments journal.
5.4.3
Petty cash journal
It is normal practice to bank all cash receipts (coins, notes, postal orders and cheques) daily. This
is done to control all money received. Payments must also be controlled and are therefore made by
cheque. However, when small payments, for example, expenses such as postage, telegrams, wages
to casual labourers, small repairs and small donations are paid out, it is more convenient to make
payments in cash rather than the drawing of a cheque.
158
All payments from petty cash are recorded in the petty cash journal. The number of analysis columns
will vary according to the type of entity and the frequency ofpayments for a certain item/service. It is,
however, not possible to provide individual columns for every type of payment. Therefore, the less
frequent payments (once or twice a month) will be entered in the column for sundry accounts.
159
Before any payment can be made out of petty cash the payment must be authorised by a person
appointed to do so. The signature of the person who authorises the payment must appear on the
petty cash voucher. These vouchers will be numbered in sequence and filed with the external source
document (mostly cash slips) received on payment.
160
When a payment is recorded in the petty cash journal, the amount is entered in the petty cash column
as well as in the appropriate analysis column.
161
The imprest system is most widely used. In terms of this system, an amount that should cover petty
cash requirements for a month is estimated. This amount is then given to the petty cashier as the
imprest amount – an amount in advance.
162
The petty cashier is reimbursed – usually at the end of the month – by means of a cheque which is
equal to the amount that he/she has spent. Thus the petty cashier starts each month with the same
amount of petty cash on hand.
163
If the petty cashier runs short of money, because of additional expenses, he/she receives a cheque.
The amount the petty cashier will receive at the end of the month to restore the “imprest” amount will
be equal to expense less amounts received during the month.
164
Provision is made for a VAT input column in the petty cash journal because it is the VAT paid by the
entity to another person or entity (the person or entity must be a registered VAT vendor).
165
156
167
BS ELECTRICAL
CPJ1
CPJ1
16
Fol
29
Day
Receipts
B6
306,00
106,00
200,00
R
Amount
23
17
Day
Pen and Pencils
Post office
Details
PETTY CASH JOURNAL – JANUARY 20.6
166
002
001
No
Fol
50,00
56,00
B6
106,00
R
Total
B8
R
13,02
6,88
6,14
VAT input
Payments
N6
R
43,86
43,86
Postage
R
49,12
49,12
Amount
N7
Fol
Stationery
Details
Sundry accounts
PCJ1
FAC1501/1
157
FAC1501/1
zz
zz
zz
zz
zz
zz
The folio numbers B6, B8, N6 and N7 are for reference purposes and will be discussed in paragraph
5.5.
At the end of the month the petty cash journal is closed off by totalling each column.
The stationery amount is the total amount on the cash slips less the VAT paid because the VAT is
claimed from the South African Revenue Service.
The amount entered in the total column is the total amount paid (price + VAT).
The total of the total column must be equal to the sum of the totals of the other columns, that is
R13,02 + R43,86 + R49,12 = R106,00.
The total of the columns must be posted to the appropriate accounts in the general ledger at the
end of the month. Each transaction in the sundry accounts column will be posted individually to the
appropriate account identified in the details column in the general ledger at the date of the transaction.
5.5
POSTING TO THE GENERAL LEDGER
All cash transactions are entered into one of the subsidiary journals (books of first entry). At the end
of the month the totals of these journals must be posted to the appropriate accounts in the general
ledger.
168
169
In the general ledger accounts are grouped as follows:
zz
zz
170
The entries in the cash receipts journal are posted to the general ledger as follows:
zz
zz
zz
zz
zz
zz
171
All the assets, liabilities and equity accounts are grouped together in the financial position section
in the general ledger and indicated by the reference B. These accounts will have balances at the
end of the financial year and will be reported in the statement of financial position.
All the income and expense accounts are grouped together in the nominal accounts section in the
general ledger and indicated by the reference N. These accounts will all be closed off at the end of
the year (ie they will not have balances). These accounts are closed off to the profit or loss account.
The total of the bank column is debited to the bank account. In the bank account the words “total
receipts” are written as cross-reference. The reason for the words “total receipts” is because
different accounts will be credited (sales account, services rendered account, capital account and
VAT output account).
The total of the sales column is credited to the sales account. In the sales account the word “bank”
is written as cross-reference.
The total of the services rendered column is credited to the services rendered account. In the
services rendered account the word “bank” is written as cross-reference.
The total of the VAT output column is credited to the VAT output account. In the VAT output account
the word “bank” is written as cross-reference.
The amounts in the column for sundry accounts are credited individually to the appropriate accounts
in the general ledger as indicated in the column for details. For example, the capital account is
credited using the cross-reference “bank”.
In the general ledger accounts the folio reference CRJ (for cash receipts journal) and the number of
the cash receipts journal is used. In the cash receipts journal the folio reference B and the number
of the account or N and the number of the account is used.
The entries in the cash payments journal are posted to the general ledger as follows:
zz
zz
The total of the bank column is credited to the bank account. In the bank account the words “total
payments” are written as cross-reference. The reason for the words “total payments” is because
different accounts will be debited (purchases account, VAT input account, tools and equipment
account, computer equipment account, salaries account, cash float account, rent expenses account
and petty cash account).
The total of the purchases column is debited to the purchases account. In the purchases account
the word “bank” is written as cross-reference.
158
FAC1501/1
zz
zz
zz
zz
zz
zz
172
The total of the VAT input column is debited to the VAT input account. In the VAT input account the
word “bank” is written as cross-reference.
The total of the tools and equipment column is debited to the tools and equipment account. In the
tools and equipment account the word “bank” is written as cross-reference.
The total of the computer equipment column is debited to the computer equipment account. In
the computer equipment account the word “bank” is written as cross-reference.
The total of the salaries column is debited to the salaries account. In the salaries account the word
“bank” is written as cross-reference.
The amounts in the column for sundry accounts are debited individually to the appropriate accounts
in the general ledger as indicated in the column for details.For example, the cash float account is
debited using the cross-reference “bank”.
In the general ledger accounts the folio reference CPJ (for cash payments journal) and the number
of the cash payments journal is used. In the cash payments journal the folio reference B and the
number of the account or N and the number of the account or PCJ (for petty cash journal) and the
number of the petty cash journal is used.
The entries in the petty cash journal are posted to the general ledger as follows:
zz
zz
zz
zz
zz
zz
The total of the receipts side of the petty cash journal is debited to the petty cash account. In the
petty cash account the words “total receipts” are written as cross-reference.
The total of the total column on the payments side of the petty cash journal is credited to the petty
cash account. In the petty cash account the words “total payments” are written as cross-reference.
The reason for the words “total payments” is because different accounts will be debited (VAT input
account, postage account and stationery account).
The total of the VAT input column is debited to the VAT input account. In the VAT input account the
words “petty cash” are written as cross-reference.
The total of the postage column is debited to the postage account. In the postage account the words
“petty cash” are written as cross-reference.
The amounts in the column for sundry accounts are debited individually to the appropriate accounts
in the general ledger as indicated in the column for details. For example, the stationery account is
debited using the cross-reference “petty cash”.
In the general ledger accounts the folio reference PCJ (for petty cash journal) and the number of
the petty cash journal is used. In the petty cash journal the folio reference B and the number of the
account or N and the number of the account or CPJ (for cash payments journal) and the number
of the cash payments journal is used.
159
FAC1501/1
173
174
175
BS ELECTRICAL
GENERAL LEDGER
FINANCIAL POSITION SECTION
Dr
B1
Capital
Cr
20.6
Jan
Dr
2 Bank
Bank
20.6
CRJ1 100 000 00
B2
20.6
Jan 31 Total receipts
CRJ1 129 614 76 Jan 31 Total payments
Balance
CPJ1 115 813 71
13 801 05
c/d
129 614 76
Feb
Cr
1 Balance
Dr
b/d
129 614 76
13 801 05
Tools and equipment
B3
Cr
B4
Cr
B5
Cr
B6
Cr
20.6
Jan 31 Bank
Dr
CPJ1
11 416 76
Computer equipment
20.6
Jan 31 Bank
Dr
CPJ1
27 955 26
Cash float
20.6
Jan
3 Bank
Dr
CPJ1
300 00
Petty cash
20.6
20.6
Jan 31 Total receipts
PCJ1
306 00 Jan 31 Total payments
Balance
PCJ1
c/d
306 00
Feb
1 Balance
Dr
b/d
106 00
200 00
306 00
200 00
VAT output
B7
Cr
20.6
Jan 31 Bank
Dr
VAT input
20.6
Jan 31 Bank
Petty cash
CPJ1
PCJ1
12 637 79
13 02
12 650 81
160
CRJ1
B8
3 636 90
Cr
FAC1501/1
At the end of the two month period the VAT return must be submitted to the South African Revenue
Service, a VAT control account must be opened and the VAT input account as well as the VAT output
account must be closed off to the VAT control account to determine whether an amount must be paid
over to the Receiver of Revenue (VAT output is bigger than the VAT input) or an amount must be
refunded by the Receiver of Revenue (VAT input is bigger than the VAT output).
176
NOMINAL ACCOUNTS SECTION
Dr
Services rendered
N1
Cr
20.6
Jan 31 Bank
Dr
Sales
CRJ1
N2
19 956 14
Cr
20.6
Jan 31 Bank
Dr
Purchases
CRJ1
6 021 72
N3
Cr
N4
Cr
N5
Cr
N6
Cr
N7
Cr
20.6
Jan 31 Bank
Dr
CPJ1
49 144 00
Salaries
20.6
Jan 31 Bank
CPJ1
12 300 00
Dr
Rental expenses
20.6
Jan 4
Bank
Dr
CPJ1
1 754 39
Postage
20.6
Jan 31 Petty cash
Dr
PCJ1
43 86
Stationery
20.6
Jan 23 Petty cash
PCJ1
49 12
161
FAC1501/1
5.6
EXERCISE AND SOLUTION
EXERCISE 1
2
177
The following transactions must be recorded from the source documents of PP Traders:
No. 001
Received from: P Benroy
Date: 1 September 20.6
Amount: Eight hundred and fifty three thousand rand only
Rand
Cent: None
For: Capital contribution by the owner (cheque)
Easy Bank Limited
Easy Bank Beperk
P Benroy
853 000 00
Cheque Account Deposit Slip
Tjekrekeningdepositostrokie
Credit
Acc no
Krediteer Rek nr 8 0 0 0 - 1 1 2 3 4 5
Name/Naam PP Traders
Bank notes
Banknote
Nickel
Nikkel
Bronze
Brons
Money and postal
Poswissels en posorders
orders
SUBTOTAL/SUBTOTAAL
1
2
3
4
5
6
7
c
PP Traders
Signature: P Bright
Drawer’s name
Trekker se naam
R
Date
Datum 1 September 20.6
Branch no
Taknr
Bank
Easy Bank
Limited
80-00-00
853 000 00
Total/Totaal
853 000 00
Cheques etc, as above, for collection to be available as cash when * For bank use
paid. While acting in good faith and exercising responsible care,
* Vir bank
the Bank will not accept responsibility for ensuring that depositors/
gebruik
account holders have lawful title to cheques, etc collected.
Tjeks ens, soos bo, ingehandig vir invordering wat na betaling as
kontant beskikbaar sal wees. Alhoewel die Bank in goeie trou handel
en alle redelike voorsorgmaatreëls tref, sal die Bank nie die verantwoordelikheid aanvaar om te verseker dat deposante/rekeninghouers regmatige titel op ingevorderde tjeks, ens het nie.
Deposited by/Gedeponeer deur: P Bright
162
FAC1501/1
Date
02/09/20.6
To
Astor Agency
For
Business vehicle
Balance
R
Deposit
R
Subtotal
R
This cheque
R50 000,00
Balance
R
0001
Date
04/09/20.6
To
SR Manufacturers
For
Merchandise
Balance
R
Deposit
R
Subtotal
R
This cheque
R150 000,00
Balance
R
0002
163
FAC1501/1
Date
05/09/20.6
To
Cash
For
Petty cash
Balance
R
Deposit
R
Subtotal
R
This cheque
R400,00
Balance
R
0003
PETTY CASH VOUCHER
No.
Date: 8 September 20.6
1
Amount
Required for:
R
Wages
c
120 00
Signature: P Bright
Authorised by: P Benroy
164
FAC1501/1
Date
11/09/20.6
To
Speedy Suppliers
For
Goods
Balance
R
Deposit
R
Subtotal
R
This cheque
R32 000,00
Balance
R
0004
Date
13/09/20.6
To
CNA
For
Stationery
Balance
R
Deposit
R
Subtotal
R
This cheque
R320,00
Balance
R
0005
165
FAC1501/1
Date
14/09/20.6
To
Protea Shopfitters
For
Cabinets and shelves
Balance
R
Deposit
R
Subtotal
R
This cheque
R14 000,00
Balance
R
0006
Date
15/09/20.6
To
Cash
For
Cash float
Balance
R
Deposit
R
Subtotal
R
This cheque
R400,00
Balance
R
0007
On 18 September 20.6 the total cash sales as per cash register roll number 1 were R7 200,00.
178
166
FAC1501/1
Easy Bank Limited
Easy Bank Beperk
Cheque Account Deposit Slip
Tjekrekeningdepositostrokie
Credit
Acc no
Krediteer Rek nr 8 0 0 0 - 1 1 2 3 4 5
Name/Naam PP Traders
Bank notes
Banknote
Nickel
Nikkel
Bronze
Brons
Money and postal
Poswissels en posorders
orders
SUBTOTAL/SUBTOTAAL
1
2
3
4
5
6
7
Drawer’s name
Trekker se naam
Date
Datum 19 September 20.6
7 200 00
7 200 00
Branch no
Taknr
Bank
Total/Totaal
7 200 00
Cheques etc, as above, for collection to be available as cash when * For bank use
paid. While acting in good faith and exercising responsible care, the
* Vir bank
Bank will not accept responsibility for ensuring that depositors/acgebruik
count holders have lawful title to cheques, etc collected.
Tjeks ens, soos bo, ingehandig vir invordering wat na betaling
as kontant beskikbaar sal wees. Alhoewel die Bank in goeie trou
handel en alle redelike voorsorgmaatreëls tref, sal die Bank nie
die verantwoordelikheid aanvaar om te verseker dat deposante/
rekeninghouers regmatige titel op ingevorderde tjeks, ens het nie.
Deposited by/Gedeponeer deur: P Bright
On 19 September 20.6 the total cash sales as per cash register roll number 2 were R28 000,00.
The amount of R28 000,00 includes two cheques from:
179
zz
zz
P Potgieter, Bridging Bank Limited (Branch code 80–10–00), for R1 400,00; and
T Little, Easy Bank Limited (Branch code 80–00–00), for R720,00.
167
FAC1501/1
Easy Bank Limited
Easy Bank Beperk
Cheque Account Deposit Slip
Tjekrekeningdepositostrokie
Credit
Acc no
Krediteer Rek nr 8 0 0 0 - 1 1 2 3 4 5
Name/Naam PP Traders
Bank notes
Banknote
Nickel
Nikkel
Bronze
Brons
Money and postal
Poswissels en posorders
orders
SUBTOTAL/SUBTOTAAL
Drawer’s name
Trekker se naam
1
P Potgieter
2
3
4
5
6
7
T Little
Bank
Bridging Bank
Limited
Easy Bank
Limited
Date
Datum 20 September 20.6
25 880 00
25 880 00
Branch no
Taknr
80-10-00
1 400 00
80-00-00
720 00
Total/Totaal
28 000 00
Cheques etc, as above, for collection to be available as cash when * For bank use
paid. While acting in good faith and exercising responsible care, the
* Vir bank
Bank will not accept responsibility for ensuring that depositors/acgebruik
count holders have lawful title to cheques, etc collected.
Tjeks ens, soos bo, ingehandig vir invordering wat na betaling as
kontant beskikbaar sal wees. Alhoewel die Bank in goeie trou handel
en alle redelike voorsorgmaatreëls tref, sal die Bank nie die verantwoordelikheid aanvaar om te verseker dat deposante/rekeninghouers regmatige titel op ingevorderde tjeks, ens het nie.
Deposited by/Gedeponeer deur: P Bright
180
168
FAC1501/1
On 20 September 20.6 the total cash sales as per cash register roll number 3 were R21 210,00. The
amount of R21 210,00 includes credit card payments to the value of R8 900,00.
181
Easy Bank Limited
Easy Bank Beperk
Cheque Account Deposit Slip
Tjekrekeningdepositostrokie
Credit
Acc no
Krediteer Rek nr 8 0 0 0 - 1 1 2 3 4 5
Name/Naam PP Traders
Bank notes
Banknote
Nickel
Nikkel
Bronze
Brons
Money and postal
Poswissels en posorders
orders
SUBTOTAL/SUBTOTAAL
Drawer’s name
Trekker se naam
1
2
3
4
5
6
7
P Dollie
Date
Datum 21 September 20.6
10 210 00
10 210 00
Branch no
Taknr
Bank
Good Bank
Limited
80-20-00
2 100 00
Total/Totaal
12 310 00
Cheques etc, as above, for collection to be available as cash when * For bank use
paid. While acting in good faith and exercising responsible care, the
* Vir bank
Bank will not accept responsibility for ensuring that depositors/acgebruik
count holders have lawful title to cheques, etc collected.
Tjeks ens, soos bo, ingehandig vir invordering wat na betaling as
kontant beskikbaar sal wees. Alhoewel die Bank in goeie trou handel
en alle redelike voorsorgmaatreëls tref, sal die Bank nie die verantwoordelikheid aanvaar om te verseker dat deposante/rekeninghouers regmatige titel op ingevorderde tjeks, ens het nie.
Deposited by/Gedeponeer deur: P Bright
PETTY CASH VOUCHER
Date: 21 September 20.6
Required for:
Wages
No.
2
Amount
R
c
80 00
Signature: P Bright
Authorised by: P Benroy
182
169
FAC1501/1
On 21 September 20.6 the total cash sales as per cash register roll number 4 were R21 000,00. The
amount of R21 000,00 includes credit card payments to the value of R8 900,00.
183
Easy Bank Limited
Easy Bank Beperk
Cheque Account Deposit Slip
Tjekrekeningdepositostrokie
Credit
Acc no
Krediteer Rek nr 8 0 0 0 - 1 1 2 3 4 5
Name/Naam PP Traders
Bank notes
Banknote
Nickel
Nikkel
Bronze
Brons
Money and postal
Poswissels en posorders
orders
SUBTOTAL/SUBTOTAAL
Drawer’s name
Trekker se naam
1
2
3
4
5
6
7
P Dollie
Date
Datum 22 September 20.6
10 000 00
10 000 00
Branch no
Taknr
Bank
Good Bank
Limited
80-20-00
2 100 00
Total/Totaal
12 100 00
Cheques etc, as above, for collection to be available as cash when * For bank use
paid. While acting in good faith and exercising responsible care, the
* Vir bank
Bank will not accept responsibility for ensuring that depositors/acgebruik
count holders have lawful title to cheques, etc collected.
Tjeks ens, soos bo, ingehandig vir invordering wat na betaling
as kontant beskikbaar sal wees. Alhoewel die Bank in goeie trou
handel en alle redelike voorsorgmaatreëls tref, sal die Bank nie
die verantwoordelikheid aanvaar om te verseker dat deposante/
rekeninghouers regmatige titel op ingevorderde tjeks, ens het nie.
Deposited by/Gedeponeer deur: P Bright
184
170
FAC1501/1
PETTY CASH VOUCHER
Date: 22 September 20.6
Required for:
CNA – Stationery
No.
3
Amount
R
c
56 00
Signature: P Bright
Authorised by: P Benroy
Date
22/09/20.6
To
CP Wholesalers
For
Merchandise
Balance
R
Deposit
R
Subtotal
R
This cheque
R76 000,00
Balance
R
0008
185
171
FAC1501/1
On 22 September 20.6 the total cash sales as per cash register roll number 5 were R35 000,00. The
amount of R35 000,00 includes credit card payments to the value of R15 000,00.
186
Easy Bank Limited
Easy Bank Beperk
Cheque Account Deposit Slip
Tjekrekeningdepositostrokie
Credit
Acc no
Krediteer Rek nr 8 0 0 0 - 1 1 2 3 4 5
Name/Naam PP Traders
Bank notes
Banknote
Nickel
Nikkel
Bronze
Brons
Money and postal
Poswissels en posorders
orders
SUBTOTAL/SUBTOTAAL
Drawer’s name
Trekker se naam
1
2
3
4
5
6
7
P Long
Date
Datum 23 September 20.6
15 000 00
15 000 00
Branch no
Taknr
Bank
Easy Bank
Limited
80-00-00
5 000 00
Total/Totaal
20 000 00
Cheques etc, as above, for collection to be available as cash when * For bank use
paid. While acting in good faith and exercising responsible care, the
* Vir bank
Bank will not accept responsibility for ensuring that depositors/acgebruik
count holders have lawful title to cheques, etc collected.
Tjeks ens, soos bo, ingehandig vir invordering wat na betaling
as kontant beskikbaar sal wees. Alhoewel die Bank in goeie trou
handel en alle redelike voorsorgmaatreëls tref, sal die Bank nie
die verantwoordelikheid aanvaar om te verseker dat deposante/
rekeninghouers regmatige titel op ingevorderde tjeks, ens het nie.
Deposited by/Gedeponeer deur: P Bright
187
172
FAC1501/1
On 23 September 20.6 the total cash sales as per cash register roll number 6 were R14 140,00. The
amount of R14 140,00 includes credit card payments to the value of R4 140,00.
188
No. 002
Received from: B Hasty
Date: 23 September 20.6
R
Amount: Four thousand five hundred and fifty rand only
Rand
Cent: None
For: Rent income (cheque)
4 550 00
PP Traders
Signature: P Bright
Easy Bank Limited
Easy Bank Beperk
Cheque Account Deposit Slip
Tjekrekeningdepositostrokie
Credit
Acc no
Krediteer Rek nr 8 0 0 0 - 1 1 2 3 4 5
Name/Naam PP Traders
Bank notes
Banknote
Nickel
Nikkel
Bronze
Brons
Money and postal
Poswissels en posorders
orders
SUBTOTAL/SUBTOTAAL
Drawer’s name
Trekker se naam
1
2
3
4
5
6
7
B Hasty
c
Date
Datum 26 September 20.6
10 000 00
10 000 00
Branch no
Taknr
Bank
Good Bank
Limited
80-20-00
4 550 00
Total/Totaal
14 550 00
Cheques etc, as above, for collection to be available as cash when * For bank use
paid. While acting in good faith and exercising responsible care, the
* Vir bank
Bank will not accept responsibility for ensuring that depositors/acgebruik
count holders have lawful title to cheques, etc collected.
Tjeks ens, soos bo, ingehandig vir invordering wat na betaling as
kontant beskikbaar sal wees. Alhoewel die Bank in goeie trou handel
en alle redelike voorsorgmaatreëls tref, sal die Bank nie die verantwoordelikheid aanvaar om te verseker dat deposante/rekeninghouers regmatige titel op ingevorderde tjeks, ens het nie.
Deposited by/Gedeponeer deur: P Bright
173
FAC1501/1
On 26 September 20.6 the total cash sales as per cash register roll number 7 were R24 500,00. The
amount of R24 500,00 includes credit card payments to the value of R5 150,00.
189
PETTY CASH VOUCHER
Date: 26 September 20.6
Required for:
Post office – postage
No.
4
Amount
R
c
66 00
Signature: P Bright
Authorised by: P Benroy
Easy Bank Limited
Easy Bank Beperk
Cheque Account Deposit Slip
Tjekrekeningdepositostrokie
Credit
Acc no
Krediteer Rek nr 8 0 0 0 - 1 1 2 3 4 5
Name/Naam PP Traders
Bank notes
Banknote
Nickel
Nikkel
Bronze
Brons
Money and postal
Poswissels en posorders
orders
SUBTOTAL/SUBTOTAAL
1
2
3
4
5
6
7
Drawer’s name
Trekker se naam
Date
Datum 27 September 20.6
19 350 00
19 350 00
Branch no
Taknr
Bank
Total/Totaal
19 350 00
Cheques etc, as above, for collection to be available as cash when * For bank use
paid. While acting in good faith and exercising responsible care, the
* Vir bank
Bank will not accept responsibility for ensuring that depositors/acgebruik
count holders have lawful title to cheques, etc collected.
Tjeks ens, soos bo, ingehandig vir invordering wat na betaling as
kontant beskikbaar sal wees. Alhoewel die Bank in goeie trou handel
en alle redelike voorsorgmaatreëls tref, sal die Bank nie die verantwoordelikheid aanvaar om te verseker dat deposante/rekeninghouers regmatige titel op ingevorderde tjeks, ens het nie.
Deposited by/Gedeponeer deur: P Bright
174
FAC1501/1
190
On 27 September 20.6 the total cash sales as per cash register roll number 8 were R36 400,00.
Date
To
For
Balance
Deposit
Subtotal
This cheque
Balance
27/09/20.6
Telkom
Telephone
R
R
R
R820,00
R
0009
Easy Bank Limited
Easy Bank Beperk
Cheque Account Deposit Slip
Tjekrekeningdepositostrokie
Credit
Acc no
Krediteer Rek nr 8 0 0 0 - 1 1 2 3 4 5
Name/Naam PP Traders
Bank notes
Banknote
Nickel
Nikkel
Bronze
Brons
Money and postal
Poswissels en posorders
orders
SUBTOTAL/SUBTOTAAL
1
2
3
4
5
6
7
Drawer’s name
Trekker se naam
Date
Datum 28 September 20.6
36 400 00
36 400 00
Branch no
Taknr
Bank
Total/Totaal
36 400 00
Cheques etc, as above, for collection to be available as cash when * For bank use
paid. While acting in good faith and exercising responsible care, the
* Vir bank
Bank will not accept responsibility for ensuring that depositors/acgebruik
count holders have lawful title to cheques, etc collected.
Tjeks ens, soos bo, ingehandig vir invordering wat na betaling as
kontant beskikbaar sal wees. Alhoewel die Bank in goeie trou handel
en alle redelike voorsorgmaatreëls tref, sal die Bank nie die verantwoordelikheid aanvaar om te verseker dat deposante/rekeninghouers regmatige titel op ingevorderde tjeks, ens het nie.
Deposited by/Gedeponeer deur: P Bright
175
FAC1501/1
Date
28/09/20.6
To
Municipality
For
– Water and
electricity, R3 200
– Rates and taxes,
R200
Balance
R
Deposit
R
Subtotal
R
This cheque
R3 400,00
Balance
R
0010
Date
28/09/20.6
To
Cash
For
P Benroy (owner)
Balance
R
Deposit
R
Subtotal
R
This cheque
R1 000,00
Balance
R
0011
191
176
FAC1501/1
On 28 September 20.6 the total cash sales as per cash register roll number 9 were R42 642,00.
192
Easy Bank Limited
Easy Bank Beperk
Cheque Account Deposit Slip
Tjekrekeningdepositostrokie
Credit
Acc no
Krediteer Rek nr 8 0 0 0 - 1 1 2 3 4 5
Name/Naam PP Traders
Bank notes
Banknote
Nickel
Nikkel
Bronze
Brons
Money and postal
Poswissels en posorders
orders
SUBTOTAL/SUBTOTAAL
1
2
3
4
5
6
7
Drawer’s name
Trekker se naam
Date
Datum 29 September 20.6
42 640 00
2 00
42 642 00
Branch no
Taknr
Bank
Total/Totaal
42 642 00
Cheques etc, as above, for collection to be available as cash when * For bank use
paid. While acting in good faith and exercising responsible care, the
* Vir bank
Bank will not accept responsibility for ensuring that depositors/acgebruik
count holders have lawful title to cheques, etc collected.
Tjeks ens, soos bo, ingehandig vir invordering wat na betaling as
kontant beskikbaar sal wees. Alhoewel die Bank in goeie trou handel
en alle redelike voorsorgmaatreëls tref, sal die Bank nie die verantwoordelikheid aanvaar om te verseker dat deposante/rekeninghouers regmatige titel op ingevorderde tjeks, ens het nie.
Deposited by/Gedeponeer deur: P Bright
193
177
FAC1501/1
On 29 September 20.6 the total cash sales as per cash register roll number 10 were R43 656,00.
194
Easy Bank Limited
Easy Bank Beperk
Cheque Account Deposit Slip
Tjekrekeningdepositostrokie
Credit
Acc no
Krediteer Rek nr 8 0 0 0 - 1 1 2 3 4 5
Name/Naam PP Traders
Bank notes
Banknote
Nickel
Nikkel
Bronze
Brons
Money and postal
Poswissels en posorders
orders
SUBTOTAL/SUBTOTAAL
1
2
3
4
5
6
7
Drawer’s name
Trekker se naam
Date
Datum 30 September 20.6
43 650 00
6 00
43 656 00
Branch no
Taknr
Bank
Total/Totaal
43 656 00
Cheques etc, as above, for collection to be available as cash when * For bank use
paid. While acting in good faith and exercising responsible care, the
* Vir bank
Bank will not accept responsibility for ensuring that depositors/acgebruik
count holders have lawful title to cheques, etc collected.
Tjeks ens, soos bo, ingehandig vir invordering wat na betaling as
kontant beskikbaar sal wees. Alhoewel die Bank in goeie trou handel
en alle redelike voorsorgmaatreëls tref, sal die Bank nie die verantwoordelikheid aanvaar om te verseker dat deposante/rekeninghouers regmatige titel op ingevorderde tjeks, ens het nie.
Deposited by/Gedeponeer deur: P Bright
178
FAC1501/1
Date
30/09/20.6
To
Simi and Son
For
– Repairs, R210
– Packing material,
R320
Balance
R
Deposit
R
Subtotal
R
This cheque
R530,00
Balance
R
0012
Date
30/09/20.6
To
Cash
For
Petty cash
Balance
R
Deposit
R
Subtotal
R
This cheque
R322,00
Balance
R
0013
195
179
FAC1501/1
On 30 September 20.6 the total cash sales as per cash register roll number 11 were R26 400,00. The
amount of R26 400,00 includes credit card payments to the value of R10 000,00.
196
Easy Bank Limited
Easy Bank Beperk
Cheque Account Deposit Slip
Tjekrekeningdepositostrokie
Credit
Acc no
Krediteer Rek nr 8 0 0 0 - 1 1 2 3 4 5
Name/Naam PP Traders
Bank notes
Banknote
Nickel
Nikkel
Bronze
Brons
Money and postal
Poswissels en posorders
orders
SUBTOTAL/SUBTOTAAL
1
2
3
4
5
6
7
Drawer’s name
Trekker se naam
Date
Datum 1 October 20.6
16 000 00
400 00
16 400 00
Branch no
Taknr
Bank
Total/Totaal
16 400 00
Cheques etc, as above, for collection to be available as cash when * For bank use
paid. While acting in good faith and exercising responsible care, the
* Vir bank
Bank will not accept responsibility for ensuring that depositors/acgebruik
count holders have lawful title to cheques, etc collected.
Tjeks ens, soos bo, ingehandig vir invordering wat na betaling
as kontant beskikbaar sal wees. Alhoewel die Bank in goeie trou
handel en alle redelike voorsorgmaatreëls tref, sal die Bank nie
die verantwoordelikheid aanvaar om te verseker dat deposante/
rekeninghouers regmatige titel op ingevorderde tjeks, ens het nie.
Deposited by/Gedeponeer deur: P Bright
197
180
FAC1501/1
REQUIRED
3
(a) Prepare the:
●
●
●
c ash receipts journal of PP Traders for September 20.6 with columns for analysis of receipts,
bank, sales, VAT output and sundry accounts
cash payments journal of PP Traders for September 20.6 with columns for bank, purchases,
stationery, VAT input and sundry accounts
petty cash journal of PP Traders for September 20.6 with columns for total, wages, VAT
input, postage and sundry accounts
(b) A
t the end of September the journals must be closed off and the amounts posted to the general
ledger of PP Traders.
181
SOLUTION: EXCERCISE 1
199
198
20
21
22
CRR2
CRR3
CRR4
CRR5
182
27
28
29
30
CRR8
CRR9
CRR10
CRR11
***
Cash sales
Cash sales
Credit card sales
Cash sales
Cash sales
Cash sales
Cash sales
Credit card sales
***
Credit card sales
16 400,00
10 000,00
43 656,00
42 642,00
36 400,00
19 350,00
5 150,00
10 000,00
4 140,00
4 550,00
20 000,00
Cash sales
B Hasty
15 000,00
Cash sales
Credit card sales
8 900,00
12 100,00
Credit card sales
8 900,00
12 310,00
28 000,00
7 200,00
N1
263 287,70
1 157 698,00
B3
23 157,89
38 294,74
37 405,26
31 929,82
21 491,23
12 403,51
30 701,75
18 421,05
18 605,26
24 561,40
6 315,79
R
Sales
26 400,00
43 656,00
42 642,00
36 400,00
24 500,00
18 690,00
35 000,00
21 000,00
21 210,00
28 000,00
7 200,00
853 000,00
R
R
853 000,00
Bank
Analysis of
receipts
Cash sales
***
Fol
Credit card sales
Cash sales
Cash sales
P Benroy
Details
884,21
B8
37 419,07
3 242,11
5 361,26
5 236,74
4 470,18
3 008,77
1 736,49
558,77
4 298,25
2 578,95
2 604,74
3 438,60
R
VAT
output
856 991,23
3 991,23
853 000,00
R
Amount
N4
B1
Fol
Rental income
Details
Sundry accounts
Capital
*** The VAT output on the rental income will be calculated separately.
*** On 23 September 20.6 the credit card sales, R4 140,00 and the cash sales, R10 000,00 = R14 140,00.
VAT output is equal to: R14 140,00/1 x 14/114 = R1 736,49.
Sales: R14 140,00 – R1 736,49 = R12 403,51.
CRR11
26
CPR7
CRR6
23
19
CRR1
R002
1
18
R001
Doc no Day
CASH RECEIPTS JOURNAL – SEPTEMBER 20.6
PP TRADERS
4
CRJ1
FAC1501/1
FAC1501/1
The formula used to calculate VAT is:
200
%-rate of VAT
100+%-rate of VAT
201
202
x Total amount
1
For example:
14 x R7 200,00
= R884,21
114
1
203
204
205
The sales amount is:
R7 200,00 (total amount of cheque) – R884,21 (VAT) = R6 315,79
183
207
PP TRADERS
Municipality
Telkom
184
0013
Cash
Simi and Son
30
0010
0012
28
0009
CP Wholesalers
Cash
Protea Shopfitters
CNA
Speedy Suppliers
Cash
Cash
27
0008
Astor Agency
Name of payee
SR Manufacturers
0011
15
22
0007
13
14
0006
0004
0005
5
11
0003
2
4
0001
Day
0002
Doc no
Fol
R
Bank
R
400,00
226 315,80
N2
B3
66 666,67
28 070,18
329 192,00
322,00
530,00
1 000,00
3 400,00
820,00
76 000,00
400,00
14 000,00
320,00
32 000,00
N3
280,70
280,70
R
Purchases Stationery
150 000,00 131 578,95
50 000,00
CASH PAYMENTS JOURNAL – SEPTEMBER 20.6
206
280,70
B9
Vehicles
N9
Packing material
Repairs
Drawings
Rates and taxes
Water en electricity
Telephone expenses
Cash float
Furniture and equipment
62 453,58
Details
Sundry accounts
322,00 PCJ1 Petty cash
39,30
N8
B2
N7
200,00
1 000,00
N6
N5
B6
B5
2 807,02
719,30
400,00
12 280,70
184,21
40 141,92
B4
Fol
400,00 PCJ1 Petty cash
43 859,65
R
Amount
25,79
392,98
100,70
9 333,33
1 719,30
39,30
3 929,82
18 421,05
6 140,35
R
VAT input
CPJ1
FAC1501/1
FAC1501/1
Cheque no 0011 is drawings of cash by the owner for his personal use. Because the owner
provided the capital with which to start the business, he is entitled to the income earned
by the entity. He therefore has the right to withdraw money for his personal use. The
withdrawal results in a reduction of the amount in the bank and also in equity. The amount
withdrawn by the owner is called drawings and the bank account will be credited and the
drawings account will be debited. At the end of the financial period (usually a year) the
drawings account will be closed off (credited) and the capital account will be debited with
the amount, thus capital decreases.
Cheques no 0010 and 0012 are split cheques because each cheque was used to make more
than one payment. The total amount of the cheque will be entered in the bank column, but
all the expenses paid plus the amount paid for each must be indicated separately.
208
The formula used to calculate VAT is:
% rate of VAT
x Total amount
100+% rate of VAT
1
209
210
For example:
14 x R50 000,00
= R6 140,35
114
1
211
212
213
The vehicles amount is:
R50 000,00 (total amount of cheque) – R6 140,35 (VAT) = R43 859,65
185
Fol
CPJ1
CPJ1
Day
5
30
4
66,00
56,00
80,00
120,00
R
Total
B7
Post office
26
3
2
Fol
B7
CNA
1
No
322,00
Cash
21
Cash
Details
22
8
Day
722,00
322,00
400,00
R
Amount
Receipts
PETTY CASH JOURNAL – SEPTEMBER 20.6
PP TRADERS
215
214
N11
200,00
80,00
120,00
R
Wages
8,11
6,88
B9
14,99
R
VAT input
Payments
N10
57,89
57,89
R
Postage
49,12
49,12
R
Amount
N3
Fol
Stationery
Details
Sundry accounts
PCJ1
FAC1501/1
186
FAC1501/1
The formula used to calculate VAT is:
216
% rate of VAT
x Total amount
100+% rate of VAT
1
217
For example:
218
14
114
219
220
221
x R56,00 = R6,88
1
The stationery amount is:
R56,00 (total amount of cheque) – R6,88 (VAT) = R49,12
PP TRADERS
222
223
224
GENERAL LEDGER
FINANCIAL POSITION SECTION
Dr
Capital
B1
Cr
20.6
Sep 1 Bank
Dr
Drawings
CRJ1 853 000 00
B2
Cr
B3
Cr
20.6
Sep 28 Bank
CPJ1
Dr
1 000 00
Bank
20.6
20.6
Sep 30 Total receipts
CRJ1 1 157 698 00 Sep 30 Total payments
Balance
CPJ1
c/d
1 157 698 00
Oct
1 Balance
Dr
b/d
329 192 00
828 506 00
1 157 698 00
828 506 00
Vehicles
B4
Cr
B5
Cr
B6
Cr
20.6
Sep
2 Bank
Dr
CPJ1
43 859 65
Furniture and equipment
20.6
Sep 14 Bank
Dr
CPJ1
12 280 70
Cash float
20.6
Sep 15 Bank
CPJ1
400 00
187
FAC1501/1
Dr
Petty cash
20.6
B7
20.6
PCJ1
Sep 30 Total receipts
722 00 Sep 30 Total payments
Balance
PCJ1
c/d
722 00
Oct
Cr
1 Balance
b/d
Dr
322 00
400 00
722 00
400 00
VAT output
B8
Cr
20.6
Sep 30 Bank
Dr
VAT input
CRJ1
37 419 07
B9
Cr
N1
Cr
20.6
CPJ1
PCJ1
Sep 30 Bank
Petty cash
40 141 92
14 99
40 156 91
225
Dr
NOMINAL ACCOUNTS SECTION
Sales
20.6
Sep 30 Bank
Dr
Purchases
CRJ1 263 287 70
N2
Cr
N3
Cr
N4
Cr
20.6
Sep 30 Bank
Dr
CPJ1 226 315 80
Stationery
20.6
Sep 22 Petty cash
30 Bank
PCJ1
CPJ1
49 12
280 70
329 82
Dr
Rental income
20.6
Sep 23 Bank
Dr
Telephone expenses
20.6
Sep 27 Bank
CPJ1
719 30
226
188
CRJ1
N5
3 991 23
Cr
FAC1501/1
Dr
Water and electricity
N6
Cr
N7
Cr
N8
Cr
N9
Cr
N10
Cr
N11
Cr
20.6
Sep 28 Bank
CPJ1
Dr
2 807 02
Rates and taxes
20.6
Sep 28 Bank
Dr
CPJ1
200 00
Repairs
20.6
Sep 30 Bank
CPJ1
Dr
184 21
Packing material
20.6
Sep 30 Bank
Dr
CPJ1
280 70
Postage
20.6
Sep 30 Petty cash
Dr
PCJ1
57 89
Wages
20.6
Sep 30 Petty cash
PCJ1
200 00
189
FAC1501/1
SELF-ASSESSMENT
5
After you have worked through this learning unit, are you
able to:
227
zz
zz
zz
zz
zz
zz
228
define a split cheque?
define drawings?
prepare a cash receipts journal?
prepare a cash payments journal?
prepare a petty cash journal?
post to the general ledger from the cash receipts
journal, cash payments journal or petty cash journal?
If you have marked all J you may continue to the next learning unit .
229
230
If you have marked any K you have to revise that specific section.
If you have marked any L you have to re-study that specific section.
190
J
J
J
J
J
K
K
K
K
K
L
L
L
L
L
J
K
L
FAC1501
LEARNING UNIT 6
CREDIT TRANSACTIONS
Introductory Financial
Accounting
FAC1501/1
OVERVIEW
1
Learning outcomes...........................................................................................................................193
Key Concepts...................................................................................................................................193
Assessment criteria..........................................................................................................................193
6.1
Introduction........................................................................................................................... 193
6.2
Purchases journal.................................................................................................................194
6.3
Purchases returns journal..................................................................................................... 198
6.4
Creditors ledger.....................................................................................................................200
6.5
Payment to a creditor and settlement discount received....................................................... 201
6.6
Creditors control account in the general ledger.................................................................... 201
6.7
Creditors reconciliation..........................................................................................................202
6.8
Disclosure of creditors in the financial statements................................................................202
6.9
Sales journal.........................................................................................................................203
6.10
Sales returns journal.............................................................................................................205
6.11
Debtors ledger.......................................................................................................................208
6.12
Payment by a debtor and settlement discount granted.........................................................208
6.13
Debtors control account in the general ledger......................................................................208
6.14
Disclosure of debtors in the financial statements.................................................................. 210
6.15
General journal..................................................................................................................... 210
6.15.1
Interest charged on overdue accounts..................................................................... 210
6.15.2 Credit losses............................................................................................................. 210
6.15.3 Correction of errors.................................................................................................. 211
Self-assessment.............................................................................................................................. 234
192
FAC1501/1
LEARNING OUTCOMES
After studying this learning unit , you should be able to:
1
zz
zz
zz
zz
zz
zz
zz
zz
zz
zz
zz
prepare a purchases journal
prepare a purchases returns journal
prepare a creditors control account in the general ledger
prepare a creditors ledger
prepare a sales journal
prepare a sales returns journal
prepare a debtors control account in the general ledger
prepare a debtors ledger
record credit losses in the general journal and general ledger
record VAT transactions that relate to credit transactions
prepare a general journal
KEY CONCEPTS
zz
zz
zz
zz
zz
zz
zz
zz
zz
zz
zz
zz
Purchases journal
Purchases returns journal
Creditors ledger
Creditors control account
Sales journal
Sales returns journal
Debtors ledger
Debtors control account
Credit purchase invoice
Credit sales invoice
Credit note
General journal
ASSESSMENT CRITERIA
zz
zz
zz
zz
6.1
Source documents applicable to credit transactions are identified using
appropriate example from entities.
The ability to complete business documents applicable to credit transactions
from relevant financial data is demonstrated.
The ability to record credit transactions of a sole proprietor in the appropriate
subsidiary books and the various ledgers from source documents is demonstrated.
The ability to identify incorrect entries made by the entity and correct these
errors in the appropriate subsidiary journal.
INTRODUCTION
There are two types of transactions, namely cash transactions and credit transactions. In this learning
unit, we deal only with credit transactions. In learning unit 4 we dealt with cash transactions.
2
3
193
FAC1501/1
If goods are sold or a service is rendered for cash, the transaction is recorded as follows:
4
Dr
Bank
Cr
Sales/Services rendered
What happens if a client is not able to pay cash for goods sold or a service rendered? The person
selling the goods or rendering the service has the choice of granting credit to the client. Think of all
the clothing, furniture and vehicles bought on credit. Due to the high risk associated with this, many
business entities do not allow credit, as people may not have the money to pay their debts. It remains
the entity’s choice whether to allow goods to be bought on credit, but if the items sold by the entity
are fairly expensive, for example vehicles, many buyers may not be able to afford buying the product
for cash.
5
Just as individuals cannot afford to pay cash for all purchases, entities too (irrespective of their size),
cannot always pay cash for transactions. So entities sometimes also need to make use of credit,
mostly to purchase goods or to buy non-current assets. With credit purchases of this nature, it is very
important that comprehensive records be kept, as the purchases must be settled at some stage and
great care should be taken to ensure that the necessary funds are available to pay these liabilities.
6
This learning unit covers the purchases journal, creditors ledger, creditors control account in the
general ledger, creditors reconciliation, disclosure of creditors in the financial statements, sales
journal, debtors ledger and the debtors control account in the general ledger. It also covers entries in
the general journal.
7
6.2
8
PURCHASES JOURNAL
This journal records credit transactions where goods, in which the entity trades, have been purchased.
The implications of such credit purchases are important. If goods have been purchased and have
not yet been paid for, it means that money is still owed to the entity it has been purchased from. An
entity to which money is owed is known as a creditor and the entity remains responsible for that debt
until it has been settled. A creditor’s account has a credit balance, as it is a liability for the entity (a
current liability).
9
All transactions where purchases are made on credit, are recorded in the purchases journal. If goods
are purchased on credit, the entity from which they are purchased issues a credit invoice in duplicate.
The entity from which the goods are purchased keeps the duplicate and gives the original to the
purchasing entity. The entry is therefore made from the original invoice.
10
194
FAC1501/1
EXAMPLE OF A CREDIT PURCHASES INVOICE
2
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
Email:accounts@bselectrical.co.za
P O Box 392
PRETORIA 0001
Fax (012) 429–3424
VAT registration number
8960225750
Date:
TAX INVOICE
No:
To:
Terms: 30 days less 10%
Code
Description
Qty
Total price
(R)
Subtotal
VAT @ 14%
Total
Amount tendered
Amount due
E & OE
3
11
EXAMPLE OF A PURCHASES JOURNAL
PURCHASES JOURNAL – SEPTEMBER 20.1
Doc
no
Day
Details
Fol
PJ1
VAT input
Purchases
Creditors
R
R
R
The source documents for the entries in the purchases journal are original invoices. Because these
invoices come from different entities, they have different invoice numbers and formats.
12
Entries are recorded and analysed in date order in the purchases journal. The creditor’s name and the
amount for which purchases were made must be clearly shown. The amounts in the purchases and
the creditors columns are different because VAT is also taken into consideration when determining the
amount to be entered in the creditors column.
13
At the end of the month, the columns in the purchases journal are added up. The totals of the columns
are posted to the relevant accounts in the general ledger and the individual entries are posted to the
creditors accounts in the creditors ledger. This process is referred to as closing off the purchases
journal. At the beginning of the next month, a new purchases journal is opened.
14
195
FAC1501/1
Where applicable, provision must be made for a VAT input column in the purchases journal. This
column may not always be used, as the entity from which the goods were purchased might not be
registered as a VAT vendor with SARS.
15
If, on the other hand, the entity is registered for VAT, VAT in the purchases journal must be accounted
for at the current rate of 14%.
16
The entity, from which the merchandise was purchased, is responsible for paying the VAT to SARS.
The VAT included in the purchase price by the entity is debited against the VAT input account when the
purchases journal is closed off at the end of the month. The purchases column will only show the net
amount of purchases. The net amount of purchases is the amount paid/payable for the purchases less
the VAT that was added to the purchase price.
17
The purchases journal is closed off at the end of each month. The closing off procedure can be
summarised as follows:
18
zz
zz
zz
zz
Add the purchases and VAT columns of the purchases journal and make sure that the figures crossbalance with the total of the creditors column.
Transfer the individual entries to the corresponding creditor’s personal accounts in the creditors ledger.
Post the column totals of the purchases journal to the relevant accounts in the general ledger,
taking care to observe the golden rule of accounting: for each debit entry there must be an equal
credit entry.
Enter the folio numbers from the general ledger and creditors ledger in the appropriate column in
the purchases journal.
196
FAC1501/1
RECORDING OF TRANSACTIONS FROM CREDIT PURCHASES INVOICES
4
19
The following transactions took place in BS Electrical during September 20.1:
RG WHOLESALERS
7 Smart Street
PRETORIA
Tel (012) 429–3931
P O Box 3336
PRETORIA 0001
Fax (012) 429–3931
VAT registration number
2277227756
Date: 12 September 20.1
TAX INVOICE
No: A7712
To: BS Electrical
499 Tshwane Drive
Pretoria
VAT registration number 8960225750
Terms: 30 days less 10%
Code
LS025
Description
Light fittings
Qty
Total price
(R)
5 boxes
1 2 000,00
)
)
Subtotal
12 000,00
VAT @ 14%
1 680,00
Total
13 680,00
Amount tendered
0,00
Amount due
13 680,00
E & OE
ST WHOLESALERS
776 Wood Street
JOHANNESBURG
Tel (011) 429–3933
VAT registration number
7894561233
Date: 25 September 20.1
P O Box 635
JOHANNESBURG 1528
Fax (011) 429–3424
TAX INVOICE
No: B1821
To: BS Electrical
499 Tshwane Drive
Pretoria
VAT registration number 8960225750
Terms: 30 days less 10%
Code
C5623
Description
Two phase electrical cable
Qty
2 000 m
Subtotal
Total price
(R)
15 000,00
15 000,00
VAT @ 14%
2 100,00
Totaal
17 100,00
Amount tendered
0,00
Amount due
17 100,00
E & OE
197
FAC1501/1
REQUIRED
5
Record the above transactions in the purchases journal of BS Electrical for the month of September 20.1.
20
21
BS ELECTRICAL
PURCHASES JOURNAL – SEPTEMBER 20.1
Doc no Day
A7712
B1821
6.3
12
25
Details
Fol
RG Wholesalers
ST Wholesalers
CL1
CL2
VAT input
R
1 680
2 100
PJ1
Purchases
R
12 000
15 000
Creditors
R
13 680
17 100
PURCHASES RETURNS JOURNAL
If an entity buys merchandise or other items on credit and are not entirely satisfied with their purchase,
they are entitled to return these items. When an item is returned by an entity the transaction is recorded
on a debit note. This debit note is sent together with the item to the entity it was purchased from. Upon
receipt of the debit note and returned item the selling entity issues a credit note in duplicate. This credit
note acknowledges that they received the returned goods and that they are crediting the account of
the entity who returned the goods. Remember that the purchasing entity is a debtor in their book and
when the goods are originally purchased their account was debited. By crediting their account with
the amount of the returned goods they now owe the selling entity less. As in the case of the purchases
journal, only goods in which the entity trades are recorded in the purchase returns journal, whereas all
other items, for example stationery bought and returned, is recorded in the general journal.
22
A debit note is sent to the seller, together with the returned goods; that entity acknowledges receipt
of the goods and issues a credit note. The entry is made from this credit note which is similar to the
credit note illustrated in the section on sales returns.
23
198
FAC1501/1
EXAMPLE OF A CREDIT NOTE
6
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
Email:accounts@bselectrical.co.za
P O Box 392
PRETORIA 0001
Fax (012) 429–3424
VAT registration number
8960225750
Date:
CREDIT NOTE
No:
To:
Code
Description
Qty
Amount credited
(R)
Subtotal
VAT @ 14%
)))
Total credit due
E & OE
EXAMPLE OF A PURCHASES RETURNS JOURNAL
7
24
PURCHASES RETURNS JOURNAL – SEPTEMBER 20.1
Doc no
Day
Details
Fol
VAT input
R
Purchases
returns
R
The procedure at the end of the month is the same as for the purchases journal.
25
199
PRJ1
Creditors
R
FAC1501/1
RECORDING OF TRANSACTIONS FROM A CREDIT NOTE
8
26
The following transaction took place in BS Electrical during September 20.1:
RG WHOLESALERS
7 Smart Street
PRETORIA
Tel (012) 429–3931
P O Box 3336
PRETORIA 0001
Fax (012) 429–3424
VAT registration number
2277227756
Date: 16 September 20.1
CREDIT NOTE
No: 5859
To: BS Electrical
499 Tshwane Drive
Pretoria
Code
Description
LS025
Qty
Light fittings
1
Amount
credited
(R)
2 400,00
)
)
Subtotal
2 400,00
VAT @ 14%
336,00
Total credit due
2 736,00
E & OE
9
REQUIRED
Record the above transaction in the purchases returns journal of BS Electrical for the month of
September 20.1.
28
29
6.4
BS ELECTRICAL
PURCHASES RETURNS JOURNAL – SEPTEMBER 20.1
Doc no
Day
5859
16
Details
RG Wholesalers
Fol
CL1
PRJ1
VAT input Purchases Creditors
returns
R
R
R
336
2 400
2 736
CREDITORS LEDGER
Just as records of all transactions that the entity had, are kept in the general ledger, record need to
be kept of all transactions with individual creditors. Apart from the general ledger, a subsidiary ledger
called the creditors ledger, is kept. In this ledger an account is opened for each individual creditor. The
transactions from the purchases journal and purchases returns journal are posted to these individual
accounts. The purpose of this ledger is to enable the entity to, at any time, know what amount is
payable to each individual creditor. It is also important that if the balances of the individual accounts
are added, they should correspond with the balance of the creditors control account in the general
ledger.
30
200
FAC1501/1
6.5
PAYMENT TO A CREDITOR AND SETTLEMENT DISCOUNT
RECEIVED
When creditors are paid within a specified period according to an agreement, the entity may get a
discount on the outstanding amount. We refer to this discount as settlement discount received.
31
6.6
CREDITORS CONTROL ACCOUNT IN THE GENERAL LEDGER
The creditors control account in the general ledger must reflect a summary of all the transactions
with creditors recorded in the creditors ledger. The creditors control account is prepared from the
total of the creditors column in the purchases journal and the purchases returns journal. Creditors
are recorded in two ledgers, namely as a control account in the general ledger and as individual
accounts in the creditors ledger. An entity should be able to tell, at any time, what amount is owed to
all outstanding creditors as a collective.
32
ILLUSTRATIVE EXAMPLE OF POSTING FROM THE SUBSIDIARY JOURNALS
FOR CREDIT PURCHASES TO THE CREDITORS CONTROL ACCOUNT IN THE
GENERAL LEDGER
10
33
34
BS ELECTRICAL
PURCHASES JOURNAL – SEPTEMBER 20.1
Doc no Day
Details
Fol
PJ1
VAT input
R
A7712
B1821
35
36
12
25
RG Wholesalers
ST Wholesalers
CL1
CL2
1 680
2 100
3 780
Purchases
R
12 000
15 000
27 000
Creditors
R
13 680
17 100
30 780
B10
BS ELECTRICAL
PURCHASES RETURNS JOURNAL – SEPTEMBER 20.1
Doc no Day
Details
Fol
VAT input
R
5859
16
RG Wholesalers
CL1
37
201
336
336
Purchases
returns
R
2 400
2 400
PRJ1
Creditors
R
2 736
2 736
B10
FAC1501/1
REQUIRED
11
Post the creditors totals of the above journals to the creditors control account in the general ledger.
38
BS ELECTRICAL
GENERAL LEDGER
39
Dr
Creditors control
20.1
Sep 30 Purchases returns
and VAT
Balance
B10
20.1
PRJ1
c/d
2 736
28 044
Sep 30 Purchases and
VAT
PJ1
30 780
30 780
30 780
Oct
6.7
Cr
1 Balance
b/d
28 044
CREDITORS RECONCILIATION
At the end of each month, an entity receives statements of account from each creditor, indicating
the amounts owing. The balances shown on these statements should correspond with the creditors
individual accounts in the creditors ledger. If not, an investigation will have to be carried out to
determine the reasons for the difference. The easiest way to try to trace errors is by means of a
creditors reconciliation.
40
41
This is done in the same way as a bank reconciliation, which will be dealt with in a later learning unit .
zz
zz
zz
42
Tick off all the corresponding items on the statement and on the creditor’s personal account.
Circle the items that do not correspond on the statement and the creditor’s personal account.
Correct the errors on the relevant creditor’s account and the control account.
Rectifying of errors in a creditor’s reconciliation:
zz
zz
If errors appear in a creditor’s account in the creditors ledger, these must be rectified in the general
ledger (creditors control account). It will also be necessary to update the individual creditor’s account.
If errors appear on the statement received from a creditor, the creditor should be notified to enable
him/her to correct his/her own records. In the entity’s records, the errors will appear on the creditors
reconciliation statement.
6.8
zz
zz
zz
DISCLOSURE OF CREDITORS IN THE FINANCIAL STATEMENTS
Creditors will be disclosed as trade and other payables in the statement of financial position under
the heading “current liabilities”.
Purchases will appear in the statement of profit or loss and other comprehensive income as part
of cost of sales.
Purchases returns is deducted from purchases. This is done as a closing entry by way of the
general journal and is discussed in a later learning unit .
43
202
FAC1501/1
6.9
SALES JOURNAL
All transactions in respect of goods (in which the entity trades) sold or services rendered on credit are
entered in the sales journal. When a client buys goods, an invoice is issued and the entry is made from
the copy of the invoice (which remains in the invoice book, with the original invoice being issued to the
client). The person who buys merchandise from the entity on credit is referred to as a debtor and he/
she will remain as a debtor until he/she pays all the money he/she owes the entity.
44
EXAMPLE OF A CREDIT SALES INVOICE
45
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
Email:accounts@bselectrical.co.za
P O Box 392
PRETORIA 0001
Fax (012) 429–3424
VAT registration number
8960225750
Date:
TAX INVOICE
No:
To:
Terms: 30 days less 10%
Code
Description
Qty
Unit price
(R)
Total price
(R)
Subtotal
VAT @ 14%
Total
Amount tendered
Amount due
E & OE
Note: There is no special difference between the invoice used for cash sales and the one used for
credit sales. In most entities the layout of the cash and credit invoices are exactly the same.
12
46
EXAMPLE OF A SALES JOURNAL
SALES JOURNAL – SEPTEMBER 20.1
Doc no Day
Details
Fol
VAT output
R
SJ1
Sales
R
Debtors
R
The source documents for the entries in the sales journal are the duplicates of sales invoices.
47
The debtor’s name and the amount of the transaction should be clearly indicated. Entries are recorded
and analysed in date order in the sales journal. The amounts in the sales and the debtors columns are
different as we are taking VAT into consideration in the debtors column.
48
203
FAC1501/1
At the end of the month, the columns in the sales journal are added. The totals of the columns are
posted to the relevant accounts in the general ledger and the individual entries are posted to the
debtors accounts in the debtors ledger. This process is referred to as closing off the sales journal. At
the beginning of the next month, a new sales journal is opened.
49
Where applicable, provision must be made for a VAT output column in the sales journal.
VAT in the sales journal must be accounted for at the current rate of 14%.
50
The VAT included in the selling price by the entity is credited against the VAT output account when the
sales journal is closed off at the end of the month.
51
The sales journal is closed off at the end of each month. This procedure can thus be summarised as
follows:
52
Add the sales and VAT output columns of the sales journal together and make sure that the figures
cross-balance with the total of the debtors column.
Transfer the individual entries to the corresponding debtor’s personal account in the debtors ledger.
Post the column totals of the sales journal to the relevant accounts in the general ledger, taking care
to observe the golden rule of accounting: for each debit entry there must be an equal credit entry.
Enter the folio numbers from the general ledger and debtors ledger in the appropriate column in
the sales journal.
zz
zz
zz
zz
ILLUSTRATIVE EXAMPLE OF RECORDING TRANSACTIONS IN A SALES
JOURNAL
13
53
BS Electrical issued the following invoices during September 20.1:
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
Email:accounts@bselectrical.co.za
Date: 12 September 20.1
PO Box 392
PRETORIA 0001
Fax (012) 429–3424
VAT registration number
8960225750
No: BS001
TAX INVOICE
To: Mr P Peter
Terms: 30 days less 10%
Code
PS1005
Description
Plug switches
Qty
2
Subtotal
Unit price
(R)
1 250,00
Total price
(R)
2 500,00
2 500,00
VAT @ 14%
350,00
Total
2 850,00
Amount tendered
0,00
Amount due
2 850,00
E & OE
204
FAC1501/1
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
Email:accounts@bselectrical.co.za
VAT registration number
8960225750
Date: 12 September 20.1
PO Box 392
PRETORIA 0001
Fax (012) 429–3424
No: BS002
TAX INVOICE
To: M
rs J Johnson
10 Leyd Street
Pretoria
VAT registration number 4325102345
Terms: 30 days less 10%
Code
FLF1002
Description
Qty
Fluorescent light fittings
1 box
Unit price
(R)
7 000,00
Subtotal
Total price
(R)
7 000,00
7 000,00
VAT @ 14%
980,00
Total
7 980,00
Amount tendered
0,00
Amount due
7 980,00
E & OE
REQUIRED
14
Record the above transactions in the sales journal of BS Electrical for the month of September 20.1.
54
55
6.10
BS ELECTRICAL
SALES JOURNAL – SEPTEMBER 20.1
Doc no
Day
BS001
BS002
12
Details
Mr P Peter
Mrs J Johnson
SJ1
Fol
DL1
DL2
VAT output
R
350
980
1 330
Sales
R
2 500
7 000
9 500
Debtors
R
2 850
7 980
10 830
SALES RETURNS JOURNAL
If a service is rendered or goods (in which the entity trades) sold on credit and the client is not entirely
satisfied, the entity may demand to be refunded in part or in full. If, however, the account has not yet
been settled, the amount paid back to the client will simply be credited to the debtors account. These
types of transactions, however, must also be recorded in a book of first entry (journal) and the journal
used in this particular case is the sales returns journal.
56
205
FAC1501/1
A credit note must be issued to the client to acknowledge the fact that the goods/merchandise was
returned. A credit note is completed in duplicate and the original is handed to the client.
57
EXAMPLE OF A CREDIT NOTE
15
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
Email:accounts@bselectrical.co.za
Date:
VAT registration number
8960225750
CREDIT NOTE
PO Box 392
PRETORIA 0001
Fax (012) 429–3424
No:
To:
Product no
Description
Qty
Unit price
(R)
Amount credited
(R)
Total
VAT @ 14%
Total credit due
E & OE
EXAMPLE OF A SALES RETURNS JOURNAL
16
SALES RETURNS JOURNAL – SEPTEMBER 20.1
Doc no
58
Day
Details
Fol
SRJ1
VAT output
Sales
returns
Debtors
R
R
R
The procedure at the end of the month is the same as that for the sales journal.
206
FAC1501/1
ILLUSTRATIVE EXAMPLE OF RECORDING TRANSACTIONS IN A
SALES RETURNS JOURNAL
17
59
The following source documents were obtained from BS Electrical during September 20.1:
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
Email:accounts@bselectrical.co.za
VAT registration number
8960225750
Date: 18 September 20.1
CREDIT NOTE
PO Box 392
PRETORIA 0001
Fax (012) 429–3424
No: CN001
To: Mr P Peter
Product no
PS1005
Description
Qty
Plug switches
1
Unit price
(R)
Amount credited
(R)
1 250,00
1 250,00
Total
1 250,00
VAT @ 14%
175,00
Total credit due
1 425,00
E & OE
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
Email:accounts@bselectrical.co.za
VAT registration number
8960225750
Date: 19 September 20.1
CREDIT NOTE
PO Box 392
PRETORIA 0001
Fax (012) 429–3424
No: CN002
To: M
rs J Johnson
10 Leyd Street
Pretoria
VAT registration number 4325102345
Product no
FLF1002
Description
Fluorescent light fittings
Qty
1 box
Total
Unit price
(R)
Amount credited
(R)
7 000,00
7 000,00
7 000,00
VAT @ 14%
980,00
Total credit due
7 980,00
E & OE
60
207
FAC1501/1
REQUIRED
18
Record the above transactions in the sales returns journal of BS Electrical for the month of September 20.1.
SOLUTION
19
61
62
BS ELECTRICAL
SALES RETURNS JOURNAL – SEPTEMBER 20.1
Doc no
6.11
Day
Details
Fol
CN001
18
Mr P Peter
DL1
CN002
19
Mrs J Johnson
DL2
SRJ1
VAT output
Sales returns
Debtors
R
R
R
175
1 250
1 425
980
7 000
7 980
1 155
8 250
9 405
DEBTORS LEDGER
Just as records of all transactions of the entity are kept in the general ledger, record need to be kept
of all transactions with individual debtors. Apart from the general ledger a subsidiary ledger, called the
debtors ledger, is kept. In this ledger an account is opened for each individual debtor. The transactions
from the sales journal and sales returns journal are posted to these individual accounts. The purpose
of this ledger is to enable the entity to, at any time, know what amount is owed by each individual
debtor. It is also important that, if the balances of the individual accounts are added, they should
correspond with the balance of the debtors control account in the general ledger.
63
6.12
PAYMENT BY A DEBTOR AND SETTLEMENT DISCOUNT GRANTED
Discount is often offered to debtors in order to encourage a quick settlement of their debts within the
stated credit term. The credit term will be shown on the credit invoice, for example 30 days from date
of sale. This means that if a debtor pays off his/her account before 30 days from date of sale, the
debtor will receive a discount on the total amount owing.
64
6.13
DEBTORS CONTROL ACCOUNT IN THE GENERAL LEDGER
The total of the individual debtors account balances in the debtors ledger should be equal to the
balance of the debtors control account in the general ledger. When there are differences, it may
be that the entity has forgotten to transfer a transaction or that a transaction has been transferred
incorrectly. Debtors are recorded in two ledgers, namely as a control account in the general ledger
and as individual accounts in the debtors ledger. An entity should be able to tell, at any time, what
amount is owed by all outstanding debtors as a collective.
65
208
FAC1501/1
ILLUSTRATIVE EXAMPLE OF POSTING FROM THE SUBSIDIARY JOURNALS FOR
CREDIT SALES TO THE DEBTORS CONTROL ACCOUNT IN THE GENERAL LEDGER
BS ELECTRICAL
66
SALES JOURNAL – SEPTEMBER 20.1
67
Doc no
BS001
BS002
Day
12
Details
SJ2
Fol
Mr P Peter
Mrs J Johnson
VAT output
Sales
Debtors
R
R
R
DL1
DL2
350
980
2 500
7 000
2 850
7 980
1 330
9 500
10 830
B11
BS ELECTRICAL
68
SALES RETURNS JOURNAL – SEPTEMBER 20.1
69
Doc no
Day
CN001
CN002
18
19
Details
Fol
Mr P Peter
Mrs J Johnson
SRJ2
VAT output
Sales returns
Debtors
R
R
R
DL1
DL2
175
980
1 250
7 000
1 425
7 980
1 155
8 250
9 405
B11
20
REQUIRED
Post the debtors’ totals of the above journals to the debtors control account in the general ledger.
21
SOLUTION
BS ELECTRICAL
70
71
Dr
GENERAL LEDGER
Debtors control
Cr
20.1
20.1
Sep 30 Sales and VAT
SJ2
10 830 Sep 30 Sales returns and
VAT
Balance
10 830
Oct
B11
1 Balance
b/d
1 425
209
SRJ2
c/d
9 405
1 425
10 830
FAC1501/1
6.14
zz
zz
zz
DISCLOSURE OF DEBTORS IN THE FINANCIAL STATEMENTS
Debtors will be disclosed as trade and other receivables in the statement of financial position under
heading “current assets”.
Sales will appear in the statement of profit or loss and other comprehensive income.
Sales returns wil be deducted from sales. This is done as a closing entry by way of the general
journal and is discussed in a later learning unit .
6.15
GENERAL JOURNAL
The general journal is used for recording all transactions that do not “fit” or cannot be recorded into
any of the other subsidiary journals.
72
EXAMPLE OF A GENERAL JOURNAL
GENERAL JOURNAL – JANUARY 20.4
Day
4
Details
GJ1
Fol
Stationery (account to be debited)
ABC Traders (account to be
credited)
Debit
Credit
R
R
xxx
xxx
Stationery bought on credit –
Invoice A2151 (Journal narration)
The account which is entered first is the account which has to be debited in the general ledger. The
account that is going to be credited is entered on the next line and a little to the right so that it can
stand out from the account that is going to be debited.
73
The journal narration is very important since it gives the reason for the entry and must also refer to
the source documents.
74
The general journal is a book of first entry. The double-entry principle must be applied in the general
ledger when posting this journal.
75
6.15.1
Interest charged on overdue accounts
Many entities charge interest on the outstanding debt if an account is not paid within the credit term.
Interest charged on overdue accounts, is regarded as an interest income. Interest income is classified
as an income account and is therefore credited because it increases equity. The debtors control
account/personal account of debtor is debited, because it is an asset account and the interest charged
on the overdue account is added to the original amount owed by the debtor.
76
6.15.2
Credit losses
With every credit transaction there is always a possibility that the debt might not be paid. These unpaid
debts must be written off as a credit loss. If a debtor owes money to an entity and he/she cannot pay,
and if all the proper measures were taken by the entity to recover the outstanding debt but failed, then
the amount the debtor owes must be written off as a credit loss.
77
210
FAC1501/1
6.15.3
Correction of errors
Sometimes transactions are entered in the incorrect ledger accounts. The correction of these errors
is made in the general journal.
78
ILLUSTRATIVE EXAMPLE OF RECORDING TRANSACTIONS IN A GENERAL
JOURNAL
The following transactions took place in BS Electrical during September 20.1:
30
Mrs J Johnson’s account of R800 was six months overdue and interest was
charged at 10% per annum.
Mr T Thomas’s account of R285 must be written off as irrecoverable.
It was found that repairs done to the delivery vehicle for R1 200 was
incorrectly debited to the insurance account. This error must be corrected.
REQUIRED
22
Record the above transactions in the general journal and general ledger of BS Electrical for the
month of September 20.1.
79
80
BS ELECTRICAL
GENERAL JOURNAL – SEPTEMBER 20.1
GJ9
Day
Details
Fol
30
Mrs J Johnson (Debtors control)
Interest income
Interest charged at 10% per annum for six
months on outstanding amount
Credit losses
VAT input
Mr T Thomas (Debtors control)
Wrote off account as irrecoverable
Repairs
Insurance
Error corrected
B5
N3
81
211
Debit
R
40,00
N4
B9
B5
250,00
35,00
N5
N6
1 200,00
Credit
R
40,00
285,00
1 200,00
FAC1501/1
82
BS ELECTRICAL
GENERAL LEDGER
83
FINANCIAL POSITION SECTION
84
Dr
Debtors control
20.1
B5
Cr
20.1
Sep 30 Interest income
GJ9
Dr
40 Sep 30 Credit losses and
VAT
VAT input
GJ9
285
B9
Cr
N3
Cr
20.1
Sep 30 Debtors control
GJ9
35
NOMINAL ACCOUNTS SECTION
85
Dr
Interest income
20.1
Sep 30 Debtors control
Dr
Credit losses
GJ9
40
N4
Cr
N5
Cr
N6
Cr
GJ9
1 200
20.1
Sep 30 Debtors control
Dr
GJ9
250
Repairs
20.1
Sep 30 Insurance
Dr
GJ9
1 200
Insurance
20.1
Sep 30 Repairs
COMPREHENSIVE EXAMPLE ONE:
RECORDING CREDIT TRANSACTIONS ON SOURCE DOCUMENTS
86
The following transactions took place in BS Electrical during January 20.1:
2
Mr P Smith bought 20 boxes of energy saving light bulbs (product no WT217)
on credit for R240 per box (exclusive of VAT). Invoice no 003 was issued to
Mr P Smith who’s address is 12 Harriet Street, Pretoria.
8
Mr P Smith returned 10 boxes of energy saving light bulbs worth R2 400
(VAT exclusive) that was bought on 2 January. Credit note no CN003 was
issued.
10
Sold 20 three point plugs (product no WT895) for R12 each to Mr H Matlock
on credit. Invoice no 004 was issued to Mr H Matlock who’s address is
2 Wade Street, Valhalla.
212
FAC1501/1
REQUIRED
23
Record the above transactions on the source documents provided below.
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
E-mail:accounts@bselectrical.co.za
Date:
VAT registration number
8960225750
TAX INVOICE
P O Box 392
PRETORIA 0001
Fax (012) 429–3424
No:
To:
Terms: 30 days less 10%
Code
Description
Qty
Subtotal
VAT @ 14%
Total
Amount tendered
Amount due
E & OE
213
Unit price
(R)
Total price
(R)
FAC1501/1
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
E-mail:accounts@bselectrical.co.za
Date:
VAT registration number
8960225750
P O Box 392
PRETORIA 0001
Fax (012) 429–3424
No:
CREDIT NOTE
To:
Product no
Description
Qty
Unit Price
(R)
Total
VAT @ 14%
Total credit due
E & OE
87
214
Amount
Credited
(R)
FAC1501/1
SOLUTION: COMPREHENSIVE EXAMPLE ONE
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
E-mail:accounts@bselectrical.co.za
VAT registration number
8960225750
Date: 2 January 20.1
P O Box 392
PRETORIA 0001
Fax (012) 429–3424
No: 003
TAX INVOICE
To: M
r P Smith
12 Harriet Street
Pretoria
VAT registration number 4375891234
Terms: 30 days less 10%
Code
Description
Qty
Unit Price
(R)
WT217
Energy saving light bulbs
20 boxes
Subtotal
240,00
Total
price
(R)
4 800,00
4 800,00
VAT @ 14%
672,00
Total
5 472,00
Amount tendered
0,00
Amount due
5 472,00
E & OE
88
215
FAC1501/1
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
E-mail:accounts@bselectrical.co.za
VAT registration number
8960225750
Date: 8 January 20.1
P O Box 392
PRETORIA 0001
Fax (012) 429–3424
No: CN003
CREDIT NOTE
To: M
r P Smith
12 Harriet Street
Pretoria
Product no
Description
Qty
Unit Price
(R)
WT217
Energy saving light bulbs
10 boxes
240,00
Total
Amount
credited
(R)
2 400,00
2 400,00
VAT @ 14%
336,00
Total credit due
2 736,00
E & OE
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
E-mail:accounts@bselectrical.co.za
Date: 10 January 20.1
VAT registration number
8960225750
P O Box 392
PRETORIA 0001
Fax (012) 429–3424
No: 004
TAX INVOICE
To: M
r H Matlock
2 Wade Street
Valhalla
Terms: 30 days less 10%
Code
Description
Qty
Unit Price
(R)
WT895
Three point plugs
20
Subtotal
12,00
Total
price
(R)
240,00
240,00
VAT @ 14%
33,60
Total
273,60
Amount tendered
0,00
Amount due
273,60
E & OE
216
FAC1501/1
COMPREHENSIVE EXAMPLE TWO:
RECORDING OF CREDIT TRANSACTIONS IN SUBSIDIARY JOURNALS
You are supplied with the following source documents from BS Electrical:
89
90
BS Electrical is registered as a VAT vendor. All the suppliers of the entity are also registered for VAT.
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
E-mail:accounts@bselectrical.co.za
VAT registration number
8960225750
Date: 3 June 20.1
P O Box 392
PRETORIA 0001
Fax (012) 429–3424
No: 003
TAX INVOICE
To: M
rs P Singh
30 Wessels Street
Pretoria
VAT registration number 4355501234
Terms: 30 days less 10%
Code
Description
Qty
Unit Price
(R)
EC1002
Two phase electrical cable
6m
Subtotal
800,00
Total
price
(R)
4 800,00
4 800,00
VAT @ 14%
672,00
Total
5 472,00
Amount tendered
0,00
Amount due
5 472,00
E & OE
91
217
FAC1501/1
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
E-mail:accounts@bselectrical.co.za
P O Box 392
PRETORIA 0001
Fax (012) 429–3424
VAT registration number
8960225750
Date: 10 June 20.8
No: 004
TAX INVOICE
To: M
r J Mtuli
Terms: 30 days less 10%
Code
Description
Qty
Unit Price
(R)
TCK789
Light fittings
4
750,00
Subtotal
Total
price
(R)
3 000,00
3 000,00
VAT @ 14%
420,00
Total
3 420,00
Amount tendered
0,00
Amount due
3 420,00
E & OE
HALL TRADERS
123 Main Street
PRETORIA
Tel (012) 429–1234
E-mail:accounts@halltraders.co.za
PO Box 6006
PRETORIA 0001
Fax (012) 429–5678
VAT registration number
1234567890
Date: 13 June 20.8
No: T29
TAX INVOICE
To: BS Electrical
499 Tshwane Drive
Pretoria
VAT registration number 8960225750
Terms: 30 days less 10%
Code
XYZ897
Description
Qty
Three phase electrical cable
250 m
Subtotal
Unit price
(R)
46,00
Total price
(R)
11 500,00
11 500,00
VAT @ 14%
1 610,00
Total
13 110,00
Amount tendered
0,00
Amount due
13 110,00
E & OE
218
FAC1501/1
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
E-mail:accounts@bselectrical.co.za
VAT registration number
8960225750
Date: 14 June 20.8
P O Box 392
PRETORIA 0001
Fax (012) 429–3424
No: 023
CREDIT NOTE
To: M
r J Mtuli
Product no
Description
Qty
Unit Price
(R)
TCK789
Light fittings
1
750,00
Amount
credited
(R)
750,00
Total
750,00
VAT @ 14%
105,00
Total credit due
855,00
E & OE
HALL TRADERS
123 Main Street
PRETORIA
Tel (012) 429–1234
E-mail:accounts@halltraders.co.za
VAT registration number
123456780
Date: 16 June 20.8
P O Box 6006
PRETORIA 0001
Fax (012) 429–5678
No: 012
CREDIT NOTE
To: B
S Electrical
Product no
Description
Qty
Unit Price
(R)
XYZ897
Thre phase electrical cable
50 m
Total
46,00
Amount
credited
(R)
2 300,00
2 300,00
VAT @ 14%
322,00
Total credit due
2 622,00
E & OE
92
219
FAC1501/1
BS ELECTRICAL
499 Tshwane Drive
PRETORIA
Tel (012) 429–3111
E-mail:accounts@bselectrical.co.za
P O Box 392
PRETORIA 0001
Fax (012) 429–3424
VAT registration number
8960225750
Date: 17 June 20.8
No: 024
CREDIT NOTE
To: M
rs P Singh
Product no
Description
Qty
Unit Price
(R)
EC1002
Two phase electrical cable
2m
800,00
Subtotal
Amount
credited
(R)
1 600,00
1 600,00
VAT @ 14%
224,00
Total credit due
1 824,00
E & OE
KZN DEALERS
456 Tambotie Road
JOHANNESBURG
Tel (011) 429–3830
E-mail:accounts@kzndealers.co.za
Date: 18 June 20.8
PO Box 753
LITTLE FALLS 0002
Fax (011) 429–3933
VAT registration number
4567891230
No: 789
TAX INVOICE
To: BS Electrical
499 Tshwane Drive
Pretoria
VAT registration number 8960225750
Terms: 30 days less 10%
Code
PLP456
JYH123
Description
Cash register
Electrical plugs
Qty
1
1 000
Subtotal
Unit price
(R)
2 500,00
3,55
Total price
(R)
2 500,00
3 550,00
6 050,00
VAT @ 14%
847,00
Total
6 897,00
Amount tendered
0,00
Amount due
6 897,00
E & OE
220
FAC1501/1
REQUIRED
24
Complete the following books of prime entry for BS Electrical for June 20.8. Make use of the column
headings as indicated.
93
94
BS ELECTRICAL
PURCHASES JOURNAL – JUNE 20.8
Doc no
95
96
98
100
102
VAT input
R
Purchases
R
Creditors
R
Day
Details
Fol
VAT input
R
PRJ 6
Purchases
returns
R
Creditors
R
BS ELECTRICAL
SALES JOURNAL – JUNE 20.8
Day
Details
SJ 6
Fol
VAT output
R
Sales
R
Debtors
R
BS ELECTRICAL
SALES RETURNS JOURNAL – JUNE 20.8
Doc no
101
Fol
PURCHASES RETURNS JOURNAL – JUNE 20.8
Doc no
99
Details
BS ELECTRICAL
Doc no
97
Day
PJ 6
Day
Details
SRJ 6
Fol VAT output Sales returns
R
R
Debtors
R
BS ELECTRICAL
GENERAL JOURNAL – JUNE 20.8
Day
GJ 6
Details
Fol
221
Debit
R
Credit
R
FAC1501/1
(1) Post the journals after closing to the appropriate accounts in the general, debtors and creditors
ledgers. Balance all accounts.
(2) Prepare the debtors and creditors lists.
SOLUTION: COMPREHENSIVE EXAMPLE TWO
BS ELECTRICAL
103
PURCHASES JOURNAL – JUNE 20.8
Doc no
T29
789
104
105
109
C1
C2
VAT input
R
1 610
497
2 107
B9
Purchases
R
11 500
3 550
15 050
N2
Creditors
R
13 110
4 047
17 157
B8
Day
16
Details
Fol
Hall Traders
C1
VAT input
R
322
322
B9
PRJ 6
Purchases
returns
R
2 300
2 300
N4
Creditors
R
2 622
2 622
B8
BS ELECTRICAL
SALES JOURNAL – JUNE 20.8
Doc no
108
Hall Traders
KZN Dealers
Fol
PURCHASES RETURNS JOURNAL – JUNE 20.8
012
107
13
18
Details
BS ELECTRICAL
Doc no
106
Day
PJ 6
Day
003
3
004
10
Details
SJ 6
Fol
Mrs P Singh
D1
Mr J Mtuli
D2
VAT output
R
672
Sales
R
4 800
Debtors
R
5 472
420
1 092
B10
3 000
7 800
N1
3 420
8 892
B5
BS ELECTRICAL
SALES RETURNS JOURNAL – JUNE 20.8
Doc no
023
024
Day
14
17
Details
Mr J Mtuli
Mrs P Singh
Fol
D2
D1
VAT output
R
105
224
329
B10
222
SRJ 6
Sales
returns
R
750
1 600
2 350
N3
Debtors
R
855
1 824
2 679
B5
FAC1501/1
110
111
BS ELECTRICAL
GENERAL JOURNAL – JUNE 20.8
Day
18
GJ6
Details
Fol
Equipment
VAT input
KZN Dealers/Creditors control
Shop equipment bought on credit
per invoice no: 789
B3
B9
B8/C2
Debit
R
2 500
350
Credit
R
2 850
BS ELECTRICAL
112
GENERAL LEDGER
113
FINANCIAL POSITION SECTION
114
Dr
Equipment
B3
Cr
B5
Cr
20.8
Jun 18 Creditors control
Dr
GJ6
2 500
Debtors control
20.8
20.8
Jun 30 Sales and VAT
SJ6
8 892 Jun 30 Sales returns and
VAT
Balance
SRJ6
c/d
8 892
Jul
1 Balance
Dr
b/d
8 892
6 213
Creditors control
20.8
B8
Cr
GJ6
PJ6
2 850
17 157
20.8
Jun 30 Purchases returns
and VAT
Balance
PRJ6
c/d
2 622
17 385
Jun 18 Equipment and VAT
30 Purchases and VAT
20 007
20 007
Jul
Dr
1 Balance
VAT input
20.8
b/d
17 385
B9
Cr
20.8
Jun 18 Creditors control
Jun 30 Creditors control
GJ6
PJ6
350 Jun 30 Creditors control
2 107
Balance
2 457
Jul
2 679
6 213
1 Balance
b/d
2 135
223
PRJ6
c/d
322
2 135
2 457
FAC1501/1
Dr
VAT output
20.8
B10
Cr
SJ6
1 092
20.8
Jun 30 Debtors control
Balance
SRJ6
c/d
329 Jun 30 Debtors control
763
1 092
1 092
Jul
115
1 Balance
b/d
763
N1
Cr
SJ6
7 800
N2
Cr
N3
Cr
N4
Cr
NOMINAL ACCOUNTS SECTION
Dr
Sales
20.8
Jun 30 Debtors control
Dr
Purchases
20.8
Jun 30 Creditors control
PJ6
15 050
Dr
Sales returns
20.8
Jun 30 Debtors control
Dr
SRJ6
2 350
Purchases returns
20.8
Jun 30 Creditors control
PRJ6
2 300
BS ELECTRICAL
116
117
Dr
DEBTORS LEDGER
Mrs P Singh
20.8
Jun
Cr
20.8
3 Sales and VAT
SJ6
5 472 Jun 17 Sales returns and
VAT
30 Balance
5 472
Jul
D1
1 Balance
b/d
3 648
224
SRJ6
c/d
1 824
3 648
5 472
FAC1501/1
Mr J Mtuli
Dr
D2
Jun 10 Sales and VAT
SJ6
3 420 Jun 14 Sales returns and
VAT
30 Balance
SRJ6
c/d
3 420
Jul
Cr
20.8
20.8
1 Balance
b/d
855
2 565
3 420
2 565
BS ELECTRICAL
118
119
Dr
CREDITORS LEDGER
Hall Traders
20.8
C1
Cr
PJ6
13 110
20.8
Jun 16 Purchases
returns and VAT
30 Balance
Jun 13 Purchases and VAT
PRJ6
c/d
2 622
10 488
13 110
13 110
Jul
Dr
1 Balance
KZN Dealers
20.8
b/d
10 488
C2
Cr
PJ6
GJ6
4 047
2 850
20.8
Jun 30 Balance
c/d
6 897 Jun 18 Purchases and VAT
Equipment and VAT
6 897
6 897
Jul
1 Balance
b/d
DEBTORS LIST AS AT 30 JUNE 20.8
120
Debtors
Mrs P Singh
Mr J Mtuli
Fol
D1
D2
R
3 648
2 565
6 213
Fol
C1
C2
R
10 488
6 897
17 385
CREDITORS LIST AS AT 30 JUNE 20.8
121
Creditors
Hall Traders
KZN Dealers
225
6 897
FAC1501/1
COMPREHENSIVE EXAMPLE THREE: RECORDING OF CREDIT AND
CASH TRANSACTIONS IN THE SUBSIDIARY JOURNALS
25
The following transactions at 14% VAT inclusive took place in Sunshine Glass Traders for
February 20.4:
122
123
The owner, S Shine, increased his capital.
Paid the City Council for water and electricity by cheque.
R
15 000
3 078
3
Purchased merchandise from Glasco Ltd and paid by cheque.
Purchased merchandise on credit from Ferguson Limited.
Sold trading inventory on credit to J Jason.
8 778
9 120
13 680
4
Purchased a desk on credit from City Furnishers.
6
Purchased receipt books and pens from Pen and Pencil and paid by
cheque.
Drew a cash cheque to pay the week’s wages.
8
Paid Glasco Ltd on account.
Received settlement discount.
4 000
228
10
Cash sales of merchandise.
3 876
12
Issued a credit note to J Jason for an overcharge on 3 February.
Drew a cash cheque to pay the week’s wages.
15
Cash sales amounted to
Received a cheque from J Jason in payment of his account.
Settlement discount granted to him on this payment.
2 394
6 000
342
18
Sold goods on credit to F Brown.
Cash purchases of trading inventory paid for by cheque.
Purchased glassware on credit from Glasco Ltd.
4 332
2 736
5 700
20
Returned damaged goods to Glasco Ltd.
570
21
Drew a cash cheque to pay for wages.
Received damaged goods returned by F Brown and issued a credit
note.
989
Feb 1
25
Cash sales amounted to
Received a payment from F Brown.
Settlement discount granted to him on this payment.
26
Drew a cash cheque to pay for wages.
Paid the telephone account by cheque.
Received an account from Printo Limited for the printing of business
documents.
3 534
228
954
114
940
228
6 156
2 560
228
945
570
798
27
Purchased inventory on credit from Glasco Ltd.
The account of Ferguson Limited was paid by cheque.
Received settlement discount.
2 736
5 500
285
28
Paid the owner’s house instalment by business cheque to HP Bank.
Received a cheque from Z Zittace for rent for a part of the building.
2 500
912
124
226
FAC1501/1
REQUIRED
26
(1) Record the above transactions in the following subsidiary journals of Sunshine Glass Traders for
February 20.4:
(a) Cash receipts journal (analysis columns for bank, sales, VAT output, debtors, settlement
discount granted [Dr], VAT input [Dr] and sundry accounts)
(b) Cash payments journal (analysis columns for bank, purchases, creditors, settlement discount
received [Cr], wages, VAT input, VAT output [Cr] and sundry accounts)
(c) Sales journal (analysis columns for VAT output, sales and debtors)
(d) Purchases journal (analysis columns for VAT input, purchases and creditors)
(e) Sales returns journal (analysis columns for VAT output, sales returns and debtors)
(f) Purchases returns journal (analysis columns for VAT input, purchases returns and creditors)
(g) General journal
(2) Post the entries recorded in the subsidiary journals to the relevant accounts in the general ledger
of Sunshine Traders (all the accounts must be properly balanced/totalled at 28 February 20.4).
For purpose of this example document numbers are not required.
227
28
912
2 560
F Brown
Z Zittace
6 156
Cash sales
J Jason
25
2 394
6 000
Cash sales
15 000
15
Fol
3 876
Details
Cash sales
S Shine
10
1
Day
1 638
B10
10 900
N1
36 898
B5
756
294
476
VAT output
112
5 400
2 100
3 400
Sales
912
8 716
8 394
3 876
15 000
Bank
CASH RECEIPTS JOURNAL – FEBRUARY 20.4
(a)
Analyis
of
receipts
SUBSIDIARY JOURNALS
(1)
SUNSHINE GLASS TRADERS
SOLUTION: COMPREHENSIVE EXAMPLE THREE
B4
9 130
2 788
6 342
Debtors
N7
(500)
(200)
(300)
Settlement
discount
granted
(Dr)
B9
(70)
(28)
(42)
VAT input
(Dr)
15 800
800
15 000
Amount
N3
B7
Rental income
Capital
Details
Sundry accounts
Fol
CRJ2
FAC1501/1
228
127
27
28
8
12
18
21
26
1
3
6
Day
(b)
City Council
Glasco Ltd
Pen and Pencil
Cash
Glasco Ltd
Cash
Cash
Cash
Cash
Telkom
Ferguson Ltd
HP Bank
Details
Fol
31 218
B5
N2
10 100
2 400
7 700
R
R
3 078
8 778
228
954
4 000
940
2 736
989
945
570
5 500
2 500
Purchases
Bank
5 785
4 228
B6
10 013
R
Creditors
N8
R
(450)
(250)
(200)
Settlement
discount
received
(Cr)
989
945
940
954
3 828
N9
R
Wages
1 890
70
336
378
1 078
28
B9
R
VAT input
B10
R
(63)
(35)
(28)
VAT output
(Cr)
R
B8
2 500
5 900
N5
N10
200
500
N6
Fol
Details
Drawings
Telephone expenses
Stationery
Water and electricity
Sundry accounts
2 700
Amount
CASH PAYMENTS JOURNAL – FEBRUARY 20.4CPJ2
SUNSHINE GLASS TRADERS
126
125
FAC1501/1
229
FAC1501/1
128
SUNSHINE GLASS TRADERS
(c) SALES JOURNAL – FEBRUARY 20.4
129
Day
3
18
130
Details
Fol
SJ2
VAT output
R
J Jason
F Brown
Sales
R
1 680
532
2 212
B10
12 000
3 800
15 800
N1
Debtors
R
13 680
4 332
18 012
B4
SUNSHINE GLASS TRADERS
(d) PURCHASES JOURNAL – FEBRUARY 20.4
131
Day
3
18
27
132
Details
Fol
PJ2
VAT input
R
Ferguson Ltd
Glasco Ltd
Glasco Ltd
Purchases
R
1 120
700
336
2 156
B9
8 000
5 000
2 400
15 400
N2
9 120
5 700
2 736
17 556
B6
SUNSHINE GLASS TRADERS
(e) SALES RETURNS JOURNAL – FEBRUARY 20.4
133
Day
Details
Fol
VAT output
R
12
21
J Jason
F Brown
SRJ2
Sales
returns
R
14
28
42
134
Debtors
R
100
200
300
B10
135
Creditors
R
N11
114
228
342
B4
SUNSHINE GLASS TRADERS
(f) PURCHASES RETURNS JOURNAL – FEBRUARY 20.4
Day
Details
Fol
VAT input
R
20
Glasco Ltd
PRJ2
Purchases
returns
R
70
70
B9
136
230
Creditors
R
500
500
N12
570
570
B6
FAC1501/1
SUNSHINE GLASS TRADERS
137
138
(g) GENERAL JOURNAL – FEBRUARY 20.4
Day
4
26
Details
GJ2
Fol
Debit
R
Credit
R
Furniture
B1
3 100
VAT input
B9
434
City Furniture/Creditors control
B6
Desk purchased on credit
Printing
N13
700
VAT input
B9
98
Printo Limited/Creditors control
B6
3 534
798
Printing of documents on credit
139
140
SUNSHINE GLASS TRADERS
(2)
GENERAL LEDGER
141
Dr
FINANCIAL POSITION SECTION
Furniture at cost
B1
Cr
B4
Cr
20.4
Feb
Dr
4 Creditor control
GJ2
3 100
Debtors control
20.4
20.4
Feb 28 Sales and VAT
SJ2
18 012 Feb 28 Bank and discount
Sales returns and
VAT
Balance
CRJ2
9 130
SRJ2
c/d
342
8 540
18 012
Mar
1 Balance
Dr
b/d
18 012
8 540
Bank
20.4
Cr
20.4
Feb 28 Total receipts
CRJ2
36 898 Feb 28 Total payments
Balance
36 898
Mar
B5
1 Balance
b/d
5 680
142
231
CPJ2
c/d
31 218
5 680
36 898
FAC1501/1
Dr
Creditors control
B6
Cr
GJ2
GJ2
PJ2
3 534
798
17 556
20.4
20.4
Feb 28 Bank and discount
Purchases returns
and VAT
Balance
CPJ2
10 013 Feb
PRJ2
c/d
570
11 305
4 Furniture and VAT
26 Printing and VAT
28 Purchases and VAT
21 888
21 888
Mar
Dr
1 Saldo
Capital
b/d
11 305
B7
Cr
20.4
Feb
Dr
1 Bank
Drawings
CRJ2
15 000
B8
Cr
B9
Cr
20.4
Feb 28 Bank
Dr
CPJ2
2 500
VAT input
20.4
20.4
Feb
4 Creditors control
26 Creditors control
28 Bank
Debtors control
Creditors control
GJ2
GJ2
CPJ2
CRJ2
PJ2
434 Feb 28 Creditors control
Balance
98
1 890
70
2 156
PRJ2
c/d
4 648
Mar
1 Balance
Dr
b/d
4 648
4 578
VAT output
20.4
Feb 28 Debtors control
Balance
70
4 578
B10
Cr
20.4
SRJ2
c/d
42 Feb 28 Debtors control
Bank
3 871
Creditors control
SJ2
CRJ2
CPJ2
3 913
2 212
1 638
63
3 913
Mar
143
232
1 Balance
b/d
3 871
FAC1501/1
144
Dr
NOMINAL ACCOUNTS SECTION
Sales
N1
Cr
20.4
Feb 28 Bank
Debtors control
CRJ2
SJ2
10 900
15 800
26 700
Dr
Purchases
N2
Cr
N3
Cr
20.4
Feb 28 Bank
Creditors control
CPJ2
PJ2
10 100
15 400
25 500
Dr
Rental income
20.4
Feb 28 Bank
Dr
Telephone expenses
CRJ2
800
N5
Cr
N6
Cr
N7
Cr
N8
Cr
CPJ2
450
N9
Cr
20.4
Feb 26 Bank
CPJ2
Dr
500
Water and electricity
20.4
Feb
1 Bank
Dr
CPJ2
2 700
Settlement discount granted
20.4
Feb 28 Debtors control
Dr
CRJ2
500
Settlement discount received
20.4
Feb 28 Creditors control
Dr
Wages
20.4
Feb 28 Bank
CPJ2
3 828
233
FAC1501/1
Dr
Stationery
N10
Cr
N11
Cr
N12
Cr
20.4
Feb
6 Bank
CPJ2
Dr
200
Sales returns
20.4
Feb 28 Debtors control
Dr
SRJ2
300
Purchases returns
20.4
Feb 28 Creditors control
Dr
Printing
PRJ2
500
N13
Cr
20.4
Feb 26 Creditors control
27
GJ2
700
SELF-ASSESSMENT
After you have worked through this learning unit, are you
able to:
145
zz
zz
zz
zz
zz
zz
146
147
correctly enter credit purchases and credit purchase returns
transactions in the respective journals?
correctly enter credit sales and credit sales returns
transactions in the respective journals?
correctly prepare the creditors control and debtors control
accounts in the general ledger?
correctly prepare a creditors and debtors list?
provide for VAT implications on credit transactions?
correctly enter transactions in the general journal?
If you have marked all J you may continue to the next learning unit.
If you have marked any K you have to revise that specific section.
148
If you have marked any L you have to re-study that specific section.
234
J
K
L
J
K
L
J
J
J
J
K
K
K
K
L
L
L
L
1
FAC1501
LEARNING UNIT 7
INVENTORY
Introductory Financial
Accounting
FAC1501/1
OVERVIEW
1
Learning outcomes�������������������������������������������������������������������������������������������������������������������������� 236
Key concepts����������������������������������������������������������������������������������������������������������������������������������� 236
Assessment criteria������������������������������������������������������������������������������������������������������������������������� 237
7.1
Introduction�������������������������������������������������������������������������������������������������������������������������� 237
7.2
Inventory valuation methods������������������������������������������������������������������������������������������������ 237
7.3
Inventory control systems���������������������������������������������������������������������������������������������������� 237
7.3.1
The perpetual (continuous) inventory control system���������������������������������������������� 238
7.3.2
The periodic inventory control system��������������������������������������������������������������������� 240
7.4
Additional purchase costs���������������������������������������������������������������������������������������������������� 242
7.5
Drawings and donations of inventory����������������������������������������������������������������������������������� 243
7.6
Settlement discount granted................................................................................................. 243
7.7
Settlement discount received................................................................................................244
7.8
Carriage/freight charges on sales.........................................................................................244
7.9
Mark-up on cost....................................................................................................................244
7.10
Exercises and solutions........................................................................................................255
Self-assessment������������������������������������������������������������������������������������������������������������������������������ 258
LEARNING OUTCOMES
After studying this learning unit, you should be able to:
1
1
zz
zz
zz
zz
define a perpetual inventory control system
define a periodic inventory control system
explain the difference between a periodic and a perpetual inventory control system
define the different valuation methods, such as first-in, first-out (FIFO) and the weighted average
methods
1
KEY CONCEPTS
zz
zz
zz
zz
zz
Perpetual inventory control system
Periodic inventory control system
FIFO
LIFO
Weighted average
236
FAC1501/1
ASSESSMENT CRITERIA
zz
zz
7.1
The difference between a perpetual and a periodic inventory control system
is explained.
The calculation of the value of cost of sales and gross profit explained.
INTRODUCTION
Most business entities carry inventory, so it is important that you have a clear and full understanding of
how to account for it. This not only involves ledger account entries but also the valuation of inventory
and presentation in financial statement.
2
In most cases inventory is the largest current asset of a trading entity. It is important that a trading
entity at all times is able to supply the demand for its different types of merchandise. For that reason
trading entities keep a supply of inventory that is constantly replenished and from which sales are
made. This means that the expenditure of funds on the purchase of inventory during a particular
period will not always equal the cost of the goods that are sold during the same period.
3
In determining the profit of a trading entity, it is thus important to determine the cost of the goods
that were indeed sold during a period. This is known as the cost of sales. The cost of sales and the
cost price of inventory on hand can be determined according to one of the following two inventory
control methods:
4
zz
zz
perpetual inventory method
periodic inventory method
7.2
INVENTORY VALUATION METHODS
When an entity purchases various batches of an inventory item at different prices, and not all goods
are sold during the year, the question arises as to which of the prices paid for the batches should be
considered to be the purchase price of the batches still on hand.
5
The method used to allocate costs to inventory and to determine the cost of goods, should be the one
that brings about the most realistic determination of profit in the particular entity.
6
7
The three most used valuation methods in practice are the following:
zz
zz
zz
First-in, first-out (FIFO) method: According to this method, it is accepted that the items which
were purchased first are sold first. Inventory on hand is therefore valued at the latest prices.
Last-in, first-out (LIFO) method: According to this method, it is accepted that the items which
were purchased last are sold first. This method falls outside the scope of this module and therefore
will not be discussed in any examples.
Weighted average method: The total cost of the goods available for sale is divided by the total
number of units in order to determine an average cost per unit.
7.3
INVENTORY CONTROL SYSTEMS
Inventory systems refers to the way in which inventory is recorded in the accounting records of a
trading entity.
8
237
FAC1501/1
7.3.1
The perpetual (continuous) inventory control system
Under the perpetual inventory system, the purchase of inventory is recorded directly into the inventory
account at cost price. At the time of sale, the cost price of goods sold is transferred from the inventory
account to the cost of sales account.
9
The accounting entries under such a system can be summarised as follows (VAT is ignored in
these examples):
10
11
Purchase inventory for cash:
Dr
Inventory
(because the asset inventory increases)
Cr
Bank
(because the asset bank decreases when money is paid out)
12
13
The transaction is recorded in the cash payments journal at cost price.
14
Purchase inventory on credit:
15
Dr
Inventory
(see above)
Cr
Creditor
(because a liability is created or increased) and
Cr
Creditors control
16
17
18
19
The transaction is recorded in the purchases journal at cost price.
20
Sale of merchandise for cash:
Dr
Bank
(an asset increases with money received) (selling price)
Cr
Sales
(an income which increases equity) (selling price)
Dr
Cost of sales
(an expense that decreases equity) (cost price)
Cr
Inventory
(an asset decreases) (cost price)
21
22
23
24
The transaction is recorded in the cash receipts journal.
25
It is important to note that the difference between the cost of sales and the selling price is the gross
profit, which is the amount by which the equity increases.
26
Merchandise sold on credit:
27
Dr
Debtor
Dr
Debtors control
Cr
Sales
(see above) (selling price)
Dr
Cost of sales
(see above) (cost price)
Cr
Inventory
(see above) (cost price)
28
29
30
31
32
(an asset is created or increased) (selling price) and
The transaction is recorded in the sales journal.
33
238
FAC1501/1
When merchandise is returned by a debtor:
34
Dr
Sales returns (this has the opposite effect of sales on equity – it decreases equity)
(selling price)
Cr
Debtor (the asset decreases because the debtor owes the business less) (selling
price) and
Cr
Debtors control
Cr
Cost of sales
(this has the opposite effect on equity to the effect when
merchandise was sold) (cost price)
Dr
Inventory
(the asset increases
returned) (cost price)
35
36
37
38
39
40
by
the
amount
of
the
merchandise
The transaction is recorded in the sales returns journal.
Merchandise returned, previously sold for cash:
41
If the entity has a policy of not repaying cash, a credit note will be issued to the client that can be
exchanged for other merchandise.
42
If the business is willing to refund cash:
43
Dr
Sales returns (see above) (selling price)
Cr
Bank (the asset bank will decrease to cancel the previous increase) (selling price)
44
45
The transaction is recorded in the cash payments journal.
46
To reinstate the merchandise as part of the inventory:
47
Inventory
Cr
Cost of sales (see above) (cost price)
49
50
51
(the asset inventory increases) (cost price)
Dr
48
The transaction is recorded in the general journal.
When merchandise is returned to a creditor:
52
Dr
Creditor
Dr
Creditors control
Cr
Inventory (an asset is decreased – there is less inventory because of the goods
returned) (cost price)
53
54
55
(because the liability decreases) (cost price) and
The transaction is recorded in the purchases returns journal.
From the above discussion it is clear that the cost price of merchandise sold is
recorded at the same time as the sale of the merchandise. This procedure enables the entity to
determine the gross profit on each sale and to keep a continuous record of the Rand value of the
inventory that has not yet been sold.
56
However, it remains necessary to do a physical inventory count at least once a year, usually at the end
of the financial year. Theoretically the result of the inventory count should yield the same result as the
balance on the inventory account. This seldom happens. Some of the main reasons why there is a
difference are the theft of inventory, breakages, leakages and evaporation. This loss of inventory will,
of course, not be recorded in the inventory account and will only be detected when a physical count
of inventory is done.
57
239
FAC1501/1
7.3.2
The periodic inventory control system
Under the periodic inventory system, the purchase of inventory is not recorded in the inventory
account. A separate account, known as the purchases account, is used to record these purchases.
It follows that if inventory is returned to the seller, for one reason or another, the return of inventory
cannot be recorded in the inventory account but must be recorded in a separate account known as
the purchases returns account.
58
It should thus be clear that under a periodic inventory system, the cost of sales is not determined at
the time of the recording of the sale. The cost of sales can thus only be determined at the end of the
financial period after a physical inventory count has been done.
59
60
The cost price of inventory sold during an accounting period will thus be determined as follows:
Cost price of inventory at the beginning of the financial year (closing inventory of
previous year)
Add: Cost price of inventory purchased during the financial year (the total amount
spent on purchases)
Less: Cost price of inventory at the end of the financial year, determined by a
physical inventory count (the unsold inventory)
The accounting entries associated with a periodic inventory system can be summarised as follows
(VAT is ignored in the examples):
61
62
Purchase of inventory for cash:
63
Dr
Purchases (under the periodic inventory system, purchases are regarded as
an expense that reduces equity)
Cr
Bank
64
(the asset bank decreases when money is paid out)
The transaction is recorded in the cash payments journal at cost price.
65
66
Purchase of inventory on credit:
Dr
Purchases
Cr
Cr
Creditor (creditors is a liability account which is created or increased) and
Creditors control
67
68
69
70
71
The transaction is recorded in the purchases journal at cost price.
Sale of merchandise for cash:
Dr
Bank
(the asset increases with the money received)
Cr
Sales
(an income account which increases equity)
72
73
74
(see above)
The transaction is recorded in the cash receipts journal at selling price.
Sale of merchandise on credit:
75
76
Dr
Debtor
Dr
Debtors control
Cr
Sales
77
78
(an asset which is created or increased) and
(see above)
240
FAC1501/1
The transaction is recorded in the sales journal at selling price.
79
80
81
When merchandise is returned by a debtor:
Dr
Sales returns
(equity decreases)
Cr
Debtor
(the asset decreases) and
Cr
Debtors control
82
83
The transaction is recorded in the sales returns journal at selling price.
84
Merchandise returned, previously sold for cash:
85
The policy of the entity would determine whether a credit note will be issued (refer to the perpetual
inventory system) or whether the cash will be refunded to the client.
86
87
The entry for a cash refund will be as follows:
Dr
Sales returns
Cr
Bank (the asset bank will decrease to cancel the previous increase)
88
89
(the equity decreases)
The transaction is recorded in the cash payments journal.
90
91
When inventory is returned to a creditor:
Dr
Creditors
Dr
Creditors control
Cr
Purchases returns
92
93
94
95
(the liability decreases) and
(the actual purchase is reduced)
The transaction is recorded in the purchases returns journal at cost price.
Physical inventory count at the end of the financial year:
96
Dr
Inventory (an asset account which is created with the inventory on hand at
the end of the financial year)
Cr
Trading account (a nominal account which is used to determine the gross profit and
which increases equity if a gross profit is made)
97
98
The transaction is recorded in the general journal.
99
From the above summary it is clear that, under a periodic inventory system, there is no cost of sales
account but a purchases account and that the column headings of subsidiary journals will have to be
adapted to accommodate this inventory system. Some of the accounts kept in the general ledger will
also have to be changed when the periodic inventory system is in use.
100
It is very important, in assignments and in the examination, to make sure that you know which inventory
system an entity uses as this will determine how the subsidiary journals and the general ledger will
be laid out.
101
241
FAC1501/1
7.4
ADDITIONAL PURCHASE COSTS
Carriage on purchases and railage are examples of expenses that an entity may have to pay in order
to transport the inventory which has been purchased to the entity’s premises. Custom and excise
duties may also have to be incurred when inventory is imported.
102
When the perpetual (continuous) inventory system is used, carriage on purchases, and the like, are
debited directly to the inventory account, since the cost of sales must be brought into account with
each sales transaction, and carriage paid on purchases constitutes an integral part of the cost per unit.
103
When the periodic inventory system is used, all purchases of inventory during a
financial year are debited to the purchases account. Consequently this account will show the total
of all purchases at the end of the financial year. Carriage on purchases (paid for in cash, as well as
on credit) by an entity which uses this inventory system, will be debited to the carriage on purchases
account. This account will show the total amount spent on transporting inventory to the premises of
the entity. When the cost of sales is calculated at the end of the financial year, carriage on purchases
must also be taken into account. Custom and excise duties will be treated in a similar manner.
104
The following illustration will demonstrate how accounts under the different inventory systems will be
affected when additional purchase costs are incurred:
105
Transaction
Payment of delivery
costs on inventory
purchased
Perpetual inventory
control system
Dr Inventory
Cr Bank
or
Cr Creditor (and creditors
control) if on credit
Periodic inventory
control system
Dr Carriage on
purchases
Cr Bank
or
Cr Creditor (and creditors
control) if on credit
Use the following information from the books of Gogo Dealers to calculate the cost of sales:
R
Inventory (1 January 20.1)
Purchases
Carriage on purchases
106
95 000
260 000
3 600
A physical inventory count on 31 December 20.1 indicated that inventory on hand amounted to R80 000.
107
242
FAC1501/1
SOLUTION
2
R
7.5
108
Inventory (1 January 20.1)
Add: Purchases
Carriage on purchases
95 000
260 000
3 600
Less: Inventory (31 December 20.1)
358 600
(80 000)
Cost of sales
278 600
DRAWINGS AND DONATIONS OF INVENTORY
Drawings and donations of inventory are recorded by means of the general journal at cost price.
109
Please study the following table carefully:
Transaction
Perpetual inventory
control system
Periodic
inventory
control system
Inventory taken by owner
for personal use
Dr Drawings
Cr Inventory
Dr Drawings
Cr Purchases
Donation of inventory
Dr Donations
Cr Inventory
Dr Donations
Cr Purchases
When an entity is registered as a VAT Vendor drawings and donations are not exempted from VAT.
The VAT is, however, calculated on the cost price and must be credited to the VAT output account.
110
7.6
SETTLEMENT DISCOUNT GRANTED
Discount is often offered to debtors in order to encourage a quick settlement of their debts within the
stated credit term. The credit term will be shown on the credit invoice, for example 30 days from date
of sale. This means that if a debtor pays off his/her account before 30 days from date of sale, the
debtor will receive a discount on the total amount owing.
111
The accounting entries associated with the periodic and perpetual inventory system can be summarised
as follows:
112
Dr
Settlement discount granted (the account is an expense that reduces equity)
Cr
Debtors (the asset account debtors decreases when a settlement discount is granted)
113
114
243
FAC1501/1
At the end of the financial year, you will close off the settlement discount granted account to the sales
account in the general ledger.
115
7.7
SETTLEMENT DISCOUNT RECEIVED
When creditors are paid within a specified period according to an agreement, the entity may get a
discount on the outstanding amount. We refer to this discount as settlement discount received.
116
The accounting entries associated with the periodic and perpetual inventory system can be summarised
as follows:
117
Dr
Creditors (creditors account is a liability and it decreases when a settlement discount is received)
Cr
Settlement discount received (the account is an income that increases equity)
118
119
At the end of the financial year you will however close off settlement discount received differently
under the perpetual and periodic inventory systems.
120
The accounting entries associated with the periodic inventory system can be summarised as follows:
121
122
Periodic inventory system
Dr
Settlement discount received
Cr
Purchases
123
124
125
The accounting entries associated with the perpetual inventory system can be summarised as follows:
126
Perpetual inventory system
Dr
Settlement discount received
Cr
Cost of sales
127
128
7.8
CARRIAGE/FREIGHT CHARGES ON SALES
The freight or carriage charges on sales account is an expense. This is the cost of transporting the
goods sold from the entity to the customer and therefore it is an expense to the entity. Carriage/freight
charges on sales will therefore be treated as an expense in the entity’s statement of profit and loss
and other comprehensive income.
129
7.9
MARK-UP ON COST
Cost of sales is the cost of the goods that were sold during a period. The mark-up percentage on cost
is the gross profit percentage of the cost price.
130
Therefore to calculate the cost price when the mark-up percentage and selling price is given you will
use the following formula.
131
Cost price = Selling price x 100 ÷ (100 + mark-up percentage on cost)
132
133
244
FAC1501/1
COMPREHENSIVE EXAMPLE ONE
3
134
135
What is the cost price of the product?
Mark-up percentage on cost
=
30%
Selling price
=
Cost price + mark-up % on cost
Cost price
=
100%
=
R?
Selling price
=
130%
=
R390
x
R390
136
137
BS Hardware sells a ladder for R390. The mark-up percentage on cost is 30%.
138
139
Cost price
= 100
130
140
141
=
142
R300
COMPREHENSIVE EXAMPLE TWO
You are supplied with the following source documents from BS Hardware:
BS Hardware is registered as a VAT vendor. All the suppliers of the entity are also registered for VAT.
All goods are sold at a constant mark-up of 25% on cost and a perpetual inventory system is in use.
143
BS HARDWARE
TAX INVOICE
777 Church Street
PO Box 1001
Tshwane
0002
VAT no:
Tel:
Fax:
E-mail:
7891078956
012–429 3931
012–429 3933
accounts@bshardware.co.za
Sold to: M
rs P Singh
30 Wessels Street
Pretoria
VAT registration number 4355501234
Date: 3 June 20.8
Customer reference no: DB1
Invoice no: G31
Terms: 30 days less 10%
Amount
Product no
THG002
Description
Paint
Quantity
Unit price (R)
6x5ℓ
800,00
Subtotal
R
c
4 800 00
4 800 00
VAT @ 14%
672 00
Total
5 472 00
Amount paid
0 00
Amount due
5 472 00
245
FAC1501/1
BS HARDWARE
TAX INVOICE
777 Church Street
PO Box 1001
Tshwane
0002
VAT no:
Tel:
Fax:
E-mail:
7891078956
012–429 3931
012–429 3933
accounts@bshardware.co.za
Sold to: Mr J Mtuli
Date: 10 June 20.8
Customer reference no: DB2
Invoice no: G32
Terms: 30 days less 10%
Amount
Product no
TCK789
Description
Doors
Quantity
Unit price (R)
4
750,00
Subtotal
R
c
3 000 00
3 000 00
VAT @ 14%
420 00
Total
3 420 00
Amount paid
0 00
Amount due
3 420 00
HALL TRADERS
TAX INVOICE
123 Main Street
PO Box 6006
Tshwane
0002
VAT no:
Tel:
Fax:
Email:
1234567890
012–429 3424
012–429 3425
accounts@halltraders.co.za
Sold to: BS Hardware
777 Church Street
Tshwane
VAT registration number 7891078956
Customer reference no: BS786
Date: 13 June 20.8
Invoice no: T29
Terms: 30 days less 10%
Amount
Product no
XYZ 897
Description
PVC Pipes
Quantity
Unit price (R)
250 x 2 m
46,00
Subtotal
R
c
11 500 00
11 500 00
VAT @14%
1 610 00
Total
13 110 00
Amount paid
0 00
Amount due
13 110 00
144
246
FAC1501/1
BS HARDWARE
CREDIT NOTE
VAT NO: 7891078956
PO Box 1001
Tshwane
0002
777 Church Street
Tel: 012–429 3931
Fax: 012–429 3933
Date: 14 June 20.8
To: Mr J Mtuli
CREDIT NOTE NUMBER: CN3
Amount
credited
Product no
TCK789
Description
Doors
Quantity
Unit price (R)
–
–
R
c
600 00
Total
600 00
VAT @ 14%
84 00
Total credit due
684 00
HALL TRADERS
CREDIT NOTE
VAT NO: 1234567890
PO Box 6006
Tshwane
0002
123 Main Street
Tel: 012–429 3424
Fax: 012–429 3425
Date: 16 June 20.8
To: BS Hardware
CREDIT NOTE NUMBER: Q12
Amount
credited
Product no
XYZ897
Description
PVC Pipes
Quantity
Unit price (R)
50
46,00
Total
R
c
2 300 00
2 300 00
VAT @ 14%
322 00
Total credit due
2 622 00
247
FAC1501/1
BS HARDWARE
CREDIT NOTE
VAT NO: 7891078956
PO Box 1001
Tshwane
0002
777 Church Street
Tel: 012–429 3931
Fax: 012–429 3933
Date: 17 June 20.8
To: Mrs P Singh
CREDIT NOTE NUMBER: CN4
Amount
credited
Product no
THG002
Description
Paint
Quantity
Unit price (R)
2x5ℓ
800,00
Total
R
c
1 600 00
1 600 00
VAT @ 14%
224 00
Total credit due
1 824 00
KZN DEALERS
TAX INVOICE
456 Tambotie Road
PO Box 2002
Johannesburg
0003
VAT no:
Tel:
Fax:
E-mail:
4567891230
011–429 3938
011–429 3939
accounts@kzndealers.co.za
Sold to: B
S Hardware
777 Church Street
Tshwane
VAT registration number 7891078956 Date: 18 June 20.8
Customer reference no: KZN789
Invoice no: JK20
Terms: 30 days less 10%
Amount
Product no
Description
PLP456
Cash register
JYH123
Electrical plugs
Quantity
Unit price (R)
1
2 300,00
2 300 00
1 000
3,55
3 550 00
Subtotal
R
c
5 850 00
VAT @ 14%
819 00
Total
6 669 00
Amount paid
0 00
Amount due
6 669 00
248
FAC1501/1
REQUIRED
4
(1) Prepare the following books of prime entry for BS Hardware for June 20.8, and make use of the
column headings as indicated:
BS HARDWARE
PURCHASES JOURNAL – JUNE 20.8
Doc no
Day
Details
PJ6
Fol
VAT input
Inventory
Creditors
R
R
R
BS HARDWARE
PURCHASES RETURNS JOURNAL – JUNE 20.8
Doc no
Day
Details
Fol
PRJ6
VAT input
Inventory
Creditors
R
R
R
BS HARDWARE
SALES JOURNAL – JUNE 20.8
Doc no
Day
Details
SJ6
Fol
VAT
output
Sales
Debtors
Cost of
sales
R
R
R
R
BS HARDWARE
SALES RETURNS JOURNAL – JUNE 20.8
Doc no
Day
Details
Fol
SRJ6
VAT
output
Sales
returns
Debtors
Cost of
sales
R
R
R
R
249
FAC1501/1
BS HARDWARE
GENERAL JOURNAL – JUNE 20.8
Day
145
Details
GJ6
Fol
Debit
Credit
R
R
(2) Post the journals after closing it to the appropriate accounts in the general, debtors and creditors
ledger. Balance all accounts.
(3) Prepare the debtors and creditors lists.
146
SOLUTION: COMPREHENSIVE EXAMPLE TWO
BS HARDWARE
PURCHASES JOURNAL – JUNE 20.8
Doc
no
Day
Details
Fol
PJ6
VAT input
Inventory
Creditors
R
R
R
T29
13
Hall Traders
C1
1 610
11 500
13 110
JK20
18
KZN Dealers
C2
497
3 550
4 047
2 107
15 050
B9
B4
17 157
B8
BS HARDWARE
PURCHASES RETURNS JOURNAL – JUNE 20.8
Doc
no
Q12
Day
16
Details
Hall Traders
Fol
PRJ6
VAT input
Inventory
Creditors
R
R
R
C1
322
2 300
B9
B4
2 622
B8
BS HARDWARE
SALES JOURNAL – JUNE 20.8
Doc
no
Day
G31
3
G32
10
Details
Fol
SJ6
VAT
output
Sales
Debtors
Cost of
sales
R
R
R
R
Mrs P Singh
D1
672
4 800
5 472
3 840
Mr J Mtuli
D2
420
3 000
3 420
2 400
1 092
7 800
8 892
6 240
B10
250
N1
B5
N2/B4
FAC1501/1
147
Calculations:
Cost of sales:
Mrs P Singh R4 800 x 100 ⁄ 125 = R3 840
148
Mr J Mtuli R3 000 x 100 ⁄ 125 = R2 400
149
BS HARDWARE
SALES RETURNS JOURNAL – JUNE 20.8
Doc
no
Day
Details
Fol
SRJ6
VAT
output
Sales
returns
Debtors
Cost of
sales
R
R
R
R
CN3
14
Mr J Mtuli
D2
84
600
684
480
CN4
17
Mrs P Singh
D1
224
1 600
1 824
1 280
308
2 200
2 508
1 760
B10
150
151
N3
B5
N2/B4
Calculations:
Cost of sales:
Mr J Mtuli R600 x 100 ⁄ 125 = R480
Mrs P Singh R1 600 x 100 ⁄ 125 = R1 280
152
BS HARDWARE
GENERAL JOURNAL – JUNE 20.8
Day
18
30
GJ6
Details
Fol
Debit
Credit
R
R
Equipment
VAT input
KZN Dealers/Creditors control
B3
B9
B8
2 300
322
VAT control
VAT input
Transfer of VAT input to the VAT control
account
B11
B9
2 107
VAT output
VAT control
Transfer of VAT output to the VAT control
account
B10
B11
784
251
2 622
2 107
784
FAC1501/1
BS HARDWARE
GENERAL LEDGER
153
154
Dr
FINANCIAL POSITION SECTION
Equipment
20.8
Jun 18 Creditors control
Dr
GJ6
Cost of sales
PJ6
SRJ6
Cr
B4
Cr
2 300
Inventory
20.8
Jun 30 Creditors control
B3
20.8
15 050 Jun 18 Creditors control
1 760
30 Cost of sales
Balance
PRJ6
2 300
SJ6
c/d
6 240
8 270
16 810
Jul
1 Balance
Dr
b/d
16 810
8 270
Debtors control
20.8
Jun 30 Sales and VAT
SJ6
B5
20.8
8 892 Jun 30 Sales returns and
VAT
Balance
SRJ6
2 508
c/d
6 384
8 892
Jul
1 Balance
Dr
b/d
8 892
6 384
Creditors control
20.8
Jun 30 Purchases returns
and VAT
Balance
PRJ6
c/d
20.8
Jun 30 Inventory and VAT
2 622
Equipment and
17 157
VAT
B8
Cr
PJ6
17 157
GJ6
2 622
19 779
19 779
Jul
Dr
20.8
Jun 30 Creditors control
PJ6
Creditors control
GJ6
Cr
1 Balance
VAT input
20.8
2 107 Jun 30 Creditors control
322
2 429
252
VAT control
b/d
17 157
B9
Cr
PRJ6
GJ6
322
2 107
2 429
FAC1501/1
VAT output
Dr
20.8
Jun 30 Debtors control
VAT control
SRJ6
GJ6
20.8
308 Jun 30 Debtors control
B10
Cr
SJ6
1 092
784
1 092
1 092
VAT control
Dr
20.8
Jun 30 VAT input
GJ6
20.8
2 107 Jun 30 VAT output
Balance
B11
Cr
GJ6
784
c/d
1 323
2 107
Jul
1 Balance
b/d
2 107
1 323
NOMINAL ACCOUNTS SECTION
Sales
Dr
20.8
Jun 30 Debtors control
Cost of sales
Dr
20.8
Jun 30 Inventory
SJ6
20.8
6 240 Jun 30 Inventory
Total
N1
Cr
SJ6
7 800
N2
Cr
SRJ6
1 760
c/d
4 480
6 240
Jul
1 Total
Dr
20.8
Jun 30 Debtors control
b/d
4 480
Sales returns
SRJ6
6 240
2 200
155
253
N3
Cr
FAC1501/1
156
157
BS HARDWARE
DEBTORS LEDGER
Mrs P Singh
Dr
20.8
Jun 3 Sales and VAT
D1
20.8
5 472 Jun 17 Sales returns and
VAT
SJ6
30 Balance
SRJ6
1 824
c/d
3 648
5 472
Jul
1 Balance
b/d
5 472
3 648
Mr J Mtuli
Dr
20.8
Jun 10 Sales and VAT
D2
20.8
3 420 Jun 14 Sales returns and
VAT
SJ6
30 Balance
SRJ6
c/d
3 420
Jul
1 Balance
Cr
b/d
Cr
684
2 736
3 420
2 736
BS HARDWARE
158
159
CREDITORS LEDGER
Hall Traders
Dr
20.8
Jun 16 Inventory and VAT
30 Balance
PRJ6
c/d
20.8
2 622 Jun 13 Inventory and VAT
C1
Cr
PJ6
13 110
10 488
13 110
13 110
Jul
Dr
KZN Dealers
20.8
Jun 30 Balance
1 Balance
b/d
10 488
C2
Cr
PJ6
4 047
GJ6
2 622
20.8
c/d
6 669 Jun 18 Inventory and VAT
Equipment and
VAT
6 669
6 669
Jul
254
1 Balance
b/d
6 669
FAC1501/1
160
Debtors list as at 30 June 20.8
Debtors
Mrs P Singh
Mr J Mtuli
161
Fol
D1
D2
R
3 648
2 736
6 384
Fol
C1
C2
R
10 488
6 669
17 157
Creditors list as at 30 June 20.8
Creditors
Hall Traders
KZN Dealers
ADDITIONAL INFORMATION:
(a) The above example is similar to comprehensive example two from the learning unit 6 on credit
transactions. However, in the previous example, the periodic inventory control system was used
hence inventory in trade was debited to the purchases account.
(b) In the above example, the perpetual inventory system is used. Inventory in trade is debited to the
inventory account and an inventory column is required instead of a purchases column in the subsidiary journals. When inventory is bought or returned, the entries for the transactions will affect
the inventory account in the general ledger as the use of a purchases account and purchases
returns account is not permitted when a perpetual inventory system is used.
7.10
EXERCISES AND SOLUTIONS
EXERCISE 1
5
The following information was obtained from the records of Pienaar Traders for the financial year
ended 28 February 20.3:
162
R
169
Inventory (1 March 20.2)
Sales
Purchases
Sales returns
Purchases returns
Inventory (28 February 20.3)
171
164
172
165
173
166
167
174
175
168
176
177
170 000
550 000
350 000
1 500
2 000
160 500
170
163
The entity applies the periodic inventory system.
255
FAC1501/1
REQUIRED
6
178
Calculate the cost of sales.
SOLUTION: EXERCISE 1
7
R
181
179
Inventory (1 March 20.2)
Add: *Net purchases
170 000
348 000
518 000
(160 500)
182
180
183
185
Less: Inventory (28 February 20.3)
Cost of sales
186
184
187
*Net purchases
=
Purchases – purchases returns
=
R350 000 – R2 000
=
R348 000
189
190
191
188
357 500
EXERCISE 2
8
The following information was obtained from the records of Cool Traders for the financial year ended
28 February 20.4:
192
193
203
Inventory (1 March 20.3)
Sales
Purchases
Sales returns
Purchases returns
Freight charges on purchases
Freight charges on sales
Settlement discount granted
Settlement discount received
194
R
185 000
350 000
265 000
700
3 600
750
1 300
550
265
204
195
205
196
206
197
207
198
208
199
209
200
210
201
211
202
212
A physical inventory count on 28 February 20.4 indicated that inventory on hand amounted to
R145 000. The periodic inventory system is in use.
213
REQUIRED
9
214
1.
What is the cost of sales amount for the year ended 28 February 20.4?
2.
Which amount represents the gross profit figure for the year ended 28 February 20.4?
215
256
FAC1501/1
SOLUTION EXERCISE 2
10
216
1.
Cost of sales calculation
217
222
218
Inventory (1 March 20.3)
Net purchases: (Purchases – purchases returns – settlement
discount received) (R265 000 – R3 600 – R265)
223
Plus
219
220
Plus
221
Less
2.
225
226
= (Sales – sales return – settlement discount granted)
= (R350 000 – R700– R550)
= R348 750
239
240
241
257
750
(145 000)
301 885
234
Gross profit calculation
261 135
231
232
Cost of sales
*Sales
238
230
Inventory (28 February 20.4)
= *Sales – cost of sales
= R348 750 – R301 885
= R46 865
237
229
Freight charges on purchases
Gross profit
236
228
224
233
235
R
185 000
227
FAC1501/1
SELF-ASSESSMENT
11
After you have worked through this learning unit, are you
able to:
242
zz
zz
243
explain the difference between a perpetual and a periodic
inventory control system?
correctly calculate the value of cost of sales and gross profit?
If you have marked all J you may continue to the next learning unit.
244
If you have marked any K you have to revise that specific section.
If you have marked any L you have to re-study that specific section.
245
258
J
J
K
K
L
L
FAC1501
LEARNING UNIT 8
BANK RECONCILIATION
STATEMENTS
Introductory Financial
Accounting
FAC1501/1
OVERVIEW
1
Learning outcomes.......................................................................................................................... 260
Key concepts................................................................................................................................... 260
Assessment criteria......................................................................................................................... 260
8.1
Introduction........................................................................................................................... 261
8.2
Steps when compiling a bank reconciliation statement.........................................................262
8.3
Bank reconciliation where a bank reconciliation statement was prepared in the previous
period....................................................................................................................................269
Self-assessment...............................................................................................................................278
LEARNING OUTCOMES
After studing this learning unit you should be able to:
1
1
zz
zz
zz
zz
identify the causes of the differences between the bank account balance and the bank statement
balance
update the cash receipts and cash payments journals
prepare a bank account
prepare a bank reconciliation statement
KEY CONCEPTS
zz
zz
zz
zz
zz
zz
zz
zz
zz
zz
Bank reconciliation statement
Outstanding cheques
Outstanding deposits
Direct deposits
Bank charges
Interest charged on overdraft
Dishonoured cheques
Cash receipts journal
Cash payments journal
Bank account
ASSESSMENT CRITERIA
zz
zz
zz
zz
The student should be able to identify the reasons why the bank balance in
the general ledger and the bank balance in the bank statement seldom agree.
The ability to record outstanding cheques and outstanding deposits in the bank
reconciliation statement is demonstrated.
The ability to record direct deposits, bank charges, debit orders, dishonoured
cheques, interest on overdraft or interest on current account in the appropriate
subsidiary journal is demonstrated.
The ability to record mistakes either made by the bank or the entity in either
the bank reconciliation statement or the appropriate subsidiary journal
is demonstrated
260
FAC1501/1
8.1
INTRODUCTION
An entity which has a cheque account can arrange with the bank to issue a bank statement at regular
intervals, usually monthly.
2
The bank statement shows, among other things, the opening balance for the period, bank transactions
made during that period and the closing balance at the end of that period.
3
Since bank transactions made by the entity are also recorded in its cash receipts and cash payments
journals, the balance shown in the bank statement should agree with the balance in the bank account
in the books of the entity. However, this is rarely the case.
4
Some of the reasons why the two balances do not agree are:
5
zz
Outstanding cheques: These are cheques issued to suppliers during the statement period but
which have not yet been presented to the bank for payment.
zz
Outstanding deposits: These are deposits made by the entity during the statement period but
which have not yet been credited by the bank.
zz
Direct deposits: These are deposits made by customers directly into the bank account of the entity.
zz
Bank charges: These comprise of service fees, cost of cheque books, commissions, ledger fees,
and so on. Because of the nature of these charges, the entity only becomes aware of them when
the bank statement is received.
zz
Interest charged on overdraft: This is the cost of overdrawing the bank balance. Again, the entity
only gets to know of this type of cost when the bank statement is received.
zz
Dishonoured cheques: These are cheques received from customers but which were not paid by
their respective banks because they (the customers) do not have sufficient funds.
zz
Mistakes and omissions made by both the entity and the bank
The reasons listed above can be classified under the following headings:
6
(1) Entries in the cash receipts and cash payments journals but which are not in the bank statement:
zz
zz
outstanding cheques
outstanding deposits
(2) Items in the bank statement but which are not in the cash receipts and cash payments journals:
zz
zz
zz
zz
zz
direct deposits
bank charges
stop orders
dishonoured cheques
interest on overdraft
(3) Items affecting both the bank statement and the cash receipts and cash payments journals:
zz
mistakes made by both the entity and the bank
261
FAC1501/1
8.2
STEPS WHEN COMPILING A BANK RECONCILIATION STATEMENT
After the reasons why the balances do not agree have been identified and classified, the bank
reconciliation can begin. The following steps are taken to prepare the bank reconciliation statement:
7
Step 1
8
Compare the debit column of the bank statement with the cash payments journal and vice versa.
Tick off items which appear in both the bank statement and the cash payments journal. Note any
outstanding items.
9
Step 2
10
Compare the credit column of the bank statement with the cash receipts journal and vice versa.
Tick off items which appear in both the bank statement and the cash receipts journal. Note any
outstanding items.
11
Step 3
12
Adjust the cash receipts journal and the cash payments journal with items which are in the bank
statement but not in the cash receipts and cash payments journals, for example, direct deposits, bank
charges and dishonoured cheques.
13
Step 4
14
Use the totals obtained from the adjusted cash receipts and cash payments journals to prepare the
bank account.
15
Step 5
16
Prepare a bank reconciliation statement using the outstanding cheques and deposits and correct any
mistakes made by both the bank and the entity.
17
To simplify the preparation of the bank reconciliation statement, always start with the balance as per
bank statement. The final balance on the bank reconciliation statement should agree with the balance
of the bank account.
18
19
262
FAC1501/1
COMPREHENSIVE EXAMPLE ONE
20
The bank statement of AM Dealers for the month ended 30 September 20.1 are given below:
BANK STATEMENT OF AM DEALERS FOR SEPTEMBER 20.1
Address: 4
6 Kaskastreet
Tshwane
0003
Date
01.09.20.1
05.09.20.1
06.09.20.1
09.09.20.1
13.09.20.1
19.09.20.1
20.09.20.1
21.09.20.1
22.09.20.1
23.09.20.1
26.09.20.1
27.09.20.1
28.09.20.1
30.09.20.1
Details
Debits
R
Balance
Deposit
Cheque no: B110
Deposit
Cheque no: B111
Cheque no: B112
Deposit
Cheque no: B113
Service fees
Cheque unpaid
Deposit
Cheque no: B114
Cheque no: B115
Cheque book
Service fees
Debit order – Insurance
Direct deposit – Mr A Tlape
Credits
R
500
420
1 240
64
104
160
1 288
1
160
1 680
600
48
10
5
300
200
Balance
R
2 400
2 900
2 480
3 720
3 656
3 552
3 712
2 424
2 423
2 263
3 943
3 343
3 295
3 285
3 280
2 980
3 180
The balance of the bank account in the general ledger of AM Dealers as at 1 September 20.1 was a
favourable balance of R2 400.
21
AM DEALERS
CASH RECEIPTS JOURNAL (BANK COLUMN ONLY) –SEPTEMBER 20.1 CRJ9
Day
5
9
20
26
28
Details
Analysis
R
500
1 240
160
1 680
480
Cash sales
A Bean
Cash sales
B Cool
Cash sales
Total
263
Bank
R
500
1 240
160
1 680
480
4 060
FAC1501/1
AM DEALERS
CASH PAYMENTS JOURNAL (BANK COLUMN ONLY) – SEPTEMBER 20.1 CPJ9
Cheque no
Day
B110
B111
B112
B113
B114
B115
B116
B117
6
12
18
20
26
28
29
Details
T Yoti
PNA
Municipality
Town Furnishers
Monate Ltd
Green Stores
Tak CC
Rolke Engineers
Total
Bank
R
420
64
104
1 288
600
48
212
400
3 136
REQUIRED
2
(1)
Prepare the cash receipts journal and the cash payments journal (bank column only) for
September 20.1.
(2) Prepare the bank account in the general ledger.
(3) Prepare the bank reconciliation statement as at 30 September 20.1.
SOLUTION: COMPREHENSIVE EXAMPLE ONE
Step 1
Compare the debit column of the bank statement with the cash payments journal.
22
23
Tick off items which appear in both the bank statement (debit column) and cash payments journal.
264
FAC1501/1
BANK STATEMENT OF AM DEALERS FOR SEPTEMBER 20.1
Address: 46 Kaskastreet
Tshwane
0003
Date
01.09.20.1
05.09.20.1
06.09.20.1
09.09.20.1
13.09.20.1
19.09.20.1
20.09.20.1
21.09.20.1
22.09.20.1
23.09.20.1
26.09.20.1
27.09.20.1
28.09.20.1
30.09.20.1
Details
Debits
R
Balance
Deposit
Cheque no: B110
Deposit
Cheque no: B111
Cheque no: B112
Deposit
Cheque no: B113
Service fees
Cheque unpaid
Deposit
Cheque no: B114
Cheque no: B115
Cheque book
Service fees
Debit order – Insurance
Direct deposit – Mr A Tlape
Credits
R
500
420√
1 240
64√
104√
160
1 288√
1√
160√
1 680
600√
48√
10√
5√
300√
200
Balance
R
2 400
2 900
2 480
3 720
3 656
3 552
3 712
2 424
2 423
2 263
3 943
3 343
3 295
3 285
3 280
2 980
3 180
AM DEALERS
CASH PAYMENTS JOURNAL (BANK COLUMN ONLY) – SEPTEMBER 20.1 CPJ9
Cheque no
Day
B110
B111
B112
B113
B114
B115
B116
B117
6
12
18
20
26
28
29
Details
T Yoti
PNA
Municipality
Town Furnishers
Monate Ltd
Green Stores
Tak CC
Rolke Engineers
Total
Bank
R
420
64
104
1 288
600
48
212
400
3 136
√
√
√
√
√
√
Outstanding items will be the service fees (R1,00 + R5,00 = R6,00), unpaid (dishonoured) cheque
(R160,00), cheque book (R10,00), debit order (R300,00), cheque to Tak CC (R212,00), and the cheque
to Rolke Engineers (R400,00).
24
265
FAC1501/1
Step 2
25
Compare the credit column of the bank statement with the cash receipts journal.
26
Tick off items which appear in both the bank statement (credit column) and the cash receipts journal.
27
BANK STATEMENT OF AM DEALERS FOR SEPTEMBER 20.1
Address: 4
6 Kaskastreet
Tshwane
0003
Date
Details
01.09.20.1
05.09.20.1
06.09.20.1
09.09.20.1
13.09.20.1
19.09.20.1
20.09.20.1
21.09.20.1
22.09.20.1
23.09.20.1
26.09.20.1
27.09.20.1
28.09.20.1
30.09.20.1
Debits
R
Balance
Deposit
Cheque no: B110
Deposit
Cheque no: B111
Cheque no: B112
Deposit
Cheque no: B113
Service fees
Cheque unpaid
Deposit
Cheque no: B114
Cheque no: B115
Cheque book
Service fees
Debit order – Insurance
Direct deposit – Mr A Tlape
Credits
R
500√
420√
1 240√
64√
104√
160√
1 288√
1√
160√
1 680√
600√
48√
10√
5√
300√
200√
Balance
R
2 400
2 900
2 480
3 720
3 656
3 552
3 712
2 424
2 423
2 263
3 943
3 343
3 295
3 285
3 280
2 980
3 180
AM DEALERS
CASH RECEIPTS JOURNAL (BANK COLUMN ONLY) – SEPTEMBER 20.1 CRJ9
Day
5
9
20
26
28
Details
Analysis
R
500
1 240
160
1 680
480
Cash sales
A Bean
Cash sales
B Cool
Cash sales
Total
Bank
R
500
1 240
160
1 680
480
4 060
√
√
√
√
Outstanding items will be the direct deposit (R200,00) and the cash sales (R480,00) deposited on
28 September 20.1.
28
266
FAC1501/1
Step 3
29
Adjust the cash receipts journal and the cash payments journal with items in the bank statement but
which are not in those journals.
30
AM DEALERS
CASH RECEIPTS JOURNAL (BANK COLUMN ONLY) –SEPTEMBER 20.1 CRJ9
Day
Details
30
Total
Direct deposit – Mr A Tlape
Bank
R
4 060
200
4 260
b/d
AM DEALERS
CASH PAYMENTS JOURNAL (BANK COLUMN ONLY) – SEPTEMBER 20.1 CPJ9
Day
30
31
Details
Total
Bank charges
Unpaid cheque
Debit order – Insurance
Bank
R
3 136
16
160
300
3 612
b/d
Step 4
Use the totals obtained from the adjusted cash receipts and cash payments journals to prepare a
bank account.
32
AM DEALERS
33
GENERAL LEDGER
34
Dr
20.1
Sep
1 Balance
30 Total receipts
b/d
CRJ9
20.1
2 400 Sep 30 Total payments
Balance
4 260
6 660
Oct
Cr
Bank
1 Balance
b/d
3 048
267
CPJ9
c/d
3 612
3 048
6 660
FAC1501/1
Step 5
35
AM DEALERS
36
BANK RECONCILIATION STATEMENT AS AT 30 SEPTEMBER 20.1
37
Debit
R
Credit balance as per bank statement
Credit outstanding deposit
Debit outstanding cheques: B116
B117
Debit balance as per bank account
Credit
R
3 180
480
212
400
3 048
3 660
3 660
NOTE:
If the bank statement had a debit (overdrawn) balance, it would have been shown in the debit
column of the bank reconciliation statement.
COMPREHENSIVE EXAMPLE TWO
The bank account in the books of RG Stores showed an overdrawn balance of R103,60 on
31 October 20.1.
38
39
On the same date, the entity’s bank statement showed a favourable balance of R36,60.
A comparison of the bank statement with the cash receipts and cash payments journals revealed the
following differences:
40
zz
zz
zz
zz
zz
The bank did not credit a deposit of R75,60 on 31 October 20.1.
The following cheques had not yet been presented for payment by 31 October 20.1:
—— 789 for R143,10
—— 795 for R226,90
The bank returned a cheque for R36,10, which was received from a customer, unpaid and marked
“refer to drawer”.
The bank recorded the following charges:
—— interest on overdrawn account of R3,20
—— service fees of R11,30
Totals in the cash journals before preparing the bank reconciliation
—— cash receipts journal, R913,08
—— cash payments journal, R1 016,68
41
268
FAC1501/1
REQUIRED
3
(1) Prepare the bank account in the general ledger.
(2) Prepare the bank reconciliation statement as at 31 October 20.1.
SOLUTION: COMPREHENSIVE EXAMPLE TWO
RG STORES
42
GENERAL LEDGER
43
Dr
20.1
Oct 31 Total receipts
Balance
Bank
CRJ10
c/d
Cr
20.1
913 08 Oct 31 Balance
Total payments
257 80
b/d
CPJ10
1 170 88
1 170 88
Nov
44
45
103 60
1 067 28
1 Balance
b/d
257 80
Calculation:
Total payments
Total cash payments journal, R1 016,68 + Customer’s returned cheque, R36,10 + Bank charges,
R14,50 (R3,20 + R11,30) = R1 067,28
46
RG STORES
47
48
BANK RECONCILIATION STATEMENT AS AT 31 OCTOBER 20.1
Debit
R
Credit balance as per bank statement
Credit outstanding deposit
Debit outstanding cheques: 789
795
Credit balance as per bank account
143,10
226,90
370,00
8.3
Credit
R
36,60
75,60
257,80
370,00
BANK RECONCILIATION WHERE A BANK RECONCILIATION
STATEMENT WAS PREPARED IN THE PREVIOUS PERIOD
When a bank reconciliation statement was prepared in the previous period (previous month), the first
step is to ascertain if the outstanding cheques and the outstanding deposits in the previous period
appear in the current period’s bank statement.
49
269
FAC1501/1
If they appear in the current period’s bank statement, they must be ticked off first and those items
still outstanding from the previous period must be noted and shown in the current period’s bank
reconciliation statement.
50
The “normal” procedures for bank reconciliation statements will then be followed to prepare the bank
reconciliation statement for the current period.
51
COMPREHENSIVE EXAMPLE THREE
(a) Spiza Traders prepared the following bank reconciliation statement at 31 July 20.1:
SPIZA TRADERS
BANK RECONCILIATION STATEMENT AS AT 31 JULY 20.1
Credit balance as per bank statement
Credit outstanding deposit
Debit outstanding cheques: 104
107
Debit balance as per bank account
52
(b)
Debit
Credit
R
R
172,00
420,00
742,00
1 334,00
974,00
360,00
1 334,00
The business received the following bank statement for August 20.1
BANK STATEMENT OF SPIZA TRADERS FOR AUGUST 20.1
Address: 2
1 Kennedy Road
Midrand
1685
Date
Aug 1
3
4
6
7
12
13
16
Details
Debits
R
Credits
R
Balance
Deposit
Cheque 104
Cheque 107
Deposit
Cheque 108
Cheque book
Service fees
Cheque 109
Deposit
Cheque 111
Cheque 113
360,00
172,00
420,00
1 000,00
900,00
8,00
12,00
400,00
384,00
77,00
136,00
270
Balance
R
974,00
1 334,00
1 162,00
742,00
1 742,00
842,00
834,00
822,00
422,00
806,00
729,00
593,00
FAC1501/1
19
20
27
30
Deposit
Deposit (direct)
Cheque 114
Cheque 115
Debit order: UP Insurers
800,00
80,00
69,52
750,00
100,00
1 393,00
1 473,00
1 403,48
653,48
553,48
SPIZA TRADERS
CASH RECEIPTS JOURNAL (BANK COLUMN ONLY) – AUGUST 20.1 CRJ8
Day
6
12
19
31
Details
Analysis
R
1 000,00
384,00
800,00
582,92
S Singh
Cash sales
A Dune
Cash sales
Total
Bank
R
1 000,00
384,00
800,00
582,92
2 766,92
SPIZA TRADERS
CASH PAYMENTS JOURNAL (BANK COLUMN ONLY) – AUGUST 20.1 CPJ8
Cheque
no
108
109
110
111
112
113
114
115
4
Day
7
8
12
16
26
29
Details
XYZ Wholesalers
DWR Suppliers
Cash
Cash
Cash
Cash
Cash
RG Traders
Bank
R
900,00
400,00
168,00
77,00
70,40
136,00
69,52
750,00
2 570,92
REQUIRED
(1) Prepare the cash receipts journal and the cash payments journal (bank column only) for
August 20.1.
(2) Prepare the bank account in the general ledger.
(3) Prepare the bank reconciliation statement as at 31 August 20.1.
271
FAC1501/1
SOLUTION: COMPREHENSIVE EXAMPLE THREE
53
Step 1
Compare the debit column and credit column of the previous month’s bank reconciliation statement
with the current month’s bank statement.
54
Tick off items which appear in both the bank statement (debit column and credit column) and the
previous month’s bank reconciliation statement.
55
SPIZA TRADERS
BANK RECONCILIATION STATEMENT AS AT 31 JULY 20.1
Debit
Credit
R
Credit balance as per bank statement
Credit outstanding deposit
Debit outstanding cheques: 104
107
Debit balance as per bank account
R
974,00
360,00
172, 00
420,00
742,00
1 334,00
√
√
√
1 334,00
BANK STATEMENT OF SPIZA TRADERS FOR AUGUST 20.1
Address: 2
1 Kennedy Road
Midrand
1685
Date
Details
Debits
R
Aug 1 Balance
Deposit
3 Cheque 104
4 Cheque 107
6 Deposit
7 Cheque 108
Cheque book
Service fees
Cheque 109
12 Deposit
13 Cheque 111
16 Cheque 113
19 Deposit
20 Deposit (direct)
27 Cheque 114
30 Cheque 115
Debit order: UP Insurers
Credits
R
360,00 √
172,00
420,00
√
√
1 000,00 √
900,00
8,00
12,00
400,00
384,00 √
77,00
136,00
800,00 √
80,00 √
69,52
750,00
100,00
272
Balance
R
974,00
1 334,00
1 162,00
742,00
1 742,00
842,00
834,00
822,00
422,00
806,00
729,00
593,00
1 393,00
1 473,00
1 403,48
653,48
553,48
FAC1501/1
Step 2
56
Compare the debit column of the bank statement with the cash payments journal.
57
58
Tick off items which appear in both the bank statement (debit column) and cash payments journal.
BANK STATEMENT OF SPIZA TRADERS FOR AUGUST 20.1
Address: 2
1 Kennedy Road
Midrand
1685
Details
Debits
R
Date
Aug 1 Balance
Deposit
3 Cheque 104
4 Cheque 107
6 Deposit
7 Cheque 108
Cheque book
Service fees
Cheque 109
12 Deposit
13 Cheque 111
16 Cheque 113
19 Deposit
20 Deposit (direct)
27 Cheque 114
30 Cheque 115
Debit order: UP Insurers
Credits
R
360,00 √
172,00
420,00
√
√
1 000,00√
900,00
8,00
12,00
400,00
√
√
384,00√
77,00
136,00
√
√
800,00√
80,00√
69,52
750,00
100,00
√
√
Balance
R
974,00
1 334,00
1 162,00
742,00
1 742,00
842,00
834,00
822,00
422,00
806,00
729,00
593,00
1 393,00
1 473,00
1 403,48
653,48
553,48
SPIZA TRADERS
CASH PAYMENTS JOURNAL (BANK COLUMN ONLY) – AUGUST 20.1 CPJ8
Cheque
no
Day
Details
Bank
R
108
109
110
111
112
113
114
115
7
8
12
16
26
29
XYZ Wholesalers
DWR Suppliers
Cash
Cash
Cash
Cash
Cash
RG Traders
273
900,00
400,00
168,00
77,00
70,40
136,00
69,52
750,00
2 570,92
√
√
√
√
√
√
FAC1501/1
Outstanding items will be the bank charges (R8,00 + R12,00 = R20,00), the debit order (R100,00) and
the outstanding cheques (R168,00 and R70,40).
59
60
Step 3
Compare the credit column of the bank statement with the cash receipts journal.
61
Tick off items which appear in both the bank statement (credit column) and the cash receipts journal.
62
BANK STATEMENT OF SPIZA TRADERS FOR AUGUST 20.1
Address: 2
1 Kennedy Road
Midrand
1685
Date
Details
Debits
R
Aug 1 Balance
Deposit
3 Cheque 104
4 Cheque 107
6 Deposit
7 Cheque 108
Cheque book
Service fees
Cheque 109
12 Deposit
13 Cheque 111
16 Cheque 113
19 Deposit
20 Deposit (direct)
27 Cheque 114
30 Cheque 115
Debit order: UP Insurers
Credits
R
360,00 √
172,00
420,00
√
√
1 000,00 √√
900,00
8,00
12,00
400,00
√
√
384,00 √√
77,00
136,00
√
√
800,00 √
80,00 √
69,52
750,00
100,00
√
√
Balance
R
974,00
1 334,00
1 162,00
742,00
1 742,00
842,00
834,00
822,00
422,00
806,00
729,00
593,00
1 393,00
1 473,00
1 403,48
653,48
553,48
SPIZA TRADERS
CASH RECEIPTS JOURNAL (BANK COLUMN ONLY) – AUGUST 20.1 CRJ8
Day
6
12
19
31
Details
Analysis
R
1 000,00
384,00
800,00
582, 92
S Singh
Cash sales
A Dune
Cash sales
Totaal
274
Bank
R
1 000, 00 √
384, 00 √
800 ,00 √
582, 92
2 766, 92
FAC1501/1
Outstanding items will be the direct deposit (R80,00) and the cash sales (R582,92) deposited on
31 August 20.1.
63
Step 4
64
Adjust the cash receipts journal and the cash payment journals with the items that are in the bank
statement but not in those journals.
65
SPIZA TRADERS
CASH RECEIPTS JOURNAL (BANK COLUMN ONLY) – AUGUST 20.1 CRJ8
Day
31
Details
Bank
Total
Direct deposit
R
2 766,92
80,00
2 846,92
b/d
SPIZA TRADERS
CASH PAYMENTS JOURNAL (BANK COLUMN ONLY) – AUGUST 20.1 CPJ8
Day
31
Details
Bank
Total
Bank charges
Debit order: UP Insurers
R
2 570,92
20,00
100,00
2 690,92
b/d
Step 5
66
Use the totals obtained from the adjusted cash receipts and cash payment journals to prepare the
bank account.
67
SPIZA TRADERS
68
69
Bank
Dr
20.1
Aug 1 Balance
31 Total receipts
GENERAL LEDGER
b/d
CRJ8
20.1
742 00 Aug 31 Total payments
Balance
2 846 92
3 588 92
Sep 1 Balance
b/d
898 00
275
Cr
CPJ8
c/d
2 690 92
898 00
3 588 92
FAC1501/1
70
Step 6
SPIZA TRADERS
BANK RECONCILIATION STATEMENT AS AT 31 AUGUST 20.1
Debit
R
Credit balance as per bank statement
Credit outstanding deposit
Debit outstanding cheques: 110
112
Debit balance as per bank account
168,00
70,40
898,00
1 136,40
Credit
R
553,48
582,92
1 136,40
NOTE:
If the bank statement had a debit (overdrawn) balance, it would have been shown in the debit
column of the bank reconciliation statement.
COMPREHENSIVE EXAMPLE FOUR
LP TRADERS
BANK RECONCILIATION STATEMENT AS AT 30 NOVEMBER 20.1
Debit
R
Credit balance as per bank statement
Credit outstanding deposit
Debit outstanding cheques: 110
115
118
130
Debit balance as per bank account
3,30
5,00
7,50
4,50
500,00
520,30
The bank statement on 31 December 20.1 showed a favourable balance of:
The total of the cash payments journal on 31 December 20.1 was:
The total of the cash receipts journal on 31 December 20.1 was:
Credit
R
359,60
160,70
520,30
R
299,57
2 098,86
1 248,20
A comparison of the bank statement with the previous month’s bank reconciliation statement, the cash
receipts journal and the cash payments journal for December 20.1 showed the following differences:
71
72
276
FAC1501/1
Items in the bank statement but not in the cash receipts and cash payments journals for
December 20.1:
73
R
zz
zz
zz
zz
Deposit on 30 November 20.1
Cheques not yet presented to the bank
for payment:
160,70
115
118
130
5,00
7,50
4,50
Service fees
5,40
Dishonoured cheque. This cheque of R15,00 was received from a client, D Dobson,
as payment on his account.
Items in the cash receipts and cash payments journals but which are not in the bank statement for
December 20.1:
75
zz
zz
Deposit on 30 December 20.1
Cheques:
121
129
131
136
R
192,03
192,36
196,00
256,00
215,00
REQUIRED
5
(1)
Prepare the cash receipts journal and the cash payments journal (bank column only) for
December 20.1.
(2) Prepare the bank account in the general ledger.
(3) Prepare the bank reconciliation statement as at 31 December 20.1.
SOLUTION: COMPREHENSIVE EXAMPLE FOUR
LP TRADERS
CASH PAYMENTS JOURNAL (BANK COLUMN ONLY) – DECEMBER 20.1 CPJ12
Day
31
Details
Total
Bank charges
Unpaid cheque: D Dobson
b/d
76
277
Bank
R
2 098,86
5,40
15,00
2 119,26
FAC1501/1
77
LP TRADERS
GENERAL LEDGER
78
Dr
Bank Cr
20.1
20.1
Dec 1 Balance
b/d
31 Total receipts
Balance
500 00 Dec 31 Total payments
CPJ12
2 119 26
CRJ12 1 248 20
c/d
371 06
2 119 26
2 119 26
20.2
Jan
1 Balance
b/d
371 06
LP TRADERS
BANK RECONCILIATION STATEMENT AS AT 31 DECEMBER 20.1
Debit
R
Credit balance as per bank statement
Credit outstanding deposit
Debit outstanding cheques: 110
121
129
131
136
Credit
R
299,57
192,03
3,30
192,36
196,00
256,00
215,00
Credit balance as per bank account
862,66
371,06
862,66
SELF-ASSESSMENT
6
After you have worked through this learning unit, are you
able to:
79
zz
zz
zz
zz
80
81
correctly identify non-corresponding items when comparing
the cash receipts journal (CRJ) and cash payments journal
(CPJ) with the bank statement received from the bank?
correctly identify non-corresponding items when comparing
the cash receipts journal and cash payments journal with
the bank reconciliation statement of the previous month and
the bank statement received from the bank?
prepare the bank account in the general ledger?
correctly prepare a bank reconciliation statement?
If you have marked all J you may continue to the next learning unit.
If you have marked any K you have to revise that specific section.
If you have marked any L you have to re-study that specific section.
82
278
J
K
L
J
J
J
K
K
K
L
L
L
1
FAC1501
LEARNING UNIT 9
TRIAL BALANCE
Introductory Financial
Accounting
FAC1501/1
OVERVIEW
1
Learning outcomes ..........................................................................................................................280
Key concepts....................................................................................................................................280
Assessment criteria..........................................................................................................................280
9.1
Introduction�������������������������������������������������������������������������������������������������������������������������� 281
9.2
Errors which will not be revealed by a trial balance������������������������������������������������������������� 281
9.3
Errors which will be revealed by a trial balance������������������������������������������������������������������� 281
9.4
Tracing errors in a trial balance�������������������������������������������������������������������������������������������� 281
Self-assessment������������������������������������������������������������������������������������������������������������������������������ 296
LEARNING OUTCOMES
After studying this learning unit you should be able to:
1
1
zz
zz
zz
zz
correctly prepare a trial balance from a given list of ledger account balances and totals
identify those errors that will not be revealed by a trial balance
identify those errors that will be revealed by a trial balance
trace errors in a trial balance
1
Almost everything in life is easier to get into than out of.
KEY CONCEPTS
zz
zz
zz
Trial balance
Financial position section
Nominal accounts section
ASSESSMENT CRITERIA
The ability to trace errors that will be revealed in a trial balance and correctly
prepare a trial balance is demonstrated.
2
280
FAC1501/1
9.1
INTRODUCTION
In order to determine whether the double-entry principle has been applied correctly when recording
transactions, an entity needs to prepare a trial balance on a frequent basis. This is usually done
at the end of the month after the subsidiary journals have been posted to the ledger accounts and
these accounts have been properly balanced or totalled. A trial balance also checks the arithmetical
accuracy of the bookkeeping and is prepared by using the balances or totals which appear in the
ledger accounts of the general ledger.
3
A trial balance is a list of debit and credit balances taken from the general ledger accounts. It is divided
into two sections, namely a financial position section and a nominal accounts section. The balances
are entered on the same side as they appear in the ledger accounts. A debit balance brought down
(b/d) is entered in the debit column of the trial balance and a credit balance brought down (b/d) is
entered in the credit column of the trial balance.
4
9.2
ERRORS WHICH WILL NOT BE REVEALED BY A TRIAL BALANCE
The following are examples of errors that will not be revealed by a trial balance:
5
zz
zz
zz
Errors of omission – A transaction which has been completely omitted will not be disclosed by the
trial balance.
Posting to the wrong account – This refers to a transaction that has been entered on the correct side
of a ledger account but has been posted to an incorrect account. For example, sales is correctly
credited but instead of debiting J Vos, the account of H Vos is debited.
Compensating errors – This include errors of addition, errors in balancing the account and posting
errors. An error on one side of a ledger account is compensated for by the same error on the
opposite side of another ledger account. When added, totals on both sides will be exactly the same
so the error will not be revealed.
9.3
ERRORS WHICH WILL BE REVEALED BY A TRIAL BALANCE
The following are examples of errors that will be revealed by a trial balance:
6
zz
zz
The trial balance has been incorrectly totalled.
The balances in the ledger accounts have been incorrectly transferred to the trial balance.
——
——
——
zz
The balance of the ledger account has been incorrectly calculated.
——
——
zz
An incorrect amount has been transferred to the correct side of the trial balance.
Debit balances have been transferred to the credit side of the trial balance or a credit balance
has been transferred to the debit side of the trial balance.
A balance appearing in the ledger has been omitted from the trial balance.
The account has been totalled incorrectly, thus the balance will also be incorrect.
The account has been totalled correctly but the balance has been calculated incorrectly.
Posting from the journals to the ledger accounts are incorrect.
——
——
——
9.4
A debit entry from a journal has been posted to the credit side of a ledger account, or vice versa.
The amount entered is incorrect.
Posting of one or more transactions has been omitted.
TRACING ERRORS IN A TRIAL BALANCE
The general approach is to work “backwards”. This means that the last step in the process is checked
first. So you start off by first re-adding the trial balance, then checking the entries in the trial balance,
7
281
FAC1501/1
then checking the balances and totals in the ledger accounts, then checking the postings from the
subsidiary journals to the ledger accounts and lastly checking the original entries with the details
appearing on the source documents.
Example: Basic format of a trial balance
OCEAN RETAILERS
TRIAL BALANCE AS AT 31 DECEMBER 20.6
Fol
Debit
Credit
R
R
Financial position section
Capital
B1
Drawings
B2
5 000,00
Land and buildings
B3
80 000,00
Vehicles
B4
25 000,00
Inventory
B5
8 000,00
Debtors control
B6
6 000,00
Bank
B7
3 000,00
Petty cash
B8
200,00
Cash float
B9
800,00
76 500,00
Nominal accounts section
Sales
N1
120 000,00
Cost of sales
N2
60 000,00
Sales returns
N3
1 000,00
Bank charges
N4
500,00
Property tax
N5
2 000,00
Repairs
N6
500,00
Stationery
N7
300,00
Vehicle expenses
N8
700,00
Water and electricity
N9
3 500,00
196 500,00 196 500,00
NOTE:
The trial balance is prepared from the balances and totals in the accounts of the general ledger.
The balances of individual debtors and creditors accounts in the different subsidiary ledgers are
represented by the balances on the debtors and creditors control accounts.
B refers to account that are utilized in the statement of financial position. These accounts have a
closing balance and are not closed off to final accounts.
N refers to accounts that are closed off to final accounts.
282
FAC1501/1
EXERCISE 9.1
2
Use the information supplied in the general ledger of Hex Traders and prepare the trial balance as at
30 June 20.9.
8
HEX TRADERS
9
10
11
Dr
GENERAL LEDGER
FINANCIAL POSITION SECTION
Capital
20.9
Jun
Dr
20.9
Jun
1 Balance
Drawings
1
11
21
29
Balance
Inventory
Bank
Bank
b/d
GJ1
CPJ1
CPJ1
4 650
282
300
965
B1
Cr
b/d
46 770 00
B2
Cr
B3
Cr
B4
Cr
B5
Cr
00
72
00
00
6 197 72
Dr
20.9
Jun
Vehicles
1 Balance
Dr
20.9
Jun
b/d
32 775 00
Equipment
1 Balance
30 Creditors control
b/d
GJ1
3 915 00
800 00
4 715 00
Dr
20.9
Jun
Inventory
20.9
1 Balance
30 Creditors control
Cost of sales
Bank
b/d
PJ1
SRJ1
CPJ1
4 198
6 974
49
1 765
00 Jun 11 Drawings
03
30 Creditors control
60
Cost of sales
00
Cost of sales
Balance
12 986 63
Jul
1 Balance
b/d
3 369 40
12
283
GJ1
PRJ1
SJ1
CRJ1
c/d
248
81
1 928
7 360
3 369
00
23
00
00
40
12 986 63
FAC1501/1
Dr
20.9
Jun
Debtors control
20.9
1 Balance
30 Sales and VAT
Bank (cheque R/D)
Interest income
b/d
SJ1
CRJ1
GJ1
2 442
2 747
835
15
B6
06 Jun 30 Sales returns and VAT SRJ1
40
Bank and settlement
00
discount
CRJ1
00
Credit losses and VAT GJ1
Balance
c/d
6 039 46
Jul
1 Balance
Dr
20.9
Jun
b/d
1 Balance
B7
b/d
3 420 00 Jun 30 Total payments
CRJ1 12 064 00
Balance
Dr
20.9
Jun
b/d
CPJ1
c/d
Dr
20.9
b/d
1 Balance
30 Bank
b/d
CPJ1
Jul
1 Balance
b/d
B8
Cr
B9
Cr
250 00
100 00 Jun 30 Total payments
72 44
Balance
PCJ1
c/d
172 44
c/d
72 44
100 00
172 44
100 00
Dr
Creditors control
20.9
20.9
GJ1
18 24 Jun 1
Jun 30 Stationery and VAT
Packing material and
30
GJ1
28 50
VAT
PRJ1
92 60
Inventory and VAT
Bank
CPJ1
729 60
Balance
11 599 54
3 884 46
3 884 46
Petty cash
20.9
Jun
Cr
15 484 00
Cash float
1 Balance
1 197 00
228 00
4 543 78
6 039 46
15 484 00
Jul
70 68
4 543 78
Bank
20.9
1 Balance
30 Total receipts
Cr
9 792 56
B10
Cr
Balance
b/d
1 225 50
Inventory and VAT
PJ1
7 950 40
Equipment and VAT
Packing material and
VAT
Stationery and VAT
GJ1
912 00
GJ1
GJ1
382 40
191 20
10 661 50
b/d
9 792 56
10 661 50
Jul
13
284
1 Balance
FAC1501/1
Dr
20.9
VAT input
20.9
Jun 30 Debtors control
Creditors control
Bank
Bank
Petty cash
GJ1
PJ1
CPJ1
CRJ1
PCJ1
28
1 158
422
2
6
B11
00 Jun 30 Creditors control
81
VAT control
10
46
44
PRJ1
GJ1
1 617 81
Dr
20.9
SRJ1
GJ1
17 11
1 600 70
1 617 81
VAT output
20.9
Jun 30 Debtors control
VAT control
Cr
B12
8 68 Jun 1 Balance
2 706 54
11 Drawings
30 Debtors control
Bank
Bank
b/d
GJ1
SJ1
CRJ1
CPJ1
2 715 22
Cr
1 002
34
337
1 337
3
46
72
40
00
64
2 715 22
Dr
20.9
VAT control
20.9
B13
Cr
Jun 30 VAT input
SARS (VAT)
GJ1
GJ1
GJ1
2 706 54
1 600 70 Jun 30 VAT output
1 105 84
2 706 54
Dr
2 706 54
SARS (VAT)
20.9
Jun 30 VAT control
14
Dr
B14
Cr
GJ1
1 105 84
N1
Cr
NOMINAL ACCOUNTS SECTION
Sales
20.9
Jun
1 Balance
30 Debtors control
Bank
b/d
SJ1
CRJ1
39 623 60
2 410 00
9 200 00
51 233 60
Dr
20.9
Sales returns
Jun 30 Debtors control
SRJ1
62 00
285
N2
Cr
FAC1501/1
Dr
20.9
Jun
Cost of sales
20.9
1 Balance
30 Inventory
Inventory
b/d 27 501 00 Jun 30 Inventory
SJ1
1 928 00
Balance
CRJ1 7 360 00
N3
SRJ1
c/d
36 789 00
Jul
1 Balance
b/d
36 739 40
Credit losses
Jun 30 Debtors control
GJ1
Jun
b/d
CPJ1
N4
Cr
N5
Cr
N6
Cr
N7
Cr
200 00
Bank charges
1 Balance
30 Bank
49 60
36 739 40
36 789 00
Dr
20.9
Dr
20.9
Cr
114 00
100 00
214 00
Dr
20.9
Settlement discount granted
Jun 30 Debtors control
Dr
CRJ1
17 54
Settlement discount received
20.9
Jun 30 Creditors control
Dr
20.9
Donations
Jun 22 Petty cash
Dr
20.9
PCJ1
GJ1
N8
Cr
N9
Cr
335 44 Jun 30 Creditors control
Balance
GJ1
c/d
25 00
310 44
335 44
Jul
1 Balance
Dr
20.9
Jun 30 Petty cash
b/d
335 44
310 44
Postage
PCJ1
25 96
20 00
Packing material
20.9
Jun 30 Creditors control
CPJ1
20 00
286
N10
Cr
FAC1501/1
Dr
20.9
Jun
Rental expenses
1 Balance
Dr
20.9
Jun
b/d
b/d
CPJ1
Cr
N12
Cr
N13
Cr
GJ1
c/d
16 00
576 72
1 881 00
Salaries
1 Balance
29 Bank
N11
2 475 00
4 000 00
6 475 00
Dr
20.9
Jun
Stationery
20.9
1 Balance
30 Creditors control
Petty cash
b/d
GJ1
PCJ1
399 00 Jun 30 Creditors control
167 72
Balance
26 00
592 72
Jul1
Balance
Dr
20.9
Jun
b/d
592 72
576 72
Telephone expenses
1 Balance
30 Bank
b/d
CPJ1
N14
Cr
N15
Cr
N16
Cr
N17
Cr
342 00
370 00
712 00
Dr
20.9
Jun
Water and electricity
1 Balance
11 Bank
b/d
CPJ1
3 484 50
780 00
4 264 50
Dr
20.9
Jun
Wages
1 Balance
30 Bank
b/d
CPJ1
675 00
1 290 00
1 965 00
Dr
Credit losses recovered
20.9
Jun 23 Bank
Dr
Interest income
20.9
Jun 30 Debtors control
287
CRJ1
350 00
N18
Cr
GJ1
15 00
FAC1501/1
SOLUTION: EXCERCISE 9.1
3
HEX TRADERS
TRIAL BALANCE AS AT 30 JUNE 20.9
Fol
Debit
Credit
R
R
Financial position section
Capital
B1
Drawings
B2
6 197,72
Vehicles
B3
32 775,00
Equipment
B4
4 715,00
Inventory
B5
3 369,40
Debtors control
B6
4 543,78
Bank
B7
3 884,46
Cash float
B8
250,00
Petty cash
B9
100,00
Creditors control
B10
9 792,56
SARS (VAT)
B14
1 105,84
Sales
N1
51 233,60
Sales returns
N2
62,00
Cost of sales
N3
36 739,40
Credit losses
N4
200,00
Bank charges
N5
214,00
Settlement discount granted
N6
17,54
Settlement discount received
N7
Donations
N8
20,00
Packing material
N9
310,44
Postage
N10
20,00
Rental expenses
N11
1 881,00
Salaries
N12
6 475,00
Stationery
N13
576,72
Telephone expenses
N14
712,00
Water and electricity
N15
4 264,50
Wages
N16
1 965,00
Credit losses recovered
N17
350,00
Interest income
N18
15,00
46 770,00
Nominal accounts section
25,96
109 292, 96
288
109 292,96
FAC1501/1
EXERCISE 9.2
4
Prepare a trial balance from the following balances and totals taken from the general ledger of
BJ Thomas and Son as at 30 November 20.1. Use your own folio references.
15
16
List of balances and totals:
Capital, R66 400; vehicles, R100 000; equipment, R20 000; debtors control, R14 000; creditors
control, R23 000; bank, R4 500; inventory, R7 500; petty cash, R200; sales, R160 000; cash float,
R500; drawings, R1 200; stationery, R400; bank charges, R600; interest expense, R700; credit losses,
R300; petrol and oil, R4 800; cost of sales, R80 000; sales returns, R4 000; SARS (VAT) (Dr), R1 500;
advertising, R1 800; telephone expenses, R6 000, packing material, R1 400
17
5
SOLUTION: EXCERCISE 9.2
BJ THOMAS AND SON
TRIAL BALANCE AS AT 30 NOVEMBER 20.1
Fol
Financial position section
Capital
Drawings
Vehicles
Equipment
Inventory
Debtors control
Bank
Cash float
Petty cash
Creditors control
SARS (VAT)
Nominal accounts section
Sales
Sales returns
Cost of sales
Advertising
Credit losses
Bank charges
Interest expense
Packing material
Petrol and oil
Stationery
Telephone expenses
B1
B2
B3
B4
B5
B6
B7
B8
B9
B10
B11
N1
N2
N3
N4
N5
N6
N7
N8
N9
N10
N11
18
289
Debit
R
Credit
R
66 400,00
1 200,00
100 000,00
20 000,00
7 500,00
14 000,00
4 500,00
500,00
200,00
23 000,00
1 500,00
160 000,00
4 000,00
80 000,00
1 800,00
300,00
600,00
700,00
1 400,00
4 800,00
400,00
6 000,00
249 400,00
249 400,00
FAC1501/1
EXERCISE 9.3
6
Use the information provided in the general ledger of Wilco Traders to prepare the trial balance of
Wilco Traders as at 30 June 20.4.
19
20
21
WILCO TRADERS
GENERAL LEDGER
FINANCIAL POSITION SECTION
22
Dr
20.4
B1
Capital
20.4
Jun 30 Balance
c/d 178 000 00 Jun
1 Balance
5 Bank
b/d 170 000 00
CRJ4
8 000 00
178 000 00
178 000 00
Jul
Dr
20.4
Jun
Dr
20.4
Jun
1 Balance
Vehicles
1 Balance
b/d
178 000 00
B2
Cr
B3
Cr
B4
Cr
b/d 120 000 00
Office equipment
1 Balance
4 Bank
4 Creditors control
Cr
b/d
CPJ4
GJ4
35 000 00
1 500 00
6 000 00
42 500 00
Dr
20.4
Jun
Inventory
20.4
1 Balance
30 Bank
Creditors control
Cost of sales
b/d 18 000 00 Jun 30 Creditors control
CPJ4 3 000 00
Cost of sales
PJ4 16 500 00
Cost of sales
SRJ4
166 66
Balance
PRJ4
CRJ4
SJ4
c/d
37 666 66
Jul
1 Balance
Dr
20.4
Jun
Jul
b/d
1 Balance
00
00
90
76
37 666 66
12 139 76
Debtors control
20.4
1 Balance
30 Sales and VAT
Interest income
800
22 600
2 126
12 139
B5
Cr
b/d
SJ4
GJ4
3 432 00 Jun 30 Bank and settlement
discount
CRJ4
3 637 00
18 00
Sales returns and VAT SRJ4
Credit losses and VAT GJ4
Balance
c/d
2 657
285
700
3 445
7 087 00
7 087 00
b/d
3 445 00
290
00
00
00
00
FAC1501/1
Dr
20.4
Creditors control
20.4
Jun 30 Bank and settlement
discount
Inventory and VAT
Stationery and VAT
Balance
Jun
CPJ4 12 302 00
912 00
PRJ4
GJ4
46 00
c/d 38 304 00
1 Balance
30 Office equipment and
VAT
Inventory and VAT
Stationery and VAT
Packing material and
VAT
Repairs and VAT
B6
Cr
b/d
21 012 00
GJ4
PJ4
GJ4
6 840 00
18 810 00
1 254 00
GJ4
GJ4
798 00
2 850 00
51 564 00
b/d
38 304 00
B7
Cr
51 564 00
Jul
Dr
20.4
Jun
1 Balance
VAT input
20.4
1 Balance
30 Bank
Bank
Debtors control
Creditors control
b/d
CPJ4
CRJ4
GJ4
PJ4
2 490
1 315
11
85
3 752
00 Jun 30 Creditors control
02
VAT control
67
96
00
PRJ4
GJ4
7 654 65
Dr
20.4
7 654 65
VAT output
20.4
Jun 30 Debtors control
VAT control
SRJ4
GJ4
117 65
7 537 00
35 00 Jun 1 Balance
7 871 79
30 Bank
Bank
Bank
B8
b/d
CRJ4
CPJ4
CPJ4
7 906 79
Cr
2 610
4 746
104
446
00
00
14
65
7 906 79
Dr
20.4
VAT control
20.4
B9
Cr
Jun 30 VAT input
SARS (VAT)
GJ4
GJ4
GJ4
7 871 79
7 537 00 Jun 30 VAT output
334 79
7 871 79
Dr
7 871 79
SARS (VAT)
20.4
Jun 30 VAT control
Dr
20.4
Jun
Bank
20.4
1 Balance
30 Total receipts
b/d
2 500 00 Jun 30 Total payments
CRJ4 49 208 00
Balance
51 708 00
Jul
1 Balance
b/d
18 146 00
291
B10
Cr
GJ4
334 79
B11
Cr
CPJ4
c/d
33 562 00
18 146 00
51 708 00
FAC1501/1
23
Dr
NOMINAL ACCOUNTS SECTION
Sales
20.4
Jun 30 Balance
Bank
Debtors control
N1
Cr
b/d 120 000 00
CRJ4 33 900 00
SJ4
3 190 35
157 090 35
Dr
20.4
Sales returns
Jun 30 Debtors control
SRJ4
Dr
20.4
Cost of sales
20.4
Jun 30 Balance
Inventory
Inventory
b/d 80 000 00 Jun 30 Inventory
CRJ4 22 600 00
Balance
SJ4
2 126 90
N2
Cr
N3
Cr
250 00
SRJ4
166 66
c/d 104 560 24
104 726 90
Jul
1 Balance
b/d 104 560 24
Dr
20.4
Jun
104 726 90
Settlement discount granted
1 Balance
30 Debtors control
b/d
CRJ4
N4
Cr
N5
Cr
150 00
83 33
233 33
Dr
Settlement discount received
20.4
Jun 30 Creditors control
Dr
20.4
Jun
Rental expenses
1 Balance
30 Bank
b/d
CPJ4
CPJ4
743 86
N6
Cr
N7
Cr
6 000 00
2 000 00
8 000 00
Dr
20.4
Jun
Municipal services
1 Balance
30 Bank
b/d
CPJ4
5 200 00
1 200 00
6 400 00
292
FAC1501/1
Dr
20.4
Jun
Telephone expenses
1 Balance
30 Bank
b/d
CPJ4
N8
Cr
N9
Cr
GJ4
c/d
40 35
1 859 65
3 000 00
800 00
3 800 00
Dr
20.4
Jun
Stationery
20.4
1 Balance
30 Creditors control
b/d
GJ4
800 00 Jun 30 Creditors control
1 100 00
Balance
1 900 00
Jul
1 Balance
Dr
20.4
Jun
b/d
1 900 00
1 859 65
Packing material
1 Balance
30 Creditors control
b/d
GJ4
N10
Cr
N11
Cr
N12
Cr
N13
Cr
320 00
700 00
1 020 00
Dr
20.4
Jun
Bank charges
1 Balance
30 Bank
b/d
CPJ4
430 00
192 98
622 98
Dr
20.4
Jun
1 Balance
30 Bank
b/d
CPJ4
Wages
9 000 00
3 000 00
12 000 00
Dr
20.4
Jun
Salaries
1 Balance
27 Bank
30 Bank
b/d 25 200 00
CPJ4
4 300 00
CPJ4 4 100 00
33 600 00
24
293
FAC1501/1
Dr
20.4
Jun
Cell phone expenses
1 Balance
29 Bank
b/d
CPJ4
N14
Cr
N15
Cr
N16
Cr
GJ4
18 00
N17
Cr
2 100 00
700 00
2 800 00
Dr
20.4
Jun 29 Creditors control
Dr
Repairs
GJ4
2 500 00
Interest income
20.4
Jun 30 Debtors control
Dr
20.4
Credit losses
Jun 30 Debtors control
GJ4
614 04
25
294
FAC1501/1
SOLUTION: EXCERCISE 9.3
7
WILCO TRADERS
TRIAL BALANCE AS AT 30 JUNE 20.4
Fol
Debit
Credit
R
R
Financial position section
Capital
B1
178 000,00
Vehicles
B2
120 000,00
Office equipment
B3
42 500,00
Inventory
B4
12 139,76
Debtors control
B5
3 445,00
Creditors control
B6
38 304,00
SARS (VAT)
B10
334,79
Bank
B11
18 146,00
Nominal accounts section
Sales
N1
157 090,35
Sales returns
N2
250,00
Cost of sales
N3
104 560,24
Settlement discount granted
N4
233,33
Settlement discount received
N5
Rental expenses
N6
8 000,00
Municipal services
N7
6 400,00
Telephone expenses
N8
3 800,00
Stationery
N9
1 859,65
Packing materials
N10
1 020,00
Bank charges
N11
622,98
Wages
N12
12 000,00
Salaries
N13
33 600,00
Cell phone expenses
N14
2 800,00
Repairs
N15
2 500,00
Interest income
N16
Credit losses
N17
743,86
18,00
614,04
374 491,00
295
374 491,00
FAC1501/1
SELF-ASSESSMENT
8
After you have worked through this learning unit, are you
able to:
26
zz
zz
zz
27
identify those errors that will not be revealed by a
trial balance?
identify those errors that will be revealed by a trial balance?
correctly prepare a trial balance?
If you have marked all J you may continue to the next learning unit.
If you have marked any K you have to revise that specific section.
28
29
If you have marked any L you have to re-study that specific section.
296
J
J
J
K
K
K
L
L
L
1
FAC1501
LEARNING UNIT 10
FINAL ACCOUNTS
Introductory Financial
Accounting
FAC1501/1
OVERVIEW
1
Learning outcomes.......................................................................................................................... 298
Key concepts................................................................................................................................... 298
Assessment criteria......................................................................................................................... 299
10.1
Introduction�������������������������������������������������������������������������������������������������������������������������� 299
10.2
Gross profit and net profit���������������������������������������������������������������������������������������������������� 299
10.3
Closing transfers������������������������������������������������������������������������������������������������������������������ 300
Self-assessment������������������������������������������������������������������������������������������������������������������������������ 330
LEARNING OUTCOMES
1
After studying this learning unit you should be able to:
1
zz
zz
zz
zz
zz
zz
discuss in your own words the difference between gross and net profit and describe how they
are calculated
do the closing entries at the end of a financial year for a retail entity using the perpetual inventory
system
do the closing entries at the end of a financial year for a retail entity using the periodic inventory system
do the closing entries at the end of a financial year for a service entity
prepare a trading account and profit or loss account
prepare a post-closing trial balance
1
KEY CONCEPTS
zz
zz
zz
zz
zz
zz
zz
Gross profit
Net profit (profit for the year)
Closing transfers
Year-end procedures
Final accounts
Trading account
Profit or loss account
298
FAC1501/1
ASSESSMENT CRITERIA
zz
zz
zz
zz
10.1
The ability to do the closing entries at the end of a financial year for a retail
entity using the perpetual inventory system is demonstrated.
The ability to do the closing entries at the end of a financial year for a retail
entity using the periodic inventory system is demonstrated.
The ability to do the closing entries at the end of a financial year for a service
entity is demonstrate.
The ability to prepare a trading account, profit or loss account and a post-closing
trial balance for a retail entity as well as a service entity is demonstrated.
INTRODUCTION
A retailer purchases inventory with the purpose of selling it at a profit. If he/she purchases a
bottle of coffee for R15 and sells it for R25, he/she makes a profit of R10. The profit is the difference
between what he/she paid for the item and the selling price.
2
To determine the profit on one article is simple, because the cost price and the selling price are known
and the profit will be the difference between the two. The term profit mark-up refers to the percentage
profit a retailer wants to make on the item(s) he/she sells. If the retailer sells a large and varied quantity
of articles and if the profit mark-up on these articles differs (and if operating expenses like salaries,
water and electricity, telephone, etc are taken into consideration) the calculation of profit becomes
increasingly more difficult and the retailer has to use special accounts in order to calculate the profit
accurately.
3
Periodically it is important for an entity to determine its profit for a specific period. This enables the
owner to run his/her business more effectively because errors in management can be detected more
quickly and appropriate corrective measures can be taken.
4
The date on which an entity calculates its profit is called the accounting date and the period for which
it is done is called the accounting period. This period is also called the financial year; this does not
necessarily coincide with the calendar year. The financial year is any period which consists of 12
consecutive months. Normally entities choose their accounting period to coincide with the close of the
tax year on the last day of February. An entity can, after consulting with SARS, close its financial year
on any appropriate date.
5
10.2
GROSS PROFIT AND NET PROFIT
Profit is the amount by which the income of an entity (during a certain accounting period) exceeds
the operating expenses (for the same period). The effect of a profit is to increase the equity. For
accounting reasons this profit is calculated in two stages – first the gross profit is calculated, which
forms the basis for calculating the net profit (profit for the year). In the case of a service entity there
can be no gross profit because there is no cost of sales.
6
The gross profit of an entity is the amount by which its sales exceed the cost price of the items sold
for a specific accounting period. The net profit (profit for the year) is the gross profit reduced by all
the operating expenses which are incurred in the day-to-day running of the entity. Other income, like
interest income, is then added. An entity can also suffer a loss. This happens when, for a specific
accounting period, the expenses are more than the income.
7
Assume that an entity has kept proper records of all its transactions during the financial year. During
this period inventory was purchased and sold and services rendered, documents were issued and
8
299
FAC1501/1
received and the transaction data thereon carefully entered in the appropriate subsidiary journals and
then filed. The transaction data was then posted from the subsidiary journals to the different ledger
accounts. At the end of the accounting period (financial year) the entity must determine if it has traded
at a profit or a loss. In order to calculate the profit or loss, two special accounts have to be opened.
These two accounts, referred to collectively as final accounts, are the trading account and the profit
or loss account.
10.3
CLOSING TRANSFERS
At the end of the financial year, before the trading account and profit or loss accounts are opened, the
total amounts that have accumulated in the different income and expenditure accounts of the entity
must be determined. This implies that the different income and expenditure accounts must be closed
off at the end of the year so that new accounts can be opened in the new financial year.
9
The income and expenditure accounts of the entity are nominal accounts and must be closed off at
the end of the financial year by way of closing transfers. Closing transfers are entries in the accounting
records whereby the accumulated totals in the accounting records are transferred to another account
or accounts, called final accounts or to the owner’s capital account.
10
Closing transfers are entered in the general journal. This journal is used as a book of first entry for all
transactions which do not have a formal source document and as such cannot be entered in any of
the other journals.
11
It was clearly stated that the final accounts are used to determine profit. The trading account is used
for determining the gross profit and is only applicable to retail entities and not to service entities. The
reason for this is that gross profit is the difference between total sales and total cost of sales. A service
entity renders a service and does not sell any goods. The profit or loss account is used to determine
the net profit (profit for the year) and is used for both retail and service entities.
12
The accounting procedure that must be followed at the end of the financial year by an entity (using a
perpetual inventory system) is as follows:
13
(1) Balance the financial position accounts and calculate the totals of the nominal accounts in pencil.
(2) Prepare the trial balance from the pencil totals in the nominal accounts and the balances of the
financial position accounts.
(3) The next step involves the writing-up of closing transfers, which involves the following phases:
zz
zz
zz
zz
zz
zz
zz
zz
Close off the sales returns account to the sales account.
Close off the settlement discount granted account to the sales account.
Close off the settlement discount received account to the cost of sales account.
Close off the sales account and cost of sales account to the trading account.
Close off the trading account by transferring the gross profit to the profit or loss account.
Close off the income and expense accounts by transferring their totals to the profit or loss account.
Close off the profit or loss account by transferring the net profit (profit for the year) to the capital account.
Close off the drawings account by transferring the balance to the capital account. Note that
at each phase the necessary closing transfer is made in the general journal. In the case of a
service entity the first five phases are skipped.
(4) After the closing transfers have been made, all the nominal accounts must balance, that is, the
total of the debit side and the total of the credit side of each account will be the same. The capital
account must also be balanced.
300
FAC1501/1
At this point a post-closing trial balance can be prepared which will contain only the balances of the
financial position accounts.
14
If a periodic inventory system is used by an entity the closing transfers will be as follows:
15
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
Close off the sales returns account to the sales account.
Close off the settlement discount granted account to the sales account.
Close off the purchases returns account to the purchases account.
Close off the settlement discount received account to the purchases account.
Close off the sales account and purchases account to the trading account.
Close off the carriage on purchases account to the trading account.
Transfer the opening inventory to the trading account.
Transfer the closing inventory to the trading account.
Close off the trading account by transferring the gross profit to the profit or loss account.
Close off the income and expense accounts by transferring their totals to the profit or loss account.
Close off the profit or loss account by transferring the net profit (profit for the year) to the capital account.
(12) Close off the drawings account by transferring the balance to the capital account.
The above procedures can be summarised as follows:
16
Transaction
Perpetual (continuous)
inventory system
Periodic inventory
system
General ledger
General ledger
Account
debited
Account
credited
Account
debited
Account
credited
Close off the sales returns account to
the sales account
Sales
Sales
returns
Sales
Sales
returns
Close off the settlement discount
granted account to the sales account
Sales
Settlement
discount
granted
Sales
Settlement
discount
granted
Purchases
returns
Purchases
Close off the purchases returns
account to the purchases account
Close off the settlement discount
received account
Settlement
discount
received
Cost of
sales
Settlement Purchases
discount
received
Close off the sales account to the
trading account
Sales
Trading
account
Sales
Trading
account
Close off the cost of sales account to
the trading account
Trading
account
Cost of
sales
Close off the purchases account to the
trading account
Trading
account
Purchases
Close off the carriage on purchases
account to the trading account
Trading
account
Carriage
on
purchases
Transfer the opening inventory to the
trading account
Trading
account
Inventory
Transfer the closing inventory to the
trading account
Inventory
Trading
account
Trading
account
Profit or
loss
account
Close off the trading account by
Trading
transferring the gross profit to the profit account
or loss account
301
Profit or
loss
account
FAC1501/1
Transaction
Perpetual (continuous)
inventory system
General ledger
Account
debited
Account
credited
Periodic inventory
system
General ledger
Account
debited
Account
credited
Close off the income accounts by
transferring their totals to the profit or
loss account
Income
accounts
Profit or
loss
account
Income
accounts
Profit or
loss
account
Close off the expense accounts by
transferring their totals to the profit or
loss account
Profit or
loss
account
Expense
accounts
Profit or
loss
account
Expense
accounts
Close off the profit or loss account by
transferring the net profit (profit for the
year) to the capital account
Profit or
loss
account
Capital
account
Profit or
loss
account
Capital
account
Close off the drawings account by
transferring the total to the capital
account
Capital
account
Drawings
Capital
account
Drawings
COMPREHENSIVE EXAMPLE 10.1: FINANCIAL YEAR-END
PROCEDURES OF A TRADING
ENTITY
2
The following balances and totals appeared in the books of Gena Traders at 28 February 20.3
(the end of the entity’s accounting period):
17
18
Balances and totals as at 28 February 20.3
R
19
Capital
87 450
Drawings
3 750
Land and buildings
60 000
Vehicles
50 000
Inventory 5 250
Debtors control 3 800
Bank (Dr) 2 850
Creditors control
4 300
Sales
180 000
Cost of sales
108 000
Water and electricity
14 300
Telephone expenses 2 400
Salaries
25 800
Stationery
1 600
Rental income
6 000
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
REQUIRED
3
(1)
(2)
(3)
(4)
Open the ledger accounts with the given balances and totals.
Show the closing transfers in the general journal.
Post the closing transfers to the ledger accounts.
Prepare a post-closing trial balance.
35
302
FAC1501/1
SOLUTION: EXAMPLE 10.1
4
GENA TRADERS
GENERAL JOURNAL – FEBRUARY 20.3
Day
28
GJ1
Details
Fol
Trading account
Cost of sales
Closing transfer
Sales
Trading account
Closing transfer
Trading account
Profit or loss account
Transfer of gross profit
Profit or loss account
Water and electricity
Salaries
Stationery
Telephone expenses
Closing transfer of expense account
Rental income
Profit or loss account
Closing transfer of income account
Profit or loss account
Capital
Transfer of net profit (profit for the year) to
capital account
Capital
Drawings
Transfer of drawings to capital account
N8
N2
Debit
R
108 000,00
Credit
R
108 000,00
N1
N8
180 000,00
N8
N9
72 000,00
N9
N3
N4
N5
N6
44 100,00
N7
N9
6 000,00
N9
B1
33 900,00
B1
B2
3 750,00
180 000,00
72 000,00
14 300,00
25 800,00
1 600,00
2 400,00
6 000,00
33 900,00
3 750,00
GENA TRADERS
36
37
GENERAL LEDGER
FINANCIAL POSITION SECTION
38
Dr
Capital
20.3
B1
Cr
20.3
Feb 28 Drawings
Balance
GJ1
c/d
3 750 00 Feb 28 Balance
117 600 00
Profit or loss account
b/d
GJ1
121 350 00
87 450 00
33 900 00
121 350 00
Mar
303
1 Balance
b/d
117 600 00
FAC1501/1
Dr
Drawings
20.3
Feb 28 Balance
Dr
B2
Cr
20.3
b/d
3 750 00 Feb 28 Capital
Land and buildings
GJ1
3 750 00
B3
Cr
B4
Cr
B5
Cr
B6
Cr
B7
Cr
B8
Cr
20.3
Feb 28 Balance
b/d
Dr
20.3
Vehicles
Feb 28 Balance
b/d
Dr
20.3
b/d
Dr
20.3
b/d
Dr
20.3
b/d
Dr
2 850 00
Creditors control
20.3
Feb 28 Balance
39
Feb 28 Balance
3 800 00
Bank
Feb 28 Balance
Dr
20.3
5 250 00
Debtors control
Feb 28 Balance
Feb 28 Trading account
50 000 00
Inventory
Feb 28 Balance
Dr
20.3
60 000 00
b/d
4 300 00
Sales
20.3
N1
Cr
GJ1 180 000 00 Feb 28 Balance
b/d
180 000 00
N2
Cr
GJ1
108 000 00
NOMINAL ACCOUNTS SECTION
Cost of sales
20.3
b/d 108 000 00 Feb 28 Trading account
40
304
FAC1501/1
Dr
20.3
Water and electricity
20.3
Feb 28 Balance
b/d
Dr
20.3
14 300 00 Feb 28 Profit or loss account
Salaries
20.3
Cr
GJ1
14 300 00
N4
Cr
GJ1
25 800 00
Feb 28 Balance
b/d
Dr
20.3
Stationery
20.3
N5
Cr
Feb 28 Balance
b/d
1 600 00 Feb 28 Profit or loss account
GJ1
1 600 00
Telephone expenses
20.3
N6
Cr
2 400 00 Feb 28 Profit or loss account
GJ1
2 400 00
N7
Cr
b/d
6 000 00
N8
Cr
GJ1
180 000 00
Dr
20.3
25 800 00 Feb 28 Profit or loss account
N3
Feb 28 Balance
Dr
20.3
b/d
Rental income
20.3
Feb 28 Profit or loss account
Dr
20.3
GJ1
6 000 00 Feb 28 Balance
Trading account
20.3
Feb 28 Cost of sales
Profit or loss account
GJ1 108 000 00 Feb 28 Sales
GJ1 72 000 00
180 000 00
Dr
180 000 00
Profit or loss account
20.3
N9
Cr
20.3
Feb 28 Water and electricity
GJ1
14 300 00 Feb 28 Trading account
GJ1
72 000 00
Salaries
GJ1
25 800 00
GJ1
6 000 00
Stationery
GJ1
1 600 00
Telephone expenses
GJ1
2 400 00
Capital (profit for the
year)
GJ1
33 900 00
78 000 00
41
305
Rental income
78 000 00
FAC1501/1
GENA TRADERS
POST-CLOSING TRIAL BALANCE AS AT 28 FEBRUARY 20.3
Fol
Debit
Credit
R
R
Financial position section
Capital
B1
117 600,00
Land and buildings
B3
60 000,00
Vehicles
B4
50 000,00
Inventory
B5
5 250,00
Debtors control
B6
3 800,00
Bank
B7
2 850,00
Creditors control
B8
4 300,00
121 900,00
121 900,00
COMPREHENSIVE EXAMPLE 10.2: FINAL ACCOUNTS OF A SERVICE
ENTITY
5
The following information was taken from the accounting records of Gena Services at the end of the
entity’s accounting period (28 February 20.3).
42
43
Balances and totals as at 28 February 20.3
R
44
Capital
87 450
Drawings
3 750
Land and buildings
60 000
Vehicles
50 000
Debtors control
9 050
Bank (Dr)
2 850
Creditors control
4 300
Current income
78 000
Water and electricity
14 300
Telephone expenses 2 400
Salaries
25 800
Stationery
1 600
45
46
47
48
49
50
51
52
53
54
55
56
REQUIRED
6
(1) Open the ledger accounts with the given balances.
(2) Show the closing transfers in the general journal.
(3) Post the closing transfers to the ledger accounts.
57
306
FAC1501/1
SOLUTION: EXAMPLE 10.2
7
GENA SERVICES
GENERAL JOURNAL – FEBRUARY 20.3
Day
28
GJ1
Details
Fol
Profit or loss account
Water and electricity
Salaries
Stationery
Telephone expenses
Closing transfer of expense accounts
N6
N2
N3
N4
N5
Current income
Profit or loss account
Closing transfer of income account
N1
N6
78 000,00
Profit or loss account
N6
Capital
B1
Transfer of net profit (profit for the year) to
capital account
33 900,00
Capital
Drawings
Transfer of drawings to capital account
B1
B2
Debit
R
44 100,00
Credit
R
14 300,00
25 800,00
1 600,00
2 400,00
78 000,00
33 900,00
3 750,00
3 750,00
NOTE:
The trading account falls away in the case of a service entity because there are no sales or cost
of sales which form the basis for the calculation of gross profit.
58
GENA SERVICES
GENERAL JOURNAL
59
FINANCIAL POSITION SECTION
60
Dr
Capital
20.3
B1
Cr
20.3
Feb 28 Drawings
Balance
GJ1
c/d
3 750 00 Feb 28 Balance
117 600 00
Profit or loss account
b/d
87 450 00
GJ1
33 900 00
121 350 00
121 350 00
Mar
307
1 Balance
b/d
117 600 00
FAC1501/1
Dr
Drawings
20.3
Feb 28 Balance
Dr
B2
Cr
20.3
b/d
3 750 00 Feb 28 Capital
Land and buildings
GJ1
3 750 00
B3
Cr
B4
Cr
B6
Cr
B7
Cr
B8
Cr
b/d
4 300 00
20.3
Feb 28 Balance
b/d
Dr
20.3
60 000 00
Feb 28 Balance
b/d
Dr
20.3
Vehicles
50 000 00
Debtors control
Feb 28 Balance
b/d
Dr
20.3
9 050 00
Bank
Feb 28 Balance
b/d
Dr
2 850 00
Creditors control
20.3
Feb 28 Balance
61
Dr
20.3
Current income
20.3
Feb 28 Profit or loss account
Dr
20.3
Feb 28 Balance
Dr
NOMINAL ACCOUNTS SECTION
GJ1
Water and electricity
20.3
b/d
14 300 00 Feb 28 Profit or loss account
Salaries
20.3
Feb 28 Balance
78 000 00 Feb 28 Balance
N1
Cr
b/d
78 000 00
N2
Cr
GJ1
14 300 00
N3
Cr
20.3
b/d
25 800 00 Feb 28 Profit or loss account
308
GJ1
25 800 00
FAC1501/1
Stationery
20.3
N4
20.3
Dr
Feb 28 Balance
b/d
GJ1
1 600 00
N5
Cr
GJ1
2 400 00
N6
Cr
GJ1
78 000 00
1 600 00 Feb 28 Profit or loss account
Telephone expenses
Dr
20.3
Cr
20.3
Feb 28 Balance
Dr
b/d
2 400 00 Feb 28 Profit or loss account
Profit or loss account
20.3
20.3
Feb 28 Water and electricity
GJ1
14 300 00 Feb 28 Current income
Salaries
GJ1
25 800 00
Stationery
GJ1
1 600 00
Telephone expenses
GJ1
2 400 00
Capital (profit for the
year)
GJ1
33 900 00
78 000 00
78 000 00
COMPREHENSIVE EXAMPLE 10.3: F
INAL ACCOUNTS OF A RETAIL
BUSINESS USING A PERIODIC
INVENTORY SYSTEM
8
The following balances and totals appeared in the books of Gena Traders at 28 February 20.3
(the end of the entity’s accounting period):
62
63
Balances and totals at 28 February 20.3
R
64
Capital
Drawings
Land and buildings
Vehicles
Inventory (opening)
Debtors control
Bank (Dr)
Creditors control
Sales
Sales returns
Purchases
Purchases returns
Water and electricity
Telephone expenses
Salaries
Stationery
Rental income
87 450
3 750
60 000
50 000
7 200
3 800
2 850
4 300
183 450
1 500
109 000
1 000
14 300
2 400
25 800
1 600
6 000
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
A physical inventory count showed the value of closing inventory to be R5 250 at 28 February 20.3.
309
FAC1501/1
REQUIRED
9
(1)
(2)
(3)
(4)
Open the ledger accounts with the given balances and totals.
Show the closing transfers in the general journal.
Post the closing transfers to the ledger accounts.
Prepare a post-closing trial balance.
SOLUTION: EXAMPLE 10.3
10
GENA TRADERS
GENERAL JOURNAL – FEBRUARY 20.3
Day
28
GJ1
Details
Fol
Trading account
Inventory
Transfer of opening inventory
Inventory
Trading account
Transfer of closing inventory
Sales
Sales returns
Closing transfer
Purchases returns
Purchases
Closing transfer
Trading account
Purchases
Closing transfer
Sales
Trading account
Closing transfer
Trading account
Profit or loss account
Transfer of gross profit
Profit or loss account
Water and electricity
Salaries
Stationery
Telephone expenses
Closing transfer of expense accounts
Rental income
Profit or loss account
Closing transfer of income account
N10
B5
310
Debit
R
7 200,00
Credit
R
7 200,00
B5
N10
5 250,00
N1
N2
1 500,00
N4
N3
1 000,00
N10
N3
108 000,00
N1
N10
181 950,00
N10
N11
72 000,00
N11
N5
N6
N7
N8
44 100,00
N9
N11
6 000,00
5 250,00
1 500,00
1 000,00
108 000,00
181 950,00
72 000,00
14 300,00
25 800,00
1 600,00
2 400,00
6 000,00
FAC1501/1
Day
28
Details
Fol
Profit or loss account
Capital
Transfer of net profit (profit for the year)
to capital account
N11
B1
Capital
Drawings
Transfer of drawings to capital account
B1
B2
83
Debit
R
33 900,00
Credit
R
33 900,00
3 750,00
3 750,00
GENA TRADERS
GENERAL LEDGER
84
FINANCIAL POSITION SECTION
85
Dr
Capital
20.3
B1
Cr
20.3
Feb 28 Drawings
Balance
GJ1
c/d
3 750 00 Feb 28 Balance
117 600 00
Profit or loss account
b/d
87 450 00
GJ1
33 900 00
121 350 00
121 350 00
Mar
Dr
1 Balance
Drawings
20.3
b/d
B2
117 600 00
Cr
20.3
Feb 28 Balance
Dr
b/d
3 750 00 Feb 28 Capital
Land and buildings
GJ1
3 750 00
B3
Cr
B4
Cr
B5
Cr
20.3
Feb 28 Balance
Dr
20.3
b/d
60 000 00
Vehicles
Feb 28 Balance
Dr
b/d
50 000 00
Inventory
20.3
20.3
Feb 28 Balance
Trading account
Dr
20.3
Feb 28 Balance
b/d
7 200 00 Feb 28 Trading account
GJ1
5 250 00
Debtors control
b/d
3 800 00
86
311
GJ1
7 200 00
B6
Cr
FAC1501/1
Dr
20.3
Bank
Feb 28 Balance
b/d
Dr
20.3
Feb 28 Balance
B8
b/d
Dr
Sales
Dr
GJ1
1 500 00 Feb 28 Balance
GJ1 181 950 00
N1
Cr
b/d
183 450 00
183 450 00
Sales returns
20.3
b/d
1 500 00 Feb 28 Sales
Purchases
20.3
Feb 28 Balance
N2
Cr
GJ1
1 500 00
N3
Cr
GJ1
GJ1
1 000 00
108 000 00
20.3
b/d
109 000 00 Feb 28 Purhases returns
Trading account
109 000 00
Dr
109 000 00
Purchases returns
20.3
Feb 28 Purchases
Dr
20.3
Feb 28 Balance
Dr
N4
Cr
b/d
1 000 00
N5
Cr
GJ1
14 300 00
20.3
GJ1
1 000 00 Feb 28 Balance
Water and electricity
20.3
GJ1
14 300 00 Feb 28 Profit or loss account
Salaries
20.3
Feb 28 Balance
4 300 00
20.3
183 450 00
Dr
20.3
Feb 28 Balance
Cr
NOMINAL ACCOUNTS SECTION
20.3
Feb 28 Sales returns
Trading account
Cr
2 850 00
Creditors control
87
B7
N6
Cr
20.3
b/d
25 800 00 Feb 28 Profit or loss account
88
312
GJ1
25 800 00
FAC1501/1
Dr
Stationery
20.3
N7
Cr
20.3
Feb 28 Balance
Dr
20.3
Feb 28 Balance
b/d
1 600 00 Feb 28 Profit or loss account
GJ1
1 600 00
Telephone expenses
20.3
b/d
2 400 00 Feb 28 Profit or loss account
N8
Cr
GJ1
2 400 00
N9
Cr
Dr
Rental income
20.3
20.3
Feb 28 Profit or loss account
Dr
GJ1
6 000 00 Feb 28 Balance
Trading account
20.3
b/d
6 000 00
N10
Cr
20.3
Feb 28 Inventory
Purchases
Profit or loss account
GJ1
7 200 00 Feb 28 Inventory
GJ1 108 000 00
Sales
GJ1 72 000 00
GJ1
GJ1
187 200 00
Dr
187 200 00
Profit or loss account
20.3
5 250 00
181 950 00
N11
Cr
20.3
Feb 28 Water and electricity
GJ1
14 300 00 Feb
Trading account
GJ1
72 000 00
Salaries
GJ1
25 800 00
Rental income
GJ1
6 000 00
Stationery
GJ1
1 600 00
Telephone expenses
GJ1
2 400 00
Capital (profit for the
year)
GJ1
33 900 00
78 000 00
NOTE:
The post-closing trial balance will be the same as in comprehensive example 10.1.
89
313
78 000 00
FAC1501/1
EXERCISE 10.1
11
The following totals were taken from the books of J Simpson, an attorney, at 28 February 20.7
(the end of the financial year).
90
R
91
Fee income received in cash
Fee income from services rendered on credit
160 000
80 000
92
93
94
95
Totals of operating expenses during the year
96
Salaries
Stationery
Rental expenses
Repairs to equipment
Telephone expenses
Water and electricity
90 000
8 500
40 000
3 000
6 000
5 000
97
98
99
100
101
102
REQUIRED
12
(1) Show the closing transfers in the general journal.
(2) Open the abovementioned ledger accounts in the nominal accounts section of the general ledger
and post the closing transfers to the opened ledger accounts. Postalso to the profit or loss account.
Close off all accounts.
13
SOLUTION: EXCERCISE 10.1
J SIMPSON ATTORNEY
GENERAL JOURNAL – FEBRUARY 20.7
Day
28
Details
GJ1
Fol
Profit or loss account
Water and electricity
Rental expenses
Repairs to equipment
Salaries
Stationery
Telephone expenses
Closing transfer of expense accounts
Current income
Profit or loss account
Closing transfer of income account
314
Debit
R
N9 152 500,00
N2
N3
N4
N5
N6
N7
Credit
R
5 000,00
40 000,00
3 000,00
90 000,00
8 500,00
6 000,00
N1 240 000,00
N8
240 000,00
FAC1501/1
Day
28
Details
Fol
Profit or loss account
N8
Capital
B1
Transfer of net profit (profit for the year) to
capital account
Debit
87 500,00
Credit
87 500,00
J SIMPSON ATTORNEY
103
104
105
Dr
NOMINAL ACCOUNTS SECTION
Current income (Fees received)
20.7
GJ1 240 000 00 Feb 28 Balance
Water and electricity
20.7
Feb 28 Balance
Dr
Dr
Dr
Dr
b/d
Dr
N2
240 000 00
Cr
GJ1
N3
5 000 00
Cr
GJ1
N4
40 000 00
Cr
20.7
b/d
3 000 00 Feb 28 Profit or loss account
Salaries
GJ1
N5
3 000 00
Cr
20.7
b/d
90 000 00 Feb 28 Profit or loss account
Stationery
GJ1
N6
90 000 00
Cr
20.7
b/d
8 500 00 Feb 28 Profit or loss account
Telephone expenses
20.7
Feb 28 Balance
40 000 00 Feb 28 Profit or loss account
Repairs to equipment
20.7
Feb 28 Balance
b/d
20.7
20.7
Feb 28 Balance
5 000 00 Feb 28 Profit or loss account
Rental expenses
20.7
Feb 28 Balance
Cr
20.7
b/d
20.7
Feb 28 Balance
N1
20.7
Feb 28 Profit or loss account
Dr
GENERAL LEDGER
GJ1
N7
8 500 00
Cr
20.7
b/d
6 000 00 Feb 28 Profit or loss account
315
GJ1
6 000 00
FAC1501/1
Dr
Profit or loss account
20.7
N8
Feb 28 Water and electricity
GJ1
5 000 00 Feb 28 Current income
Rental expenses
GJ1
40 000 00
Repairs to equipment
GJ1
3 000 00
Salaries
GJ1
90 000 00
Stationery
GJ1
8 500 00
Telephone expenses
GJ1
6 000 00
Capital (profit for the
year)
GJ1
87 500 00
240 000 00
14
Cr
20.7
GJ1 240 000 00
240 000 00
EXERCISE 10.2
The following trial balance was taken from the accounting records of City Outfitters at 30 November 20.5,
the end of the entity’s accounting period.
106
CITY OUTFITTERS
TRIAL BALANCE AS AT 30 NOVEMBER 20.5
Fol
Financial position section
Debits
Credits
R
R
Capital
B1
99 600,00
Drawings
B2
1 800,00
Vehicles
B3
150 000,00
Equipment
B4
30 000,00
Inventory
B5
11 250,00
Debtors control
B6
21 000,00
Bank
B7
6 750,00
Creditors control
B8
32 400,00
Sales
N1
240 000,00
Sales returns
N2
6 000,00
Cost of sales
N3
120 000,00
Advertising
N4
2 700,00
Credit losses
N5
450,00
Bank charges
N6
900,00
Interest expenses
N7
1 050,00
Packing material
N8
2 100,00
Petrol and oil
N9
7 200,00
Stationery
N10
600,00
Telephone expenses
N11
10 200,00
Nominal accounts section
372 000,00
316
372 000,00
FAC1501/1
REQUIRED
15
Take the information provided into consideration and do the following:
(1) Open the ledger accounts with the given balances.
(2) Show all the journal entries for the closing entries.
(3) Post the journal to the applicable ledger accounts. Balance or close off these accounts
where necessary.
(4) Prepare the post-closing trial balance.
SOLUTION: EXCERCISE 10.2
16
CITY OUTFITTERS
GENERAL JOURNAL – NOVEMBER 20.5
Day
30
Details
GJ1
Fol
Debit
Credit
R
R
Trading account
N12 120 000,00
Cost of sales
Closing transfer
Sales
Sales returns
Closing transfer
Sales
Trading account
Closing transfer
Trading account
Profit or loss account
Transfer of gross profit
Profit or loss account
Advertising
Credit losses
Bank charges
Interest expenses
Packing materials
Petrol and oil
Stationery
Telephone expenses
Closing transfer of expense accounts
Profit or loss account
Capital
Transfer of net profit (profit for the year) to
capital account
N3
317
N1
N2
120 000,00
6 000,00
6 000,00
N1 234 000,00
N12
234 000,00
N12 114 000,00
N13
114 000,00
N13
N4
N5
N6
N7
N8
N9
N10
N11
25 200,00
N13
B1
88 800,00
2 700,00
450,00
900,00
1 050,00
2 100,00
7 200,00
600,00
10 200,00
88 800,00
FAC1501/1
Day
30
Details
Capital
Drawings
Transfer of drawings to capital account
107
Fol
B1
B2
Debit
1 800,00
Credit
1 800,00
CITY OUTFITTERS
108
GENERAL LEDGER
FINANCIAL POSITION SECTION
109
Dr
Capital
20.5
B1
Cr
b/d
99 600 00
GJ1
88 800 00
20.5
Nov 30 Drawings
Balance
GJ1
1 800 00 Nov 30 Balance
c/d 186 600 00
Profit or loss account
188 400 00
188 400 00
Dec
Dr
Drawings
20.5
Nov 30 Balance
Dr
1 Balance
b/d
186 600 00
B2
Cr
GJ1
1 800 00
B3
Cr
B4
Cr
B5
Cr
20.5
b/d
1 800 00 Nov 30 Capital
Vehicles
20.5
Nov 30 Balance
b/d 150 000 00
Dr
Equipment
20.5
Nov 30 Balance
Dr
b/d
30 000 00
Inventory
20.5
Nov 30 Balance
b/d
11 250 00
110
318
FAC1501/1
Dr
Debtors control
B6
Cr
B7
Cr
B8
Cr
b/d
32 400 00
N1
Cr
b/d
240 000 00
20.5
Nov 30 Balance
b/d
21 000 00
Dr
Bank
20.5
Nov 30 Balance
b/d
Dr
6 750 00
Creditors control
20.5
Nov 30 Balance
111
Dr
NOMINAL ACCOUNTS SECTION
Sales
20.5
Nov 30 Sales returns
Trading account
20.5
GJ1
6 000 00 Nov 30 Balance
GJ1 234 000 00
240 000 00
Dr
Sales returns
20.5
Nov 30 Balance
Dr
240 000 00
N2
Cr
GJ1
6 000 00
N3
Cr
20.5
b/d
6 000 00 Nov 30 Trading account
Cost of sales
20.5
20.5
Nov 30 Balance
b/d 120 000 00 Nov 30 Trading account
GJ1
120 000 00
Dr
Advertising
N4
Cr
GJ1
2 700 00
Credit losses
20.5
N5
Cr
450 00 Nov 30 Profit or loss account
GJ1
450 00
20.5
Nov 30 Balance
Dr
20.5
Nov 30 Balance
20.5
b/d
b/d
2 700 00 Nov 30 Profit or loss account
319
FAC1501/1
Dr
20.5
Bank charges
20.5
Nov 30 Balance
b/d
Dr
20.5
b/d
Dr
20.5
Cr
GJ1
900 00
Interest expenses
20.5
N7
Cr
1 050 00 Nov 30 Profit or loss account
GJ1
1 050 00
900 00 Nov 30 Profit or loss account
Nov 30 Balance
N6
Packing material
20.5
Nov 30 Balance
b/d
Dr
20.5
2 100 00 Nov 30 Profit or loss account
Petrol and oil
20.5
Cr
GJ1
2 100 00
N9
Cr
GJ1
7 200 00
Nov 30 Balance
b/d
Dr
20.5
Stationery
20.5
N10
Cr
Nov 30 Balance
b/d
GJ1
600 00
N11
Cr
GJ1
10 200 00
N12
Cr
GJ1
234 000 00
Dr
20.5
7 200 00 Nov 30 Profit or loss account
N8
600 00 Nov 30 Profit or loss account
Telephone expenses
20.5
Nov 30 Balance
Dr
b/d
10 200 00 Nov 30 Profit or loss account
Trading account
20.5
20.5
Nov 30 Cost of sales
Profit or loss account
GJ1 120 000 00 Nov 30 Sales
GJ1 114 000 00
234 000 00
234 000 00
112
320
FAC1501/1
Dr
Profit or loss account
20.5
N13
Cr
GJ1
114 000 00
20.5
Nov 30 Advertising
Credit losses
GJ1
GJ1
2 700 00 Nov 30 Trading account
450 00
Bank charges
GJ1
900 00
Interest expenses
GJ1
1 050 00
Packing material
GJ1
2 100 00
Petrol and oil
GJ1
7 200 00
Stationery
GJ1
600 00
Telephone expenses
GJ1
10 200 00
Capital (profit for the
year)
GJ1
88 800 00
114 000 00
114 000 00
CITY OUTFITTERS
POST-CLOSING TRIAL BALANCE AS AT 28 FEBRUARY 20.5
Fol
Debit
Credit
R
R
Financial position section
Capital
B1
186 600,00
Vehicles
B3
150 000,00
Equipment
B4
30 000,00
Inventory
B5
11 250,00
Debtors control
B6
21 000,00
Bank
B7
6 750,00
Creditors control
B10
32 400,00
219 000,00
321
219 000,00
FAC1501/1
EXERCISE 10.3
17
The following information was taken from the accounting records of J Speedo Retailers at 28 February 20.3,
the end of the entity’s accounting period.
113
R
114
Drawings 8 000
Sales
210 000
Sales returns
5 000
Purchases
40 500
Purchases returns
3 200
Inventory (opening)
4 800
Inventory (closing)
6 100
Water and electricity
4 800
Rental expenses
12 000
Stationery
1 200
Telephone expenses
2 900
Wages
6 600
115
116
117
118
119
120
121
122
123
124
125
126
REQUIRED
18
(1) Prepare the journal entries taking into account opening and closing inventories.
(2) Prepare the closing journal entries.
322
FAC1501/1
SOLUTION: EXCERCISE 10.3
19
J SPEEDO RETAILERS
GENERAL JOURNAL – FEBRUARY 20.3
Day Details
28
GJ1
Fol
Trading account
Inventory
Transfer opening inventory
Inventory
Trading account
Taking closing inventory into account
Sales
Sales returns
Closing transfer
Purchases returns
Purchases
Closing transfer
Trading account
Purchases
Closing transfer
Sales (R210 000 – R5 000)
Trading account
Closing transfer
Trading account
Profit or loss account
Transfer of gross profit
Profit or loss account
Water and electricity
Rental expenses
Stationery
Telephone expenses
Wages
Closing transfer of expense accounts
Profit or loss account
Capital
Transfer of net profit (profit for the year)
to capital account
Capital
Drawings
Transfer of drawings to capital account
323
Debit
R
4 800,00
Credit
R
4 800,00
6 100,00
6 100,00
5 000,00
5 000,00
3 200,00
3 200,00
37 300,00
37 300,00
205 000,00
205 000,00
169 000,00
169 000,00
27 500,00
4 800,00
12 000,00
1 200,00
2 900,00
6 600,00
141 500,00
141 500,00
8 000,00
8 000,00
FAC1501/1
20
EXERCISE 10.4
The following information was taken from the accounting records of Digi Warehouse at 28 February 20.5,
the end of the financial year.
127
DIGI WAREHOUSE
TRIAL BALANCE AS AT 28 FEBRUARY 20.5
Debit
Credit
R
R
Capital
63 600
Drawings
3 000
Vehicles
60 000
Equipment
40 000
Debtors control
12 000
Inventory
8 000
Creditors control
16 000
Sales
250 000
Sales returns
5 000
Cost of sales
120 000
Municipal services
17 400
Telephone expenses
10 200
Repairs: Vehicles
4 100
Salaries
48 000
Postage
1 000
Credit losses
500
Stationery
700
Credit losses recovered
300
329 900
21
329 900
REQUIRED
(1) Write off an additional amount of R400 as credit losses.
(2) Journalise the year-end adjustment and the closing transfers.
(3) Open the accounts in the general ledger and post the journals to the ledger accounts. Balance
or close off the accounts where necessary.
(4) Prepare the post-closing trial balance.
324
FAC1501/1
SOLUTION: EXCERCISE 10.4
22
DIGI WAREHOUSE
GENERAL JOURNAL – FEBRUARY 20.5
Day
28
GJ1
Details
Fol
Credit losses
N9
Debtors control
Further amount written off.
Voucher 142
B5
Trading account
Cost of sales
Closing transfer
Sales
Sales returns
Closing transfer
Sales
Trading account
Closing transfer
Trading account
Profit or loss account
Transfer to gross profit
Profit or loss account
Municipal services
Telephone expenses
Repairs: Vehicles
Salaries
Postage
Credit losses (500+400)
Stationery
Closing transfer of expense accounts
Credit losses recovered
Profit or loss account
Closing transfer of income account
Profit or loss account
Capital
Transfer of net profit (profit for the
year)
N12
N3
120 000,00
N1
N2
5 000,00
N1
N12
245 000,00
N12
N13
125 000,00
N13
N4
N5
N6
N7
N8
N9
N10
82 300,00
N11
N13
300,00
N13
B1
43 000,00
B1
B2
3 000,00
Capital
Drawings
Transfer of drawings
325
Debit
R
400,00
Credit
R
400,00
120 000,00
5 000,00
245 000,00
125 000,00
17 400,00
10 200,00
4 100,00
48 000,00
1 000,00
900,00
700,00
300,00
43 000,00
3 000,00
FAC1501/1
128
129
130
Dr
20.5
Feb 28 Drawings
Balance
DIGI WAREHOUSE
GENERAL LEDGER
FINANCIAL POSITION SECTION
Capital
20.4
GJ1
3 000 00 Mar 1 Balance
c/d 103 600 00 20.5
Feb 28 Profit or loss account
B1
Cr
b/d
63 600 00
GJ1
43 000 00
106 600 00
106 600 00
Mar
Dr
1 Balance
Drawings
20.5
b/d
B2
b/d
3 000 00 Feb 28 Capital
Dr
20.5
Feb 28 Balance
Vehicles
Dr
20.5
Feb 28 Balance
Equipment
Dr
20.5
Feb 28 Balance
b/d
b/d
GJ1
3 000 00
B3
Cr
B4
Cr
B5
Cr
GJ1
c/d
400 00
11 600 00
60 000 00
40 000 00
Debtors control
20.5
b/d 12 000 00 Feb 28 Credit losses
Balance
12 000 00
1 Balance
Dr
20.5
Feb 28 Balance
Dr
Cr
20.5
Feb 28 Balance
Mar
103 600 00
b/d
11 600 00
Inventory
b/d
12 000 00
B6
Cr
B7
Cr
b/d
16 000 00
8 000 00
Creditors control
20.5
Feb 28 Balance
326
FAC1501/1
131
Dr
20.5
Feb 28 Sales returns
Trading account
NOMINAL ACCOUNTS SECTION
Sales
20.5
GJ1
5 000 00 Feb 28 Balance
GJ1 245 000 00
N1
Cr
b/d
250 000 00
250 000 00
Dr
20.5
Feb 28 Balance
Sales returns
20.5
b/d
5 000 00 Feb 28 Sales
Dr
20.5
Feb 28 Balance
Cost of sales
20.5
b/d 120 000 00 Feb 28 Trading account
Dr
20.5
Feb 28 Balance
Municipal services
20.5
b/d
17 400 00 Feb 28 Profit or loss account
Dr
20.5
Feb 28 Balance
Telephone expenses
20.5
b/d
10 200 00 Feb 28 Profit or loss account
Dr
20.5
Feb 28 Balance
Repairs: Vehicles
20.5
b/d
4 100 00 Feb 28 Profit or loss account
Dr
20.5
Feb 28 Balance
Salaries
20.5
b/d 48 000 00 Feb 28 Profit or loss account
Dr
20.5
Feb 28 Balance
Postage
20.5
b/d
1 000 00 Feb 28 Profit or loss account
327
250 000 00
N2
Cr
GJ1
5 000 00
N3
Cr
GJ1
120 000 00
N4
Cr
GJ1
17 400 00
N5
Cr
GJ1
10 200 00
N6
Cr
GJ1
4 100 00
N7
Cr
GJ1
48 000 00
N8
Cr
GJ1
1 000 00
FAC1501/1
Dr
20.5
Feb 28 Balance
Debtors control
Dr
20.5
Feb 28 Balance
Credit losses
20.5
b/d
500 00 Feb 28 Profit or loss account
400 00
900 00
Stationery
20.5
b/d
700 00 Feb 28 Profit or loss account
N9
Cr
GJ1
900 00
900 00
N10
Cr
GJ1
700 00
Dr
Credit losses recovered
20.5
20.5
Feb 28 Profit or loss account GJ1
300 00 Feb 28 Balance
N11
Cr
b/d
300 00
Dr
Trading account
20.5
20.5
Feb 28 Cost of sales
GJ1 120 000 00 Feb 28 Sales
Profit or loss account GJ1 125 000 00
N12
Cr
GJ1 245 000 00
245 000 00
Dr
20.5
Feb 28 Municipal services
245 000 00
Profit or loss account
GJ1
20.5
17 400 00 Feb 28 Trading account
Telephone expenses
GJ1
10 200 00
Repairs: Vehicles
GJ1
4 100 00
Salaries
GJ1
48 000 00
Postage
GJ1
1 000 00
Credit losses
GJ1
900 00
Stationery
GJ1
700 00
Capital (profit for the
year)
GJ1
43 000 00
125 300 00
132
328
N13
Cr
GJ1 125 000 00
Credit losses
recovered
GJ1
300 00
125 300 00
FAC1501/1
DIGI WAREHOUSE
POST-CLOSING TRIAL BALANCE AS AT 28 FEBRUARY 20.5
Fol
Debit
Credit
R
R
Financial position section
Capital
103 600,00
Vehicles
60 000,00
Equipment
40 000,00
Debtors control
11 600,00
Inventory
8 000,00
Creditors control
16 000,00
119 600,00
329
119 600,00
FAC1501/1
SELF-ASSESSMENT
23
After you have worked through this learning unit, are you
able to:
133
zz
zz
zz
zz
zz
zz
zz
zz
134
135
discuss the difference between gross profit and net profit?
describe how gross profit and net profit (profit for the year)
are calculated?
do the closing entries at the end of a financial year for a
retail entity using the perpetual inventory system?
do the closing entries at the end of a financial year for a
retail entity using the periodic inventory system?
do the closing entries at the end of a financial year for a
service entity?
prepare a trading account?
prepare a profit or loss account?
prepare a post-closing trial balance?
If you have marked all J you may continue to the next learning unit .
If you have marked any K you have to revise that specific section.
136
If you have marked any L you have to re-study that specific section.
330
J
K
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FAC1501
LEARNING UNIT 11
FINANCIAL STATEMENTS
OF A SOLE TRADER
Introductory Financial
Accounting
FAC1501/1
OVERVIEW
1
Learning outcomes.......................................................................................................................... 333
Key concepts................................................................................................................................... 333
Assessment criteria......................................................................................................................... 333
11.1
Year-end adjustments...........................................................................................................334
11.1.1
Introduction...............................................................................................................334
11.1.2
Prepayments and receivables and accruals of income and
expenses..................................................................................................................334
Accrued expenses....................................................................................334
11.1.2.2
Prepaid expenses.....................................................................................336
11.1.2.3
Accrued income........................................................................................337
11.1.2.4
Income received in advance.....................................................................338
11.1.3
Consumable stores on hand....................................................................................340
11.1.4
Credit losses and allowance for credit losses.......................................................... 341
11.1.5
11.1.6
11.2
11.1.2.1
11.1.4.1
Credit losses............................................................................................. 341
11.1.4.2
Allowance for credit losses.......................................................................343
Depreciation.............................................................................................................348
11.1.5.1
Methods of calculating depreciation.........................................................348
11.1.5.2
Accounting entries for depreciation..........................................................350
Summary of flow of accounting procedures when year-end
adjustments need to be made..................................................................................352
Financial statements............................................................................................................. 361
11.2.1 Introduction............................................................................................................... 361
11.2.2 Financial performance as measured by the statement of profit or loss and other
comprehensive income............................................................................................362
11.2.3 Financial position as measured by the statement of financial
position.....................................................................................................................364
11.2.4 Statement of changes in equity................................................................................366
11.2.5 Year-end adjustments............................................................................................... 372
Self-assesment................................................................................................................................ 384
332
FAC1501/1
LEARNING OUTCOMES
After studying this learning unit you should be able to:
1
1
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calculate and do adjustments at year-end with regard to accrued expenses, prepaid expenses,
accrued income and income received in advance
calculate and do adjustments with regard to consumable stores
calculate and do adjustments with regard to depreciation of non-current assets
calculate and do adjustments with regard to credit losses and allowance for credit losses
prepare a profit or loss account after taking all possible adjustments into consideration
prepare a statement of profit or loss and other comprehensive income
prepare a statement of financial position
prepare a statement of changes in equity
KEY CONCEPTS
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Adjustments
Accrued expenses
Pre-paid expenses
Accrued income
Income received in advance
Consumable stores
Depreciation
Credit losses
Allowance for credit losses
Statement of profit or loss and other comprehensive income
Statement of financial position
Statement of changes in equity
ASSESSMENT CRITERIA
zz
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You can correctly calculate and do adjustments at year-end with regard to
accrued expenses, pre-paid expenses, accrued income and income received
in advance.
You can correctly calculate and do adjustments with regard to consumable stores.
You can correctly calculate and do adjustments with regard to depreciation of
non-current assets.
You can correctly calculate and do adjustments with regard to credit losses and
allowance for credit losses.
You can correctly prepare a statement of profit or loss and other comprehensive
income for a sole trader.
You can correctly prepare a statement of financial position and notes for a
sole trader.
You can correctly prepare a statement of changes in equity for a sole trader.
333
FAC1501/1
11.1
YEAR-END ADJUSTMENTS
11.1.1
Introduction
At the end of every accounting period, the business entity prepares a trading account and a profit or
loss account to ascertain the profit or loss made during the accounting period. It is important to realise
that the profit or loss account indicates the performance of the entity for a particular financial year (see
learning unit 10).
2
11.1.2
Prepayments and receivables and accruals of income and expenses
It usually happens that at the end of the year, some expenses incurred by the entity will be outstanding
(ie due, but unpaid). The entity may also have paid for some expenses in advance. It will therefore
be necessary to adjust such expenses in order to determine the actual expenses incurred for the
accounting period under review.
3
Similarly, the entity may have rendered a specified service during the year for which it had received
no payment (income). It may also happen that the entity had been paid in advance for a service it is
yet to render. Adjustments will have to be made in such cases in order to establish the correct income
the entity earned during the accounting period under review.
4
11.2.2.1 Accrued expenses
These are expenses which have been incurred by an entity but which have not yet been paid by the
end of the accounting period. Examples are salaries owing to staff, rent payable to the landlord and
insurance premiums outstanding. Accrued expenses are shown as current liabilities.
5
When adjusting accruals and prepayments, it is necessary to
6
zz
zz
zz
identify the specific account to be adjusted
determine the outstanding amount or the prepaid amount
record the adjustment (this is normally done in the general journal)
Accrued and prepaid expenses and accrued income and income received in advance are described
as current operating items. To simplify their adjustment, “intermediary” or “notional” accounts are
used to facilitate the recording process. For example, rent outstanding will be credited to an accrued
expenses account and current income due will be debited to an accrued income account, and so
on. (See the following examples.)
7
EXAMPLE 11.1: ACCRUED EXPENSES
2
The financial year of John Seepe, a panel beater, ends on 31 December each year. Seepe Panel
Beaters has a monthly rent expense of R250. The records of the entity showed that rent was paid for
eight months during the financial year ended 31 December 20.8.
8
9
334
FAC1501/1
REQUIRED
3
(1) Record the necessary adjustment and the closing entry in the general journal of Seepe
Panel Beaters.
(2) Post the journal entry to the general ledger of Seepe Panel Beaters.
4
SOLUTION: EXAMPLE 11.1
SEEPE PANEL BEATERS
GENERAL JOURNAL – DECEMBER 20.8
GJ1
Day Details
31
Fol
Debit
R
Credit
R
Rental expenses
Accrued expenses
Adjustment for rent owing
N10
B30
1 000
Profit or loss account
Rental expenses
Closing transfer
N20
N10
3 000
1 000
3 000
SEEPE PANEL BEATERS
GENERAL LEGDER
Dr
20.8
Dec 31 Bank*
Accrued expenses
Rental expenses
CPJ
GJ1
20.8
2 000 Dec 31 Profit or loss account
1 000
N10
Cr
GJ1
3 000
3 000
10
3 000
* This is the total of all the payments regarding rent made during the financial year and is given in this example
for the sake of completeness. In the actual recording of these payments it would have been recorded on
a monthly basis on the date the payment was made. The entries would have originally been recorded in
the cash payments journal before being posted to the appropriate ledger account. This line of illustration is
followed in all subsequent examples regarding adjustments.
Dr
20.8
Dec 31 Balance
Accrued expenses
c/d
20.8
1 000 Dec 31 Rental expenses
B30
Cr
GJ1
1 000
1 000
1 000
20.9
Jan
11
335
1 Balance
b/d
1 000
FAC1501/1
Dr
Profit or loss account
20.8
Dec 31 Rental expenses
GJ1
N20
Cr
3 000
11.1.2.2 Prepaid expenses
The nature of certain expenses may compel an entity to pay for them in advance. Insurance premiums
are good examples of such expenses. Prepaid expenses are shown as current assets.
12
EXAMPLE 11.2: PREPAID EXPENSES
5
Traxi Solutions paid R9 000 for insurance on 1 January 20.8. This payment was for insurance cover
for 18 months. The financial year of Traxi Solutions ends on 31 December each year.
13
REQUIRED
6
(1) Determine the amount that was prepaid for insurance.
(2) Record the necessary adjustment and the closing entry in the general journal of Traxi Solutions.
(3) Post the journal entries to the general ledger of Traxi Solutions.
SOLUTION: EXAMPLE 11.2
7
Monthly insurance cover
Insurance expense
Prepaid expense
14
=
=
=
R9 000/18 = R500
R500 x 12 = R6 000
R500 x 6 = R3 000
TRAXI SOLUTIONS
GENERAL JOURNAL– DECEMBER 20.8
Day
31
GJ1
Details
Fol
Prepaid expenses
Insurance
Adjustment for prepaid insurance
Profit or loss account
Insurance
Closing transfer
B31
N11
3 000
N20
N11
6 000
336
Debit
R
Credit
R
3 000
6 000
FAC1501/1
TRAXI SOLUTIONS
15
16
Dr
GENERAL LEDGER
Insurance
20.8
N11
Cr
GJ1
GJ1
3 000
6 000
20.8
Dec 31 Bank
CPJ
9 000 Dec 31 Prepaid expenses
Profit or loss account
9 000
Dr
9 000
Prepaid expenses
20.8
B31
Cr
c/d
3 000
20.8
Dec 31 Insurance
GJ1
3 000 Dec 31 Balance
3 000
3 000
20.9
Jan
1 Balance
Dr
b/d
3 000
Profit or loss account
N20
Cr
20.8
Dec 31 Insurance
GJ1
6 000
11.1.2.3 Accrued income
This is income earned by the entity in respect of services rendered but for which no payment has been
received. Accrued income is shown as current assets.
17
EXAMPLE 11.3: ACCRUED INCOME
8
The commission earned by Bero Stores for selling newspapers and magazines was R12 500 for the
year ended 31 December 20.8. Bero Stores received R9 850 during the year.
18
REQUIRED
9
(1) Record the necessary adjustment and the closing entry in the general journal of Bero Stores.
(2) Post the journal entries to the general ledger of Bero Stores.
337
FAC1501/1
SOLUTION: EXAMPLE 11.3
10
BERO STORES
GENERAL JOURNAL – DECEMBER 20.8
Day Details
31
GJ1
Fol
Accrued income
Commission income
Adjustment for commission earned but not yet
received (R12 500 – R9 850)
Commission income
Profit or loss account
Closing transfer
19
Debit
R
Credit
R
B2
N14
2 650
N14
N20
12 500
2 650
12 500
BERO STORES
GENERAL LEDGER
20
Dr
Commission income
20.8
N14
Cr
CRJ
GJ1
9 850
2 650
20.8
Dec 31 Profit or loss account
GJ1
12 500 Dec 31 Bank
Accrued income
12 500
Dr
12 500
Accrued income
20.8
B2
Cr
c/d
2 650
20.8
Dec 31 Commission income
GJ1
2 650 Dec 31 Balance
2 650
2 650
20.9
Jan
Dr
1 Balance
b/d
2 650
Profit or loss account
N20
Cr
GJ1
12 500
20.8
Dec 31 Commission income
11.1.2.4 Income received in advance
Income received in advance is not yet earned so it must be deducted from total income to arrive
at the correct income earned during the financial year. Income received in advance is shown as
current liabilities.
21
22
338
FAC1501/1
EXAMPLE 11.4: INCOME RECEIVED IN ADVANCE
11
ABC Cash Store sub-lets part of its premises for a monthly rental of R280. During the financial year
ended 31 December 20.8 the tenant made a total payment of R3 640.
23
12
REQUIRED
(1) Determine the amount that was received in advance for rental.
(2) Record the necessary adjustment and the closing entry in the general journal of ABC Cash Store.
(3) Post the journal entries to the general ledger of ABC Cash Store.
13
SOLUTION: EXAMPLE 11.4
Rent received for the year
Rent received in advance
=
=
24
R280 x 12
(R3 640 – R3 360)
=
=
R3 360
R280
ABC CASH STORE
GENERAL JOURNAL – DECEMBER 20.8
Day
31
GJ1
Details
Fol
Debit
R
Rental income
Income received in advance
Adjustment for income received in advance
Rental income
Profit or loss account
Closing transfer
N15
280
B36
N15
N20
3 360
Credit
R
280
3 360
ABC CASH STORE
25
GENERAL LEDGER
26
Dr
Rental income
Cr
20.8
20.8
Dec 31 Income received in
advance
Profit or loss account
N15
Dec 31 Bank
GJ1
GJ1
CRJ
3 640
280
3 360
3 640
3 640
27
339
FAC1501/1
Dr
Income received in advance
20.8
Dec 31 Balance
B36
Cr
GJ1
280
20.8
c/d
280 Dec 31 Rental income
280
280
20.9
Jan
Dr
1 Balance
Profit or loss account
b/d
280
N20
Cr
GJ1
3 360
20.8
Dec 31 Rental income
11.1.3
Consumable stores on hand
You might have wondered why items such as stationery are classified as expenses. Surely stationery
has value? The reason it is regarded as an expense and not an asset, is because it is used up
(consumed) within the entity within one year.
28
If an entity was to sell stationery, it would be regarded as inventory. Since it would not be used up
within the entity, it would thus not be regarded as an expense, but as inventory (an asset). Remember
though that if you were to see a stationery account in a trial balance, it would always be classified as
an expense. This represents the stationery used during the current period.
29
EXAMPLE 11.5: CONSUMABLE STORES ON HAND
14
XXX Traders bought stationery valued at R5 000 during the financial year ended 31 December 20.8.
This was recorded in the stationery account as an expense of R5 000. After doing a physical inventory
count at year-end it was found that stationery valued at R1 000 was still unused. This means that
the full R5 000 of stationery they have bought during the financial year have not been used up. If
XXX Traders was to close the entity at this date, would it be able to sell the stationery on the shelves
(R1 000)? The answer to this question is surely YES!
30
For this reason an adjustment to the stationery account is necessary. The unused stationery to the
value of R1 000 is regarded as a current asset.
31
REQUIRED
15
(1) Record the necessary adjustment and the closing entry in the general journal of XXX Traders.
(2) Post the journal entries to the general ledger of XXX Traders.
32
340
FAC1501/1
SOLUTION: EXAMPLE 11.5
16
XXX TRADERS
GENERAL JOURNAL – DECEMBER 20.8
GJ1
Day Details
31
Fol
Consumable stores on hand
Stationery
Adjustment for stationery on hand
Profit or loss account
Stationery
Closing transfer
Debit
R
Credit
R
B16
N37
1 000
N20
N37
4 000
1 000
4 000
XXX TRADERS
GENERAL LEDGER
Dr
Stationery
20.8
N37
Cr
GJ1
GJ1
1 000
4 000
20.8
Dec 31 Bank
CPJ
5 000 Dec 31 Consumable stores
on hand
Profit or loss account
5 000
Dr
5 000
Consumable stores on hand
20.8
B16
Cr
c/d
1 000
20.8
Dec 31 Stationery
GJ1
1 000 Dec 31 Balance
1 000
1 000
20.9
Jan
1 Balance
Dr
b/d
1 000
Profit or loss account
N20
Cr
20.8
Dec 31 Stationery
11.1.4
GJ1
4 000
Credit losses and allowance for credit losses
11.1.4.1 Credit losses
Any entity which grants credit to its customers runs the risk of having some of those customers not
paying their debts. If it is expected that the amount due will not be paid by a customer, then this amount
must be removed from the debtors account. The amount written off is disclosed as an expense in the
profit or loss account.
33
341
FAC1501/1
Accounting entries for credit losses
34
When a debt is written off, the customer’s individual account in the debtors subsidiary ledger (and then
also the debtors control account in the general ledger) is credited.
35
The amount is debited to a credit losses account (an expense account) which is closed off to the profit
or loss account.
36
EXAMPLE 11.6: CREDIT LOSSES
17
37
On 1 January 20.8, Rek Transport had the following debtors on its list of debtors:
Kargent
Tango
R250
R185
38
On 31 August 20.8, it was decided to write the debts off as irrecoverable, since it was expected that
these amounts will not be paid. The financial year ends on 31 December 20.8
39
REQUIRED
18
(1) Record the necessary adjustment and the closing entry in the general journal of Rek Transport.
(2) Post the journal entries to the general ledger of Rek Transport.
SOLUTION: EXAMPLE 11.6
19
REK TRANSPORT
GENERAL JOURNAL - AUGUST 20.8
Day Details
31
GJ1
Fol
Credit losses
Debtors control account
* Kargent (subsidiary ledger)
* Tango (subsidiary ledger)
Credit losses recognised
N38
B9
Debit
R
435
GENERAL JOURNAL - DECEMBER 20.8
Day Details
31
N20
N38
342
435
250
185
GJ1
Fol
Profit or loss account
Credit losses
Closing transfer
Credit
R
Debit
R
435
Credit
R
435
FAC1501/1
* NOTE:
The recognition of credit losses is done in the general ledger by debiting credit losses and crediting
the debtors control account. It is also important to update the individual accounts of the debtors
with the transaction where credit losses are recognised. This is done in the subsidiary ledger,
where the individual debtors’ accounts will be credited with credit losses.
REK TRANSPORT
40
41
Dr
GENERAL LEDGER
Credit losses
20.8
N38
Cr
GJ1
435
20.8
Aug 31 Debtors control
account
GJ1
435
Dec 31 Profit or loss
account
435
Dr
435
Debtors control
B9
Cr
GJ1
435
N20
Cr
20.8
Aug 31 Credit losses
Dr
Profit or loss account
20.8
Dec 31 Credit losses
GJ1
435
11.1.4.2 Allowance for credit losses
In order to show the correct amount of total debtors on the statement of financial position, it is prudent
for the entity to estimate how much of the debts owed to it will be paid.
42
The reason for this is that in practice debtors often default on their payments. In line with the accounting
concept of prudence, entities should make allowance for debts they expect will not be paid and adjust
the accounts accordingly.
43
The entity should assess whether any events have occurred that may result in non-payment of
outstanding amounts. If such events have occurred, the recoverable debtors balance should be
estimated and an allowance for credit losses account should be created to reduce the carrying amount
of the debtors account to its recoverable amount.
44
Since the recoverable debtors balance fluctuates annually, the allowance for credit losses account will
also fluctuate annually.
45
It is important to understand that the allowance for credit losses account is normally used when
non-payments are expected but it is difficult to identify the specific debtors who will default on their
payments.
46
343
FAC1501/1
Accounting entries
47
When an allowance for credit losses is created or increased, the credit losses account (expense) is
debited and an allowance for credit losses account (negative asset) is credited. In the statement of
financial position, the allowance for credit losses is disclosed by deducting it from the debtors control
balance. It is shown as part of trade and other receivables.
48
NOTE:
Because it is an allowance for credit losses that is made, there will be no entry to any individual
debtor’s account.
20
EXAMPLE 11.7: ALLOWANCE FOR CREDIT LOSSES
Swanty Stores commenced business on 1 January 20.6. The entity serves both cash and credit
customers. It was determined that the allowance for credit losses account should amount to R2 325 at
31 December 20.6. Debtors control as at 31 December 20.6 amounts to R15 500.
49
21
REQUIRED
(1)
Record the necessary adjustment and the closing entry in the general journal of Swanty Stores.
(2)
Post the journal entries to the general ledger of Swanty Stores.
SOLUTION: EXAMPLE 11.7
22
SWANTY STORES
GENERAL JOURNAL – DECEMBER 20.6
Day Details
31
GJ1
Fol
Debit
R
Credit losses
Allowance for credit losses
Create an allowance for credit losses at year-end
N18
B38
2 325
Profit or loss account
Credit losses
Closing transfer
N20
N18
2 325
50
344
Credit
R
2 325
2 325
FAC1501/1
51
SWANTY STORES
52
Dr
GENERAL LEDGER
Allowance for credit losses
20.6
B38
Cr
GJ1
2 325
20.6
Dec 31 Balance
c/d
2 325 Dec 31 Credit losses
2 325
2 325
20.7
Jan
Dr
1 Balance
Credit losses
b/d
2 325
N18
Cr
GJ1
2 325
20.6
20.6
Dec 31 Allowance for credit
losses
GJ1
2 325
Dec 31 Profit or loss
account
2 325
Dr
Profit or loss account
2 325
N20
Cr
20.8
Dec 31 Credit losses
23
GJ1
2 325
EXAMPLE 11.8: INCREASING THE ALLOWANCE FOR CREDIT LOSSES
ACCOUNT
It is now one year later and Swanty Stores is at the end of the next financial year, 31 December 20.7.
The balance on the debtors control account is R20 000. Swanty Stores determined that the allowance
for credit losses account should amount to R3 000 at 31 December 20.7.
53
24
REQUIRED
(1) Record the necessary adjustment and the closing entry in the general journal of Swanty Stores.
(2) Post the journal entries to the general ledger of Swanty Stores.
54
345
FAC1501/1
SOLUTION: EXAMPLE 11.8
25
55
Calculation
56
R
Allowance for credit losses account 20.7
3 000)
Allowance for credit losses account 20.6
(2 325)
57
58
59
So the allowance for credit losses account must increase with
675)
SWANTY STORES
GENERAL JOURNAL – DECEMBER 20.7
Day
31
GJ1
Details
Fol
Debit
R
Credit
R
Credit losses
Allowance for credit losses
Adjusting the allowance for credit losses
N18
B38
675
Profit or loss account
Credit losses
Closing transfer
N20
N18
675
675
675
SWANTY STORES
60
61
Dr
GENERAL LEDGER
Allowance for credit losses
20.7
Dec 31 Balance
B38
Cr
b/d
GJ1
2 325
675
20.7
c/d
3 000 Jan 1 Balance
Dec 31 Credit losses
3 000
3 000
20.8
Jan
Dr
Credit losses
20.7
Dec 31 Allowance for credit
losses
1 Balance
b/d
3 000
N18
Cr
GJ1
675
20.7
Dec 31 Profit or loss account
GJ1
675
675
675
62
346
FAC1501/1
Dr
Profit or loss account
N20
Cr
20.8
Dec 31 Credit losses
26
63
GJ1
675
EXAMPLE 11.9: DECREASING THE ALLOWANCE FOR CREDIT LOSSES
Kamdo Services had the following balances on 31 December 20.8:
64
R
Allowance for credit losses (1 January 20.8)
4 210
Debtors control 38 160
65
Kamdo Services determined that the allowance for credit losses account should amount to R3 816 at
31 December 20.8.
27
REQUIRED
(1) Record the necessary adjustment and the closing entry in the general journal of Kamdo Services.
(2) Post the journal entries to the general ledger of Kamdo Services.
28
66
SOLUTION: EXAMPLE 11.9
Calculation
R
Allowance for credit losses account 20.8
3 816)
Allowance for credit losses account 20.7
(4 210)
So the allowance for credit losses account must decrease by
(394)
67
68
69
70
KAMDO SERVICES
GENERAL JOURNAL – DECEMBER 20.8
Day
31
GJ1
Details
Fol
Allowance for credit losses
Credit losses
Adjusting the allowance for credit losses
B38
N18
394
Credit losses
Profit or loss account
Closing transfer
N18
N20
394
347
Debit
R
Credit
R
394
394
FAC1501/1
KAMDO SERVICES
71
72
Dr
GENERAL LEDGER
Allowance for credit losses
B38
Cr
b/d
4 210
20.8
20.8
Dec 31 Credit losses
Balance
GJ1
c/d
394 Jan
3 816
1 Balance
4 210
4 210
20.9
Jan
Dr
1 Balance
Credit losses
20.8
b/d
3 816
N18
Cr
GJ1
394
20.8
Dec 31 Profit or loss account
GJ1
394 Dec 31 Allowance for credit
losses
394
Dr
394
Profit or loss account
N20
Cr
GJ1
394
20.8
Dec 31 Credit losses
11.1.5
Depreciation
When an entity buys an asset which is intended to be used in the entity for more than one financial
year, that asset is described as a non-current asset. Through their continuous use, these non-current
assets lose value through wear and tear. This loss of value is known as depreciation. Depreciation is
calculated for each accounting period using an agreed method of depreciation. The original cost of
the asset is adjusted based on the depreciation calculated. The adjusted value of the asset is shown
in the books as the carrying amount (book value).
73
Depreciation is an expense which allows for the matching of the original cost of the non-current asset
against income generated by the asset. If the asset was used for only a part of the accounting period,
the depreciation is calculated on the number of months for which the asset was used.
74
11.1.5.1 Methods of calculating depreciation
An entity can use several methods of depreciation to determine the amount of depreciation
to be written off on a specific non-current asset. Some of the commonly used methods are the straightline (fixed instalment) method and the reducing-balance method.
75
zz
The straight-line method
According to this method, depreciation is calculated on the cost of the asset using a pre-determined
depreciation rate. The depreciation rate could be given as a certain percentage, eg 15% per annum.
If a non-current asset was bought for R4 000 and its depreciation rate was given as 10% per annum,
the annual depreciation will be:
76
77
R4 000 x 10% = R400.
348
FAC1501/1
Where the economic (useful) life of the asset can be estimated with certainty, this can be used to
determine the depreciation rate.
78
Assume that an asset was bought for R5 000 and it was expected to have an economic life of 5 years.
The annual depreciation will be:
79
R5 000/5 years = R1 000.
80
If the asset is expected to have some value after its economic life, this value is known as
residual value. To calculate the depreciation, the residual value must first be deducted
from the cost of the asset before the depreciation rate is applied.
81
29
EXAMPLE 11.10: CALCULATION OF ANNUAL DEPRECIATION
Situ Stores bought office equipment for R10 000 on 1 January 20.8. It was estimated that this asset
will have a residual value of R2 000 after its economic life of 10 years.
82
30
REQUIRED
Calculate the annual depreciation of the office equipment.
31
83
SOLUTION: EXAMPLE 11.10
Calculation
84
Annual depreciation
85
86
zz
=
(Cost price – residual value)/economic life
=
(R10 000 – R2 000)/10 years
=
R800 per annum
The reducing-balance method
Based on this method, the annual depreciation is calculated on the carrying amount of the asset. The
carrying amount is obtained by deducting the accumulated depreciation (total depreciation to date)
on the asset from the original cost of the asset. The depreciation rate is then applied to the carrying
amount to calculate the depreciation.
87
32
EXAMPLE 11.11: CALCULATION OF DEPRECIATION USING THE
REDUCING-BALANCE METHOD
ABK Metal Works bought a machine for R60 000 on 1 March 20.7. It was decided to depreciate the
asset by 15% per annum using the reducing-balance method. The financial year of the entity ends on
31 December.
88
89
349
FAC1501/1
33
REQUIRED
Calculate the annual depreciation of the machine for the financial years ended 31 December 20.7,
20.8 and 20.9.
SOLUTION: EXAMPLE 11.11
34
90
91
Calculation
Annual depreciation (20.7)
92
93
94
=
Carrying amount x depreciation rate
=
(Cost price – accumulated depreciation) x rate
=
(R60 000 – R0) x 15% x 10/12
=
R7 500
NOTE:
The machine was bought on 1 March 20.7, which means for the first financial year it
was used for only 10 months and as such, the depreciation needs to be apportioned
for only the 10 months that it was used.
Annual depreciation (20.8)
95
96
97
Annual depreciation (20.9)
98
99
100
101
=
Carrying amount x depreciation rate
=
(Cost price – accumulated depreciation) x rate
=
(R60 000 – R7 500) x 15%
=
R7 875
=
Carrying amount x depreciation rate
=
(Cost price – accumulated depreciation) x rate
=
(R60 000 – R15 375*) x 15%
=
R6 693,75
*Accumulated depreciation: R7 500 (20.7) + R7 875 (20.8) = R15 375
102
11.1.5.2 Accounting entries for depreciation
zz
Depreciation
Depreciation is an expense account which is closed off to the profit or loss account at the end of
the year.
103
zz
Accumulated depreciation
This account holds all the depreciation written off on a particular asset until the asset is completely
written off, sold or scrapped. You have learnt that income and liability accounts have credit balances.
Since the accumulated depreciation account represents the credit side of an asset account, it must
also have a credit balance. Accumulated depreciation is regarded as a negative asset.
104
The annual depreciation calculated is shown as an expense in the profit or loss account and the
carrying amount (cost price less accumulated depreciation) is reported as a non-current asset.
105
350
FAC1501/1
EXAMPLE 11.12: R
ECORDING OF DEPRECIATION AND ACCUMULATED
DEPRECIATION
35
Milkin Products bought a plant for R120 000 on 1 April 20.7. They decided to depreciate the plant at
10% per annum using the reducing-balance method.
106
36
REQUIRED
Record the above information in the general ledger of Milkin Products for the year ended
31 December 20.8.
37
107
SOLUTION: EXAMPLE 11.12
Calculation
Annual depreciation (for the financial year that ended 31 December 20.7)
=
(R120 000 – R0) x 10% x 9/12
=
R9 000
108
Annual depreciation (for the financial year that ended 31 December 20.8)
=
(R120 000 – R9 000) x 10%
=
R11 100
109
(General journal not shown)
110
MILKIN PRODUCTS
GENERAL LEDGER
Dr
Depreciation
20.8
Dec 31 Accumulated
depreciation
N20
Cr
GJ1
11 100
20.8
Dec 31 Profit or loss account
GJ1
11 100
11 100
Dr
Accumulated depreciation
20.8
Dec 31 Balance
11 100
B19
Cr
b/d
GJ1
9 000
11 100
20.8
c/d
20 100 Jan 1 Balance
Dec 31 Depreciation
20 100
20 100
20.9
Jan
Dr
Profit or loss account
20.8
Dec 31 Depreciation
1 Balance
GJ1
11 100
351
b/d
20 100
N20
Cr
FAC1501/1
11.1.6 Summary of flow of accounting procedures when year-end adjustments need
to be made
zz
zz
zz
zz
zz
zz
zz
zz
Prepare source documents.
Prepare journals from source documents.
Post journals to ledger accounts.
Prepare a pre-adjustment trial balance.
Record adjustments in general journal and post to ledger accounts.
Prepare a post-adjustment trial balance.
Record closing entries in general journal and post to ledger accounts.
Prepare post-closing trial balance.
38
COMPREHENSIVE EXAMPLE ONE
On 28 February 20.1 the following trial balance was extracted from the general ledger of Pompeii
Traders, a general merchant that is not registered as a VAT vendor.
111
POMPEII TRADERS
PRE-ADJUSTMENT TRIAL BALANCE AS AT 31 DECEMBER 20.1
Debit
Credit
R
R
Capital (1 January 20.1)
250 000
Drawings
70 860
Mortgage
120 000
Long-term loan
30 000
Creditors control
25 000
Bank
11 000
Land and buildings (at cost price)
526 140
Equipment (at cost price)
70 000
Vehicles (at cost price)
80 000
Accumulated depreciation: Equipment (1 January 20.1)
21 000
Accumulated depreciation: Vehicles (1 January 20.1)
39 040
Allowance for credit losses
600
Inventory
7 500
Debtors control
18 000
Petty cash
350
Sales
595 000
Cost of sales
195 990
Advertising
7 400
Bank charges
2 300
Telephone expenses
9 800
Water and electricity
12 100
Salaries
80 400
Insurance
4 000
Delivery expenses
3 900
Credit losses
500
Interest on bank overdraft
600
Packing materials
6 300
Rental income
4 000
500
Settlement discount received
1 096 140
352
1 096 140
FAC1501/1
Additional information:
112
Year-end adjustments:
113
(a) An outstanding debt of R300 is irrecoverable and must be written off.
(b) The allowance for credit losses must be adjusted to R708.
(c) Depreciation must be provided as follows:
Equipment: 10% per annum according to the straight-line method
Vehicles: 20% per annum according to the diminishing balance method
(d) The terms of the mortgage loan provide for interest on the loan to be calculated at a rate of 15% per annum
on the outstanding amount of the loan at the end of the financial year. Interest is payable in the first week
of January of the following year. The loan was originally granted to the entity by Capital Bank Limited on
2 January 20.0.
(e) A Van granted an unsecured loan to the entity on 1 September 20.1. According to the terms of
the loan agreement, interest at 9% per annum will be charged and is payable in January of every
year. The total amount of the loan will be repaid in full on 30 June 20.5.
(f) Advertising expenses include an amount of R400 which was prepaid for January 20.2.
(g) The amount paid for water and electricity excludes an amount of R2 300 still payable for December 20.1.
(h) A commission of R1 250, for selling newspapers at cash registers, is still payable for the whole year.
(i) An inventory count of packing materials on 31 December 20.1 showed that there was still R700
worth of materials on hand.
(j) Insurance premium of R3 600 was paid on 1 February 20.1 for the following 12 months.
(k) The entity rented out an office in their building to a lawyer for R2 000 per month. The lawyer took
occupation on 1 December and paid an amount of R4 000, being the rent for December 20.1 and
January 20.2.
39
REQUIRED
(1) Prepare the following in respect of Pompeii Traders:
–
–
(2)
General journal with regard to adjustments at 31 December 20.1
General journal with regard to closing entries at 31 December 20.1
ost the general journal entries to the relevant ledger accounts. Close/balance these accounts
P
at year-end.
114
353
FAC1501/1
40
SOLUTION: COMPREHENSIVE EXAMPLE ONE
POMPEII TRADERS
GENERAL JOURNAL – 31 DECEMBER 20.1
Adjustments
GJ6
Day Details
31
Fol
Credit losses
Debtors control
Bad debts written off
Credit losses
Allowance for credit losses
Increase in allowance for credit losses
Depreciation
Accumulated depreciation: Equipment
Accumulated depreciation: Vehicles
Adjustment for depreciation
Interest on mortgage
Accrued expenses
Adjustment for interest payable
Interest on long-term loan
Accrued expenses
Adjustment for interest payable
Prepaid expenses
Advertising
Adjustment for advertising paid in advance
Water and electricity
Accrued expenses
Adjustment for water and electricity payable
Accrued income
Commission income
Adjustment for commission income not yet
received
Consumable stores on hand
Packing materials
Adjustment for packing materials on hand
Prepaid expenses
Insurance
Adjustment for prepaid insurance
Rental income
Income received in advance
Adjustment for income received in advance
354
N11
B6
Debit
R
300,00
Credit
R
300,00
N11
B14
108,00
N16
B12
B13
15 192,00
N14
B7
18 000,00
N15
B7
900,00
B8
N3
400,00
N7
B7
2 300,00
B10
N17
1 250,00
B11
N13
700,00
B8
N9
300,00
N19
B9
2 000,00
108,00
7 000,00
8 192,00
18 000,00
900,00
400,00
2 300,00
1 250,00
700,00
300,00
2 000,00
FAC1501/1
Closing transfers
Day
31
Details
Fol
Settlement discount received
Cost of sales
Closing transfer
Trading account
Cost of sales
Closing transfer
Sales
Trading account
Closing transfer
Trading account
Profit or loss account
Transfer of gross profit
Profit or loss account
Advertising
Bank charges
Telephone expenses
Water and electricity
Salaries
Insurance
Delivery expenses
Credit losses
Interest on bank overdraft
Packing materials
Interest on mortgage
Interest on long-term loan
Depreciation
Closing transfers
Commission income
Rental income
Profit or loss account
Closing transfers
Profit or loss account
Capital
Closing transfer
Capital
Drawings
Closing transfer
N18
N2
115
355
Debit
R
500,00
Credit
R
500,00
N20
N2
195 490,00
N1
N20
595 000,00
N20
N21
399 510,00
N21
N3
N4
N5
N7
N8
N9
N10
N11
N12
N13
N14
N15
N16
162 700,00
N17
N19
N21
1 250,00
2 000,00
N21
B1
240 060,00
B1
B2
70 860,00
195 490,00
595 000,00
399 510,00
7 000,00
2 300,00
9 800,00
14 400,00
80 400,00
3 700,00
3 900,00
908,00
600,00
5 600,00
18 000,00
900,00
15 192,00
3 250,00
240 060,00
70 860,00
FAC1501/1
116
POMPEII TRADERS
GENERAL LEDGER
117
Dr
Capital
20.1
B1
Cr
b/d
250 000 00
GJ6
240 060 00
20.1
Dec 31 Drawings
Balance
GJ6
c/d
70 860 00 Dec 31 Balance
419 200 00
Profit or loss
account
490 060 00
490 060 00
20.2
Jan
Dr
1 Balance
Drawings
20.1
b/d
419 200 00
B2
Cr
20.1
Dec 31 Balance
Dr
b/d
70 860 00 Dec 31 Capital
Debtors control
20.1
GJ6
70 860 00
B6
Cr
GJ6
300 00
c/d
17 700 00
20.1
Dec 31 Balance
b/d
18 000 00 Dec 31 Credit losses
Balance
18 000 00
20.2
Jan 1 Balance
Dr
b/d
18 000 00
17 700 00
Accrued expenses
B7
Cr
20.1
Dec 31 Interest on mortgage
GJ6
18 000 00
Interest on long-term
loan
GJ6
900 00
Water and
electricity
GJ6
2 300 00
21 200 00
Dr
Prepaid expenses
20.1
Dec 31 Advertising
Insurance
GJ6
400 00
GJ6
300 00
700 00
356
B8
Cr
FAC1501/1
Dr
Income received in advance
B9
Cr
20.1
Dec 31 Rental income
Dr
Accrued income
GJ6
2 000 00
B10
Cr
B11
Cr
B12
Cr
20.1
Dec 31 Commision income
Dr
GJ6
1 250 00
Consumable stores on hand
20.1
Dec 31 Packing materials
Dr
GJ6
700 00
Accumulated depreciation: Equipment
20.1
Jan
1 Balance
Dec 31 Depreciation
b/d
GJ6
21 000 00
7 000 00
28 000 00
Dr
Accumulated depreciation: Vehicles
B13
Cr
20.1
Jan
1 Balance
Dec 31 Depreciation
b/d
39 040 00
GJ6
8 192 00
47 232 00
Dr
Allowance for credit losses
B14
Cr
20.1
Jan
1 Balance
Dec 31 Credit losses
b/d
600 00
GJ6
108 00
708 00
Dr
20.1
Dec 31 Trading account
Sales
N1
Cr
b/d
595 000 00
20.1
GJ6 595 000 00 Dec 31 Total
357
FAC1501/1
Dr
Cost of sales
20.1
N2
Cr
20.1
Dec 31 Total
b/d 195 990 00 Dec 31 Settlement discount
received
Trading account
GJ6
GJ6
195 990 00
Dr
195 490 00
195 990 00
Advertising
20.1
500 00
N3
Cr
20.1
Dec 31 Total
b/d
7 400 00 Dec 31 Prepaid expenses
Profit or loss account
GJ6
400 00
GJ6
7 000 00
7 400 00
Dr
7 400 00
Bank charges
20.1
N4
Cr
20.1
Dec 31 Total
Dr
b/d
2 300 00 Dec 31 Profit or loss account
Telephone expenses
20.1
GJ6
2 300 00
N5
Cr
GJ6
9 800 00
20.1
Dec 31 Total
Dr
b/d
9 800 00 Dec 31 Profit or loss account
Water and electricity
20.1
N7
Cr
20.1
Dec 31 Total
Accrued expenses
b/d
GJ6
12 100 00 Dec 31 Profit or loss account
GJ6
14 400 00
Dr
Dr
N8
Cr
20.1
b/d
80 400 00 Dec 31 Profit or loss account
Insurance
20.1
Dec 31 Total
14 400 00
Salaries
20.1
Dec 31 Total
14 400 00
2 300 00
GJ6
N9
80 400 00
Cr
20.1
b/d
4 000 00 Dec 31 Prepaid expenses
Profit or loss account
4 000 00
358
GJ6
GJ6
300 00
3 700 00
4 000 00
FAC1501/1
Dr
Delivery expenses
20.1
N10
Cr
20.1
Dec 31 Total
b/d
Dr
3 900 00 Dec 31 Profit or loss account
Credit losses
20.1
GJ6
3 900 00
N11
Cr
20.1
Dec 31 Total
b/d
500 00 Dec 31 Profit or loss account
Debtors control
GJ6
300 00
Allowance for credit
losses
GJ6
108 00
GJ6
908 00
Dr
908 00
Interest on bank overdraft
20.1
908 00
N12
Cr
20.1
Dec 31 Total
b/d
Dr
600 00 Dec 31 Profit or loss account
Packing materials
20.1
GJ6
600 00
N13
Cr
20.1
Dec 31 Total
b/d
6 300 00 Dec 31 Consumable stores
on hand
Profit or loss account
GJ6
700 00
GJ6
5 600 00
6 300 00
Dr
6 300 00
Interest on mortgage
20.1
N14
Cr
20.1
Dec 31 Accrued expenses
Dr
GJ6
18 000 00 Dec 31 Profit or loss account
Interest on long-term loan
20.1
GJ6
18 000 00
N15
Cr
GJ6
900 00
20.1
Dec 31 Accrued expenses
Dr
GJ6
900 00 Dec 31 Profit or loss account
Depreciation
20.1
20.1
Dec 31 Accumulated
depreciation:
Equipment
Dec 31 Profit or loss account
GJ6
7 000 00
Accumulated
depreciation:
Vehicles
GJ6
8 192 00
15 192 00
359
N16
GJ6
Cr
15 192 00
15 192 00
FAC1501/1
Dr
Commission income
20.1
N17
Dec 31 Profit or loss account
Dr
GJ6
1 250 00 Dec 31 Accrued income
Settlement discount received
20.1
GJ6
N18
1 250 00
Cr
20.1
Dec 31 Cost of sales
GJ6
Dr
500 00 Dec 31 Total
Rental income
20.1
b/d
N19
500 00
Cr
20.1
Dec 31 Income received in
advance
Profit or loss account
Dec 31 Total
GJ6
2 000 00
GJ6
2 000 00
b/d
4 000 00
Dr
4 000 00
4 000 00
Trading account
20.1
N20
Cr
GJ6
595 000 00
20.1
Dec 31 Cost of sales
GJ6 195 490 00 Dec 31 Sales
Profit or loss account
GJ6 399 510 00
595 000 00
Dr
Cr
20.1
595 000 00
Profit or loss account
20.1
Dec 31 Advertising
Bank charges
Telephone expenses
Water and electricity
Salaries
Insurance
Delivery expenses
Credit losses
Interest on bank
overdraft
Packing materials
Interest on mortgage
Interest on long-term
loan
Depreciation
Capital (profit for the
year)
N21
Cr
GJ6
GJ6
GJ6
399 510 00
1 250 00
2 000 00
20.1
GJ6
GJ6
GJ6
GJ6
GJ6
GJ6
GJ6
GJ6
7 000 00 Dec 31 Trading account
Commision income
2 300 00
Rental income
9 800 00
14 400 00
80 400 00
3 700 00
3 900 00
908 00
GJ6
GJ6
GJ6
600 00
5 600 00
18 000 00
GJ6
GJ6
900 00
15 192 00
GJ6 240 060 00
402 760 00
360
402 760 00
FAC1501/1
118
Calculations
R
Advertising
1
2
3
4
5
6
7 000
R(7 400 – 400)
Water and electricity
R(12 100 + 2 300)
Credit losses and allowance for credit losses
14 400
Debtors control R(18 000 – 300)
Allowance for credit losses
Previous year allowance
Increase in allowance for credit losses
Total credit losses R(500 + 300 + 108)
Depreciation on equipment (straight-line method):
17 700
708
(600)
108
908
R70 000 x 10%
Depreciation on vehicles (diminishing balance method):
R(80 000 – 39 040) x 20%
Total depreciation
Finance costs
Interest on long-term loan
R30 000 x 4/12 x 9/100
Interest on mortgage
R120 000 x 15%
Interest on bank overdraft
Total finance costs
Insurance
FINANCIAL STATEMENTS
11.2.1
Introduction
8 192
15 192
900
18 000
600
19 500
Amount paid for period 1/2/20.1 to 31/1/20.2
Amount applicable to this financial year R3 600 x 11/12
Plus amount paid for Jan 20.1 in 20.0
Insurance expense for 20.1
Prepaid expenses
11.2
7 000
3 600
3 300
400
3 700
300
We have seen that journals are used on a daily basis to record the details of each transaction. The
general ledger is used as a summary of the journals and is updated on a monthly basis. A trial balance
is used primarily as an index (summary) of the accounts dealt with in the general ledger.
119
The source documents
journals
ledger
trial balance cycle should continue unabated for a
period of 12 months (if the financial period is 12 months long).
120
361
FAC1501/1
At the end of the financial year some additional accounting procedures must be followed.
journals
ledger
trial balance – for the
After executing the usual documentation procedures
final month of the financial period, two important extra procedures must be followed:
121
zz
zz
Determine the financial performance of the entity for the past financial year.
Determine the financial position of the entity at the financial year-end.
11.2.2
inancial performance as measured by the statement of profit or loss and
F
other comprehensive income
What is financial performance? Consider the situation where an investor deposits R100 000 into a
fixed deposit investment for one year at an interest rate of 12% per annum. The 12% interest rate
represents the return that the investor is expecting on the investment. If the interest rate remains the
same, the investment should grow to R112 000 by the end of the 12-month period.
122
This scenario can be compared with one where the sole owner of an entity makes a capital contribution
of R100 000 into the entity on a particular date (for example 1 July 20.1). At the end of the first financial
period of 12 months (ie 30 June 20.2), the owner would like to determine the return on his/her initial
investment for the year. How is this return calculated?
123
124
Return on capital invested = net profit (profit for the year)
Interest measures the performance of a savings investment, and profit measures the performance
of an entity’s capital investment. In fact, if the owner makes a R10 000 profit on 30 June 20.2 in the
example given above, he/she can measure the return against the return on a savings investment. A
R10 000 net profit (profit for the year) equates to a 10% return on the initial investment of R100 000
(R10 000 / R100 000 x 100 = 10%). This return is less that the return on the savings investment, which
in our example, amounts to R12 000 (12%). One could thus interpret the net profit (profit for the year)
as being a very conservative return, since the owner could have yielded a return of 12% had he/she
invested the money in a fixed deposit ― without doing any work during the year!
125
zz
The structure of the statement of profit or loss and other comprehensive income
The statement of profit or loss and other comprehensive income is a statement format of the trading
and profit or loss accounts which should be familiar to you by now. The statement of profit or loss and
other comprehensive income is divided into a gross profit section (similar to the trading account) and
a net profit section (similar to the profit or loss account).
126
Dr
Yearend
date
Trading account (F1)
Cost of sales
Profit or loss account
(gross profit)
GJ
GJ
XXX Yearend
XXX date
XXX
127
362
Sales (less sales
returns)
Cr
GJ
XXX
XXX
FAC1501/1
Dr
Profit of loss account (F2)
Cr
Yearend
Wages and salaries
Insurance
GJ
GJ
XXX YearXXX end
Trading account
(gross profit)
GJ
XXX
date
Interest expenses
GJ
XXX date
Rental income
GJ
XXX
Rental expenses
GJ
XXX
Interest income
GJ
XXX
Telephone expenses
GJ
XXX
Commission
Water and electricity
GJ
XXX
income
GJ
XXX
Advertising
GJ
XXX
etc …
Repairs and
maintenance
GJ
XXX
Stationery
GJ
XXX
Packing materials
GJ
XXX
Consumables
GJ
XXX
GJ
XXX
etc …
Capital (profit for the
year)
XXX
XXX
The trading account will be used as a tool to close off the following nominal accounts at the end of the
financial period:
128
zz
zz
zz
Sales
Sales returns (closed off against sales)
Cost of sales
The profit or loss account will be used as a tool to have all the remaining nominal accounts
closed off at the end of the financial period.
129
All nominal accounts should thus have an effective balance of 0 (nil) on the first day of the
next financial year.
130
OR:
131
1
363
FAC1501/1
XXX TRADERS
1
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED …
1
Revenue
Cost of sales
Gross profit
Other income
Rent income
Interest income
Commission income
Profit on sale of non-current asset
Distribution, administrative and other expenses
Wages and salaries
Insurance
Traffic fines
Rental expenses
Telephone expenses
Water and electricity
Advertising
Repairs and maintenance
Stationery
Packing material
Loss on sale of non-current asset
Finance costs
Interest on long-term loan
Interest on mortgage
Interest on bank overdraft
Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year
R
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
R
XXX)
(XXX)
XXX)
XXX)
Trading
account
section
XXX)
(XXX)
Profit or loss
account
section
(XXX)
XXX)
—
XXX)
You will be required to know the structure of the statement of profit or loss and
other comprehensive income as set out above.
2
11.2.3
Financial position as measured by the statement of financial position
The financial position of an entity can be determined by preparing a statement of financial
position at any point in time (usually at the end of the financial year).
3
A statement of financial position is used to answer a very important question:
4
WHAT IF … ?
The statement of financial position should effectively answer the question: What if we closed the doors
of our entity today (the statement of financial position date), sold all the assets, and paid back all our
liabilities? The result of such a closure should indicate the owner’s real equity in the entity. Remember:
equity = assets – liabilities; or:
5
364
FAC1501/1
ASSETS
=
EQUITY
+
LIABILITIES
The statement of financial position is in fact nothing but a detailed version of the accounting equation,
which shows the financial position of an entity.
6
None of the statement of financial position accounts (except for drawings) will be closed off at
the end of the financial year. All the capital, asset and liability balances will be carried forward
to the next financial period.
7
You will be required to know the structure of the statement of financial position as set out below.
8
The structure of the statement of financial position
9
XXX TRADERS
STATEMENT OF FINANCIAL POSITION AS AT …
R
R
ASSETS
Non-current assets
Property, plant and equipment
Fixed deposit
XXX
XXX
Current assets
Inventories
Trade and other receivables
Callable fixed deposit
Prepayments
Cash and cash equivalents
VAT receivable
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
TOTAL ASSETS
XXX
EQUITY AND LIABILITIES
Equity
Capital
XXX
Non-current liabilities
Long-term borrowings
XXX
Current liabilities
Trade and other payables
Income received in advance
Short-term borrowings
Current portion of long-term borrowings
Bank overdraft
VAT payable
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
TOTAL EQUITY AND LIABILITIES
XXX
365
FAC1501/1
11.2.4
Statement of changes in equity
The aim of the statement of changes in equity is to reconcile the balance of the equity at the beginning
of the financial year with the equity at the end of the financial year.
10
The structure of the statement of changes in equity
XXX TRADERS
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED …
Balance at … (Date at beginning of financial year)
Capital contribution during the year
Total comprehensive income for the year
Drawings
Balance at … (Date at end of financial year)
366
Capital
R
XXX
XXX
XXX
(XXX)
XXX
FAC1501/1
COMPREHENSIVE EXAMPLE TWO
41
Mimosa Dealers reached the end of their first financial year on 30 September 20.3. The following trial
balance was extracted from the accounting records on that date:
11
Fol
Financial position section
Debit
R
Credit
R
Capital (1 October 20.2)
B1
250 000
Drawings
B2
22 400
Equipment
B3
48 000
Investment: Fixed deposit (12%)
B4
100 000
Trading inventory
B5
110 000
Debtors control
B6
44 880
Creditors control
B7
30 210
Long-term loan: ABC Bank (14%)
B8
120 000
Bank
B9
127 150
Nominal accounts section
Sales
N1
382 500
Cost of sales
N2
190 000
Sales returns
N3
21 500
Rental expenses
N4
36 000
Interest on fixed deposit
N5
Interest on long-term loan
N6
16 800
Wages and salaries
N7
43 000
Insurance
N8
11 000
Stationery
N9
1 700
Packing materials
N10
2 050
Settlement discount granted
N11
840
Settlement discount received
N12
Credit losses
N13
800
Telephone expenses
N14
5 320
Water and electricity
N15
12 500
Repairs
N16
1 130
12 000
360
795 070
367
795 070
FAC1501/1
42
REQUIRED
(1)
(2)
(3)
(4)
(5)
(6)
Prepare the statement of profit or loss and other comprehensive income of Mimosa Dealers for
the year ended 30 September 20.3.
Prepare the statement of financial position of Mimosa Dealers as at 30 September 20.3.
Prepare the statement of changes in equity for the year ended 30 September 20.3.
If it is assumed that the R250 000 capital was invested on 1 October 20.2, calculate the percentage
(%) return for the first year on the capital invested.
If this entity is using a constant mark-up on cost for all trading inventory sold,
determine the percentage (%) mark-up.
If Mimosa Dealers moved into the building from which they trade on 1 October 20.2,
calculate the monthly rent payment if all payments have been made up to date.
43
SOLUTION: COMPREHENSIVE EXAMPLE TWO
(1)
MIMOSA DEALERS
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 30 SEPTEMBER 20.3
R
R
Revenue (382 500 – 21 500 – 840)
360 160
Cost of sales (190 000 – 360)
(189 640)
Gross profit
170 520
Other income
12 000
Interest on fixed deposit
12 000
182 520
Distribution, administrative and other expenses
(113 500)
Rental expenses
36 000
Wages and salaries
43 000
Insurance
11 000
Stationery
1 700
Packing materials
2 050
Credit losses
800
Telephone expenses
5 320
Water and electricity
12 500
Repairs
1 130
Finance costs
(16 800)
Interest on long-term loan
16 800
Profit for the year
52 220
Other comprehensive income for the year
—
Total comprehensive income for the year
52 220
NOTE:
Settlement discount granted must be deducted from revenue and settlement discount received
must be deducted from cost of sales.
368
FAC1501/1
(2)
MIMOSA DEALERS
STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20.3
R
ASSETS
Non-current assets
Property, plant and equipment
Fixed deposit
R
148 000
48 000
100 000
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
282 030
110 000
44 880
127 150
TOTAL ASSETS
430 030
EQUITY AND LIABILITIES
Equity
Capital
279 820
279 820
Non-current liabilities
Long-term borrowings
120 000
120 000
Current liabilities
Trade and other payables
30 210
30 210
TOTAL EQUITY AND LIABILITIES
430 030
12
369
FAC1501/1
(3)
MIMOSA DEALERS
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
30 SEPTEMBER 20.3
Capital
Balance at 1 October 20.2
Total comprehensive income for the year
Drawings
Balance at 30 September 20.3
(4)
(5)
13
14
(6)
15
R52 220 / R250 000 x 100 = 20,89%
Mark-up % on cost = gross profit / cost of sales x 100
Thus: mark-up % = R170 520 / R189 640 x 100 = 89,92%
R36 000 / 12 = R3 000 per month
370
R
250 000)
52 220)
(22 400)
279 820)
FAC1501/1
ACTIVITY 1
44
Lucky Traders reached the end of their first financial year at 30 April 20.4. The following trial balance
was extracted from the accounting records on that date:
16
Fol
45
Financial position section
Capital (1 May 20.3)
Drawings
Vehicles
Investment: Fixed deposit (13%)
Trading inventory
Debtors control
Creditors control
Long-term loan: Goodie Bank (15%)
Bank
Petty cash
B1
B2
B3
B4
B5
B6
B7
B8
B9
B10
Nominal accounts section
Sales
Cost of sales
Sales returns
Wages and salaries
Interest on fixed deposit
Interest on loan
Telephone expenses
Settlement discount granted
Credit losses
Insurance
Settlement discount received
Credit losses recovered
Advertising
Traffic fines
Rates and taxes
Repairs and maintenance
N1
N2
N3
N4
N5
N6
N7
N8
N9
N10
N11
N12
N13
N14
N15
N16
Debit
R
40 000
120 000
80 000
46 000
20 000
199 270
1 000
250 000
15 000
71 400
21 000
12 300
1 500
5 800
1 200
4 800
850
3 770
2 000
895 890
Credit
R
300 000
35 000
140 000
415 000
5 200
330
360
895 890
REQUIRED
(1) Prepare the statement of profit or loss and other comprehensive income of Lucky Traders for the
year ended 30 April 20.4.
(2) Prepare the statement of financial position of Lucky Traders as at 30 April 20.4.
(3) Prepare the statement of changes in equity for the year ended 30 April 20.4.
(4) If it is assumed that the insurance policy was taken out on 1 January 20.4, and that all payments
have been made up to date, what is the monthly insurance premium?
(5) Determine the date on which the fixed deposit was invested. All interest due has been received.
(6) Lucky Traders sells all goods at a constant mark-up. Determine the mark-up % on cost.
371
FAC1501/1
This solution should be based on the same format as used in the illustrative example. It would be
wise to try and do this question on your own. If your statement of financial position balances then you
should be on the right track.
17
11.2.5
Year-end adjustments
This section was discussed in detail in this learning unit of the study guide. But let us now consider
how this fits into the accounting cycle.
18
We have seen how the performance of an entity can be determined for a financial
period. This is done by means of a statement of profit or loss and other comprehensive income or
trading and profit or loss accounts.
19
The financial position of an entity can also be determined by drafting a statement
of financial position. The question now arises whether these statements are indeed
accurate in measuring financial performance and position.
20
This is where year-end adjustments come in very handy.
21
The purpose of performing year-end adjustments is to make the financial results more
realistic. The various year-end adjustments which are an extremely important section
of the syllabus will now be discussed. We deal with each individual adjustment in detail. The process
of drafting financial statements is slightly more comprehensive and complicated, because all the
adjustments need to be incorporated into one set of financial statements.
22
For the sake of revision, the most important year-end adjustments are listed:
23
zz
zz
zz
zz
zz
zz
zz
zz
zz
Depreciation
Accrued expenses
Accrued income
Prepaid expenses
Income received in advance
Consumable stores on hand
Trading inventory deficits
Credit losses
Allowance for credit losses
372
FAC1501/1
46
COMPREHENSIVE EXAMPLE THREE
The following information relates to Joyner & Sons as at 31 October 20.4, the last day of the financial
year of the entity:
24
JOYNER & SONS
PRE-ADJUSTMENT TRIAL BALANCE AS AT 31 OCTOBER 20.4
Fol
Financial position section
Capital (1 November 20.3)
Drawings
Land and buildings
Vehicles
Equipment
Accumulated depreciation: Vehicles
Accumulated depreciation: Equipment
Fixed deposit: AA Bank (12% pa)
Debtors control
Creditors control
Inventory
B1
B2
B3
B4
B5
B6
B7
B8
B9
B10
B11
Bank
Petty cash
Cash float
Long-term loan: BB Bank (14% pa)
B12
B13
B14
B15
Nominal accounts section
Sales
Cost of sales
Sales returns
Rental income
Interest on fixed deposit
Interest on long-term loan
Bank charges
Stationery
Packing materials
Insurance
Wages and salaries
Water and electricity
Telephone expenses
Repairs and maintenance
Settlement discount granted
Settlement discount received
Advertising
Credit losses
N1
N2
N3
N4
N5
N6
N7
N8
N9
N10
N11
N12
N13
N14
N15
N16
N17
N18
373
Debit
R
Credit
R
447 540
10 000
350 000
133 000
36 800
43 000
12 800
65 000
31 250
24 270
63 500
21 210
2 000
3 500
30 000
310 700
125 100
10 700
29 700
7 950
4 000
160
1 200
2 620
5 600
20 100
8 450
5 890
3 000
450
1 310
1 940
1 800
907 270
907 270
FAC1501/1
Adjustments at 31 October 20.4:
25
(a) A physical inventory count taken, revealed the following:
zz Inventory on hand, R61 800
zz Stationery on hand, R400
zz Packing materials on hand, R620
(b) The fixed deposit and long-term loan were both negotiated during 20.1.
(c) The salary of an employee, D Bono, for October 20.4 is still due, R4 900.
(d) Prepaid insurance amounts to R500.
(e) The rent due by the tenant amounts to R2 700 per month. The tenant has been renting since
1 November 20.3.
(f) The outstanding balance of a debtor, B Charlie, must be written off. The amount is R1 250.
(g) Joyner & Sons determined that the allowance for credit losses account should amount to R1 200
on 31 October 20.4.
(h) Depreciation must be provided for as follows:
zz On vehicles @ 20% per annum according to the straight-line method
zz On equipment @ 331/3% per annum on the reducing-balance method
REQUIRED
47
(1) Prepare the statement of profit or loss and other comprehensive income for Joyner & Sons for the
year ended 31 October 20.4.
(2) Prepare the statement of financial position of Joyner & Sons as at 31 October 20.4.
(3) Prepare the statement of changes in equity for Joyner & Sons for the year ended 31 October 20.4.
(4) Prepare the notes for the year ended 31 October 20.4.
374
FAC1501/1
48
SOLUTION: COMPREHENSIVE EXAMPLE THREE
(1)
JOYNER & SONS
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 OCTOBER 20.4
R
Revenue (310 700 – 10 700 – 450)
Cost of sales (125 100 – 1 310)
Gross profit
Other income
Rental income (29 700 + 2 700)
Interest on fixed deposit (7 950 – 150)
32 400
7 800
Distribution, administrative and other expenses
Bank charges
Stationery (1 200 – 400)
Packing materials (2 620 – 620)
Insurance (5 600 – 500)
Wages and salaries (20 100 + 4 900)
Water and electricity
Telephone expenses
Repairs and maintenance
Advertising
Credit losses (1 800 + 1 250 + 1 200)
Trading inventory deficits
Depreciation (26 600 + 8 000)
Finance costs
Interest on long-term loan (4 000 + 200)
Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year
375
160
800
2 000
5 100
25 000
8 450
5 890
3 000
1 940
4 250
1 700
34 600
4 200
R
299 550
(123 790)
175 760
40 200
215 960
(92 890)
(4 200)
118 870
—
R118 870
FAC1501/1
(2)
JOYNER & SONS
STATEMENT OF FINANCIAL POSITION AS AT 31 OCTOBER 20.4
Notes
ASSETS
Non-current assets
Property, plant and equipment
Fixed deposit
1
2
Current assets
Inventories
Trade and other receivables
Prepayments
Cash and cash equivalents
3
4
5
6
R
429 400
65 000
62 820
31 500
500
26 710
TOTAL ASSETS
R
494 400
121 530
615 930
EQUITY AND LIABILITIES
Equity
Capital
556 410
Non-current liabilities
Long-term borrowings
7
30 000
Current liabilities
Trade and other payables
Income received in advance
8
9
29 370
150
TOTAL EQUITY AND LIABILITIES
556 410
30 000
29 520
615 930
(3)
JOYNER & SONS
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 OCTOBER 20.4
Capital
Balance at 1 November 20.3
Total comprehensive income for the year
Drawings
Balance at 31 October 20.4
26
376
R
447 540)
118 870)
(10 000)
556 410)
FAC1501/1
(4)
27
28
JOYNER & SONS
29
NOTES FOR THE YEAR ENDED 31 OCTOBER 20.4
1 Property, plant and equipment
Carrying amount at 1 November 20.3
Cost price
Accumulated depreciation
Additions
Disposals
Depreciation for the year
Carrying amount at 31 October 20.4
Cost price
Accumulated depreciation
2 Financial assets
Non-current financial assets
Land and Equipment
building
R
R
350 000
24 000)
350 000
36 800)
–
(12 800)
–
–
–
350 000
350 000
–
–
–
(8 000)
16 000)
36 800)
(20 800)
Loans and receivables: Fixed deposit at AA
Bank at 12% pa
3 Inventories
Trading inventory (63 500 – 1 700)
Consumable stores on hand:
Vehicles
Total
R
90 000)
133 000)
(43 000)
R
464 000)
519 800)
(55 800)
–
–
(26 600)
63 400)
133 000)
(69 600)
–
–
(34 600)
429 400)
519 800)
(90 400)
65 000
)
61 800)
400)
– Stationery
– Packing material
620)
4 Trade and other receivables
Debtors control (31 250 – 1 250)
Less: Allowance for credit losses
Accrued income: – Rental income
5 Prepayments
Prepaid expenses: – Insurance
30 000)
(1 200)
1 020)
62 820)
28 800)
2 700)
31 500)
500)
6 Cash and cash equivalents
Bank
Petty cash
Cash float
7 Long-term borrowings
Long-term loan: BB Bank (14% pa)
21 210)
2 000)
3 500)
26 710)
30 000)
8 Trade and other payables
Creditors control
Accrued expenses:
– Interest on loan
– Wages and salaries
9 Income received in advance:
24 270)
)
200)
4 900)
– Interest on fixed deposit
5 100)
150)
377
29 370
150)
FAC1501/1
49
ACTIVITY 2
The following information was obtained from the records of Swinton Dealers on the last day of the
financial year of the entity:
30
SWINTON DEALERS
PRE-ADJUSTMENT TRIAL BALANCE AS AT 31 MARCH 20.4
Financial position section
Capital
Drawings
Office equipment at cost price
Accumulated depreciation: Office equipment
Bank
Fixed deposit @ 12% pa
Petty cash
Inventory (1/04/20.3)
Debtors control
Creditors control
Prepaid insurance
Rent received in advance
Allowance for credit losses
Stationery on hand
Nominal accounts section
Sales
Purchases
Freight charges on purchases
Freight charges on sales
Purchases returns
Sales returns
Customs duties
Import tariffs
Advertisements
Wages and salaries
Interest on fixed deposit
Settlement discount granted
Rental income
Administrative expenses
Repairs and maintenance
Water and electricity
Debit
R
Credit
R
186 980
23 000
24 000
8 400
102 700
80 000
2 000
45 900
21 300
12 100
2 880
16 000
1 200
2 300
213 000
85 600
4 700
3 000
5 000
1 050
1 900
3 900
800
34 800
8 800
400
3 200
2 200
3 600
8 650
454 680
378
454 680
FAC1501/1
Additional information
31
(a) The entity took out a fire insurance policy on 1 January 20.4 and paid a premium of R2 880 to
cover the entity until 31 December 20.4.
(b) On 31 March 20.4 the following was still on hand:
zz Trading inventory, R23 000
zz Stationery, R1 500
(c) An employee’s salary of R4 500 was still outstanding on 31 March 20.4.
(d) The tenant moved into the building on 30 November 20.3 and paid his rent for 12 months. No
deposit was required.
(e) Office equipment is depreciated at 20% per annum on a straight-line basis. Take into account that
a new computer was bought on 1 August 20.3 for R12 000.
(f) The fixed deposit was invested a few years ago. Interest on the investment is credited to the
current bank account.
(g) Swinton Dealers determined that the allowance for credit losses account should amount to R1 065
at 31 March 20.4.
REQUIRED
50
(1) Prepare the statement of profit or loss and other comprehensive income for Swinton Dealers for
the year ended 31 March 20.4.
(2) Prepare the statement of financial position of Swinton Dealers as at 31 March 20.4.
(3) Prepare the statement of changes in equity of Swinton Dealers for the year ended 31 March 20.4.
(4) Prepare the notes for the year ended 31 March 20.4
379
FAC1501/1
SOLUTION: ACTIVITY 2
51
(1)
SWINTON DEALERS
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 MARCH 20.4
R
Revenue (213 000 – 1 050 – 400)
Cost of sales (*1)
Gross profit
Other income
Interest on fixed deposit (8 800 + 800)
Rental income (3 200 + 3 200)
Credit losses (1 200 – 1 065)
Distribution, administrative and other expenses
Freight charges on sales
Advertisements
Wages and salaries (34 800 + 4 500)
Administrative expenses
Repairs and maintenance
Water and electricity
Insurance
Stationery
Depreciation (2 400 + 1 600)
Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year
32
R
211 550
(114 000)
97 550
16 135
9 600
6 400
135
113 685
(63 070)
3 000
800
39 300
2 200
3 600
8 650
720
800
4 000
50 615
—
50 615
* 1 Calculation of cost of sales
R
Opening inventory
45 900)
Purchases (85 600 – 5 000)
80 600)
Freight charges on purchases
4 700)
Customs duties
1 900)
Import tariffs
3 900)
137 000)
Closing inventory
(23 000)
114 000)
380
FAC1501/1
33
Notes on adjustments
(a) The fire insurance premium equals R2 880/12 = R240 per month. By 31 March 20.4 only 3 months’
insurance have been “used”. Thus R240 x 3 = R720 must end up in the statement of profit or loss
and other comprehensive income as an expense, and R240 x 9 = R2 160 must end up in the
statement of financial position as an asset.
(b) • The opening trade inventory is R45 900. The closing trade inventory is R23 000. Both these
amounts are used to calculate cost of sales in the statement of profit or loss and other comprehensive income. The closing inventory of R23 000 will be shown in the statement of financial
position as a current asset.
• Stationery worth R2 300 was evidently bought during the financial year, and by the end of the
year R800 had been used, since stationery of R1 500 was on hand at the inventory count. The
portion that was used (R800) is an expense, and the part that is left on the shelves, is an asset.
(c) Salary accrued. Debit salaries, credit accrued expenses (current liabilities) with R4 500.
(d) The initial double-entry made must have been a debit against bank and a credit against income
(rent) received in advance. There have in the meantime, however, been some reversals made
against the rent received in advance account. This is evident from the fact that an income
account for rental income exists as well. The total rent for the year must have been R16 000
+ R3 200 = R19 200. This amounts to R1 600 per month for the tenant. By 31 March 20.4 the
tenant had only occupied the premises for 4 months (since he moved in). This means that
Swinton Dealers had only earned 4 months of rent at R1 600 per month. The income for rent
(as shown in the statement of profit or loss and other comprehensive income) will thus be
R6 400. 8 months of rent have been received in advance (R12 800) and will be disclosed in the
statement of financial position as a current liability.
(e) R12 000 x 20% = R2 400
R12 000 x 20% x 8/12 = R1 600
Total depreciation for the year = R4 000
(f)
R80 000 x 12% = R9 600
R9 600 interest has been earned by the entity, but only R8 800 has been received. This leaves
R800 receivable interest (current asset in the statement of financial position).
(g) Allowance for credit losses account at 31 March 20.4 = R1 065
Allowance for credit losses account at 31 March 20.3 = R1 200
A decrease in the allowance for credit losses is needed (income) and the new allowance
for credit losses of R1 065 will be disclosed as a deduction from debtors in the statement of
financial position.
381
FAC1501/1
(2)
SWINTON DEALERS
STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20.4
Notes
ASSETS
Non-current assets
Property, plant and equipment
Fixed deposit
R
R
91 600
1
2
Current assets
Inventories
Trade and other receivables
Prepayments
Cash and cash equivalents
11 600
80 000
152 395
3
4
5
6
24 500
21 035
2 160
104 700
TOTAL ASSETS
243 995
EQUITY AND LIABILITIES
Equity
Capital
214 595
214 595
Current liabilities
Trade and other payables
Income received in advance
29 400
7
8
TOTAL EQUITY AND LIABILITIES
16 600
12 800
243 995
34
382
FAC1501/1
(3)
SWINTON DEALERS
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 MARCH 20.4
Capital
R
186 980
50 615
(23 000)
214 595
Balance at 1 April 20.3
Total comprehensive income for the year
Drawings
Balance at 31 March 20.4
SWINTON DEALERS
NOTES FOR THE YEAR ENDED 31 MARCH 20.4
1 Property, plant and equipment
R
Carrying amount at 1 April 20.3
Cost price
Accumulated depreciation
Additions
Disposals
Depreciation for the year
Carrying amount at 31 March 20.4
Cost price
Accumulated depreciation
Equipment
R
3 600)
12 000)
(8 400)
12 000)
–
(4 000)
11 600)
24 000)
(12 400)
2 Financial assets
Non-current financial assets
Loans and receivables: Fixed deposit at 12%
pa
80 000)
3 Inventories
Trading inventory
Consumable stores on hand: – stationery
4 Trade and other receivables
Debtors control
Less: Allowance for credit losses
Accrued income: – Interest income
21 300)
(1 065)
383
Total
R
3 600)
12 000)
(8 400)
12 000)
–
(4 000)
11 600)
24 000)
(12 400)
23 000)
1 500)
24 500)
20 235)
800)
21 035)
FAC1501/1
5 Prepayments
Prepaid expenses: – Insurance
2 160)
6 Cash and cash equivalents
Bank
Petty cash
102 700)
2 000)
104 700)
7 Trade and other payables
Creditors control
Accrued expenses: – Salaries
12 100)
4 500)
16 600
12 800)
12 800)
8 Income received in advance:
– Rental income
52
SELF-ASSESSMENT
After you have worked through this learning unit, are you
able to:
35
zz
zz
zz
zz
zz
zz
zz
36
37
correctly calculate and do adjustments at year-end with
regard to accrued expenses, prepaid expenses, accrued
income and income received in advance?
correctly calculate and do adjustments with regard to
consumable stores?
correctly calculate and do adjustments with regard to
depreciation of non-current assets?
correctly calculate and do adjustments with regard to credit
losses and allowance for credit losses?
correctly prepare a statement of profit or loss and other comprehensive income for a sole trader?
correctly prepare a statement of financial position and notes
for a sole trader?
correctly prepare a statement of changes in equity for a
sole trader?
J
K
L
J
K
L
J
K
L
J
K
L
J
K
L
J
K
L
J
K
L
If you have marked any K you have to revise that specific section.
If you have marked any L you have to re-study that specific section.
If you have marked all J you may congratulate yourself for having achieved all the outcomes of
this course.
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