FAC1501 Study Guide

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Preface_FAC1501E_70548943
Learning_Unit_1_FAC1501E
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Learning_Unit_11_FAC1501E

Printed and published by the

University of South Africa

Muckleneuk, Pretoria

FAC1501/1/2018

70548943

InDesign

FAC1501

Introductory Financial

Accounting

INTRODUCTORY

FINANCIAL ACCOUNTING

Preface

4CONTENTS Page

5LEARNING UNIT 1: THE NATURE AND PURPOSE OF FINANCIAL ACCOUNTING 1

6LEARNING UNIT 2: THE ACCOUNTING EQUATION: FINANCIAL POSITION 9

7LEARNING UNIT 3: THE ACCOUNTING EQUATION: FINANCIAL PERFORMANCE 35

8LEARNING UNIT 4: BUSINESS DOCUMENTS: CASH TRANSACTIONS 61

9LEARNING UNIT 5: THE RECORDING OF CASH TRANSACTIONS 115

10LEARNING UNIT 6: CREDIT TRANSACTIONS 191

11LEARNING UNIT 7: INVENTORY 235

12LEARNING UNIT 8: BANK RECONCILIATION STATEMENTS 259

13LEARNING UNIT 9: TRIAL BALANCE 279

14LEARNING UNIT 10: FINAL ACCOUNTS 297

15LEARNING UNIT 11: FINANCIAL STATEMENTS OF A SOLE TRADER 331

FAC1501

LEARNING UNIT 1

Introductory Financial

Accounting

THE NATURE AND

PURPOSE OF

FINANCIAL ACCOUNTING

FAC1501/1

2OVERVIEW

Learning outcomes �� 2

Key concepts �� 2

Assessment criteria �� 3

1�1 Introduction �� 3

1.2 Whatisnancialaccounting? �� 3

1.3 Theobjectiveofnancialaccounting �� 4

1.4 Thenatureofnancialaccounting �� 4

1.5 InternationalFinancialReportingStandards(IFRSs)�� 5

1.6 Theobjectiveofnancialstatements �� 6

1.7 Usersofnancialstatements ��6

1.8 Exercisesandsolutions �� 7

Self-assessment �� 8

LEARNING OUTCOMES

1Afterstudyingthislearningunityoushouldbeableto:

zdenenancialaccounting

zexplaintheobjectiveofnancialaccounting

zexplainthenatureofnancialaccounting

zlistthestepsinvolvedinthenancialaccountingcycle

zexplainthedifferencebetweennancialaccountingandbookkeeping

zexplaintheacronymIFRSs

zidentifytheusersofnancialaccountinginformationinthenancialstatementsandthereasons

whytheyneedthenancialinformation

KEY CONCEPTS

zTransaction

zFinancialaccounting

zObjectiveofnancialaccounting

zFinancialaccountingcycle

zBookkeeping

zInternationalFinancialReportingStandards(IFRSs)

zUsersofnancialstatements

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ASSESSMENT CRITERIA

zTheconcept“nancialaccounting”isexplained.

zThenatureandobjectiveofnancialaccountingisexplained.

zThespecicandgeneralfunctionsofnancialaccountingareexplained.

zTheprocessingofbasictransactionsisexplained.

ThemeaningofInternationalFinancialReportingStandards(IFRSs)and

itsapplicationtothepreparationandpresentationofnancialinformation

areexplained.

zTheoverallobjectiveofnancialstatementstomeettheneedsoftheusersof

nancialinformationisexplained.

Informationusefultotheusersofnancialinformationisdeterminedaccording

tothespecicusers’needs.

1.1 INTRODUCTION

2Every 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.

1.2 WHAT IS FINANCIAL ACCOUNTING?

3Financialaccountingcanbedenedastheorderlyandsystematicidenticationandrecordingofthe

monetaryvaluesofnancialtransactionsofanindividualorbusinessentity,andthereportingofthe

resultsofthesetransactions byway ofthe preparationandpresentationof nancialstatementsto

enabletheuserstousetheinformationobtainedinthesenancialstatementsasabasisfordecision-

making.Financialaccountingisaspecialisedmethodusedtocommunicatenancialinformationabout

an entity and its activities to those persons or entities that have an interest in the activities of the entity�

4Financialaccountingisaprocessthatinvolvesthreeactivities,namely:

Identication–selectingthoseeventsthatareevidenceofeconomicactivity(transactions)relevant

totheparticularentity.

zRecordingthemonetaryvalueoftheeconomicevents(transactions)soastoprovideapermanent

historyofthenancial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classiedandsummarised.

zThe 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nancialstatements,thatconsistof:

— astatementofnancialposition;

— astatementofprotorlossandothercomprehensiveincome;

— astatementofchangesinequity;

— astatementofcashows;

—

notes,comprisingofasummaryofsignicantaccountingpoliciesandotherexplanatorynotes.

5Anentitydoesnotnecessarilyrefertobusinessentities.Itcanalsorefertoaneducationalinstitution,

areligiousinstitutionoraprivatehousehold.

FAC1501/1

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

6Theobjectiveofnancialaccountingistoenabletheusersofnancialinformationtoascertainreadily

whatthenancialresultsandnancialpositionoftheentityis.Withthisstatementwemean:

(a) Didtheentitytradeataprotorloss?

(b)

Whatwastheincomeoftheentityandwhatweretheexpensesincurredinproducingthatincome?

(c) Howmuchdoestheentityowetootherentities?

(d) Howmuchdocustomersowetotheentity?

(e) Whatisthenatureandamount(invalue)ofthevariouskindsofpropertyandotherassetsthe

entitypossesses?

(f) Whatistheamountoftheentity’scapital(equity)?

1.4 THE NATURE OF FINANCIAL ACCOUNTING

7Financial accounting functions as an information system: far-reaching decisions are taken on the

basisoftheresultsreportedinnancialstatementsandbusinesstransactionshavetobemeasured,

classied, summarised and recorded continuously. We call these actions the nancial accounting

cycle.Thiscycleisdemonstratedinthefollowingdiagram.

FAC1501/1

8Diagram 1: The nancial accounting cycle

25Financialaccountingisthesystematicrecordingofthenancialtransactionsofanentityinsucha

mannerthatanyinformationrequiredbytheentityisreadilyavailable.Thesystematicrecordingof

thenancialinformationiscalledanancialaccountingcycle,whichconsistsoftheelementslisted

in diagram 1�

26The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nancialstatements.

1.5 INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSS)

27Itwouldbeproblematicifeachentitykeptindividualisedrecordsofitstransactionsasthiswouldmake

itdifculttocomparetheperformanceofanentitywiththoseofothersimilarentities.Topreventthis

fromhappening,thenancialaccountingprofessionhasstandardisedthewayinwhichentitiesare

requiredtokeeprecordoftheirtransactions.

28In South Africa the recording and reporting of nancial information are governed by international

nancial reporting standards as set by the Financial Reporting Standards Council (FRSC) in

South Africa. The purpose of these nancial 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 nancial statements of different entities conducting the

TRANSACTION

DATA

SOURCE

DOCUMENTS

SUBSIDIARY

JOURNALS

GENERAL

LEDGER

SUBSIDIARY

LEDGERS

TRIAL

BALANCES

FINANCIAL

STATEMENTS

AN A LYSI S

AND

INTERPRETATION

DECISIONMAKING

MANAGEMENT

record on

prepare

post to

extract

prepare

update

INPUT

OUTPUT

PROCESSING

FAC1501/1

same type of business are comparable and that an entity’s nancial statements will also be

comparabletothosepreparedinpreviousyears.

29InSouthAfricawehavetocomplywithInternationalFinancialReportingStandards(IFRSs)whichcan

beregardedasthe“rulesfornancialaccounting”.

1.6 THE OBJECTIVE OF FINANCIAL STATEMENTS

30Theobjectiveofnancialstatementsistoprovideinformationaboutthenancialposition,performance

andchangesinthenancialpositionofanentitythatisusefultoawiderangeofusersinmaking

economic decisions�

1.7 USERS OF FINANCIAL STATEMENTS

31Financial statements are prepared and presented at least once a year and are directed towards

thecommoninformationneedsofawiderangeofusers.

32Thefollowingcategoriesofusers,andtheirneedforaccountinginformation,havebeenidentied:

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;

●exercising control, that is evaluating the current situation and taking

corrective steps

33Although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

3REQUIRED

Answerthefollowingquestions:

(a) Whatisatransaction?

(b) Howwillyoudenenancialaccounting?

(c) Whatistheobjectiveofnancialaccounting?

(d) Whatisthenatureofnancialaccounting?

(e) Listthestepsinthenancialaccountingcycle.

(f) Whatdoesbookkeepingentail?

(g) WhatdoesIFRSsstandfor?

(h) Listthecategoriesofusersofnancialaccountinginformation.

(i) Namethereasonswhymanagementneednancialaccountinginformation.

(j) Whatistheobjectiveofnancialstatements?

4SOLUTION

(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identicationandrecordingofthemonetary

valuesofnancialtransactionsofanindividualorbusinessentity,andthereportingoftheresults

ofthesetransactionsbywayofthepreparationandpresentationofnancialstatementstoenable

theuserstousetheinformationasabasisfordecisionmaking.

(c)

Toenabletheusersofnancialinformationtoascertainreadilywhatthenancialresultsand

nancialpositionoftheentityis.

(d) ● toidentifyeventsthatareevidenceofeconomicactivityrelevanttotheparticularentity,

ztorecordthemonetaryvalueofeconomiceventssoastoprovideapermanenthistoryofthe

nancialactivitiesoftheentity,

zto communicate the recorded information to interested users�

(e) Transactions  source documents journalsgeneralledgerandsubsidiaryledgerstrial

balancesnalaccountsandnancialstatements

(f) Bookkeepingisthesystematicrecordingoftransactions.

(g) InternationalFinancialReportingStandards.

(h) ● Clients

zEmployees

zGovernment

zInvestors

zLenders

zSuppliersandothercreditors

zManagement

(i) Information to be used for decisions directed at

zplanning,thatisdeterminingfutureactionstobetaken,or

zexercisingcontrol,thatisevaluatingthecurrentsituationandtakecorrectivesteps.

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(j)

Theobjectiveofnancialstatementsistoprovideinformationaboutthenancialposition,

performanceandchangesinthenancialpositionofanentitythatisusefultoawiderangeof

usersinmakingeconomicdecisions.

5SELF-ASSESSMENT

34After you have worked through this learning unit, are you

ableto:

zdenenancialaccounting?

zexplaintheobjectiveofnancialaccounting?

zexplainthenatureofnancialaccounting?

zlistthestepsinvolvedinthenancialaccountingcycle?

zexplainwhattheacronymIFRSsstandsfor?

zlisttheusersofnancialstatements?

explain what information different users of nancial

statementswillbeinterestedin?

zexplainthemainobjectiveofnancialstatements?

35IfyouhavemarkedallJyoumaycontinuetothenextlearningunit.

36IfyouhavemarkedanyK you have to revisethatspecicsection.

37IfyouhavemarkedanyL you have to re-studythatspecicsection.

FAC1501

Introductory Financial

Accounting

THE ACCOUNTING

EQUATION: FINANCIAL

POSITION

LEARNING UNIT 2

FAC1501/1

2OVERVIEW

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nancialstatements �� 13

2�6 The double-entry principle �� 14

2�7 The accounting equation: Financial position �� 14

2.8 Thestatementofnancialposition �� 23

2�9 Exercises and solutions �� 30

Self-assessment �� 34

LEARNING OUTCOMES

1After studying this learning unit you should be able to:

zlist the basic business forms found in South Africa

zexplain the characteristics of a sole trader

zunderstand the accounting equation concerning assets, equity and liabilities

zexplaintheeffectsofnancialaccountingentriesconcerningassets,equityandliabilitiesonthe

accounting equation

zprepare entries in general ledger accounts for assets, equity and liabilities

zprepareastatementofnancialpositionforaserviceentity.

KEY CONCEPTS

zServiceentity

zRetailing entity

zManufacturing entity

zForms of business

zSole trader

zDouble-entry principle

zT-account

zDebit

zCredit

zAccounting equation

zAssets

zLiabilities

zEquity

FAC1501/1

zIncome

zExpenses

zStatementofnancialposition

zBalancing off of accounts

zDebtors

zCreditors

ASSESSMENT CRITERIA

The processing of accounting information by different types of business entities

becauseofthedifferenceinoperatingactivitiesisexplained.

zThe form of business ownership according to the capital needs of an entity

is explained�

zThe characteristics of a sole trader are explained�

zTheelementsofthegeneralpurposenancialstatementsareexplained.

zAccountingterminologyisexplainedandexamplesoftheirusearegiven.

zThe principle of debits and credits are explained�

zBusiness 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�

zAssets,liabilitiesandequityaredenedandclassiedforrecognitioninthe

statementofnancialposition.

2.1 INTRODUCTION

2In the previous learning unit you learned that nancial accounting is an information system

that communicates nancial information to the users of nancial accounting information. But who

exactlyneedstokeepnancialaccountingrecords?Theanswertothisquestionissimple:everybody

who earns an income!

3The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nancialaccounting

system?

2.2 TYPES OF BUSINESS ENTITIES

4Theprocessingofnancial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specicoperatingactivities.Theoperatingactivitiesofanentityarethoseactivitiesfromwhichit

triestomakeaprot.Theobjectiveofeveryentityistoearnaslargeaprotaspossible.

5Let’s consider the following example:

6Mr Bongile Sithole, a qualied 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�

FAC1501/1

zMr Bongile Sithole therefore runs

— a commercial entity

— which sells

— aservicetohisclients.

zThe hardware store is

— a commercial entity

— which buys and sells

— goods to their customers�

7Commercial entities can be retail entities that will sell goods to the public, or whole salers that only sell

goods to retailer entities�

zThe engineering entity is

— a manufacturing entity

— which manufactures and sells

— goods to their customers�

8Eachofthesetypesofentitieswillmakeuseofnancialaccountingrecordsthataresuitabletotheir

ownneeds.Theminimuminformationthatmustbeavailablefromthesenancialaccountingrecords

isprescribedbyInternationalFinancialReportingStandards(IFRSs).

2.3 SOUTH AFRICAN FORMS OF BUSINESS OWNERSHIP

9Mr 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inuencetheform of the business�

10Fornancialaccountingpurposeswedistinguishbetweenthefollowingformsofbusinessownership:

zsole traders

zpartnerships

zclose corporations

zcompanies

11In South Africa two types of companies can be formed, namely a prot company and a non-

protcompany.

12Inthismoduleyouwillconcentrateonthenancial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�

2.4 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�

zIt is suitable for smaller types of entities that do not need big amounts of capital to start�

FAC1501/1

zAlldecisionsregardingtheentityaretakenbytheownerandalltheprotsandlossesaccrueto

theowner.MrBongileSitholewilltakealldecisionsregardingBSElectricalandalltheprotand

losses will accrue to him as owner�

zMr Bongile Sithole is the sole owner and disposer of the assets of the business�

zThe 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�

zAsthesoletraderisnotalegalentity,theprotsoftheentitywillbetaxedinthehandsofthe

owner.MrBongileSitholewilldeclaretheprotsinhispersonalincometaxreturnandhewillbe

taxed on the amount�

zIf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�

13To be able to do Mr Bongile Sithole’s books it is necessary to look at the accounting equation�

2.5 THE ELEMENTS OF FINANCIAL STATEMENTS

14Everyentityimplementsanancialaccountingsystemaccordingtotheminimumnancialaccounting

standards and practices when it draws up nancial statements that are used in making economic

decisions.Financialstatementswillreectthenancial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nancial

statements�

15Theelementsdirectlyrelatedtothemeasurementofnancialpositionatagiventimeinthestatement

ofnancialpositionareassets,liabilitiesandequity.

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nal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.

Prot or loss is frequently used as a measure of performance. The elements directly related

to the measurement of nancial performance for a period in the statement of prot or loss and

othercomprehensiveincomeareincomeandexpenses.

Income less expenses = prot for the year

FAC1501/1

Income is the income earned by the entity through its normal everyday business activities

for the nancial 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 nancial accounting period

(normally a year) necessary to earn the income, for example purchases, rent expenses,

telephone expenses, water and electricity, salaries and wages.

16To be able to record transactions correctly it is necessary to have a look at the process of

recording transactions�

2.6 THE DOUBLE-ENTRY PRINCIPLE

17Bookkeepingisthepartofnancialaccountingthatisconcernedwiththerecordingoftransactions.

The transactions are recorded in an account�

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) ……. Account (credit side) Cr

Left-hand side (LHS) Right-hand side (RHS)

18For 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�

19Thedouble-entryprincipleprovidesalogicalmethodofrecordingtransactions.Inusingthedouble-

entry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�

20As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�

2.7 THE ACCOUNTING EQUATION: FINANCIAL POSITION

21The logical method of recording transactions by way of the accounting equation is used to process

transaction data� Transactions may:

zaffect assets and/or equity and/or liabilities�

zgenerateincomeorgiverisetoexpenditure

FAC1501/1

22The accounting equation states that:

ASSETS = EQUITY + LIABILITIES

A = E + L

23OR

EQUITY = ASSETS – LIABILITIES

E = A – L

The equity equals all the assets in the entity less all the claims against those assets (li-

abilities).

24The accounting equation is a mathematical equation that should always balance. The nancial

position of an entity is indicated by this equation�

25For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�

Basic requirements for the accounting equation:

zA minimum of two accounts must be used for each transaction.

zThe equation must remain in balance after each transaction. In other words the debit

side (A) is equal to the credit side (E + L).

26Consider the following example of transactions that affect assets and/or equity and/or liabilities:

27Before 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 en-

tity independent from its owner, Mr Bingole Sithole.

FAC1501/1

28Everyentityforwhichseparatenancialrecordsarekeptisanancial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.

29Transaction 1:

30Mr Bingole Sithole, a qualied 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.

31Explanation:

32The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 left-

handsideoftheequation(A)andtheright-handsideoftheequation(E+L),nowequalsR40000.

33The effect of this transaction on the accounting equation can be illustrated as follows:

A = E + L

Bank Capital

R R R

+ 40 000 =+ 40 000 +–

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�

34Transaction 2:

35On 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�

36Explanation:

37Tools 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�

A creditor is a person or entity to which the entity, BS Electrical, owes money. This debt is

usually paid back within one year.

FAC1501/1

39The 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 + 7 000

40 000 7 000 = 40 000 + 7 000

40Transaction 3:

41On1January20.6BSElectricalboughtaladderfromLadders(Pty)Ltdandpaidforitbycheque,

R1 200�

42Explanation:

43Money(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].

44The 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 0 0 0 + 7 000

- 1 200 + 1 200

38 800 + 8 200 = 40 000 + 7 000

45Transaction 4:

46On 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.

47Explanation:

48The 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

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 (nancing 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:

A = E + L

Bank Tools and

equipment

Capital Big Builders

(creditor)

Uni Bank

(long-term

loan)

R R R R R

+ 40 000 + 40 000

+ 7 000 + 7 000

  –1200 + 1 200

+ 50 000 + 50 000

+ 88 800 + 8 200 =+ 40 000 ++ 7 000 + 50 000

49The following rules can be applied:

Dr (debit side) Asset accounts (credit side) Cr

+(increase)  –(decrease)

Dr (debit side) Liability accounts (credit side) Cr

–(decrease)  +(increase)

Dr (debit side) Equity account (credit side) Cr

–(decrease)  +(increase)

50For you as a learner of nancial 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!

When analysing a transaction, the following four questions need to be asked:

zWhich two accounts are involved in the transaction?

zDo the accounts form part of assets, equity or liabilities?

zDid the assets, equity or liabilities increase or decrease?

zWhich one of the accounts must be debited and which one must be credited?

FAC1501/1

51Let’s consider the transactions of BS Electrical again:

52Transaction 1:

53Mr Bingole Sithole, a qualied 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.

54The effect of this transaction on the accounting equation can be illustrated as follows:

A = E + L

Bank Capital Liabilities

R R R

+ 40 000 = + 40 000 + –

55Explanation (detailedexplanationoftheaccountingequationtransaction1):

561. Bank account (an asset) increased; and must therefore be debited.

Dr (debit side) Assets (credit side) Cr

+(increase)  –(decrease)

572. Capital account (equity) increased; and must therefore be credited.

Dr (debit side) Equity (credit side) Cr

–(decrease)  +(increase)

58The above transaction will be recorded in the ledger accounts as follows:

(a) The debit-side of the bank account:

Dr Bank 1Cr

Date Details Fol RDate Details Fol R

20�6

Jan 1Capital (name of

account to be

credited)

40 000

59A few things to remember:

zThedateofthetransaction(date).Thetransactiontookplaceon1January20.6.

zA 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.

zCross-referencingtothefolionumberoftheotheraccountaffected(fol).(Itwillbediscussedina

laterlearningunit.)

FAC1501/1

zRecording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.)

(b) The credit-side of the capital account:

Dr Capital 2Cr

Date Details Fol RDate Details Fol R

20�6

Jan 1 Bank (name of

account to be

debited)

40 000

60Debit side = Credit side = R40 000

61Transaction 2:

62On 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�

63The 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 + 7 000

40 000 7 000 = 40 000 + 7 000

64Explanation (detailedexplanationoftheaccountingequationtransaction2):

651. Tools and equipment account (an asset) increased and must therefore be debited.

Dr (debit side) Assets (credit side) Cr

+(increase)  –(decrease)

662. Big Builders’ account (a liability) increased and must therefore be credited.

Dr (debit side) Liabilities (credit side) Cr

–(decrease)  +(increase)

FAC1501/1

68The above transaction will be recorded in the ledger accounts as follows:

(a) The debit-side of the tools and equipment account:

Dr Tools and equipment 3Cr

Date Details Fol RDate Details Fol R

20�6

Jan 1 Big Builders (name

of account to be

credited)

7 000

(b) The credit-side of Big Builders’ account:

Dr Big Builders 4Cr

Date Details Fol RDate Details Fol R

20�6

Jan 1 Tools and equipment

(name of account

to be debited)

7 000

69Debit side = Credit side = R7 000

70Transaction 3:

71On1January20.6BSElectricalboughtaladderfromLadders(Pty)Ltdandpaidforitbycheque,

R1 200�

72The effect of this transaction on the accounting equation can be illustra ted as follows:

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 =+ 40 000 ++ 7 000

73Explanation (detailedexplanationoftheaccountingequationtransaction3):

741. Tools and equipment account (an asset) increased and must therefore be debited.

Dr (debit side) Assets (credit side) Cr

+(increase)  –(decrease)

FAC1501/1

752. Bank account (an asset) decreased and must therefore be credited.

Dr (debit side) Assets (credit side) Cr

+(increase)  –(decrease)

76The above transaction will be recorded in the ledger accounts as follows:

77(a) The debit-side of the tools and equipment account:

78You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�

Dr Tools and equipment 3Cr

Date Details Fol RDate Details Fol R

20�6

Jan 1Big Builders

Bank (name of

account to be

credited)

7 000

1 200

79(b) The credit-side of the bank account:

80Use the same bank account created in transaction 1�

Dr Bank 1Cr

Date Details Fol RDate Details Fol R

20�6

Jan 1Capital 40 000

20�6

Jan 1Tools and equipment

(name of account to

be debited)

1 200

81Transaction 4:

82On 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.

83The 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 + 40 000

+ 7 000 + 7 000

– 1 200 + 1 200

+ 50 000 + 50 000

+ 88 800 + 8 200 =+ 40 000 ++ 7 000 + 50 000

FAC1501/1

84Explanation (detailedexplanationoftheaccountingequationtransaction4):

851. Bank account (an asset) increased and must therefore be debited.

Dr (debit side) Assets (credit side) Cr

+(increase)  –(decrease)

2. Long-term loan: Uni Bank account (a liability) increased and must therefore be credited.

Dr (debit side) Liabilities (credit side) Cr

–(decrease)  +(increase)

86The above transaction will be recorded in the ledger accounts as follows:

(a) The debit-side of the bank account:

87Use the same bank account created in transaction 1 and used in transaction 3�

Dr Bank 1Cr

Date Details Fol RDate Details Fol R

20�6

Jan 1Capital account

Long-term loan:

Uni Bank (name of

account to be

cre dited)

40 000

50 000

20�6

Jan 1 Tools and equipment 1 200

(b) The credit-side of the long-term loan: Uni Bank account:

Dr Long-term Loan: Uni Bank 5Cr

Date Details Fol RDate Details Fol R

20�6

Jan 1 Bank (name of

account to be

debited)

50 000

88The accounting equation is, therefore, based on the double-entry accounting system, and is used for

preparing the statement of nancial position at a specic point in time�

2.8 THE STATEMENT OF FINANCIAL POSITION

89The statement of nancial position reects the nancial position of an entity in terms of the basic

accounting equation on a specic date.Itisastatementofbalancesataspecicdate.

FAC1501/1

91ThestatementofnancialpositionofBSElectricalpreparedasat1January20.6isasfollows:

BS ELECTRICAL

STATEMENT OF FINANCIAL POSITION AS AT 1 JANUARY 20.6

ASSETS REQUITY AND LIABILITIES R

Bank 88 800 Capital 40 000

Tools and equipment 8 200 Creditor 7 000

Long-term loan 50 000

97 000 97 000

92Atthisstageitisnecessarytohavealookatthewaysassetscanbeused:

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classied

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classiedascurrent assets�

FAC1501/1

94Let’shavealookatthedifferencebetweennon-currentassetsandcurrentassets.

ASSETS

Assets are resources controlled (used)

by the entity, as a result of past events

(asset was bought), and from which

future economic benets (income) are

expected to ow to the entity.

CURRENT NON-CURRENT

An asset shall be classied as

current when it satises any of the

following criteria:

All other assets (thus being assets

that are not classied as current

assets will be classied as non-

current).

zIt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 nancial assets of a

long-term nature. (In this module we

will only concern ourselves with tan-

giblenon-currentassets.)

zIt 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�

It is expected to be converted

into money (realised) within

twelvemonthsofthestatementof

nancialpositiondate.

Non-current assets are those assets

with a useful life of longer than one

year�

Examples of current assets are: Examples of non-current assets are:

zTradinginventories

zConsumable stores on hand

zDebtors(tradereceivables)

zAccrued income

zPre-paid expenses

zBank(positivebalance)

zCashoat

zPetty cash

zLand and buildings

zVehicles

zFurniture

zEquipment

zMachinery

FAC1501/1

95Liabilities can also be non-current or current, depending on when the liability must be settled:

Someliabilitiesarepayablemorethanoneyearafternancialyearend,thatis,theyarenotpayable

withinthenextnancialyear.Theseliabilitiesareclassiedasnon-current liabilities�

zLiabilitiespayablewithinthenextnancialyearareclassiedascurrent liabilities.

96Let’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 outow of cash

(payment) from the entity.

CURRENT NON-CURRENT

A liability shall be classied as

current when it satises any of the

following criteria:

All other liabilities (thus being liabili-

ties that are not classied as current

liabilities will be classied as non-

current).

zIt 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nancialpositiondate.

It is held primarily for the purpose

of being traded�

zItisduetobesettledwithintwelve

months after the statement of

nancialpositiondate.

Examples of current liabilities are: Examples of non-current liabilities are:

zCreditors(tradepayables)

zBankoverdrafts

Current portion of long-term

borrowings

zShort-term borrowings

zAccrued expenses

zIncomereceivedinadvance

zLong-term loans

zMortgage

zDebentures

FAC1501/1

97AccordingtotheseprinciplesthecorrectstatementofnancialpositionforBSElectricalisasfollows:

BS ELECTRICAL

STATEMENT OF FINANCIAL POSITION AS AT 1 JANUARY 20.6

ASSETS REQUITY AND LIABILITIES R

Non-current assets

Tools and equipment

Current assets

Bank

8 200

88 800

Equity

Capital

Non-current liabilities

Long-term loan

Current liabilities

Creditor

40 000

50 000

7 000

Total assets 97 000 Total equity and liabilities 97 000

98Therulesthatneedtobefollowedwhenthedouble-entryaccountingisappliedcanbederivedfrom

thestatementofnancialposition.(Thecorrectverticalformatwillbediscussedlater.)

99To summarise the ledger accounts in the general ledger:

Dr Bank 1Cr

Date Details Fol RDate Details Fol R

20�6

Jan 1Capital

Long-term loan:

Uni Bank

40 000

50 000

20�6

Jan 1 Tools and equipment 1 200

100The 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.

An account with entries on both the debit and the credit sides, have to be balanced (to

balance is to nd the nal amount on the account).

To balance the bank account:

Add the debit side of the bank account and write down the total in pencil: R40 000 +

R50 000 = R90 000.

zAdd the credit side of the bank account and write down the total in pencil: R1 200.

zThe 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.

zThe 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.

FAC1501/1

Dr Bank 1Cr

Date Details Fol RDate Details Fol R

20�6

Jan

Feb

Capital

Long-term loan:

Uni Bank

40 000

  50000

20�6

Jan

Tools and equipment

Balance

c/d

1 200

88 800

90 000 90 000

Balance b/d 88 800

Dr Capital 2Cr

Date Details Fol RDate Details Fol R

20�6

Jan 1Bank 40 000

Dr Tools and equipment 3Cr

Date Details Fol RDate Details Fol 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 Big Builders 4Cr

Date Details Fol RDate Details Fol R

20�6

Jan

Tools and equipment

7 000

Dr Long-term loan: Uni Bank 5Cr

Date Details Fol RDate Details Fol R

20�6

Jan 1Bank 50 000

FAC1501/1

101According 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nancialpositionasfollows:

BS ELECTRICAL

STATEMENT OF FINANCIAL POSITION AS AT 1 JANUARY 20.6

ASSETS Note R

Non-current assets 8 200

Tools and equipment 8 200

Current assets 88 800

Bank 88 800

Total assets 97 000

EQUITY AND LIABILITIES

Equity 40 000

Capital 40 000

Non-current liabilities 50 000

Long-term loan: Uni Bank 50 000

Current liabilities 7 000

Creditor(BigBuilders) 7 000

Total equity and liabilities 97 000

102Thestatementofnancialpositionisnowshowninitsverticalformatandthisisthecorrectformat

that must be used in future.

FAC1501/1

2.9 EXERCISES AND SOLUTIONS

3EXERCISE 1

(a) Denetheconceptofanaccountingentity.

(b) Describethenancial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nancing.

(e) Whatismeantbythedouble-entryprinciple?

4SOLUTION: EXCERCISE 1

(a) Anaccountingentityisanyentityforwhichseparatenancial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�

5EXERCISE 2

103TheassetsofMaxiServicesamounttoR30000anditsliabilities(creditors)toR5000.

6REQUIRED

Calculate the equity�

7SOLUTION: EXCERCISE 2

104Usetheaccountingequation.Theamountswhicharegivenaresubstitutedfortheappropriatesymbol

andthevalueoftheunknownsymboliscalculated.

105A = E + L

106E = A – L

107E = R30 000 – R5 000

108E = R25 000

FAC1501/1

8EXERCISE 3

109T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�

9REQUIRED

Show the accounting equation and determine the equity�

10SOLUTION: EXCERCISE 3

110Step 1: Identify the assets:

111 Equipment = R100 000

112 Debtors = R40 000

113 Cash = R10 000

114Step 2: Identify the liabilities:

115 Creditors control = R20 000

116Substitute these amounts into the equation:

117A = E + L

118E = A – L

119E = R(100000+40000+10000) – R20000

120E = R150 000 – R20 000

121E = R130 000

FAC1501/1

122ZebraService’snancialpositioncanalsobepresentedintheformofastatementofnancialposition

as follows:

ZEBRA SERVICES

STATEMENT OF FINANCIAL POSITION AS AT 30 NOVEMBER 20.6

ASSETS REQUITY AND LIABILITIES R

Equipment

Debtors

Cash in bank

100 000

40 000

10 000

Equity

Creditors

130 000

20 000

150 000 150 000

11EXERCISE 4

Calculatethemissingguresusingtheaccountingequation:

(a) Bank = 4 000

Vehicles = 5 000

Equipment = 7 000

 Equity =  ?

(b) Equity = 150 000

Loan = 50 000

 Bank =  ?

Machinery = 190 000

(c) Bank = 5 000

Debtors = 15 000

Buildings = 100 000

Furniture = 40 000

Creditors = 50 000

 Equity =  ?

(d) Equity = 60 000

Loan = 10 000

Creditors = 6 000

 Assets =  ?

FAC1501/1

12SOLUTION: EXCERCISE 4

(a) A = E + L

E = A – L

 E = R(4000+5000+7000) – R0

E = R16 000

(b) A = E + L

R190 000 + 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

FAC1501/1

13SELF-ASSESSMENT

123After you have worked through this learning unit, are you

able to:

classify the different elements of financial state-

mentscorrectly?

zdeneanasset?

zdenealiability?

zdeneincome?

zdene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?

zprepareastatementofnancialposition?

IfyouhavemarkedallJ you may continue to the next learning unit �

124IfyouhavemarkedanyKyouhavetorevisethatspecicsection.

125IfyouhavemarkedanyLyouhavetore-studythatspecicsection.

FAC1501

Introductory Financial

Accounting

THE ACCOUNTING

EQUATION: FINANCIAL

PERFORMANCE

LEARNING UNIT 3

FAC1501/1

2OVERVIEW

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protorlossaccount �� 47

3.5 Thestatementofprotorlossandothercomprehensiveincome �� 50

3�6 Summary �� 51

3�7 Exercises and solutions ��53

Self-assessment �� 60

LEARNING OUTCOMES

1After studying this learning unit you should be able to:

zunderstand the accounting equation concerning income and expenses

zexplaintheeffectsofnancialaccountingentriesconcerningincomeandexpensesontheac-

counting equation

zprepare entries in general ledger accounts of income and expenses

zprepareatrialbalanceforaserviceentity

zprepareaprotorlossaccountforaserviceentity

zprepareastatementofprotorlossandothercomprehensiveincomeforaserviceentity

KEY CONCEPTS

zIncome

zExpenses

zDebtors

zTrial balance

zProtorlossaccount

zStatementofprotorlossandothercomprehensiveincome

FAC1501/1

ASSESSMENT CRITERIA

zBusiness transactions concerning income and expenses are explained with

appro priate 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denedandclassiedfor

recognitioninthestatementofprotorlossandothercomprehensiveincome.

3.1 INTRODUCTION

2Theobjectiveofeveryentityistoearnaslargeaprotaspossible.Itisthereforenecessarytodetermine

thenancialperformanceoftheentitybycalculatingthenancialresultoveraspecicperiod.

3.2 THE ACCOUNTING EQUATION: FINANCIAL PERFORMANCE

3Thenancialresultofanentityismeasuredintermsoftheprotorlosswhichtheentityhasmade

overaspecicperiod.Thisperiodisknownasthenancialperiodandisusuallyoneyear.

An entity makes a prot 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

4Anentitymustearnanincometobeabletopayitsexpenses.Protfortheyearistheowner’sreward

forthecapitalinvestedandtheentrepreneurialspiritshown.

Prot (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) Capital (credit side) Cr

– (decrease) + (increase)

5Thefollowingrulecanbeappliedtoprot/income:

Dr (debit side) Prot/income (credit side) Cr

Always credited

– (decrease) + (increase)

FAC1501/1

INCOME

Prot/income is the increase in

economic benets 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:

Gains are increases in economic

benets, which do not arise from the

normal activities of the entity, for

example:

zfees earned zprotonsaleofnon-currentasset

zsales

zinterest income

zrental income

zcommission income

zcreditlossesrecovered

6Expenses are incurred to earn income�

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) Capital (credit side) Cr

– (decrease) + (increase)

7Thefollowingrulecanbeappliedtolosses/expenses:

Dr (debit side) Losses/expenses (credit side) Cr

Always debited

+ (increase) – (decrease)

FAC1501/1

EXPENSES

Losses/expenses are the outow of

economic benets (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 LOSSES

Expenses are incurred in the normal

courseoftheentity’sactivities.They

arisefromthegenerationofincome,

for example:

Losses are decreases in economic

benets, which do not arise from

the normal activities of the entity, for

example:

zCost of sales zLoss on sale of non-current asset

zRental expenses

zInterest expenses

zWages and salaries

zAdvertising

zCredit losses

zInsurance

zRepairs and maintenance

zTelephone expenses

zWater and electricity

zPostage

zRates and taxes

zStationery

zConsumables

zPackingmaterials

zBankcharges

zDepreciation

zAdministrativeexpenses

FAC1501/1

8Let’sconsiderafewmoretransactionsofMrBingoleSitholeforthe20.6nancialyearthatgenerate

incomeorgiverisetoexpenditure.Thenancialyearendsannuallyon31December.

9Transaction 5:

10MrBingoleSitholerenderedaserviceon15January,forcash,toaclientfortheamountofR60000.

11Explanation:

12Received money for services rendered, therefore the bank account (an asset)

increases and must be debited�

Dr (debit side) Assets (credit side) Cr

+ (increase) – (decrease)

13Servicesrenderedarean income that increases the prot 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�

Dr (debit side) Prot/income (credit side) Cr

– (decrease) + (increase)

14The effect of the transaction on the accounting equation can be illustrated as follows:

A=E+L

Bank Tools and

equipment

Capital Income/

expenditure

Big Builders

(creditor)

Uni Bank

(long-term

loan)

R R R R R R

88 800 8 200 40 000 7 000 50 000

+ 60 000 + 60 000

148 800 8 200 =40 000 60 000 +7 000 50 000

FAC1501/1

16The above transaction will be recorded in the ledger accounts as follows:

171. The debit-side of the bank account:

Dr Bank 1Cr

Date Details Fol RDate Details Fol R

20�6

Jan

Capital

Long-term loan: Uni

Bank

Servicesrendered

(account to be

credited)

40 000

50 000

60 000

20�6

Jan 1 Tools and equipment 1 200

182. The credit-entry in the services rendered account:

Dr Services rendered 2Cr

Date Details Fol RDate Details Fol R

20�6

Jan 15 Bank(account to be

debited)

60 000

19Transaction 6:

20MrBingoleSitholerenderedaserviceon16January,oncredit,toMBeautyfortheamountofR20000.

21Explanation:

22Clients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benetsareexpected

(moneytobereceived).Therefore,itisanasset.Assets increased and M. Beauty (a debtor) must

be debited�

A person who owes money to the entity is a debtor (asset).

Dr (debit side) Assets (credit side) Cr

+ (increase) - (decrease)

23Services rendered is an income that increases the prot for the year. Therefore, equity

increased and services rendered account must be credited�

Dr (debit side) Prot/income (credit side) Cr

– (decrease) + (increase)

FAC1501/1

25The effect of the transaction on the accounting equation can be illustrated as follows:

A = E + L

Bank Tools and

equipment

M. Beauty

(debtor)

Capital Income/

expenditure

Big

Builders

(creditor)

Uni Bank

(long-term

loan)

R R R R R R R

88 800 8 200 40 000 7 000 50 000

+ 60 000 + 60 000

+ 20 000 + 20 000

148 800 8 200 20 000 =40 000 80 000 +7 000 50 000

26The above transaction will be recorded in the ledger accounts as follows:

271. The debit-side of M Beauty’s account:

Dr M. Beauty 6 Cr

Date Details Fol RDate Details Fol R

20�6

Jan 16 Servicesrendered

(account to be

credited)

20 000

282. The credit-entry in the services rendered account:

Dr Services rendered 7Cr

Date Details Fol RDate Details Fol R

20�6

Jan 15

Bank

M.Beauty(account

to be debited)

60 000

20 000

29Transaction 7:

30On28Januarythebusiness’stelephoneaccountforJanuarywaspaidbycheque,R1200.

31Explanation:

32Telephone expenses is an expense that decreases the prot for the year. Therefore, equity

decreased and the telephone expense account must be debited�

Dr (debit side) Losses/expenses (credit side) Cr

+ (increase) – (decrease)

FAC1501/1

33Paid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�

Dr (debit side) Assets (credit side) Cr

+ (increase) – (decrease)

34The effect of the transaction on the accounting equation can be illustrated as follows:

A = E + L

Bank Tools and

equipment

M Beauty

(debtor)

Capital Income/

expenditure

Big

Builders

(creditor)

Uni Bank

(long-term

loan)

R R R R R R R

88 800 8 200 40 000 7 000 50 000

+60000 + 60 000

+ 20 000 +20000

–1200   –1200

 147600 8 200  20000 =40 000   78800 +7 000 50 000

35The above transaction will be recorded in the ledger accounts as follows:

361. The entry on the debit-side of the telephone expenses account:

Dr Telephone expenses 8Cr

Date Details Fol RDate Details Fol R

20�6

Jan 28 Bank(account to be

credited)

1 200

372. The credit-entry in the bank account:

Dr Bank 1Cr

Date Details Fol RDate Details Fol R

20�6

Jan

Capital

Long-term loan: Uni

Bank

Servicesrendered

40 000

50 000

60 000

20�6

Jan 1

Tools and equipment

Telephone expenses

(account to be

debited)

1 200

FAC1501/1

39Transaction 8:

40On31Januarythereceptionist’ssalaryforJanuarywaspaidbycheque,R6000.

41Explanation:

42Salaries account is an expense that decreases the prot for the year. Therefore, equity

decreased and salaries account must be debited�

Dr (debit side) Losses/expenses (credit side) Cr

+ (increase) – (decrease)

43Paid 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.

Dr (debit side) Assets (credit side) Cr

+ (increase) – (decrease)

44The effect of the transaction on the accounting equation can be illustrated as follows:

A = E + L

Bank Tools and

equipment

M. Beauty

(debtor)

Capital Income/

expenditure

Big

Builders

(creditor)

Uni Bank

(long-term

loan)

R R R R R R R

 88800 8 200 40 000 7 000 50 000

+60000 + 60 000

+ 20 000 + 20 000

 –1200 – 1 200

 –6000 – 6 000

 141600 8 200  20000 =40 000 72 800 +7 000 50 000

45The above transaction will be recorded in the ledger accounts as follows:

461. The debit-side of the salaries account:

Dr Salaries 9Cr

Date Details Fol RDate Details Fol R

20�6

Jan 31 Bank(account to be

credited)

6 000

FAC1501/1

482. The credit-entry in the bank account:

Dr Bank 1Cr

Date Details Fol RDate Details Fol R

20�6 20�6

Jan

Capital

Long-term loan: Uni

Bank

Servicesrendered

40 000

50 000

60 000

Jan

Tools and equipment

Telephone expenses

Salaries (account to

be debited)

1 200

6 000

49Asummaryofalltheledgeraccountsinthegeneralledger,attheendofJanuary20.6areasfollows:

50Thebankaccountmustbebalancedoff.

51BS ELECTRICAL

52GENERAL LEDGER

Dr Bank 1Cr

Date Details Fol RDate Details Fol R

20�6

Jan

Feb

20�6

Jan

Capital

Long-term loan: Uni

Bank

Servicesrendered

40 000

50 000

60 000

Tools and equipment

Telephone expenses

Salaries

Balance

c/d

1 200

6 000

141 600

150 000 150 000

Balance

b/d

141 600

Dr Capital 2Cr

Date Details Fol RDate Details Fol R

20�6

Jan 1 Bank 40 000

Dr Tools and equipment 3Cr

Date Details Fol RDate Details Fol R

20�6

Jan 1 Big Builders

Bank

7 000

1 200

8 200

FAC1501/1

Dr Big builders 4Cr

Date Details Fol RDate Details Fol R

20�6

Jan 1 Tools and equipment 7 000

Dr Long-term loan: Uni Bank Account 5Cr

Date Details Fol RDate Details Fol R

20�6

Jan 1Bank 50 000

Dr M Beauty 6 Cr

Date Details Fol RDate Details Fol R

20�6

Jan 16 Servicesrendered 20 000

Dr Services rendered 7Cr

Date Details Fol RDate Details Fol R

20�6

Jan 15

Bank

MBeauty

60 000

20 000

Dr Telephone expenses 8Cr

Date Details Fol RDate Details Fol R

20�6

Jan 28 Bank 1 200

Dr Salaries 9Cr

Date Details Fol RDate Details Fol R

20�6

Jan 31 Bank 6 000

54The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nancialposition.Theledger

accountsinthegeneralledgernumberedfrom7to9areallincome/prot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nalnancialstatementsareprepared.Atrialbalancewillbecompiledtocheckthearithmetical

correctness of the recording of transactions in the general ledger�

3.3 THE TRIAL BALANCE

55The 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

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.

56The 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

naltotalsofthetwocolumnsshouldalwaysbethesame.

BS ELECTRICAL

TRIAL BALANCE AS AT 31 JANUARY 20.6

Debit Credit

R R

Bank 141 600

Capital 40 000

Tools and equipment 8 200

Big Builders 7 000

Long-termloan:UniBank 50 000

M.Beauty 20 000

Servicesrendered 80 000

Telephone expenses 1 200

Salaries 6 000

177 000 177 000

57The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protorlossaccountcannow

be compiled�

3.4 THE PROFIT OR LOSS ACCOUNT

58IfMrBingoleSitholewantstodetermineafteronemonthwhetheritisworthwhileforhimtocarryon

thebusiness,theprot/incomeaccountsandlosses/expenseaccountsmustbeclosedofftotheprot

orlossaccountsothattheprotforthemonthcanbecalculated.

59Thenancialresultofanentityismeasuredintermsoftheprotorlosswhichtheentityhasmade

overaspecicperiod.Thisperiodisknownasthenancial period and is usually one year�

At the end of the nancial period (usually a year) all expense/loss accounts and income/

prot accounts of a service entity must be closed off to a prot or loss account which

forms the basis for the preparation of a statement of prot or loss and other comprehen-

sive income.

FAC1501/1

61Explanation of the transfer of income to the prot or loss account:

62To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protorlossaccount.Theservicesrenderedaccountwillnowbalanceoff.

63The prot or loss account is credited with R80 000� This is done to adhere to the double-

entry principle�

Dr Services rendered 7Cr

Date Details Fol RDate Details Fol R

20�6

Jan 31 Protorloss(account

to be credited)

80 000

20�6

Jan 15

Bank

M.Beauty

60 000

20 000

80 000 80 000

64Explanation of the transfer of expenditure to the prot or loss account:

65To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protorlossaccount.

66The p ro  t or loss account is debited with R1 200� This is done to adhere to the double-entry principle�

Dr Telephone expenses 8Cr

Date Details Fol RDate Details Fol R

20�6

Jan 28 Bank 1 200

20�6

Jan 31 Protorloss(account

to be debited)

1 200

1 200 1 200

67Thesameprincipleisapplicabletotheclosingoffofthesalariesaccount(anexpense)totheprotor

loss account�

68The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protorloss

account�

69The p ro  t o r lo ss ac c ount is debited with R6 000� This is done to adhere to the double-entry principle�

FAC1501/1

Dr Salaries 9Cr

Date Details Fol RDate Details Fol R

20�6

Jan 31 Bank 6 000

20�6

Jan 31 Protorloss(account

to be debited)

6 000

6 000 6 000

71Theprotorlossaccountisanalaccountinthegeneralledgerandthestatementofprotorlossand

othercomprehensiveincomeisoneofthenancial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).

72The prot or loss account is as follows:

Dr Prot or loss 10 Cr

Date Details Fol RDate Details Fol R

20�6 20�6

Jan 31 Telephone expenses

(account to be

credited)

Salaries (account to

be credited)

Capital(Protforthe

month) (account to

be credited)

1 200

6 000

72 800

Jan 31 Servicesrendered

(account to be

debited)

80 000

80 000 80 000

73Anentitymakesaprot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prot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(prot)isR80000–R7200=R72800.

To calculate the prot or loss for the month (the same as calculating the

balance c/d):

zAdd the debit side of the prot or loss account and write down the total in pencil: R1 200

+ R6 000 = R7 200.

Add the credit side of the prot or loss account and write down the total in pencil: R80 000.

zThe credit total of the prot 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 prot or loss account that is

the smallest in this case, the debit side. It is a prot because the income is greater than

than the expenses.

zThe 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 prot

or loss account will be capital account (prot for the month).

FAC1501/1

74Thelasttransferistheentryfortheprotfortheperiodthatmustbecreditedtothecapitalaccount

(protorlossaccountisdebited)becauseBSElectricalowestheprottotheowner,MrB.Sithole.

Theprot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�

Dr Capital 2Cr

Date Details Fol RDate Details Fol R

20�6

Jan 1

Bank

Protorloss(prot

for the month)

(account to be

debited)

40 000

72 800

112 80 0

75A statement of prot or loss and other comprehensive income will now be compiled using the

informationincludedintheprotorlossaccount.

3.5 THE STATEMENT OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME

76Theaimofthestatementofprotorlossandothercomprehensiveincomeistoreectthenancial

performance(prot/loss)foranancialperiod.

77Thestatementofprot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

Protforthemonth 72 800

Othercomprehensiveincomeforthemonth* —

Total comprehensive income for the month 72 800

78* OthercomprehensiveincomeforthemonthfallsoutsidethescopeoftheFAC1501syllabus.

79 Notes fall outside the scope of this module�

80In order to complete the set of nancial statements the statement of nancial position will also

be compiled�

FAC1501/1

Thestatementofnancialpositionisasfollows:

BS ELECTRICAL

STATEMENT OF FINANCIAL POSITION AS AT 31 JANUARY 20.6

Notes R

ASSETS

Non-current assets 8 200

Tools and equipment 8 200

Current assets 161 600

Debtors control 20 000

Bank 141 600

Total assets 169 800

EQUITY AND LIABILITIES

Equity 112 8 00

Capital 112 80 0

Non-current liabilities 50 000

Long-termloan:UniBank 50 000

Current liabilities 7 000

Creditors control 7 000

Total equity and liabilities 169 800

82Learningunit2and3arethemostimportantlearningunitsinnancialaccounting.Pleasemakesure

you understand the rules concerning assets, liabilities, equity, prot/income accounts and losses/

expenseaccounts.Youwillhavenoproblemswithnancialaccountinginfutureifyouunderstand

theserulesandknowhowtoapplythem.

3.6 SUMMARY

83Thetablebelowpresentsausefuloverviewoftheaccountingequationandtherelatedsub-categories

ofthe elements ofnancialstatements.Examplesof relevantledgeraccountsare provided under

each category�

FAC1501/1

ASSETS

Debit (+) Credit (–)

=EQUITY

Debit (–) Credit (+)

+LIABILITIES

Debit (–) Credit (+)

NON-CURRENT ASSETS

Land and buildings

Equipment

Vehicles

Furniture

Machinery

Goodwill

Investments(nancial)

CURRENT ASSETS

Tradinginventory

Debtors control

Prepaid expenses

Accrued income

Bank

Petty cash

Cashoat

*DRAWINGS

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

*CAPITAL

INCOME

Sales

Rental income

Interest income

Dividendincome

Commision income

Creditlossesrecovered

Protonsaleofanon-

current asset

NON-CURRENT LIABILITIES

Long-term loans

Mortgage

CURRENT LIABILITIES

Short-term loans

Creditors control

Bankoverdraft

Current portion of long-term

loans

Accrued expenses

Incomereceivedinadvance

FAC1501/1

3.7 EXERCISES AND SOLUTIONS

3EXERCISE 1

(a) Howisthenancialresultcalculatedinnancialaccountingterms?

(b) Whichnancialreportreectsthenancialresult?

(d) Givethreeexamplesofexpenditure.

(e) Howisprot/lossdeterminedforanancialperiod?

(f) Doesalossincreaseordecreasetheequityoftheowner?

4SOLUTION: EXCERCISE 1

(a) PROFITFORTHEYEAR = INCOME – EXPENDITURE

(b) Thestatementofprotorlossandothercomprehensiveincomefortheyearended…

zsales

zinterest income

zrental income

zcommission income

zcreditlossesrecovered

(d) ● costofsales

zrental expenses

zinterest expense

zwages and salaries

zadvertising

zcredit losses

zinsurance

zrepairs and maintenance

ztelephone expenses

zwater and electricity

zpostage

zrates and taxes

zstationery

zconsumables

zpackingmaterials

zbankcharges

zdepreciation

zadministrativeexpenses

(e) PROFITFORTHEYEAR = INCOME – EXPENDITURE

(f) Alossdecreasesincomeandprotsandthereforealsodecreasestheequity.

FAC1501/1

5EXERCISE 2

86ThenancialpositionofTPayn,anattorney,at28February20.6isasfollows:

87A = E + L

88R50 000 = R30 000 + R20 000

89For the year ended 28 February 20�7 he had the following income and expenditure:

Fees earned 180 000

Salaries 100 000

Administrativeexpenses 20 000

Insurance expenses 10 000

6REQUIRED

CalculateTPayn’sequityasat28February20.7.

7SOLUTION: EXCERCISE 2

90Income = Fees earned R180 000

91Expenditure = SalariesR100000+AdministrativeexpensesR20000+Insurance

expenses R10 000

92 = R130 000

93Prot for the year = Income – Expenses

= R180 000 – R130 000

= R50 000

Equity = Capital + Prot for the year

E = R30 000 (20�6) + R50 000 (20�7)

E = R80 000

8EXERCISE 3

9REQUIRED

List each of the following ledger accounts under one of the categories in the table

below� “Furniture” is inserted as an example�

ASSETS EQUITY LIABILITIES

Non-current

assets

Current assets Capital Income Expenditure Non-current

liabilities

Current

liabilities

Furniture

FAC1501/1

95Ledgeraccountstobeclassied:

(a) land and buildings

(b) mortgage

(d) postage

(e) interest income

(f) vehicles

(g) salaries

(h) debtors

(i) creditors

(j) bankoverdraft

(k) fees earned

(l) electricity deposit

(m) subscriptions

10SOLUTION: EXCERCISE 3

ASSETS EQUITY LIABILITIES

Non-current

assets

Current

assets

Capital Income Expenditure Non-current

liabilities

Current

liabilities

(a) land and

buildings

(b) mortgage

(d) postage

(e) interest

income

(f) vehicles

(g) salaries

(h) debtors

(i) creditors

(j) bank

overdraft

(k) fees

earned

(l) electricity

deposit*

(m) subscriptions

96* 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�

FAC1501/1

11EXERCISE 4

97DPaulusstartedatelevisionantennainstallationserviceon1June20.6.Thefollowingtransactions

tookplaceduringtherstmonth:

98Transactions:

99June 1 Cashinthebankdepositedasopeningcapital,R25000.

100 2 DPaulusmadehisprivateequipmentavailabletothebusiness,R9000.

101 3 Additionalequipmentpurchasedandpaidforbycheque,R12000.

102 4 InstallationfeesforworkdoneonaccountforKannadriftMunicipality,

R4 200�

103 6 VehiclepurchasedoncreditfromVirginiaCarsLimited,R22400.

104 17 KannadriftMunicipalitypaidR2200ontheiraccount.

105 28 Wagespaid,R4000.

106 30 Paid R9 000 to Virginia Cars Limited in part settlement of the

entity’saccount.

12REQUIRED

Use theaccountingequationtoanalysetheabovementionedtransactionsasfollows:

107NB: (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�

108Example: On1July20.6DPaulusreceivedR2000incashfor aninstallationdoneforCook

Financing Corporation�

Date

Accounting equation

Assets = Equity + Liabilities

20�6

July 1 + R2 000 + R2 000 0

109Cashreceivedwillincreasethebank,thereforeassetsincreased.

110Thecashwasforinstallationfees,anincome,thereforeequityincreased.

111

FAC1501/1

13SOLUTION: EXCERCISE 4

Date Accounting equation

Assets = Equity + Liabilities

20�6

June

+ 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

+ R25 000

+ R 9 000

+ R 4 200

– R 4 000

 +R22400

 –R 9000

R47 600 R34 200 R13 400

112Assets (R47 600) = Equity (R34 200) + Liabilities (R13 400)

14EXERCISE 5

113The following transactions relate to Witblits Electricians:

114Transactions:

115Oct 1 WBlits,theowner,depositedasopeningcapital,R10000.

116  ObtainedaloanfromSABank,R6000.

117 3 BoughtequipmentoncreditfromSparksDealers,R1000.

118 9 Issuedachequeforanadvertisementinalocalnewspaper,R200.

119 12 Paidthetelephoneaccountbycheque,R75.

120 13 ReceivedachequefromHHouseforservicesrendered,R500.

121 24 As an additional capital contribution W Blits transferred his motor

vehicletothebusiness,R9000.

122 27 Paidsalariesbycheque,R2000.

123 30 IssuedachequetoSABankasarepaymentontheloan,R1500.

15REQUIRED

Preparetheappropriategeneralledgeraccountswhichreecttheabovetransactionsinthebooks

of Witblits Electricians� The general ledger accounts must be properly balanced at 31 October 20�6�

124NB: Indicate the correct contra general ledger account�

FAC1501/1

16SOLUTION: EXCERCISE 5

125WITBLITS ELECTRICIANS

126GENERAL LEDGER

Dr Capital 1Cr

Date Details Fol RDate Details Fol R

20�6

Oct 1

Bank

Motorvehicles

10 000

9 000

19 000

Dr Bank 2Cr

Date Details Fol RDate Details Fol R

20�6 20�6

Oct

Nov

Capital

Long-term loan:

SABank

Servicesrendered

10 000

6 000

500

Oct 9

Advertisements

Telephone expenses

Salaries

Long-term loan: SA

Bank

Balance

c/d

200

2 000

1 500

12 725

16 500 16 500

Balance

b/d

12 725

Dr Long-term loan: SA Bank 3Cr

Date Details Fol RDate Details Fol R

20�6 20�6

Oct 30

Bank

Balance

c/d

1 500

4 500

Oct

Nov

Bank 6 000

6 000 6 000

Balance

b/d

4 500

Dr Equipment 4Cr

Date Details Fol RDate Details Fol R

20�6

Oct 3SparksDealers 1 000

Dr Motor vehicles 5Cr

Date Details Fol RDate Details Fol R

20�6

Oct 24 Capital 9 000

FAC1501/1

Dr Sparks Dealers 6Cr

Date Details Fol RDate Details Fol R

20�6

Oct 3Equipment 1 000

Dr Services rendered 7Cr

Date Details Fol RDate Details Fol R

20�6

Oct 13 Bank 500

Dr Telephone expenses 8Cr

Date Details Fol RDate Details Fol R

20�6

Oct 12 Bank 75

Dr Salaries 9Cr

Date Details Fol RDate Details Fol R

20�6

Oct 27 Bank 2 000

Dr Advertisements 10 Cr

Date Details Fol RDate Details Fol R

20�6

Oct 9 Bank 200

127

FAC1501/1

17SELF-ASSESSMENT

128After you have worked through this learning unit, are you

able to:

zdeneincome?

zdeneexpenses?

explainthedifferencebetween(andgiveexamplesof)

incomeandexpenses?

z explain the rules for debiting and crediting different types

ofprot/incomeandlosses/expenseaccounts?

correctlyclassifyanygivenprot/incomeandlosses/ex-

penseaccount?

correctlyenteranygiventransactionconsideringprot/

incomeandlosses/expenseintotheaccountingequation?

correctly apply the accounting equation to any given

transactionconsideringprot/incomeandlosses/expense?

correctlyenteranygiventransactionconcerningprot/

incomeandlosses/expenseintheledgeraccounts?

zprepareatrialbalance?

zprepareaprotorlossaccount?

zprepareastatementofprotorlossandothercomprehen-

siveincome?

129IfyouhavemarkedallJ you may continue to the next learning unit �

130IfyouhavemarkedanyKyouhavetorevisethatspecicsection.

131IfyouhavemarkedanyLyouhavetore-studythatspecicsection.

FAC1501

Introductory Financial

Accounting

BUSINESS DOCUMENTS:

CASH TRANSACTIONS

LEARNING UNIT 4

FAC1501/1

2OVERVIEW

Learning outcomes �� 62

Key concepts �� 62

Assessment criteria �� 63

4�1 Introduction �� 63

4.2 Thenancial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

1Afterstudyingthislearningunityoushouldbeableto:

zdenecashtransactions

zdenesourcedocuments

zexplainthedifferencebetweeninternalsourcedocumentsandexternalbusinessdocuments

zexplaintheapplicablesourcedocumentsinvolvedindifferentcashtransactions

zcompletedifferentbusinessdocuments

KEY CONCEPTS

zCash transactions

zSource documents

zInternalsourcedocuments

zExternalsourcedocuments

zCashslips

zCashregisterrolls

zDuplicatecashinvoices

zOriginalcashinvoices

zDuplicatereceipts

zOriginalreceipts

zDuplicatecashsalesinvoices

zChequecounterfoils

zCheques

zOriginaldeliverynote

zDuplicatedeliverynote

zPetty cash voucher

FAC1501/1

zOriginalcreditcardslip

zDuplicatecreditcardslip

zBank statement

zOriginaldepositslip

zDuplicatedepositslip

zInternetbanking:Noticeofpayment

zValueAddedTax(VAT)

zSales

zPurchases

zCash discount

ASSESSMENT CRITERIA

Theconcept“sourcedocuments”isexplainedandsourcedocumentsapplicable

tocashtransactionsareidentiedusingappropriateexamplesfromentities.

zTheprinciplesofVATandthecalculationthereofisexplainedwithexamples

toverifytheabilitytocalculateVAT.

zTheabilitytocompletebusinessdocumentsapplicabletocashtransactions

fromrelevantnancialdataisdemonstrated.

Theabilitytoapplytheaccountingequationwhenrecordingcashtransactions

is demonstrated�

zTheabilitytorecordcashtransactionsofasoleproprietorinvariousledgers

fromsourcedocumentsisdemonstrated.

4.1 INTRODUCTION

2In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.

4.2 THE FINANCIAL ACCOUNTING CYCLE

3Accountingdataisprocessedwithinadeniteframeworkwhichisknownasthenancialaccounting

cycle.Thenancialaccountingcyclewasexplainedinlearningunit1.

4Youwillrememberthat,accordingtothenancialaccountingdiagram,theremustrst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.

4.3 CASH TRANSACTIONS

5The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oat.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.

FAC1501/1

4.4 BUSINESS DOCUMENTS

6When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�

7Therearetwotypesofsourcedocuments,namely:

zInternal source documents

Internalsourcedocumentsarethosedocumentspreparedbytheentityitselftorecordtransac-

tions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:

— 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

zExternal 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:

— originalcashpurchasesinvoices

— originalreceipts

— cheques

— cashslips

4.5 STARTING A BUSINESS ENTITY

8MrBingoleSithole,aqualiedelectrician,startsasmallserviceentity,BSElectrical,fromhomeon

2 January 20�6�

9Before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

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.

10Helping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.

11BSElectricalalsoappliedfor:

zInternet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.

zAbusinesscreditcardwithHelpingBankLimitedtobeabletodothenecessarypurchasesfor

the entity�

zA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.

zAbusinesstelephonewithTelkom.

zAVATnumberwiththeSouthAfricanRevenueService(SARS).

4.6 VALUE ADDED TAX (VAT)

12If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�

13Once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:

zCategory 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.

zCategory 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.

zCategory 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speci-

callyappliedinwritingforamonthlybasis.

FAC1501/1

zCategory 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ap-

prove.Thesearevendorswhoseentitiesconsistoffarmingactivitiesandwhosetaxablesupplies

donotorarenotlikelytoexceedR1,5million.

zCategory 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:

—

Thevendor’sentityentailssolelyofoneormoreactivitiesconsistingofthelettingofxed

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.

zCategory 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�

14Becausewearedealingwithsmallentitiesinthismodule,wewilllookatcategoriesAandB(with

two-monthVATperiods).

15Value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.

16Thefollowingledgeraccountsmustbeopened:

za VAT input account

za VAT output account

zattheendofeverysecondmonthaVATcontrolaccount,todeterminetheamountrefundableby

orpayabletoSARS.

17TheVATinputaccountandtheVAToutputaccountwillbeclosedofftotheVATcontrolaccountatthe

endofeverysecondmonth.

FAC1501/1

18TheamountsofallthetransactionswillthereforealwaysbetheamountexcludingVAT.

19The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-ling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.

20The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:

zThe 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rst.

zThe 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fa-

vourablecash-owadvantageforthevendor.Saythepaymentsbasisisapplied,then,ifaven-

dor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.

21To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.

zfor supplies under R50 (including VAT)

Theissuingoftaxinvoicesisoptional.

zfor supplies between R50 (including VAT) and R5 000 (including VAT)

Anabridgedtaxinvoicewiththefollowinginformationmustbeissued:

— 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

zeither:

— 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reectedonthetaxinvoice.

FAC1501/1

zfor 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

22AlltaxinvoicesmustbeissuedwithamountsstatedinthecurrencyofSouthAfrica.

23Debitandcreditnotescanalsobeissuedif:

zthesupplyofgoodsorserviceswerecancelled

zthenatureofthesupplyofgoodsorserviceshasbeenfundamentallyvariedoraltered

ztheconsideration(priceincludingVAT)ofthegoodsorserviceshasbeenalteredbyagreement

withtherecipient

zgoodsorservicessuppliedhavebeenreturned

24Thesecreditnotesissuedmustcontainthefollowinginformation:

zthe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:

— theamountoftheexcesstax;or

— astatementthatthereductionincludestaxandtherateoftaxapplied

zthereasonfortheissuingofthecreditnotewithsufcientinformationtoidentifyitwithreference

totheoriginalsupply

25Some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nalproductforhumanconsumption.

26Supply of nancial 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.

zHow to calculate the VAT amount when the VAT inclusive amount is given

27BelowisanexplanationofhowtocalculatetheVATamountwhentheVATinclusiveamountisgiven.

29VATexclusive 30=31100%

32VAT 33=3414%

35VATinclusive 36=37114%

39VAT amount = VATinclusiveamount x 14

40 1 114

41When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:

43R6612 x 14 = R812

44 1 114

FAC1501/1

45ThereforetheVATexclusiveamountwillbeR6612-R812=R5800.

zHow to calculate the VAT amount when the VAT exclusive amount is given

46BelowisanexplanationofhowtocalculatetheVATamountwhentheVATexclusiveamountisgiven.

47VATexclusive 48=49100%

50VAT 51=5214%

53VATinclusive 54=55114%

57VAT amount = VATexclusiveamount x 14

58 1 100

59When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:

61R5800 x 14 = R812

62 1 100

63ThereforetheVATinclusiveamountwillbeR5800+R812=R6612.

64You will use the same methods to calculate VAT output and VAT input.

4.7 COMPREHENSIVE EXAMPLE

65ConsiderthefollowingtransactionsbyBSElectrical:

66Transaction 1:

67Mr 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.

68Explanation:

69Money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.

70Source documents:

(a) Duplicate receipt

71BS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.

FAC1501/1

No.0001  Date:2 January 20.6

Receivedfrom: Mr B Sithole

R c

Amount: Hundred thousand rand only

Rand

Cent:  None 100 000 00

For:  Capital contribution by the owner (cheque)

BS Electrical

Signature: S Peterson

(b) Duplicate deposit slip

73The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.

74The 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rst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.

FAC1501/1

Helping Bank Limited ChequeAccountDepositSlip

Helpende Bank Beperk Tjekrekeningdepositostrokie

Credit

Krediteer

Acc no

Reknr 9 0 0 0 - 1 2 3 4 5 6

Date

Datum 2 January 20.6

Name/Naam BS Electrical

Bank notes Banknote

Nickel Nikkel

Bronze Brons

Moneyandpostal

orders Poswisselsenposorders

SUBTOTAL/SUBTOTAAL

Drawer’sname

Trekker se naam Bank

Branch no

Taknr

1Mr B Sithole

Helping Bank

Limited 90–00–00 100 000 00

Total/Totaal 100 000 00

Cheques etc, as above, for collection to be available as cash when

paid. While acting in good faith and exercising responsible care,

the Bank will not accept responsibility for ensuring that depositors/

accountholdershavelawfultitletocheques,etccollected.

Tjeksens,soosbo,ingehandigvirinvorderingwatnabetalingaskon-

tant beskikbaar sal wees. Alhoewel die Bank in goeie trou handel

en alle redelike voorsorgmaatreëls tref, sal die Bank nie die verant-

woordelikheidaanvaaromteversekerdatdeposante/rekeninghouers

regmatigetitelopingevorderdetjeks,enshetnie.

*Forbank

use

* Vir bank

gebruik

Depositedby/Gedeponeerdeur:S Peterson

76Transaction 2:

77On 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.

78Explanation:

79Toolsandequipment(anasset)increasesandmustbedebited.

80Paidbycheque;bank(anasset)decreasesandmustbecredited.

A cheque is an instruction to the bank to pay a sum of money to a certain person or en-

tity. The amount of money in the current bank account is reduced by the amount of each

cheque that is written out.

FAC1501/1

81Source documents:

(a) Cheque counterfoil

82Mrs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.

83To 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.

84Another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.

Date 02/01/20.6

NOT TRANSFERABLE

90–00–00–01

To Big Builders Helping Bank Limited

For Tools and

equipment

Pretoria Date: 2 January 20.6

Balance R

Deposit RPay: Big Builders or Bearer

Subtotal RThe sum of: Ten thousand rand only 10 000,00

This cheque R10 000,00

Balance R

B Sithole S Peterson

For: BS Electrical

0001 0001:900000•:9000 123456!!• 01

(b) Original cash invoice

85MrsSPetersonreceivedthecashinvoicefromBigBuildersafterpaymentforthetoolsandequipment

bought� The cash invoice is a supporting document�

FAC1501/1

BIG BUILDERS

900NarrowDrive

PRETORIA

Tel(012)333–1615

VAT registration number

5590223986

POBox2176

PRETORIA0001

Fax(012)333–1616

Date: 2 January 20.6 TAX INVOICE No: 0273

To: BS Electrical

499 Tshwane Drive

Pretoria

VAT registration number 8960225750

Payment method

Cheque/debit card

Cash

Credit card

Account

Code Description Qty Total price

IBM1334

IBM2043

IBM6033

Tool box

Electrician tool kit

Screw driver

Vat@14%

4 626,75

4 000,00

1 4 5,1 8

8 771,93

1 228,07

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.

87Calculation:

88VAT on R8 771,93

89R8771,93 x 14 =R1228,0702=R1228,07

1 100

90The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.

The general rules for the rounding off of an amount are:

zIf 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

zIf 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.

FAC1501/1

92In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�

93Transaction 3:

94On 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.

95Explanation:

96Toolsandequipment(anasset)increasesandmustbedebited.

97Paidbycheque;bank(anasset)decreasesandmustbecredited.

98Source documents:

(a) Cheque counterfoil

99Mrs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.

Date 02/01/20.6

NOT TRANSFERABLE

90–00–00–01

To Wiseman Traders Helping Bank Limited

For Tools and

equipment

Pretoria Date: 2 January 20.6

Balance R

Deposit RPay: Wiseman Traders or Bearer

Subtotal RThe sum of: Three thousand and fourteen Rand

and fty ve Cents 3 014,55

This cheque R3 014,55

Balance R

B Sithole S Peterson

For: BS Electrical

0002 0002:900000•:9000 123456!!• 01

(b) Original cash invoice

100Mrs 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.

FAC1501/1

If an entity gets a cash discount, the discount is subtracted from the original price pay-

able and only the nal 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

VAT registration number

6702336097

POBox1165

PRETORIA0001

Fax(012)335–1629

Date: 2 January 20.6 TA X INVOICE No: 0578

To: Cash

Payment method

Cheque/debit card

Cash

Credit card

Account

Code Description Qty Total price

FCR1268 Fancy cash register

-10% discount

VAT@14%

12 938,16)

(293,82)

2 644,34)

370,21)

Invoice total 3 014,55))

Amount tendered 3 014,55))

Change 0,00))

VAT included @ 14% 370,21))

E & OE

101Calculations:

102Selling price (VAT exclusive)

103R3349,50 x 100 =R2938,16

1 114

104Cash discount

105R2938,16 x 10 =R293,816=R293,82

1 100

106The 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.

107Inthiscasetherst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�

108

FAC1501/1

109VAT on R2 644,34

110R2644,34 x14 =R370,2076=R370,21

1 100

111Transaction 4:

112On3January20.6MrsSPetersonissuedchequenumber0003forR300asthecashoatforthe

cashregister.Thechequewascashedforsmallchangetobekeptinthecashregister.

113Explanation:

114Cashoat(anasset)increasesandmustbedebited.

115Paidbycheque;bank(anasset)decreasesandmustbecredited.

116Source documents:

(a) Cheque counterfoil

117A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:

z 1xR50 =R50

z 2xR20 =R40

z 5xR10 =R50

z 10xR5 =R50

z 10xR2 =R20

z 20xR1 =R20

z 40x50c =R20

z100x20c =R20

z200x10c =R20

z200x5c =R10

R300

118Attheendofeachdaythecashoatwillberestoredandkeptinthecashregisterforthenextday.

119MrsSPetersonusedthechequecounterfoiltodotheentryinthebooksofBSElectrical.

120A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.

121

FAC1501/1

Date 03/01/20.6

90–00–00–01

To Cash Helping Bank Limited

For Cash oat Pretoria Date: 3 January 20.6

Balance R

Deposit RPay: Cash or Bearer

Subtotal RThe sum of: Three hundred rand only 300,00

This cheque R300,00

Balance R

B Sithole S Peterson

For: BS Electrical

0003 0003:900000•:9000 123456!!• 01

122Transaction 5:

123The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�

124Explanation:

125Rentpaidisanexpensethatdecreasestheprotfortheyearthereforeequitydecreasesandrentpaid

account must be debited�

126Paidmoneyforrent;thereforethebankaccount(anasset)decreasesandmustbecredited.

127Source documents:

(a) Cheque counterfoil

Date

04/01/20.6

NOT TRANSFERABLE

90–00–00–01

To Mr B Sithole Helping Bank Limited

For Rent paid Pretoria Date: 4 January 20.6

Balance R

Deposit RPay: Mr Bingole Sithole or Bearer

Subtotal R The sum of: Two thousand rand only 2 000,00

This cheque R2 000,00

Balance R

B Sithole S Peterson

For: BS Electrical

0004 0004:900000•:9000 123456!!• 01

128Transaction 6:

129On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

FAC1501/1

Mrs V Happyrespectively.

Mrs S Petersononlydepositedthese amountsintothebankaccounton

11 January 20�6�

130Explanation:

131Receivedmoneyforservicesrendered.Therefore,thebankaccount(anasset)increasesandmust

be debited�

132Servicesrenderedareanincomethatincreasestheprotfortheyear.Therefore,equityincreases

and the services rendered account must be credited�

133Source documents:

(a) Duplicate cash sales invoices

134Mr B Sithole issued original cash sale invoices to the customers after he nished the jobs.

Mrs S Peterson kept copies of these cash invoices and used it to do the entries in the books of

BSElectrical.

BS ELECTRICAL

499TshwaneDrive

PRETORIA

Tel(012)429–3111

VAT registration number

8960225750

POBox392

PRETORIA0001

Fax(012)429–3424

Date: 10 January 20.6 TA X INVOICE No: 0001

To: Cash Payment method

Cheque/debitcard

Cash

Credit card

Account

Code Description Qty Total price

SR001 Electrical services

-10% cash discount

VAT@14%

2 hours 1 140,36)

(114,04)

1 026,32)

143,68)

Invoice total 1 170,00)

Amount tendered 1 200,00)

Change 30,00)

VAT included @ 14% 143,68)

E & OE

135Calculations:

136Cash discount

137R1140,36 x 10 =R114,036=R114,04

1 100

FAC1501/1

138VAT on R1 026,31

139R1026,31 x 14 =R143,6834=R143,68

1 100

BS ELECTRICAL

499TshwaneDrive

PRETORIA

Tel(012)429–3111

VAT registration number

8960225750

POBox392

PRETORIA0001

Fax(012)429–3424

Date: 10 January 20.6 TA X INVOICE No:0002

To: Cash Payment method

Cheque/debit card

Cash

Credit card

Account

Code Description Qty Total price

SR001 Electrical services

-10% cash discount

VAT@14%

5 hours 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

140Calculations:

141Cash discount

142R2850,88 x10 =R285,088=R285,09

1 100

143VAT on R2 565,79

144R2565,79 x 14 =R359,2106=R359,21

1 100

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

Date: 10 January 20.6 TAX INVOICE No: 0003

To: Cash Payment method

Cheque/debitcard

Cash

Credit card

Account

Code Description Qty Total price

SR001 Electrical services

-5% Cash discount

VAT@14%

6 hours 3 421,05)

(171,05)

3 250,00)

455,00)

Invoice total 3 705,00)))

Amount tendered 3 705,00)))

Change 0,00)))

VAT included @ 14% 455,00)))

E & OE

145Calculations:

146Cash discount:

147R3421,05 x 5 =R171,0525=R171,05

1 100

148VAT on R3 250,00

149R3250,00 x 14 =R455,00

1 100

(b) Duplicate receipts

150Mrs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.

151

FAC1501/1

No.0002 Date:10 January 20.6

Receivedfrom: Mnr P Lucky

R c

Amount: One thousand one hundred and seventy rand only

Rand

Cent None 1 170 00

For  Services rendered (cash)

BS Electrical

Signature S Peterson

No.0003 Date:10 January 20.6

Receivedfrom: Mrs V Happy

R c

Amount: Two thousand nine hundred and twenty ve rand only

Rand

Cent None 2 925 00

Vir Services rendered (cheque)

BS Electrical

Signature S Peterson

152Mr 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.

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

153The 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.

FAC1501/1

Helping Bank Limited ChequeAccountDepositSlip

Helpende Bank Beperk Tjekrekeningdepositostrokie

Credit

Krediteer

Acc no

Reknr

Date

Datum 11 January 20.6

Name/Naam BS Electrical

Bank notes Banknote 1 170 00

Nickel Nikkel

Bronze Brons

Moneyandpostal

orders Poswisselsenposorders

SUBTOTAL/SUBTOTAAL 1 170 00

Drawer’sname

Trekker se naam Bank

Branch no

Taknr

1Mrs V Happy

Growing Bank

Limited 90–05–60 2 925 00

Total/Totaal 4 095 00

Chequesetc,asabove,for collection tobeavailableas cashwhen

paid.Whileactingingoodfaithandexercisingresponsiblecare,the

Bankwillnotacceptresponsibilityforensuringthatdepositors/account

holdershavelawfultitletocheques,etccollected.

Tjeks ens, soos bo, ingehandig vir invordering wat na betaling as

kontantbeskikbaarsalwees.AlhoeweldieBankingoeietrouhandel

enalleredelikevoorsorgmaatreëlstref,sal die Bankniedieverant-

woordelikheidaanvaaromteversekerdatdeposante/rekeninghouers

regmatigetitelopingevorderdetjeks,enshetnie.

*Forbank

use

* Vir

bankgebruik

Depositedby/Gedeponeerdeur:S Peterson

154Transaction 7:

155On15January20.6MrBSitholedecidedthathewouldbuythedifferenttypesofcablesandother

ttingsnecessaryfortheservicesherendersandkeepitinBSElectrical’sinventory.Clientscould

thenbuythenecessarycableandttingsfromBSElectricalandMrBSitholecouldadvisethemon

whatisneededforaspecicservicerendered.BSElectricalwouldgeta20%discountiftheentity

buysatbulkfromHugeWholesalers.

156MrBSitholehandedMrsSPetersonthefollowinglistofitemsshehastoorderfromHugeWholesalers:

z1000moftwo-phaseelectriccable

z1000mofthree-phaseelectriccable

z1boxof100rollsofinsulationtape

z2boxesof100lightttingseach

z1boxof100uorescentlightttings

FAC1501/1

z2boxesof100lightswitcheseach

z2boxesof100plugswitcheseach

157The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.

158The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.

159Explanation:

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 prot for the year. Therefore, equity

decreases and purchases account must be debited.

160Purchasesisanexpensethatdecreasestheprot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.

161Source documents:

(a) Delivery note

162Huge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.

FAC1501/1

HUGE WHOLESALERS

1167 Marine Drive

PRETORIA

Tel(012)336–3433

VAT registration number

5591223986

POBox1550

PRETORIA0001

Fax(012)336–3434

Date: 15 January 20.6 DELIVERY NOTE No: SP6058

Supplied to:

BS Electrical

499 Tshwane Drive

Pretoria

P O Box 392

PRETORIA

0001

Code Description Qty Unit price

(excl VAT)

Total price Checked

EC1002

EC1003

IT1001

LF1002

FLF1002

LS1002

PS1002

Two-phase electric cable

Three-phase electric cable

Insulation tape

Light ttings

Fluorescent light ttings

Light switches

Plug switches

1 000 m

1 box

2 boxes

1 box

2 boxes

300

3 245

7 999

998

1 215

10 000

13 000

300

6 490

7 999

1 996

2 430

00)

√

VAT@14%

42 215

5 910

00)

Total 48 125 10

VAT included @ 14% 5 910 10

Note:

Discount of 20% applicable

Checkedby:Mrs S PetersonSignature:S Peterson Date: 15 January 20.6

E &OE

163Calculations:

164VAT on R42 215

165R42215,00 x 14 =R5910,10

1 100

(b) Original cash invoice

166Ifthedeliverynotewascorrect,anoriginalcashinvoiceforthenal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.

FAC1501/1

HUGE WHOLESALERS

1667 Marine Drive

PRETORIA

Tel:(012)336-343

VAT registration number

5591223986

POBox1550

PRETORIA0001

Fax(012)336–3434

Date: 15 January 20.6 TA X INVOICE No: 5996

To: BS Electrical

499 Tshwane Drive

Pretoria

VAT registration number 8960225750

Payment method

Cheque/debitcard

Cash

Credit card

Account

Code Description Qty Total price

EC1002

EC1003

IT1001

LF1002

FLF1002

LS1002

PS1002

Two-phase electric cable

Three-phase electric cable

Insulation tape

Light ttings

Fluorescent light ttings

Light switches

Plug switches

1 000 m

1 box

2 boxes

1 box

2 boxes

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

167Calculations:

168Cash discount

169R10000,00+R13000,00+R300,00+R6490,00+R7999,00+R1996,00+R2430,00=R42215,00

170R42215,00 x 20 =R8443,00

1 100

171VAT on R33 772,00

172R33772,00 x 14 =R4728,08

1 100

173Mrs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

FAC1501/1

entriesinthebooksofBSElectrical.MrsSPetersonreceivedanSMSasconrmationofthepayment

madetoHugeWholesalers.

174Mrs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.

175The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.

176Theinternetbanktransactionwasdoneonlyasanexamplebutitwillnotbediscussedfurtherduring

this course�

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:  905520X611363667435578

Paymentdate:   20.6/01/15

Paymentmadeby:  BS Electrical

Paymentmadeto:  Huge Wholesalers

Beneciaryaccountnumber: 9000522968

Fortheamountof:  R38 500,08

Referenceonbeneciarystatement: BS Electrical

PleaserememberthatthefollowingapplytointernetbankingpaymentsonnonHelpingbank

accounts

zPaymentsmadeonweekdaysbefore15:30willbecreditedtothereceivingbankaccountbymidnight

ofthesameday.

zPaymentsmadeonweekdaysafter15:30willbecreditedbymidnightthefollowingday.

zPayments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condential.Ifthe

transmissionhasbeenmisdirectedtoyou,pleasecontactusimmediately.Thankyou.

HelpingBankLimited,RegNo19X0/005959/05

177Transaction 8:

178On16January20.6,MrsSPetersonissuedacashchequenumber0005forR200astheimpressamount

tostartthepettycashoatofBSElectrical.ThechequewascashedandthemoneywaskeptbyMrsS

Petersonwhoactedaspettycashier.

FAC1501/1

179Explanation:

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 oat. Petty cash is

the same as cash on hand and is an asset.

A cheque for a predetermined amount known as a petty cash oat is drawn and cashed

for this purpose. The oat is then kept entirely separate from the monies received by the

entity in the normal course of its business. Usually the petty cash oat is restored to its

original balance at the end of the month.

180Pettycash(anasset)increasesandmustbedebited.

181Paidbycheque,bank(anasset)decreasesandmustbecredited.

182Source documents:

(a) A cheque counterfoil

183A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.

Date 16/01/20.6

90–00–00–01

To Cash Helping Bank Limited

For Petty cash Pretoria Date: 16 January 20.6

Balance R

Deposit RPay: Cash or Bearer

Subtotal RThe sum of: Two hundred Rand only 200,00

This cheque R200,00

Balance R

B Sithole S Peterson

For: BS Electrical

0005 0005:900000•:9000 123456!!• 01

184Transaction 9:

185On17January20.6,MrsSPetersonboughtpostagestampsandtookR50(VATinclusive)outofpetty

cashtopayforit.

186Explanation:

187Postageisanexpensethatdecreasestheprotfortheyear,thereforeequitydecreasesandpostage

account must be debited�

188Pettycash(anasset)decreasesandmustbecredited.

FAC1501/1

189Source documents:

(a) Petty cash voucher

190Mrs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

OfcetothepettycashvoucherasproofthatsheactuallyboughtthestampswiththeR50takenfrom

petty cash�

191To 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.

PETTY CASH VOUCHER No. 001

Date: 17 January 20.6 Amount

Required for: R c

Postmaster – postage stamps 50 00

Signature: S Peterson

Authorised by: B Sithole

192Transaction 10:

193On17January20.6,MrTWisemanboughtelectriccablesandttingstobeinstalledbyMrBSithole

inhisnewhome.Hepurchased:

z50mtwophaseelectriccable,R712,50

z4rollsinsulationtape,R17,10

z27plugswitches,R233,93

z20lightswitches,R142,27

z20lightttings,R924,77

z3uorescentlightttings,R341,96

194MrBSitholedeliveredandinstalledtheelectriccablesandttings.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.

195Explanation:

Any trading inventory (inventory bought to be sold) sold is called sales. Sales is an in-

come that increases the prot for the year. Therefore, equity increases and sales account

must be credited.

196Receivedmoney,thereforethebankaccount(anasset)increasesandmustbedebitedwiththetotal

amountofR2372,53(cablesandttings)+R9750,00(servicesrendered)=R12122,53.

FAC1501/1

197Salesisanincomethatincreasestheprotfortheyear.Therefore,equityincreasesandthesales

accountmustbecreditedwithR2081,17.

198Servicesrenderedisanincomethatincreasestheprotfortheyear.Therefore,equityincreasesand

servicesrenderedaccountmustbecreditedwithR8552,63.

199Source documents:

(a) Cash register roll

200The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.

201Usually only one entry for the total cash sales of the specic 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.

202Cheque fraud is on the increase and most entities will only accept bank guaranteed cheques or

chequesfrompeopletheyknowwell.

203Inbig businesses eachcashierwillhave theirown passwordand code aswellastheir own cash

oats.Attheendofthecashiersshiftthecashregisterwilladdallthesalesbythespeciccashier.

Thetotalofthesalesmustcorrespondwiththecashlesstheamountforthecashoatinthecash

responsiblefortheirowncashregister.

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ttings

20@R46,2384

LF1002 924,77

Fluorescentlightttings

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

204Calculation:

205VAT

206R2372,53x

14 =R291,36

207 114

(b) Duplicate cash invoice

208MrBSithole issued originalcashsaleinvoices tothe customersafterhenishedthe jobs. MrsS

PetersonkeptcopiesofthesecashinvoicesandusedittodotheentriesinthebooksofBSElectrical.

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

Date: 17 January 20.6 TAX INVOICE No: 0004

To: Mr T Wiseman

25 Park Street

Pretoria

VAT registration number 4301235678

Payment method

Cheque/debit card

Cash

Credit card

Account

Code Description Qty Total

price

SR001 Electrical services

VAT @ 14%

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

209Mrs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�

No.0005 Date:17 January 20.6

Receivedfrom: Mr T Wiseman

R c

Amount: Twelve thousand one hundred and twenty two rand

Rand

Cent: Fifty three cents 12 122 53

For: Inventory (Cash slip no 0001 – R2 372,53)

Services rendered (Cash invoice no 0004 – R9 750,00)

(cheque) BS Electrical

Signature S Peterson

(d) Duplicate deposit slip

210The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.

FAC1501/1

Helping Bank Limited ChequeAccountDepositSlip

Helpende Bank Beperk Tjekrekeningdepositostrokie

Credit

Krediteer

Acc no

Reknr

Date

Datum 18 January 20.6

Name/Naam BS Electrical

Bank notes Banknote

Nickel Nikkel

Bronze Brons

Moneyandpostal

orders Poswisselsenposorders

SUBTOTAL/SUBTOTAAL

Drawer’sname

Trekker se naam Bank

Branch no

Taknr

1Mr T Wiseman

Growing Bank

Limited 90–05–60 12 122 53

Total/Totaal 12 122 53

Chequesetc,asabove,for collection tobeavailableas cashwhen

paid.Whileactingingoodfaithandexercisingresponsiblecare,the

Bankwillnotacceptresponsibilityforensuringthatdepositors/account

holdershavelawfultitletocheques,etccollected.

Tjeks ens, soos bo, ingehandig vir invordering wat na betaling as

kontantbeskikbaarsalwees.AlhoeweldieBankingoeietrouhandel

enalleredelikevoorsorgmaatreëlstref,sal die Bankniedieverant-

woordelikheidaanvaaromteversekerdatdeposante/rekeninghouers

regmatigetitelopingevorderdetjeks,enshetnie.

*Forbank

use

* Vir bank

gebruik

Depositedby/Gedeponeerdeur:S Peterson

4.8 EXERCISES AND SOLUTIONS

3EXERCISE 1

211Consider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

FAC1501/1

COMPUTER WORLD

590DelphiDrive

PRETORIA

Tel(012)435–1615 VAT registration number

7704337090

POBox5116

PRETORIA0001

Fax(012)435–1639

Date: 16 January 20.6 TAX INVOICE Invoice No: B145

To: BS Electrical

499 Tshwane Drive

Pretoria

VAT registration number 8960225750

Payment method

Cheque/debit card

Cash

Credit card

Account

Code Description Qty Total price

C755 Compy 755 computer

VAT @ 14%

114 271,05

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

VAT registration number

6805736098

POBox1069

PRETORIA0001

Fax(012)997–1111

Date: 16 January 20.6 TA X INVOICE No: 1569

To: BS Electrical

499 Tshwane Drive

Pretoria

VAT registration number 8960225750

Payment method

Cheque/debit card

Cash

Credit card

Account

Code Description Qty Total price

PE101 Point of sales inventory programme

VAT@14%

11 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,ttingsandinsulationtape.Hehaspur-

chased:

z5rollsofinsulationtape(IT1001)@R4,275perroll

z10plugswitches(PS1002)@R8,664perswitch

z6lightswitches(LS1002)@R7,1136perswitch

z6lightttings(LF1002)@R46,2384pertting

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ttingstobeinstalledinhisnewhome.

Hepurchased:

z40mofthree-phasecable(EC1003)@R18,525permeter

z10rollsofinsulationtape(IT1001)@R4,275perroll

z50plugswitches(PS1002)@R8,664perswitch

z45lightswitches(LS1002)@R7,1136perswitch

z30lightttings(LF1002)@R46,2384pertting

z10uorescentlightttings(FLF1002)@R113,9886pertting

MrBSitholeinstalledtheelectriccableandttingsinMrBStrong’snewhomeandissuedorigi-

naltaxinvoicenumber0006tohimforR2600,00.MrBStrongpaidtheamountfortheelectric

cableandttings,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ttingsandswitchesfromHugeWholesalers.Since

therstpaymentwasmadeviatheinternetanditwasforthesignicant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

VAT registration number

5591223986

POBox1550

PRETORIA0001

Fax(012)336–3434

Date: 22 January 20.6 DELIVERY NOTE No: SP6058

Supplied to: BS Electrical

499 Tshwane Drive

Pretoria

P O Box 392

PRETORIA

0001

Code Description Qty Unit price

(excl.)

Total price Checked

IT1001

LF1002

FLF1002

LS1002

PS1002

Insulation tape

Light ttings

Fluorescent light ttings

Light switches

Plug switches

VAT @ 14%

1 box

2 boxes

1 box

2 boxes

300

3 245

7 999

998

1 215

300

6 490

7 999

1 996

2 430

√

19 215

2 690

Total 21 905 10

VAT included @ 14% 2 690 10

Note:

Discount of 20% if paid on delivery.

Checkedby: Mrs S Peterson Signature:S Peterson  Date:22 January 20.6

E & OE

FAC1501/1

HUGE WHOLESALERS

1667 Marine Drive

PRETORIA

Tel(012)336–3433

VAT registration number

5591223986

POBox1550

PRETORIA0001

Fax(012)336-3434

Date: 22 January 20�6 TAX INVOICE No: 5996

To: BS Electrical

499 Tshwane Drive

Pretoria

VAT registration number 8960225750

Payment method

Cheque/debit card

Cash

Credit card

Account

Code Description Qty Total price

IT1001

LF1002

FLF1002

LS1002

PS1002

Insulation tape

Light ttings

Fluorescent light ttings

Light switches

Plug switches

-20% cash discount

VAT@14%

1 box

2 boxes

1 box

2 boxes

300,00))

6 490,00))

7 999,00))

1 996,00))

2 430,00))

19 215,00))

(3 843,00))

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

213(7) On23January20.6MrsSPetersontookR56fromthepettycashtobuystationeryfromPen

andPencils.

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

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.

214Internal documents to be completed:

Date

90–00–00–01

To Helping Bank Limited

For Pretoria Date:

Balance R

Deposit RPay: or Bearer

Subtotal R The sum of:

This cheque R

Balance R

B Sithole S Peterson

For: BS Electrical

0006 0006:900000•:9000 123456!!• 01

Date

90–00–00–01

To Helping Bank Limited

For Pretoria Date:

Balance R

Deposit RPay: or Bearer

Subtotal R The sum of:

This cheque R

Balance R

B Sithole S Peterson

For: BS Electrical

0007 0007:900000•:9000 123456!!• 01

Date

90–00–00–01

To Helping Bank Limited

For Pretoria Date:

Balance R

Deposit RPay: or Bearer

Subtotal R The sum of:

This cheque R

Balance R

B Sithole S Peterson

For: BS Electrical

0008 0008:900000•:9000 123456!!• 01

FAC1501/1

Date

90–00–00–01

To Helping Bank Limited

For Pretoria Date:

Balance R

Deposit RPay: or Bearer

Subtotal R The sum of:

This cheque R

Balance R

B Sithole S Peterson

For: BS Electrical

0009 0009:900000•:9000 123456!!• 01

Date

90–00–00–01

To Helping Bank Limited

For Pretoria Date:

Balance R

Deposit RPay: or Bearer

Subtotal R The sum of:

This cheque R

Balance R

B Sithole S Peterson

For: BS Electrical

00010 00010:900000•:9000 123456!!• 01

BS ELECTRICAL

499TshwaneDrive

PRETORIA

Tel(012)429–3111

VAT registration number

8960225750

POBox392

PRETORIA0001

Fax(012)429–3424

Date:

TAX INVOICE No: 0005

To: Payment method

Cheque/debitcard

Cash

Credit card

Account

Code Description Qty Total price

Invoice total

Amount tendered

Change

VAT included @ 14%

E & OE

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

Date:

TAX INVOICE No: 0006

To: Payment method

Cheque/debitcard

Cash

Credit card

Account

Code Description Qty Total price

Invoice total

Amount tendered

Change

VAT included @ 14%

E & OE

215

No.0006 Date:

Receivedfrom: 

R c

Amount:

Rand

Cent: 

For:

BS Electrical

Signature

216

100

FAC1501/1

No.0007 Date:

Receivedfrom:

R c

Amount:

Rand

Cent: 

For:

BS Electrical

Signature

217

Helping Bank Limited ChequeAccountDepositSlip

Helpende Bank Beperk Tjekrekeningdepositostrokie

Credit

Krediteer

Acc no

Reknr

Date

Datum

Name/Naam

Bank notes Banknote

Nickel Nikkel

Bronze Brons

Moneyandpostal

orders Poswisselsenposorders

SUBTOTAL/SUBTOTAAL

Drawer’sname

Trekker se naam Bank

Branch no

Taknr

Total/Totaal