FAC1502E1_70539340 3..367 FAC1502 Study Guide

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# 1997 University of South Africa
Revised edition 2005, 2006, 2007, 2008, 2009, 2010, 2011, 2013, 2014, 2016, 2017
All rights reserved
Printed and published by the
University of South Africa
Muckleneuk, Pretoria
FAC1502/1/2018
70539340
3B2

ACN-Style

CONTENTS

Introduction and overview of the module
Topic A

Topic B

Topic C

Topic D

Topic E

(v)

THE BASIC PRINCIPLES AND SPHERES OF ACCOUNTING

STUDY UNIT 1: THE NATURE OF ACCOUNTING THEORY, PRINCIPLES,
ACCOUNTING POLICY, PRACTICE AND PROCEDURES

STUDY UNIT 2: THE FINANCIAL POSITION

STUDY UNIT 3: THE FINANCIAL PERFORMANCE (RESULT)

STUDY UNIT 4: THE DOUBLE-ENTRY SYSTEM AND THE ACCOUNTING
PROCESS

COLLECTING AND PROCESSING THE ACCOUNTING DATA OF
ENTITIES

STUDY UNIT 5: PROCESSING ACCOUNTING DATA

STUDY UNIT 6: ADJUSTMENTS

STUDY UNIT 7: THE CLOSING-OFF PROCEDURE, DETERMINING
PROFIT OF AN ENTITY AND PREPARING
FINANCIAL STATEMENTS

116

ACCOUNTABILITY FOR CURRENT AND NON-CURRENT ASSETS

167

STUDY UNIT 8: CASH AND CASH EQUIVALENTS

169

STUDY UNIT 9: TRADE AND OTHER RECEIVABLES

191

STUDY UNIT 10: INVENTORY

220

STUDY UNIT 11: PROPERTY, PLANT AND EQUIPMENT

230

STUDY UNIT 12: OTHER NON-CURRENT ASSETS

259

ACCOUNTABILITY FOR CURRENT AND NON-CURRENT LIABILITIES

263

STUDY UNIT 13: CURRENT LIABILITIES

265

STUDY UNIT 14: NON-CURRENT LIABILITIES

277

ACCOUNTING REPORTING

285

STUDY UNIT 15: FINANCIAL STATEMENTS OF A SOLE
PROPRIETORSHIP

287

STUDY UNIT 16: NONPROFIT ENTITIES

314

STUDY UNIT 17: INCOMPLETE RECORDS

342

FAC1502/1/1/2018

(iii)

Aims of this module
After having studied this module, you should be able to
.
.

.
.
.
.

apply the basic principles of accounting
gather, process and record relevant information and prepare basic statement of profit or loss
and other comprehensive income (income statement), statement of changes in equity and
statement of financial position (balance sheet)
record assets properly and be accountable for assets
record liabilities properly and be accountable for liabilities
keep proper records to ascertain the financial performance and financial position of sole
proprietors and non-profit entities
prepare proper books from incomplete records

NOTE
ALL REFERENCES TO ‘‘ACCOUNTING’’ IN THIS STUDY GUIDE MEANS ‘‘FINANCIAL
ACCOUNTING’’.

(iv)

INTRODUCTION AND OVERVIEW
OF THE MODULE

We would like to welcome you as a student to Module I (FAC1502) of the Accounting I course.
This is the second module of a series of modules presented by the Department of Financial
Accounting at UNISA. The title of this module is Accounting concepts, principles and
procedures.
The courses in the Department of Financial Accounting are presented to degree level (i.e. with
Accounting III as a major subject). This, together with another major and other subjects, will
enable you to obtain either the BCom or BCompt degree. You may, having completed the
BCom or BCompt degree, study further in accounting by studying the BCom/BCompt (honours)
degree and thereafter the MCom/MCompt and DCom/DCompt degrees. This will take quite a
number of years and hard work, but it is possible! The ultimate goal of many students in
accounting is to become accountants and to follow the BCompt route.
Your first milestone will, however, be to master (i.e. to pass) Accounting FAC1502. You must,
therefore, ensure that you understand and know everything contained in this module as
everything is important. It is not only required of you to know it for the examination, but you WILL
need it in future modules or in your everyday walk of life (if you do not study accounting further).
You may ask: Why is it necessary to study accounting? The most important reason will be: To
account for income and expenditure, and for assets and liabilities. You may say: I do not earn
an income or incur expenses, or I do not owe money or own assets. Our question will be in turn:
What about your pocket money, remuneration for work or part time work, your study bursary or
study loan (which is not an income, but a liability) or what about your clothes, books and
stationery you had to buy for your studies? You have to account for the value of all of it. This
does not only apply to your personal case, but especially to the business you own or the
organisation where you work.
Many persons and/or organisations fall into financial difficulties or even go bankrupt and people
land in jail as a result of their lack of knowledge of accounting. We would like to help you to
prevent this.
Now that you know WHY you must study Accounting, what are the aims of the Accounting
FAC1502 module?
Refer again to the Aims of this module, specified above.

FAC1502/1

(v)

Study activities
In this study guide a variety of exercises are given. You should do these exercises by yourself
also and compare your attempt with the solutions given in the study guide. It also contains selfevaluation questions, to encourage your active participation in the learning process. These are
a combination of reading, studying, doing and thinking activities that are presented in a flexible
manner. This will enable you to absorb the knowledge content of the topic, to practice your
understanding and to direct your thoughts.
This is important because as you encounter these study activities and actually perform them,
you will become directly involved in controlling the extent and the quality of your learning
experience. In short, how much and how well you learn, will depend on the extent of your
progress through the study activities, and the quality of your effort.
In cases where exercises are given, the questions should be answered without reference to
the study material. You should then mark your answer against the answer given in the study
guide. Where your answer differs from that given in the study guide, ask yourself why?, how?,
when?, where? what did I do wrong? If more than 25% is incorrect, try again to answer the
question without referring to the study guide or your previous attempt. Accounting is very much
a practical subject; the more you practice, the better.

Meaning of words
Outcomes are communicated and assessment criteria are phrased in terms of what you should
be able to do. This involves the use of action words, describing what you must do in the
learning activity.
The following list of words includes examples of the action words that you will encounter in this
module. (You need not study this.)

Meaning of action words
WORD
1
2
3

(vi)

Read

MEANING

So as to obtain a broad and basic background, knowledge or
information; do not study.
Read thoroughly Necessary theory that needs to be clearly understood. You may be
assessed on this theory through short questions.
Study
Learn with the view of gaining the highest level of understanding
and mastery which is necessary for examinations, further study
and/or career.
You will not be required to give a definition of a concept in the
examinations. You will, however be required to apply the theory in
the correct accounting format and to follow the correct steps/
procedures. For example, the layout and terminology to be used in
the preparation of financial statements are prescribed. You may not
use any other formats.
Prepare
You must make ready or complete what is required on the basis of
previous study.

TOPIC A

THE BASIC PRINCIPLES AND SPHERES
OF ACCOUNTING

Learning outcome
The learner should be able to describe, calculate and record the financial performance and
financial position of a sole proprietor, by using the basic accounting equation and the
double-entry system to record the various types of transactions.

FAC1502/1

CONTENTS

Study unit

FAC1502/1

Page

THE NATURE OF ACCOUNTING THEORY, PRINCIPLES,
ACCOUNTING POLICY, PRACTICE AND PROCEDURES

THE FINANCIAL POSITION

THE FINANCIAL PERFORMANCE (RESULT)

THE DOUBLE-ENTRY SYSTEM AND THE ACCOUNTING
PROCESS

STUDY UNIT

1
The nature of accounting theory,
principles, accounting policy, practice
and procedures

Learning outcome
You are able to explain what is meant by the nature of accounting theory, principles,
accounting policy, practice and procedures.

Contents

Page

Key concepts

1.1

Introduction

1.2

What is accounting?

1.2.1 Definition

1.2.2 The nature of accounting

1.3

Universal accounting denominator

1.4

Forms of ownership

1.5

Users of financial information

1.5.1 Investors

1.5.2 Employees

1.5.3 Lenders

1.5.4 Suppliers and other trade payables

1.5.5 Customers

1.5.6 Government and their agencies

1.5.7 Public

The fields of accounting

1.6.1 Financial accounting

1.6.2 Management accounting

1.6

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1.7

Accounting principles

1.8

Accounting policy

1.9

Disclosure of accounting policy

1.10

International Financial Reporting Standards (IFRS)

1.11

Accounting standards and statements

1.11.1 Introduction

1.11.2 The Conceptual Framework for Financial Reporting 2010

1.11.2.1 The objective of financial statements

1.11.2.2 Underlying assumption

1.11.2.3 The qualitative characteristics of financial statements

1.11.2.4 The elements of financial statements

1.12

1.11.2.5 Recognition and measurement of the elements of financial
statements

Exercise and solution

Self-assessment

KEY CONCEPTS
.
.
.
.
.
.
.
.
.
.
.
.
.

financial information
decision making
nature of accounting
unit of measurement
forms of ownership
fields of accounting
accounting principles
international financial reporting standards
accounting statements
accounting policy
going concern
qualitative characteristics
elements of financial statements

BEFORE CONTINUING, STUDY TUTORIAL LETTER 101 UP TO THE FIRST ASSIGNMENT.

1.1 Introduction
In this module, we introduce you to the concepts, principles and procedures of accounting. The
first two study units are included mainly to give you some background knowledge. At first, the
information may appear to be rather confusing, but if you follow the study guide step by step,
working through all the examples in the prescribed book and exercises in this study guide, the
methods and procedures will become clear. To master this subject, you must get as much
practise as you can – so start early in the semester.

FAC1502/1

Over the centuries, accounting developed in conjunction with and as part of the economic
system and it performs an extremely useful and important function in society.
Through the ages, records were always kept by hand, but nowadays computers are being used
increasingly. Whichever method is used, the basic principles remain unchanged, since all
activities in a business are still expressed in terms of money and are recorded. However, it is
necessary to know the procedures used in a manual system in order to understand how a
computerised accounting system works.
Read paragraph 1.1 of the prescribed book.

GOLDEN RULE
Accounting CAN NOT be studied by merely reading/memorising. You need to practise,
practise and practise again!

1.2 What is accounting?
1.2.1 Definition
Study paragraph 1.2 of the prescribed book.

Accounting is therefore a process consisting of the following three activities:
identifying those events that are evidence of economic activity (transactions) relevant to the
particular business or entity
. recording the monetary value of the economic events (transactions) in order to provide a
permanent history of the financial activities of a business. Recording involves keeping a
chronological diary of measured events in an orderly and systematic manner and classifying
and summarising economic events
. communicating the recorded information to interested users. This information is communicated through the preparation and distribution of accounting reports, the most common of
which are known as financial statements.
.

Read paragraphs 1.3 and 1.4 of the prescribed book.

GOLDEN RULE
Accounting records transactions in order to provide useful information for decision making.

1.2.2 The nature of accounting
Accounting is a specialised means of communication which is used to convey a specialised
message about an entity’s finances. The recipient of this specialised message (the user of
financial information) must understand it otherwise the information that is conveyed has no
value.
Accounting uses words and figures to convey financial information to the users of such
information. As you progress with your study of accounting you will become familiar with the

FAC1502/1

meaning of these words and figures, which are also known as the concepts, principles and
procedures of accounting. This knowledge will ultimately help you understand the message
contained in financial statements.
Each and every person who is involved in an entity uses financial information to a greater or
lesser degree. Each of us also needs to know something about accounting to manage our
personal financial affairs. Financial resources are limited or scarce, and if we are going to
spend them we must plan properly. Knowledge of accounting is therefore also useful in this
area.
Accounting is therefore a ‘‘language’’ used to convey financial information to interested parties.
Read paragraph 1.7 in the prescribed book thoroughly.

1.3 Universal accounting denominator
The common unit of measurement in accounting is money and in the RSA, the currency is
known as the rand. All an entity’s transactions are converted into monetary values before being
processed. Using money as the common denominator, however, gives rise to two important
limitations:
.

Not all events can be expressed in monetary terms.

The value of money is unstable and is influenced by many economic factors such as
inflation.

1.4 Forms of ownership
The form of a business ownership refers to the way in which a business is owned and
managed – how the original funds for starting the business were raised and how the profits,
losses and risks in the business are divided.
In the RSA, there are four main forms of ownership, namely:
.

sole traders

partnerships

close corporations

companies

Apart from these main forms of entities, non-profit entities can also be distinguished.

Study paragraph 1.5 and read paragraph 1.6 thoroughly in the prescribed book.

1.5 Users of financial information
Financial information is required by many users, who analyse the information for various
decision-making purposes. The following are the most common users of this information:

FAC1502/1

1.5.1 Investors
1.5.2 Employees
1.5.3 Lenders
1.5.4 Suppliers and other trade creditors
1.5.5 Customers
1.5.6 Government and their agencies
1.5.7 Public

Study paragraphs 1.8 to 1.11 in the prescribed book.

1.6 The fields of accounting
Users of financial information can be subdivided into the following two categories:
internal users – for example, management and employees
. external users – for example, investors, creditors and government
.

Two fields of accounting have developed as a result of this distinction between the users of the
information. Financial accounting is concerned with the provision of financial information to
mainly external parties, while management accounting is concerned with the provision of
financial information to people within the entity.

1.6.1 Financial accounting
This field of accounting is concerned with recording transactions and preparing the financial
statements for the entity as a whole. Financial accounting is governed by international financial
reporting standards (IFRS), which consists of external standards which must be adhered to.
These standards ensure the comparability of financial statements between entities.

1.6.2 Management accounting
Management accounting provides financial information for specific purposes. Managers use
this information in their decision making, which leads to the attainment of the objectives of the
entity. Without this financial information, it would be difficult for management to manage
effectively.
In this course we will be concentrating on financial accounting.

Study paragraph 1.12 and read paragraph 1.18 in the prescribed book.

GOLDEN RULE
Financial statements must reveal a fair presentation of the financial position, financial
performance and cash flow of an entity.

FAC1502/1

1.7 Accounting principles
In this study unit we turn our attention to the theory of accounting. You may well ask: ‘‘Why?
Accounting is supposed to be a practical subject’’. This is true, but no subject that is logically
structured can exist without a theoretical foundation.
The techniques used in the practice of accounting are based on conceptual and theoretical
ideas. These ideas are generally known as accounting principles.

1.8 Accounting policy
Situations often occur in our everyday lives that are repetitive (ie they are always the same),
but they would each have a different outcome if we were to act differently each time. If we do
not have some kind of guideline on how we should act in such cases, our actions would
probably be inconsistent. Our friends would think we were unreliable. If we lay down a guideline
so that we always act the same way in a particular situation, we can say that we are
determining a policy for our actions, which will result in our actions being consistent.
We encounter precisely the same situation in accounting. Transactions of a repetitive nature
frequently occur, and the requirement of consistency means that an entity has to establish an
accounting policy to determine exactly how such transactions should be treated. Accounting
policy is thus a set of decisions about how the entity will handle the same type of transaction in
order to achieve a consistent result.

1.9 Disclosure of accounting policy
Since an accounting policy represents an entity’s decisions about situations which it could deal
with in various ways, it has to disclose its accounting policy in its financial statements. For
example, an entity has to indicate what basis it has used to deal with the depreciation of
property, plant and equipment.

1.10 International Financial Reporting Standards (IFRS)
This is the next important concept that you will encounter in your accounting studies. For the
sake of conciseness, we will refer to this as IFRS.
If everyone were to develop his or her own language and grammatical rules, communication
would break down. We therefore have generally applicable language and grammar rules.
Accounting, as a specialised medium of communication, has precisely the same problem. If
each entity were to prepare financial reports according to its own accounting rules and its
interpretation of accounting theory and principles, chaos would result in the world of economics
and business.
A foundation has therefore been developed over the years for the measurement and
disclosure of the results of financial events (transactions).
This foundation is a general framework and encompasses, in broad terms, accounting
concepts, principles, methods and procedures collectively known as IFRS.

In this study guide, we will sometimes disclose more information in the financial statements
than is required by IFRS. This is done to provide more detail and to help you understand
certain concepts.

FAC1502/1

1.11 Accounting standards and statements
1.11.1 Introduction
The objective of creating accounting standards for particular issues (eg for the treatment of
taxation in financial statements) is to limit the variety of available accounting practices, but
without striving for strict uniformity or creating a set of rigid rules for all circumstances. The
ultimate aim of accounting standards is to encourage widespread use of particular standards in
financial reporting and to eliminate undesirable alternatives.

1.11.2 The Conceptual Framework for Financial Reporting 2010
Bear in mind that the framework is not a standard. It is a framework ‘‘... which sets out the
objectives and concepts which underlie the preparation and presentation of financial
statements ...’’.
1.11.2.1 The objective of financial statements
Study paragraph 1.9 in the prescribed book again.

1.11.2.2 Underlying assumption
According to the framework, there is one underlying assumption for financial statements.
This is:
(1) the going concern.
Study paragraph 1.13 in the prescribed book.

1.11.2.3 The qualitative characteristics of financial statements
The fundamental qualitative characteristics are:
(1) relevance
(2) faithful representation
Further enhancements to the qualitative characteristics of financial information are:
(1)
(2)
(3)
(4)

comparability
verifiability
timeliness
understandability

Study paragraph 1.14 in the prescribed book.

1.11.2.4 The elements of financial statements
GOLDEN RULE
The following are elements of financial statements:
. Elements that measure the financial position (assets = equity + liabilities):
(1) assets
(2) liabilities
(3) equity

FAC1502/1

. Elements that measure profitability (profit or loss = increase or decrease in equity):
(4) income
(5) expenses

Study paragraph 1.15 in the prescribed book.

1.11.2.5 Recognition and measurement of the elements of financial statements
Study paragraphs 1.16 to 1.18 in the prescribed book.

1.12 Exercise and solution
We end this study unit with a few revision questions. It is in your own interest to try to answer
these by referring to the study unit or prescribed book.

Exercise
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)

Discuss the nature of accounting.
What is the common unit of measurement in accounting?
Name the four main forms of ownership.
Discuss the different users of financial information.
Differentiate between financial accounting and management accounting.
Name the qualitative characteristics of financial information.
Define the concept of accounting policy.
What is meant by disclosure of accounting policy?
Describe the concept of international financial reporting standards.
Discuss the underlying assumption of financial statements.
Name the fundamental qualitative characteristics of financial statements.
Name the elements of financial statements.

Solution
(1) Refer to paragraph 1.2.2.
(2) The common unit of measurement in accounting is money.
(3) Sole trader
Partnership
Close Corporation
Company
(4) See section 1.5.
(5) See section 1.6.
(6) See section 1.14.3 in the prescribed text book.
(7) See section 1.8 in the study guide.
(8) See section 1.9 in the study guide.
(9) See section 1.10 in the study guide.
(10) See section 1.13 in the prescribed book.
(11) Relevance
Faithful representation

FAC1502/1

(12) Assets
Liabilities
Equity
Income
Expenses

SELF-ASSESSMENT
Now that you have studied this study unit, can you:
.

describe the importance of financial information as a basis for decision making?

discuss the different users of financial information and their needs?

state the different forms of ownership?

discuss the nature of accounting?

explain the difference between financial and management accounting?

name the qualitative characteristics of financial statements?

explain what is meant by the accounting policy?

explain what is meant by the disclosure of the accounting policy?

explain what is meant by the international financial reporting standards?

explain what is meant by the accounting standards and statements?

FAC1502/1

STUDY UNIT

2
The financial position
Learning outcome
Students should be able to describe what the primary purpose of accounting is and what is
understood by the double entry system. They should also be able to calculate the financial
position of an entity and the elements of the basic accounting equation.

Contents
Key concepts

2.1

Introduction

2.2

Accounting entity

2.3

Financial position

2.4

Net asset value

2.5

Application of the basic accounting equation (BAE)

2.6

The double-entry system

2.7

Revision exercises and solutions

2.7.1 Revision exercise 1

2.7.2 Revision exercise 2

Self-assessment

KEY CONCEPTS
.
.
.
.
.
.
.
.

FAC1502/1

Page

Accounting entity
Accounting equation
Financial position
Assets
Liabilities
Equity
Double-entry
Net worth

2.1 Introduction
The primary purpose of accounting is to give information on the financial position and the
financial result of an entity. This study unit deals with the key elements of the financial position.
Read paragraph 2.1 of the prescribed book.

2.2 Accounting entity
Every entity for which separate financial records are kept is an accounting entity. It is extremely
important to see the business as a separate entity from its owners because transactions
entered into by the entity have to be dealt with from the point of view of the entity whose books
are being done.
Study paragraph 1.6 (again) as well as paragraph 2.2 of the prescribed book.

2.3 Financial position
The financial position of the entity is described in terms of assets and interests at a given time.
They are reflected in a statement of financial position, which is essentially an accounting report
on the financial position of an entity. The statement of financial positon communicates relevant
financial information to the owners, creditors and other interested parties.
Study paragraph 2.6 of the prescribed book.

2.4 Net asset value
The difference between the value of assets owned by an entity and the liabilities it has incurred
represents net asset value. If we express this as an equation, then
ASSETS 7 LIABILITIES = NET ASSET VALUE
The net asset value represents the portion by which the assets exceed the liabilities. Net asset
value is therefore also called EQUITY.
Study paragraph 2.3 of the prescribed book.

2.5 Application of the basic accounting equation (BAE)
Exercise

1
The assets of Maxi Services amount to R30 000 and its liabilities (creditors) to R5 000.
Calculate the equity.
We use the BAE. The amounts which are given are substituted for the appropriate symbol and
the unknown symbol is calculated.

FAC1502/1

A
E

Exercise

=
=
=
=

E+L
A–L
R30 000 7 R5 000
R25 000

2
T Tom is the owner of Zebra Services which offers a carpet cleaning service. On
30 November 20.1 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.
Show the BAE for Zebra Services and determine the equity.
Step 1: Identify the assets
Step 1: Equipment
Step 1: Trade receivables
Step 1: Cash

= R100 000
= R40 000
= R10 000

Step 2: Identify the liabilities
Step 1: Trade payables

= R20 000

Substitute these amounts into the equation:
A
E

=
=
=
=

E+L
A–L
R(100 000 + 40 000 + 10 000) 7 R20 000
R130 000

Zebra Service’s financial position can also be presented in the form of statement of financial
position (previously known as balance sheet) as follows:

ZEBRA SERVICES
STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) AS AT 30 NOVEMBER 20.1
ASSETS
Equipment
Trade receivables
Cash in bank

R
100 000
40 000
10 000
150 000

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EQUITY AND LIABILITIES
Equity
Trade payables

R
130 000
20 000

150 000

COMMENT
This statement of financial position (balance sheet) is in a basic form. Later we will deal
with statements of financial positions (balance sheets) in more detail.

Study paragraph 2.5 and 2.6 of the prescribed book.

2.6 The double-entry system
The double-entry system is based on the fact that every transaction affects two or more items
in the BAE. In principle it means that each transaction must be recorded in such a way that the
equation remains in balance. The dual effect which each transaction has on the elements of the
BAE is the fundamental principle on which all entries in an accounting system are based.
Study paragraphs 2.4, 2.6 and 2.7 of the prescribed book.

2.7 Revision exercises and solutions
2.7.1 Revision exercise 1
(1) Define the concept of an accounting entity.
(2) Describe the financial position of an entity in terms of the BAE.
(3) Explain the nature of
(a) assets
(b) equity
(c) liabilities
(4) Name two sources of financing.
(5) What is meant by the double-entry system?

Solution: Revision exercise 1
(1) An accounting entity is any entity for which separate financial records are kept.
(2) ASSETS = EQUITY + LIABILITIES
(3) (a) Assets are the possessions of the entity.
(b) Equity is the interest which the owner has in the business and which the entity
therefore owes to him.
(c) Liabilities are creditors’ interests or interests of parties other than the owner(s).
Liabilities are therefore the debts of the entity.
(4) The owner
Trade payables
(5) In principle it means that every transaction has a dual effect on the elements of the BAE
and that after every transaction the BAE must remain in balance.

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2.7.2 Revision exercise 2
Calculate the missing figures using the BAE.
R
(1) Bank
Vehicles
Equipment
Capital

=
=
=
=

4 000
5 000
7 000
?

(2) Capital
Loan
Bank
Machinery

=
=
=
=

150 000
50 000
?
190 000

(3) Bank
Trade receivables
Buildings
Furniture
Trade payables
Capital

=
=
=
=
=
=

5 000
15 000
100 000
40 000
50 000
?

(4) Capital
Loan
Trade payables
Assets

=
=
=
=

60 000
10 000
6 000
?

Solution: Revision exercise 2

FAC1502/1

(1)

A
E

= E+L
= A–L
= R(4 000 + 5 000 + 7 000) 7 R0
= R16 000

(2)

A =
E+L
R190 000 + Bank
R190 000 + Bank

=
=
=

R(150 000 + 50 000)
R(150 000 + 50 000) 7 R190 000
R10 000

(3)

A
E

= E+L
= A–L
= R(5 000 + 15 000 + 100 000 + 40 000) 7 R50 000
= R160 000 7 R50 000
= R110 000

(4)

= E+L
= R60 000 + R(10 000 + 6 000)
= R76 000

SELF-ASSESSMENT
Now that you have studied this study unit, can you:
.

describe the primary purpose of accounting?

describe an entity?

describe the financial position of the entity?

describe the double-entry system?

calculate the elements of the basic accounting equation?

FAC1502/1

STUDY UNIT

3
The financial performance (result))

Learning outcome
Students should be able to apply the concepts of income and expenditure to determine the
gross and net profits (or losses) and the effect thereof on equity.

Contents
Key concepts

3.1

Introduction

3.2

The financial performance (result)

3.3

Income

3.4

Expenditure

3.5

Influence of profit or loss on equity

3.6

Statement of profit or loss and other comprehensive income (income
statement) (financial performance)

3.7

Statement of changes in equity

3.8

Accounting policies and explanatory notes

3.9

Revision exercises and solutions

3.9.1 Revision exercise 1

3.9.2 Revision exercise 2

Self-assessment

KEY CONCEPTS
.
.
.
.

FAC1502/1

Page

Financial result
Profit/loss
Income
Expenditure

3.1 Introduction
In paragraph 2.3 we discussed the first component of the primary goal of accounting, which is
to determine the financial position of an entity as it is reflected in the statement of financial
position. In this study unit we discuss the second component of this primary goal, namely the
financial performance of the entity, and indicate how it is reflected in the form of a statement
of profit or loss and other comprehensive income.
Study paragraph 3.1 in the prescribed book.

3.2 The financial performance (result)
The financial result of an entity is measured in terms of the profit or loss which the entity has
made over a specific period, which is referred to as the financial period and which is normally
a year. An entity makes a profit when the income it has earned is more than the expenditure it
has incurred in generating or producing that income. The difference between the income and
expenditure is known as the profit or loss. Profit is the owner’s reward for the capital he or she
has invested and the entrepreneurial spirit he or she has shown. It therefore increases the
equity.

3.3 Income
The objective of every entity is to earn as large an income as possible.
Study paragraph 3.2.1 of the prescribed book.

3.4 Expenditure
Expenditure is incurred to earn income.
Study paragraph 3.2.2 of the prescribed book.

3.5 Influence of profit or loss on equity
Income (profit) increases and expenditure (losses) decreases the owner’s interest.
Study paragraph 3.3 of the prescribed book.

Exercise
The financial position (BAE) of T Payn, an attorney, on 28 February 20.0 is as follows:
A
R50 000

=
=

E + L
R30 000 + R20 000

For the year ended 28 February 20.1 he had the following income and expenditure:

FAC1502/1

R
Income received
Salaries expense
Administrative costs
Insurance expense

180
100
20
10

000
000
000
000

Calculate T Payn’s equity on 28 February 20.1.
We use the equation which we discussed in paragraph 2.4 and 4.3:
Profit = Income 7 Expenditure
= R180 000 7 R(100 000 + 20 000 + 10 000)
= R180 000 7 R130 000
= R50 000
E

= R30 000 + R50 000
= R80 000

COMMENTS
. Capital plus profit together form the equity of the owner. See the above exercise —
R(30 000 + 50 000) = R80 000.
. Profit is income minus expenditure.

3.6 Statement of profit or loss and other comprehensive
income (income statement) (financial peformance)
The financial performance is measured in the statement of comprehensive income of an entity
(previously known as the income statement).
Study paragraph 3.4 of the prescribed book.

3.7 Statement of changes in equity
Study paragraph 3.5 of the prescribed book.

3.8 Accounting policies and explanatory notes
Study paragraphs 3.6 and 3.7 of the prescribed book.

3.9 Revision exercises and solutions
3.9.1 Revision exercise 1
(1) How is the financial performance (result) calculated in accounting terms? Which financial
report reflects the financial performance?
(2) Give three examples of income.

FAC1502/1

(3) Give three examples of expenditure.
(4) How is profit/loss determined for a financial period?
(5) Does a loss increase or decrease the equity of the owner?

Solution: Revision exercise 1
(1) Income minus expenditure. The statement of profit or loss and other comprehensive
income reflects the financial performance.
(2) Refer to paragraph 3.3.
(3) Refer to paragraph 3.4.
(4) Expenditure is subtracted from income. Refer to paragraph 3.2.
(5) A loss decreases equity.

3.9.2 Revision exercise 2
On 28 February 20.2 Alpha Services showed the following income and expenditure for the
financial year.
R
Income received
Salaries
Wages
Telephone expenses
Stationery
Interest received
Insurance

850
520
50
4
2
1
12

000
000
000
000
000
000
000

Calculate the net profit/loss of Alpha Services on 28 February 20.2.

Solution: Revision exercise 2
Income

= Income received + Interest received
= R(850 000 + 1 000)
= R851 000

Expenditure

= Salaries + Wages + Telephone + Stationery + Insurance
= R(520 000 + 50 000 + 4 000 + 2 000 + 12 000)
= R588 000

Profit

= Income 7 Expenditure
= R851 000 7 R588 000
= R263 000

SELF-ASSESSMENT
Now that you have studied this study unit, can you:
.

describe the concept income?

describe the concept expenditure?

calculate the profit (or loss)?

calculate the effect of profit/loss on equity?

FAC1502/1

STUDY UNIT

4
The double-entry system and the
accounting process

Learning outcome
Students should be able to analyse and record transactions in the books of an entity and
prepare financial statements.

Contents
Key concepts

4.1

Introduction

4.2

The double-entry system

4.3

The effect of transactions on the basic accounting equation (BAE)

4.4

Transactions which affect only assets, equity and liabilities

4.4.1 Capital contributions

4.4.2 Acquisition of loans

4.4.3 Purchase of assets for cash

4.4.4 Buying assets on credit (debt)

4.4.5 Payments to creditors

4.4.6 Withdrawals by owner

Transactions which give rise to income and expenditure

4.5.1 Income (cash)

4.5.2 Expenditure (cash)

4.5.3 Income (credit)

4.5.4 Expenditure (credit)

4.5.5 Payments received from debtors

4.6

Summary of transactions

4.7

Basic form of a statement of financial position

4.8

Revision exercises and solutions

4.8.1 Revision exercise 1

4.8.2 Revision exercise 2

4.5

FAC1502/1

Page

4.9

The general ledger account
4.9.1 Assets
4.9.2 Equity and liabilities
4.10 Balancing an account
4.11 Schematic representation
4.12 Recording of transactions in ledger accounts
4.13 The general ledger
4.14 The trial balance
4.15 Preparing financial statements
4.15.1 The statement of profit or loss and other comprehensive
income
4.15.2 The statement of changes in equity
4.15.3 The statement of financial position
4.15.4 Notes
4.16 Summary
4.17 Revision exercises and solutions
4.17.1 Revision exercise 1
4.17.2 Revision exercise 2
4.17.3 Revision exercise 3
4.17.4 Revision exercise 4
4.17.5 Revision exercise 5
Self-assessment

36
36
36
36
37
38
40
43
44
44
45
46
47
47
48
48
48
49
51
53
55

KEY CONCEPTS
.
.
.
.

Debit and credit
Transactions
Effect on financial position
T-account

.
.
.
.

Ledger
Contra account
Folio number
Trial balance

4.1 Introduction
We mentioned the double-entry system in paragraph 2.6 in the study guide — read that
paragraph again. To make a double-entry correctly, you need a good working knowledge of the
appropriate names for different things in accounting and particularly the concepts of ‘‘debit’’
and ‘‘credit’’. It is very important that you master this study unit since it explains the foundation
on which the accounting system is built.
Read paragraph 4.1 of the prescribed book.

4.2 The double-entry system
At this stage we are simply using the accounting equation as a teaching aid to explain the
analysis of transactions. The BAE does not form part of a formal accounting system.
To make a double-entry you must:
Think about what the effect of the transaction is going to be on the BAE, in other words, how
it is going to affect the financial position of the entity.
. Identify the components (accounts) which are involved, that is the components which will
have the desired effect on the equation.
.

FAC1502/1

.
.
.
.

Determine which account(s) has/have to be debited and which account(s) has/have to be
credited.
Be sure that the amount(s) debited are equal to the amount(s) credited.
Be able to indicate the date of the transaction.
Indicate the name of the contra ledger account in the account in which you are doing the
entry. The contra account is the other account which is involved in the transaction: the one
account refers to the other.
Indicate the folio number of the subsidiary journal.

4.3 The effect of transactions on the basic accounting
equation (BAE)
A transaction is an agreed upon transfer of value from one party to another which affects
(changes) the amount, nature or composition of an entity’s assets, liabilities or equity. In other
words it affects the BAE. Entering into a transaction gives rise to the first step in the accounting
cycle, namely the completion of a source document.
Transactions may
.
.

affect assets and/or equity and/or liabilities
generate income or give rise to expenditure
Study paragraph 4.2 of the prescribed book.

4.4 Transactions which affect only assets, equity and
liabilities
Below we give practical examples of transactions which affect only assets or interests. (A ‘‘+’’
indicates an increase and a ‘‘7’’ indicates a decrease.)
Study paragraphs 4.2.1 to 4.2.4 of the prescribed book.

4.4.1 Capital contributions
Transaction
1 Feb 20.1

T Tom decided to start a carpet-cleaning business called Fix-’n-Mat. He
withdrew R130 000 from his personal savings account and deposited it in
Fix-’n-Mat’s bank account.

Analysis

(1) The asset ‘‘Bank’’ increases by R130 000 and there is now money in
Fix-’n-Mat’s bank account.
(2) The owner, T Tom, provides Fix-’n-Mat with funds and increases his
interest in Fix-’n-Mat. The equity ‘‘Capital’’ increases by R130 000.

ASSETS

Previous balances
This transaction
New balances

FAC1502/1

EQUITY

LIABILITIES

Bank

Capital

0
+ 130 000

0
0

130 000

COMMENTS
. In an entity which has not yet entered into any transaction, the elements of the
equation will always be 0.
. The terms ‘‘bank’’ and ‘‘capital’’ in the analysis are actually names of accounts.
. The investment of capital is usually the first transaction.
. Capital may be contributed in the form of cash or any other asset (eg furniture).
‘‘Furniture’’ instead of ‘‘Bank’’ will then increase.
. The BAE balances after the transaction.

4.4.2 Acquisition of loans
Transaction
2 Feb 20.1

Fix-’n-Mat obtained a loan of R25 000 with a payback period of more than a
year from ABC Bank. The amount was paid into its bank account.

Analysis

(1) The asset ‘‘Bank’’ increases by R25 000.
(2) ABC Bank now has a claim against or an interest in Fix-’n-Mat and a
liability, namely a ‘‘Loan: ABC Bank’’, comes into being.

ASSETS

Balances brought
down
Transaction
New balances

EQUITY

LIABILITIES

Bank

Capital

Loan:
ABC Bank

130 000

+ 25 000
155 000

0
=

130 000

+ 25 000
+

25 000

COMMENTS
. The results of the first transaction form the balances which are brought down in this
transaction.
. Liabilities arise when another party or institution supplies funds (make loans) to the
entity.
. Amounts (in this case R25 000) are added to both the left-hand side and the righthand side of the BAE.
. The BAE balances after the transaction.

FAC1502/1

4.4.3 Purchase of assets for cash
Transaction
6 Feb 20.1

Fix-’n-Mat bought equipment from XY Furnishers for R100 000 and paid by
cheque.

Analysis

(1) The asset ‘‘Bank’’ decreases by R100 000 since money has been
withdrawn.
(2) The asset ‘‘Equipment’’ increases.
ASSETS

Balances brought down
Transaction

EQUITY

LIABILITIES

Equipment

Bank

Capital

Loan:
ABC Bank

0
+100 000

155 000
7100 000

130 000
0

100 000

55 000

New balances

130 000

25 000
0
+

25 000

COMMENTS
. Assets now consist of bank and equipment.
. The left-hand side of the equation increases and decreases. One asset is exchanged
for another asset.
. The BAE balances after the transaction.

4.4.4 Buying assets on credit (debt)
Transaction
10 Feb 20.1

Fix-’n-Mat bought furniture for R2 000 on credit from Joc Limited.

Analysis

(1) The asset ‘‘Furniture’’ increases by R2 000.
(2) A liability, ‘‘Trade payables’’, comes into being.

ASSETS

FAC1502/1

= EQUITY +

LIABILITIES

Furniture

Equipment

Bank

Capital

Loan:
ABC
Bank

Trade
payables

Balances
brought down
Transaction

0
+2 000

100 000
0

55 000
0

130 000
0

25 000
0
0
+2 000

New balances

2 000

100 000

55 000

130 000 +

25 000

2 000

COMMENTS
.
.
.
.

Assets may also be bought on credit and a creditor comes into being.
The transaction is recorded when it is entered into and not when the payment is made.
The left-hand side and the right-hand side of the BAE increase.
The BAE balances after the transaction.

4.4.5 Payments to creditors
Transaction
11 Feb 20.1

Fix-’n-Mat paid Joc Limited’s account of R2 000.

Analysis

(1) The asset ‘‘Bank’’ decreases by R2 000.
(2) The liability, ‘‘Trade payables’’ (liability), decreases by R2 000.

ASSETS

= EQUITY +

LIABILITIES

Furniture

Equipment

Bank

Capital

Loan:
ABC
Bank

Balances brought
down
Transaction

2 000
0

100 000
0

55 000
72 000

New balances

2 000

100 000

53 000

Trade
payables
R

130 000
0

25 000 2 000
0
72 000

130 000 +

25 000

COMMENTS
. The left-hand side and the right-hand side of the BAE decrease.
. The BAE balances after the transaction.

4.4.6 Withdrawals by owner
Transaction
12 Feb 20.1

The owner withdrew R1 000 for his own use.

Analysis

(1) Fix-’n-Mat’s ‘‘Bank’’ decreases by R1 000.
(2) T Tom’s ‘‘Capital’’ (equity) in Fix-’n-Mat decreases by R1 000.

FAC1502/1

ASSETS

= EQUITY +

LIABILITIES

Furniture

Equipment

Bank

Capital

Loan:
ABC
Bank

Trade
payables

130 000
71 000

25 000
0

0
0

129 000 +

25 000

Balances brought
down
Transaction

2 000
0

100 000
0

New balances

2 000

100 000

53 000
71 000
52 000 =

COMMENTS
. Withdrawals are the opposite of capital contributions and reduce capital. Remember,
withdrawals are not expenditure.
. Where the entity pays personal expenses of the owner’s, it is also treated as a
withdrawal.
. The left-hand side and the right-hand side of the BAE are reduced.
. The BAE balances after the transaction.

4.5 Transactions which give rise to income and expenditure
4.5.1 Income (cash)
Transaction
13 Feb 20.1

Fix-’n-Mat provided services for a client S Silver and received a cheque for
R1 000.

Analysis

(1) The asset ‘‘Bank’’ increases by R1 000.
(2) The fee which Fix-’n-Mat earns is an income. Equity therefore
increases by R1 000.

ASSETS
Furniture Equipment

FAC1502/1

=
Bank

Capital

R
129 000
0

0
+1 000

129 000

1 000

Balances
brought down
Transaction

2 000
0

100 000
0

52 000
+1 000

New balances

2 000

100 000

53 000

EQUITY

Income/
Expenditure
R

LIABILITIES
Loan:
ABC
Bank

Trade
payables

25 000
0

0
0

25 000

COMMENTS
. Income earned increases the equity. It is the objective of the entity to earn income for
the entrepreneur.
. The left-hand side and the right-hand side of the BAE increase.
. The BAE balances after the transaction.

4.5.2 Expenditure (cash)
Transaction
16 Feb 20.1

Fix-’n-Mat paid wages by cheque, R800.

Analysis

(1) The asset ‘‘Bank’’ decreases by R800.
(2) Wages are an expenditure item and the equity decreases by R800.

ASSETS
Furniture Equipment

EQUITY

Bank

Capital

R
129 000
0

1 000
7800

129 000

200

Balances
brought down
Transaction

2 000
0

100 000
0

53 000
7800

New balances

2 000

100 000

52 200

Income/
Expenditure

LIABILITIES
Loan:
ABC
Bank

Trade
payables

25 000
0

0
0

25 000

COMMENTS
. In essence expenditure incurred decreases income and therefore also decreases the
equity.
. The left-hand side and the right-hand side of the BAE decrease.
. The BAE balances after the transaction.

4.5.3 Income (credit)
Transaction
18 Feb 20.1

Fix-’n-Mat provided services worth R6 000 to C Canon on credit.

Analysis

(1) C Canon becomes a debtor of Fix-’n-Mat. The asset ‘‘Trade
receivables’’ comes into being and increases by R6 000.
(2) ‘‘Income received’’ are an income item and equity increases by
R6 000.

FAC1502/1

ASSETS

Trade
Furniture Equipment Bank
receivables
R
Balances brought
down
Transaction
New balances

EQUITY
Capital

Income/
Expenditure

LIABILITIES
Loan:
Trade
ABC Bank payables

0
+ 6 000

2 000
0

100 000
0

52 200
0

129 000
0

200
+6 000

25 000
0

0
0

6 000

2 000

100 000

52 200

129 000

6 200

25 000

COMMENTS
. Organisations or clients who owe money to an entity are known as debtors and arise
from the entity rendering services or goods on credit.
. The left-hand side and the right-hand side of the BAE increase.
. The realisation principle applies here, and the income is shown as having been earned
on 18 February when the service was provided and not when the cash is received.

4.5.4 Expenditure (credit)
Transaction
21 Feb 20.1

Fix-’n-Mat placed an advertisement in a local newspaper for R200.
Payment was due only in 30 days.

Analysis

(1) The liability ‘‘Trade payables’’ increases by R200.
(2) ‘‘Advertisements’’ are an expenditure item and the equity decreases
by R200.

ASSETS

Trade
Furniture Equipment Bank
receivables
R
Balances brought
down
Transaction
New balances

EQUITY
Capital

Income/
Expenditure

6 000
0

2 000
0

100 000
0

52 200
0

129 000
0

6 200
7200

6 000

2 000

100 000

52 200

129 000

6 000

LIABILITIES
Loan:
Trade
ABC Bank payables

25 000
0

0
+ 200

25 000

200

COMMENTS
.
.
.
.
.

FAC1502/1

Expenditure may also be incurred on credit (for goods/services received).
The organisations to which money is owed are known as creditors.
The right-hand side of the BAE increases and decreases.
The expenditure is shown on 21 February 20.1 and not only when it is paid.
The BAE balances after the transaction.

4.5.5 Payments received from debtors
Transaction
28 Feb 20.1

C Canon settled his account in part, R2 000.

Analysis

(1) The asset ‘‘Bank’’ increases by R2 000.
(2) The asset ‘‘Trade receivables’’ decreases by R2 000.

ASSETS

EQUITY

Trade
Furniture Equipment Bank
receivables
R
Balances brought
down
Transaction
New balances

Income/
Expenditure

Capital

6 000
72 000

2 000
0

100 000 52 200
0
+ 2 000

4 000

2 000

100 000

54 200

LIABILITIES
Loan:
Trade
ABC Bank payables

129 000
0

6 000
0

129 000

6 000

25 000
0

200
0

25 000

200

COMMENTS
. This transaction affects assets only.
. The left-hand side of the BAE increases and decreases.
. The BAE balances after the transaction.

4.6 Summary of transactions
Fix-’n-Mat’s transactions for February 20.1 can now be summarised as follows:
ASSETS

INTERESTS
EQUITY

Furniture

Equipment

Bank

Capital

Income/
Expenditure

+130 000

+100 000

+130 000
+25 000
7100 000

LIABILITIES
Loan:
Trade
ABC Bank payables
R

+25 000

+2 000

+2 000
72 000

72 000
71 000
+1 000
7800

71 000
+1 000
7800
+6 000
7200

+6 000
72 000
+4 000

+200

+2 000
+2 000

+100 000

+54 200

160 200

+129 000

+6 000

+25 000

+200

{
{

20.1
Feb
1
2
6
10
11
12
13
16
18
21
28

Trade
receivables

{

Date

135 000

160 200

25 200

FAC1502/1

COMMENT
. Note that these totals correspond to the closing balances in paragraph 4.5.5 above.

4.7 Basic form of a statement of financial position (previously
known as the balance sheet)
Now we are going to prepare a statement of financial position using the totals of the BAE (see
paragraph 4.6). The basic form of the statement of financial position is based on the BAE. You
have already come across a very simple statement of financial position in paragraph 2.5. A
statement of financial position is a report and in essence is a formal presentation of the
elements of the BAE.

FIX-’N-MAT
STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.1

ASSETS
Non-current assets
Equipment
Furniture

Note

R
102 000
100 000
2 000

Current assets
Trade and other receivables
Cash and cash equivalents
Total assets

58
4
54
160

EQUITY AND LIABILITIES
Total equity
Capital

135 000
135 000

Non-current liabilities
Long-term borrowings
Current liabilities
Trade and other payables
Total equity and liabilities

200
000
200
200

25 000
25 000
200
200
160 200

COMMENTS
. The statement of financial position balances and shows the same totals as the BAE.
. Note the heading — the statement of financial position is prepared to reflect the
financial position on a specific date.
. The withdrawals are subtracted from the capital. As mentioned, withdrawals are not
an expenditure item.
. The equity in the BAE is also R135 000.

4.8 Revision exercises and solutions
4.8.1 Revision exercise 1
D Paulus started a television antenna installation business on 1 June 20.1. The following
transactions took place during the first month:

FAC1502/1

Transactions:
June

1
2
3
4
6

17
28
29
30

Cash in the bank deposited as opening capital, R25 000.
D Paulus made his private equipment available to the business, R9 000.
Additional equipment purchased and paid for by cheque, R12 000.
Installation fees for work done on account for Kannadrift Municipality, R4 200.
Vehicle purchased on credit from Virginia Cars Limited, R22 400. This vehicle
was financed by obtaining a loan from Crown Bank at an interest rate of 9% per
annum.
Kannadrift Municipality paid R2 200 on their account.
Wages paid, R4 000.
Cheque drawn for private use, R1 300.
Paid R9 000 to Virginia Cars Limited on their account.

Required:
Using the basic accounting equation, analyse the abovementioned transactions as
follows:
NB: (1) Show the effect of each transaction on the basic accounting equation with a plus
sign (+) for an increase and a minus sign (7) for a decrease.
(2) Balance the equation.
Example: On 1 July 20.1 D Paulus received R2 000 in cash for an installation done for Cook
Financing Corporation.
Date

Basic accounting equation
A

20.1
July 1

R
2 000

E
+

R
2 000

R
0

Solution: Revision exercise 1
D PAULUS
Basic accounting equation
A
20.1
June 1
Jun e 2
Jun e 3
Jun
e4
Jun e 6
Ju ne 17
Ju
Ju
Ju

ne 28
ne 29
ne 30

Total

+
+
+
7
+
+
+
7
7
7
7

R
25 000
9 000
12 000
12 000
4 200
22 400
2 200
2 200
4 000
1 300
9 000
46 300

R
+25 000
+ 9 000

+ 4 200
+22 400

7 4 000
7 1 300
79 000
32 900

13 400

{

Date

46 300

FAC1502/1

4.8.2 Revision exercise 2
The following transactions during January 20.1 relate to F Fox, an attorney.
Date

Transactions

Amount

20.1

Jan 3
Jan

F Fox deposited as opening capital
Paid rental for January 20.1

20 000
2 300

Jan 4

Bought law library on credit from Book Limited

24 000

Jan 5
Jan 6

Bought a computer for cash from Leo Limited
Provided services for cash

1 700
7 200

Jan 9
Jan 10

Debited D Dunn with fees for services rendered
Leo Limited repaired equipment on credit

8 318
100

Jan 13

F Fox drew a cheque for private use

1 234

Jan 18
Jan 29

F Fox received commission on a property transaction
Paid the following by cheque

1 350

i(i) Salaries
(ii) Leo Limited (on account)
Jan 30

8 350
100

Received payment from D Dunn on his account

1 500

Required:
(1) Analyse the above transactions in tabular form as follows:

ASSETS

Date

Total

Library Trade
and
receivEquip- ables
ment

EQUITY

Income/
Capital Expenditure

Bank

LIABILITIES

Trade payables

(2) Prepare the statement of financial position of F Fox at 31 January 20.1.

FAC1502/1

Solution: Revision exercise 2
F FOX
(1) ACCOUNTING EQUATION
ASSETS

20.1

Library Trade
and
receivEquip- ables
ment
R

Jan 3
Jan 4 +24 000
Jan 5 + 1 700
Jan 6
Jan 9
Jan10
Jan13
Jan18
Jan29

Bank

Income/
Capital Expenditure

+20 000
72 300

+20 000

LIABILITIES

Trade payables

72 300
+ 24 000

71 700
+7 200

+7 200
+8 318
7 100

+8 318
234 71 234
350
350
100
500
366 = +18 766

{

71
+1
78
7
Jan30
71 500 +1
Total +25 700 +6 818 +16

R48 884

+ 100

+1 350
78 350
7 100
+6 118

+24 000

{

Date

EQUITY

R48 884

F FOX
(2) STATEMENT OF FINANCIAL POSITION AS AT 31 JANUARY 20.1
ASSETS
Non-current assets
Equipment
Library

Note

R
25 700
1 700
24 000

Current assets
Trade and other receivables
Cash and cash equivalents
Total assets

23
6
16
48

EQUITY AND LIABILITIES
Total equity
Capital

24 884
24 884

Current liabilities
Trade and other payables
Total equity and liabilities

24 000
24 000
48 884

184
818
366
884

FAC1502/1

4.9 The general ledger account
Up to now we have dealt only with asset, liability and equity items appearing in a statement of
financial position or BAE.
We recorded transactions in columns in the summary of the BAE to show their effect on a
specific asset, equity or liability item. We had columns for debtors, furniture, equipment, capital
and so on. But it is impractical to prepare a new equation after every new transaction — just
think what would happen in a business with thousands of transactions! To avoid this we are
now going to open an account in the general ledger for every column of the BAE. We speak of
the general ledger because there are also subsidiary ledgers, which we will explain later.
An account is opened in the general ledger for every asset, liability and equity item. Every
account appears on its own on a page in the ledger and each account is given a number, which
is known as a folio number.
An account is an accounting record in which all transactions relating to a specific item are
recorded.
Study paragraphs 4.3 to 4.3.1 in the prescribed book.

4.9.1 Assets
Study paragraph 4.3.1 in the prescribed book.

4.9.2 Equity and liabilities
Study paragraphs 4.3.2 to 4.3.5 in the prescribed book.

4.10 Balancing an account
With what you have learnt about an account, we now know that an account may have entries
on the debit or the credit side or on both sides.
Study paragraph 4.4 in the prescribed book.

NB:
The closing balance of the previous period becomes the opening balance of the next period.
.
.

FAC1502/1

c/d = carried down, which indicates the amount to be carried down to the following month
b/d = brought down, which indicates that the amount has been brought down from the
previous month

FAC1502/1

PREPARE: a) Statement of profit or loss and other
comprehensive income
b) Statement of changes in Equity

Profit or Loss account: Profit to Capital account

4.11 Schematic representation

in equity to
statement of financial position and Notes

changes

COMMENTS
. The top level of the schematic representation shows the basic accounting equation
(BAE).
. The second level of the schematic representation shows how each of the components
of the BAE becomes part of the account system. The left-hand side of the account is
known as the debit side (Dr) and the right-hand side as the credit side (Cr).
. The total of the amounts on the debit side of an asset account is usually larger than
that on the credit side. The account will therefore usually have a debit balance
(brought down). The total of the amounts on the credit side of a liability account is
usually larger than that on the debit side. The account will therefore usually have a
credit balance (brought down).
. The capital account reflects the equity of the owner at the date of the statement of
financial position. The balance on this account is the result of income, expenditure,
drawings and capital investment. These components are all dealt with separately in
the accounting system.
.
.
.

Additional capital contributions and income increase equity.
Drawings and expenditure decrease equity.
But note: drawings is not an expenditure and therefore does not reduce
the profit.

. The left hand side (Equity section) forms the basis for the preparation of the statement
of profit or loss and other comprehensive income and the statement of changes in
equity.
. The capital (Equity section) and the right hand side (ASSETS and LIABILITIES) form
the basis for the preparation of the statement of financial position.

4.12 Recording of transactions in ledger accounts
When we enter a transaction in a ledger account, we have to ask ourselves: Which accounts
are affected? In answer to this question, we are now going to record the transactions in
paragraphs 4.4 and 4.5 in the ledger accounts (T-accounts).
Transaction
(4.4.1)
Bank

Capital

130 000

(4.4.2)
Bank

FAC1502/1

Loan

25 000

(4.4.3)
Equipment

Bank

100 000

(4.4.4)
Furniture

Trade payables (Joc Ltd)

2 000

(4.4.5)
Bank

Trade payables (Joc Ltd)
2 000

2 000

(4.4.6)
Bank

Drawings
1 000

1 000

COMMENT
All drawings by the owner are recorded in a separate account, namely ‘‘Drawings’’, and
not directly in the capital account. Drawings is a disbursement of the profit to the owner
and is not expenses resulting from business operations.

(4.5.1)
Bank

Income (fees)

1 000

(4.5.2)
Bank

Wages
800

800

FAC1502/1

(4.5.3)
Trade receivables (C Canon)

Income (fees)

6 000

(4.5.4)
Trade payables

Advertisements

200

(4.5.5)
Bank

Trade receivables (C Canon)

2 000

4.13 The general ledger
In the previous example two accounts were opened each time for each transaction. In practice
all transactions which affect, say, bank are summarised in one account for bank. Given the
information we have above, the accounts will take the following form. Each one is closed off
and the balance determined.

GOLDEN RULE
Assets (eg Bank) increase on the Debit (Dr) side and decrease on the Credit (Cr) side of
the account.

Bank

Date

Details

Fol

20.1
Feb
Feb
Feb
Feb

Amount
R

1
2
13
28

Capital
Loan:ABC Bank
Income received
Trade receivables

130
25
1
2

FAC1502/1

Balance

b/d

Date

Details

Fol

20.1
000
000
000
000

158 000
20.1
Mar 1

54 200

Feb
Feb
Feb
Feb
Feb

Amount
R

6
11
12
16
28

Equipment
Trade payables
Drawings
Wages
Balance

c/d

100 000
2 000
1 000
800
54 200
158 000

Equipment

20.1
Feb 6

R
Bank

100 000

Furniture

20.1
Feb 10

R
Creditors

2 000

Trade receivables

20.1
Feb 18

R
Income received

6 000

20.1
Feb 28

R
Bank
Balance

c/d

6 000
20.1
Mar 1

Balance

b/d

2 000
4 000
6 000

4 000

GOLDEN RULE
Equity (eg Capital) and Liabilities (eg Creditors) increase on the credit (Cr) side and
decrease on the debit (Dr) side of the account.

GOLDEN RULE
Income (eg Sales) increases equity and are credited (Cr) to the particular income account.

GOLDEN RULE
Expenses (eg Wages) decreases equity and are debited (Dr) to the particular expense
account.

FAC1502/1

Capital

20.1
Feb 1

Bank

130 000

Drawings

20.1
Feb 12

R
Bank

1 000

Loan: ABC Bank

20.1
Feb 2

Dr
20.1
Feb 11
28

R
Bank

25 000

Trade payables

Bank
Balance

c/d

R
2 000
200

20.1
Feb 10
21

Furniture
Advertisements

2 200

2 200
20.1
Mar 1

Dr
20.1
Feb 16

Bank

20.1

Balance

b/d

200

Wages

Advertisements

Feb 21

R
2 000
200

800

R
Creditors

200

Income (fees)

20.1
Feb 13
18

R
Bank
Debtors

1 000
6 000
7 000

FAC1502/1

COMMENT
. Note that the details of an item in a ledger account is simply the name of the other
ledger account involved in the transaction. This other ledger account is known as the
contra ledger account.

4.14 The trial balance
Study paragraph 4.5 of the prescribed book.

A trial balance is a list of the balances brought down (b/d) of the accounts in the general ledger
on a specific date.
GOLDEN RULE
The balance ‘‘brought down’’ (b/d) must be used to prepare the trial balance.
The following trial balance has been prepared from the ledger accounts in paragraph 4.13.

FIX-’N-MAT
TRIAL BALANCE AS AT 28 FEBRUARY 20.1
Dr
Bank
Equipment
Furniture
Trade receivables
Capital
Drawings
Loan
Trade payables
Wages
Advertisements
Income received

R
54
100
2
4

Cr
R
200
000
000
000
130 000

1 000
25 000
200
800
200
7 000
162 200

162 200

GOLDEN RULE
Asset and expense accounts have debit (Dr) balances brought down (b/d) and are entered
on the debit side of the trial balance.

GOLDEN RULE
Equity (capital), liability and income accounts have credit (Cr) balances brought down (b/d)
and are entered on the credit side of the trial balance.

FAC1502/1

COMMENTS
. The trial balance balances.
. Note that an account with a debit balance (brought down) is shown on the debit side of
the trial balance and an account with a credit balance (brought down) on the credit
side.
. If we compare the totals of the trial balance with the totals of the columns of the BAE
(see paragraph 4.6), we note the following:
Capital in the BAE is R129 000. In the trial balance capital, R130 000 (Cr), and
drawings, R1 000 (Dr), are shown separately. This also gives a net total of
R129 000.
. Income less expenditure = R6 000. If the expenses in the trial balance, namely
wages and advertisements with debit balances of R800 and R200 respectively, are
subtracted from the income, namely fees with a credit of R7 000, the net amount is
R(7 000 7 1 000) = R6 000 credit, which corresponds to the income in the
BAE.
.

4.15 Preparing financial statements
In this module we deal with the statement of financial position, statement of profit or loss and
other comprehensive income and statement of changes in equity as well as some of the notes.
The statement of cash flows will be dealt with in FAC1601.
As mentioned previously, the trial balance serves as a basis for preparing a statement of profit
or loss and other comprehensive income, statement of changes in equity, and statement of
financial position. The trial balance represents the information in the ledger. The statement of
profit or loss and other comprehensive income shows the entity’s financial result and the
statement of financial position shows its financial position.
Study paragraphs 4.6 and 4.7 of the prescribed book.

4.15.1 The statement of profit or loss and other comprehensive income
We now use the information from the trial balance in paragraph 4.14 above to prepare a
statement of profit or loss and other comprehensive income for Fix-’n-Mat.

FIX-’N-MAT
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE
MONTH ENDED 28 FEBRUARY 20.1
Note

FAC1502/1

Revenue
Distribution, administrative and other expenses
Wages
Advertisements

7 000
(1 000)
800
200

Profit for the period
Other comprehensive income for the period
Total comprehensive income for the period

6 000
—
6 000

COMMENTS
. Note the title. A statement of profit or loss and other comprehensive income is
prepared for a period ended, not on a certain date.
. The profit for the period as determined in the statement of profit or loss and other
comprehensive income corresponds to the income/expenditure column in the BAE.
. The income and expenditure accounts are called nominal accounts.

GOLDEN RULE
Revenue (comprising income accounts) less expenses result in a profit or loss.

4.15.2 The statement of changes in equity
This statement shows all the changes in equity which have occurred during the financial period.
The purpose of the statement of changes in equity is to reconcile the equity at the beginning of
the financial period with the equity at the end of the financial period. The balance of the equity
at the end of the financial period is then shown in the statement of financial position. Equity will
be discussed in more detail later in this study guide.

FIX-’N-MAT
STATEMENT OF CHANGES IN EQUITY FOR THE MONTH ENDED 28 FEBRUARY 20.1
Capital
R
130 000

Balance at 1 February 20.1
Total comprehensive income for the period

6 000

Drawings

(1 000)

Balance at 28 February 20.1

135 000

GOLDEN RULE
The profit increases equity and a loss decreases equity.

COMMENTS
. Note that the statement of changes in equity is prepared for a period ended and not
on a specific date.
. The equity at the end of the month corresponds to the net total in the BAE in paragraph
4.6.

FAC1502/1

GOLDEN RULE
The balance at the end of the period on the statement of changes in equity must be the
same as the ‘‘capital’’ reflected in the statement of financial position.

4.15.3 The statement of financial position
Before we prepare a statement of financial position, please refer to paragraph 2.5 and also to
the statement of financial position for Fix-’n-Mat which we compiled in paragraph 4.7.
We will now show the statement of financial position of Fix-’n-Mat in narrative form and in
compliance with IFRS.

FIX-’N-MAT
STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.1
ASSETS
Non-current assets
Property, plant and equipment
Current assets
Trade and other receivables
Cash and cash equivalents (bank)

Note
3

R
102 000
102 000
58 200
4 000
54 200

Total assets

160 200

EQUITY AND LIABILITIES
Total equity
Capital

135 000
135 000

Total liabilities
Non-current liabilities
Long-term borrowings
Current liabilities
Trade and other payables
Total equity and liabilities

25 200
25 000
25 000
200
200
160 200

COMMENTS
. See paragraph 4.15.4, Notes, for the calculation of property, plant and equipment.
. The total assets of R160 200 corresponds to the total as shown in the BAE in
paragraph 4.6.
. The total equity and liabilities of R160 200 corresponds to the total as shown in the
BAE in paragraph 4.6.
. Words and figures between brackets is for explaining purposes only and do not form
part of any financial statement.

FAC1502/1

GOLDEN RULES
. ASSETS are, at this stage, grouped into non-current and current assets.
. Non-current assets do not change often and are used in ordinary business, production
or to render services.
. Current assets change after every operating transaction, thus very often.
. EQUITY (the interest of the owner(s) in the entity) comprise, at this stage, of capital only.
. LIABILITIES comprise, at this stage, non-current and current liabilities
. Non-current liabilities are to be paid after 12 months and do not change often. Current
liabilities are short term, change often and must be repaid within 12 months.

4.15.4 Notes
Additional information on items appearing in the financial statements is given in the notes to the
financial statements.
These explanatory notes are shown after the statement of cash flows. We do not deal with the
statement of cash flows in this module and will therefore show the notes after the statement of
profit or loss and other comprehensive income.
Note number 1 is used to reveal the accounting policies of the business. Now let us prepare the
notes of Fix-’n-Mat.

FIX ’N MAT
NOTES FOR THE MONTH ENDED 28 FEBRUARY 20.1
1. Accounting policy:
The financial statements have been prepared on the historical cost basis and comply with
International Financial Reporting Standards.
2. Revenue represents fees earned for services rendered to clients.
3. Property, plant and equipment

Carrying amount: Beginning of period
Cost
Accumulated depreciation
Additions
Depreciation
Carrying amount: End of period
Cost
Accumulated depreciation

Equipment

Furniture

Total

—
—
—
100 000
—
100 000
100 000
—

—
—
—
2 000
—
2 000
2 000
—

—
—
—
102 000
—
102 000
102 000
—

No depreciation was written off during this financial period.

4.16 Summary
We began by explaining the financial position (statement of financial position) and financial
performance (statement of profit or loss and other comprehensive income) and then went back
to how we enter into a transaction to set the accounting process in motion.

FAC1502/1

4.17 Revision exercises and solutions
4.17.1 Revision exercise 1
(1) Name the three groups of accounts in the general ledger.
(2) What is the difference between the total debits and the total credits of an account called?
(3) How do we test the arithmetical accuracy of transactions in the general ledger?

Solution: Revision exercise 1
(1) . Assets
. Liabilities
. Equity, which includes:
.
.
.
.

capital
drawings
income
expenditure

(2) Balance
(3) By preparing a trial balance

4.17.2 Revision exercise 2
List each of the following ledger accounts under one of the categories in the table below.
‘‘Furniture’’ is inserted as an example.

ASSETS

Non-current
assets

Current
assets

EQUITY

Capital

Furniture

Ledger accounts to be classified:
(a) Land and buildings
(b) Bond
(c) Petty cash
(d) Postage
(e) Interest income
(f) Vehicles
(g) Salaries
(h) Trade receivables
(i) Trade payables
(j) Bank overdraft
(k) Income received
(l) Electricity deposit
(m) Drawings
(n) Subscriptions (e.g. Membership fees)

FAC1502/1

Income

LIABILITIES

Expenditure

Noncurrent
liabilities

Current
liabilities

Solution: Revision exercise 2
ASSETS
Noncurrent
assets
(a)

EQUITY

Current
assets

Capital

Income

LIABILITIES

Expenditure

Noncurrent
Current
liabilities liabilities

Land and
buildings

(b)

Bond

(c)

Petty cash

(d)

Postage

(e)

Interest
income

(f)

Vehicles

(g)

Salaries

(h)

Trade
receivables

(i)

Trade
payables

(j)

Bank
overdraft

(k)

Income
received

(l)

Electricity
deposit

(m)

Drawings

(n)

Subscriptions

4.17.3 Revision exercise 3
The following transactions during February 20.1 relate to G Goodman, a dentist:
Date

Transactions

Amount

20.1
Feb
Feb
Feb
Feb
Feb
Feb
Feb
Feb
Feb
Feb

1
2
4
6
8
12
16
20
27
28

R
G Goodman deposited as opening capital
G Goodman transferred personal equipment to his firm
Paid rental for February by cheque
Bought furniture on credit from Badman
Rendered services on credit to R Rudman
G Goodman drew a cheque for private use
Issued a cheque to Badman in part payment of their account
Rendered services for cash to C Coleman
Received payment from R Rudman on his account
Paid the following by cheque:

50
6
8
12
30
1
5
7
1

ii(i) Salaries
i(ii) Wages
(iii) Telephone

10 000
2 000
500

000
000
000
000
000
000
000
000
300

FAC1502/1

Required:
Record the above transactions using a table as illustrated in the following example:
Feb 28 G Goodman paid the water and electricity account by cheque — R600.

Date

General ledger

20.1

Account

Feb

debited

credited

Water and
electricity

600

Bank

Solution: Revision exercise 3
G GOODMAN
Date

General ledger

20.1 Account

Account

Feb

credited

debited

R
50 000

2
4

Equipment Capital
Rent
Bank
expenses
Furniture
B Badman

12 000

R Rudman Income
received

30 000

Drawings

16
20

B Badman Bank
Bank
Income
received
Bank
R Rudman

27
28

Salaries
Wages

6 000

FAC1502/1

Cr
R
50 000

12 000
30 000
1 000

1 000

5 000
7 000
1 300

8 000

5 000
7 000

1 300
10 000
2 000

10 000
2 000

500

Telephone Bank
expenses

6 000
8 000

Bank

Bank
Bank

Bank

Capital

4.17.4 Revision exercise 4
The following transactions during October 20.1 relate to Witblits Electricians:
Date

Transactions

Amount

20.1
Oct 1
Oct 3
Oct 9
Oct
Oct
Oct
Oct

12
13
17
24

Oct 27
Oct 30

R
W Blits, the owner, deposited as opening capital
Obtained loan from SA Bank
Bought equipment on credit from Sparks Dealers
Issued a cheque for an advertisement in a local newspaper
Paid the telephone account by cheque
Received a cheque from H House for services rendered
Drew a cheque for private use
As an additional capital contribution W Blits transfered
his motor vehicle to the business
Paid salaries by cheque
Issued a cheque to SA Bank as a repayment on the loan

10 000
6 000
1 000
200
75
500
2 000
9 000
2 000
1 500

Required:
Prepare the following in the accounting records of Witblits Electricians:
(1) The appropriate ledger accounts which reflect the above transactions, properly
balanced/closed on 31 October 20.1.
NB: Indicate the correct contra ledger account.
(2) The trial balance on 31 October 20.1.

Solution: Revision exercise 4
WITBLITS ELECTRICIANS
(1) GENERAL LEDGER
Dr

Capital: W Blits

20.1
Oct 1
Oct 24

10 000
9 000
19 000
Cr

R
Bank

2 000

Equipment (at cost)

20.1
Oct 3

Bank
Vehicles

Drawings: W Blits

20.1
Oct 17

R
Sparks
Dealers

1 000

FAC1502/1

Vehicles (at cost)

20.1
Oct 24

R
Capital:
W Blits

9 000

Bank

20.1
Oct 1

R
Capital
Long-term
loan
Income received

20.1

10 000
6 000
500

Oct 9
Oct 12
Oct 17
Oct 27
Oct 30
Oct 31

R
Advertisements
Telephone expenses
Drawings:
W Blits
Salaries
Long-term loan
Balance
c/d

16 500
20.1
Nov 1

Balance

b/d

10 725

R
Bank
Balance

c/d

20.1

1 500
4 500

Oct 1

R
Bank

6 000
6 000

20.1
Nov 1
Dr

Balance

Oct 3
Dr

Advertisements

20.1

R
Bank

R
Equipment

Income received

Cr
R
Bank

Salaries

Bank

R
Bank

500
Cr

R
2 000
Telephone expenses

20.1

1 000

200

Oct 13

FAC1502/1

4 500
Cr

20.1

Oct 12

b/d

Sparks Dealers
20.1

20.1
Oct 27

000
000
500
725

16 500

6 000

Oct 9

2
2
1
10

Long-term borrowing (SA Bank)

20.1
Oct 30
31

200
75

WITBLITS ELECTRICIANS
(2) TRIAL BALANCE AS AT 31 OCTOBER 20.1
Dr
R
Capital — W Blits
Drawings — W Blits
Equipment (at cost)
Vehicles (at cost)
Bank
Long-term loan (SA Bank)
Sparks Dealers
Income received
Advertisements
Salaries
Telephone expenses

Cr
R
19 000

2
1
9
10

000
000
000
725
4 500
1 000
500

200
2 000
75
25 000

25 000

4.17.5 Revision exercise 5
The following transactions during March 20.1 relate to P Victor, an attorney:
Date

Transactions

Amount

20.1
Mar 3
Mar 34
Mar 35
Mar
Mar
Mar
Mar
Mar
Mar
Mar

15
18
21
23
25
30
31

R
P Victor opened his firm of attorneys and deposited as
opening capital
Paid rental for March
Bought a photocopier from Foto-Kop on credit
Paid Foto-Kop by cheque
Rendered services on credit to U Wright
Received a cheque from U Wright
Bought stationery from AA Dealers on credit
Deposited cash received for services rendered to U Wrong
Paid on account to AA Dealers
Paid salaries by cheque
P Victor drew a cheque for private use

12
1
8
2
3
1
3
1
1

000
000
000
000
000
800
000
200
500
400
1 000

Required:
(1) Record the above transactions using a table as illustrated in the following example:
20.1
March 3

Paid telephone account by cheque — R1 000.
ASSETS

=
Equipment

EQUITY

LIABILITIES

Date

Bank

Trade
receivables

Capital

Income/
Expenditure

Trade
payables

20.1

March 3

71 000

Totals

71 000

FAC1502/1

(2) Prepare the statement of changes in equity of P Victor for the month ended 31 March
20.1.
(3) Prepare P Victor’s statement of financial position as at 31 March 20.1 in narrative form.
(4) Show the accounting policy and the property, plant and equipment notes.

Solution: Revision exercise 5
P VICTOR
(1) TRANSACTION ANALYSIS

ASSETS

EQUITY

LIABILITIES

Date

Bank

Trade
receivables

20.1

Mar 3
Mar 4
Mar 5

+ 12 000
7 1 000

Trade
payables

+ 12 000
7 1 000

+ 3 000
1 800 7 1 800

+
7
7
7

1 200
1 500
400
1 000

9 100

+ 3 000
7 3 000
+ 1 200

+ 3 000
7 1 500

7
+ 1 200

+ 8 000

R18 300

400

200 +

1 000

+ 11 000

+ 7 500

{

+ 8 000
7 2 000

2 000

{

15
18
21
23
25
30
31

Capital

Income/
Expenditure

+ 8 000
7

Mar
Mar
Mar
Mar
Mar
Mar
Mar

Equipment

R18 300

P VICTOR
(2) STATEMENT OF CHANGES IN EQUITY FOR THE MONTH ENDED 31 MARCH 20.1

FAC1502/1

Capital contribution from owner
Total comprehensive loss for the period
Drawings

Capital
R
12 000)
(200)
(1 000)

Balance at 31 March 20.1

10 800)

P VICTOR
(3) STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20.1
ASSETS
Non-current assets
Property, plant and equipment

Note

R
8 000
8 000

Current assets
Trade and other receivables
Cash and cash equivalents (bank)

10 300
1 200
9 100

Total assets

18 300

EQUITY AND LIABILITIES
Total equity
Capital

10 800
10 800

Current liabilities
Trade and other payables
Total equity and liabilities

7 500
7 500
18 300

P VICTOR
(4) NOTES FOR THE MONTH ENDED 31 MARCH 20.1
1. Accounting policy:
The financial statements have been prepared on the historical cost basis and comply with
International Financial Reporting Standards.
2.

Property, plant and equipment
Carrying amount: Beginning of period
Cost
Accumulated depreciation
Additions
Depreciation
Carrying amount: End of period
Cost
Accumulated depreciation

Equipment

Total

R
—
—
—
8 000
—
8 000
8 000
—

No depreciation was written off during the month.

SELF-ASSESSMENT
Now that you have studied this study unit, can you prepare the following:
.

ledger accounts?

a trial balance?

a basic statement of profit or loss and other comprehensive income?

a statement of changes in equity?

a basic statement of financial position?

certain notes to the financial statements?

FAC1502/1

TOPIC B

COLLECTING AND PROCESSING THE
ACCOUNTING DATA OF
ENTITIES

Learning outcome
The learner should be able to collect, process, adjust (where necessary) and record
financial information in order to complete the statement of profit or loss and other
comprehensive income (thereby calculating the gross and net profits) and statement of
changes in equity for the financial period and the statement of financial position at the end
of the financial period, of a sole proprietor.

FAC1502/1

CONTENTS

Study unit

FAC1502/1

Page

PROCESSING ACCOUNTING DATA

ADJUSTMENTS

THE CLOSING-OFF PROCEDURE, DETERMINING PROFIT
OF AN ENTITY AND PREPARING FINANCIAL STATEMENTS

116

STUDY UNIT

5
Processing accounting data
Learning outcome
Students should be able to prepare all the journals, posting to ledger accounts and to
prepare a trial balance.

Contents

Page

Key concepts

5.1

Introduction

5.2

The accounting cycle

5.3

Books of first entry: journals

5.4

Types of journals

5.5

Cash journals

5.5.1 Cash receipts journal

5.5.2 Cash payments journal

Credit journals and the general journal

5.6.1 Introduction

5.6.2 Inventory systems

5.6.3 Purchases journal and purchases returns journal

5.6.4 Sales journal and sales returns journal

5.6.5 General journal

5.7

The trial balance

5.8

Revision exercise and solution

5.9

Settlement discount

5.9.1 Settlement discount granted

5.9.2 Settlement discount received

Value added tax (VAT)

5.10.1 Background

5.10.2 Tax period

5.10.3 Accounting bases

Revision exercise and solution

5.6

5.10

5.11

Self-assessment

FAC1502/1

KEY CONCEPTS
.
.
.
.
.
.
.
.
.
.

Source documents
Accounting cycle
Cash receipts journal
Cash payments journal
Purchases journal
Purchases returns journal
Sales journal
Sales returns journal
General journal
Output VAT

.
.
.
.
.
.
.
.
.
.

General ledger
Trade receivables ledger
Trade payables ledger
Comprehensive taxation
Vendor
Taxable supplies
Exempted supplies
Settlement discount
Value added tax (VAT)
Input VAT

5.1 Introduction
In the previous study units you learnt how to analyse transactions and to determine their effect
on the basic accounting equation. We then recorded all the transactions in the accounts in the
general ledger and we explained the principle of the double-entry system and emphasised how
important it is. This created a framework in which to study the processing of accounting data in
greater detail and this is what we are going to look at next.
Study paragraph 5.1 of the prescribed book.

5.2 The accounting cycle
Accounting data are processed within a definite framework which is known as the accounting
cycle.

The following diagram shows the accounting cycle:
Transactions
taking place
!

Completion of
source documents
!

Recording of transactions
in journals
!

Posting to ledgers
!

Reporting in
financial statements
!

Analysis and interpretation
of financial statements
!

Decision making by
the management

FAC1502/1

5.3 Books of first entry: journals
Because of the large number of transactions that take place in an entity, it is not practical to
record each transaction directly in the ledger. This makes the ledger very bulky and
unmanageable and in a manual system it means that only one person can write up the books.
This led to the use of subsidiary journals or books of first entry in which transactions of the
same type are grouped together and analysed before being recorded in summarised form in
the ledger. A journal is thus a link between source documents and the ledger. No transaction
may be recorded in the ledger before it has been recorded in a journal.
Study paragraph 5.2 of the prescribed book.

5.4 Types of journals
There are various types of journals or books of first entry but for the time being we will be
concentrating on the following:
the cash receipts journal and the cash payments journal in which all cash transactions
are recorded
. the purchases journal and the purchases returns journal in which all credit purchases
and returns of credit purchases are recorded
. the sales journal and the sales returns journal in which all credit sales and returns of
credit sales are recorded
. the general journal in which transactions are recorded which are not recorded in one of the
other journals, for example the correction of errors and the writing off of credit losses (bad debts)
.

5.5 Cash journals
5.5.1 Cash receipts journal
All moneys received which is deposited in the entity’s bank account is recorded in the cash
receipts journal. At the end of the month only one amount, which represents the entire month’s
cash receipts, is debited to the bank account. The other column totals represent the contra
accounts and are credited to such accounts. The amounts in the sundry accounts column are
credited individually to the relevant accounts.
Study paragraph 5.3.1 of the prescribed book.
Let us now go back to the information we had for Fix-’n-Mat in study unit 4. Fix-’n-Mat’s cash
receipts journal and ledger accounts would look as follows:

FIX-’N-MAT
CASH RECEIPTS JOURNAL — FEBRUARY 20.1
Document Day
number
Rec 1
2
3
4

Details

1 T Tom
2 ABC Bank
13 S Silver
28 C Canon

Analysis
of
receipts
R

CRJ1
Sundry accounts

Bank

Current
income

Amount
R

130 000
25 000

1 000
2 000

1 000

158 000

1 000

Fol

Details
Capital
Loan:
ABC Bank

2 000

C Canon

157 000

FAC1502/1

Bank

20.1
Feb 28

Capital

R
Receipts 158 000

20.1
Feb 1 Bank

Fees earned
20.1
Feb 18 ....
28 Bank

Loan: ABC Bank

R
....
1 000

20.1
Feb 2 Bank

Dr
20.1
Feb 18 ....

C Canon
....

20.1
Feb 28 Bank

Cr
R
130 000

Cr
R
25 000

Cr
R
2 000

COMMENTS
. Source documents for entries in the cash receipts journal are the cash register roll,
duplicate receipts, duplicate cash invoices and duplicate deposit slips.
. The cash receipts for the month are recorded and analysed in date order.
. Each amount received during the day is not banked immediately. Receipts are first
recorded in the analysis of receipts column and the amount which is banked for that
day is recorded in the bank column.
. Check the addition in the columns by cross-casting. In other words, when the totals of
the analysis columns are added, they must equal the total in the bank column.
. Entries in the sundry accounts column are posted individually to the general ledger.
. Only the totals of the other columns are posted.
. The cash receipts journal is a book of first entry. The double-entry system has to be
applied in the general ledger.
. The amounts are not recorded individually again in the bank account in the general
ledger. Note that the credit entries in the accounts add up to R158 000, which
corresponds to the debit entry in the bank account.
. The number and headings of columns in the journal will depend on the frequency of
occurrence of transactions and can differ from one entity to the other.

5.5.2 Cash payments journal
All cash payments, that is payments by cheque, are recorded in the cash payments journal. At
the end of the month only one amount, which represents the entire month’s cash payments, is
credited to the bank account. The other column totals represent the contra accounts and are
debited to such accounts. The amounts in the sundry accounts column are debited individually
to the relevant accounts.
Study paragraph 5.3.2 of the prescribed book.

FAC1502/1

Fix-’n-Mat’s cash payments journal and ledger accounts would look as follows:

FIX-’N-MAT
CASH PAYMENTS JOURNAL — FEBRUARY 20.1
Cheque

Day

Details

Bank

CPJ1
Wages

number

Amount

1
2
3
4

6
11
12
16

R
100 000
2 000
1 000
800

XY Furnishers
Joc Limited
Cash
Cash

103 800

Bank

20.1
Feb 28

20.1
Feb 28 Payments

Wages

20.1
Feb 28

Sundry accounts

Bank

800

Equipment
Joc Limited
Drawings

103 000

Equipment

20.1
Feb 6 Bank

R
800

R
100 000
2 000
1 000

Details

800

R
103 800

Fol

R
100 000

Joc Limited

20.1
Feb 11 Bank

R
2 000

20.1
Feb 10 ...

Drawings

20.1
Feb 12 Bank

...

R
1 000

The complete bank account will now take the following form:
Dr

Bank

20.1
Feb 28

Receipts

R
CRJ1 158 000

20.1
Feb 28

Cr
Payments
Balance

CPJ1
c/d

158 000
20.1
Mar 1

Balance

b/d

R
103 800
54 200
158 000

54 200

Note that this balance is the same as the bank balance we calculated using the BAE in
paragraph 4.6 and the bank account in paragraph 4.13 of study unit 4.

COMMENTS
. Source documents for entries in the cash payments journal are cheque counterfoils
and debit notes, or the bank statement issued by the bank.
. Entries are recorded and analysed in the cash payments journal in the same order as
the cheque numbers.
. The amount which is written on the cheque is the amount which is recorded in the
bank column.
. Check whether the adding of the columns is correct by cross-casting. In other words,
when the totals of the analysis columns are added, they must equal the total of the
bank column.

FAC1502/1

. Entries in the sundry accounts column are posted individually to the general ledger.
. Only the totals of the other columns are posted.
. The amounts are not recorded individually again in the bank account in the general
ledger.
. The cash payments journal is a book of first entry. The double-entry system has to be
applied in the general ledger.
. More analysis columns can be included as is required by the organisation.

Exercise 5.1
Ms Beauty Baloyi opens a hairdressing salon, Beauty’s Hair, on 1 June 20.3 and enters into the
following transactions during June:
20.3
Jun

Jun
Jun
Jun
Jun
Jun
Jun
Jun
Jun
Jun
Jun
Jun
Jun
Jun
Jun

1 Deposited R10 000 in the business’s bank account
Paid the month’s rental by cheque to Huurtru, R1 000.
Paid the water and electricity deposit, R500.
2 Bought R2 500 worth of equipment and R845 worth of consumable inventory from
Head Suppliers and paid by cheque, R3 345.
5 Fees received for services rendered, R350.
7 Drew a cheque and paid the assistant’s wages, R200.
10 Cash banked for services rendered, R556.
14 Drew a cheque for R500 to pay the week’s wages, R200, the remainder being for Ms
Baloyi’s own use.
15 Cash register roll total for services rendered, R642.
17 Bought stationery from Office Suppliers, R80 and paid by cheque.
19 Fees received for services rendered, R438.
21 Paid the week’s wages, R200.
22 Bought shampoo and other requirements from Head Suppliers and paid by cheque,
R550.
24 Cash register roll total for services rendered, R387.
25 Issued a cheque to Telkom to pay the telephone account, R260, which included
installation costs of R180.
28 Cashed a cheque for R1 500. R1 300 was for the owner’s own use and R200 was for
wages.
30 Cash banked for services rendered, R875.

Required:
(1) Prepare the cash receipts journal for Beauty’s Hair for June 20.3.
(2) Prepare the cash payments journal for Beauty’s Hair for June 20.3.
(3) Show the postings from these journals to the general ledger accounts.
(4) Prepare the trial balance as at 30 June 20.3.

FAC1502/1

Solution: Exercise

5.1

BEAUTY’S HAIR
(1) CASH RECEIPTS JOURNAL — JUNE 20.3
Document Day
number

Details

Analysis
of receipts

Bank

10 000

CRJ1
Current
income

Rec 1

1 B Baloyi

CRR 1

5 Service fee

350

CRR 2

10 Service fee

556

CRR 3

15 Service fee

642

CRR 4

19 Service fee

438

CRR 5

24 Service fee

387

CRR 6

30 Service fee

875

13 248

3 248

Sundry accounts
Amount Fol Details
10 000

Capital

10 000

(CRR = Cash register roll)

BEAUTY’S HAIR
(2) CASH PAYMENTS JOURNAL — JUNE 20.3
Cheque
number

Day

Details

Bank

CPJ1

Consumable inventory
Wages

Fol

Details

Rental
expenses

500

Water and
electricity
deposit

2 500

Equipment

300

Drawings

Stationery

260

Telephone
expenses

200

1 300

Drawings

800

5 940

1 000

City
Treasurer
500

Head
Suppliers

3 345

845

Cash

200

Cash

500

200

Office
Suppliers

Cash

200

Head
Suppliers

550

200
550

Telkom
260

Amount

Huurtru
1 000

Sundry accounts

Cash

1 500
8 135
B3

1 395
N5

FAC1502/1

BEAUTY’S HAIR
(3) GENERAL LEDGER
Dr

Equipment

20.3
Jun 2

Bank

CPJ1

2 500

Water and electricity deposit

20.3

R
Bank

CPJ1

500

Dr
20.3
Jun 30

Jun 1

Bank
Receipts

CRJ1

R
13 248

20.3
Jun 30

Payments
Balance

CPJ1
c/d

13 248
20.3
Jul 1

Balance

b/d

13 248

5 113

Capital
20.3
Jun 1

B4
Bank

Drawings

20.3
Jun 14 Bank
28 Bank

CPJ1
CPJ1

R
8 135
5 113

CRJ1

Cr
R
10 000

R
300
1 300
1 600

Current income
20.3
Jun 30

Dr
20.3
Jun 1

Rental expenses
Bank

CPJ1

Dr
20.3
Jun 17 Bank

FAC1502/1

CRJ1

R
3 248

R
1 000
Stationery
R

CPJ1

Dr
20.3
Jun 25 Bank

Bank

80
Telephone expenses

CPJ1

R
260

Consumable inventory

20.3
Jun 30 Bank

CPJ1

Dr
CPJ1

R
1 395
Wages

20.3
Jun 30 Bank

R
800

BEAUTY’S HAIR
(4) TRIAL BALANCE AS AT 30 JUNE 20.3
Fol

Debit
R

Equipment
Water and electricity deposit
Bank
Capital
Drawings
Current income
Rental expenses
Stationery
Telephone expenses
Consumable inventory
Wages

B1
B2
B3
B4
B5
N1
N2
N3
N4
N5
N6

Credit
R

2 500
500
5 113
10 000
1 600
3 248
1 000
80
260
1 395
800
13 248

13 248

COMMENTS
. The B numbers indicate the statement of financial position accounts and the N
numbers, the nominal accounts. Nominal accounts are income and expenditure
accounts while statement of financial position accounts are capital, asset and liability
accounts.
. In the folio column in the ledger, the cash receipts or cash payments journal is given as
a reference, but in the details column the names of the contra ledger accounts are
entered.
. The summarising effect of the subsidiary journals can be clearly seen in the ledger.
Note the entries in the bank account and the current income account.

5.6 Credit journals and the general journal
5.6.1 Introduction
In many business entities goods are bought and sold on credit. In the process, accounts have
to be opened for debtors and creditors. If all these accounts are included in the general ledger,
the same sort of problem arises that we have already mentioned — the ledger becomes too
bulky and unmanageable and in a manual system only one person can write up the books. For
this reason a trade receivables ledger and a trade payables ledger are opened in which the
individual debtors’ and creditors’ accounts are kept. A single account is then held in the general

FAC1502/1

ledger for debtors, namely a trade receivables control account, and one for creditors,
namely a trade payabless control account. This means that the entire accounting system is
adapted to make provision for the control accounts. In the cash receipts journal and the cash
payments journal provision is made for additional columns for trade receivables control and
trade payables control.
You can read more about the trade receivables control and the trade payables control accounts
in study units to follow,
Study paragraph 5.3.3 of the prescribed book.

5.6.2 Inventory systems
We distinguish between the periodic inventory system and the perpetual inventory system,
which will be dealt with in detail in study unit 7. At this stage all you need to know is that
inventory in trade (merchandise) which is purchased has to be debited to a purchases account
if a periodic system is being used. Provision must therefore be made for a purchases column
in the subsidiary journal. If a perpetual inventory system is used, inventory in trade
(merchandise) is debited to the inventory account and an inventory column is required
instead of a purchases column in the subsidiary journals.

5.6.3 Purchases journal and purchases returns journal
Merchandise purchased on credit is recorded in the purchases journal. At the end of the month
only the total credit purchases for the month is debited to the purchases account and credited
to the trade payables control account. If some of the goods are returned, they are recorded in
the purchases returns journal.
NB:

For the purpose of this module, only merchandise purchased on credit is recorded in
the purchases journal. All other credit purchases are recorded in the general journal.

Trade discount is often allowed by a wholesaler to a retailer. The discount percentage that is
agreed upon, is calculated and deducted on the cash or credit invoice. The net amount on the
invoice is recorded as the amount of purchases in the accounting records of the purchaser.
Thus, the trade discount amount is never recorded in the accounting records of the purchaser.
To encourage a debtor to pay his/her account within a certain period, a cash discount option is
given to the debtor. If the account is settled within the stipulated period, the discount will be
recorded in the settlement discount granted account in the sellers’ accounting records and the
settlement discount received account in the buyers’ accounting records. The full amount of the
invoice must be paid if the account is not settled within the stipulated period.
Study paragraphs 9.3 and 13.6 of the prescribed book.

A purchases journal and purchases returns journal have the following formats:

FAC1502/1

ABC DEALERS
PURCHASES JOURNAL — MAY 20.3
Invoice No

Day

1534
1535
1536
1537
1538
1539
1540

PJ5

Details

3
7
11
14
21
25
30

Grand Wholesalers
XY Company
AA Limited
XY Company
XY Company
Grand Wholesalers
AA Limited

Fol

Purchases

Trade
payables

CL2
CL3
CL1
CL3
CL3
CL2
CL1

R
1 258
983
2 324
437
1 212
538
215

6 967

ABC DEALERS
PURCHASES RETURNS JOURNAL — MAY 20.3
Credit note
No
C115
C116

Day

Details

10
27

Fol

Grand Wholesalers
XY Company

GENERAL LEDGER
Dr

Purchases

Trade
payables

CL2
CL3

158
114

272

Cr
Date

Details

Fol

20.3
May

Trade payables control

20.3
May 31 Purchases
returns

Purchases
returns

TRADE PAYABLES LEDGER

20.3
R
May 31 Creditors 6 967

PRJ5

20.3
R
May 31 Purchases 6 967

Debit

Credit

Balance

AA Limited
11
30

Inv
Inv

1536
1540

CL1

PJ5
PJ5

2 324
2 215

2 324
2 539

272

Purchases returns
20.3
May 31 Creditors

Cr
R
272

Grand Wholesalers
3
10

Inv

1534

Credit note
C 115

1539

PJ5
PRJ5

CL2
1 258

1 258

538

1 100
1 638

158

PJ5

XY Company
7
14
21
27

Inv
Inv
Inv
Credit
C 116

1535
1537
1538
note

CL3

PJ5
PJ5
PJ5
PRJ5

983
437
1 212
114

983
1 420
2 632
2 518

FAC1502/1

COMMENTS
. The source documents for entries in the purchases journal are original invoices.
Because these invoices come from different businesses, they are renumbered
consecutively.
. The source documents for entries in the purchases returns journal are the original
credit notes received from the creditors and they must be renumbered consecutively.
. Entries are recorded and analysed in date order in the purchases journal and
purchases returns journal.
. The creditor’s name and the amount for which purchases or returns were made must
be clearly shown.
. Only the totals of the columns are posted to the general ledger.
. The amounts in the purchases and the creditors columns are the same in the
purchases journal because we are still ignoring VAT. The same applies for purchases
returns.
. The creditors’ accounts are individually credited in the trade payables ledger with
purchases and debited with returns. A three-column ledger is preferable to the
traditional T-account format because the balance can be calculated after each
transaction.
. The total of all the balances of the individual creditor’s accounts must correspond with
the balance of the trade payables control account.
. The purchases journal and purchases returns journal are books of first entry. The
double-entry procedure has to be applied in the general ledger.

5.6.4 Sales journal and sales returns journal
Merchandise sold on credit is recorded in the sales journal. At the end of the month only the total
credit sales for the month are credited to the sales account and debited to the trade receivables
control account. If the debtors return some of the goods, they are recorded in the sales returns
journal.
NB:

For the purposes of this module, only merchandise sold on credit is recorded in the
sales journal. All other credit sales are recorded in the general journal.

Study paragraphs 5.3.3.3 and 5.3.3.4 of the prescribed book.
A sales journal and sales returns journal have the following formats:

ABC DEALERS
SALES JOURNAL — MAY 20.3

FAC1502/1

Invoice
No

Day

2018
2019
2020
2021
2022
2023
2024
2025

2
5
12
14
17
21
29
30

SJ3
Details

M Moloi
A Abdul
G Green
E Els
G Green
M Moloi
E Els
A Abdul

Fol
DL4
DL1
DL3
DL2
DL3
DL4
DL2
DL1

Sales

Debtors

R
268
315
424
176
587
643
269
103

268
315
424
176
587
643
269
103

2 785

ABC DEALERS
SALES RETURNS JOURNAL — MAY 20.3
Credit
Note No

Day

D223
D224
D225

8
19
21

Details

Sales

May 31 Trade
receivables
Trade receivables control

20.3
May 31 Sales

R
2 785

20.3
May 31 Sales
returns

Sales returns

20.3
May 31 Trade
receivable

Sales
returns

Trade
receivables

DL4
DL3
DL2

175
114
192

11281

TRADE RECEIVABLES LEDGER
20.3

Fol

M Moloi
G Green
E Els

GENERAL LEDGER
Dr

SRJ3

Cr
R

Date

Details

20.3
May

Fol

Debit
R

Credit Balance
R

2 785
Cr
R

A Abdul
5
30

Inv
Inv

2019
2025

DL1

315
103

315
418

281

E Els
14
21

281
29

Inv 2021
Credit
Note no
D225
Inv 2024

DL2

176

92
269
G Green

12
17
19

Inv 2020
Inv 2022
Credit Note
no D224

DL3

424
587

424
1 011
114

M Moloi
2
8

Inv 2018
Credit
Note no
D223
Inv 2023

897
DL4

268

75
643

84
353

193
836

COMMENTS
. The source documents for entries in the sales journal are the duplicates of sales
invoices.
. The source documents for entries in the sales returns journal are the duplicates of
credit notes issued to the debtors.

FAC1502/1

. The debtor’s name and the amount of the transaction should be clearly indicated.
. Entries are recorded and analysed in date order in the sales journal and sales returns
journal.
. Only the totals of the columns are posted to the general ledger.
. The amounts in the sales and the debtors columns are the same in the sales journal
and sales returns journal, because we are still ignoring VAT. The effect of VAT will be
explained later.
. The debtors’ accounts are debited individually in the trade receivables ledger with
sales, and credited with sales returns.
. The total of all the balances of the individual debtor’s accounts must correspond with
the balance of the trade receivables control account.
. The sales journal and sales returns journal are books of first entry; it is, in other words,
a summary of sales and returns. The double-entry system has to be applied in the
general ledger.

5.6.5 General journal
All transactions which cannot be entered in one of the journals which we have discussed are
entered in the general journal. Examples are credit losses (bad debts) which are written off,
interest on debtors’ accounts, errors which are corrected and year-end adjustments (which will
be discussed in a later study unit).
Study paragraph 5.3.3.5 of the prescribed book.
NB:

Purchases and sales of goods other than merchandise are recorded in the general
journal for the purposes of this module.

A general journal takes the following form:

ABC DEALERS
GENERAL JOURNAL — MAY 20.3
Date
5

Particulars
Vehicles
ABC Bank
Delivery vehicle bought on credit per invoice
F147 from ORA Motors. The delivery vehicle was
financed by obtaining a loan from ABC Bank at
an interest rate of 9% per annum
Packaging material
Stationery
Packaging material per invoice Z214 incorrectly
debited to stationery account
Credit losses (Bad debts)
F Field
F Field’s balance written off as irrecoverable

J3
Fol

Debit
R
43 000

Credit
R
43 000

430
430

84
84

COMMENTS
. The account which is entered first is the account which has to be debited in the general
ledger.
. The narration is very important since it gives the reason for the entry and must also

FAC1502/1

refer to source documents.
. The general journal is a book of first entry. The double-entry system has to be applied
in the general ledger.
. Theoretically all transactions can be recorded in the general journal.

5.7 The trial balance
For each transaction, the debit entry must equal the credit entry. The total of all the debit
balances should, therefore, correspond to the total of all the credit balances. A list of balances
is prepared periodically to determine whether any errors have been made. This list of balances
is called a trial balance.

Study paragraph 4.5 of the prescribed book again.

5.8 Revision exercise and solution
On 1 March 20.5 A Apple opened a supermarket under the tradename AA Supermarket. He
decided to use the periodic inventory system and entered into the following transactions during
March 20.5:
20.5
March

A Apple deposited R50 000 in the entity’s current bank account as a capital
contribution.
Paid rental by cheque to JHB Letting Agents, R2 000.
Bought shop equipment from EQUIP on credit, R10 000 and paid R1 000 as a
deposit.
Issued a cheque to City Treasurer to pay the water and electricity deposit, R1 000.

Purchased merchandise on credit from TR Wholesalers, R23 541.
Purchased packaging material from S Suppliers and paid by cheque, R468.

Drew a cash cheque for cash float, R500.

Cash sales on opening day, R18 674.

Purchased merchandise on credit from the following wholesalers:
BB Dealers
DBN Distributors

R7 832
R6 965

Sublet a storeroom to G Gold and received his cheque for R250.
Cash sales per cash register roll, R12 455.

Drew a cheque to pay wages, R1 200.

Issued invoices to the following people for goods sold:
B Blue
S Silver

R478
R693.

Purchased merchandise from Z Zulu and paid by cheque, R5 378.

Purchased a computer from HI Q, R5 260. Issued a cheque for R1 478, which
included a deposit of R1 000 and R478 for paper and computer supplies.

FAC1502/1

20.5
March 15

Sold on credit to the following people:

16
17

G Green R324.
R Red
R299.
Cash sales, R8 790.
Drew a cash cheque for the following:

19
20

Wages
R1 500.
Owner’s own use R1 000.
Received a cheque from B Blue, R200.
Purchased merchandise from TR Wholesalers and paid by cheque, R2 675.
Merchandise sold for cash, R12 570.

Goods sold on credit:
B Blue
R362.
R Red
R178.

S Silver paid R100 on his account.
Cash sales, R10 238.

24
25
27

Paid R550 to The Newsmaker for placing advertisements.
Drew cash to pay wages, R1 500.
Purchased stationery on credit from HI Q, R267.
Issued a receipt to R Red for R299 in part payment of his account.
Issued cheques to the following people in part settlement of their accounts:
TR Wholesalers
BB Dealers
DBN Distributors
HI Q

R20 000
R 6 000
R 5 000
R 1 000

Credit sales to S Silver, R262. He paid R200 on his account.

Cash sales, R16 742.
Issued cheques for the following:
L Lemon, the manager’s salary,
EQUIP on account,
JHB Letting Agents for rental for April,

R2 500
R1 000
R2 000

31 Issued a cheque to Telkom to pay the telephone account, R595
Cash sales, R15 284
31 Issued receipts to the following debtors for money received on their accounts:
G Green
B Blue

R324
R640

31 Cashed a cheque for R3 000, to pay wages of R1 500, and the balance was for the
owner’s own use.
Required:
Prepare the following:
(1) The subsidiary journals of AA Supermarket for March 20.5
(2) The general, trade receivables and trade payables ledgers of AA Supermarket for
March 20.5
(3) The trial balance of AA Supermarket as at 31 March 20.5
Ignore VAT.

FAC1502/1

Solution: Revision exercise
AA SUPERMARKET
(1) SUBSIDIARY JOURNALS
(a) CASH RECEIPTS JOURNAL — MARCH 20.5

Document Day
number

Rec 1
CRR 1
Rec 2
CRR 2
CRR 3
Rec 3
CRR 4
Rec 4
CRR 5
Rec 5
Rec 6
CRR 6
CRR 7
Rec 7
Rec 8

1
4
6
16
19
20
23
25
29
31

Details

A Apple
Sales
G Gold
Sales
Sales
B Blue
Sales
S Silver
Sales
R Red
S Silver
Sales
Sales
G Green
B Blue

Fol

Analysis
of
receipts
R
50 000
18 674
250
12 455
8 790
200
12 570
100
10 238
299
200
16 742
15 284
324
640

DL1
DL2
DL4
DL2

DL3
DL1

CRJ1

Bank

R
50 000
18 674
12 705
8 790
200
12 570

Sales

Trade
receivables
control
R

Sundry accounts
Amount

Fol

Details

R
50 000

Capital

250

Rental income

18 674
12 455
8 790
1200
12 570
1100

10 338
299

10 238

16 942

16 742
15 284

1299
1200

1324
1 640

16 248
146 766

94 753

1 763

50 250

(b) CASH PAYMENTS JOURNAL — MARCH 20.5
Cheque
number

Day

001
002
003

004
005
006
007
008
009
010
011
012
013
014
015
016
017
018
019
020
021

2
3
10
13
14
17
20
24
27

Details

JHB Letting Agents
EQUIP
City Treasurer
S Suppliers
Cash
Cash
Z Zulu
HI Q
Cash
TR Wholesalers
The Newsmaker
Cash
TR Wholesalers
BB Dealers
DBN Distributors
HI Q
L Lemon
EQUIP
JHB Letting Agents
Telkom
Cash

Fol

CL4

CL5

CL1
CL2
CL3
CL5
CL4

Bank

R
2 000
1 000
1 000
468
500
1 200
5 378
1 478
2 500
2 675
550
1 500
20 000
6 000
5 000
1 000
2 500
1 000
2 000
595
3 000

CPJ1

Trade pay- Purchases
ables control
R

Wages

Sundry accounts
Amount

Fol

R
2 000

Rental expenses

1 000

468
500

N5
B4

Water and electricity
deposit
Packaging material
Cash float

478
1 000

N4
B8

Stationery
Drawings

550

Advertisements

2 500

Salaries

1 500

2 000
595
1 500

N8
N9
B8

Rental expenses
Telephone expenses
Drawings

12 591

Details

1 000

1 200
5 378
1 000
1 500
2 675
1 500
20 000
6 000
5 000
1 000
1 000

61 344

35 000

8 053

5 700

N10

FAC1502/1

(c)

PURCHASES JOURNAL — MARCH 20.5

Invoice
no
A0001
A0002
A0003

Day
2
5

Details

PJ1
Fol

TR Wholesalers
BB Dealers
DBN Distributors

Purchases

CL1
CL2
CL3

Trade
payables

23 541
7 832
6 965

38 338

N3
(d)

SALES JOURNAL — MARCH 20.5

Invoice
No
F001
F002
F003
F004
F005
F006
F007

(e)

SJ1

Day

Details

Fol

B Blue
S Silver
G Green
R Red
B Blue
R Red
S Silver

DL1
DL2
DL3
DL4
DL1
DL4
DL2

15
21
29

Trade
receivables

Sales
478
693
324
299
362
178
262

478
693
324
299
362
178
262

2 596

GENERAL JOURNAL — MARCH 20.5

Date
1

Details

J1
Fol

Debit

Credit

R
10 000

Equipment
EQUIP/Trade payables control
Shop equipment bought on credit per invoice
Z001

B1
B6

Equipment
HI Q/Trade payables control
Computer bought on credit per invoice Z002

B1
B6

5 260

Stationery
HI Q/Trade payables control
Stationery bought on credit per invoice Z003

N4
B6

267

R
10 000

5 260

267

AA SUPERMARKET
(2) LEDGERS
(a)

GENERAL LEDGER

Dr
20.5
Mar 1
14

Equipment (at cost)
R
Trade payables
control
Trade payables
control

10 000

5 260
15 260

FAC1502/1

Water and electricity deposit

20.5
Mar 1

R
Bank

CPJ1

Dr
20.5
Mar 31

1 000

Trade receivables
Sales

SJ1

R
2 596

20.5
Mar 31

Bank
Balance

CRJ1
c/d

2 596
20.5
Apr 1

Balance

b/d

2 596

833

Cash float

20.5
Mar 3

R
500

Bank

CPJ1

Dr
20.5
Mar 31

Bank
Receipts

R
CRJ1 146 766

20.5
Mar 31

Payments
Balance

CPJ1
c/d

146 766
20.5
Apr 1

Balance

b/d

Dr
20.5
Mar 31

CPJ1
c/d

85 422

R
35 000
18 865

20.5
Mar 1
14
25
31

B6
Equipment
Equipment
Stationery
Purchases

J1
J1
J1
PJ1

53 865

20.5
Mar 1

20.5
Mar 17
31

Balance

b/d

Capital

Dr
CPJ1
CPJ1

R
10 000
5 260
267
38 338

Bank

18 865

CRJ1

R
50 000

Drawings
Bank
Bank

53 865
20.5
Apr 1

R
61 344
85 422
146 766

Trade payables
Bank
Balance

R
1 763
833

R
1 000
1 500
2 500

FAC1502/1

Sales
20.5
Mar 31

Trade receivables SJ1
Bank
CRJ1

R
2 596
94 753
97 349

Rental income
20.5
Mar 6

Dr
20.5
Mar 31

Purchases
Trade payables
Bank

PJ1
CPJ1

Cr
R

Bank

CRJ1

250

R
38 338
8 053
46 391

Dr
20.5
Mar 14
25

Stationery
Bank
Trade payables
control

CPJ1

R
478

267
745

Dr
20.5
Mar 2

Packaging material
Bank

CPJ1

Dr
20.5
Mar 24

Advertisements
Bank

CPJ1

Dr
20.5
Mar 30

R
550

Salaries
Bank

CPJ1

Dr
20.5
Mar 1
30

R
468

R
2 500

Rental expenses
Bank
Bank

CPJ1
CPJ1

R
2 000
2 000
4 000

FAC1502/1

Telephone expenses

20.5
Mar 31

Bank

CPJ1

Wages

(b)

Bank

CPJ1

N10

R
595

Dr
20.5
Mar 31

R
5 700

TRADE RECEIVABLES LEDGER

B Blue
Date
20.5
Mar 12
Mar 19
Mar 21
Mar 31

DL1
Details

Fol

Invoice F001
Receipt No 3
Invoice F005
Receipt No 8

SJ1
CRJ1
SJ1
CRJ1

Debit

Credit

R
478

R
200

362
640

S Silver
Date

Details

Fol
SJ1
CRJ1
SJ1
CRJ1

Debit

Credit

R
693

R
100

262
200

G Green

Balance
R
693
593
855
655

DL3
Details

Fol

20.5
Mar 15 Invoice F003
Mar 31 Receipt No 7

SJ1
CRJ1

Debit

Credit

R
324

R Red
Date

R
478
278
640
—

DL2

20.5
Mar 12 Invoice F002
Mar 23 Receipt No 4
Mar 29 Invoice F007
Receipt No 6

Date

Balance

Balance
R
324
—

DL4
Details

Fol

20.5
Mar 15 Invoice F004
Mar 21 Invoice F006
Mar 25 Receipt No 5

Debtors list

S Silver
R Red

655
178
833

SJ1
SJ1
CRJ1

Debit

Credit

R
299
178

299

Balance
R
299
477
178

Corresponds to the balance of account B3.

FAC1502/1

GOLDEN RULE
The total of all the balances of the individual debtor acconts in die subsidiary trade
receivables ledger MUST equal the balance of the trade receivables control account in the
general ledger.

(c)

TRADE PAYABLES LEDGER

TR Wholesalers
Date

Details

20.5
Mar 2
27

Invoice A0001
Cheque 013

CL 1
Fol
PJ1
CPJ1

Debit

Credit

R
23 541

Balance
R
23 541
3 541

20 000

BB Dealers
Date

Details

20.5
Mar 5
27

Invoice A0002
Cheque 014

CL 2
Fol

Debit
R

PJ1
CPJ1

Credit

Balance

R
7 832

R
7 832
1 832

6 000

DBN Distributors
Date

Details

20.5
Mar 5
27

Invoice A0003
Cheque 015

CL 3
Fol

Debit
R

PJ1
CPJ1

Credit

Balance

R
6 965

R
6 965
1 965

5 000

EQUIP
Date
20.5
Mar 1
30

CL 4
Details

Fol

Invoice Z001
Cheque 002
Cheque 018

J1
CPJ1
CPJ1

Debit

Credit

Balance

R
10 000

R
10 000
9 000
8 000

1 000
1 000

HI Q
Date
20.5
Mar 14
25
27

CL 5
Details

TR Wholesalers
BB Dealers
DBN Distributors
EQUIP
HI Q

Debit
R

Invoice Z002
Cheque 008
Invoice Z003
Cheque 016

Creditors list

FAC1502/1

Fol
J1
CPJ1
J1
CPJ1

Credit

Balance

R
5 260

1 000
267
1 000

R
3 541
1 832
1 965
8 000
3 527
18 865

Corresponds to the balance of account B6

5
4
4
3

R
260
260
527
527

GOLDEN RULE
The total of the individual creditor accounts in the subsidiary trade payables ledger MUST
equal the balance of the trade payables control account in the general ledger.

AA SUPERMARKET
(3)

TRIAL BALANCE AS AT 31 MARCH 20.5
Fol

Debit

Credit

Equipment (at cost)

B 1

R
15 260

Water and electricity deposit

B 2

1 000

Trade receivables control

B 3

833

Cash float

B 4

500

Bank

B 5

85 422

Trade payables control

B 6

18 865

Capital

B 7

50 000

Drawings

B 8

Sales

N 1

97 349

Rent income

N 2

250

Purchases

N 3

46 391

Stationery

N 4

745

Packaging material

N 5

468

Advertisements

N 6

550

Salaries

N 7

2 500

Rental expenses

N 8

4 000

Telephone expenses

N 9

595

Wages

N10

5 700

2 500

166 464

5.9 Settlement discount
5.9.1 Settlement discount granted
Discount is often offered to debtors in order to encourage quick settlement of their debts within
the stated credit term. The credit term will be shown on the credit invoice.
Study paragraph 9.3 of the prescribed book.

5.9.2 Settlement discount received
Discount is often received from creditors in order to encourage quick settlement of our
outstanding account.
Study paragraph 13.6 of the prescribed book.

FAC1502/1

5.10 Value-Added Tax (VAT)
5.10.1 Background
Study paragraphs 5.4 and 5.5 of the prescribed book.

VAT is levied at every point in the chain of production and distribution. Value-Added Tax is
based on a tax credit system which allows every producer or distributor along the chain to
recover the Value-Added Tax which was previously paid by the business. The tax borne by
each producer or distributor, through whose hands the goods or services have passed, before
reaching the end user, is in effect the tax on the value added by the business.
The tax that must eventually (every two months) be paid to the South African Revenue Service
(SARS) is the tax on the supply of goods (sales) and/or services rendered by the entity
(OUTPUT VAT) less the tax paid by the entity on the goods (purchases) and/or services
supplied to the entity (INPUT VAT).

GOLDEN RULES
. OUTPUT VAT is the tax levied (charged) by the entity on sales of goods or services
rendered by the business.
. INPUT VAT is the tax paid (or payable) on goods delivered and/or services rendered to
the entity, including imports. Deductions for input tax will only be allowed if a proper tax
invoice is received and kept.
. OUTPUT VAT minus INPUT VAT = amount payable/refundable, i.e. the amount payable
to the South African Revenue Services (SARS) or the amount that can be claimed from
SARS.

Value-Added Tax (VAT) can only be charged by persons who, in terms of the Act, are registered
as VAT vendors. Registration is compulsory if a person carries on an entity and the total value
of his supplies for a 12 month period exceeds or is likely to exceed a stipulated (in the Act)
amount.
An entity may also register voluntarily if its sales or service rendered are less than the
stipulated amount.
The stipulated amount excludes tax, exempted supplies and abnormal receipts.
If an entity is not registered, no output tax may be charged and no deduction for input tax can
be claimed.
The onus is on the entity to register where necessary and this must be done within 21 days of
becoming liable to register.

5.10.2 Tax period
A tax period is allocated to each entity. The return submitted by the entity must cover the period
allocated.
Some entities registered for VAT (vendors) must submit their returns every two months for
those two months. Some entities must complete and submit their returns for unequal months,
i.e. January, March, May, etc., others for equal months, i.e. February, April, etc.

FAC1502/1

5.10.3 Accounting bases
There are only two bases allowed for the calculation of the VAT liability, namely:
the invoice basis
the payments basis

.
.

Under the invoice basis tax is accounted for on
the issue of an invoice or
the receipt of payment, whichever comes first

.
.

Under the payments basis tax is accounted for when payments are made (purchases) and
payments are received (sales).
Certain requirements have to be met before a vendor may use the payments basis.

Exercise 5.2
To grasp the principles of VAT, work through the following exercise thoroughly. VAT at 14% is
applicable.
The following information relates to Rundu Dealers, who is registered as a VAT vendor and
who use the periodic inventory system: (The VAT period of the business ends on unequal
months.)
(a)

TRIAL BALANCE AS AT 28 FEBRUARY 20.4
Debit
R

Capital
Land and buildings
Equipment
Inventory — 1 November 20.3
Bank
W Wolf
L Lion
T Tiger
VAT input
VAT output
Sales
Purchases
Distribution, administration and other expenses

144
29
19
4
1

Credit
R
177 150

200
700
200
467
583
770
2 310

2 715
2 925
86 400
45 650
20 500
268 785

268 785

FAC1502/1

(b) TRANSACTIONS FOR MARCH 20.4
March 1
5
7
12
13

21
23
28
29
30

Cash sales, R15 504.
Paid the account of T Tiger by cheque after deducting R114 discount.
Received a cheque from W Wolf for R1 469 in full settlement of his account.
Received a cheque from L Lion for R713 and allowed R57 discount.
Received an account from Stationers Ltd for the printing of documents, R684.
Credit sales:
— L Lion
R2 280
— W Wolf
R1 140
Sold an old computer to O Old for R285 and received his cheque for the amount
due.
Cash sales, R6 840.
Issued a credit note to L Lion for an overcharge on the invoice of the 13th, R57.
Paid C Cheetah by cheque for carriage on goods purchased, R1 140.
Received a credit invoice from T Tiger for goods purchased, R14 535.
Issued cheques for salaries and wages, R5 746 and for purchases from B Bam
R7 980.
Issued a debit note to T Tiger for goods returned to him, R798.

Required:
(1)

Record the above transactions in the following subsidiary journals, properly totalled,
of Rundu Dealers for March 20.4:
(a) Cash receipts journal (analysis columns for bank, sales, VAT output, trade
receivables, VAT input (Dr), settlement discount granted and sundries)
(b) Cash payments journal (analysis columns for bank, purchases, trade payables,
settlement discount received, VAT input, VAT output (Cr) and sundries)
(c) Sales journal (analysis columns for VAT output, sales and trade receivables)
(d) Purchases journal (analysis columns for VAT input, purchases and trade
payables)
(e) Sales returns journal (analysis columns for VAT output, sales returns and trade
receivables)
(f) Purchases returns journal (analysis columns for VAT input, purchases returns and
trade payables)
(g) General journal

(2)

FAC1502/1

Post the entries recorded above to the VAT input and VAT output accounts. Close off
these accounts to the VAT control account. Balance the VAT control account at
31 March 20.4, the end of the business’ VAT period.

Solution Exercise

5.2

RUNDU DEALERS
(1)
(a)
Date

SUBSIDIARY JOURNALS
CASH RECEIPTS JOURNAL — MARCH 20.4
Details

Fol

Bank

Sales

Trade
receivables

CRJ2
VAT input

VAT
output
Dr

1
7
14

R
15 504
1 469

Sales
W Wolf
L Lion

713

O Old

285

Sales

R
13 600

6 840

6 000

24 811

19 600

R
1 904

Settlement
discount
granted
Dr

Amount

1 583

(14*) #

(100)

770

(7) #

(50)

(21)

2 779

L15

L16

Fol

250

35
840
2 353

Sundry accounts

(150)

Details

Equipment

250

* Discount includes 14% VAT therefore
R114
1

14
114

= R14

# VAT input is debited. See # under comments on p. 88

(b)
Date

CASH PAYMENTS JOURNAL — MARCH 20.4
Details

Fol

Bank

Purchases

Trade
payables

CPJ2
VAT
input

VAT
output

Settlement
discount
received

Cr
5
23

T Tiger
C Cheetah

R
2 196
1 140

Cash

5 746

B Bam

7 980

7 000

17 062

7 000

R
2 310

R
(14*)

Sundry accounts

Amount
R
(100)

140

Fol

Details

R
1 000
5 746

Carriage
on purchases
Salaries and
wages

980
2 310

1 120
L15

(14)

(100)

6 746

L15

* Discount includes 14% VAT therefore
R114
1

14
114

= R14

FAC1502/1

(c)

SALES JOURNAL — MARCH 20.4

Date

Details

L Lion
W Wolf

SJ2
Fol

VAT output

Sales

Trade
receivables

R
280
140

R
2 000
1 000

R
2 280
1 140

420

3 000

3 420

L16

(d)

PURCHASES JOURNAL — MARCH 20.4

Date

Details

T Tiger

Fol

PJ2
VAT input Purchases

Trade
payables

R
1 785

R
12 750

R
14 535

1 785

12 750

14 535

L15

(e)

SALES RETURNS JOURNAL — MARCH 20.4

Date

Details

Fol

SRJ2

VAT output
R

L Lion

Sales
returns
R

Trade
receivables
R

L16

(f)

PURCHASES RETURNS JOURNAL — MARCH 20.4

Date

Details

T Tiger

Fol

PRJ2

VAT input
R

L15

FAC1502/1

Purchases
returns
R

Trade
payables
R

700

798

700

798

(g)

GENERAL JOURNAL — MARCH 20.4

Date
12

Detail

Fol

Printing
VAT input
Stationers Ltd/Trade payables control
Account received for printing

L15

Debit

Credit

R
600
84
684

VAT control
VAT input
Transfer of VAT input to the
VAT control account

L17
L15

5 627

VAT output
VAT control
Transfer of VAT output to the
VAT control account

L16
L17

6 131

5 627

6 131

NB: The last two journal entries can only be done after the VAT input account and the VAT
output account in the general ledger have been completed. It is in fact the ‘‘balances’’ of
these two accounts that are transferred to the VAT control account.

RUNDU DEALERS
(2) General ledger
Dr
20.4
Mar 1 Balance
31 Bank
Trade receivables
control
Trade payables control
Trade payables control

VAT input
b/d
CPJ2

R
2 715
1 120

CRJ2
PJ2
J2

21
1 785
84

L15

20.4
Mar 31 Trade payables control
VAT control

R
PRJ2
J2

98
5 627

5 725

VAT output

20.4
Mar 31 Trade receivables
control
VAT control

R
SRJ2
J2

7
6 131

L16

20.4
Mar 31 VAT input
Balance

J2
c/d

20.4

Mar 1 Balance
b/d
31 Bank
CRJ2
Trade receivables control SJ2
Trade payables control
CPJ2

2 925
2 779
420
14

6 138

VAT control

L17

R
5 627
504

20.4
Mar 31 VAT output

6 131

Cr
R
6 131
6 131

20.4
Apr 1

Balance

b/d

504*

* A cheque must be issued to the South African Revenue Service for this amount before
25 April 20.4

FAC1502/1

COMMENTS
. Calculation of VAT on all amounts which include 14% VAT is:

Amount without VAT
VAT
; Amount VAT inclusive

=
=
=

%
100
14
114

R
1,00
0,14
1,14

To calculate an amount if VAT was included
14
114 x Amount given
Example: Amount received on 1 March 20.4 = R15 504 (including VAT). (See cash
receipts journal.)
14
VAT
= 114
6 R15 504 = R1 904
100
SALES = 114 6 R15 504 = R13 600
or
SALES = R15 504 7 R1,14 = R13 600.
. VAT on cash sales is credited to the VAT output account because Rundu Dealers
received VAT for payment to the South African Revenue Service.
. VAT on credit sales is credited to the VAT output account.
. VAT on cash purchases is debited to the VAT input account.
. VAT on credit purchases is debited to the VAT input account.
. VAT on sales returns is debited to the VAT output account. (To cancel the VAT output
portion of the sales returned.)
. VAT on purchases returns is credited to the VAT input account. (To cancel the VAT
input portion of the purchases returned.)
. # VAT on settlement discount granted to debtors is debited to the VAT input account (to
reduce the amount owed to the South African Revenue Service).
. VAT on settlement discount received from creditors is credited to the VAT output
account (to increase the amount owed to the South African Revenue Service).
. The balances of the VAT input and VAT output accounts are transferred to the VAT
control account to determine what amount must be paid to or to be claimed from the
South African Revenue Service.
. When the difference between the debit and credit sides of the VAT control is a:
. credit, the difference is payable to the South African Revenue Service (current
liability)
. debit, the difference is refundable by the South African Revenue Service (current
asset)
NB: VAT is charged on services, for example telephone account, water and electricity
account and repairs.

5.11 Revision exercise and solution
The following information relates to Sunshine Glass Traders, who is registered as a VAT
vendor. The periodic inventory system and control accounts are in use: (The VAT period of the
business ends on equal months.)

FAC1502/1

SUNSHINE GLASS TRADERS
(a)

TRIAL BALANCE AS AT 31 JANUARY 20.4
Fol

Land and buildings (at cost)
Furniture (at cost)
Inventory: Trading
Trade receivables control
Bank
Trade payables control
Capital
Drawings
VAT input
VAT output
Sales
Purchases
Rent income
Packaging material
Telephone expenses
Water and electricity
Settlement discount granted
Settlement discount received
Wages
Stationery

Debit
R
60 000
5 320
6 536
2 431
2 554

B1
B2
B3
B4
B5
B6
B7
B8
B9
B10
N1
N2
N3
N4
N5
N6
N7
N8
N9
N10

Credit
R

6 075
75 000
3 884
4 337
4 527
13 569
9 855
800
964
483
1 247
170
210
2 150
250
100 181

100 181

(b) Transactions, 14% VAT inclusive, for February 20.4:
R
Feb

Feb 3

The owner, S Shine, increased his capital contribution
Paid the City Council for water and electricity

15 000
3 078

Purchased merchandise from Glasco Ltd and paid by cheque
Purchased merchandise on credit from Ferguson Limited
Sold trading inventory on credit to J Jason

8 778
9 120
13 680

Purchased a desk on credit from City Furnitures

Purchased receipt books and pens from Pen and Pencil
and paid by cheque
Drew a cheque for the week’s wages

3 534

228
954

Paid Glasco Ltd on account
Received discount

3 992
228

Cash sales of merchandise

3 876

Issued a credit note to J Jason for an overcharge on the 3rd
Drew a cheque for the week’s wages

Cash sales
Received a cheque from J Jason
Settlement discount granted to him

114
940
2 394
5 988
342

FAC1502/1

Feb 18

Sold goods on credit to F Brown
Cash purchases of trading inventory
Purchased glassware on credit from Glasco Ltd

4 560
2 736
5 700

Returned damaged goods to Glasco Ltd

570

Drew a cheque for wages
Received damaged goods returned by F Brown and issued a
credit note

989

Cash sales
Received a payment from F Brown
Discount allowed to him

Drew a cheque for wages
Issued a cheque to Telkom to pay the telephone account
Received an account from Printo Limited for the printing of
documents

228
6 156
2 552
228
945
570
798

Purchased inventory on credit from Glasco Ltd
Paid Ferguson Limited by cheque and received
R285 discount

3 420
5 490

Paid the owner’s house instalment by cheque to HP Bank
Received a cheque from Z Zittace for rental

2 500
912

Required:
(1)

Record the above transactions in the following subsidiary journals of Sunshine Glass
Traders for February 20.4:
(a) Cash receipts journal (analysis columns for bank, sales, VAT output, trade
receivables, settlement discount granted, VAT input (Dr) and sundries)
(b) Cash payments journal (analysis columns for bank, purchases, trade payables,
settlement discount received, wages, VAT input, VAT output (Cr) and sundries)
(c) Sales journal (analysis columns for trade receivables, VAT output and sales)
(d) Purchases journal (analysis columns for trade payables, VAT input and
purchases)
(e) Sales returns journal (analysis columns for trade receivables, VAT output and
sales returns)
(f) Purchases returns journal (analysis columns for trade payables, VAT input and
purchases returns)
(g) General journal

(2)

Post the entries recorded in the subsidiary journals to the relevant accounts in the
general ledger of Sunshine Glass Traders. (All the accounts must be properly
balanced/totalled at 28 February 20.4.) Close the VAT input and VAT output accounts
and transfer the balances to the VAT control account.

NB: (a) Remember to enter the balances at 31 January 20.4 in the applicable ledger
accounts.
NB: (b) The first word(s) of each entry must indicate the contra ledger account.
(3)

FAC1502/1

Prepare the trial balance of Sunshine Glass Traders as at 28 February 20.4.

SOLUTION: Revision exercise
SUNSHINE GLASS TRADERS
(1) SUBSIDIARY JOURNALS
(a) CASH RECEIPTS JOURNAL – FEBRUARY 20.4
Date

Details

1
10
15

S Shine
Cash
Cash
J Jason

Cash
F Brown
Z Zittace

Fol

Bank

Sales

R
15 000
3 876
2 394

5 988
6 156
2 552
912

VAT input

VAT
output

10 900
N1

Fol

R
15 000

Capital

112

800

Rental
income

1 638

15 800

6 330

(300)

(42)

2 780

(200)

(28)

756

9 110

(500)

(70)

B10

CASH PAYMENTS JOURNAL — FEBRUARY 20.4
Details

Fol

Bank

Purchases

City Council

R
3 078

1
3
6

Glasco Ltd
Pen and Pencil
Cash
Glasco Ltd
Cash
Cash

8 778
228
954
3 992
940
2 736

7 700

21
26

27
28

Details

476
294

Trade
payables

Wages

CPJ2
Settlement
discount
received

VAT
input

VAT
output
Cr

8
12
18

Sundry accounts

Amount

5 400

Date

Settlement
discount
granted
Dr

3 400
2 100

36 878

(b)

Trade
receivables

CRJ2

Cash
Cash
Telkom

(c)

Fol

Details

2 700

Water and
electricity

200

N10

Stationery

500

Telephone
expenses

2 500

Drawings

4 220

(200)

(28)

940
2 400

336
989
945
70
5 775

10 100
N2

(250)

9 995

3 828

(450)

(35)
1 890
B9

(63)

5 900

SALES JOURNAL — FEBRUARY 20.4

Date

3
18

R
378

Amount

954

5 490
2 500
31 200

1 078
28

989
945
570

Ferguson Ltd
HP Bank

Sundry accounts

Details

J Jason
F Brown

Fol

SJ2
Trade
receivables

VAT output

Sales

R
13 680
4 560

R
1 680
560

R
12 000
4 000

18 240

2 240

16 000

B10

FAC1502/1

(d)

PURCHASES JOURNAL — FEBRUARY 20.4

Date

Details

3
18
27

Fol

Ferguson Limited
Glasco Ltd
Glasco Ltd

PJ2
Trade
payables

VAT input

Purchases

R
9 120
5 700
3 420

R
1 120
700
420

R
8 000
5 000
3 000

18 240

2 240

16 000

SALES RETURNS JOURNAL — FEBRUARY 20.4
Trade
Date
Details
Fol receivables

(e)

R
12
21

J Jason
F Brown

R
14
28

100
200

342

300

N11

PURCHASES RETURNS JOURNAL — FEBRUARY 20.4

Date

Details

Fol

(g)

PRJ2

Trade
payables

VAT input

Purchases
returns

Glasco Ltd

570

500

570

500

N12

GENERAL JOURNAL — FEBRUARY 20.4

Date
4

FAC1502/1

114
228

B4
(f)

VAT output

SRJ2
Sales
returns

Details

Fol

Furniture
VAT input
City Furnitures/Trade payables control
Desk purchased on credit

B2
B
B6

Debit
R
3 100
434

Credit
R

3 534

Printing
VAT input
Printo Limited/Trade payables control
Printing of documents on credit

N13
B9
B6

700
98

VAT output
VAT control
Transfer of VAT output to the
VAT control account

B10
B11

8 426

VAT control
VAT input
Transfer of VAT input to the
VAT control account

B11
B9

8 999

798

8 426

8 999

(2) GENERAL LEDGER
Dr
20.4
Feb 1

Land and buildings (at cost)
Balance

b/d

Dr
20.4
Feb 1
4

R
60 000
Furniture (at cost)

Balance
City Furnitures

R
5 320
3 100

b/d
J2

8 420
Dr
20.4
Feb 1

Inventory: Trading
Balance

Dr
20.4
Feb 1
28

R
6 536

b/d

Trade receivables control
Balance
Sales

b/d
SJ2

R
2 431
18 240

20.4
Feb 28

Bank and discount CRJ2
Sales returns
SRJ2
Balance
c/d

20 671
20.4
Mar 1

Balance

b/d

20 671

11 219

Dr
20.4
Feb 1
28

Bank
Balance
Total receipts

b/d
CRJ2

R
2 554
36 878

20.4
Feb 28

B5
Total payments
Balance

CPJ2
c/d

39 432
20.4
Mar 1
Dr
20.4
Feb 28

Balance

b/d

R
9 110
342
11 219

Cr
R
31 200
8 232
39 432

8 232
Trade payables control

Bank and discount CPJ2
Purchases returns PRJ2
Balance
c/d

R
9 995
570
18 082
28 647

20.4
Feb 1
Feb 4
Feb 26
Feb 28
20.4
Mar 1

B6
Balance
Furniture
Printing
Purchases

b/d
J2
J2
PJ2

20.4
Feb 1

R
6 075
3 534
798
18 240
28 647

Balance

b/d

Capital
R

B7
Balance
Bank

b/d
CRJ2

18 082

Cr
R
75 000
15 000
90 000

FAC1502/1

Drawings

20.4

Feb 1 Balance
28 Bank

b/d 3 884
CPJ2 2 500
6 384

Dr
20.4
Feb 1 Balance
4 Trade payables
control
26 Trade payables
control
28 Bank
Trade receivables
control
Trade payables
control

VAT input
b/d
J2

R
20.4
4 337 Feb 28 Trade payables control PRJ2
VAT control
J2
434

CRJ2
PJ2

70
2 240
9 069

VAT output

B10

20.4
Feb 1 Balance
b/d
SRJ2
42
28 Trade receivables
J2 8 426
control
SJ2
Bank
CRJ2
Trade payables control CPJ2
8 468

Dr
20.4
Feb 28 VAT input

VAT control
J2

b/d

Cr
R
4 527
2 240
1 638
63
8 468

R
20.4
8 999 Feb 28 VAT output
Balance

B11

J2
c/d

R
8 426
573

8 999
20.4
Mar 1 Balance

70
8 999

J2
98
CPJ2 1 890

9 069

20.4
Feb 28 Trade receivables
control
VAT control

8 999

573
Sales
20.4
Feb 1 Balance
28 Bank
Trade receivables
control

R
b/d 13 569
CRJ2 10 900
SJ2

16 000
40 469

Dr
20.4
Feb 1 Balance
28 Bank
Trade payables
control

Purchases
R
b/d 9 855
CPJ2 10 100
PJ2 16 000
35 955

FAC1502/1

Rental income
20.4
Feb 1
28

N3
Balance
Bank

b/d
CRJ2

Cr
R
800
800
1 600

Packaging material

20.4
Feb 1 Balance

b/d

Dr
b/d
CPJ2

R
964

Telephone expenses

20.4
Feb 1 Balance
26 Bank

R
483
500
983

Water and electricity

20.4
Feb 1 Balance
Bank

b/d
CPJ2

R
1 247
2 700
3 947

Settlement discount granted

20.4
Feb 1 Balance
b/d
28 Trade receivables
control
CRJ2

R
170
500
670

Settlement discount received
20.4
Feb 1
28

Balance
Trade payables
control

b/d

R
210

CPJ2

450
660

Dr
20.4
Feb 1
28

Wages
Balance
Bank

b/d
CPJ2

R
2 150
3 828
5 978

FAC1502/1

Stationery

20.4
Feb 1 Balance
6 Bank

b/d
CPJ2

N10

N11

N12

R
250
200
450

Sales returns

20.4
Feb 28 Trade receivables
control
SRJ2
Dr

R
300
Purchases returns
20.4
Feb 28 Trade payables
control

PRJ2

Printing

20.4
Feb 26 Printo Limited

(3)

N13

TRIAL BALANCE AS AT 28 FEBRUARY 20.4

Land and buildings at cost
Furniture at cost
Inventory: Trading
Trade receivables control
Bank
Trade payables control
Capital
Drawings
VAT control
Sales
Purchases
Rental income
Packaging material
Telephone expenses
Water and electricity
Settlement discount granted
Settlement discount received
Wages
Stationery
Sales returns
Purchases returns
Printing

B1
B2
B3
B4
B5
B6
B7
B8
B11
N1
N2
N3
N4
N5
N6
N7
N8
N9
N10
N11
N12
N13

Debit
R
60 000
8 420
6 536
11 219
8 232

Credit
R

18 082
90 000
6 384
573
40 469
35 955
1 600
964
983
3 947
670
660
5 978
450
300
500
700
151 311

R
700

Fol

FAC1502/1

500

151 311

COMMENTS
. After the journal entries have been posted to the VAT input account and the VAT output
account in the general ledger, the ‘‘balances’’ on these accounts must be transferred to
the VAT control account. This means that the general journal entries on 28 February
20.4 can only be done after the ‘‘balances’’ on these accounts have been calculated.
. The VAT control account has a debit balance, which is refundable by the South African
Revenue Service.
. VAT is not included in the amount credited to sales as this is not an income for the
business but must be paid over to the South African Revenue Service.
. The debtors owe the VAT-inclusive amount to the business.
. The same reasoning applies to creditors and purchases.

SELF-ASSESSMENT
Having studied this study unit, can you:
.

prepare the following books, taking Value-Added Tax into account?
.
.
.
.
.
.
.

cash receipts journal
cash payments journal
purchases journal
purchases returns journal
sales journal
sales returns journal
general journal

post to the following ledgers?
general ledger
Trade receivables ledger
. Trade payables ledger
.
.

prepare a trial balance?

FAC1502/1

STUDY UNIT

6
Adjustments

Learning outcome
Students should be able to do year-end adjustments to balances in the books of an entity.

Contents
Key concepts

6.1

Introduction

6.2

Short-term adjustments

6.2.1 Prepaid expenses

100

6.2.2 Accrued expenses

101

6.2.3 Consumable inventory adjustments

103

6.2.4 Income received in advance

104

6.2.5 Accrued income

105

6.2.6 Credit losses (bad debts)

107

6.2.7 Allowance for settlement discount

108

6.3

Long-term adjustments

108

6.4

Preparation of the trial balance

110

6.4.1 Pre-adjustment trial balance

110

6.4.2 Post-adjustment trial balance

110

6.4.3 Post-closing trial balance

110

Revision exercise and solution

110

6.5

Self-assessment

FAC1502/1

Page

115

KEY CONCEPTS
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.

Adjustment
Closing
Prepaid expenses
Accrued expenses
Consumable inventory adjustments
Income received in advance
Credit losses (Bad debts)
Settlement discount
Depreciation
Accumulated depreciation
Asset contra account
Carrying amount
Pre-adjustment trial balance
Post-adjustment trial balance
Post-closing trial balance

6.1 Introduction
An entity usually does business on a permanent basis without any interruptions. We also know that
its owners and managers need regular information on its financial results and financial position. The
life of an entity is therefore divided into equal periods (financial periods), usually of 12 months, and
the profit or loss is determined for that period.
Thus far it was assumed that all transactions recorded were in respect of the specific financial
period. The closing off of accounts and the determination of the profit, were recorded under this
assumption. This does not always happen and the accounts (and eventually statements) have
sometimes to be adjusted to ‘‘correct’’ the balances in accounts before the final accounts and
financial statements can be prepared.
For more accurate financial statements at the end of a financial period, additional entries, which
do not originate from source documents, may therefore be necessary.
Study paragraphs 6.1 to 6.4 of the prescribed book.

The three steps relating to adjustments mentioned in paragraph 6.3 (and further on) can be
extended to five steps:
Step 1: Identify the accounts that must be adjusted.
Step 2: Determine how the accounts would be affected and what the balances of these
accounts should be.
Step 3: Calculate the amount(s) involved in the adjustment.
Step 4: Record the necessary adjustments in the general journal and past the entries to the
ledger(s)
Step 5: Ensure that the new balances of the accounts are now correct.

6.2 Short-term adjustments
Short-term adjustments have to do with the apportionment of income and expenditure to

FAC1502/1

consecutive periods within a year. This is income which is received in one period but which is
earned in an earlier or a later period. The same applies to expenses which are incurred in
another period.

6.2.1 Prepaid expenses
Study paragraph 6.3.5.2 in the prescribed book.

A prepaid expense is an expense which has been paid during the current financial period,
where all or part of the expense relates to a future financial period. For example, insurance
expenses are usually payable in advance. When the financial year of a business entity ends, it
is therefore possible that a portion of the insurance expense relates to the next financial period.
An adjustment is therefore necessary to match only that portion of the expense which relates to
the current financial period against the income for that period.
On 2 January 20.1 Xa-Xa Dealers paid a new annual insurance premium of R2 400. Its
financial year ends on 28 February 20.1. Using this information we can work out that the actual
amount it spent on insurance up to and including 28 February was only R400, which is R2 400
7 12 = R200 per month for two months, namely January and February. The R2 000 which
was paid in advance represents an asset at that point. The apportionment of the amount
between asset and expenditure elements will be as follows: R400 is an expenditure item in
respect of insurance for the current financial year. This amount must appear in the profit and
loss account and the statement of profit or loss and other comprehensive income. The R2 000
is a prepaid expense and therefore represents an amount that will be used in future. It must
appear on the statement of financial position of 28 February 20.1 and is therefore a short-term
(current) asset.

GOLDEN RULE
One entry or ‘‘leg’’ of the adjustment journal always affects a nominal account and thereby
the trading account or profit or loss account. The other entry or ‘‘leg’’ of the journal always
affects a statement of financial position account.

Accounting entries
The debit balance in the expense account for insurance has to be reduced by R2 000. To
reduce an expense account, a credit entry has to be made. The balance of the insurance
account will then reflect the actual expense, namely R400, and this amount can be written off
against the profit or loss account. The prepaid amount of R2 000 is a temporary asset on the
date of the statement of financial position and it is debited in the prepaid expense account and
shown on the statement of financial position under current assets.

JOURNAL ENTRIES
ADJUSTMENT ENTRY: 28 FEBRUARY 20.1
Prepaid expenses
Insurance
Adjustment of insurance account

FAC1502/1

100

J1
GL55
GL40

2 000
2 000

CLOSING TRANSFER: 28 FEBRUARY 20.1
Profit or loss
Insurance
Transfer of insurance to profit or loss account

J2
GL60
GL40

400
400

GENERAL LEDGER
Dr
20.1
Jan 2

Insurance

Bank

CPJ

R
2 400

20.1
Feb 28

Prepaid expenses
Profit or loss

Cr
R
2 000
400

J1
J2

2 400

Dr
20.1
Feb 28

Prepaid expenses
Insurance

Dr
20.1
Feb 28

2 400

R
2 000

Profit or loss (extract)

Insurance

R
400

XA-XA DEALERS
STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.1
(extract)
R
xxxx
2 000

Current assets
Prepayments

6.2.2 Accrued expenses
An accrued expense is an expense which relates to the current financial period, but which is
still unpaid at the end of that period.
On 28 February 20.1, the end of its financial year, Xa-Xa Dealers’ water and electricity account
shows expenses of R2 880. On closer examination Xa-Xa’s accountant establishes that the
February water and electricity account of R360 has not been taken into account. With this
information the actual expenditure on water and electricity for the year can be determined,
namely R2 880 + R360 = R3 240. The apportionment of the item between actual expenditure
and amount owing (liability) will be as follows: R3 240 was the actual expenditure (to be
reflected in the profit or loss account and statement of profit or loss and other comprehensive
income) and R360 is still owed (to be reflected in the statement of financial position) and must
be paid at a future date.

101

FAC1502/1

Accounting entries
The debit balance on the water and electricity expense account has to be increased by R360.
To increase an expense account, a debit entry has to be made. The balance on the water
and electricity account will now reflect the actual expenditure, namely R3 240. This amount can
be written off against the profit and loss account. The outstanding amount of R360 is a liability
on the date of the statement of financial position and it is credited in the accrued expense
account and is shown on the statement of financial position under current liabilities.

JOURNAL ENTRIES

ADJUSTMENT ENTRY — 28 FEBRUARY 20.1
Water and electricity
Accrued expenses
Adjustment of water and electricity account

GL41
GL56

360
360

CLOSING TRANSFER — 28 FEBRUARY 20.1
Profit or loss
Water and electricity
Closing of water and electricity account to profit or
loss account

J6
GL60
GL41

3 240
3 240

GENERAL LEDGER
Dr

Water and electricity

20.1
Feb 28 Balance
b/d
Accrued expenses J5

R
2 880
360

20.1
Feb 28

41
Profit or loss

3 240

20.1
Feb 28

R
3 240
3 240

Accrued expenses

Profit or loss (extract)

Cr
R

Water and
electricity

360

R
Water and
electricity

3 240

XA-XA DEALERS
STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.1 (extract)
R
Current liabilities
Trade and other payables
Accrued expenses

FAC1502/1

102

xxxx
xxxx
360

6.2.3 Consumable inventory adjustments
Study paragraph 6.3.2 of the prescribed book.
On 28 February 20.1, the end of its financial year, Xa-Xa Dealers’ stationery account shows
that stationery to the value of R500 was purchased during the year. At a physical count it is
determined that R150’s worth of stationery is still on hand. With this information the actual
expenditure on stationery can be calculated, namely R500 7 R150 = R350. The apportionment
of the item between actual expenditure (profit and loss account and statement of profit or loss
and other comprehensive income) and the asset element (statement of financial position) will
be as follows: R350 represents expenditure on stationery while R150 represents the value of
the stationery that will be used in the future.

Accounting entries
The debit balance in the stationery expense account has to be reduced by R150. To reduce an
expense account a credit entry has to be made. The balance on the stationery account will
now show the actual expenditure, namely R350. This amount can now be written off against
the profit or loss account. The stationery on hand, worth R150, is an asset on the date of the
statement of financial position and is debited in the stationery on hand account and is shown in
the statement of financial position under current assets.

JOURNAL ENTRIES
ADJUSTMENT JOURNAL — 28 FEBRUARY 20.1
Inventory: Stationery
Stationery
Adjustment of stationery account

J3
GL57
GL42

150
150

CLOSING TRANSFER — 28 FEBRUARY 20.1
Profit or loss
Stationery
Closing of stationery account

J4
GL60
GL42

350
350

GENERAL LEDGER
Dr
20.1
Feb 28

Stationery
Balance

b/d

R
500

20.1
Feb 28

42
R
Inventory:
Stationery

150

Profit or loss

350

500

Dr
20.1
Feb 28

500

Inventory: Stationery
Stationery

R
150

103

FAC1502/1

Profit or loss (extract)

20.1
Feb 28

Stationery

R
350

XA-XA DEALERS
STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.1 (extract)
R
Current assets

xxxx

Inventories

xxxx

Stationery

150

6.2.4 Income received in advance
Study paragraph 6.3.4.2 in the prescribed book.

Income received in advance is income which has been received during the current financial
period but relates to a future financial period. Only the portion relating to the current financial
period must be recorded as income, and an adjustment is necessary for the portion received in
advance.
On 28 February 20.1, the end of its financial year, Xa-Xa Dealers’ rental income account shows
that R10 400 was received. Xa-Xa Dealers rent out a part of their building for R800 a month. On
closer investigation it is established that the rental for March 20.1 has already been received.
With this information the actual income received in rental for the year can be determined, that is
R10 400 7 R800 = R9 600 (= R800 6 12).
The apportionment of the item between actual income and the liability (amount owing)
component will be as follows: R9 600 is the actual income and R800 is due to the lessee
because it was paid in advance. Differently stated, the income has not yet been earned.

Accounting entries
The credit balance in the rental income account has to be reduced by R800. To reduce an
income account a debit entry has to be made. The balance on the rental income account will
now show the actual income, namely R9 600. This amount can now be written off against the
profit or loss account. The amount received in advance is a liability on the date of the
statement of financial position and is credited in the income received in advance account and
shown in the statement of financial position under current liabilities.

JOURNAL ENTRIES
ADJUSTMENT JOURNAL — 28 FEBRUARY 20.1
Rental income
Income received in advance
Adjustment of rental income account

FAC1502/1

104

J9
GL44
GL59

800
800

CLOSING TRANSFER — 28 FEBRUARY 20.1
Rental income
Profit or loss
Closing of rental income to profit or loss account

J10
GL44
GL60

9 600
9 600

GENERAL LEDGER
Dr

Rental income

20.1
Feb 28

R
Income received
in advance
J9
Profit or loss
J10

20.1
Feb 28

44
Balance

b/d

10 400

Income received in advance
20.1
Feb 28

R
10 400

800
9 600
10 400

Rental income

20.1
Feb 28

R
800

Profit or loss (extract)

60
Rental income

J10

Cr
R
9 600

XA-XA DEALERS
STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.1 (extract)
R
xxxx

Current liabilities
Income received in advance

800

6.2.5 Accrued income
Study paragraph 6.3.4.1 in the prescribed book.
Accrued income is income which relates to the current financial period but which has not yet
been received.
On 28 February 20.1, the end of its financial year, Xa-Xa Dealers’ commission income account
shows an income of R2 200. On closer examination it is established that an amount of R200
earned in commission has not yet been received.
With this information the actual income in commission can be determined. It is
R2 200 + R200 = R2 400. The apportionment of the item between actual earnings in
commission and the associated asset (the commission which has not yet been received)
will be as follows: R2 400 which has actually been earned and R200 which is still to be
received.

105

FAC1502/1

Accounting entries
The credit balance in the commission income account has to be increased by R200. To
increase an income account another credit entry has to be made. The balance on the
commission income account will now reflect the actual income, namely R2 400. This amount
can now be written off against the profit or loss account. The outstanding amount of R200 is an
asset on the day of the statement of financial position and is shown under current assets in the
statement of financial position.

JOURNAL ENTRIES
ADJUSTMENT JOURNAL — 28 FEBRUARY 20.1
Accrued income
Commission income
Adjustment of commission income account

J11
GL61
GL45

200
200

CLOSING TRANSFER — 28 FEBRUARY 20.1
Commission income
Profit or loss
Closing of commission income to profit or loss
account

J12
GL45
GL60

2 400
2 400

GENERAL LEDGER
Dr

Commission income

20.1
Feb 28

Profit or loss

J12

R
2 400

20.1
Feb 28

45
Balance
Accrued income

b/d
J11

2 400

R
2 200
200
2 400

Accrued income

20.1
Feb 28

R
Commission
income

J11

200

Profit or loss (extract)
20.1
Feb 28

R
Commission
income

J12

2 400

XA-XA DEALERS
STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.1 (extract)
Current assets
Trade and other receivables
Accrued income

FAC1502/1

106

R
xxx
xxx
200

6.2.6 Credit losses (Bad debts)
Study paragraph 6.3.3 in the prescribed book.
On 25 January 20.1 Xa-Xa Dealers receive a notification that a debtor, A Boeka, is insolvent.
On closer investigation it is established that the debtor still owes R230.
With this information an adjustment must be made in A Boeka’s account. The outstanding
amount of R230 must be removed from his account and shown as an expense or loss.
The assets will therefore decrease and an expense or loss component, namely credit losses,
will come into being.

Accounting entries
The debit balance of R230 on A Boeka’s account has to be written off, since he is insolvent and
cannot pay. To reduce an asset account, a credit entry has to be made. A Boeka’s account in
the trade receivables ledger will be credited and will now show no balance. The trade
receivables’ control account in the general ledger must also be credited and the credit losses
account debited. The debt which cannot be paid is an expense/loss and is written off against
the profit and loss account at the end of the financial year.

JOURNAL ENTRIES
GENERAL JOURNAL — 25 JANUARY 20.1

J13

Credit losses (Bad debts)
A Boeka/Trade receivables control
Write off debtor’s account as irrecoverable

GL62
DL2/GL6

230
230

CLOSING TRANSFER — 28 FEBRUARY 20.1
Profit or loss
Credit losses
Closing of credit losses to profit or loss account

J14
GL60
GL62

230
230

GENERAL LEDGER
Dr
20.1
Jan 25 Trade receivables
control(A Boeka)

Credit losses (Bad debts)
R
J13

Dr
20.1
Feb 28 Credit losses

20.1
Feb 28 Profit or loss

J14

R
230

230

R
230

Trade receivables control
b/d

J14

Profit or loss (extract)

Dr
20.0
Mar 1 Balance

xxxx

20.1
Jan 25 Credit losses

R
J13

107

230

FAC1502/1

TRADE RECEIVABLES LEDGER
Dr
20.1
Jan 25

A Boeka
Balance

b/d

R
230

20.1
Jan 25

2
Credit losses

J13

Cr
R
230

In study unit 9 the writing off of credit losses is explained in detail. The above solution is done
according to method 2 as explained in paragraph 9.4.5.

6.2.7 Allowance for settlement discount
Study paragraph 9.3 of the prescribed book.

6.3 Long-term adjustments (depreciation)
Study paragraph 6.3.1 in the prescribed book.

Business entities buy tangible assets (property, plant and equipment) which are not for resale,
but are used in the operation of the business. As these assets are used, they decrease in
value. This decline in value is charged against the profits of the business and is spread
(apportioned) over the expected useful life of the asset.
The apportionment of the cost of the asset usually takes the form of depreciation entries.
Xa-Xa Dealers bought machinery to the value of R80 000 during the year. On 28 February
20.1, the end of its financial year, an amount of R12 000 has to be written off as depreciation.
With this information an adjustment can be made in the books. An expense, namely
depreciation of R12 000, is created. Instead of crediting the machinery account, a special
account known as accumulated depreciation: machinery account is credited. The account
is known as an asset contra account.

Accounting entries
Depreciation is an expense to the entity and the depreciation account will therefore be debited
with R12 000. The expense will then be written off against the profit and loss account. The
apportionment of the depreciation is credited in the asset contra account, namely
accumulated depreciation: machinery. The accumulated depreciation is subtracted from the
cost price of the machinery to determine the carrying amount of the machinery. The carrying
amount is shown under non-current assets in the statement of financial position and is part of
property, plant and equipment.

JOURNAL ENTRIES
ADJUSTMENT JOURNAL — 28 FEBRUARY 20.1
Depreciation
Accumulated depreciation: machinery
Adjustment to make provision for depreciation

FAC1502/1

108

J15
GL46
GL63

12 000
12 000

CLOSING TRANSFER — 28 FEBRUARY 20.1
Profit or loss
Depreciation
Closing of depreciation to the profit or loss
account

J16
GL60
GL46

12 000
12 000

GENERAL LEDGER
Dr
20.1
Feb 28

Depreciation
R
Accumulated
depreciation:
machinery

J15

20.1
Feb 28

Profit or loss

J16

Accumulated depreciation: machinery

R
12 000

Depreciation

J15

Profit or loss (extract)

Depreciation

12 000

20.1
Feb 28

J16

Cr
R
12 000

R
12 000

XA-XA DEALERS
STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.1 (extract)
ASSETS
Non-current assets
Property, plant and equipment

Note
3

R
68 000

XA-XA DEALERS
NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.1

Property, plant and equipment
Carrying amount: Beginning of year
Cost
Accumulated depreciation
Additions
Disposals
Depreciation
Carrying amount: End of year
Cost
Accumulated depreciation

Machinery

80
(12
68
80
(12

—
—
—
000
—
000)
000
000
000)

109

Total
—
—
—
80 000
—
(12 000)
68 000
80 000
(12 000)

FAC1502/1

6.4 Preparation of the trial balance
It is important to be able to identify at what stage in the accounting process a trial balance is
prepared.
A trial balance is prepared as many times as it is required, but at least every month. At the end
of the financial year, as many as three trial balances are prepared.

6.4.1 Pre-adjustment trial balance
This is the trial balance which is compiled to test the correctness of the entries after the posting
from the subsidiary journals to the general ledger (the same as the usual monthly trial balance). Its
purpose is to test whether the requirements of the double-entry system have been met because if
the trial balance does not balance at this stage, the statement of financial position will not balance
either.

6.4.2 Post-adjustment trial balance
Study paragraph 6.4 in the prescribed book.
This is the trial balance which is compiled after all the journalised adjustments have been
posted to the general ledger.

6.4.3 Post-closing trial balance
This is the trial balance which is compiled after the closing journal entries have been posted to
the ledger. In this trial balance all the nominal accounts are closed and the profit or loss as well
as drawings are transferred to the capital account. All that remains in the trial balance at this
stage are the assets, liabilities and equity accounts. These are the accounts which appear as
items in the statement of financial position.

6.5 Revision exercise and solution
The following information relates to A Abbo:
Balances at 30 June 20.2 (extract)
Debit
R
Rental income
Stationery
Water and electricity
Commission income
Credit losses
Accumulated depreciation: machinery
Trade receivables control
Machinery at cost

R
6 600

350
1 800
5 600
280
30 000
11 150
200 000

ADDITIONAL INFORMATION:
(a) Only 11 months’ rental was received.
(b) Stationery on hand on 30 June 20.2 amounted to R50.
(c) R600 commission was received in advance.
(d) An additional amount of R150 must be written off as irrecoverable.
(e) Provision must be made for depreciation of R30 000 on machinery.
(f) June 20.2’s water and electricity account of R160 has not yet been paid.

FAC1502/1

110

Credit

Required:
(1)

Open the above accounts in the general ledger.

(2)

Record the adjustments and post to the general ledger accounts.

(3)

Record the closing journals and show the partial profit or loss account in the ledger.

(4)

Show the necessary items in the partial statement of financial position.

(5)

Show the property, plant and equipment note.

Solution: Revision exercise
NB: Only one set of accounts is used. The journal entries after the accounts must also be
posted to the same set of accounts.

A ABBO
(1)

GENERAL LEDGER

Rental income

20.2
Jun 30

R
7 200

Profit or loss

20.2
June 30

Balance
Accrued
income

b/d

R
6 600

600

7 200

Stationery

20.2
Jun 30

R
350

Balance

b/d

20.2
Jun 30

Inventory:
Stationery
Profit or loss

J1
J2

b/d

R
1 800

160

20.2
Jun 30

Profit or loss

1 960
Dr
20.2
Jun 30

R
J1
J2

Cr
R
1 960

1 960

Commission income

Income received
in advance
Profit or loss

50
300
350

Water and electricity

Balance
Accrued
expenditure

Cr
R

350
Dr

20.2
Jun 30

Balance

b/d

Cr
R
5 600

600
5 000
5 600

5 600

111

FAC1502/1

Credit losses (Bad debts)

20.2
Jun 30 Balance
Trade receivables
control

b/d

R
280

150

20.2
Jun 30

Cr
R

Profit or loss

430

Accumulated depreciation: machinery
20.2
Jun 30

Balance
Depreciation

b/d
J1

Cr
R
30 000
30 000
60 000

Dr
20.2
Jun 30

Trade receivables control

Balance

b/d

R
11 150

20.2
Jun 30

7
R
Credit losses
(Bad debts)
Balance

J1
c/d

11 150
20.2
Jul 1

Balance

b/d

Dr
20.2
Jun 30

b/d

Dr
20.2
Jun 30

Dr
20.2
Jun 30
Dr

11 000

Accrued expenditure

112

Cr
R

Water and
electricity

Income received in advance
20.2
Jun 30

FAC1502/1

R
53 050

20.2
Jun 30

R
30 600
Inventory: Stationery

Stationery

R
200 000
Accrued income

Rental income

150
11 000
11 150

Machinery (at cost)

Balance

30 160

Cr
R

Commission
income

30 600

Dr
20.2
Jun 30

Depreciation
R
Accumulated
depreciation

Dr
20.2
Jun 30 Stationery
Water and
electricity
Credit losses
Depreciation

20.2
June 30

30 000

13
R
Profit or
loss

Profit or loss (extract)

R
30300

J2
J2
J2

31 960
30 430
30 000

20.2
Jun 30

30 000

Rent income
Commission
income

R
07 200

35 000

A ABBO
(2) GENERAL JOURNAL
ADJUSTMENT ENTRIES: 30 JUNE 20.2

J1
R

Accrued income
Rental income
To adjust the above

GL9
GL1

600

Inventory: Stationery
Stationery
To adjust the above

GL10
GL2

Commission income
Income received in advance
To adjust the above

GL4
GL12

600

Credit losses
Trade receivabels control
To adjust the above

GL5
GL7

150

Depreciation
Accumulated depreciation: machinery
To make provision for depreciation

GL13
GL6

30 000

Water and electricity
Accrued expenditure
To adjust the above

GL3
GL11

160

600

150

30 000

160

113

FAC1502/1

A ABBO
(3)

Closing transfers

Rental income
Commission income
Profit or loss
Closing off of accounts against the
profit or loss account

GL1
GL4
GL14

Profit or loss
Stationery
Water and electricity
Credit losses
Depreciation
Closing off of accounts against the
profit or loss account

GL14
GL2
GL3
GL5
GL13

R
7 200
5 000

12 200

32 690
300
1 960
430
30 000

A ABBO
(4)

STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.2 (extract)

ASSETS

Note

Non-current assets

R
140 000

Property, plant and equipment

Current assets

140 000
X XXX

Inventories

Trade and other receivables R(11 000 + 600)

11 600

EQUITY AND LIABILITIES
Current liabilities

XXX

Trade and other payables
Income received in advance

160
600

A ABBO
(5) NOTES FOR THE YEAR ENDED 30 JUNE 20.2
Property, plant and equipment

Machinery
R

FAC1502/1

Total
R

Carrying amount:
Beginning of the period
Cost
Accumulated depreciation

170 000
200 000
(30 000)

Depreciation

(30 000)

Carrying amount:
End of the period
Cost
Accumulated depreciation

140 000
200 000
(60 000)

114

SELF-ASSESSMENT
Now that you have studied this study unit can you:
.

list the accounts and items which have to be adjusted?

record the adjustments in respect of the following?
.

short-term adjustments such as
prepaid expenses
accrued expenses
consumable inventory adjustments
income received in advance
accrued income
Credit losses (Bad debts)

long-term adjustments such as depreciation

calculate the amounts in question?

record the necessary entries in the books?

prepare a pre-adjustment, a post-adjustment and a post-closing trial balance?

show the effect of adjustments in the statement of profit or loss and other
comprehensive income and statement of financial position?

115

FAC1502/1

STUDY UNIT

7
The closing-off procedure, determining profit of
an entity and preparing financial statements

Learning outcome
Students should be able to complete the closing-off procedure, determine the profit or loss
of an entity and prepare more advanced financial statements.

Contents
Study unit

Key concepts

117

7.1

Introduction

118

7.2

Financial performance of a service entity

118

7.3

Components of the financial performance of an entity

118

7.3.1 Gross profit

118

7.3.2 Profit for the year/period

118

7.3.3 Cost price of sales

119

Inventory systems

119

7.4.1 The perpetual (continuous) inventory system

119

7.4.2 The periodic inventory system

123

7.4.3 Additional purchase costs

127

7.4.4 Drawings and donations of inventory

128

Closing-off of nominal accounts

128

7.5.1 Trading account

130

7.5.2 Profit or loss account

135

Preparation of financial statements

138

7.4

7.5

7.6

FAC1502/1

Page

116

7.6.1 The statement of profit or loss and other comprehensive income
(financial performance)
138
7.6.2 The statement of changes in equity

139

7.6.3 The statement of financial position

140

7.6.4 Notes

141

7.7

Gross profit percentage

141

7.8

Integrated example

142

7.9

Revision exercises and solutions

153

7.9.1 Revision exercise 1

153

7.9.2 Revision exercise 2

154

7.9.3 Revision exercise 3

156

7.9.4 Revision exercise 4

156

7.9.5 Revision exercise 5

157

7.9.6 Revision exercise 6

159

7.9.7 Revision exercise 7

162

7.9.8 Revision exercise 8

163

Self-assessment

166

KEY CONCEPTS
.
.
.
.
.
.
.
.
.
.
.

Financial period
Nominal accounts
Cost of sales
Gross profit
Profit for the year/period
Inventory (merchandise, trading goods)
Perpetual inventory system
Periodic inventory system
Closing entries
Trading account, profit or loss account
Statement of profit or loss and other comprehensive income, statement of changes in
equity, statement of financial position and notes.

117

FAC1502/1

7.1 Introduction
This study unit will give you the background knowledge which you require to prepare the
financial statements of a service entity and a trading concern.
With the accounting entries we have dealt with so far, you already know how to determine:
the owner’s capital
. the entity’s assets (including trading inventory and cash)
. the entity’s liabilities
. income and expenditure accounts (nominal accounts), which include the following in the
case of a trading concern:
. merchandise sales
. merchandise purchases
. all other expenditure
. other income
.

Since the preparing of financial statements goes hand in hand with the closing off procedure
every financial year, we will explain the closing entries which have to be made annually. All the
nominal accounts (income and expenditure) are closed off and they provide the details
for compiling the statement of profit or loss and other comprehensive income.
The accounts which remain in the trial balance after closing, namely the assets, liabilities and
capital accounts, form the basis of the information which is included in the statement of
financial position.
Study paragraph 7.1 of the prescribed book.

7.2 Financial performance of a service entity
Study paragraph 7.2 of the prescribed book.

7.3 Components of the financial performance of an entity
As you already know, the most important question is, ‘‘How has the business fared financially?’’
Has it made a profit or a loss? The calculations are made for a specific financial period, usually
a year. We now turn our attention to the following aspects:

7.3.1 Gross profit
This is the difference between sales and the ‘‘cost price of sales’’. The relevant accounts are
closed off to the trading account.

7.3.2 Profit for the year/period
This is the amount which remains from the gross profit after all expenditure necessary to
manage the business has been subtracted and other income has been added. These income
and expenditure accounts are closed off and transferred to the profit or loss account.

FAC1502/1

118

7.3.3 Cost price of sales
Before determining the cost price of sales, we need to look at inventory. The merchandise
inventory which an entity buys during a financial period is not necessarily all sold during that
period. The inventory still in the entity at the beginning of the accounting period is known as the
opening inventory and that at the end of the period as the closing inventory.
Study paragraph 7.3.1 of the prescribed book.

7.4 Inventory systems (trading inventory)
Depending on the nature of the entity, the type of merchandise sold and the level of computerisation
in the entity, an entity can either use a perpetual (continuous) inventory system or a periodic
inventory system. Thusfar we have worked with the periodic inventory system.
With a perpetual inventory system the entity will keep a continuous track of inventory levels for
the different inventory items it sells. This method is ideally suited to an entity that sells items
that can be easily identified, measured and a value attached to them. The use of scanners and
bar codes enables many entities to apply this method of inventory recording.
Study paragraph 7.3.2 of the prescribed book.

7.4.1 The perpetual (continuous) inventory system
Under the perpetual inventory system, the purchase of inventory is recorded directly into the
inventory account at cost price. At the time of sale, the cost price of the goods sold is
transferred from the inventory account to the cost of sales account.
The accounting entries under such a system can be summarised as follows (VAT is ignored in
these examples):
Purchase of inventory for cash:
Dr

Inventory

(because the asset inventory increases.)

Bank

(because the asset bank decreases when money is paid out.)

The transaction is recorded in the cash payments journal at cost price.
Purchase of inventory on credit:
Dr

Inventory

Trade payables (because a liability is created or increased.)
and
Trade payables control

(see above.)

The transaction is recorded in the purchases journal at cost price.
Sale of merchandise for cash:
Dr

Bank

(an asset increases with money received) (selling price)

Sales

(an income which increases equity) (selling price)

Cost of sales

(an expense that decreases equity) (cost price)

Inventory

(an asset decreases) (cost price)

The transaction is recorded in the cash receipts journal.

119

FAC1502/1

It is important to note that the difference between the cost of sales and the selling price is the
gross profit which is the amount by which the equity increases.
Merchandise sold on credit:
Dr

(an asset is created or increased) (selling price)

Debtor
and
Debtors control

Sales

(see above) (selling price)

Cost of sales

(see above) (cost price)

Inventory

(see above) (cost price)

The transaction is recorded in the sales journal.
When merchandise is returned by a debtor:
Dr

Sales returns

(this has the opposite effect of sales on equity – it decreases equity)
(selling price)

Debtor

(the asset decreases because the debtor owes the
business less) (selling price)

and
Cr

Debtors control

Cost of sales

(this has the opposite effect on equity to the effect when
merchandise was sold) (cost price)

Inventory

(the asset increases by the amount of the merchandise returned)
(cost price)

The transaction is recorded in the sales returns journal.
Merchandise returned, previously sold for cash:
If the business has a policy of not repaying cash, a credit note will be issued to the client that
can be exchanged for other merchandise.
If the business is willing to refund the cash:
Dr

Sales returns

(see above) (selling price)

Bank

(the asset bank will decrease to cancel the previous increase)
(selling price)

The transaction is recorded in the cash payments journal.
To reinstate the merchandise as part of inventory:
Dr

Inventory

(the asset inventory increases) (cost price)

Cost of sales

(see above) (cost price)

The transaction is recorded in the general journal
When merchandise is returned to a creditor:
Dr

Creditor
and

Creditors control

Inventory

(because the liability decreases) (cost price)

(an asset is decreased – there is less inventory because of the
goods returned) (cost price)

The transaction is recorded in the purchases returns journal.

FAC1502/1

120

From the above discussion it is clear that the cost price of merchandise sold is recorded at the
same time as the sale of the merchandise. This procedure enables the entity to determine the
gross profit on each sale and to keep a continuous record of the Rand value of the inventory
that has not yet been sold.
However, it remains necessary to do a physical inventory count at least once a year, usually at
the end of the financial year. Theoretically the result of the inventory count should yield the
same result as the balance on the inventory account. This seldom happens. Some of the main
reasons why there is a difference are the theft of inventory, breakages, leakages, and
evaporation. This loss of inventory will, of course, not be recorded in the inventory account and
will only be detected when a physical count of inventory is done.

GOLDEN RULES
. Perpetual inventory system: Cost of sales is determined with every sales transaction:
Debit: Cost of sales, Credit: Inventory with the cost value of the sales.
. Perpetual inventory system: No purchases or purchases returns accounts are kept (see
paragraph 7.4.2)
. Perpetual inventory system: A physical inventory count will only disclose shortages (or
surpluses) in inventory.

Exercise 7.1
The following exercise illustrates the perpetual inventory system:
R
10 000

Inventory on 1 January 20.1
Transactions for year up to 31 December 20.1
Credit purchases
Cash purchases
Credit sales (mark-up on cost price is 25%)
Cash sales (mark-up on cost price is 25%)

Solution Exercise

50
40
75
25

000
000
000
000

7.1

Accounting entries which have to be made
(1) In the perpetual inventory system inventory is an asset. Inventory on hand and inventory
which is purchased are therefore debited in the asset account, inventory, at cost price
and the contra account such as creditors or bank is credited.
(2) When goods (merchandise) are sold, the sales account (income) is credited with the
selling price and the contra account such as debtors or bank is debited.
(3) Goods (merchandise) are taken out of the inventory (asset) account at cost price
(inventory account is credited) and debited to the cost of sales (expense) account.

121

FAC1502/1

LEDGER ENTRIES
GENERAL LEDGER
Dr

Inventory

20.1
Jan 1
Dec 31

Balance
Trade payables
control
Bank

b/d

R
10 000

20.1
Dec 31

50 000
40 000

Cost of sales
Cost of sales
Balance

100 000
20.2
Jan 1

Balance

b/d

c/d

R
60 000
20 000
20 000
100 000

20 000

Sales

20.1
Dec 31

R
Trading
account

20.1
Dec 31

100 000

Cr
R
Trade receivables
control
Bank

100 000
Dr

75 000
25 000
100 000

Cost of sales

20.1
Dec 31

R
60 000
20 000
80 000

Inventory
Inventory

20.1
Dec 31

Cr
Trading account

R
80 000
80 000

Trading account

20.1
Dec 31

R
80 000

Cost of sales
Profit or
loss
(Gross profit*)

20.1
Dec 31

Cr
Sales

R
100 000

20 000
100 000

100 000

* The gross profit is the difference between sales and cost of sales. The gross profit is
transferred to the profit or loss account. Where cost of sales is more than sales, the result is a
gross loss.

COMMENTS
. When determining the cost of sales, it is important to establish whether the mark-up
was made on the cost price or the selling price since the price that applies is taken
to be 100 (100%).
Suppose the mark-up of 25% is on the cost price as in the above exercise.
Thus:
Cost price
Mark-up
Selling price

FAC1502/1

122

%
= 100
= 25
= 125

The cost price in Rand will obviously be less than the selling price.
Therefore:
Multiply by the smaller figure (100) and divide by the larger figure (125).
To calculate the cost of sales of R75 000
100
125

75 000
1

Cost price = R60 000
If the mark-up of 25% is on the selling price:
%
Selling price

= 100

Mark-up

Cost price

The cost price will again be less than the selling price.
Thus:

75
100

75 000
1

Cost price = R56 250
.

The gross profit, which is also called the trading profit, is determined in the
trading account.

The details which are required to calculate the gross profit or loss are
transferred to the trading account by means of the general journal:
. The sales account is debited and the trading account is credited (sales are
closed).
. The cost of sales account is credited (the account is closed) and the trading
account is debited. The balance on the trading account represents the gross
profit or loss.

The closing balance of the inventory account (asset) represents the closing
inventory.

7.4.2 The periodic inventory system
Under the periodic inventory system, the purchase of inventory is not recorded in the
inventory account. A separate account, known as the purchases account, is used to record
these purchases. It follows that if inventory is returned, for one reason or another, to the seller,
the return of inventory cannot be recorded in the inventory account but must be recorded in a
separate account known as the purchases returns account.
As a result of the above procedure it should be clear that under a periodic inventory system, the
cost of sales is not determined at the time of the recording of the sale. The cost of sales can
thus only be determined at the end of the financial period after a physical inventory count has
been done.
The cost price of inventory sold during an accounting period will thus be determined as follows:
Cost price of inventory at the beginning of the financial year (closing inventory of
previous year)
Add:
Less:

Cost price of inventory purchased during the financial year. (This is the total
amount spent on purchases)
Cost price of inventory at the end of the financial year, determined by a physical
inventory count. (This is the unsold inventory)

123

FAC1502/1

The accounting entries associated with a periodic inventory system can be summarised as
follows (VAT is ignored in the examples):
Purchase of inventory for cash:
Dr

Purchases

(under the periodic inventory system, purchases are regarded as an
expense that reduces equity)

Bank

(the asset bank decreases when money is paid out)

The transaction is recorded in the cash payments journal at cost price.
Purchase of inventory on credit:
Dr

Purchases

Trade payables (creditors is a liability account which is created or increased)
and
Trade payables control

(see above)

The transaction is recorded in the purchases journal at cost price.
Sale of merchandise for cash:
Dr

Bank

(the asset increases with the money received)

Sales

(an income account which increases equity)

The transaction is recorded in the cash receipts journal at selling price.
Sale of merchandise on credit:
Dr

Trade receivables (an asset which is created or increased)
and

Trade receivables control

Sales

(see above)

The transaction is recorded in the sales journal at selling price.
When merchandise is returned by a debtor:
Dr

Sales returns

(equity decreases)

Trade receivables (the asset decreases)
and

Trade receivables control

The transaction is recorded in the sales returns journal at selling price.
Merchandise returned, previously sold for cash:
The policy of the business would determine whether a credit note will be issued (refer to the
perpetual inventory system) or whether the cash will be refunded to the client.
The entry for a cash refund will be as follows:
Dr

Sales returns

(the equity decreases)

Bank

(the asset bank will decrease to cancel the previous increase)

The transaction is recorded in the cash payments journal.

FAC1502/1

124

When inventory is returned to a creditor:
Dr
Dr

Trade payables (the liability decreases)
and
Trade payables control

Purchase returns (the actual purchase is reduced)

The transaction is recorded in the purchases returns journal at cost price.
Physical inventory count at the end of the financial year:
Dr

Inventory

(an asset account which is created with the inventory on hand at the
end of the financial year)

Trading account

(a nominal account which is used to determine the gross profit and
which increases equity if a gross profit is made)

The transaction is recorded in the general journal.
From the above summary it is clear that, under a periodic inventory system, there is no cost of
sales account but a purchases account and that the column headings of subsidiary journals will
have to be adapted to accommodate this inventory system. Some of the accounts kept in the
general ledger will also have to be changed when the periodic inventory system is in use.
It is very important, in assignments and in the examination, to make sure that you know which
inventory system a business uses as this will determine how the subsidiary journals and the
general ledger will be laid out.

GOLDEN RULES
. Periodic inventory system: Purchases and purchases returns accounts are kept. These
accounts are closed off (made NIL), at the end of the financial period, to the Trading
account.
. Periodic inventory system: NO cost of sales account is kept. Cost of sales is determined
via entries in the Trading account.
. Periodic inventory system: A physical inventory count is essential.

Exercise 7.2
We use the information from the previous exercise except that in this system (periodic system)
the closing inventory on 31 December 20.1 is determined first; it is R20 000.

Solution Exercise

7.2

Accounting entries which have to be made
(1) The opening balance on the inventory account (asset) is held in the books throughout the
financial period, which is usually a year, without any other entries.
(2) Inventory purchased is recorded (debited) at cost price in the purchases account
(expenditure) and the contra account, for instance creditors or bank, is credited. The
purchases account is closed off at the end of the financial year, to the trading account by
means of a general journal entry (debit trading account and credit purchases account).

125

FAC1502/1

(3) When goods are sold, the sales account (income) is credited with the selling price and the
contra account, say bank or debtors, is debited.
(4) A physical inventory count is undertaken to determine the closing inventory (usually at cost
price — R20 000 in the exercise). To record this figure, the inventory account is debited
and the trading account is credited. At this point, you should have a look at the trading
account in the ledger. In this system a cost of sales account is not kept.
(5) As the opening inventory is either sold or included in the closing inventory, it must be
‘‘transferred’’. The inventory account is therefore credited and the trading account debited.
This means that the opening inventory is added to purchases. Closing inventory is
deducted (the trading account is credited) and the cost of sales is thus calculated.

COMMENTS
. Determining cost of sales and gross profit
Opening inventory at cost price
Plus: Purchases at cost price
Inventory available for sale at cost price
Less: Closing inventory at cost price
Cost of sales
Gross profit

R
10 000
90 000
100 000
20 000
80 000
20 000*

Sales
* Balancing figure

100 000

. When determining the gross profit, the required details are transferred to the trading
account:
. The inventory account is credited and the trading account is debited with the
opening inventory (transfer of opening inventory).
. The purchases account is credited and the trading account is debited (purchases
account is closed).
. The sales account is debited and the trading account is credited (sales account is
closed).
The closing inventory is given (see accounting entry 4 above) and has already been
entered in the inventory account and the trading account.

GENERAL LEDGER
Dr

Inventory

20.1
Jan 1

Balance

20.1
Dec 31

Trading account

Dr
20.1
Dec 31

b/d

R
10 000

126

Trading account

Purchases

Creditors control
Bank

R
10 000

20 000

R
50 000
40 000
90 000

FAC1502/1

20.1
Dec 31

Trading account

R
90 000

90 000

Sales

20.1
Dec 31 Trading account

R
100 000

20.1
Dec 31

Cr
R
Trade receivables
control
Bank

100 000

75 000
25 000
100 000

Trading account

20.1
Dec 31 Inventory (opening)
Purchases
Profit or loss
(gross profit)*

R
10 000
90 000

20.1
Dec 31

Sales
Inventory (closing)

R
100 000
20 000

20 000
120 000

120 000

* Balancing figure

COMMENTS
. The gross profit calculated is the same for both systems (see * above and in the
previous example).
. The main differences between the two systems are:
(1) In the perpetual inventory system, purchases are recorded at cost price in the
inventory account (asset) and a cost of sales account is kept during the financial
period.
(2) In the periodic inventory system, purchases are recorded in the purchases
account (expenditure) and the cost of sales is calculated, by implication, in the
trading account.

7.4.3 Additional purchase costs
Study paragraph 7.3.2.2 of the prescribed book.
Carriage on purchases and railage are examples of expenses that an entity may have to pay in
order to transport the inventory which has been purchased to the premises of the entity.
Custom and excise duties may also have to be incurred when inventory is imported.
When the perpetual (continuous) inventory system is used, carriage on purchases, and the like,
is debited directly to the inventory account, since the cost of sales must be brought into account
with each sales transaction and carriage constitutes an integral part of the cost per unit.
When the periodic inventory system is used, all purchases of inventory during a financial year
are debited to the purchases account. Consequently this account will show the total of all
purchases at the end of the financial year. Carriage on purchases (paid for in cash, as well as
on credit) by an entity which uses this inventory system, will be debited to the carriage on
purchases account. This account will show the total amount spent for transporting inventory to
the premises of the entity. When the cost of sales is calculated at the end of the financial year,
carriage on purchases must also be taken into account. Custom and excise duties will be
treated in a similar manner.
The following illustration will demonstrate how accounts under the different inventory systems
will be affected when additional purchase costs are incurred:

127

FAC1502/1

Transaction
Payment of delivery costs
on inventory purchased

Perpetual inventory
system

Periodic inventory
system

Dr Inventory
Cr Bank
or
Cr Trade payables (and
trade receivables control)
if on credit

Dr Carriage on purchases
Cr Bank
or
Cr Trade payables (and
trade receivables control)
if on credit

Use the following information from the books of Gogo Dealers to calculate the cost of sales:
R
95 000
260 000
3 600

Inventory (1 January 20.1)
Purchases
Carriage on purchases

A physical inventory count on 31 December 20.1 indicated that inventory on hand amounted to
R80 000.
Solution:
R
95 000
260 000
3 600

Inventory (1 January 20.1)
Add: Purchases
Add: Carriage on purchases

358 600
Less:

Inventory (31 December 20.1)

80 000

Cost of sales

278 600

7.4.4 Drawings and donations of inventory
Drawings and donations of inventory are recorded by means of the general journal at cost price.
Please study the following table carefully:
Transaction

Perpetual inventory
system

Periodic inventory system

Inventory taken by owner
for personal use

Dr Drawings
Cr Inventory

Dr Drawings
Cr Purchases

Donation of inventory

Dr Donations
Cr Inventory

Dr Donations
Cr Purchases

Drawings and donations are not exempted from VAT. The VAT is, however, calculated on the
cost price and must be credited to the VAT output account.

7.5 Closing-off of nominal accounts
Study paragraph 7.3 of the prescribed book again.

FAC1502/1

128

We have worked through the accounting cycle up to the trial balance. This means that we have
tested the arithmetic of our accounts while bearing in mind the shortcomings of a trial balance.
As mentioned previously, the main purpose of an entity is to make a profit. To determine the
financial result of an entity, the nominal accounts are closed by means of closing journals and
transferred to the trading account (a nominal account) in the case of trading entities and/or
to the profit or loss account.
The gross profit, as determined, is debited to the trading account and credited to the profit or loss
account (a nominal account). All the other nominal accounts with credit balances such as rental
income and discount received, are debited (closed off) and the profit or loss account is credited.
Similarly, all expense accounts with debit balances such as telephone expenses, rental
expenses and salaries, are credited (closed off) and the profit or loss account is debited.
The difference between the debit and credit sides of the profit or loss account results in the
profit or loss which is, in turn, transferred to the capital account. The profit or loss account is
therefore, also closed off.
Remember that the trading account and the profit or loss account form part of the
accounting system.
By using the information in the following trial balance, the closing off of the nominal accounts at
the end of the accounting period, will be explained.

TOEKELA DEALERS
PRE-CLOSING TRIAL BALANCE AS AT 31 January 20.1
Fol

Capital
Drawings
Bank
Inventory – 1 February 20.0
Vehicles (at cost)
Equipment (at cost)
Trade receivables control
Trade payables control
Sales
Sales returns
Purchases
Purchases returns
Rent income
Stationery
Wages
Water and electricity
Credit losses (Bad debts)
Settlement discount granted
Settlement discount received

B 1
B 2
B 3
B 4
B 5
B 6
B 7
B 8
N 1
N 2
N 3
N 4
N 5
N 6
N 7
N 8
N 9
N10
N11

R
103 400

3
4
5
91
19
10

000
250
000
000
500
100
14 700
77 500

1 500
52 500
2 500
600
150
10 550
950
300
150
250
198 950

198 950

Because of the presence of a purchases account, we know that the periodic inventory system
is in use.
On 31 January 20.1 a physical inventory count was done and the value of the inventory was
found to be R8 000 according to the inventory list. Remember that this amount still has to be
recorded in the books.

129

FAC1502/1

GOLDEN RULES
All nominal accounts (i.e. income or revenue and expense acounts) MUST be closed off
(made NIL) at the end of the financial period to either the Trading account or the Profit or
Loss account.
Only entities that trade i.e. buy and sell merchandise, will have a Trading account.

7.5.1 Trading account
As mentioned previously, the gross profit is calculated in the trading account. The details
required to do this calculation are:
opening inventory at cost price
purchases at cost price
. closing inventory at cost price
. sales at selling price
. cost price of goods sold
.
.

In accounting terms the calculation would take the following form:
Opening inventory + purchases (all at cost price) 7 closing inventory (at cost price) = cost
price of goods sold.
Gross profit = sales 7 cost price of goods sold.
Using the details from a previous exercise, we have the following:
R10 000 + R90 000 7 R20 000 = R80 000 (cost price of sales)
Gross profit = R100 000 7 R80 000
= R20 000
The cost price of goods sold is influenced by all the expenses incurred up to the point where
the goods are offered for sale. It includes costs such as carriage on purchases, customs duty,
dock dues and freight. Such costs increase the cost prices of goods sold and therefore reduce
the gross profit.

Closing inventory
In practice it seldom happens that an entity sells all the available inventory, that is opening
inventory and purchases, and that there is no closing inventory. If this does happen, the closing
inventory is simply left out of the calculation. The closing inventory is actually counted, a list is
made and it is valued at cost price or market price, whichever is the lower. It is then recorded in
the books by means of a general journal entry. Since the closing inventory is an asset, the
inventory account is debited.
The necessary details such as opening inventory, purchases and sales, are transferred from
the nominal ledger accounts to the trading account by means of closing transfers in the general
journal.
The gross profit is obtained when the ‘‘balance’’ on the trading account is determined. The
journal entries for the closing transfers are given after the following ledger accounts.

TOEKELA DEALERS
GENERAL LEDGER
Dr

Capital
20.1
Jan 31

FAC1502/1

130

B1
Balance

b/d

Cr
R
103 400

Drawings

20.1
Jan 31 Balance

b/d

R
3 000

b/d

Balance

b/d

R
5 000

Jan 31

Trading account

8 000

20.1
Jan 31

Balance

b/d

20.1
Jan 31

R
1 500

J
J

150
75 850

20.1
Jan 31

b/d

Balance

20.1
Jan 31

b/d

R
1 500

R
77 500

77 500

Sales returns

Balance

R
14 700

77 500

R
5 000

Balance

Sales

Sales returns
Settlement
discount granted
Trading account

R
10 100

Trade payables control

R
19 500

Trade receivables control

Balance

R
91 000

Equipment (at cost)

Balance

R
3 000

Trading account

Vehicles (at cost)

20.1
Jan 31

Inventory

R
4 250

20.0
Feb 1
20.1

20.1
Jan 31

Capital

Bank

20.1
Jan 31 Balance

20.1
Jan 31

Sales

131

R
1 500

FAC1502/1

Dr
20.1
Jan 31

Purchases
Balance

b/d

R
52 500

20.1
Jan 31

N3
Purchases returns
Settlement
discount received
Trading account

Cr
J

R
2 500

J
J

250
49 750

52 500

Dr
20.1
Jan 31

Purchases returns
Purchases

Dr
20.1
Jan 31

Profit or loss

Balance

b/d

Balance

FAC1502/1

132

20.1
Jan 31

R
150

20.1
Jan 31

b/d

R
10 550

20.1
Jan 31

b/d

R
950

20.1
Jan 31

Balance

b/d

R
300

20.1
Jan 31

b/d

R
150
150

20.1
Jan 31

b/d

Profit or loss

Sales

R
10 550

Cr
J2

Profit or loss

R
150

Cr
J2

Profit or loss

R
600

Cr
J2

Profit or loss

R
2 500

Settlement discount granted

Balance

b/d

Balance

Credit losses (Bad debts)

Dr
20.1
Jan 31

R
600

Water and electricity

Dr
20.1
Jan 31

Balance

Wages

Dr
20.1
Jan 31

20.1
Jan 31

Stationery

Dr
20.1
Jan 31

R
2 500

Rent income

Dr
20.1
Jan 31

52 500

R
950

Cr
J2

N10

R
300

R
150
150

Settlement discount received

20.1
Jan 31

Purchases

R
250
250

20.1
Jan 31

N11
R

Balance

b/d

Trading account

20.1
Jan 31 Inventory (opening)
Purchases
Profit or loss
(Gross profit)

J
J
J

R
5 000
49 750

20.1
Jan 31

250
250

N12

Sales
Inventory
(closing)

R
75 850

8 000

29 100
83 850

83 850

COMMENTS
CLOSING TRANSFERS OF SETTLEMENT DISCOUNT:
(1) Settlement discount granted transferred to sales:
To transfer settlement discount granted to the sales account the sales account is debited
and the settlement discount granted account is credited (thus the account is closed)
20.1
Jan 31

R
Sales
Settlement discount granted
Closing transfer of settlement discount granted

R
150
150

(2) Settlement discount received transferred to purchases:
To transfer settlement discount received to the purchases account the settlement discount
received account is debited (thus the account is closed) and the purchases account is
credited.
20.1
Jan 31

R
Settlement discount received
Purchases
Closing transfer of settlement discount received

R
250
250

CLOSING TRANSFERS TO THE TRADING ACCOUNT:
(1) To transfer the opening inventory to the trading account, the inventory account is
credited (account is closed) and the trading account is debited by means of a closing
transfer in the general journal
20.1
Jan 31

Trading account
Inventory
Closing transfer of opening inventory

N12
B4

R
5 000

133

FAC1502/1

(2) To transfer purchases to the trading account, the purchases account is credited
(account is closed) and the trading account is debited.
20.1
Jan 31

Trading account
Inventory
Closing transfer of purchases account

N12
N3

R
49 750

(3) To transfer sales returns to the trading account, sales returns is credited (account is
closed) and the trading account is debited.
J1
20.1
R
R
Jan 31 Sales
N12
1 500
Sales returns
N2
1 500
Closing transfer of sales returns

(4) To transfer sales to the trading account, sales are debited (account is closed) and the
trading account is credited.
20.1
Jan 31

Sales
Trading account
Closing transfer of sales account

N1
N12

R
75 850

(5) To transfer purchases returns to the trading account, purchases returns are debited
(account is closed) and the trading account is credited.
J1
20.1
Jan 31

Purchase returns
Purchases
Closing transfer of purchases returns

N4
N12

R
2 500

(6) To record the closing inventory, which is an asset, in the books, the inventory account
is debited and the trading account is credited.
J1
20.1
Jan 31

Inventory
Trading account
To record the closing inventory in the books

B4
N12

R
8 000

(7) The trading account is now balanced. The result (balance) is the gross profit, namely
R29 100, which is transferred by means of a closing transfer to the profit or loss
account, where the profit is determined.
20.1
Jan 31

FAC1502/1

134

Trading account
Profit or loss
Closing transfer of gross profit to profit or
loss account

N12
N13

R
29 100

(8) Instead of all the separate closing transfers, a combined entry can be made with the
same effect.
General journal
20.1
Jan 31

Sales
Inventory (closing)
Inventory (opening)
Purchases
Trading account
Closing off and transfer of above
accounts to trading account

N 1
B 4
B 4
N 3
N12

R
75 850
8 000

5 000
49 750
29 100*

* Balancing figure between debits and credits
The amount of R29 100 is NOT credited in itself to the trading account. Each entry is shown
separately in the trading account (being contra entries). This will in effect credit the trading
account with the R29 100.

GOLDEN RULE
The trading account, being also a nominal account, is closed off to the profit or loss
account. (See the schematic representation.)

7.5.2 Profit or loss account
As mentioned previously, the profit is calculated in the profit or loss account.
The details required to do this calculation are:
.
.
.

the gross profit
all business expenditure
all business income

Profit or loss

20.1
Jan 31

Stationery
Wages
Water and
electricity
Credit losses
Capital (Total comprehensive income
for the year)

J
J

R
150
10 550

J
J

950
300

17 750

20.1
Jan 31

N13
Trading account
(Gross profit)
Rent income

29 700

Cr
J

R
29 100

600

29 700

COMMENTS
Closing journal entries
(1) The gross profit has already been transferred.
(2) To transfer the expenditure accounts to the profit and loss account, the expenditure
accounts such as stationery, wages, and water and electricity are credited (accounts
are closed) and the profit and loss account is debited with each account individually.
This is done so that the expenditure on each item can readily be identified.

135

FAC1502/1

CLOSING TRANSFERS OF EXPENDITURE
20.1
Jan 31

J2
R

Profit or loss
Stationery
Closing transfer

N13
N6

150

Profit or loss
Wages
Closing transfer

N13
N7

10 550

Profit or loss
Water and electricity
Closing transfer

N13
N8

950

Profit or loss
Credit losses (Bad debts)
Closing transfer

N13
N9

300

150

10 550

950

300

(3) To transfer the income accounts to the profit or loss account, the income accounts
such as rental income and commission received are debited (accounts are closed)
and the profit or loss account is credited.
CLOSING TRANSFERS OF INCOME
20.1
Jan 31

J2
R

Rental income
Profit or loss
Closing transfer

N5
N13

R
600
600

(4) Instead of all the individual closing transfers, a combined entry can be made, for
instance:
GENERAL JOURNAL
20.1
Jan 31

Rental income
Profit or loss
Stationery
Wages
Water and electricity
Credit losses (Bad debts)
Closing off the above accounts against
the profit and loss account

J2
N5
N13
N6
N7
N8
N9

R
600
11 350*

150
10 550
950
300

* Balancing figure between debits and credits. Remember that the amounts in the
nominal accounts are shown separately in the profit or loss account, which means that
the amount of R11 350 is not posted in itself to the account.

FAC1502/1

136

(5) The profit or loss is the result (‘‘balance’’) of the profit or loss account.
(6) To transfer the profit due to the owner to the capital account, the profit or loss
account is debited (account is closed) and the capital account is credited (equity
increases).

GOLDEN RULE
The profit or loss account, also being a nominal account, is closed off to the capital
account. The profit or loss must be disclosed in the statement of changes in equity. (See
the schematic representation.)
CLOSING TRANSFER OF PROFIT FOR THE YEAR/PERIOD
20.1
Jan 31

Profit or loss
Capital
To transfer profit to capital

N13
B1

J3
R
17 750

R
17 750

(7) If the entity suffers a loss, the profit or loss account is credited and the capital account
is debited (equity decreases).
(8) At the same time the owner owes the amount in the drawings account to the entity. To
bring this debt into account, the drawings account is closed against the capital
account by crediting drawings and debiting the capital account (equity decreases).

GENERAL JOURNAL
20.1
Jan 31

Capital
Drawings
To close drawings

B1
B2

R
3 000

(9) The complete capital account will then look like this:
Dr

Capital

20.1
Jan 31 Drawings
Balance

R
J3
3 000
c/d 118 150

20.1
Jan 31

Balance
Profit or loss

b/d
J3

121 150

Cr
R
103 400
17 750
121 150

20.1
Feb 1

Balance

b/d

118 150

(10) Post-closing trial balance
At this stage a post-closing trial balance can be prepared. This trial balance contains
the balances of all those accounts the balances of which are to be carried forward to
the following financial period. These balances are used to prepare the statement of
financial position.
In the above example this trial balance is as follows (note that there are NO nominal
account balances, or a balance for the Drawings account, any more, as they have
been closed off):

137

FAC1502/1

POST-CLOSING TRIAL BALANCE AS AT 31 JANUARY 20.1
Fol
Capital
Bank
Inventory
Vehicles (at cost)
Equipment (at cost)
Trade receivables control
Trade payables control

B1
B3
B4
B5
B6
B7
B8

Dr
R
4
8
91
19
10

Cr
R
118 150

250
000
000
500
100

132 850

14 700
132 850

GOLDEN RULE
The post closing trial balance contains only balances of statement of financial position
accounts — no nominal accounts.

7.6 Preparation of financial statements
The financial statements of an entity do not form part of the ledger accounts of the entity, but
are prepared from the information in the accounts and the balances of such accounts. The
statements are prepared separately from the accounting records.
Study paragraph 7.3.4 of the prescribed book.

7.6.1 The statement of profit or loss and other comprehensive income
(financial performance)
The information in the trading and profit or loss accounts is communicated to interested
parties by means of the statement of profit or loss and other comprehensive income.

FAC1502/1

138

TOEKELA DEALERS
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE
YEAR ENDED 31 JANUARY 20.1
Notes
2

Revenue
Cost of sales

R
75 850)
(46 750)

Opening inventory
Net purchases

5 000)
49 750)

Closing inventory

54 750)
(8 000)

Gross profit

29 100)

Other income:

600)

Rental income

600)
29 700

Distribution, administrative and other expenses

(11 950)

Stationery
Wages
Water and electricity
Credit losses (Bad debts)

150)
10 550)
950)
300)

Profit for the year

17 750)

Other comprehensive income for the year
Total comprehensive income for the year

—
17 750)

GOLDEN RULE
The statement of profit or loss and other comprehensive income is prepared from
information in the trading account and profit or loss account. (See schematic
representation.)

7.6.2 The statement of changes in equity
The statement of changes in equity was discussed in paragraph 4.15.2. Please study this
paragraph again. This statement is prepared from the information in the capital account.

TOEKELA DEALERS
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 JANUARY 20.1

Balance at 1 February 20.0
Total comprehensive income for the year
Drawings

Capital
R
103 400
17 750
(3 000)

Balance at 31 January 20.1

118 150

139

FAC1502/1

GOLDEN RULE
The statement of changes in equity is prepared from the information in the capital account.
(See schematic representation.)

7.6.3 The statement of financial position
The statement of financial position is compiled from those accounts which are not closed in the
process of determining the profit/loss of the entity. These accounts are either assets, liabilities
or equity accounts (the balances of these accounts appearing in the post-closing trial balance).
All the nominal accounts (expenditure and income) are closed. In the statement of financial
position a summary is made of all the entity’s assets and liabilities based on the accounting
equation, A = E + L.
A statement of financial position shows the entity’s financial position on a specific date,
whereas the profit or loss account or statement of profit or loss and other comprehensive
income shows the financial result over a financial period. The change in equity from one
financial period to the following financial period is reflected in the statement of changes in equity.

TOEKELA DEALERS
STATEMENT OF FINANCIAL POSITION AS AT 31 JANUARY 20.1
ASSETS
Non-current assets
Property, plant and equipment
Current assets
Inventories

Note

R
110 500

110 500
22 350
8 000

Trade and other receivables

10 100

Cash and cash equivalents

4 250

Total assets

132 850

EQUITY AND LIABILITIES
Total equity

118 150

Capital

118 150

Current liabilities

14 700

Trade and other payables

14 700

Total equity and liabilities

132 850

COMMENTS
. When the totals of the different assets are calculated and added together, the result is
equal to:
.
.

the equity, plus
the totals of the different liabilities which are calculated and added together (In the
example there is only one short-term liability, namely creditors.)

. Remember that the balances in the statement of financial position are the opening
balances of the ledger accounts for the next financial period.

FAC1502/1

140

. There are usually more items under trade and other receivables and trade and other
payables than merely debtors and creditors. These items will be listed under trade and
other receivables and trade and other payables and will be added up to give the total
for trade and other receivables and trade and other payables.

GOLDEN RULE
The statement of financial position is prepared from the balances in the post-closing trial
balance after the note on property, plant and equipment has been prepared.

7.6.4 Notes
1 Accounting policy: The annual financial statements have been prepared on the historical
cost basis and comply with International Financial Reporting Standards.
2
3

Income represents net sales to third parties.
Property, plant and
equipment
Carrying amount:
Beginning of year
Cost
Accumulated
depreciation

Equipment

Vehicles

Total

19 500

91 000

110 500

19 500

91 000

110 500

(—)

19 500

91 000

110 500

19 500

91 000

110 500

(—)

Depreciation
Carrying amount:
End of year
Cost
Accumulated
depreciation

No depreciation was written off during the financial year.
GOLDEN RULE
The note on ‘‘property, plant and equipment’’ reflects all changes in all non-current assets
and the associated accumulated depreciation accounts.

GOLDEN RULE
The total of the ‘‘carrying amount: end of year’’ must be the same as the amount disclosed
as ‘‘property, plant and equipment’’ under ‘‘non-current assets’’ in the statement of financial
position.

7.7 Gross profit percentage
An entity calculates its gross profit separately because it gives an indication of its performance
in its major activity, namely selling goods at a profit, apart from all the other activities in which it
engages to support this primary activity.

141

FAC1502/1

Study paragraphs 7.3.3 and 7.4 of the prescribed book.

COMMENT
The gross profit is normally expressed as a percentage of either the selling price or the
cost price of goods sold.
Gross profit
100
6
Selling price
1

Gross profit
100
6
Cost of sales
1

29 000
6
76 000

38,2%

29 000
47 000

61,7%

100
1

Entities usually have a price policy which sets a certain gross profit percentage as an objective.
The selling price is determined by adding this profit percentage to the cost price of
merchandise. At the end of the period management can compare the actual result (gross profit
percentage) with the theoretical percentage (ie the profit-taking policy), or the result can be
compared with the results of other years, or with those of other entities in the industry.

7.8 Integrated example
The following information pertains to Hot-Rod Dealers:

FAC1502/1

142

HOT-ROD DEALERS
(1)

PRE-ADJUSTMENT TRIAL BALANCE AS AT 31 DECEMBER 20.4
Fol

Debit
R

Capital
Drawings
Land and buildings (at cost)
Vehicles (at cost)
Furniture (at cost)
Inventory: Trading — 1 Jan 20.4
Trade receivables control
Bank
Accumulated depreciation: vehicles
Accumulated depreciation: furniture
Trade payables control
Sales
Sales returns
Carriage on sales
Commission income
Rental income
Purchases
Purchases returns
Carriage on purchases
Credit losses (Bad debts)
Insurance
Packaging material
Salaries
Water and electricity

GL 1
GL 2
GL 3
GL 4
GL 5
GL 6
GL 7
GL 8
GL 9
GL10
GL11
GL12
GL13
GL14
GL15
GL16
GL17
GL18
GL19
GL20
GL21
GL22
GL23
GL24

4
180
120
15
4
40
5

Credit
R
250 000

400
000
000
000
000
140
900
26
3
50
253

000
000
750
615

615
670
480
2 860
170 550
550
400
230
2 750
800
38 500
3 300
587 255

587 255

(2) ADDITIONAL INFORMATION:
(a) Inventory on 31 December 20.4
Trading inventory
Packaging material

R
6 500
175

(b) Debtor S Sorry is insolvent; his debt of R140 has to be written off as irrecoverable.
(c) An employee is on leave and his January 20.5 salary of R1 500 has been paid to him in
advance.
(d) Delivery fees of R100 on purchases have not been paid yet.
(e) An insurance premium of R250 per month has been paid until the end of March 20.5.
(f) Rent income has been paid until the end of January 20.5.
(g) R880 commission was earned on 28 December 20.4; the amount is still outstanding.
(h) Provision must be made for depreciation as follows:
Vehicles — R15 750
Furniture — R 1 275

Required:
(1)

Open the accounts of Hot-Rod Dealers in the general ledger with the given balances.

(2)

Record the adjustments in the general journal and post to the ledger accounts.

143

FAC1502/1

(3)

Record the closing journal entries. Post to the ledger and show the trading account
and profit or loss account for the year ended 31 December 20.4.

(4)

Prepare a post-closing trial balance as at 31 December 20.4.

(5)

Prepare the statement of profit or loss and other comprehensive income of Hot-Rod
Dealers for the year ended 31 December 20.4.

(6)

Prepare the statement of changes in equity for the year ended 31 December 20.4.

(7)

Prepare the statement of financial position of Hot-Rod Dealers as at 31 December 20.4.

(8)

Prepare the following notes:
(a) Accounting policy
(b) Property, plant and equipment.

Solution: Integrated example
Please note: Only one set of general ledger accounts is used. The journal entries after the
accounts, must be posted to the same set of accounts.

HOT-ROD DEALERS
(1) GENERAL LEDGER (POSTINGS INCLUDED)
Dr
20.4
Dec 31

Capital

Drawings
Balance

J2
c/d

R
4 400
273 610

278 010

Dr
20.4
Dec 31

Balance

b/d

FAC1502/1

R
4 400

20.4
Dec 31

Balance

b/d

Furniture (at cost)

20.4
Dec 31

R
15 000

144

b/d
J2

Balance

b/d

273 610
2

Capital

Cr
R
4 400

R
120 000

Balance

R
250 000
28 010

R
180 000

Vehicles (at cost)

Balance

278 010

Land and buildings (at cost)

Dr
20.4
Dec 31

20.5
Jan 1

Balance
Profit or loss

Drawings

Dr
20.4
Dec 31

20.4
Dec 31

Dr
20.4
Jan 1
Dec 31

Inventory: Trading
Balance
Trading account

b/d
J2

Balance

Dr
20.4
Dec 31

20.5
Jan 1

b/d

R
Trading
account
Balance

J2
c/d

4 000
6 500
10 500

Trade receivables control
Balance

b/d

R
40 140

20.4
Dec 31

b/d

J1
c/d

140
40 000
40 140

40 000
Bank

Balance

b/d

R
5 900

Accumulated depreciation: vehicles

20.4

Cr
R

Credit losses
(Bad debts)
Balance

40 140
Balance

6 500

Dr
20.4
Dec 31

20.4
Dec 31

10 500

20.5
Jan 1

R
4 000
6 500

20.4
Dec 31

Balance
Depreciation

R
26 000
15 750

b/d
J1

41 750
Dr

Accumulated depreciation: furniture

20.4

20.4
Dec 31

Balance
Depreciation

Cr
R
3 000
1 275

b/d
J1

4 275
Dr

Trade payables control
20.4
Dec 31

Dr
20.4
Dec 31

Balance

b/d

Sales
Sales returns
Trading account

J2
J2

Dr
20.4
Dec 31

R
615
253 000
253 615

20.4
Dec 31

b/d

R
615

R
50 750

12
Balance

Cr
R
253 615

b/d

253 615

Sales returns
Balance

20.4
Dec 31

Cr
R

Sales

145

615

FAC1502/1

Dr
20.4
Dec 31

Carriage on sales
Balance

b/d

Dr
20.4
Dec 31

R
670

20.4
Dec 31

14
Profit or loss

Commission income

Profit or loss

R
1 360

20.4
Dec 31

R
670

Balance
Accrued
income

20.4
Dec 31

b/d
J1

880
1 360

Rental income
R
Income received
in advance
Profit or loss

J1
J2

20.4
Dec 31

16
Balance

b/d

20.4
Dec 31

R
b/d 170 550

20.4
Dec 31

17
Purchases returns
Trading account

J2
J2

170 550
Dr
20.4
Dec 31

Purchases returns
Purchases

Dr
20.4
Dec 31

R
550

20.4
Dec 31

18
Balance

Carriage on purchases
Balance
Accrued expenses

b/d
J1

R
400
100

20.4
Dec 31

b/d

19
Trading account

500
Dr
20.4
Dec 31

b/d
J1

R
230
140
370

FAC1502/1

146

Cr
R
550
170 000
170 550
Cr
R
550

Cr
R
500
500

Credit losses (Bad debts)
Balance
Trade receivables

R
2 860

2 860

Purchases
Balance

220
2 640
2 860

Cr
R
480

1 360

20.4
Dec 31

Profit or loss

20
J2

Cr
R
370
370

Dr
20.4
Dec 31

Insurance
Balance

b/d

R
2 750

20.4
Dec 31

21
R
Prepaid
expenses
Profit or loss

J1
J2

2 750

Dr
20.4
Dec 31

Balance

b/d

20.4
Dec 31

Inventory:
Packaging
material
Profit or loss

J1
J2

Balance

b/d

20.4
Dec 31

Prepaid
expenses
Profit or loss

J1
J2

Balance

b/d

Dr
20.4
Dec 31

20.4
Dec 31

24
Profit or loss

Prepaid expenses
Salaries
Insurance

J1
J1

1 500
37 000
38 500

Water and electricity
R
3 300

Cr
R

38 500

175
625
800

Salaries
R
38 500

Cr
R

800

750
2 000
2 750

Packaging material
R
800

Cr
R
3 300

R
1 500
750
2 250

Dr
20.4
Dec 31

Accrued income
R
Commission
income

880

147

FAC1502/1

Income received in advance
20.4
Dec 31

Rent income

Accrued expenses
20.4
Dec 31

Cr
R

Carriage on
purchases

100

R
Packaging
material

175

Depreciation

20.4
Dec 31

R
220

Inventory: Packaging material

20.4
Dec 31

R
Accumulated
depreciation:
vehicles
Accumulated
depreciation:
furniture

15 750

1 275

20.4
Dec 31

Profit or loss

17 025

R
17 025

17 025

HOT-ROD DEALERS
GENERAL JOURNAL
(2)

ADJUSTMENT ENTRIES — 31 DECEMBER 20.4

J1
R

FAC1502/1

Inventory: Packaging material
Packaging material
Packaging material on hand at 31 December 20.4

GL29
GL22

175

Credit losses (Bad debts)
Trade receivables control
Write S Sorry’s debt off as irrecoverable

GL20
GL 7

140

Prepaid expenses
Salaries
Salaries prepaid

GL25
GL23

1 500

Carriage on purchases
Accrued expenses
Carriage on purchases still payable

GL19
GL28

100

148

R
175

140

1 500

100

Prepaid expenses
Insurance
Insurance prepaid for 3 months

GL25
GL21

750

Rental income
Income received in advance
Rent received in advance for January 20.5

GL16
GL27

220

Accrued income
Commission income
Commission earned not yet received

GL26
GL15

880

Depreciation
Accumulated depreciation: vehicles
Accumulated depreciation: furniture
Provision for depreciation

GL30
GL 9
GL10

17 025

750

220

880

15 750
1 275

HOT-ROD DEALERS
GENERAL JOURNAL
(3)

CLOSING ENTRIES — 31 DECEMBER 20.4

J2
R

Purchases returns
Purchases
Closing transfer of purchases returns

GL18
GL17

550

Sales
Sales returns
Closing transfer of sales returns

GL12
GL13

615

Inventory: Trading (closing)
Sales
Trading account
Closing off and transfer of accounts to trading
account

GL 6
GL12
GL31

6 500
253 000

Trading account
Inventory: Trading (opening)
Purchases
Carriage on purchases
Closing off and transfer of accounts to trading
account

GL31
GL 6
GL17
GL19

174 500

Trading account
Profit or loss
Transfer of gross profit

GL31
GL32

85 000

Commission income
Rental income
Profit or loss
Closing off of accounts against profit or
loss account

GL15
GL16
GL32

1 360
2 640

550

615

259 500

4 000
170 000
500

85 000

4 000

149

FAC1502/1

Profit or loss
Salaries
Water and electricity
Carriage on sales
Insurance
Packaging material
Credit losses
Depreciation
Closing off of accounts against profit or
loss account

GL32
GL23
GL24
GL14
GL21
GL22
GL20
GL30

60 990

Profit or loss
Capital
Transfer of profit to capital

GL32
GL 1

28 010

Capital
Drawings
Close off drawings against capital

GL 1
GL 2

4 400

37 000
3 300
670
2 000
625
370
17 025

28 010

4 400

HOT-ROD DEALERS
GENERAL LEDGER
Dr
20.4
Dec 31

Trading account
R
Inventory:
Trading (opening)
Purchases
Carriage on
purchases
Profit or loss
(gross profit)

J2
J2

4 000
170 000

500

85 000

20.4
Dec 31

Sales
Inventory:
Trading
(closing)

R
253 000

6 500

259 500

Dr
20.4
Dec 31

FAC1502/1

150

259 500

Profit or loss
Salaries
Water and electricity
Carriage on sales
Insurance
Packaging material
Credit losses
(Bad debts)
Depreciation
Capital (Total comprehensive income
for the year)

J2
J2
J2
J2
J2

R
37 000
3 300
670
2 000
625

J2
J2

370
17 025

28 010
89 000

20.4
Dec 31

Cr
R

Trading account
(gross profit)
Commission
income
Rental income

85 000

J2
J2

1 360
2 640

89 000

HOT-ROD DEALERS
(4) POST-CLOSING TRIAL BALANCE AS AT 31 DECEMBER 20.4
Fol

Debit
R

Capital
Land and buildings (at cost)
Vehicles (at cost)
Furniture (at cost)
Inventory: Trading
Packaging material
Trade receivables control
Bank
Accumulated depreciation: vehicles
Accumulated depreciation: furniture
Trade payables control
Prepaid expenses
Accrued income
Income received in advance
Accrued expenses

GL 1
GL 3
GL 4
GL 5
GL 6
GL29
GL 7
GL 8
GL 9
GL10
GL11
GL25
GL26
GL27
GL28

Credit
R
273 610

180
120
15
6

000
000
000
500
175
40 000
5 900
41 750
4 275
50 750
2 250
880
220
100

370 705

HOT-ROD DEALERS
(5)

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR
THE YEAR ENDED 31 DECEMBER 20.4
R
253 000
(168 000)

Revenue
Cost of sales
Inventory (1 January 20.4)
Net purchases
Carriage on purchases

4 000
170 000
500
174 500
(6 500)

Inventory (31 December 20.4)
Gross profit
Other income

85 000
4 000

Rental income
Commission income

2 640
1 360
89 000
(60 990)

Distribution, administrative and other expenses
Salaries
Water and electricity
Carriage on sales
Insurance
Packaging material
Credit losses (Bad debts)
Depreciation (R15 750 + R1 275)

37 000
3 300
670
2 000
625
370
17 025

Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year

28 010
—
28 010

151

FAC1502/1

COMMENTS
. Revenue are sales less sales returns R (253 615 7 615) = R253 000.
. Net purchases are purchases less purchases returns R (170 550 7 550) = R170 000.

HOT-ROD DEALERS
(6)

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.4

Balance at 1 January 20.4
Total comprehensive income for the year
Drawings

Capital
R
250 000)
28 010)
(4 400)

Balance at 31 December 20.4

*273 610)

* Capital account

HOT-ROD DEALERS
(7) STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.4
ASSETS

Note

Non-current assets
Property, plant and equipment
Current assets
Inventories R(6 500 + 175)
Trade and other receivables R(40 000 + 880)*
Prepayments
Cash and cash equivalents

268 975
2

268 975
55 705
6 675
40 880
2 250
5 900

Total assets

324 680

EQUITY AND LIABILITIES
Total equity

273 610

Capital

273 610

Current liabilities

51 070

Trade and other payables R(50 750 + 100)#

50 850

Income received in advance

220

Total equity and liabilities

324 680

* Trade receivables R40 000 + Accrued income R880 = R40 880.
# Trade payables R50 750 + Accrued expenses R100 = R50 850.

FAC1502/1

152

HOT-ROD DEALERS
(8)
1

NOTES FOR THE YEAR ENDED 31 DECEMBER 20.4
Accounting policy:
1.1

1.2

The annual financial statements have been prepared on the historical cost basis and
comply with International Financial Reporting Standards appropriate to the business
of the entiity.
Property, plant and equipment are shown at cost less accumulated depreciation.
Land and buildings are classified as investment properties and are not depreciated.

2
Property, plant and
equipment

Land and
buildings

Vehicles

Furniture

Total

R
Carrying amount:
Beginning of year

180 000

94 000

12 000

286 000

Cost
Accumulated depreciation

180 000
(—)

120 000
(26 000)

15 000
(3 000)

315 000
(29 000)

(15 750)

(1 275)

(17 025)

Depreciation
Carrying amount:
End of year
Cost
Accumulated depreciation

(—)
180 000
180 000
(—)

*78 250
120 000
(41 750)

*10 725
15 000
(4 275)

268 975
315 000
(46 025)

* Combination of ASSET account and Accumulated Depreciation on ASSET account

7.9 Revision exercises and solutions
7.9.1 Revision exercise 1
(1) Name the two descriptions of profit and the names of the accounts in which each is
determined.
(2) What details are necessary to determine the cost of sales?
(3) What two inventory systems are used mainly in practice?
(4) Name the main differences between the two inventory systems.
(5) Calculate the cost price of goods which were sold for R150 000 if the profit mark-up was
20% on the cost price.
(6) Calculate the cost price of goods which were sold for R150 000 if the profit mark-up was
20% on the selling price.
(7) What statement reflects the position of an entity’s assets and liabilities?

Solution: Revision exercise 1
(1) Gross profit/Trading account
Profit/Profit or loss account
(2) Opening inventory
Purchases
All other purchase related costs
Closing inventory
(3) Perpetual inventory system
Periodic inventory system
(4) Perpetual inventory system:
(a) Purchases of trading inventory are entered in the inventory account.
(b) Purchase related costs are recorded in the inventory account.
(c) The cost of sales account is updated during the financial period.

153

FAC1502/1

Periodic inventory system:
(a) Purchases of trading inventory are recorded in the purchases account.
(b) Purchase related costs are recorded in accounts for each specific type of cost
(c) The cost price of sales may be determined in the trading account.
(5)
Cost price
Profit mark-up
Selling price

%
100
20
120

If the selling price is R120, the cost price is R100
100
6 150 000
120

If the selling price is R150 000 the cost price is

= R125 000
(6)
Selling price
Profit mark-up
Cost price

%
100
20
80

If the selling price is R100, the cost price is R80
80
6 150 000
100

If the selling price is R150 000, the cost price

= R120 000
(7) Statement of financial position

7.9.2 Revision exercise 2
Record each of the transactions listed below under the appropriate column heading in a
business that uses:
(1) a perpetual inventory system
(2) a periodic inventory system
NB: Ignore VAT
Account in general

Assets

Equity

Liabilities

ledger to be

Subsidiary journal

debited

credited

–

Transactions:
1
2
3
4
5
6

FAC1502/1

Purchased inventory on credit, R4 000.
Paid carriage on purchases by cheque, R400.
Purchased inventory and paid by cheque, R8 000.
Sold half of the inventory on hand for cash, R10 000.
Inventory with a cost price of R1 000 was sold on credit for R2 100.
Inventory purchased on credit was returned to the seller, R200.

154

–

Solution: Revision exercise 2
(1) ENTITY USING A PERPETUAL INVENTORY SYSTEM
Account in general

Assets

Equity

Liabilities

ledger to be
No

Subsidiary journal

Purchases journal

debited

credited

Inventory

–

4 000
Trade
payables
control

2
3
4

Cash payments
journal

Inventory

Cash payments
journal

Inventory

Cash receipts
journal

Cost of
sales

4 000
400

Bank

400
8 000

Bank

8 000

Inventory

6 200

Bank

10 000
Sales

Sales journal

10 000

Cost of
sales

1 000
Inventory

Trade receivables control

1 000
2 100

Sales
6

Purchases returns
journal
Trade payables control

2 100

Inventory

200
200

(2) ENTITY USING A PERIODIC INVENTORY SYSTEM
Account in general

Assets

Equity

Liabilities

ledger to be
No
1

Subsidiary journal

debited

Purchases journal Purchases

Cash payments
journal

credited

–

Trade payables control

Cash payments
journal

Purchases

Cash receipts
journal

Bank

Sales journal

Trade receivables control

–

4 000
4 000

Carriage onpurchases

400
Bank

400

Bank

8 000

10 000
Sales

10 000

2 100
Sales

2 100

Purchases returns Trade payjournal
ables control

200
Purhcases
returns

200

155

FAC1502/1

7.9.3 Revision exercise 3
Calculate the gross profit of Zetta Traders for the year ended 30 June 20.2. Zetta Traders use
the periodic inventory system.
R
6 000
100 000
140 000
10 000

Opening inventory on 1 July 20.1
Total purchases
Total sales
Closing inventory (valued on 30 June 20.2)

Solution: Revision exercise 3
R
6 000
100 000
106 000
10 000
96 000

Opening inventory
Plus: Purchases
Goods available for sale
Less: Closing inventory
Cost of goods sold
Gross profit = Sales – cost of sales
= R(140 000 – 96 000)
= R44 000

7.9.4 Revision exercise 4
Now use the data in exercise 3 above to record it in the following ledger accounts on
30 June 20.2 in the general ledger of Zetta Traders:
1.
2.
3.
4.

Inventory account
Purchases account
Sales account
Trading account

Solution: Revision exercise 4
ZETTA TRADERS
GENERAL LEDGER
Dr
20.1
Jul 1
20.2
Jul 1

Inventory
Balance

b/d

Trading account

Dr
20.2
Jun 30 Trading account

FAC1502/1

156

20.2
Jun 30

Cr
R
6 000

Trading account

10 000

Dr
20.2
Jun 30 Balance

R
6 000

Purchases
b/d

R
100 000

20.2
Jun 30

R
100 000

Trading account

Sales
R
140 000

20.2
Jun 30

3
Balance

b/d

Cr
R
140 000

Trading account

20.2
Jun 30

R
Inventory
(opening)
Purchases
Profit or loss
(Gross profit)

20.2
Jun 30

6 000
100 000

Cr
R
140 000

Sales
Inventory
(closing)

10 000

44 000
150 000

150 000

7.9.5 Revision exercise 5
The following balances appeared in the ledger of P Ellis on 31 August 20.1
R
Inventory – 1 August 20.1
Purchases
Sales
Carriage on purchases
Customs duties

2 000
3 000
7 300
250
800

After a stocktaking (counting of inventory) on 31 August 20.1 the inventory on hand was valued
at R1 500.

Required:
(1)

Open the above accounts in the ledger with the given balances or totals.

(2)

Record the closing transfers in the general journal and post to the ledger.

(3)

Show the gross profit in the trading account.

Solution: Revision exercise 5
P ELLIS
(1) GENERAL LEDGER
Dr
20.1
Aug 1
20.1
Sept 1

Inventory: Trading
Balance
Trading account

b/d

R
2 000

1 500

Dr
20.1
Aug 31

Trading account

Balance

b/d

R
3 000

20.1
Aug 31

2
Trading account

Trading account

R
7 300

20.1
Aug 31

3
Balance

b/d

157

Cr
R
3 000

Sales

Cr
R
2 000

Purchases

Dr
20.1
Aug 31

20.1
Aug 31

Cr
R
7 300

FAC1502/1

Carriage on purchases

20.1
Aug 31

Balance

b/d

R
250

20.1
Aug 31

4
Trading account

Balance

b/d

R
800

20.1
Aug 31

R
250

Customs duties

20.1
Aug 31

5
Trading account

Cr
R
800

(2) CLOSING JOURNAL TRANSFER

20.1
Aug 31 Sales
Inventory (closing)
Inventory (opening)
Purchases
Carriage on purchases
Customs duties
Trading account
Closing transfer to trading account

GL3
GL1
GL1
GL2
GL4
GL5
GL6

R
7 300
1 500

2 000
3 000
250
800
2 750*

* Balancing figure

(3)
Dr

Trading account

20.1
Aug 31

Inventory (opening)
Purchases
Carriage on
purchases
Custom duties
Profit or loss
(gross profit)

R
2 000
3 000

20.1
Aug 31

6
Sales
Inventory (closing)

Cr
R
7 300
1 500

250
800
2 750
8 800

8 800

COMMENTS
. Instead of separate journal entries for closing transfers a combined journal entry is
made, but remember that each item is recorded separately in the trading account.
. All expenditure which influences the cost price of products, such as carriage on
purchases and customs duties in the present example, is added to the purchases (ie
the purchase price).

FAC1502/1

158

7.9.6 Revision exercise 6
The following balances appear, among others, in the ledger of G Grabe, a general dealer,
on 28 February 20.1, the end of his financial year.
R
159 600
5 000
1 450
12 850
28 460
260
150
850

Capital (1/3/20.0)
Drawings (total for the year)
Commission income
Rental expenses
Salaries and wages
Credit losses
Stationery
Municipal taxes

Required:
(1)
(2)

Open the above accounts in the ledger, with the totals or balances as given.
Suppose the gross profit for the year is R46 990. Prepare journal entries for the
closing transfers.

(3)

Complete the profit or loss account in the ledger, and also the posting of the closing
transfers to the ledger accounts, which must be properly closed.

(4)

What was the equity at the beginning of the financial year?

(5)

What is the equity at the end of the financial year?

(6)

What is the difference in the equity at the beginning and the end of the financial year?

Solution: Revision exercise 6
G. GRABE
(1) GENERAL LEDGER
Dr

Capital

20.1
Feb 28

20.0

Drawings

5 000

Balance

c/d

160 470

Mar 1

R
Balance

b/d

159 600

Profit or loss

5 870

20.1
Feb 28

165 470

165 470
20.1
Mar 1

Dr
20.1
Feb 28

Balance

b/d

Drawings

Balance

b/d

R
5 000

20.1
Feb 28

160 470

Capital

159

Cr
R
5 000

FAC1502/1

Dr
20.1
Feb 28

Commission income
R
Profit or
loss

Dr
20.1
Feb 28

Balance

b/d

R
12 850

20.1
Feb 28

Salaries and wages

20.1
Feb 28

R
28 460

Balance

b/d

Dr
20.1
Feb 28

b/d

Dr
20.1
Feb 28

160

20.1
Feb 28

R
260

20.1
Feb 28

R
150

20.1
Feb 28

Balance

b/d

20.1
Feb 28

12 850

Cr
R

Profit or
loss

28 460

Cr
R

Profit or
loss

260

Cr
R

Profit or
loss

Municipal taxes
R
850

Cr
R

Profit or
loss

Stationery
Balance

R
1 450

b/d

Credit losses (Bad debts)
Balance

1 450

20.1
Feb 28

Balance

Rental expenses

FAC1502/1

20.1
Feb 28

150

Cr
R

Profit or
loss

850

(2)

CLOSING TRANSFERS

20.1
Feb 28 Trading account
Profit or loss
Transfer of gross profit from trading
account

R
46 990

GL10

Commission income
Profit or loss
Rental expenses
Salaries and wages
Credit losses
Stationery
Municipal taxes
Closing transfer to profit or loss
account

GL3
GL9
GL4
GL5
GL6
GL7
GL8

46 990

1 450
41 120*
12 850
28 460
260
150
850

* Balancing figure

(3)

GENERAL LEDGER

Dr
20.1
Feb 28

Profit or loss
Rental expenses
Salaries & wages
Credit losses
Stationery
Municipal taxes
Capital (Total
comprehensive
income for the
year)

J1
J1
J1
J1
J1

R
12 850
28 460
260
150
850

5 870

20.1
Feb 28

Cr
R

Trading
account
(Gross profit)
Commission
income

48 440

46 990

1 450

48 440

CLOSING TRANSFERS
20.1
Feb 28 Profit or loss
Capital
Transfer of profit to capital
Capital
Drawings
To close drawings account

GL10
GL1

GL1
GL2

R
5 870

5 000
5 000

(4) R159 600
(5) R160 470 (=R159 600 + R5 870 7 R5 000)
(6) R870 (=R5 870 7 R5 000) as well as (R160 470 7 R159 600)

161

FAC1502/1

7.9.7 Revision exercise 7
On 28 February 20.2 the profit or loss account of H Hilton shows a profit of R23 192. The
accounts below with balances appear in the ledger on this day:
R
Capital
Sundry creditors
Sundry debtors
Inventory
Bank (Dr)
Petty cash
Drawings
Loan from XY Bank
Furniture at cost
Land and buildings at cost

88
5
3
12
5
4
1
10
81

000
080
748
060
316
200
430
550
400
668

Required:
(1)

Prepare the statement of changes in equity of H Hilton for the period ended
28 February 20.2.

(2)

Give a summary of the financial position of H Hilton’s entity entity on
28 February 20.2 as indicated in the statement of financial position.

NB:

No notes are required.

Solution: Revision exercise 7
H HILTON
(1)

FAC1502/1

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
28 FEBRUARY 20.2

Balance at 1 March 20.1
Total comprehensive income for the year
Drawings

R
Capital
88 000
23 192
(4 430)

Balance at 28 February 20.2

106 762

162

H HILTON
(2)

STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.2

ASSETS
Non-current assets
Property, plant and equiment R(81 668 + 10 400)
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents R(5 316 + 200)*
Total assets

R
92 068
92 068
21 324
12 060
3 748
5 516
113 392

EQUITY AND LIABILITIES
Total equity
Capital

106 762
106 762

Non-current liabilities
Long-term borrowing
Current liabilities
Trade and other payables
Total equity and liabilities

1
1
5
5
113

550
550
080
080
392

* Bank R5 316 + Petty cash R200.

7.9.8 Revision exercise 8
Use the information in Ntini’s Store’s trial balance to prepare the following:
(1)
(2)
(3)
(4)

Statement of profit or loss and other comprehensive income
Statement of changes in equity
Statement of financial position
Notes to the financial statements

TRIAL BALANCE AS AT 31 DECEMBER 20.4

Land and buildings at cost
Vehicles at cost
Equipment at cost
Drawings
Trade receivables control
Trade payables control
Inventory 1/1/20.4
Cash on hand
Cash sales
Rental income
Settlement discount received
Settlement discount granted
Purchases
Carriage on sales
Advertisements
Capital
Credit sales
Bank
Salaries
Carriage on purchases
Sales returns
Purchases returns
Import duty

Debit

Credit

R
40
30
20
3
78

R
000
800
000
600
000
77 000

22 080
1 440
46 840
280
440
1 152
58 368
1 932
1 176
95 284
67 200
6 840
15 020
4 356
600
1 120
2 800
288 164

288 164

Closing inventory on 31 December 20.4 amounts to R15 484.

163

FAC1502/1

Solution: Revision exercise 8
NTINI’S STORE
(1)

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR
THE YEAR ENDED 31 DECEMBER 20.4
Notes

112 288

Revenue R(46 840 + 67 200 – 600 – 1 152)
Cost of sales
Inventory (1 January 20.4)
Net purchases R(58 368 7 1120 – 440)
Carriage on purchases
Import duties
Inventory (31 December 20.4)
Gross profit
Other income:
Rental income
Distribution, administrative and other expenses
Carriage on sales
Advertisements
Salaries

(70 560)
22
56
4
2

080
808
356
800

86 044
(15 484)
41 728
280
42 008
(18 128)
1 932
1 176
15 020

Profit for the year

23 880

Other comprehensive income for the year
Total comprehensive income for the year

—
23 880

NTINI’S STORE
(2) STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.4

FAC1502/1

Balance at 1 January 20.4
Total comprehensive income for the year
Drawings

Capital
R
95 284
23 880
(3 600)

Balance at 31 December 20.4

115 564

164

NTINI’S STORE
(3) STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.4
ASSETS

Note

Non-current assets

R
90 800

Property, plant and equipment
Current assets

90 800
101 764

Inventories
Trade and other receivables
Cash and cash equivalents R(6 840 + 1 440)
Total assets

15 484
78 000
8 280
192 564

EQUITY AND LIABILITIES
Total equity
Capital
Current liabilities
Trade and other payables
Total equity and liabilities

115
115
77
77
192

564
564
000
000
564

NTINI’S STORE
(4) NOTES FOR THE YEAR ENDED 3 DECEMBER 20.4:
1

Accounting policy:

The annual financial statements have been prepared on the historical cost basis and
comply with International Financial Reporting Standards.
Income represents net sales to customers.

3
Property, plant and
equipment

Land and
buildings

Equipment

Vehicles

Total

Carrying amount:
Beginning of year

40 000

20 000

30 800

90 800

Cost
Accumulated depreciation

40 000
(—)

20 000
(—)

30 800
(—)

90 800
(—)

(—)

40 000
40 000

20 000
20 000

30 800
30 800

90 800
90 800

(—)

165

FAC1502/1

Depreciation
Carrying amount:
End of year
Cost
Accumulated depreciation

No depreciation was written off during the financial year.

SELF-ASSESSMENT
Now that you have studied this study unit, can you:

FAC1502/1

calculate the gross profit?

calculate the net profit?

record transactions according to the perpetual inventory system?

record transactions according to the periodic inventory system?

post closing journal entries to the trading account and profit or loss account?

prepare the statement of profit or loss and other comprehensive income?

prepare the statement of changes in equity?

prepare the statement of financial position?

prepare the notes to the financial statements?

calculate appropriate percentages for evaluation purposes?

166

TOPIC C

ACCOUNTABILITY FOR CURRENT AND
NON-CURRENT ASSETS

Learning outcome
The learner should be able to exercise control, record transactions, and to record the
necessary calculations for valuation (where applicable) and adjustments related to current
and non-current assets.

167

FAC1502/1

CONTENTS

Study unit

FAC1502/1

Page

8 CASH AND CASH EQUIVALENTS

169

9 TRADE AND OTHER RECEIVABLES

191

10 INVENTORY

220

11 PROPERTY, PLANT AND EQUIPMENT

230

12 OTHER NON-CURRENT ASSETS

259

168

STUDY UNIT

8
Cash and cash equivalents

Learning outcome
Students should be able to know how to treat all transactions related to cash and cash
equivalents apart from cash receipts and payments.

Contents

Page

Key concepts

170

8.1

The nature of cash and cash equivalents

170

8.2

Internal control over cash

170

8.3

Reconciliation of the bank statement balance with the
bank account balance

171

8.3.1 Introduction

171

8.3.2 Why a bank reconciliation is necessary

171

8.3.3 Procedure to follow in the reconciliation process

172

8.4

The petty cash journal

178

8.5

Revision exercises and solutions

180

8.5.1 Revision exercise 1

180

8.5.2 Revision exercise 2

183

8.5.3 Revision exercise 3

185

8.5.4 Revision exercise 4

187

8.5.5 Revision exercise 5

189

Self-assessment

190

169

FAC1502/1

KEY CONCEPTS
.
.
.
.
.
.
.
.
.
.
.
.
.
.

Outstanding cheques
Deposits
Bank charges
Interest on overdraft
Direct deposits
Dishonoured cheque
Stale cheque
Stopped/cancelled cheque
Bank reconciliation statement
Balance per bank account
Balance per bank statement
Petty cash float
Imprest system
Petty cash journal

8.1 The nature of cash and cash equivalents
Cash, in the accountancy environment, includes not only coins and notes but also postal
orders, cheques and credit card transactions. As money is the primary legal tender, every
transaction eventually leads to either an outflow or an inflow of money for an entity. Cash
equivalents include savings accounts or any investment that can be converted into cash in a
period shorter than 12 months. This qualifies cash and cash equivalents as current assets.
Study paragraphs 8.1 and 8.2 of the prescribed book.

GOLDEN RULE
Cash must be handled carefully since a lack of cash may lead to the ‘‘downfall’’ of an entity,
accompanied by loss of job opportunities and all sorts of other troubles.

8.2 Internal control over cash
Study paragraph 8.3 of the prescribed book.
As money is necessary for survival, the internal controls applicable to cash are very important
for a business. The following are measures that can be used by a business for control
purposes:
.

.
.
.
.
.

FAC1502/1

Employees’ duties should be divided in such a way that an error by one employee will be
detected by another employee in the normal performance of his duties. It should take at
least two employees to embezzle cash.
Cash receipts should be recorded in such a way that the actual cash received can be
checked against an independent daily record.
Cash received should be banked daily.
All payments except petty cash payments (see paragraph 8.4) should be made by cheque.
The bank statement should be compared with the cash receipts and cash payments
journals.
The bank statement balance should be reconciled with the bank account balance.

170

8.3 Reconciliation of the bank statement balance with the
bank account balance
8.3.1 Introduction
Study paragraph 8.4 of the prescribed book.
For purposes of safekeeping and cash control, all monies received are deposited at a bank.
Although a bank is a financial institution it is managed like a business. Every entity that entrusts
its money to a bank is a creditor of the bank. People or entities can also borrow money from a
bank and will then be debtors of the bank.
The bank will issue, as often as requested or at least once a month, a statement to the entity
showing their record of transactions with the entity.
The following will be reflected on the bank statement:
.
.
.
.
.
.
.
.

the opening balance (beginning of the month)
deposits credited during the month
cheques paid (debited) during the month
bank charges for the month
interest charged (debit) on overdraft or paid on a favourable (credit) bank balance
debit and stop orders for the month
dishonoured cheques for the month (cheques deposited, but not paid by the drawers’ bank)
correction of errors made by the bank in the previous month

8.3.2 Why a bank reconciliation is necessary
If the bank and the entity keep record of the same transactions the balance of the bank
statement and the bank account in the books of the business must be the same.
Study paragraph 8.5.1 of the prescribed book.
In order to ascertain that the bank account in the books of the entity corresponds to the bank
statement, a bank reconciliation statement is prepared. This means the balance of the bank
account in the books of the entity is reconciled with the balance on its bank statement.
The reconciliation process has two steps: first the entity’s records are updated to account for
actual transactions reflected by the bank statement, and secondly record those transactions to
which the bank must still attend to in the bank reconciliation statement.
The bank reconciliation could be seen as an extension of the bank statement. An outstanding
item that will be credited on the bank statement, must be credited on the bank reconciliation
statement and vice versa.
REMEMBER
A favourable bank account balance is on the debit side of the bank account as well as on
the bank reconciliation statement.
. An unfavourable or overdrawn bank account balance is on the credit side of the bank
account as well as on the bank reconciliation statement.
. A favourable bank statement balance is on the credit side of the bank statement as well as
on the bank reconciliation statement.
.

171

FAC1502/1

An unfavourable or overdrawn bank statement balance (indicated by DT, DR or OD) is on
the debit side of the bank statement as well as on the bank reconciliation statement.

8.3.3 Procedure to follow in the reconciliation process
Where a bank reconciliation statement was completed for the previous month the bank
statement must first be compared with that bank reconciliation statement to ascertain
whether the outstanding items and corrections have been done by the bank. Remember to
compare the items on the debit side of the bank reconciliation statement with entries on the
debit side of the bank statement and credit entries on the reconciliation with credit entries on
the statement.
. Compare the amounts in the cash receipts journal for the current month with the entries on
the credit side of the bank statement.
. Compare the amounts in the cash payments journal for the current month with entries on
the debit side of the bank statement.
.

The differences between the bank statement, the previous month’s reconciliation statement
and the cash journals will then be corrected as explained in the prescribed book.
Study paragraph 8.5.2 in the prescribed book.

GOLDEN RULE
Transactions or corrections which the entity must react on, must be recorded in the two
cash journals of the entity, e.g. bank charges, interest, debit/stop orders, errors in the
books of the entity, stale cheques, etc.

GOLDEN RULE
Transactions or corrections which the bank must (or will) react on, must be recorded in the
bank reconciliation, e.g. deposits not yet credited, unpaid cheques and errors made by
the bank to be corrected.

Exercise 8.1
The bank reconciliation statement for June 20.0 and the CRJ, CPJ, bank account and bank
statement of Benson Traders for July 20.0 reflect the following:
NB: The ticks (V) indicate that those entries which appear in the books of the entity (i.e. the
bank reconciliation at 30 June 20.0 and the two cash journals for July 20.0) also appear
on the bank statement for July 20.0). They do not require any further attention. You should
also check these by yourself.

FAC1502/1

172

BENSON TRADERS
BANK RECONCILIATION STATEMENT AS AT 30 JUNE 20.0

Favourable balance per bank statement
Deposit not yet credited (deposited 1/7/20.0)
Cheques not yet presented for payment
No 11 — dated 23/6/20.0 (Donation)
No 13 — dated 30/6/20.0 (ABC Stores)
Favourable balance per bank account

Debit

Credit

R
11 350
V 2 000

*200
V 350
12 800
13 350

13 350

Cheque no 11 was not presented for payment during July and must, again, be shown as
outstanding on the July 20.0 bank reconciliation statement.

BENSON TRADERS
CASH RECEIPTS JOURNAL – JULY 20.0 (bank column only)
Doc no

Date
15
25
30

CRJ 7

Details

Bank

Cash sales
Cash sales
Cash sales
Rental income
Interest income

6 700 V
3 300 V
1 800 V
850
80
12 730
B 15

Amounts in italics are amounts entered as a result of the amounts reflected on the bank
statement, but not yet in the CRJ. This updates the CRJ.

BENSON TRADERS
CASH PAYMENTS JOURNAL – JULY 20.0 (bank column only)
Doc no

Date

14
15
16
—
17
18
19

5
7
9
14
15
30

CPJ 7

Details

Bank

Municipality
John’s Wholesalers
ABC Stores
S Swan (R/D cheque)*
Cash (wages)
Telkom
Cash (wages)
P Saxo (R/D cheque)*
Insurance
Bank charges

900 V
2 500 V
1 200 V
200 V
450 V
180
450 V
300
500
43
6 723
B 15

Amounts in italics are amounts entered as a result of the amounts reflected on the bank
statement, but not yet in the CPJ. This updates the CPJ.

173

FAC1502/1

* The accounts of S Swan and P Saxo in the trade receivables ledger, must be debited with the
amounts of R200 and R300 respectively. If any discount was involved on receipt of the
cheques the discount must be cancelled via the general journal. The accounts of S Swan and
P Saxo would be debited and the discount allowed would be credited.
REAL BANK LIMITED
Real Bank Limited
Registered Bank
Reg no 93/2571
VAT-Reg No: 2600101432
Tel: (012) 555–5555
Fax: (012) 555–5556
BENSON TRADERS
PO Box 12345
PRETORIA
0001
Account no 01/200/998/9

Details

Statement no 3
July 20.0

Cheque no

Fee

Date

R
Balance

b/f

Credit

Balance

01:07

Deposit
Cheque

Debit

11 350

01:07
13

2 000 V

13 350

1,20

02.07

350 V

13 000

1,00

07:07

200 V

12 800

3,50

09:07

2 500 V

10 300

7,00

15:07

Unpaid cheque:
S Swan
Cheque

Deposit

6 700 V

17 000

Cheque

1,50

15:07

900 V

16 100

Cheque

1,20

15:07

450 V

15 650

Cheque

1,20

20:07

1 200 V

14 450

3,10

25:07

1,60

30:07

Deposit

3 300 V

17 750

Unpaid cheque:
P Saxo

300

17 450

Interest

30:07

17 530

Deposit: R Charles

30:07

850

18 380

Cheque

1,20

30:07

450 V

17 930

0.50

30:07

500

17 430

Deposit book

17 410

Service fees: July

17 387

XYZ Insurance Co

The unticked debit entries were entered in the cash payments journal before the journal was
closed off for July 20.0.
The unticked credit entries were entered in the cash receipts journal before the journal was
closed off for July 20.0.

FAC1502/1

174

ADDITIONAL INFORMATION
(a) S Swan and P Saxo are debtors of the business.
(b) The deposit on 30/07/20.0 is in respect of rent received.

Solution Exercise

8.1

GENERAL LEDGER
Dr

Bank

20.0
Jul 1
31

Balance
Receipts

b/d
CRJ 7

R
12 800
12 730

20.0
Jul 31

Payments
Balance

B15

CPJ 7
c/d

R
6 723
18 807

25 530
Aug 1

Balance

b/d

25 530

18 807

BANK RECONCILIATION STATEMENT AS AT 31 JULY 20.0
Debit
R
Favourable balance per bank statement
Deposit not yet credited (deposited 1/8/20.0)
Cheques not yet presented for payment:
No 11 — dated 23/6/20.0 (Donation)
No 18 — dated 30/7/20.0 (Telkom)
Favourable balance per bank account

Credit
R
17 387
1 800

200
180
18 807
19 187

19 187

Exercise 8.2
The following information relates to Cool Cat Carter Traders:
(a)

BANK RECONCILIATION STATEMENT AS AT 31 MAY 20.9

Debit balance as per bank statement
Cheques not yet presented for payment:
No 404 – dated 20/12/20.8 (L Lombard)
No 447 – dated 25/5/20.9 (M Mitsi)
Deposit not yet credited
Incorrect entry by the bank
Credit balance as per bank account

460
50
25
115 V
20 V
400
535

(b)
Dr

Bank
R

20.9
Jun 1

535

Balance

b/d

175

R
400

FAC1502/1

(c)

CASH RECEIPTS JOURNAL (bank column only) FOR JUNE 20.9

Date

Details

Fol

CRJ 6
Amount

Sales

R
300 V

5
10

Sales
L Long

150 V
150 V

J Dlamini

200 V

25
28

Sales
Sales

240 V
70

1 110
(d)

CASH PAYMENTS JOURNAL (bank column only) FOR JUNE 20.9

Cheque
Number

Date

450

451
452
453
454

8
17
18
27

Details

Fol

CPJ 6
Amount
R
40 V

B Nkura
R Swart
GEM Builders
K Kum & Co
S Soul

160 V
300
170
200 V
870

(e)

BANK STATEMENT FOR JUNE 20.9
Date

Details

Cheques
etc
R

1
4
6
10
12
15
20

26
28

FAC1502/1

176

Balance
Deposit
Deposit
Deposit
Cheque 451
Deposit — K Nkome
Cheque 453
Cheque ‘‘R/D’’
(L Long)
Deposit
Cheque 454
Stop order — insurance
Deposit — T Nkwe
Deposit
Error corrected
Bank interest
Service fees
Cheque 450
Deposit

Deposits

Balance

R
460
160
10
140
20
70
46

Dr
Dr
Dr
Cr
Dr
Cr
Dr

196
44
156
206
166
51
31
51
61
101
99

Dr
Cr
Dr
Dr
Dr
Dr
Dr
Dr
Dr
Dr
Cr

300 V
150 V
150 V
160 V
90
116
150
240 V
200 V
50
40
115 V
20 V
20
10
40 V
200 V

(f) ADDITIONAL INFORMATION:
According to the entries on cheque number 453, R170 was paid to K Kum & Co.

Required:
(1)

Complete only the Bank column of the cash receipts and cash payments journals of
Cool Cat Carter Traders for June 20.9.

(2)

Show the bank account in the general ledger of Cool Cat Carter Traders properly
balanced at 30 June 20.9.

(3)

Prepare the bank reconciliation statement of Cool Cat Carter Traders as at
30 June 20.9. Commence with the balance as per bank statement.

Solution Exercise

8.2

COOL CAT CARTER TRADERS
(1)

CASH RECEIPTS JOURNAL (bank column only) – JUNE 20.9
Date
2
5
10
19
25
28
30

Details

CRJ 6
Fol

Bank
R
300
150
150
200
240
70
50
90
40

Sales
Sales
L Long
J Dlamini
Sales
Sales
L Lombard/Trade payables control
K Nkome
T Nkwe

V
V
V
V
V
V
V
V
V

1 290 V
CASH PAYMENTS JOURNAL (bank column only) – JUNE 20.9
Cheque
No

Date

Details

CPJ 6
Fol

Bank
R

450
451
452
453
454

3
8
17
18
27
30

B Nkuna
R Swart
GEM Builders
K Kum & Co
S Soul
L Long/Trade receivables control
Insurance
Interest expenses
Bank charges

40
160
300
170
200
150
50
20
10

V
V
V
V
V
V
V
V
V

1 100 V

177

FAC1502/1

(2) GENERAL LEDGER
Dr

Bank

20.9
Jun 30

Receipts
Balance

CRJ6
c/d

R
1 290
210

20.9
Jun 1
30

Cr
Balance
Payments

b/d
CPJ6

1 500

1 500
20.9
Jul 1

(3)

R
400
1 100

Balance

b/d

210

BANK RECONCILIATION STATEMENT AS AT 30 JUNE 20.9
Dr
R

Credit balance as per bank statement
Deposit not yet credited by the bank
Cheques not yet presented for payment:
No 447 – dated 25/5/20.9 (M Mitsi)
No 452 – dated 17/6/20.9 (GEM Builders)
Bank error — cheque No 453 (R170–R116)
Credit balance as per bank account

Cr
R
99
70

25
300
54
210
379

379

COMMENTS
. L Lombard’s cheque (R50) has been outstanding for more than 6 months.
. Cheque no 453 issued to K Kum and Co for R170 was entered correctly in the cash
payments journal. The bank made the mistake of debiting the bank statement with only
R116. A mistake made by the bank must be shown in the bank reconciliation
statement. During July 20.9 the bank will correct the error in the bank statement. The
(R170 7R116 = R54) correction will then be ticked off against the R54 in the bank
reconciliation statement for June 20.9.

8.4 The petty cash journal
For purposes of control, all payments in a business are made by cheque.
There are, however, smaller amounts to be paid daily, for example for postage, carriage, wages
for day workers, etc., for which payment by cheque is too expensive.
Entities usually cash a cheque to provide for a petty cash float to pay for these types of
expenses.
Items purchased out of the petty cash float are recorded in the petty cash journal, which is part
of the cash records but is separate from the cash payments journal. Recording is done from
suitable petty cash vouchers authorised by responsible officials of the entity.
The so-called imprest system is preferable for controlling petty cash. The petty cashier is
provided with a float of say R100. During the month payments are made and when necessary a
cheque is issued to restore the float to R100.

FAC1502/1

178

Study paragraph 8.6 of the prescribed book.

Exercise 8.3
Books of Dickson Traders — June 20.9.
Cash cheque 727 for R300 for petty cash on 1 June.
PETTY CASH PAYMENTS — JUNE 20.9
Date
4
8
12
17
19
21
23
26
27

Details
Stationery
Stamps
Cleaner’s wages
Pro-advertising poster
Cleaner’s wages
Stamps
Paper
Cleaner’s wages
Taxi fare for messenger

Cash voucher

Amount

001
002
003
004
005
006
007
008
009

R
25,20
18,10
60,00
26,50
60,00
8,50
21,95
60,00
10,00

Cash cheque number 795 is issued on 30 June 20.9 to restore the petty cash float to R300.
Required:
(1)

Prepare a petty cash journal for June 20.9 with the following payment analysis
columns: total, wages, postage, stationery and sundries.

(2)

Post to the petty cash control account in the general ledger and balance this account.

179

FAC1502/1

Solution Exercise

8.3

DICKSON TRADERS
(1)

PETTY CASH JOURNAL — JUNE 20.9

PCJ 1

Receipts

Payments
Date

Date

Fol

Details

Total

20.9
R
Jun 1 CPJ8 300,00
30 CPJ8 290,25

20.9
4
8
12
17
19
21
23
26
27

Petty
cash
voucher

Fol

Balance
b/d

Wages

Postage

Stationery

Sundries
Amount

Stationery
Stamps
Wages
Pro-ad
Wages
Stamps
Paper
Wages
Messenger

001
002
003
004
005
006
007
008
009

R
25,20
18,10
60,00
26,50
60,00
8,50
21,95
60,00
10,00

26,60

47,15

c/d

290,25
300,00

180,00

Balance

36,50
300,00

590,25

180,00

26,60

47,15

336,50

590,25
20.9
Jul 1

Total

R
25,20

Fol

Details

18,10
60,00
26,50

Advertising

10,00

Travelling
expenses

60,00
8,50
21,95
60,00

300,00

(2)

GENERAL LEDGER

Petty cash control

20.9
Jun 1 Bank
30 Bank

CPJ8
CPJ8

R
300,00
290,25

20.9
Jun 30

Cr
R
Petty cash
payments
Balance

PCJ1
c/d

590,25
20.9
Jul 1

Balance

b/d

290,25
300,00
590,25

300,00

8.5 Revision exercises and solutions
8.5.1 Revision exercise 1
The following information for January 20.9 relates to Monday Trading:
(a)

BANK RECONCILIATION STATEMENT AS AT 31 DECEMBER 20.8
Dr

Debit balance as per bank statement
Deposit not yet credited
Cheques not yet presented for payment:
No 846 – dated 18/12/20.8 (B Small)
No 849 – dated 21/12/20.8 (L Langa)
Credit balance as per bank account

R
2 300

180

R
2 100

400
300
900
3 000

FAC1502/1

3 000

(b)

CASH RECEIPTS JOURNAL — JANUARY 20.9 (extract)
Date

1
5
18
19
25
30

Details

CRJ 8

Analysis of
receipts
R
1 250
300

Sales
S Singh
Sales
Rental income

1 500
500

B Small (cheque 846 cancelled —
cheque 856 re-issued)
Sales
M Nkosi

2 000
400

Sales
R Amer
Sales

3 000
400
1 200

Bank
R
1 550
2 000
400
2 400
3 000
1 600
10 950

(c)

CASH PAYMENTS JOURNAL — JANUARY 20.9 (extract)

Cheque
number

Date

851
852
853

854
855
856
857
858
859
860
861

10
15
18
20
25
30

Details

Purchases
S Sono
Municipality
Water and electricity
Assessment rates

CPJ 8
Amount

Bank

R
1 500
100
150

100
50

Purchases
Salaries
B Small
H Ebrahim
Purchases
Furniture
Petty cash
R Seema

1 300
2 000
400
50
4 000
2 000
100
600
12 200

181

FAC1502/1

(d)

BANK STATEMENT — JANUARY 20.9
Date

Details

Cheque
number

Cheque
etc

Deposits

Balance

R
2 300 Dr
200 Dr
1 350 Cr
150 Dr
1 850 Cr
1 700 Cr
400 Cr
1 600 Dr
800 Cr
3 200 Dr
200 Dr
250 Dr
4 750 Cr
2 750 Cr
2 735 Cr
2 335 Cr
2 235 Cr
2 200 Cr
1 700 Cr

Balance
2 100
1 550

2
6
7
11
15
20
21
26

851

1 500

853
854
855

150
1 300
2 000

858

4 000

857

2 000

2 400
3 000
5 000
859

Interest
856
860

30
Bank charges
Stop order

2 000
15
400
100
35
500

(e) ADDITIONAL INFORMATION:
The stop order of R500 represents the annual inventory insurance premium with the Pay
Insurance Co.
. The deposit of R5 000 (26 January 20.9) was made by the tenant of an office, in respect of
the rental for January and February 20.9.
.

Required:
(1)

Prepare the cash receipts and cash payments journals of Monday Trading for
January 20.9.

(2)

Show the bank account in the general ledger of Monday Trading, properly balanced
at 31 January 20.9.

(3)

Prepare the bank reconciliation statement of Monday Trading as at 31 January 20.9.
Begin with the balance as per bank statement.

Solution: Revision exercise 1
MONDAY TRADING
(1)

CASH RECEIPTS JOURNAL – JANUARY 20.9 (extract)

Date
31

FAC1502/1

182

Details
Subtotal
Rental income

Bank
10 950
5 000
15 950

CASH PAYMENTS JOURNAL – JANUARY 20.9 (extract)
Date
31

Details

Bank

Subtotal
Interest expenses
Bank charges
Insurance

12 200
15
35
500
12 750

(2)

GENERAL LEDGER

Bank

20.9
Jan 31

Receipts

CRJ

R
15 950

20.9
Jan 1
31

Cr
Balance
Payments
Balance

b/d
CPJ
c/d

15 950
20.9
Feb 1

(3)

Balance

b/d

R
900
12 750
2 300
15 950

2 300

BANK RECONCILIATION STATEMENT AS AT 31 JANUARY 20.9
Dr
R

Credit balance as per bank statement
Deposit not yet credited
Cheques not yet presented for payment:
No 849 – dated 27/12/20.8 (L Langa)
No 852 – dated 3/1/20.9 (S Sono)
No 861 – dated 30/1/20.9 (R Seema)
Debit balance as per bank account

Cr
R
1 700
1 600

300
100
600
2 300
3 300

3 300

8.5.2 Revision exercise 2
The following information relates to Ontario Traders:
(a) Pencil totals of the bank column of the cash journals at
31 December 20.8:

. Cash receipts journal
. Cash payments journal

25 718
27 115

(b) Item that appeared on the bank reconciliation statement at
30 November 20.8 but not on the bank statement:
. Cheque No 632, issued to L Marino on 15 June 20.8

231

(c) Items that appeared in the cash receipts and cash payments journals, but not on the bank statement:
. A deposit entered in the cash receipts journal on 31 December 20.8,
banked on 3 January 20.9

183

792

FAC1502/1

. Cheque No 985, issued on 29 December 20.8 to the
municipality to pay the water and electricity account

2 211

(d) Items that appeared on the bank statement but not in the cash
journals:
.
.
.
.
.

Bank charges
Interest on bank overdraft
A stop order for an annual donation to a primary school
A ‘‘R/D’’ cheque originally received from debtor, S Scholly
A deposit, paid directly into the bank account of Ontario
Traders, by a tenant F Flee

(e) Balance of the bank account in the general ledger at
30 November 20.8 (debit)
(f) Balance as per bank statement at 31 December 20.8 (favourable)

62
70
220
308
1 100

297
990

Required:
(1) Complete the cash receipts and cash payments journal of Ontario Traders for
December 20.8.
(2) Show the bank account in the general ledger of Ontario Traders properly balanced at
31 December 20.8.
(3) Prepare the bank reconciliation statement of Ontario Traders as at
31 December 20.8. Begin with the balance as per bank statement.

Solution: Revision exercise 2
ONTARIO TRADERS
(1)

CASH RECEIPTS JOURNAL – DECEMBER 20.8 (extract)

Date
31

Details
Subtotal
Rental income
L Marino/Trade payables control

Bank
25 718
1 100
231
27 049

CASH PAYMENTS JOURNAL – JANUARY 20.8 (extract)
Date
31

FAC1502/1

184

Details
Subtotal
Bank charges
Interest on bank overdraft
Donations
R Scholly/Trade receivables control

Bank
27 115
62
70
220
308
27 775

(2) GENERAL LEDGER
Dr

Bank

20.8
Dec 1
31

Balance
Receipts
Balance

b/d
CRJ
c/d

R
297
27 049
429

20.8
Dec 31

Cr
Payments

CPJ

27 775

R
27 775

27 775
20.9
Jan 1

Balance

b/d

429

(3) BANK RECONCILIATION STATEMENT AS AT 31 DECEMBER 20.8
Debit
R
Credit balance per bank statement
Deposit not yet credited by the bank
Cheque not yet presented for payment:
No 985 – dated 29/12/20.8 (water and electricity)
Credit balance per bank account

Credit
R
990
792

2 211
429
2 211

2 211

8.5.3 Revision exercise 3
The following information for September 20.7 relates to Mic Shops:
(a) Pencil totals of the bank columns in the cash journals at
30 September 20.7:

. Cash receipts journal
. Cash payments journal

8 658
7 932

(b) Credit balance per bank account in the general ledger at
31 August 20.7
(c) Unfavourable balance per bank statement at 30 September 20.7
(d) Items appearing in the cash journals but not on the bank statement:
. A deposit on 30 September 20.7
. Cheque No 2894 issued on 30 September 20.7 to pay the
telephone account

800
104
808
450

(e) Items appearing on the bank statement but not in the cash journals:
. Bank charges
. Interest on bank overdraft
. A direct deposit made by P Parsons, a debtor
. A cheque issued by D Dickensen returned by the bank marked
‘‘R/D’’ (insufficient funds)
. A deposit meant for another client of the bank

35
85
300
90
175

(f) Cheque No 2867 for R118 issued to Pros Limited, a creditor, during the month was recorded
as R181 in the cash payments journal. This mistake was discovered when the CPJ was
compared with the bank statement.

185

FAC1502/1

Required:
(1) Complete the cash receipts and cash payments journals of Mic Shops for
September 20.7.
(2) Show the bank account in the general ledger of Mic Shops, properly balanced at
30 September 20.7.
(3) Prepare the bank reconciliation statement of Mic Shops as at
30 September 20.7. Begin with the balance as per bank statement.

Solution: Revision exercise 3
MIC SHOPS
(1) CASH RECEIPTS JOURNAL – SEPTEMBER 20.7 (extract)
Date
30

Details

Bank

Subtotal
P Parsons/Trade receivables control
Pros Limited/Trade payable control (correction of cheque 2867)

8 658
300
63
9 021

CASH PAYMENTS JOURNAL – SEPTEMBER 20.7 (extract)
Date
30

Details

Bank

Subtotal
Bank charges
Interest on bank overdraft
D Dickensen/Trade receivables control

7 932
35
85
90
8 142

(2) GENERAL LEDGER
Dr
20.7
Sep 30

Bank
Receipts

CRJ

R
9 021

20.7
Sep 1
30

Cr
Balance
Payments
Balance

b/d
CPJ
c/d

9 021
20.7
Oct 1

Balance

b/d

R
800
8 142
79
9 021

(3) BANK RECONCILIATION STATEMENT AS AT 30 SEPTEMBER 20.7

Debit balance per bank statement
Deposit not yet credited by the bank
Cheques not yet presented for payment:
No 2894 – dated 30/9/20.7 (telephone)
Debit erroneous deposit
Debit balance per bank account

Debit

Credit

R
104
808
450
175
79
808

FAC1502/1

186

808

8.5.4 Revision exercise 4
BOOKS OF BUWANG TRADERS
(a) BANK RECONCILIATION STATEMENT AS AT 30 APRIL 20.8
Dr

R
Credit balance per bank statement
Credit outstanding deposit
Debit cheques not yet presented:
No 420 – dated 20/11/20.7 (Donations)
No 691 – dated 17/1/20.8 (LL Traders)
No 715 – dated 28/2/20.8 (R Rex)

R
840,60
370,00

2 000,00
416,40
638,80

Credit error on bank statement
Credit balance per bank account

120,00
1 724,60
3 055,20

3 055,20

(b) The bank statement for May 20.8 reflected the following items which did not appear in the
cash journals:
.
.
.
.
.
.
.
.

Correction of error — R120
Deposit credited — R370
Cheque No 691 for R416,40
Dishonoured cheque from D Baloyi — R150
Cheque No 004 for R90 issued by another client of the bank
Chequebook — R28,50, service fee — R36,40, interest on overdraft — R19,80
Stop order for insurance premium — R290
Direct deposit of R200 by J Matla for rental

(c) The cash journals reflected the following differences from the bank statement:
. Deposits not yet entered by the bank — R1 450,00
. Cheques not yet presented:
No 802 – dated 3/5/20.8 (DR Limited) — R1 964,62
No 803 – dated 4/5/20.8 (AA Suppliers) — R2 134,20
(d) Cheque No 420 was issued on 20 November 20.7 in favour of Botmelo Day Care as a
donation. The day care centre has since closed down.
(e) Balances and pencil totals at the end of May 20.8:
. Cash receipts journal — R11 258,29
. Cash payments journal — R13 428,72
. Bank statement — R977,89 (favourable)

Required:
(1) Complete the cash receipts and cash payments journals of Buwang Traders for May
20.8.
(2) Show the bank account properly balanced.
(3) Prepare the bank reconciliation statement as at 31 May 20.8.

187

FAC1502/1

Solution: Revision exercise 4
BUWANG TRADERS
(1) CASH RECEIPTS JOURNAL – MAY 20.8 (extract)
Date
31

Details

Bank

Subtotal
Rental income
Donations (Cheque 420 cancelled)

11 258,29
200,00
2 000,00
13 458,29

CASH PAYMENTS JOURNAL – MAY 20.8 (extract)
Date
31

Details

Bank

Subtotal
D Baloye/Trade receivables control
Bank charges
Interest on overdraft
Insurance

13 428,72
150,00
64,90
19,80
290,00
13 953,42

(2) GENERAL LEDGER
Dr
20.8
May 31 Receipts
Balance

Bank
R
CRJ 13 458,29
c/d
2 219,73

20.8
May 1
31

Cr
R
b/d 1 724,60
CPJ 13 953,42

Balance
Payments

15 678,02

15 678,02
20.8
Jun 1

Balance

b/d

2 219,73

(3) BANK RECONCILIATION STATEMENT AS AT 31 MAY 20.8
Debit
R
Credit balance per bank statement
Deposit not yet credited by the bank
Cheques not yet presented for payment:
No 715 – dated 28/2/20.8 (R Rex)
No 802 – dated 3/5/20.8 (DR Limited)
No 803 – dated 4/5/20.8 (AA Suppliers)

90,00
2 219,73
4 737,62

188

R
977,89
1 450,00

638,80
1 964,62
2 134,20

Credit incorrect cheque on bank statement
Credit balance per bank account

FAC1502/1

Credit

4 737,62

COMMENTS
. The opening balance of the bank account of R1 724,60 is taken from the given (April’s)
bank reconciliation statement.
. Cheque 715 had still not been presented at the end of May and was recorded on the
bank reconciliation statement at 31 May 20.8.
. Cheque 420 had not been presented after six months. It was debited to the bank
account as it is a stale cheque.
. Interest on the overdraft was entered separately and was not included in the bank
charges.

8.5.5 Revision exercise 5
Books of Pitsi Dealers for August 20.4.
Petty cash balance 1 August 20.4 — R200
Petty cash payments — August 20.4:
Date
4
7
11
14
18
19
25
27

Details
Cleaner’s wages
Stamps
Cleaner’s wages
Stationery
Cleaner’s wages
Tea, coffee & milk
Cleaner’s wages
Owner took R30 for taxi fare

Cash voucher

Amount

072
073
074
075
076
077
078
079

R
60
15
60
35
60
40
60
30

On 15 August 20.4 and on 31 August 20.4 cash cheques were issued to restore the float to
R200.
Required:
(1)

Prepare a petty cash journal for August 20.4 with the following payment columns:
total, wages, postage, stationery and sundries.

(2)

Post to the petty cash control account in the general ledger and balance this account.

189

FAC1502/1

Solution: Revision exercise 5
PITSI DEALERS
(1)

PETTY CASH JOURNAL — AUGUST 20.4

PCJ6

Receipts

Payments
Date

Date

Fol

20.4

Details

Total
R

Petty
cash
voucher

Fol

20.4

Aug 1 b/d 200,00
15 CPJ6 170,00
15 CPJ6 190,00

Aug 4
7
11
14
18
19
25
27
30

b/d

Wages

Postage

Stationery

Sundries
Amount

Cleaner’s wages
Stamps
Cleaner’s wages
Stationery
Cleaner’s wages
Tea, coffee & milk
Cleaner’s wages
Taxi fare – owner

072
073
074
075
076
077
078
079

60,00
15,00
60,00
35,00
60,00
40,00
60,00
30,00

60,00

15,00

35,00

c/d

360,00
200,00

240,00

Balance

70,00
200,00

560,00

240,00

15,00

35,00

270,00

560,00
20.4
Sep 1

Total

Fol

Details

15,00
60,00
35,00
60,00
40,00

Refreshments

30,00

Drawings

60,00

200,00

(2) GENERAL LEDGER
Dr

Petty cash control

20.4
Aug 1
15
31

Balance
Bank
Bank

b/d
CPJ6
CPJ6

R
200
170
190

20.4
Aug 31

Cr
R
Petty cash
payments
Balance

PCJ6
c/d

560
20.4
Sep 1

Balance

b/d

200

SELF-ASSESSMENT
Now that you have studied this study unit, can you:

FAC1502/1

describe the nature and importance of cash?

describe how control over cash is exercised?

reconcile the bank statement balance with the bank account balance?

prepare a petty cash journal?

190

360
200
560

STUDY UNIT

9
Trade and other receivables

Learning outcome
Students should be able to know how all aspects of debtors are to be treated in the books
of an entity.

Contents

Page

Key concepts

192

9.1

Introduction

192

9.2

Settlement discount granted

192

9.3

Allowance for settlement discount granted

194

9.4

Interest charged

195

9.5

Credit losses (bad debts)

196

9.5.1 Writing off of credit losses (bad debts)

196

9.5.2 Allowance for credit losses

197

9.5.3 Increasing the allowance for credit losses (bad debts)

199

9.5.4 Decreasing the allowance for credit losses

201

9.5.5 Writing off credit losses (bad debts) when an allowance
for credit losses exists

202

9.5.6 Recovery of credit losses (bad debts) written off

205

9.5.7 VAT, credit losses and credit losses recovered

205

9.6

Presentation on the statement of financial position

206

9.7

Trade receivables control account

206

9.8

Revision exercises and solutions

213

9.8.1 Revision exercise 1

213

9.8.2 Revision exercise 2

213

191

FAC1502/1

9.8.3 Revision exercise 3

214

9.8.4 Revision exercise 4

216

Self-assessment

219

KEY CONCEPTS
.
.
.
.
.
.
.
.

Credit transaction
Trade debtors
Credit term
Settlement discount granted
Credit losses (Bad debts)
Current assets
Allowance for credit losses
Debtors control

9.1 Introduction
A sale made without the buyer paying at the time of the sale is known as a credit transaction.
The person or business owing money to an entity which originates from a credit sale is known
as a trade debtor. A debtor accepts responsibility for paying the debt within a specific period.
The period is known as a credit term and is predetermined in accordance with the credit policy
of the entity making the sale. Because some debtors do not pay their accounts, many firms
create an allowance for credit losses.
In this study unit we will concentrate on how debtors are encouraged to pay their accounts on
time. We will also look at the writing off of bad debts/credit losses, the creation and adjustment
of the allowance for credit losses.
Study paragraphs 9.1 and 9.2 of the prescribed book.

9.2 Settlement discount granted
Discount is often offered to debtors in order to encourage a quick settlement of their debts
within the stated credit term. The credit term will be shown on the credit invoice, for example,
30 days from the date of sale.
Study paragraph 9.3 of the prescribed book.

FAC1502/1

192

Exercise

9.1
A client purchased R2 850 worth of goods on credit on 1 March 20.0.
The client has one month (the credit term) in which to settle the debt. If the client pays
before 31 March 20.0, a discount of 2% will be granted. If the client settles the account
before 31 March 20.0 it means that the amount payable is R2 793, calculated as follows:
2
R2 850 7 R(2 850 6 100
)

= R(2 850 7 57)
= R2 793
If VAT at 14% is included in the R2 850, the VAT collected on behalf of the SA Revenue Service
(SARS) (recorded at the date of sale) will amount to R350 and will be recorded in the VAT
output account.
The selling price recorded in the sales account in the general ledger is R2 500. The fact that
discount has been granted does not affect the original selling price recorded in the general
ledger.
The discount will, however, have an influence on VAT. Although the debtor purchased the
goods for R2 850 the actual income for the business is R2 500. If 2% discount is allowed on the
R2 500 the income for the business is R2 450. VAT (calculated at 14%) on R2 450 is R343.
The original VAT of R350 is therefore overstated and must be reduced by R7, in other words
2% 6 R350. Such adjustments are made in the VAT input account and NOT in the VAT
output account. The reason for this is that the net sales (sales less sales returns) multiplied by
the VAT percentage, should result in the amount of VAT output.
The discount of R57 thus includes VAT of R7, which may be calculated as follows:
57
14
1 X 114 = R7

Solution Exercise

9.1

The accounting entries for the exercise are as follows:
Dr
20.0
Mar 1 Sales

Trade receivables control
R
2 850

20.0
Mar 31 Bank
Settlement
discount granted
VAT input

R
2 793
50
7
2 850

2 850
Dr

Sales
R

Dr
20.0
Mar 31 Trade receivables
control

20.0
Mar 1

Cr
R
Trade receivables
control

2 500

VAT input
R

20.0

193

FAC1502/1

VAT output
R

20.0
Mar 1

Cr
R
Trade receivables
control

350

Settlement discount granted

20.0
Mar 31 Trade receivables
control

Cr
R

Bank

20.0
Mar 31 Trade receivables
control

Cr
R

2 793

Settlement discount granted will be written off at the end of the financial period and subtracted
from sales in the statement of profit or loss and other comprehensive income. The influence of
discount on VAT was also discussed in paragraph 5.9.

9.3 Allowance for settlement discount granted
An entity with a settlement discount granted policy applicable to debtors who fully pay their
accounts in the settlement period must, at the end of the financial year create an allowance for
settlement discount granted for these sales that took place in the current financial year but for
who the settlement period falls in the next financial year. The allowance for settlement discount
granted will reduce the sales amount that will be recorded. When an allowance for settlement
discount granted is created, there are certain accounting procedures that have to be followed.
These procedures will be explained by way of the following example:

Exercise

9.2
On 30 June 20.0, the end of the financial year of Brio Traders, outstanding trade receivables
control account amounted to R30 000 and the sales amounted to R70 000.
The entity’s credit policy allows a settlement discount grated of 5% if the account is settled
within 30 days after the sale took place. Over the years the entity established that 90% of their
customers take up the settlement discount granted.
90% x R30 000 = R27 000 (debtors that might take up the settlement discount granted offer)
Allowance for settlement discount granted: R27 000 x 5% = R1 350.

Solution Exercise

9.2

The following accounting entries are necessary to create an allowance for settlement discount
granted:

FAC1502/1

194

BRIO TRADERS
GENERAL JOURNAL
20.0
Jun 30

Sales
Allowance for settlement discount granted
Allowance for settlement discount granted created at
year-end

Debit
R
1 350

Credit
R
1 350

GENERAL LEDGER
Dr

Sales

20.0
Jun

R
Allowance for
settlement discount
granted

Cr
20.0
Jun 30 Balance

R
70 000

1 350

Allowance for settlement discount granted

20.0
Jun 30 Sales

R
1 350

COMMENTS
. The sales for the year is, an income of R68 650 and is disclosed as "Revenue" in the
statement of profit or loss and other comprehensive income for the year ended
30 June 20.0.
. Remember that the trade receivable control account is an asset account and
allowance for settlement discount granted is a contra asset account. The allowance for
settlement discount granted must be deducted from the trade receivables control
account (R30 000) to determine the amount at which trade receivables must be taken
into account under trade and other receivables in the statement of financial position.

Disclosure on the statement of financial position
NAME OF ENTITY
STATEMENT OF PROFIT OR LOSS AND OTHE COMPREHENSIVE INCOME FOR THE
YEAR ENDED
R
Revenue/Income/Sales
Less: Settlement discount granted
Less: Allowance for settlement discount granted

xxx xxx
xx xxx
xx xxx

Debtors are current assets. Current assets are assets which the entity can reasonably expect
to realize within the normal business cycle of one year.

195

FAC1502/1

According to IFRS, current assets must be disclosed as follows on the statement of financial
position:
NAME OF ENTITY
STATEMENT OF FINANCIAL POSITION AS AT
R
ASSETS
Current assets

xxx xxx

Inventories
Trade receivables

xx xxx
xx xxx

Less: Allowance for credit losses
Less: Allowance for settlement discount granted
Cash and cash equivalents
Total assets

x xxx
x xxx
x xxx
xxx xxx

EQUITY AND LIABILITIES

9.4 Interest charged
Many entities charge interest on the outstanding debt if an account is not paid within the credit
term. Suppose the entity which sold the goods in the above example has a policy of charging
18% interest per annum on accounts that are not paid within the stated credit terms. If the client
does not pay the account of R550 before 31 March 20.0, but only pays it at the end of April, he
will be charged 18% per annum interest (for 1 month) on R550 and will have to pay R558,25,
calculated as follows:
R550 + R(550 6

18
100

1
12

)

= R(550 + 8,25)
= R558,25
The interest increases the outstanding balance on the individual debtor’s account as well as
the balance in the trade receivables control account. This transaction is recorded by means of
a general journal entry.

9.5 Credit losses (bad debts)
When a credit transaction occurs there is always a possibility that the debt might not be paid.
These debts which are never paid are known as credit losses or irrecoverable debts. Because
there is always the possibility that some debts will not be paid, most entities have a policy of
creating an allowance for credit losses.

9.5.1 Writing off of credit losses (bad debts)
When management decides that a specific debt will not be recovered, the amount must be
written off as a credit loss. When credit losses are written off the debtor’s personal account and
the trade receivables control account are affected. The amount of the credit loss will be debited to
the credit losses account (a nominal account) and credited to the debtor’s personal account and
the trade receivables control account (a statement of financial position account).
Study paragraphs 9.4 to 9.6 of the prescribed book.

FAC1502/1

196

Exercise

9.3
On 15 May 20.0 AM Traders was informed that A Langa, a debtor who owed the entity R660,
was declared insolvent. The amount must be written off as irrecoverable. The balance on the
trade receivables control account at 30 April was R18 000.

Solution Example

9.3

The accounting entries are as follows:

AM TRADERS
GENERAL JOURNAL
Fol
20.0
May 15 Credit losses
A Langa/Trade receivables control
Write A Langa’s account off as irrecoverable

Debit
R
660

Credit
R
660

GENERAL LEDGER
Dr
20.0
May 1

Trade receivables control
Balance

b/d

R
18 000

20.0
May 15

Credit losses

20.0
May 15 Trade receivables
control

R
660

Credit losses

Cr
R

660

TRADE RECEIVABLES LEDGER
A Langa

20.0
May 1

Account rendered
Credit losses

Debit

Credit

Balance

660

660
—

9.5.2 Allowance for credit losses
It is customary for entities selling goods on credit to create an allowance for credit losses. This
allowance is based on the estimated credit losses (bad debts). The prospect of not realising all
debts is typical of this type of uncertainty. When an allowance for credit losses is created, there
are certain accounting procedures that have to be followed. These procedures will be
explained with the aid of the following example:

197

FAC1502/1

Exercise

9.4
On 30 June 20.0, the end of the financial year of Trio Traders, outstanding trade debtors
amounted to R20 000.
The financial manager determined that the allowance for credit losses account should amount
to R800 at 30 June 20.0.

Solution Exercise

9.4

The following accounting entries are necessary to create a new allowance for credit losses:

TRIO TRADERS
GENERAL JOURNAL
Debit

Credit

20.0
Jun 30

Credit losses
Allowance for credit losses
Allowance for credit losses created
at year end

800
800

GENERAL LEDGER
Dr

Trade receivables control

20.0
Jun 30

R
Balance

b/d

20 000

Allowance for credit losses
20.0
Jun 30

Dr
20.0
Jun 30

FAC1502/1

198

Credit losses
R
Allowance for
credit losses

800

Cr
R

Credit losses

800

CLOSING JOURNAL ENTRY
Debit

Credit

20.0
Jun 30 Profit or loss
Credit losses
Closing credit losses off to the profit
or loss account

800
800

GENERAL LEDGER
Dr

Credit losses

20.0
Jun 30

R
Allowance for
credit losses

20.0
Jun 30

Cr
R
800

Profit or loss

800

Profit or loss (extract)

20.0
Jun 30

Credit losses

R
800

COMMENTS
. When an allowance is created the only accounts which are affected are the credit
losses account (a nominal account) and the allowance for credit losses (a contra asset
account). In the general ledger the balance on the trade receivables control account
remains R20 000. The trade receivables’ control account will only be credited when
actual credit losses are verified.
. The allowance for credit losses (R800) is deducted from trade receivables (R20 000).
The R19 200 is shown in the statement of financial position as current assets under
trade and other receivables.
. The R800 credit losses is closed off to the profit and loss account.

9.5.3 Increasing the allowance for credit losses (bad debts)
Ex ercise

9.5
On 30 June 20.1 the outstanding trade debtors of Trio Traders (follows on Exercise 10.3)
amounted to R30 000. (Credit losses already written off during the year amounted to R730.)
The financial manager determined that the allowance for credit losses account should amount
to R1 200 at 30 June 20.1.

199

FAC1502/1

Solution Exercise

9.5

The following accounting entries are necessary to adjust the allowance for credit losses:

TRIO TRADERS
GENERAL JOURNAL

20.1
Jun 30 Credit losses
Allowance for credit losses
Allowance for credit losses adjusted:
New allowance
Existing allowance
Amount needed for adjustement

Debit

Credit

R
400
400

R
1 200
800
400

GENERAL LEDGER
Dr

Trade receivables control

20.1
Jun 30

Balance

b/d

R
30 000

Allowance for credit losses
20.0
Jul 1
20.1
Jun 30

Balance
Credit losses

b/d

R
800
400
1 200

Credit losses

20.1
Jun 30

Balance
Allowance for
credit losses

b/d

R
730

20.1
Jun 30

Profit or loss

R
1 130

400
1 130

1 130

COMMENTS
. The credit losses written off during the year were debited to the credit losses account
(the current balance of R730) and were credited to the trade receivable control
account before the balance of R30 000 was calculated on the control account.

FAC1502/1

200

. The trade receivables control account is not affected by a change in the allowance for
credit losses.
. The allowance for 20.0 (R800) is deducted from the allowance calculated for 20.1
(R1 200). Only the difference is debited to credit losses and credited to the allowance
for credit losses.
. Remember that the trade receivables control account is an asset account and
allowance for credit losses is a contra asset account. The allowance for credit losses
(R1 200) must be deducted from the trade receivables control account (R30 000) to
determine the amount at which debtors must be taken into account under trade and
other receivables in the statement of financial position.
. The credit losses for the year (R730) and the difference in the allowance (R400) are
written off as an expense in the profit and loss account (R1 130).

9.5.4 Decreasing the allowance for credit losses
Exe rcise

9.6
On 30 June 20.2 the outstanding trade debtors of Trio Traders (follows on Exercise 9.5)
amounted to R25 000. (Credit losses already written off during the year amounted to R960.)
The financial manager determined that the allowance for credit losses account should amount
to R1 000 at 30 June 20.2.

Solution Exercise

9.6

The following accounting entries are necessary to adjust the allowance for credit losses:

TRIO TRADERS
GENERAL JOURNAL

20.2
Jun 30 Allowance for credit losses
Credit losses
Allowance for credit losses adjusted:
Existing allowance
New allowance (R25 000 6 4%)
Amount needed for adjustment

Debit

Credit

R
200
200

R
1 200
1 000
200

201

FAC1502/1

GENERAL LEDGER
Dr

Trade receivables control

20.2
Jun 30

Balance

R
25 000

b/d

Allowance for credit losses

20.2
Jun 30

R
200

Credit losses
Balance

c/d

20.1
Jul 1

Balance

Cr
b/d

1 000
1 200

1 200
20.2
Jul 1

Credit losses

20.2
Jun 30

R
960

Balance

b/d

R
1 200

960

20.2
Jun 30

Balance

b/d

1 000

Cr
R
Allowance for
credit losses
Profit or loss

200
760
960

COMMENTS
. The trade receivables control account is not affected by changes in the allowance for
credit losses.
. The credit balance that has increased from the original R800 to R1 200 must now be
reduced to R1 000. This has to be done by making a debit entry in the account.
However, the balance carried forward on the allowance for credit losses account will
always be a credit balance.
. The fact that in the years 20.0 and 20.1 the entries in the credit losses account have
been debited does not mean that all the entries posted to the account will be debits. It
is self-evident that if the allowance is decreased, the difference between the existing
and the new allowance has to be added back. The only way this can be done is to
debit the allowance for credit losses account and credit the credit losses account.

9.5.5 Writing off credit losses (bad debts) when an allowance for credit
losses exists
If credit losses are written off where an allowance for credit losses exists, one of two methods
can be followed:
METHOD 1:
As credit losses occur, the credit losses can be written off against the allowance account: debit
the allowance account and credit the debtor’s personal account and the trade receivables
control account.

FAC1502/1

202

Exercise

9.7
On 30 November 20.0 Trio Traders (follows on Exercise 9.3) was informed that B Down, a
debtor who owed R730, was declared insolvent.
During the financial year that ended on 30 June 20.1 credit sales amounted to R40 000 and
R29 270 was received from debtors in payment of their accounts. The financial manager
determined that the allowance for credit losses account should amount to R1 200 at
30 June 20.1.

Solution Exercise

9.7

The accounting entries are as follows:

TRIO TRADERS
GENERAL JOURNAL
Debit

Credit

20.1
Nov 30 Allowance for credit losses
B Down/Trade receivables control
Write B Down’s account off as irrecoverable

730
730

GENERAL LEDGER
Dr

Trade receivables control

20.0
Jul 1
Balance
20.1
Jun 30 Sales

b/d

R
20 000

20.0
Nov 30

40 000

20.1
Jun 30

Cr
R
Allowance for
credit losses

730

Bank
Balance

c/d

60 000
20.1
Jul 1

Balance

Dr
20.0
Nov 30 Trade receivables
control
20.1
Jun 30 Balance

b/d

29 270
30 000
60 000

30 000

Allowance for credit losses

c/d

20.0

730

Jul 1
20.1
Jun 30

1 200

Cr
R

Balance

b/d

Credit losses*

800
1 130

1 930

1 930
20.1
Jul 1

Balance

b/d

1 200

*Balancing figure

203

FAC1502/1

Dr
20.1
Jun 30

Credit losses
R
Allowance for
credit losses

20.1
Jun 30

R
1 130

Profit or loss

1 130

TRADE RECEIVABLES LEDGER
B Down

20.0
Jul 1
Nov 30

Debit

Credit

Account rendered
Allowance for credit losses

Balance
R
730
—

730

Method 2:
The allowance for credit losses account remains unchanged during the year. Credit losses that
occur during the year are written off against the credit losses account.

Exercise

9.8
On 30 November 20.0 Trio Traders (follows on Exercise 9.3) was informed that B Down, a
debtor who owed R730, was declared insolvent.
During the financial year that ended on 30 June 20.1 credit sales amounted to R40 000 and
R29 270 was received from debtors in payment of their accounts. The financial manager
determined that the allowance for credit losses account should amount to R1 200 at 30 June 20.1.

Solution Exercise

9.8

The accounting entries are as follows:

TRIO TRADERS
GENERAL JOURNAL
Debit

Credit

20.0
Nov 30 Credit losses
B Down/Trade receivables control
Write B Down’s account off as irrecoverable

730
730

GENERAL LEDGER
Dr
20.0
Jul 1
20.1
Jun 30

Trade receivables control
Balance

b/d

Sales

40 000

20.1
Jul 1

FAC1502/1

204

R
20 000

60 000
Balance

b/d

30 000

20.0
Nov 30
20.1
Jun 30

Cr
R
730

Credit losses
Bank
Balance

c/d

29 270
30 000
60 000

Allowance for credit losses
20.0
Jul 1
20.1
Jun 30

Balance

b/d

R
800

Credit losses

400
1 200

Credit losses

20.0
Nov 30
20.1
Jun 30

R
Trade receivables control

730

Allowance for
credit losses

400

20.1

Jun 30

Profit or loss

1 130

TRADE RECEIVABLES LEDGER
B Down
Debit

Credit

Balance

20.0
Jul 1
Account rendered
Nov 30 Credit losses

730

730
—

COMMENT
. The amount written off as credit losses in the profit or loss account remains
unchanged. (Refer to previous exercise.)

9.5.6 Recovery of credit losses (bad debts) written off
When money is recovered that was previously written off as irrecoverable (a credit loss), it must
be recorded and disclosed separately. An account, credit losses recovered, will be opened
for this purpose. The money recovered will be debited against the bank account and the credit
losses recovered account will be credited. Credit losses recovered are seen as an income and
are added to other operating income in the statement of profit or loss and other comprehensive
income. This is to cancel the expense written off previously.
Study paragraph 9.7 of the prescribed book.

9.5.7 VAT, credit losses and credit losses recovered
The amount owed by a debtor always includes VAT. The VAT collected on credit sales is paid
over every second month to the SA Revenue Service. If a debt is not paid and has to be written
off, the seller is entitled to claim the VAT portion that was included in the credit losses back from
the SA Revenue Service.
Similarly, when a debt/credit loss which was previously written off is recovered, the seller is
responsible for paying over to the SA Revenue Service the VAT component of that sale.
Study paragraphs 9.8 to 9.11 of the prescribed book.

205

FAC1502/1

9.6 Presentation on the statement of financial position
Debtors are current assets. Current assets are assets which the entity can reasonably expect
to realise within the normal business cycle of one year.
According to IFRS, current assets must be disclosed as follows on the statement of financial
position:

NAME OF ENTITY
STATEMENT OF FINANCIAL POSITION AS AT .........................
ASSETS
Non-current assets
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total assets
EQUITY AND LIABILITIES

R
xxx
xx
xx
x
xxx

xxx
xxx
xxx
xxx
xxx

9.7 Trade receivables control account
Many entities sell their goods on credit. If only one or two credit transactions were involved an
account for the debtor can be opened in the general ledger and the specific debtor will be debited
and the sales account credited with the amount of the transaction. But, as we explained in study
unit 5, if an entity mainly, or to a great extent, sells on credit, a sales journal can be used for all the
credit sales transactions. A separate ledger is then kept in which an account for every debtor is
listed. Posting from the journals to the trade receivables ledger takes place on a daily basis.
To obtain a complete record of all the transactions, a control account is kept in the general
ledger. The trade receivables control account contains a summary of all the entries made in
the individual debtors’ accounts. Posting to the trade receivables’ control account takes place
once a month when the totals of all the subsidiary journals are finalised.
Study paragraphs 9.12 to 9.14 of the prescribed book.

FAC1502/1

206

The procedure can be summarised as follows:

Exercise

Individual entries in the sales journal

Posted to

Personal accounts of debtors (debit
side) in the trade receivables ledger
on the day the transaction took place.

Total of the debtors control column in
the sales journal

Posted to

Trade receivables control account
(debit side) on the last day of the
month.

Individual entries in the sales returns
journal

Posted to

Personal accounts of debtors (credit
side) in the trade receivables ledger
on the day the transaction took place.

Total of the debtors control column in
the sales returns journal

Posted to

Trade receivables control account
(credit side) on the last day of the
month.

Individual entries in the cash receipts
journal

Posted to

Personal accounts of debtors (credit
side) in the trade receivables ledger
on the day the transaction took place.

Total of the debtors control column in
the cash receipts journal

Posted to

Trade receivables control account
(credit side) on the last day of the
month.

9.9
The opening balances on the individual debtors are: debtor A: R450,00, debtor B: R680,00 and
debtor C: R220,00.

JOURNALS
SALES JOURNAL — MAY 20.2
Date
2

Debtor
A
B
C

SJ1

Fol

Sales

VAT output

Trade receivables

DL1
DL2
DL3

R
200,00
400,00
100,00

R
20,00
40,00
10,00

R
220,00
440,00
110,00

700,00

70,00

770,00
GL 5

SALES RETURNS JOURNAL — MAY 20.2
Date
8

Debtor
B
C

SRJ1

Fol

Sales returns

VAT output

Trade receivables

DL2
DL3

R
40,00
20,00

R
4,00
2,00

R
44,00
22,00

60,00

6,00

66,00
GL 5

207

FAC1502/1

CASH RECEIPTS JOURNAL — MAY 20.2
Date

Details

A
B
C

Fol

Bank

CRJ1
Trade
receivables

Discount
allowed

VAT
input

R
600,00
400,00
500,00

R
670,00
400,00
522,00

R
64,00
20,00

2,00

1 500,00

1 592,00

84,00

8,00

DL1
DL2
DL3

R
*6,00

GL5
* Approximation

GENERAL JOURNAL — MAY 20.2
Date

Details

C/trade receivables
Furniture
VAT output
Sold furniture on credit to C
Furniture
VAT input
C/trade receivables
Received
furniture back from C

J1
Fol

DL3

Total
Debit

Credit

R
803,00
730,00
73,00

DL3

230,00
23,00
253,00

1 056,00

Required:
(1)

Prepare the trade receivables control account in the general ledger.

(2)

Prepare the ledger accounts of the three debtors in the trade receivables ledger.

* List of opening balances of debtors
R
A
B
C

FAC1502/1

208

450,00
680,00
220,00
1 350,00

Solution Exercise

9.9

GENERAL LEDGER
Dr
20.2
May 1
31

Trade receivables control
Balance*
Sales
Furniture
VAT output

R
b/d 1 350,00
SJ1
770,00
J1
730,00
J1
73,00

20.2
May 31

Sales returns
Bank and
discount
Furniture
VAT input
Balance

GL5

SRJ1

R
66,00

CRJ1 1 592,00
J1
230,00
J1
23,00
c/d 1 012,00

2 923,00
20.2
Jun 1

Balance**

b/d

2 923,00

1 012,00

GOLDEN RULE
The trade receivables control account is a summary of ALL transactions related to all the
individual debtor accounts in the trade receivables ledger.

GOLDEN RULE
What was done (Dr or Cr) to the individual debtor accounts, must be done IN TOTAL to the
trade receivables control account.

TRADE RECEIVABLES LEDGER (General ledger format)
Dr
20.2
May 1
2

A
Balance*
Sales

b/d
SJ1

R
450,00
220,00

DL1
20.2
May 15

R
Bank and
discount

CRJ1

670,00

Dr
20.2
May 1
2

20.2
Jun 1

Balance*
Sales

b/d
SJ1

DL2
20.2
May 8
15
31

Sales returns
Bank
Balance

SRJ1
CRJ1
c/d

1 120,00
Balance**

b/d

670,00
670,00

B
R
680,00
440,00

Cr
R
44,00
400,00
676,00
1 120,00

676,00

209

FAC1502/1

20.2
May 1
2
15

Balance*
Sales
Furniture

b/d
SJ1
J1

R
220,00
110,00
803,00

20.2
May 8
15
18
31

1 133,00
20.2
Jun 1

Balance**

b/d

Sales returns
Bank and
discount
Furniture
Balance

DL3

SRJ1

R
22,00

CRJ1
J1
c/d

522,00
253,00
336,00
1 133,00

336,00

** List of closing balances of debtors
R
A
B
C

—
676,00
336,00
1 012,00

GOLDEN RULE
The total of all the balances of the individual debtor accounts in the trade receivables
ledger must equal the balance of the trade receivables control account in the general
ledger.

COMMENTS
. The totals from the journals are posted to the control account.
. The opening and closing balances on the control account are the same as the
totals of the lists of balances of the individual debtors.
. When debtors settle their accounts and they receive discount, VAT is also affected.
The actual amount received from the debtor is shown in the bank column, the discount
in the settlement discount allowed column and the VAT that must be cancelled in the
VAT input column. These three amounts must add up to the amount shown in the
debtors column. The total of the debtors column that is posted to the trade receivables
control account at the end of the month already includes discount and is posted as
bank and discount. The totals of the settlement discount granted column and the VAT
input column are consequently not credited separately to the trade receivables control
account.

FAC1502/1

210

Exercise 9.10
The following information in respect of June 20.1 was obtained from the financial records of
N Nelson:
R
19 190

Balance on the trade receivables control account – 31 May 20.1
Totals for the month:
Cash receipts journal:
Trade receivables column
Settlement discount granted column
Sales journal (Trade receivables column)
Sales returns journal (Trade receivables column)
General journal:
Credit losses written off
Certain accounts with debit balances transferred from the creditors
ledger to the trade receivables ledger
Interest charged on overdue accounts
List of individual debtors per trade receivables ledger

16
1
19
4

860
470
500
615
751

46
160
16 230

In the process of reconciling the balance on the trade receivables control account with the list
of balances per trade receivables ledger, the following errors were discovered:
(1) Sales invoice No 1001 for R2 270 which had been entered correctly in the sales journal,
was entered in A Abel’s account as R2 770.
(2) Credit note No 52 for R30 was entered correctly in the sales returns journal but erroneously
posted as a debit to the account of B Brown.
(3) A cheque for R75 received from P Pet in full settlement of his account was incorrectly
analysed as sales in the cash receipts journal.
(4) The sales journal was overcast by R1 000. (‘‘Overcast’’ means that the amounts have
been added up incorrectly and that the total amount is R1 000 more than it should be.)

Required:
(1)

Prepare the trade receivables control account at 30 June 20.1 properly balanced.
Each entry must indicate the correct contra ledger account.

(2)

Reconcile the balance on the trade receivables control account as determined in 1
above with the total of the debtors list.

211

FAC1502/1

Solution Exercise

9.10

N NELSON
(1) GENERAL LEDGER
Dr

Trade receivables control

20.1
Jun 1
30

Balance
Sales
R(19 500 7
1 000)
(1)
Trade payables
control (2)
Interest received

b/d

R
19 190

18 500

GJ
GJ

46
160

20.1
Jun 30

Cr
Bank
(3)
Sales returns
Credit losses

CRJ
SRJ
GJ

R
16 860
4 615
751

Sales
Balance

GJ
c/d

75
15 595

37 896
20.1
Jul 1

Balance

b/d

37 896

15 595

(2) RECONCILIATION
R
Total of the list of debtors’ balances
Less: Error on A Abel’s account
R(2 770 7 2 270)
(5)
Incorrect posting of credit note, B Brown
(R30 6 2)
(4) and (5)
Correction of error — P Pet
Balance as per Trade receivables control account

R
16 230

(500)
(60)
(75)

(635)
15 595

Remarks
(1)
(2)

(3)
(4)

(5)

When an error is made in totalling a journal the mistake only affects the control account; it
cannot affect the debtors list.
It is possible for a creditor of a business to be a debtor of that business as well. It can also
happen that a debtor may have a credit balance on his account. If either of these
situations occurs it is advisable to transfer the debit or credit amount to the trade
receivables or trade payables control accounts respectively.
The amount in the debtors column is R16 860. This amount is the total amount received
from debtors including any settlement discount granted.
When an entry was made on the wrong side of an account, the effect of the correction is
double the amount of the error. First, the wrong entry must be cancelled and then the
amount must be correctly entered.
In cases of both A Abel and B Brown, the entries in the control account are correct. The
errors have to be corrected in the accounts of the debtors and then on the list.

When answering a question on the reconciliation of a trade receivables control account with the
list of debtors, it is very important that you read the question very carefully. As you are reading,
decide what type of error is involved. Also ensure that when you do the control account, you
use the correct contra ledger account.

FAC1502/1

212

9.8 Revision exercises and solutions
9.8.1 Revision exercise 1
Client A buys R750 of goods from B Enterprises. Client A has 60 days in which to settle the
account. If the account is settled within 30 days a discount of 5% is granted. If the account is
paid after 30 days but on or before 60 days, no discount is granted. If the account is not paid
within 60 days, interest of 20% per annum is charged.
Which of the following statements is incorrect?
(a)
(b)
(c)
(d)

The amount payable at the end of 30 days is R712,50.
The amount of interest due after 60 days is R24,66.
The credit term is 30 days.
The credit term is 60 days.

Solution: Revision exercise 1
Statement (c) is incorrect.
The credit term is 60 days. If the client pays the debt within 30 days it means that he can take
advantage of the discount granted by the entity.

9.8.2 Revision exercise 2
The following information relates to Source Boutique:
(1) Balances at 28 February 20.3:

Trade receivables control
Credit losses recovered

42 000
2 600

(2) Additional information:
(a) An amount of R800, previously written off as a credit loss, was recovered on 1 July
20.2 and credited to the debtor’s account.
(b) Debtors accounts to the amount of R1 500, outstanding since
1 March 20.2, must be written off.
(c) It was determined that the allowance for credit losses account should amount to
R1 652 at 28 February 20.3.
Which of the following amounts will be shown as credit losses in the statement of profit or loss
and other comprehensive income of Source Boutique for the year ending 28 February 20.3?
(a)
(b)
(c)
(d)

R3 152 {R1 652+R1 500}
R3 088 {R1 588+R1 500}
R1 500
R2 352 {R(1 500 7 800) + R1 652}

Solution: Revision exercise 2
The correct statement is (a), R3 152.
Calculation:
Credit losses
Allowance for credit losses

R
1 500
1 652
3 152

* To post a credit loss recovered to the trade receivables control account is incorrect. The
journal entry to correct the entry is as follows:

213

FAC1502/1

JOURNAL ENTRY
20.3
Feb 28

J1
R
800

Trade receivables control
Credit losses recovered
Reversal of entry made 1/7/20.2

R
800

The trade receivables control account balance will be increased by this entry and decreased by
the credit loss written off.
JOURNAL ENTRY
20.3
Feb 28

J2
R
1 500

Credit losses
Trade receivables control
Credit losses written off

R
1 500

Trade receivables control

20.3
Feb 28

Balance
Credit losses
recovered

b/d

R
42 000

800

20.3
Feb 28

Cr
Credit losses
Balance

J2
c/d

42 800
20.3
Mar 1

Balance

b/d

R
1 500
41 300
42 800

41 300
Credit losses

20.3
Feb 28

R
Trade receivables control
Allowance for
credit losses*
(creation of
new allowance)

1 500

1 652

20.3
Feb 28

R
Profit or
loss*

3 152

* The journal entries (J3 and J4) indicated in the credit losses account are obvious and are
therefore not shown.

9.8.3 Revision exercise 3
The following information relates to Dumpies Traders at 28 February 20.1:
(1) Balances:
Trade receivables control account 28/2/20.0
Allowance for credit losses 28/2/20.0
Credit losses recovered
Credit sales
Settlement discount granted

R
55
3
2
305
4

000
240
500
000
200

(2) Additional information:
During the year R270 000 was collected (received) from debtors in respect of credit
sales. Debtor J Solomon was declared insolvent and his account of R500 has to be
written off. It was determined that the allowance for credit losses account should amount
to R4 265 at 28 February 20.1.

FAC1502/1

214

Solution: Revision exercise 3
Calculation:
Dr
20.0
Mar 1
20.1
Feb 28

Trade receivables control

Balance

b/d

Sales

R
55 000
305 000

20.1
Feb 28 Bank
(2)
Settlement discount
granted
(2)
Allowance for
credit losses
Balance
(1)

360 000
20.1
Mar 1

Balance

b/d

85 300

R
270 000
4 200

c/d

500
85 300
360 000

(1)

Remarks
(1) The balance on the trade receivables control account is always carried forward to the next
financial period.
(2) The amount of cash received from debtors does not include settlement discount granted to
debtors. The total amount in the debtors column of the cash receipts journal will be
R274 200, which then includes the Settlement discount granted.
The journal entries and general ledger accounts in respect of the allowance are as follows:
(Method 1 was followed – refer to paragraph 9.4.5.)
GENERAL JOURNAL
20.1
Feb 28

R
Allowance for credit losses
J Solomon/Trade receivables control
Writing off of amount owed by J Solomon
Credit losses
Allowance for credit losses
Adjustment of allowance
Allowance
* Add: Credit loss written off
Less: Existing allowance
Amount needed

R
500
500

1 525
1 525
R
4 265
500
4 765
3 240
1 525

215

FAC1502/1

GENERAL LEDGER
Dr

Allowance for credit losses

20.1
Feb 28

R
Trade receivables control
Balance

c/d

500
4 265

20.0
Mar 1
20.1
Feb 28

Balance

Cr
b/d

Credit losses

1 525

4 765

4 765
20.1
Mar 1

R
3 240

Balance

b/d

4 265

Credit losses

20.1
Feb 28

R
Allowance for
credit losses

20.1
Feb 28

1 525

Cr
R
Profit or
loss

1 525

COMMENT
. Irrespective of which method is followed (refer to paragraph 9.5) the balance on the
allowance for credit losses account will be R4 265, and R1 525 will be debited to the
profit or loss account as credit losses.

9.8.4 Revision exercise 4
(1) The following information was obtained from the financial records of Fine Traders on
28 February 20.8:
R
Balance of allowance for credit losses account 28/2/20.7
Balance of trade receivables control account 28/2/20.7
List of individual debtors as per trade receivables ledger
Totals for the month:
Cash receipts journal:
Trade receivables column
Settlement discount granted column
Sales column
Trade payables column
Cash payments journal:
Trade payables column
Trade receivables column (cheques dishonoured)
Purchases column
Sales journal
Purchases journal
Sales returns journal (all on credit sales)
Purchases returns journal

FAC1502/1

216

510
10 200
11 520

69 140
3 000
101 100
1 400
80
3
60
69
53
1
2

000
200
000
020
800
000
150

(2) ADDITIONAL INFORMATION:
(a) The debtors column in the cash receipts journal was overcast by R1 000.
(b) The creditors column in the purchases journal was overcast by R2 000.
(c) A sales invoice for the amount of R600 was entered twice in the sales journal and posted
twice to the personal account of B Broad.
(d) Credit note No 31, for R500, was credited to the account of T Thin, but no other entry was
made in the books.
(e) An invoice for the amount of R50 was correctly entered in the purchases journal, but
posted as R150 to the account of N Narrow.
(f) An invoice for the amount of R400 was correctly entered in the sales journal, but posted as
R40 to the account of D Dandy.
(g) A cheque for R900 received from debtor G Great was returned by the bank marked ‘‘R/D’’.
The necessary entry was made in the cash payments journal, but no posting was made to
the account of G Great.
(h) The balance of P Pauper’s account for R1 420 has still to be written off as irrecoverable.
(i) It was determined that the allowance for credit losses account should amount to R538 at
28 February 20.8.

Required:
(1) Prepare a properly balanced trade receivables control account for the month
ending 28 February 20.8.
(2) Reconcile the total of the list of debtors with the balance on the trade receivables
control account as calculated in (1).
(3) Prepare the journal entry for the adjustment of the new allowance for credit
losses at 28 February 20.8 and show all the transactions relating to credit losses
and allowance for credit losses in the general ledger.

Solution: Revision exercise 4
(1)
Dr
20.7
Mar 1
20.8
Feb 28

Trade receivables control

Balance

b/d

Sales
R(69 020 7
600)
Bank
(R/D cheques)

R
10 200
68 420

3 200

20.8
Feb 28

Bank and discount
R(69 140 7
1 000)
Sales returns
R(1 000 + 500)
Allowance for
credit losses
Balance

81 820
20.8
Mar 1

Balance

b/d

R
68 140

1 500

c/d

1 420
10 760

81 820

10 760

217

FAC1502/1

(2) Reconciliation of debtors list
R
Total of debtors list
Add: R/D cheque adjustment (G Great)
Sales invoice adjustment
R(400 7 40) (D Dandy)

R
11 520

900
360

Less: Duplicate sales invoice (B Broad)
Credit loss
Balance as per trade receivables control

1 260
12 780

(600)
(1 420)

(2 020)
10 760

(3) Journalising the allowance for credit losses and the general ledger
GENERAL JOURNAL
20.8
Feb 28

J2
R
1 448

Credit losses
Allowance for credit losses
Adjustment of allowance

R
1 448

R
New allowance R10 760 6 5%
Add: Credit loss written
off (P Pauper)
1 420
Less: Opening balance
of allowance:
510
Amount needed

R
538

910
1 448

GENERAL LEDGER
Dr

Allowance for credit losses

20.8
Feb 28 Trade receivables J1*
Balance
c/d

R
1 420
538

20.7
Mar 1
20.8
Feb 28

Balance

b/d

Credit losses**

1 958

20.8
Feb 28

Balance

218

b/d

538

Credit losses
R
Allowance for
credit losses

1 448

20.8
Feb 28

Cr
R
Profit or
loss

* Journal entries J1 and J3 are obvious and are not shown.
** Balancing figure

FAC1502/1

1 448
1 958

20.8
Mar 1

R
510

J3*

1 448

COMMENTS
. Always read the question carefully. Much of the information given in this question has
nothing to do with the trade receivables control account. Make sure that you know
what items have to be entered in a trade receivables control account.
. The actual amount written off (R1 420) is more than the opening balance of the
allowance. An additional amount (more than the new allowance) must therefore be
credited to the allowance (and debited to the credit losses account).
. If the other method of writing off credit losses were followed (paragraph 9.4) the net
result would be the same. The balance of the allowance for credit losses would be
R538 and the amount written off as credit losses in the profit or loss account would be
R1 448.

SELF-ASSESSMENT
Now that you have studied this study unit, can you:
.

calculate the amount of discount on early payment of debts, calculate its effect on
VAT, and will you be able to record it?

calculate the amount of allowance for credit losses and how to record it in the
books?

record the entries involving credit losses (Bad debts) written off?

show how debtors are disclosed in the statement of financial position?

prepare a trade receivables control account?

219

FAC1502/1

STUDY UNIT

10
Inventory

Learning outcome
Students should be able to know and understand the importance of inventory and how
entries related to inventory is recorded in the books of an entity.

Contents
Key concepts

220

10.1

Introduction

221

10.2

The importance of correct inventory valuation

222

10.3

Valuation of inventory at historical cost

223

10.4

Methods of estimating the value of inventory

224

10.5

Consistency in the application of procedures

225

10.6

Disclosure of inventory in the financial statements

225

10.7

Revision exercises and solutions

226

10.7.1 Revision exercise 1

226

10.7.2 Revision exercise 2

226

10.7.3 Revision exercise 3

228

10.7.4 Revision exercise 4

228

Self-assessment

KEY CONCEPTS
.
.
.
.
.

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Page

Valuation of inventory
Historical cost
Consistency
Gross profit percentage
Disclosure in the financial statements

220

229

10.1 Introduction
Inventory is one of the more important assets for many entities. Inventory can be classified as
all or any one of the following:
goods which are kept to be sold in the normal course of business (merchandise)
goods which are in the process of being manufactured for sale
goods which are used during the manufacture of inventory for sale (eg manufacturing
material)
. goods which are consumed in the normal business activities (eg stationery)
.
.
.

It is important to keep strict control over inventory and this is often done by means of an
inventory count, which usually takes place at the end of the financial year. Even if an inventory
count occurs on a continuous basis throughout the year it is still customary to count the
inventory annually.
If you have forgotten what the difference is between a perpetual and a periodic inventory
system, refer to study unit 7, section 7.4.
Study paragraphs 10.1 and 10.2 of the prescribed book.

10.2 The importance of correct inventory valuation
It is very important that inventory is valued correctly. A mistake in the inventory figure will affect
the calculation of cost of sales, the gross profit and subsequently profit in the statement of profit
or loss and other comprehensive income. On the statement of financial position the total of the
current assets as well as the equity will be incorrect. This mistake will also affect the figures for
the following year, because the closing inventory for one year is the opening inventory for the
next year.
Study paragraph 10.5 of the prescribed book.

The following exercise illustrates what can happen when incorrect figures are used.

Exercise 10.1
The following information pertaining to three financial years ended 31 December was obtained
from the records of Woud Traders:
From the statement of financial position:

Total equity
Capital

20.2

20.1

R
332 230

R
224 230

221

20.0
R
120 000

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From the statement of profit or loss and other comprehensive income:
20.2
R

20.1
R

420 000
(252 000)

396 000
(237 770)

Opening inventory
Purchases

151 824
256 176

144 000
245 594

Closing inventory

408 000
(156 000)

389 594
(151 824)

Gross profit
Distribution, administrative and other expenses

168 000
(60 000)

158 230
(54 000)

Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year

108 000
—
108 000

104 230
—
104 230

Revenue
Cost of sales

ADDITIONAL INFORMATION
(a) Merchandise amounting to R4 104, received on 31 December 20.1, is included in
inventory but the invoice was only received and recorded in the purchases journal on 10
January 20.2.
(b) An invoice for merchandise with a cost price of R1 740 and a selling price of R2 106,
dispatched Free On Board on 31 December 20.1, was completed and recorded in the sales
journal on 3 January 20.2. These goods were included in the inventory at 31 December
20.1.
(c) The business uses the periodic inventory system.
Required:
Prepare the adjusted statement of profit or loss and other comprehensive income and
calculate the equity of the owner that must be shown in the statement of financial position
for 20.1 and 20.2. Calculations must be clearly shown.

Solution Exercise

10.1

Calculation of correct amounts:
(a)

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Inventory 31/12/20.1
Less: Merchandise already dispatched
Correct inventory 31/12/20.1

R
151 824
1 740
150 084

(b)

Purchases for 20.1
Add: Correction of goods already received
Correct amount of purchases for 20.1

245 594
4 104
249 698

(c)

Purchases for 20.2
Less: Correction of goods already received

256 176
4 104
252 072

(d)

Sales for 20.1
Add: Selling price of goods dispatched
Correct amount of sales for 20.1

396 000
2 106
398 106

222

(e)

R
420 000
2 106
417 894

Sales for 20.2
Less: Selling price of goods dispatched
Correct amount of sales for 20.2

ADJUSTED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME
20.2
R
894
156)
084
072

20.1
R

Revenue
Cost of sales
Opening inventory
Purchases

417
(246
150
252

398
(243
144
249

106
614)
000
698

Closing inventory

402 156
(156 000)

393 698
(150 084)

Gross profit
Distribution, administrative and other expenses

171 738
(60 000)

154 492
(54 000)

Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year

111 738
—
111 738

100 492
—
100 492

ADJUSTED EQUITY OF THE OWNER
R
Equity (capital) – 20.1 (given)
Less: Incorrect profit given for 20.1

224 230
104 230

Equity – 20.0
Add: Revised profit for 20.1

120 000
100 492

Equity – 20.1
Add: Revised profit for 20.2

220 492
111 738

Equity – 20.2

332 230

10.3 Valuation of inventory at historical cost
Study paragraph 10.3 of the prescribed book.
In this course inventory is valued at historical cost. Inventory can also be measured according
to other methods, for example first-in-first-out method and weighted average method. It is not
necessary for you to know how these methods are applied.
When determining the historical cost of inventory, more costs are involved than simply the
cost of purchasing the goods that are to be sold. Other costs that must be included are:
.
.
.
.

costs of transporting the goods from the point of purchase to the premises of the business
import duty — if goods are purchased from outside South Africa
railage on goods purchased or carriage inwards
insurance on goods purchased

The above-mentioned costs form part of the cost price of inventory and will be used in
determining the gross profit of an entity.

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There are disadvantages to using historical cost as a basis for valuation. For instance, if the
value of the inventory falls below historical cost then the value stated is not realistic. Inventory
must then be valued at net realisable value (NRV) as an alternative to historical cost. Net
realisable value is the price at which inventory can be sold. If it is necessary to incur any costs
to sell the products at the realisable value, these costs must be deducted from the selling price
to determine the net realisable value.

10.4 Methods of estimating the value of inventory
Study paragraph 10.6 and 10.7 of the prescribed book.

There is more than one method of estimating inventory. The only method that we will be
discussing is the gross profit method. It is sometimes necessary to use this method, for
example, if inventory has been damaged or destroyed.
Gross profit is the difference between sales and cost of sales. If the amount of sales and the
cost of sales are known, then

Sales
7
Cost of sales
=
Gross profit
_____________________________________________________________________
R300 000

R200 000

R100 000

If only the cost of sales and gross profit are known, then

Cost of sales
+
Gross profit
=
Sales
_____________________________________________________________________
R200 000

R100 000

R300 000

The actual gross profit is sometimes given as a percentage of either the cost of sales or sales.
If the gross profit is expressed as a percentage of the cost of sales, then we use the following
formula:

Gross profit 6 100 = Gross profit percentage on cost of sales
1
Cost of sales

If the gross profit is expressed as a percentage of sales then the following formula is used:

Gross profit 6 100 = Gross profit percentage on sales
1
Sales

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224

Applying the above figures to these formula, we get the following gross profit percentages:

Gross profit 6 100 =
1
Cost of sales
Gross profit
Sales

6 100
1 =

R100 000
R200 000

100
1

= 50%

R100 000
R300 000

100
1

= 33

1
3

10.5 Consistency in the application of procedures
It is very important that any valuation of inventory should be applied consistently throughout the
year. Any change in the basis of inventory valuation from one year to the next or during the
same year has to be disclosed. Disclosure takes place by means of a note to the financial
statements, explaining the nature and effect of the change.

10.6 Disclosure of inventory in the financial statements
Inventory is a current asset. In this course inventory consists mainly of finished products. In
addition, there may be other inventory items such as packaging material, stationery and
cleaning materials. All the different inventories are subclassified under inventories in the
statement of financial position. The accounting policy applied for the valuation of inventory
must be disclosed in a note to the statement of financial position.

Ex am ple
Presentation on the statement of financial position:
Current assets
Inventories R(60 000 + 6 000)

R
66 000

(For a more detailed exposition refer to paragraph 9.6.)
The cost of merchandise is part of the cost of sales, that is, it is used in calculating the gross
profit. Stationery is used in the sales function and any expenses for stationery used are written
off under selling, administrative and general expenses in the statement of profit or loss and
other comprehensive income when calculating profit.
Study paragraph 10.4 of the prescribed book.

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10.7 Revision exercises and solutions
10.7.1 Revision exercise 1
(1) Which combination of the following statements is correct?
(a) Office furniture bought by Furnishop Traders for the new secretary is classified under
property, plant and equipment in the statement of financial position.
(b) The cost of stationery used is included in the calculation of gross profit.
(c) When using the periodic inventory system the cost of sales is calculated after a
physical inventory count has been done.
(d) Closing inventory includes all goods on the premises. This includes goods that have
already been paid for by a purchaser.
1.
2.
3.
4.

(a)
(a)
(a)
(a)

(b) (c) (d)
(b)
(c)
(c) (d)

(2) What is the difference between cost of goods purchased and cost of sales?

Solution: Revision exercise 1
(1) Option 3, (a) and (c) is correct.

COMMENTS
. Statement (a) The goods were not bought for resale.
. Statement (b) Stationery has nothing to do with the cost of purchasing goods for
resale. Stationery used is a selling expense shown under distribution,
administrative and other expenses in the statement of profit or loss and
other comprehensive income.
. Statement (c) When the periodic inventory system is used the only way of knowing
how much inventory is on hand is to do an inventory count.
. Statement (d) If the ownership of goods has passed to the purchaser, that is the
purchaser has paid or undertaken to pay for the goods, then these
goods are not included in the closing inventory figure.

(2) Cost of goods purchased does not include opening and closing inventory, whereas cost of
sales does.

10.7.2 Revision exercise 2
The following information relates to Bombay Traders:
R
Balances at 28 February 20.4:
Inventory: Trading — 28 February 20.3
Purchases
Purchases returns
Import duty
Sales
Sales returns
Carriage on sales
Packaging material used

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226

20
106
6
10
175
5
4
7

000
000
000
000
000
000
800
200

ADDITIONAL INFORMATION
Inventory: Trading — 28 February 20.4
Inventory: Packaging material — 28 February 20.4

25 000
600

Which of the following represents the correct amount of cost of goods purchased and cost of
sales respectively?
Cost of goods purchased
1.
2.
3.
4.

R116
R110
R116
R110

000
000
000
000

Cost of sales
R111
R110
R110
R105

000
400
400
000

Solution: Revision exercise 2
Option 4 is correct.
Cost of goods purchased, R110 000; cost of sales, R105 000.
Calculation:
R
Purchases
Purchases returns

106
(6
100
10
110

Import duty
Cost of goods purchased

000
000)
000
000
000

R
Cost of sales:
Sales
Sales returns
Revenue
Cost of sales
Opening inventory – 28 Feb. 20.3
Purchases

175
(5
170
(105
20
110
130
(25

Closing inventory – 28 Feb. 20.4
Gross profit

000
000)
000
000)
000
000
000
000)

65 000

COMMENTS
. Closing inventory is only goods for sale (merchandise) and does not include
packaging material. Packaging material is a consumable inventory. Packaging
material used is an expense and packaging material on hand is shown under
inventory as a current asset in the statement of financial position.
. Revenue is equal to gross sales minus sales returns. All other expenses related to
sales are deducted from gross profit.

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10.7.3 Revision exercise 3
From the following information, calculate the gross profit percentage on cost of sales and sales.

Revenue
Cost of sales
Gross profit

20.3
R
600 000
(402 000)

20.2
R
375 000
(255 000)

20.1
R
300 000
(210 000)

198 000

120 000

90 000

Solution: Revision exercise 3
Gross profit
100
Cost of sales 6 1

20.3
R198 000
100
R402 000 6 1
= 49,3%

Gross profit
100
Sales 6 1

R198 000
R600 000

6100
1

= 33%

20.2
R120 000
100
R255 000 6 1

20.1
R90 000
100
R210 000 6 1

= 47,1%
R120 000
R375 000

6100
1

= 42,9%
R90 000
R300 000

= 32%

6100
1

= 30%

10.7.4 Revision exercise 4
The following is an extract from the statement of profit or loss and other comprehensive income
of M Dry, a general dealer, for the year ended 30 June 20.6:

M DRY
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE
YEAR ENDED 30 JUNE 20.6 (extract)
Revenue
Cost of sales
Inventory — 1/7/20.5
Purchases
Inventory — 30/6/20.6
Gross profit

R
114 000
(76 000)
30 000
90 000
120 000
(44 000)
38 000

ADDITIONAL INFORMATION
(a) On 30 June 20.7 a fire occurred in the warehouse before the annual inventory count could
be completed, and an estimated 25% of the total inventory was destroyed.
M Dry informs you that the same mark-up was applied in the last financial year as was
used in 20.5/6.
(b) Purchases and sales for the 20.6/7 financial year amounted to R96 000 and R120 000
respectively.
Required:
(1) Prepare the section of the statement of profit or loss and other comprehensive income
reflecting the estimated gross profit for the year ended 30 June 20.7.
(2) Calculate the value of the inventory destroyed by the fire.

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Solution: Revision exercise 4
M DRY
(1) STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR
THE YEAR ENDED 30 JUNE 20.7 (estimated)
R
120 000
(80 000)

Revenue
Cost of sales
Inventory — 30 June 20.6
Purchases

44 000
96 000

Inventory — 30 June 20.7

140 000
(60 000)

Gross profit

40 000

COMMENT
.

Calculation of the gross profit percentage on sales 20.5/6:
R38 000
100
= 114 000 6 1 = 33 13 %
To calculate the cost of sales:
Gross profit percentage on sales =
Gross profit

Gross profit
Sales

100
1

= Sales 6 gross profit percentage
= R120 000 6

331/3
100

= R40 000
Therefore: Cost of sales

= Sales 7 Gross profit
= R120 000 7 R40 000
= R80 000

Closing inventory for 20.6 is the opening inventory of 20.7.
Calculation of closing inventory can also be done as follows:
Closing inventory = Opening inventory + Purchases 7 Cost of sales
= R44 000
+ R96 000 7 R80 000
= R60 000

(2) VALUE OF INVENTORY DESTROYED:
R60 000 6 25%

= R15 000

SELF-ASSESSMENT
Now that you have studied this study unit, can you
.

explain why it is important to value and record inventory accurately?

explain why an inventory valuation method has to be applied consistently and
accurately?

discuss what inventory consists of and how inventory is presented in the statement
of financial position?

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STUDY UNIT

11
Property, plant and equipment

Learning outcome
Students should be able to record transactions related to property, plant and equipment.

Contents
Key concepts

231

11.1

Introduction

231

11.2

Determination of the cost price of property, plant and
equipment

232

11.3

Safeguarding and control of property, plant and equipment

232

11.4

Recording the purchase of property, plant and equipment

232

11.5

The concept of depreciation

233

11.6

Recording depreciation

233

11.7

Methods of calculating depreciation

233

11.8

Acquisition of property, plant and equipment during the
financial year

243

11.9 Disposal of property, plant and equipment

243

11.10 Revision exercises and solutions

250

11.10.1 Revision exercise 1

250

11.10.2 Revision exercise 2

252

11.10.3 Revision exercise 3

254

11.10.4 Revision exercise 4

257

Self-assessment

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230

258

KEY CONCEPTS
Historical cost price
. Tangible non-current assets
.

.
.
.
.

land and buildings
machinery
vehicles
furniture and equipment

Depreciation
Accumulated depreciation
. Sale (alienation) of property, plant and equipment
. Disposal of property, plant and equipment
.
.

11.1 Introduction
For an item to be classified as an asset, it is not necessary for the entity to be the legal owner of
the item. Assets obtained on credit and lease agreements can be treated as assets by the
entity provided the corresponding liability is recorded. For accounting purposes the economic
reality and not the legal ownership of the item must be taken into account when determining
whether an item can be classified as an asset, in other words substance over form. Refer to
paragraph .35 of the Framework.
Non-current assets are, as you already know, acquired with the intention of carrying out,
supporting or facilitating operations. Non-current assets have an operating lifespan of more
than one year and can be used over and over again. They are used but not consumed (ie noncurrent assets are not used up in the short term).
Non-current assets may be tangible, intangible or financial assets.
Tangible non-current assets are assets such as buildings, machinery, vehicles and furniture.
They are assets which you can see and touch. They are shown in the statement of financial
position under the heading ‘‘Property, plant and equipment’’.
Because property, plant and equipment become obsolete after several years, they must be
written off over their expected economic life. This is usually done by means of a provision
referred to as depreciation. The annual amount written off is treated as an expense in the profit
and loss account.
When an asset can no longer operate economically, it is replaced. The proceeds on the
realisation (sale) of the asset are normally used to partly finance the new asset.
All the aspects in the accounting system relating to the above will be explained further on in this
study unit.

Study paragraphs 11.1 to 11.3 of the prescribed book.

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11.2 Determination of the cost price of property, plant and
equipment
The cost price of property, plant and equipment consists of:
the purchase price, including all expenses incurred in getting the asset to the premises
all the installation costs including, for example, the wages of the business’s own technical
personnel
. any other expenses incurred in getting the asset operational
.
.

The cost price will remain constant throughout the life of the asset and is referred to as the
historical cost price.
Financing costs on loans raised to acquire the asset are not included in the cost price of the
asset. The same applies to maintenance costs.
Study paragraph 11.4 of the prescribed book.

11.3 Safeguarding and control of property, plant and
equipment
An assets register is used in which the following important information regarding the asset is
recorded:
.
.
.
.
.
.
.
.

location
serial number
cost price
date of acquisition
expected lifespan
carrying amount
current year’s depreciation
accumulated depreciation
Study paragraph 11.10 of the prescribed book.

11.4 Recording the purchase of property, plant and equipment
The purchase of property, plant and equipment is recorded in the applicable asset accounts.
For example, machinery is recorded in the machinery (at cost) account and vehicles in the
vehicles (at cost) account.
Since the asset accounts in question do not contain any details, it is necessary to keep the
assets register (see paragraph 11.3 and example 11.12 in the prescribed book) up to date.
The totals of the cost prices in the assets register with regard to a specific asset account must
be equal to the balance of that asset account in the general ledger.
At the end of each period the asset account is balanced and reconciled with the amount in the
assets register.
Study paragraphs 11.5 and 11.6 of the prescribed book.

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232

11.5 The concept of depreciation
Assets are acquired to generate income. Because income is generated, the cost of owning the
asset can be written off against income earned over the useful life of the asset.
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
Once the depreciable amount has been established the method of allocating the depreciable
amount must be decided on (refer to paragraph 11.7 on the methods of calculating depreciation).
The method decided on for allocating depreciation must represent a fair allocation of the cost of
owning the asset each year.
Study paragraphs 11.7.1 – 11.7.3 of the prescribed book.

11.6 Recording depreciation
During the expected useful life of an asset, a reasonable amount must be written off from the
cost price of the asset in each financial period and debited to a depreciation account.
Under the double-entry system, another account has to be credited with the same amount. In
practice it is not the asset account but a contra asset account, the accumulated depreciation
account, which is credited with the annual depreciation.
The difference between the debit balance on the asset account and the credit balance on the
accumulated depreciation account is known as the net carrying amount of the asset.
Study paragraph 11.7.4 of the prescribed book.

11.7 Methods of calculating depreciation
There are various methods of determining the amount of annual depreciation to be written off.
We will discuss only the straight line method, the diminishing balance method and the
production unit method.
Study paragraph 11.7.5 of the prescribed book.

Exercise

11.1
Suppose Bilgredon bought a machine on 1 June 20.0 for R500 000 with a discount of R60 000,
transport costs of R15 000 and installation costs of R5 000. The depreciable cost price of the
machine is R(500 000760 000+15 000+ 5 000) = R460 000. The estimated lifespan is 5
years. (Bilgredon’s financial year ends on 31 May.) We now examine the three methods of
using this information.
Required:
Use the given information and prepare
(1)

depreciation schedules,

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(2)

general journal entries, and

(3)

ledger accounts
to record the depreciation according to
(a) the straight line method,
(b) the diminishing balance method, and
(c) the production unit method (using the given additional information).

Solution Exercise

11.1

(a) Straight line method
The cost price is written of over the expected useful life (in years) of the asset.
(a) (1) ASSET AND DEPRECIATION SCHEDULE: STRAIGHT LINE METHOD

Date

Cost price

Calculation of
depreciation

(a)

Cost price
Lifespan in years

Annual
Accumulated
depreciation depreciation
(b)

Carrying
amount
(a) – (b)

or
20%6cost price
May 31

20.1 (End of financial year 1)

460 000

20.2 (End of financial year 2)

460 000

20.3 (End of financial year 3)

460 000

20.4 (End of financial year 4)

460 000

20.5 (End of financial year 5)

460 000

460 000
5
460 000
5
460 000
5
460 000
5
460 000
5

Total depreciation

92 000

368 000

92 000

184 000

276 000

92 000

276 000

184 000

92 000

368 000

92 000

460 000

NIL

R460 000

This method is also known as the fixed installment method.
(a) (2) JOURNAL ENTRIES FOR THE FIVE YEARS
GENERAL JOURNAL
20.1
May 31

Depreciation: machinery
Accumulated depreciation: machinery
Provision for depreciation on the straight
line method (year 1)
Profit or loss
Depreciation: machinery
Closing entry

R
92 000

92 000
92 000

The journal entries for the years 20.2, 20.3, 20.4, and 20.5 would be the same as above.

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234

(a) (3) GENERAL LEDGER
Dr

Machinery (at cost)

20.1
Jun 1

R
460 000

Bank

Dr
20.1
May 31 Balance

20.2
May 31 Balance

Accumulated depreciation: machinery
c/d

c/d

R
92 000

184 000

20.1
May 31

Depreciation 20.1

20.1
June 1

Balance

20.2
May 31

Depreciation 20.2

R
92 000
b/d

92 000

184 000

20.3
May 31 Balance

c/d

276 000

184 000
20.2
June 1

Balance

20.3
May 31

Depreciation 20.3

b/d

c/d

368 000

276 000
20.3
June 1

Balance

20.4
May 31

Depreciation 20.4

b/d

c/d

460 000

368 000
20.4
June 1

Balance

20.5
May 31

Depreciation 20.5

b/d

460 000
20.5
June 1

20.1
May 31 Accumulated
depreciation

368 000
92 000

460 000

276 000
92 000

368 000

20.5
May 31 Balance

184 000
92 000

276 000

20.4
May 31 Balance

92 000

Balance

b/d

460 000

Depreciation: machinery
R

20.1
May 31

Cr
R
92 000

Profit or loss

92 000

The entries would be the same as the above for the years 20.2, 20.3, 20.4 and 20.5.

Dr
20.1
May 31 Depreciation:
machinery

Profit or loss (extract)

R
92 000

The entries would be the same as the above for the years 20.2, 20.3, 20.4 and 20.5.

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COMMENT
. The depreciable amount is the cost of the asset less its residual value. The residual
value is the expected value (eg scrap value, trade-in value) of the asset at the end of
its useful life. In this example there was no residual value given.

BILGREDON
STATEMENT OF FINANCIAL POSITION AS AT 31 MAY (extract)
Non-current assets
Property, plant and
equipment

20.5
R
NIL

20.4
R
92 000

20.3
R

20.2
R

184 000

276 000

20.1
R
368 000

COMMENTS
. Only the carrying amount is shown on the face of the statement of financial position.
. A detailed reconciliation of movements in the carrying amount from the beginning to
the end of the financial period is shown in a note.

The following is an example of the note for the year ended 31 May 20.2:

BILGREDON
NOTES FOR THE YEAR ENDED 31 MAY 20.2
Property, plant and equipment

Machinery

Total

368 000

460 000
(92 000)

Additions
Disposals
Depreciation

—
(—)
(92 000)

Carrying amount:
End of year

276 000

460 000
(184 000)

Carrying amount:
Beginning of year
Cost
Accumulated depreciation

Cost
Accumulated depreciation

COMMENT
. Additions and disposals are shown in the exercise for illustrative purposes only. They
need not be shown unless there were additions or disposals during the applicable
financial period.

FAC1502/1

236

(b) Diminishing balance method
In this case a fixed percentage of the carrying amount is written off annually. Assume that a
percentage of 20% is given.
(b) (1) ASSET AND DEPRECIATION SCHEDULE: DIMINISHING BALANCE METHOD
Date

Cost price
(a)

Calculation of
Annual
Accumulated
depreciation depreciation depreciation

Carrying
amount

20
100

(a) – (b)

x carrying

(b)

amount
May 31

20.1 (End of financial year 1)

460 000

20.2 (End of financial year 2)

460 000

20.3 (End of financial year 3)

460 000

20.4 (End of financial year 4)

460 000

20.5 (End of financial year 5)

460 000

R
20
100
20
100
20
100
20
100
20
100

x 4601000

92 000

368 000

x 3681000

73 600

165 600

294 400

x 2941400

58 880

224 480

235 520

x 2351520

47 104

271 584

188 416

x 1881416

37 683

309 267

150 733

Total depreciation

R309 267

The carrying amount at the end of the fifth year (R150 733) is deemed to be the disposal
(scrap) value of the asset. According to this method the carrying amount will, mathematically,
never become nil.
This method does not use the depreciable amount (cost less residual value) as the basis for
calculation, but is based on the cost price less accumulated depreciation, or the carrying
amount.

237

FAC1502/1

(b) (2) JOURNAL ENTRIES FOR THE FIVE YEARS
GENERAL JOURNAL
20.1
May 31

20.2
May 31

Depreciation: machinery
Accumulated depreciation: machinery
Provision for depreciation at 20% pa on the
diminishing balance method (year 1)

R
92 000

Profit or loss
Depreciation: machinery
Closing entry

92 000

Depreciation: machinery
Accumulated depreciation: machinery

73 600

92 000

73 600

Provision for depreciation at 20% pa on the
diminishing balance method (year 2)

20.3
May 31

Profit or loss
Depreciation: machinery
Closing entry

73 600

Depreciation: machinery
Accumulated depreciation: machinery

58 880

73 600

58 880

Provision for depreciation at 20% pa on the
diminishing balance method (year 3)

20.4
May 31

Profit or loss
Depreciation: machinery
Closing entry

58 880

Depreciation: machinery
Accumulated depreciation: machinery

47 104

58 880

47 104

Provision for depreciation at 20% pa on the
diminishing balance method (year 4)

20.5
May 31

Profit or loss
Depreciation: machinery
Closing entry

47 104

Depreciation: machinery
Accumulated depreciation: machinery

37 683

47 104

37 683

Provision for depreciation at 20% pa on the
diminishing balance method (year 5)
Profit or loss
Depreciation: machinery
Closing entry

FAC1502/1

238

37 683
37 683

(b) (3) GENERAL LEDGER
Dr
20.1
Jun 1

Machinery (at cost)
R
460 000

Bank

Accumulated depreciation: machinery

20.1
May 31 Balance

c/d

R
92 000

20.2
May 31 Balance

c/d

165 600

20.1
May 31
20.1
Jun 1
20.2
May 31

Cr
R
92 000

Depreciation 20.1
Balance

b/d

Depreciation 20.2

73 600

165 600
20.3
May 31 Balance

c/d

224 480

165 600
20.2
Jun 1
20.3
May 31

Balance

b/d

Depreciation 20.3

c/d

271 584

224 480
20.3
Jun 1
20.4
May 31

Balance

b/d

Depreciation 20.4

c/d

309 267

271 584
20.4
Jun 1
20.5
May 31

Balance

b/d

Depreciation 20.5

309 267
20.5
Jun 1

20.1
May 31 Accumulated
depreciation
20.2
May 31 Accumulated
depreciation
20.3
May 31 Accumulated
depreciation
20.4
May 31 Accumulated
depreciation
20.5
May 31 Accumulated
depreciation

271 584
37 683

309 267

224 480
47 104

271 584
20.5
May 31 Balance

165 600
58 880

224 480
20.4
May 31 Balance

92 000

Balance

b/d

309 267

Depreciation: machinery
R

20.1
May 31

92 000
20.2
May 31
73 600
20.3
May 31
58 880
20.4
May 31
47 104
20.5
May 31
37 683

Cr
R
Profit or
loss

92 000

Profit or
loss

73 600

Profit or
loss

58 880

Profit or
loss

47 104

Profit or
loss

37 683

239

FAC1502/1

Profit or loss (extract)

20.1
May 31 Depreciation:
machinery
20.2
May 31 Depreciation:
machinery
20.3
May 31 Depreciation:
machinery
20.4
May 31 Depreciation:
machinery
20.5
May 31 Depreciation:
machinery

R
92 000

73 600

58 880

47 104

37 683

BILGREDON
STATEMENT OF FINANCIAL POSITION AS AT 31 MAY (extract)

Non-current assets
Property, plant and
equipment

20.5
R

20.4
R

150 733

188 416

20.3
R

20.2
R

235 520

294 400

20.1
R
368 000

BILGREDON
NOTES FOR THE YEAR ENDED 31 MAY 20.2
Property, plant and equipment

Machinery

Total

368 000

460 000
(92 000)

Depreciation

(73 600)

Carrying amount:
End of year

294 400

460 000
(165 600)

Carrying amount:
Beginning of year
Cost
Accumulated depreciation

Cost
Accumulated depreciation

(c) Production unit method
In this case the units produced by the machine are written off annually as a percentage of the
units the machine is expected to produce over its total life span. Production for year 1 = 500
units, year 2 = 550 units, year 3 = 300 units, year 4 = 200 units and year 5 = 450 units. The total
number of units expected to be produced by the machine = 2 000 units.

FAC1502/1

240

Cost price
(a)

May 31

Calculation of
Anual
Accumulated
depreciation* depreciation depreciation
(b)

Carrying
amount
(a) 7 (b)

20.1 (End of financial year 1)

460 000

500
2 000 6 460 000

115 000

345 000

20.2 (End of financial year 2)

460 000

550
2 000 6 460 000

126 500

241 500

218 500

20.3 (End of financial year 3)

460 000

300
2 000 6 460 000

69 000

310 500

149 500

20.4 (End of financial year 4)

460 000

200
2 000 6 460 000

46 000

356 500

103 500

20.5 (End of financial year 5)

460 000

450
2 000 6 460 000

103 500

460 000

NIL

Total depreciation

R460 000

* Formula for calculating depreciation
=

Units produced during the year
expected number of units
to be produced over life span

x Cost price

Machinery (at cost)
R
460 000

Bank

Accumulated depreciation: machinery

20.1
May 31 Balance

c/d

R
115 000

20.2
May 31 Balance

c/d

241 500

20.1
May 31
20.1
Jun 1
20.2
May 31

Cr
R
115 000

Depreciation 20.1
Balance

b/d

Depreciation 20.2

126 500

241 500
20.3
May 31 Balance

c/d

310 500

241 500
20.2
Jun 1
20.3
May 31

Balance

b/d

Depreciation 20.3

c/d

356 500

241 500
69 000

310 500
20.4
May 31 Balance

115 000

310 500
20.3
Jun 1
20.4
May 31

Balance

b/d

Depreciation 20.4

356 500

310 500
46 000
356 500

241

FAC1502/1

Accumulated depreciation: machinery (continued)

20.5
May 31 Balance

c/d

R
460 000

20.4
Jun 1
20.5
May 31

Balance

b/d

Depreciation 20.5

103 500

460 000

460 000
20.5
Jun 1

Dr
20.1
May 31 Accumulated
depreciation
20.2
May 31 Accumulated
depreciation
20.3
May 31 Accumulated
depreciation
20.4
May 31 Accumulated
depreciation
20.5
May 31 Accumulated
depreciation
Dr

R
356 500

Balance

b/d

460 000

Depreciation: machinery
R

20.1
May 31

115 000
20.2
May 31
126 500
20.3
May 31
69 000
20.4
May 31
46 000
20.5
May 31
103 500

Cr
R
Profit or
loss

115 000

Profit or
loss

126 500

Profit or
loss

69 000

Profit or
loss

46 000

Profit or
loss

103 500

Profit or loss (extract)

20.1
May 31 Depreciation:
machinery

115 000

20.2
May 31 Depreciation:
machinery

126 500

20.3
May 31 Depreciation:
machinery

69 000

20.4
May 31 Depreciation:
machinery

46 000

20.5
May 31 Depreciation:
machinery

103 500

BILGREDON
STATEMENT OF FINANCIAL POSITION AS AT 31 MAY (extract)
Non-current assets
Property, plant and
equipment

FAC1502/1

242

20.5
R
NIL

20.4
R
103 500

20.3
R
149 500

20.2
R
218 500

20.1
R
345 000

BILGREDON
NOTES FOR THE YEAR ENDED 31 MAY 20.2
Property, plant and equipment

Machinery

Carrying amount:
Beginning of year
Cost
Accumulated depreciation
Depreciation
Carrying amount:
End of year
Cost
Accumulated depreciation

Total
R

345 000

460 000
(115 000)

(126 500)

218 500

460 000
(241 500)

Study paragraphs 11.7.4 to 11.7.6 and 11.9 of the prescribed book.

11.8 Acquisition of property, plant and equipment during the
financial year
Suppose a machine is purchased six months before the end of the year. The provision for
depreciation for the first year must be determined for the portion of the year, which in this case
6
is 12
or 50% of the year.
If the cost price of the machine is R460 000 and the depreciation rate is 20% per year, the
depreciation to be provided for the first year will be:
20
6
R460 000 6 100
6 12

= R46 000.
Study paragraphs 11.7.7 to 11.7.8 of the prescribed book.

11.9 Disposal of property, plant and equipment
Study paragraph 11.8 of the prescribed book.

When an asset is no longer useful to an entity, and is disposed of, it must be removed from the
books and the assets register.
There are different ways to dispose of an asset:
.
.
.

scrapping the asset
selling it outright
trading it in as partial payment on the purchase of a new asset

243

FAC1502/1

If the asset is traded-in for another asset, or sold, the profit or loss made on the disposal of the
asset must be treated as income or expenditure in the statement of profit or loss and other
comprehensive income for the current financial period.

Exercise

11.2
Scrapping an asset that has been written off entirely. (This means there are no proceeds.)
Suppose that Bilgredon used the straight-line method of depreciation and decided to scrap the
machine at the end of its useful life.

Required:
Show the journal entry and ledger accounts to record the transaction.

Solution Exercise

11.2

GENERAL JOURNAL
20.5
May 31

R
460 000

Accumulated depreciation: machinery
Machinery (at cost)
Scrapped machine written off

R
460 000

GENERAL LEDGER
Dr
20.1
Jun 1

Machinery (at cost)
R
460 000

Bank

R
460 000

460 000

244

R
Accumulated
depreciation

Accumulated depreciation: machinery

20.5
May 31 Machinery (at cost)

FAC1502/1

20.5
May 31

460 000
Cr

20.1
May 31

Depreciation

R
92 000

20.2
May 31

Depreciation

92 000

20.3
May 31

Depreciation

92 000

20.4
May 31

Depreciation

92 000

20.5
May 31

Depreciation

92 000
460 000

Exercise

11.3
Scrapping an asset (at the end of the financial year) which has not been written off
(depreciated) entirely.
Suppose that Bilgredon bought a machine costing R460 000 on 30 November 20.0. They decided
to scrap the machine at the year ended 31 May 20.5 when the accumulated depreciation
amounted to R402 500. (Note that in this exercise the purchase date has changed and the
production volume method of depreciation is used.)
Required:
(a)

Show the journal entries and ledger accounts to record the transactions.

(b)

Show the note regarding property, plant and equipment.

Solution Exercise

11.3

(a) GENERAL JOURNAL
20.5
May 31

R
460 000

*Realisation of machinery
Machinery (at cost)

R
460 000

Transfer machinery at cost to
realisation account
Accumulated depreciation: machinery
Realisation of machinery

402 500
402 500

Transfer depreciation to realisation account
Loss on disposal of machinery
Realisation of machinery

57 500
57 500

Loss on scrapping of machine
*NOTE: The account ‘‘Realisation of machinery’’ is used to capture the entries regarding the
disposal of the machinery.

GENERAL LEDGER
Dr

Machinery (at cost)

20.0
Nov 30

R
460 000

Bank

20.5
May 31

Cr
R
Realisation of
machinery

460 000

245

FAC1502/1

Accumulated depreciation: machinery

20.5
May 31 Realisation of
machinery

20.1
May 31

402 500
20.2
May 31
20.3
May 31
20.4
May 31
20.5
May 31

Cr
R

Depreciation
(part of year)
Depreciation

126 500

Depreciation

69 000

Depreciation

46 000

Depreciation

103 500

402 500

57 500

402 500

Realisation of machinery

20.5
May 31 Machinery at cost

R
460 000

20.5
May 31

Cr
R
Accumulated
depreciation
Loss on disposal
of machinery

460 000

402 500
57 500
460 000

Loss on disposal of machinery

20.5
May 31 Realisation of
machinery

R
57 500

BILGREDON
(b) NOTES FOR THE YEAR ENDED 31 MAY 20.5
Property, plant and equipment
Carrying amount:
Beginning of year
Cost
Accumulated depreciation*
Depreciation
Disposals
Cost
Accumulated depreciation
Carrying amount:
End of year
Cost
Accumulated depreciation
* R57 500 + R126 500 + R69 000 + R46 000

FAC1502/1

246

Machinery
R

Total
R

161 000

460 000
(299 000)

(103 500)
(57 500)

(460 000)
402 500

—

—
—

Study paragraph 11.11 of the prescribed book.

Exercise

11.4
Suppose that Bilgredon had sold the machine in exercise 11.3 for R60 000 cash instead of
scrapping it.
Required:
Prepare the journal entries and ledger accounts to record this transaction.

Solution Exercise

11.4

GENERAL JOURNAL
20.5
May 31 Realisation of machinery
Machinery (at cost)
Transfer machine at cost to
realisation account

R
460 000

Accumulated depreciation: machinery
Realisation of machinery
Transfer depreciation to realisation account

402 500
402 500

Bank*
Realisation of machinery
Cash received for machinery

60 000

Realisation of machinery
Profit on sale of machinery
Sold machinery at a profit

2 500

60 000

2 500

*This entry will normally be recorded in the cash receipts journal.

GENERAL LEDGER
Dr
20.0
Nov 30

Machinery (at cost)
Bank

R
460 000

20.5
May 31

Cr
R
Realisation of
machinery

460 000

247

FAC1502/1

Accumulated depreciation: machinery

20.5
May 31 Realisation of
machinery

R
402 500

20.1
May 31
20.2
May 31
20.3
May 31
20.4
May 31
20.5
May 31

Depreciation

R
57 500

Depreciation

126 500

Depreciation

69 000

Depreciation

46 000

Depreciation

103 500

402 500

Realisation of machinery

20.5
May 31 Machinery at cost
Profit on sale of
machinery

R
460 000

20.5
May 31

2 500

Cr
R
Accumulated
depreciation
Bank

462 500

402 500
60 000
462 500

Profit on sale of machinery
20.5
May 31

Cr
R

Realisation of
machinery

2 500

Bank

20.5
May 31 Realisation of
machinery

R
60 000

Pro rata depreciation:
When an asset is sold before the end of its expected life span and during the financial year, the
pro rata depreciation for the period from the beginning of the financial year up to the date of
sale must be taken into account as part of the accumulated depreciation. For example, if you
sell an asset on 30 September and the financial year end is 31 December, the asset has been
in use for 9 months or 34 of the year. If the percentage for a full year is 20%, the pro rata
9
depreciation in this case would be 12
6 20% for the last year.

Summary
The following six (6) steps should be followed when dealing with the disposal of an asset:
1. Record the depreciation of the current period up until the date of disposal (general
journal):
Debit:
Credit:

Depreciation
Accumulated depreciation

Now calculate the total accumulated depreciation of the disposed asset.

FAC1502/1

248

2. Transfer the total accumulated depreciation of the disposed asset to the realisation
account (general journal):
Debit:
Credit:

Accumulated depreciation
Realisation account

3. Transfer the cost price of the disposed asset to the realisation account (general
journal):
Debit:
Credit:

Realisation account
The particular asset account (Vehicles, Equipment, etc.)

4. Record the amount earned on the realisation (note that the realisation account is
credited in all three cases):
4.1 Sold for cash (CRJ):
Debit:
Credit:

Bank
Realisation account

4.2 Sold on credit (general journal):
Debit:
Credit:

Trade receivables (and Trade receivables control account)
Realisation account

4.3 Asset traded in (general journal):
Debit:
Credit:

The asset account (as part of the cost price of the new asset)
Realisation account

5. Determine the profit or loss on the disposed asset:
5.1 If the total of the debit side of the realisation account is bigger than that of the credit
side, the asset was disposed of at a loss.
5.2 If the total of the credit side of the realisation account is bigger than that of the debit
side, the asset was disposed of at a profit.
6. Transfer the profit or loss to the profit or loss account on disposal of that type of
asset (general journal):
6.1 Profit:
Debit:
Credit:

Realisation account
Profit on disposal of ... account

6.2 Loss:
Debit:
Credit:

Loss on disposal of ... account
Realisation account

GOLDEN RULE
Profits and losses on disposal of assets must be disclosed separately in the statement of
profit or loss and other comprehensive income.

249

FAC1502/1

11.10 Revision exercises and solutions
11.10.1 Revision exercise 1
The following information relates to Bacinis:
Balances as at 31 August 20.3:

Plant and machinery (at cost)
Accumulated depreciation: plant and machinery

85 000
46 600

ADDITIONAL INFORMATION
(a) According to the assets register, plant and machinery consist of two Zobo machines of
equal value. Both the machines were purchased and installed on the same date.
(b) Depreciation is written off at 20% per annum by the diminishing balance method.
(c) On 31 January 20.4, management decided to increase production capacity and purchased
a Jojo machine on credit from Maxi Limited for R90 000. One of the Zobo machines was
traded in, reducing the amount owing to Maxi Ltd to R70 500.
(d) On 1 February 20.4, installation charges on the new machine amounting to R6 000 were
paid in cash.

Required:
(1)

Prepare journal entries to record the above transactions, excluding cash, for the year
ended 31 August 20.4.

(2)

Show the following general ledger accounts for the year ended
31 August 20.4, properly balanced:
(a) Accumulated depreciation
(b) Machinery realisation

(3)

Prepare the note regarding property, plant and equipment for the year ended
31 August 20.4

Solution: Revision exercise 1
(1) GENERAL JOURNAL
20.4
Jan 31

Depreciation
Accumulated depreciation
Depreciation written off on machine
traded in
Machinery realisation
Plant and machinery (at cost)
Transfer cost price of machine traded in

FAC1502/1

250

R
90 000

Plant and machinery (at cost)
Maxi Ltd
Jojo machine purchased on credit

R
90 000

(1)

1 600
1 600

42 500
42 500

Accumulated depreciation
Machinery realisation
Transferring depreciation of
machine traded in

(1)

24 900
24 900

Maxi Ltd
(2)
Machinery realisation
Recording trade-in value of Zobo machine

19 500
19 500

Machinery realisation
Profit on sale of machinery
Transferring profit on machine
traded in
Aug 31

1 900
1 900

Depreciation
Accumulated depreciation
Depreciation on plant and machinery

(3)

15 040
15 040

(2) GENERAL LEDGER
(a)
Dr

Accumulated depreciation

20.4
Jan 31

20.4
Aug 31

R
Machinery
realisation

Balance

24 900

c/d

20.3
Aug 31
20.4
Jan 31
Aug 31

Balance

b/d

Depreciation
Depreciation

R
46 600
1 600
15 040

38 340
63 240

63 240
20.4
Sep 1

Balance

b/d

38 340

(b)
Dr

Machinery realisation

20.4
Jan 31

R
Plant and
machinery
Profit on sale of
machinery

42 500

20.4
Jan 31

Cr
R
Accumulated
depreciation
Maxi Ltd

24 900
19 500

1 900
44 400

44 400

CALCULATIONS:
1 Depreciation on machine traded in

To 31 August 20.3 (R46 600 6 12 )
31 August 20.3 – 31 January 20.4

23 300

20
5
1006 126 R(42 500 7 23 300)

1 600
24 900

251

FAC1502/1

2 Trade-in value
R90 0007R70 500

19 500

3 Depreciation on machinery still in use
Zobo machine
20
R(42 500723 300)6 100

3 840

Jojo machine
20
7
6 12
R(90 000 + 6 000)6 100

11 200
15 040

(3) BACINIS
NOTES FOR THE YEAR ENDED 31 AUGUST 20.4
Property, plant and equipment
Carrying amount:
Beginning of year

Machinery
R

Total
R

38 400

Cost
Accumulated depreciation

85 000
(46 600)

Additions (R90 000 + R6 000)
Depreciation (R1 600 + R15 040)
Disposals

96 000
(16 640)
(17 600)

Cost
Accumulated depreciation

(42 500)
(24 900)

100 160
138 500
(38 340)

Carrying amount:
End of year
Cost (R85 000 + R96 000 – R42 500)
Accumulated depreciation (R46 600 + R16 640 – R24 900)

11.10.2 Revision exercise 2
On 1 January 20.1 B Book started an entity, BB Printers, and bought a printing machine, Zebra,
for R40 000 cash.
On 1 October 20.2 he bought an additional printing machine, Jaguar, on credit from AB
Machinery for R60 000 and paid a deposit of R10 000.
The Zebra machine became obsolete and BB Printers decided to purchase a Cheetah
machine from ZYP Company for R100 000. The Zebra machine was accepted as a trade-in,
valued at R15 000. The Cheetah machine was installed on 1 July 20.3 and BB Printers paid
R5 000 installation costs.
ADDITIONAL INFORMATION
(a) Depreciation on the Zebra and Jaguar machines is provided for at 20% per annum on the
straight line method.
(b) The estimated life span of the Cheetah machine is 8 years and the estimated trade-in value
at the end of the term is R9 000.

FAC1502/1

252

Required:
Prepare the following ledger accounts, properly balanced and closed off, for the year
ended 31 December 20.3:
(1)

Machinery at cost

(2)

Depreciation

(3)

Accumulated depreciation

(4)

Machinery realisation

Solution: Revision exercise 2
GENERAL LEDGER
(1)
Dr

Machinery (at cost)

20.3
Jan 1
Jul 1
Jul 1

R
100 000
100 000
5 000

Balance
ZYP Company
Bank

b/d

20.3
Jul 1
Dec 31

Cr
R
Machinery
realisation
Balance

c/d

205 000
20.4
Jan 1

Balance

b/d

40 000
165 000
205 000

165 000

(2)
Dr

Depreciation

20.3
Jul 1

Dec 31

Accumulated
depreciation
Accumulated
depreciation

20.3
Dec 31

Cr
R
22 000

Profit or loss

4 000
18 000
22 000

22 000

(3)
Dr
20.3
Jul 1
Dec 31

Accumulated depreciation
R
Machinery
realisation
Balance

c/d

20 000
21 000

20.3
Jan 1
Jul 1
Dec 31

Balance
Depreciation
Depreciation

b/d

41 000

R
19 000
4 000
18 000
41 000

20.4
Jan 1

Balance

b/d

253

21 000

FAC1502/1

(4)
Dr

Machinery realisation

20.3
Jul 1

R
40 000

Machinery (at cost)

20.3
Jul 1

Cr
R
Accumulated
depreciation
ZYP Company
Loss on disposal
of machinery

40 000

20 000
15 000
5 000
40 000

CALCULATIONS
1

Balances on 31 December 20.2:
Machinery:

Zebra
Jaguar

Accumulated depreciation:
Zebra:
20%
6
Jaguar:
20%
6

R
40 000
60 000
100 000

R40 000 6
R60 000 6

2
3
12

16 000
3 000
19 000

Depreciation:
Zebra 1 January 20.3 – 1 July 20.3
20%6R40 0006

6
12

4 000

Zebra 1 January 20.1 – 1 July 20.3
R(16 000 + 4 000)

20 000

Jaguar 31 December 20.3:
20%6R60 00061

12 000

Cheetah 31 December 20.3:
R(105 000 – 9 000)786

6
12

6 000
18 000

11.10.3 Revision exercise 3
B Box, the owner of Box Traders, bought a new machine for R60 000 on 1 July 20.0. He
decided to write off depreciation at 25% per annum, using the straight-line (fixed instalment)
method.
On 1 October 20.2 he purchased a second machine for R80 000 cash and decided on the
same depreciation policy as before.
On 30 June 20.3 the machine bought during 20.0 was sold for R18 000 cash.

Required:
Prepare the following ledger accounts reflecting all applicable entries, in the books of Box
Traders, properly balanced/closed off at 31 March of each financial year (show all
calculations):

FAC1502/1

254

(1)

Machinery at cost

(2)

Depreciation

(3)

Accumulated depreciation

(4)

Machinery realisation

Solution: Revision exercise 3
GENERAL LEDGER
(1)
Dr
20.0
Jul 1
20.2
Oct 1

Machinery (at cost)

Bank

R
60 000

Bank

80 000

20.3
Mar 31

Balance

c/d

140 000
20.3
Apr 1

Balance

b/d

140 000

140 000
20.3
Jun 30
20.4
Mar 31

Machinery
realisation

60 000

Balance

c/d

140 000
20.4
Apr 1

Balance

b/d

R
140 000

80 000
140 000

80 000

(2)
Dr
20.1
Mar 31

20.2
Mar 31

20.3
Mar 31

Jun 30
20.4
Mar 31

Depreciation
R
Accumulated
depreciation

Accumulated
depreciation

Accumulated
depreciaton

(1)

20.1
Mar 31

11 250
20.2
Mar 31

(2)

15 000
20.3
Mar 31

(3)

25 000
20.4
Mar 31

Accumulated
depreciation

(4)

3 750

Accumulated
depreciation

(5)

20 000

Cr
R
Profit or
loss

11 250

Profit or
loss

15 000

Profit or
loss

25 000

Profit or loss
(loss)

23 750

255

FAC1502/1

(3)
Dr

Accumulated depreciation

20.2
Mar 31

Balance

c/d

R
26 250

20.1
Mar 31
20.2
Mar 31

Depreciation

(1)

R
11 250

Depreciation

(2)

15 000

26 250
20.3
Mar 31

Balance

c/d

26 250
20.2
Apr 1
20.3
Mar 31

51 250

Balance

b/d

26 250

Depreciation

(3)

25 000

51 250
20.3
Jun 30
20.4
Mar 31

Machinery
realisation

(6)

45 000

Balance

c/d

30 000

51 250
20.3
Apr 1
Jun 30
20.4
Mar 31

Balance
Depreciation

b/d
(4)

51 250
3 750

Depreciation

(5)

20 000

75 000

75 000
20.4
Apr 1

Balance

b/d

30 000

(4)
Dr

Machinery realisation

20.3
Jun 30

Machinery at cost
Profit on sale of
machinery

R
60 000

20.3
Jun 30

Cr
R
Accumulated
depreciation
Bank

3 000*

45 000
18 000

63 000

* Balancing figure
CALCULATIONS
Depreciation:

(1) 1 July 20.0 to 31 March 20.1: R60 0006

25
100

(2) 1 April 20.1 to 31 March 20.2: R60 0006

25
100

(3) First machine
1 April 20.2 to 31 March 20.3: R60 0006

25
100

Second machine
1 October 20.2 to 31 March 20.3: R80 0006
(4) First machine (sold)
1 April 20.3 to 30 June 20.3: R60 0006

25
100

(5) Second machine (for year)
1 April 20.3 to 31 March 20.4: R80 0006
(6) Accumulated depreciation – First machine
R(11 250 + 15 000 + 15 000 + 3 750)

FAC1502/1

256

11 250
15 000

15 000
25
100

25
100

9
12

3
12

6
12

10 000

25 000

3 750

20 000

45 000

11.10.4 Revision exercise 4
The following information regarding machines X and Y relates to Jingo:

Date of purchase
Purchase price (cash)
Installation cost
Estimated useful life
Scrap value

Machine X

Machine Y

1 March 20.0
R40 000
R4 000
4 years
R4 000

1 September 20.1
R88 000
R4 000
5 years
R12 000

The entity uses the straight-line (fixed instalment) method to provide for depreciation. On
31 August 20.1 machine X was sold for R26 000 cash.

Required:
Prepare the following ledger accounts of Jingo for the year ended 28 February 20.2,
properly balanced/closed off:
(1)

Machinery at cost (machines X and Y)

(2)

Machinery realisation

(3)

Accumulated depreciation

(4)

Depreciation

Solution: Revision exercise 4
GENERAL LEDGER
(1)
Dr
20.1
Mar 1
Sep 1

Machinery (at cost)
Balance
Bank

b/d

R
44 000
92 000

20.1
Aug 31
20.2
Feb 28

Cr
R
Machinery
realisation

44 000

Balance

c/d

136 000
20.2
Mar 1

Balance

b/d

92 000
136 000

92 000

(2)
Dr
20.1
Aug 31

Machinery realisation
Machinery

R
44 000

20.1
Aug 31

Cr
R
Accumulated
depreciation
Bank
Loss on sale of
machinery

44 000

15 000
26 000
3 000
44 000

257

FAC1502/1

(3)
Dr

Accumulated depreciation

20.1
Aug 31
20.2
Feb 28

R
Machinery
realisation

(1)

15 000

Balance

c/d

8 000

20.1
Mar 1
Aug 31
20.2
Feb 28

Balance
Depreciation

b/d

R
10 000
5 000

Depreciation

(2)

8 000

23 000

23 000
20.2
Mar 1

Balance

b/d

8 000

(4)
Dr

Depreciation

20.1
Aug 31
20.2
Feb 28

R
Accumulated
depreciation

5 000

Accumulated
depreciation

8 000

20.2
Feb 28

Cr
Profit or loss

13 000

R
13 000

13 000

CALCULATIONS:
Depreciation to be written off
1

Machine X
44 000 4 000
4

10 000 pa

1 March 20.0 – 28 Feb 20.1
6
1 March 20.1 – 31 Aug 20.1 (10 1000 6 12
)

10 000
5 000
15 000

Machine Y
92 000 12 000
5

6
1 Sep 20.1–28 Feb 20.2 (16 1000 6 12
)

16 000 pa
8 000

SELF-ASSESSMENT
Having studied this study unit, can you:

FAC1502/1

define a non-current asset?

explain how the cost price of a non-current asset is determined?

record the entries for the purchase of property, plant and equipment?

record the entries for the disposal of property, plant and equipment?

calculate the depreciation according to the three methods explained and record the
related entries?

258

STUDY UNIT

12
Other non-current assets

Learning outcome
Students should be able to record transactions related to other non-current assets such as
investments.

Contents
Key concepts

259

12.1

Introduction

260

12.2

Intangible assets

260

12.3

Financial instruments

260

12.4

Types of other financial assets and method of recording them

260

12.4.1 Cash investments

260

12.4.2 Investments in shares

261

KEY CONCEPTS
.
.
.
.
.
.
.
.

Intangible assets
Amortisation
Other financial assets
Cash investments
Loans granted
Investments in shares
Ordinary shares
Investment income

259

FAC1502/1

12.1 Introduction
Non-current assets are divided into tangible assets, intangible assets and other financial
assets. Tangible assets (property, plant and equipment) were discussed in study unit 11. In this
study unit other non-current assets (intangible assets and other financial assets) will be
discussed.

Study paragraph 12.1 of the prescribed book.

12.2 Intangible assets
IAS 38 (AC 129 .2) defines intangible assets as ‘‘... identifiable, non-monetary assets without
physical substance held for use in the production or supply of goods or services, for rental to
others or for administrative purposes, which are controlled by an entity as a result of past
events, and from which future economic benefits are expected to flow to the entity.’’

Study paragraph 12.2 of the prescribed book.

12.3 Financial instruments
Study paragraph 12.3 of the prescribed book.

12.4 Types of other financial assets and method of recording
them
When a financial asset is acquired, the relevant financial asset account is debited and the bank
account credited.

12.4.1 Cash investments
Every entity tries to invest its available cash in the most profitable way, that is the entity tries to:
.

obtain the highest yield, or

earn the best return on its investment

Although cash investments may not always be the most profitable type of investment, entities
often have cash temporarily available which they want to invest for a relatively short period.
The cash may be required on a specific future date.
These investments may be in the form of savings accounts, call deposits or fixed deposits. This
kind of investment usually yields interest at a fixed rate or a rate that does not change often.

Study paragraph 12.4.1 of the prescribed book.

FAC1502/1

260

12.4.2 Investments in shares
A popular form of investment is the purchase of shares in a company. The investment return on
shares is called ‘‘dividends’’.
Dividends earned on investments in shares differ from interest in that interest is usually earned
at a fixed rate while dividends are received only if the company which issued the shares
declares a dividend. The rate at which dividends are to be paid out is decided on annually. The
accounting procedure is basically the same as for interest.
As regards the extent of dividends declared, you should note that dividends are shown either
as a percentage of the nominal value of the shares or as cents per share.
Study paragraphs 12.4.2 and 12.5 of the prescribed book.

261

FAC1502/1

262

TOPIC D

ACCOUNTABILITY FOR CURRENT AND
NON-CURRENT LIABILITIES

Learning outcome
The learner should be able to explain, valuate and record the transactions pertaining to
current and non-current liabilities and to explain how they are controlled.

263

FAC1502/1

CONTENTS

Study unit

FAC1502/1

Page

CURRENT LIABILITIES

265

NON-CURRENT LIABILITIES

277

264

STUDY UNIT

13
Current liabilities

Learning outcome
Students should be able to know the treatment of current liabilities in the books of an entity

Contents
Key concepts

266

13.1

Introduction

266

13.2

Trade payables

266

13.3

Sundry current liabilities

267

13.4

Disclosure in the statement of financial position

268

13.5

Trade payables control account

268

13.6

Revision exercises and solutions

273

13.6.1 Revision exercise 1

273

13.6.2 Revision exercise 2

273

13.6.3 Revision exercise 3

274

Self-assessment

276

265

FAC1502/1

KEY CONCEPTS
.
.
.
.
.
.
.
.
.

Trade payables
Sundry current liabilities
Value-Added Tax payable
Instalments payable on interest bearing borrowings
Accrued expenses
Provisions
Dividends payable
Profit share payable
Settlement discount received

13.1 Introduction
A liability is a claim which a party other than the owner/s has on the assets of the entity. It usually
originates from a transaction in the past but it can also be the result of legal action. It is expected
that the payment of a liability will lead to an outflow of resources.
Liabilities can be classified as current liabilities, indicating that payment will or should take
place within the next period of 12 months, or non-current liabilities for which payment should
take place after the next period of 12 months.
The following items are usually classified as current liabilities:
.
.
.
.
.
.

trade payables
accrued expenses
income received in advance
instalments payable on long-term borrowings
Value-Added Tax payable to the SA Revenue Services
bank overdraft

Study paragraphs 13.1 to 13.3 of the prescribed book.

13.2 Trade payables
This type of creditor results from the purchase of goods and services on credit.
When creditors are paid within a specific period according to an agreement, the entity may get
a discount on the outstanding account.
Settlement discount received is deducted in determining the cost of purchases. Suppose, for
example, LM Traders purchased merchandise costing R500 on 2 January 20.1 from creditor
BAD Suppliers. On 30 January 20.1, LM Traders issued a cheque for R495 in full settlement of
BAD Suppliers’ account.
The entries would be as follows:

FAC1502/1

266

Trade payables: BAD Suppliers

20.1
Jan 30

Bank

20.1

495

Jan 2

Settlement
discount received

Cr
R

Purchases

500

5
500

500

Settlement discount received

20.1
Dec 31

R
Purchases

20.1
Jan 30

Cr
R

Trade payables:
BAD
Suppliers

COMMENTS
. Settlement discount received is deducted from purchases in determining the cost of
purchases.
. In this specific example we showed two entries on the debit side of the creditors
account. The total of the two amounts is normally recorded in the creditors column of
the cash payments journal. Only one posting, representing both accounts is then
necessary.
. Creditor BAD Suppliers will be one of many creditors. A trade payables control
account in the general ledger will then be in use and will represent all individual
creditors appearing in the trade payables ledger. A debit to a creditor’s individual
account will be included in the debits to the control account and vice versa.
. In study unit 6 we explained the influence of Settlement discount received on VAT. In
this study unit we will be ignoring VAT.

Study paragraphs 13.5 to 13.6 of the prescribed book.

13.3 Sundry current liabilities
There are several types of current liabilities. At the end of the financial year an entity must
provide for accrued expenses or losses and VAT payable to the SA Revenue Service. Income
received in advance is also classified as a current liability.
To refresh your memory with regard to accrued expenses and income received in advance,
revise study unit 6, which deals with adjustments.
Study paragraph 13.7 of the prescribed book.

GOLDEN RULE
That portion of a long-term loan or obligation to be repaid within the next 12 months, must
be disclosed as a current liability in the statement of financial position.

267

FAC1502/1

13.4 Disclosure in the statement of financial position
According to International Financial Reporting Standards in South Africa, the current liabilities
are disclosed as follows in the statement of financial position:

NAME OF ENTERPRISE
STATEMENT OF FINANCIAL POSITION AS AT ...........
ASSETS

EQUITY AND LIABILITIES
Total equity
Current liabilities
Trade and other payables
Income received in advance
Other financial liabilities
Current portion of long-term borrowings
Current VAT payable

XXX
XX
X
X
XX
X

XXX
XXX
XXX
XXX
XXX
XXX

Exercise 13.1
The following balances were taken from the post-adjustment trial balance of Picnic Traders as
at 31 December 20.1:
R
Trade payables
Accrued interest on loan
Bank overdraft
VAT control
Income received in advance

221
1
34
4
13

000
500
600
500
000

The layout in the statement of financial position with regard to the above will be as follows:

PICNIC TRADERS
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.1 (extract)
ASSETS

EQUITY AND LIABILITIES
Total equity
Current liabilities
Trade and other payables R(221 000 + 1 500)
Income received in advance
Other financial liabilities
Current VAT payable

274
222
13
34
4

600
500
000
600
500

Study paragraph 13.4 of the prescribed book.

13.5 Trade payables control account
The trade payables control account in the general ledger represents all the individual creditors
in the creditors (subsidiary) ledger.

FAC1502/1

268

The trade payables control account reflects a summary of the individual creditors’ transactions
and the balance of the trade payables control account must be equal to the total of the
individual creditors’ account balances.
Posting to the personal accounts of the creditors takes place on a daily basis. Once a month,
when the totals of all the creditors control columns in all the subsidiary journals have been
determined, the amounts are posted to the trade payables control account.
The procedure can be summarised as follows:
Individual entries in the purchases
journal

Posted to

Personal accounts of creditors (credit
side) in the trade payables ledger on
the day the transaction took place

Total of the creditors control column
in the purchases journal

Posted to

Trade payables control account
(credit side) on the last day of the
month

Individual entries in the purchases
returns journal

Posted to

Personal accounts of creditors (debit
side) in the creditors ledger on the
day the transaction took place

Total of the creditors control column
in the purchases returns journal

Posted to

Trade payables control account (debit side) on the last day of the month

Individual entries in the cash payments journal

Posted to

Personal accounts of creditors (debit
side) in the trade payables ledger on
the day the transaction took place

Total of the creditors control column
in the cash payments journal

Posted to

Trade payables control account (debit side) on the last day of the month

Provision can be made in the general journal for analysis columns for the trade receivables and
trade payables control accounts. The entries made in the general journal that affect creditors must
also be posted on a daily basis to the personal accounts of the creditors and the totals of the
columns at the end of the month to the control accounts.
At the end of the month all the accounts in the general ledger and subsidiary ledgers must be
balanced and a list with all the outstanding creditors’ balances compiled. The balance on the
trade payables control account must be equal to the total of the creditors list. If not, an error
was made either when posting to an individual creditor’s account in the trade payables ledger
or when posting the totals of the journals to the trade payables control account. The accountant
must then determine the reason/s for the difference/s and make the necessary corrections.
The following errors will result in a difference between the balance of the creditors control
account and the list of individual creditors balances in the trade payables ledger:
.

.
.
.
.

Error/s in posting to either the control account and/or to the trade payables ledger, eg a
posting to the debit side of an account instead of to the credit side, or transposition of figures
(R123 instead of R231)
Incorrect balancing of accounts
Incorrect totalling of one or more columns in the journals
Incorrect listing of a balance
Omission of a posting, where an entry in a journal (or the total column) was not posted to the
ledger account/s

269

FAC1502/1

A reconciliation of the trade payables control account balance with the total of individual
creditors balances is explained in the following exercise:

Exercise 13.2
The following information relates to Tip-Top Traders:
(1) List of creditors’ balances as at 30 September 20.2 as per trade payables ledger:
R
L Brand
S Ismail
C Roux
J Zulu

(2) Balance of the trade payables control account in the
general ledger as at 31 August 20.2:

6
10
19
4
40

424
285
426
048
183

R
47 072

(3) Totals of subsidiary journals as at 30 September 20.2:
R
Purchases journal
Sales journal
Purchases returns journal
Sales returns journal
Cash receipts journal:
Bank column
Sales column
Trade receivables column
Settlement discount granted column
Cash payments journal:
Bank column
Purchases column
Trade payables column
Settlement discount received column

96
138
2
6

282
195
899
403

210
98
118
5

818
000
624
806

187
87
105
4

520
000
358
838

ADDITIONAL INFORMATION
(a) A credit note of R353 received from S Ismail in respect of goods returned was correctly
entered in the purchases returns journal, but posted to the wrong side of S Ismail’s
account.
(b) An invoice of R286 in respect of goods purchased from L Brand was erroneously omitted
from the purchases journal.
(c) According to the monthly statement received from J Zulu, interest of R45 has been
charged on the overdue account. No entry has as yet been made.
(d) According to the trade payables ledger the correct balance on C Roux’s account at
30 September 20.2 was R14 926.
(e) Wages paid, R880, was analysed to the creditors column in the cash payments journal. No
correction has as yet been made.
(f) The purchases journal was overcast by R1 000. (‘‘Overcast’’ means that the total amount is
more than it should be. ‘‘Undercast’’ means that the total is less than it should be.)

FAC1502/1

270

Required:
(1)
(2)
(3)

Prepare the trade payables control account in the general ledger for September 20.2.
Prepare the corrected accounts of the creditors in the trade payables ledger.
Prepare a list of the adjusted creditors’ balances as at 30 September 20.2.

Solution Exercise

13.2

TIP-TOP TRADERS
(1) GENERAL LEDGER
Dr
20.2
Sep 30

Trade payables control
R
Purchases returns PRJ
2 899
Bank
CPJ 105 358
Balance
c/d
35 308

20.2
Sep 1 Balance
30 Purchases R(96 282
– 1 000 + 286)
Interest expenses
Wages

b/d

R
47 072

PJ
J
J

95 568
45
880

143 565

143 565
20.2
Oct 1

Balance

b/d

35 308

GOLDEN RULE
. The trade payables control account is a summary of ALL transactions related to all the
individual creditor accounts in the trade payables ledger.

GOLDEN RULE
. What was done (Dr or Cr) to the individual creditor accounts, must be done IN TOTAL to
the trade payables control account.

(2) TRADE PAYABLES LEDGER
L Brand
20.2
Sep 30

Dr
R
Account rendered
Purchases

Cr
R

b/d
PJ

286

Balance
R
6 424 Cr
6 710 Cr

S Ismail
20.2
Sep 30

Dr
R
Account rendered
Purchases returns (26R353)

b/d
J

Cr
R

706

271

Balance
R
10 285 Cr
9 579 Cr

FAC1502/1

C Roux

20.2
Sep 30

Account rendered

Balance

R
14 926 Cr

Balance

R
4 048 Cr
4 093 Cr

b/d

J Zulu

20.2
Sep 30

Account rendered
Interest expenses

b/d
J

(3) LIST OF ADJUSTED BALANCES PER TRADE PAYABLES LEDGER AS AT
30 SEPTEMBER 20.2:
L Brand
S Ismail
C Roux
J Zulu

R
6 710
9 579
14 926
4 093
35 308

Balance as per trade payables control account.

GOLDEN RULE
The total of all the balances of the individual creditor accounts in the trade payables ledger,
must equal the balance of the trade payables control account in the general ledger.

COMMENTS
. If information was omitted or was transferred incorrectly from the source document to
the purchases journal both the trade payables control account and the individual
creditor’s account will be affected by the mistake.
. If the information was entered correctly in the journal but a posting error was made to
the trade payables ledger, the individual creditor’s account must be corrected and the
creditors list must be adjusted to correct the error.
. If an adding mistake was made in one or more columns in the journals, the correction
must only be made in the trade payables control account.
. In this exercise the mistakes or omissions on the creditors’ personal accounts were
corrected on their accounts and a new list (adjusted list) that equalled the balance of
the trade payables control account was compiled at 30 September 20.2.

Study paragraphs 13.8 to 13.10 of the prescribed book.

FAC1502/1

272

13.6 Revision exercises and solutions
13.6.1 Revision exercise 1
MY Company commenced trading on 1 December 20.1 and they are registered for VAT
purposes. Sales in December (all on credit) amounted to R570 000 (inclusive of VAT calculated
at 14%).

Required:
Show the related accounts and entries in the general ledger, in order to indicate the
amount of VAT payable to SARS.

Solution: Revision exercise 1
MY COMPANY
GENERAL LEDGER
Dr

Sales

20.1
Dec 31

R
500 000

Trading account

20.1
Dec 31

Cr
R
Trade receivables
control

500 000

Trade receivables control

20.1
Dec 31

Sales and VAT

R
570 000

VAT output
20.1
Dec 31

Cr
R
Trade receivables
control

70 000

13.6.2 Revision exercise 2
MY Company, whose financial year ends on 31 December 20.0, has a loan of R600 000
secured by a first mortgage over land and buildings redeemable in three equal annual
instalments of R200 000. The first instalment is payable on 30 June 20.1.

Required:
Show how the amount will be reflected on the statement of financial position as at
31 December 20.0.

273

FAC1502/1

Solution: Revision exercise 2
MY COMPANY
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.0 (extract)
ASSETS

EQUITY AND LIABILITIES
Total liabilities

600 000

Non-current liabilities

400 000

Long-term borrowings
Long-term loan secured by a first mortgage over land
and buildings
Current liabilities
Current portion of long-term borrowings

400 000
400 000
200 000
200 000

COMMENT
We will explain more about non-current liabilities in study unit 14.

13.6.3 Revision exercise 3
The following information in respect of June 20.1 was obtained from the records of N Nelson:

Balance of trade payables control account — 31 May 20.1
Totals for the month
Cash payments journal:
Trade payables column
Settlement discount received column
Purchases journal
Purchases returns journal
General journal:
Certain accounts with debit balances transferred to
trade receivables ledger from trade payables ledger
List of individual creditors per trade payables ledger:
Credit balances
Debit balances

R
16 571

14
1
17
3

326
673
350
750

46
16 812
110

In the process of reconciling the balances on the trade payables control account with the list of
individual balances per creditors ledger, the following errors were discovered:
(a) An invoice for R1 787, which had been entered correctly in the purchases journal was
entered against the account of Tims Ltd as R1 878.
(b) Credit note No 63 for R60 was entered correctly in the purchases returns journal, but
erroneously posted as a credit to the account of Ewing Ltd.
(c) A cheque for R90 paid to M Sorry was entered on the debit side of S Sorry’s account.

FAC1502/1

274

(d) The total of the list of creditors balances was overcast by R500.
(e) The total of the purchases journal was undercast by R100.

Required:
(1)

Prepare the trade payables control account as at 30 June 20.1, properly balanced.
The first word(s) of each entry must indicate the contra ledger account.

(2)

Reconcile the total of the list of creditors balances with the balance of the trade
payables control account as determined in (1) above.

Solution: Revision exercise 3
N NELSON
(1) GENERAL LEDGER
Dr
20.1
Jun 30

Trade payables control

Bank
CPJ
Purchases returns PRJ
Balance
c/d

R
14 326
3 750
15 991

20.1
Jun 1

Balance
Purchases
R(17 350+100)
Trade receivables
control

b/d
PJ

R
16 571
17 450

34 067

46
34 067

20.1
Jul 1

Balance

b/d

15 991

(2) RECONCILIATION
R
Total of the list of creditors balances
(credit balances less debit balances) (R16 8127 R110)
Less: Tims Ltd R(1 878 – 1 787)
Ewing Ltd R(60 6 2)
Overcasting
Balance of trade payables control account

R
16 702

91
120
500

275

711
15 991

FAC1502/1

SELF-ASSESSMENT
Now that you have studied this study unit, can you:

FAC1502/1

explain what a trade payables is?

explain what settlement discount received is?

calculate the discount involved and record the appropriate entries?

explain the different types of sundry current liabilities?

show how current liabilities are disclosed in the statement of financial performance?

reconcile the balance of the trade payables control account in the general ledger
with the total of the list of individual creditors balances in the trade payables ledger?

276

STUDY UNIT

14
Non-current liabilities

Learning outcome
Students should be able to describe the non-current liabilities, record the necessary entries
in the books and disclose it in the statement of financial position.

Contents
Key concepts

277

14.1

Introduction

277

14.2

Recording of a non-current liability in the books and its
disclosure in the financial statements

278

14.2.1 Long-term loans and mortgages

278

14.2.2 Debentures

279

Revision exercises and solutions

281

14.3.1 Revision exercise 1

281

14.3.2 Revision exercise 2

281

14.3

Self-assessment

283

KEY CONCEPTS
.
.
.
.
.
.
.
.

Non-current liabilities
Long term
Mortgage
Debenture
Registrar of Deeds
Insured by
Disclosure
Long-term borrowings

14.1 Introduction
A non-current liability is a liability which is payable at the end of the financial period, after a
period of more than one year. The entity usually provides security for this type of loan.

277

FAC1502/1

Study paragraphs 14.1 and 14.2 of the prescribed book.

14.2 Recording of a non-current liability in the books and its
disclosure in the financial statements
Long-term borrowings must be disclosed under non-current liabilities on the statement of
financial position. In this course we will concentrate on long-term borrowings, namely long-term
loans, mortgages and debentures.

14.2.1 Long-term loans and mortgages (Long-term borrowings)
Study paragraph 14.3 of the prescribed book.

Exercise 14.1
Eco buys a property on 1 January 20.1 for R114 000 by means of a first mortgage in favour of
ABC Bank. The interest rate payable is 17% per annum and payment will take place in four
equal installments every fifth year. The first payment will be on 1 January 20.6. The entity’s
financial year end is 31 December.

Required:
Show the entries in the ledger accounts and the liability portion of the statement of
financial position of Eco.

Solution Exercise

14.1

ECO
LEDGER ACCOUNTS
Dr
20.1
Jan 1

Land
R
Mortgage:
ABC Bank

114 000

Mortgage: ABC Bank
20.1
Jan 1

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278

Cr
Land

R
114 000

ECO
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.1 (EXTRACT)
ASSETS

EQUITY AND LIABILITIES
Non-current liabilities

114 000

Long-term borrowings

114 000

Long-term loan from ABC Bank

114 000

COMMENTS
. When an instalment on a loan is payable during the next financial year, the instalment
must be disclosed as a current liability in the statement of financial position of the
current year.
. In the statement of financial position as at 31 December 20.5 the amount indicated as
a long-term loan will be R85 500 and under current liabilities an amount of R28 500 will
be shown as the current portion of long-term borrowings.
. In the statement of profit or loss and other comprehensive income an expense of
R19 380 (17% x R114 000) in respect of interest expense will be shown annually for
the first five years.

14.2.2 Debentures
Study paragraphs 14.4 and 14.5 of the prescribed book.

Exercise 14.2
A Company wishes to borrow R2 000 000 by means of debentures of R1 000 each at 15%
interest. The public are invited in an advertisement to buy the debentures. The debentures will
be redeemed on 31 December 20.9. Applications for 2 500 debentures are received and 2 000
debentures are allocated on 1 January 20.1.

Required:
Show the entries in the ledger accounts and statement of financial position of A Company

279

FAC1502/1

Solution Exercise

14.2

A COMPANY
LEDGER ACCOUNTS
Dr

Bank

20.1
Jan 1

R
Applications
for debentures

20.1
Jan 1

2 500 000

Cr
R
Applications
for debentures

500 000

Applications for debentures

20.1
Jan 1

15% Debentures
Bank

R
2 000 000
500 000

20.1
Jan 1

Bank

2 500 000

Cr
R
2 500 000
2 500 000

15% Debentures
20.1
Jan 1

Cr
R
Applications
for debentures

2 000 000

A COMPANY
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.1 (extract)
ASSETS

EQUITY AND LIABILITIES
Non-current liabilities

2 000 000

Long-term borrowings

2 000 000

2 000, 15% R1 000 debentures redeemable on
31 December 20.9

2 000 000

COMMENTS
. The amount received as a result of excess applications is repaid to the unsuccessful
applicants.
. Debentures may also be secured by a mortgage.
. The annual interest expense on the debentures will be shown in the statement of profit
or loss and other comprehensive income.
. On the statement of financial position as at 31 December 20.8 the debentures will be
shown as a current liability since they will be redeemed within the next 12 months.

FAC1502/1

280

14.3 Revision exercises and solutions
14.3.1 Revision exercise 1
(1) What criterion is used to determine whether a liability is a non-current or a current liability?
(2) How do debentures differ from an ordinary long-term loan?
(3) What do the words ‘‘secured by a first bond over land and buildings’’ mean?

Solution: Revision exercise 1
(1) The criterion for determining whether an item is non-current or current is 12 months. A
liability which is payable within 12 months is a current liability, and one which is payable
after 12 months is a non-current liability.
(2) The only difference between debentures and a long-term loan is that with debentures there
are a number of creditors, whereas with a long-term loan there is usually only one creditor
which is usually a financial institution.
(3) ‘‘Secured by a first bond over land and buildings’’ means that the person or institution
providing the loan has a first claim on the land and buildings in question. If the borrower is
not able to repay the loan, the claimant can seize the land and buildings, sell them and
retain as much of the amount as the mortgagor owes the claimant. The remaining portion
of the amount goes to the second mortgagee, who in turn claims as much as is owed to
him. Any remaining portion goes to the owner. Such a mortgage bond is registered against
the property by the Registrar of Deeds. The Registrar of Deeds is a government office
which controls such matters. If the borrowers were to try to sell the land and buildings, the
property cannot be transferred to the buyer’s name before all mortgagees had been paid
the amounts owed to them.

14.3.2 Revision exercise 2
On 30 June 20.1 B Bomb Enterprises bought a stand, erf number 213, situated on the corner of
Short and Long Streets in Pandorp for R100 000. B Bomb paid a deposit of R20 000 and took
out a mortgage for the balance with Goodfin.
The applicable interest rate is 17% per annum payable annually on 30 June. The loan is to be
redeemed by means of annual instalments of R10 000. The first capital redemption will take
place on 30 June 20.2.
The financial year-end of B Bomb Enterprises is 30 September.

Required:
Show the following for the year ended 30 September 20.1:
(1) The appropriate ledger accounts with the relevant information only
(2) The relevant information in the statement of profit or loss and other comprehensive
income for the year ended 30 September 20.1
(3) The relevant items as they would appear in the statement of financial position as at
30 September 20.1

281

FAC1502/1

Solution: Revision exercise 2
B BOMB ENTERPRISES
(1) LEDGER ACCOUNTS
Dr

Land

20.1
Jun 30

Bank
17% Mortgage:
Goodfin

R
20 000
80 000
100 000

17% Mortgage: Goodfin
20.1
Jun 30

Cr
Land

R
80 000

Bank
20.1
Jun 30

Cr
Land

R
20 000

Interest expenses

20.1
Sep 30

R
Accrued
expenses

20.1
Sep 30

Cr
Profit or loss

R
3 400

3 400

Accrued expenses
20.1
Sep 30

Cr
Interest expenses

R
3 400

B BOMB ENTERPRISES
(2) STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR
THE YEAR ENDED 30 SEPTEMBER 20.1 (extract)
R
Profit from operations
Finance costs:
Interest expenses

FAC1502/1

282

xx xxx
(x xxx)
3 400

B BOMB ENTERPRISES
(3) STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20.1 (extract)
ASSETS
Non-current assets

R
100 000

Property, plant and equipment

100 000

EQUITY AND LIABILITIES
Total liabilities
Non-current liabilities

83 400
70 000

Long-term borrowings
17% Long-term loan secured by a first mortgage over
land. Repayable in annual instalments of R10 000.
The first instalment is payable on 30 June 20.2

70 000

Current liabilities

13 400

Trade and other payables
Current portion of long-term borrowings

3 400
10 000

COMMENTS
. On 30 September 20.1 interest had not yet been paid on the loan because it is payable
annually on 30 June. The first amount of interest will therefore be paid only on 30 June
20.2.
The interest is calculated as follows:
For the year the amount is
17
R80 000 6 100
= R13 600
Because only three months’ interest has accrued, the amount that has to be provided
for is:
3
R13 600 6 12
= R3 400
. The interest is shown as an expense in the statement of profit or loss and other
comprehensive income because the loan has already been utilised for three months of
the financial year, irrespective of whether the interest has been paid.
. The statement of financial position has to show all the details of the loan — only that
part that will be outstanding for more than 12 months on 30 September 20.1 will be
shown as a non-current liability. The instalment which is payable within 12 months is
shown as a current liability.
. The land is a non-current asset on which no depreciation is written off.
. The interest which has not yet been paid is also a current liability. See also paragraph
6.2.2.

SELF-ASSESSMENT
Now that you have studied this study unit, can you describe the following, record the
necessary entries and calculations in the books and show how they will appear in the
statement of financial position:
.
.
.
.

long-term loan?
mortgage?
debenture?
interest on loans?

283

FAC1502/1

284

TOPIC E

ACCOUNTING REPORTING

Learning outcome
The learner should be able to prepare the financial statements (i.e. the statement of profit
or loss and other comprehensive income, statement of changes in equity and the
statement of financial position) and the notes to the financial statements of a sole
proprietor, a nonprofit organisation and to prepare proper books from incomplete records.

285

CONTENTS

Study unit

FAC1502/1

Page

FINANCIAL STATEMENTS OF A SOLE PROPRIETORSHIP

287

NONPROFIT ENTITIES

314

INCOMPLETE RECORDS

342

286

STUDY UNIT

15
Financial statements of a sole
proprietorship

Learning outcome
Students should be able to record all transactions related to a sole proprietor and prepare
the financial statements of a sole proprietor.

Contents
Key concepts

287

15.1

Introduction

288

15.2

Establishment of a sole proprietorship

288

15.3

Further capital contributions and profit

289

15.4

Drawings

290

15.5

The presentation of equity in the statement of changes in
equity and statement of financial position

291

Revision exercises and solutions

294

15.6.1 Revision exercise 1

294

15.6.2 Revision exercise 2

295

15.6.3 Revision exercise 3

298

15.6

Self-assessment

313

KEY CONCEPTS
.
.
.
.
.
.

Sole proprietor/sole trader
Equity
Capital
Profit/loss for the period/year
Drawings
Additional investment

287

FAC1502/1

15.1 Introduction
A sole proprietorship (also known as a sole trader) is the simplest form of business ownership
and is often managed by the owner himself. There is no legislation prescribing how a sole
proprietorship should be established.
Cash and/or any other type of asset, for example a motor vehicle, is necessary to start the
business entity.
The equity simply consists of the capital invested in the business entity plus the profit made (or
less a loss suffered) and less any money and/or goods withdrawn by the owner for personal
use.

Study paragraphs 15.1 to 15.3 of the prescribed book.

15.2 Establishment of a sole proprietorship
A sole proprietor usually contributes capital in the form of cash, and/or non-current assets in
the form of property, plant and equipment towards the starting of the business. The following
example illustrates the accounting entries that are made when a sole proprietorship is
established.

Exercise 15.1
On 1 March 20.1 J Brewis invests R25 000 to start JB Television Services, a service entity. His
investment consists of R3 000 cash, equipment valued at R8 000 and a motor vehicle valued
at R14 000.

Required:
Show the journal entry that will be made to record the relevant information of JB Television
Services on the date of the investment.

Solution Exercise

15.1

JB TELEVISION SERVICES
GENERAL JOURNAL
20.1
Mar 1

R
Bank
Equipment
Motor vehicles
Capital
Deposit of cash in the bank account of the
entity and recording of other assets brought
into the entity at valuation

FAC1502/1

288

3 000
8 000
14 000
25 000

COMMENTS
. On 1 March 20.1 ‘‘Capital’’ indicates the interest of J Brewis (the owner) in his
business. Different meanings are attached to the word ‘‘capital’’ in the financial and
accounting worlds. You will have to learn to differentiate between the various
meanings by noting the context in which the word is used.
. The cash portion of the capital is usually recorded in the cash receipts journal.

On 1 March 20.1 the statement of financial position of the entity is as follows:

JB TELEVISION SERVICES
STATEMENT OF FINANCIAL POSITION AS AT 1 MARCH 20.1
ASSETS
Non-current assets
Property, plant and equipment

Note

R
22 000

22 000

Current assets

3 000

Cash and cash equivalents

3 000

Total assets

25 000

EQUITY AND LIABILITIES
Total equity

25 000

Capital

25 000

Total equity and liabilities

25 000

JB TELEVISION SERVICES
NOTES FOR THE PERIOD ENDED 1 MARCH 20.1
1

Accounting policy:
1.1
1.2

The annual financial statements have been prepared on the historical cost basis and
comply with International Financial Reporting Standards.
Property, plant and equipment are shown at valuation.
Property, plant and equipment

Carrying amount:
Beginning of year
Cost
Accumulated depreciation

Vehicles

Equipment

Total

14 000

8 000

22 000

14 000
(—)

8 000
(—)

22 000
(—)

We must again emphasise that an entity in which the owner has an interest (as J Brewis has in
JB Television Services) is an accounting entity which is separate from the owner. If a statement
of financial position were compiled for J Brewis personally, it would contain an item
‘‘Investment in JB Television Services.’’

15.3 Further capital contributions and profit
After the entity has been in operation for some time, the owner may decide to extend his
business (eg by buying and selling television sets in addition to maintaining them). Brewis

289

FAC1502/1

could then find his present capital insufficient. Suppose he decides to invest a further R15 000
cash in the entity on 1 August 20.1. The capital account in the books of the entity (and also the
capital section of the statement of financial position, if we were to prepare one at this stage)
would reflect the increase.

JB TELEVISION SERVICES
GENERAL LEDGER
Dr

Capital: J Brewis
20.1
Mar 1

Aug 1

Cr
R
3 000
8 000
14 000
15 000

Bank
Equipment
Motor vehicle
Bank*

40 000

The total value of the owner’s initial investment is R25 000 (R[3 000 + 8 000 + 14 000])
* The owner’s additional investment
You will remember that the profit for a financial period is transferred to the capital account at the
end of the period. Suppose that the profit of the entity in the first financial year amounts to
R9 000. The profit is added to the capital:
GENERAL JOURNAL

Profit or loss
Capital: J Brewis
Transfer of profit for the year

R
9 000

Brewis’s capital will now amount to R49 000:
R
Initial investment
25 000
+ Additional investment 15 000
+ Profit for the year
9 000
49 000

15.4 Drawings
Unless Brewis has an adequate income from another source, he will probably have to use the
profit from his business for personal use. Generally, the ‘‘drawings’’ will take the form of cash
withdrawals, but he could also withdraw other assets. Consider, for example, a retailer who
takes groceries (ie from the trading inventory of the business) for his own use. This would also
be classified as ‘‘drawings’’.
Assume the owner, J Brewis, withdrew R8 000 in cash during the year. The entries would be as
follows:

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290

J B TELEVISION SERVICES
GENERAL LEDGER
Dr

Capital: J Brewis

20.2
Feb 28

Drawings
Balance

c/d

R
8 000
41 000

20.2
Feb 1
28

Cr
Balance
Profit or loss
(profit)

b/d

9 000

49 000

49 000
20.2
Mar 1

R
40 000

Balance

b/d

41 000

Drawings

20.2
Feb 28

Bank

R
8 000
8 000

20.2
Feb 28

Cr
Capital: J Brewis

R
8 000
8 000

COMMENT
. The original investment of the owner and any further contributions specified as capital
contributions are referred to as capital. When profit is added and drawings subtracted
from the capital investment this is known as equity. The equity shows the interest of
the owner in the entity. In other words the balance of R41 000 represents equity and
not capital. Equity is the claim that the owner has against the assets of the entity. In a
sole proprietorship the capital account is used to show the changes in equity. The
changes in equity are disclosed in a statement called the ‘‘Statement of changes in
equity’’.

15.5 The presentation of equity in the statement of changes in
equity and statement of financial position
Study paragraphs 15.4 to 15.6 of the prescribed book.

It is required that full details of equity must be shown in a statement of changes in equity. Any
changes in the course of the financial year, must be shown in the statement as follows:

JB TELEVISION SERVICES
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 28 FEBRUARY 20.2
Capital
R
25 000
15 000
9 000
(8 000)

Balance at 1 March 20.1
Additional investment
Total comprehensive income for the year
Drawings
Balance at 28 February 20.2

41 000

291

FAC1502/1

Only the balance at the end of the year will be shown in the statement of financial position as
follows:

JB TELEVISION SERVICES
STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.2 (extract)
Note

EQUITY AND LIABILITIES
Total equity

41 000

Capital

41 000

The following exercise illustrates a simple statement of profit or loss and other comprehensive
income, statement of changes in equity and statement of financial position of a sole
proprietorship. Take careful note of how the owner’s equity is treated.

Exercise 15.2
The following information relates to Jeff’s Maintenance Services:
POST-ADJUSTMENT TRIAL BALANCE AS AT 31 DECEMBER 20.1.
Dr
R
Bank
Trade receivables control
Inventory: cleaning materials
Equipment at cost
Vehicles at cost
Accumulated depreciation on equipment
Accumulated depreciation on vehicles
Insurance
Trade payables control
Fees earned
Capital: J Jefferson — 1 January 20.1
Drawings
Wages
Administrative expenses
Advertisements
Fuel and maintenance
Depreciation (equipment R1 300, vehicles R3 400)
Rental expenses

Cr
R

580
5 515
640
13 000
17 000
2 600
6 800
720
165
65 895
20 200
12 000
18 650
12 410
335
1 110
4 700
9 000
95 660

95 660

Required:

FAC1502/1

(1)

Prepare the statement of profit or loss and other comprehensive income of Jeff’s
Maintenance Services for the year ended 31 December 20.1.

(2)

Prepare the statement of changes in equity of Jeff’s Maintenance Services for the
year ended 31 December 20.1.

(3)

Prepare the statement of financial position of Jeff’s Maintenance Services as at
31 December 20.1.

(4)

Show the notes for the year ended 31 December 20.1.

292

Solution Exercise

15.2

JEFF’S MAINTENANCE SERVICES
(1)

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR
THE YEAR ENDED 31 DECEMBER 20.1

Revenue
Distribution, administrative and other expenses
Insurance
Wages
Administrative expenses
Advertisements
Fuel and maintenance
Rental expenses
Depreciation R(1 300 + 3400)

Note
2

Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year

R
65 895
(46 925)
720
18 650
12 410
335
1 110
9 000
4 700
18 970
—
18 970

JEFF’S MAINTENANCE SERVICES
(2)

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.1
Capital
R
20 200
18 970
(12 000)

Balance at 1 January 20.1
Total comprehensive income for the year
Drawings
Balance at 31 December 20.1

27 170

JEFF’S MAINTENANCE SERVICES
(3)

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.1

ASSETS
Non-current assets
Property, plant and equipment

Note
3

R
20 600
20 600

Current assets

6 735

Inventories
Trade and other receivables
Cash and cash equivalents

640
5 515
580

Total assets

27 335

EQUITY AND LIABILITIES
Total equity
Capital

27 170
27 170

Current liabilities
Trade and other payables

165
165

Total equity and liabilities

27 335

293

FAC1502/1

JEFF’S MAINTENANCE SERVICES
(4) NOTES FOR THE YEAR ENDED 31 DECEMBER 20.1
1

Accounting policy:
The annual financial statements have been prepared on the historical cost basis and
comply with International Financial Reporting Standards.

Revenue represents fees earned from clients for services rendered.

Property, plant and equipment
Carrying amount:
Beginning of year

Vehicles

Equipment

Total

13 600

11 700

25 300

17 000
(3 400)

13 000
(1 300)

30 000
(4 700)

Depreciation for the period

(3 400)

(1 300)

(4 700)

Carrying amount:
End of year

10 200

10 400

20 600

17 000
(6 800)

13 000
(2 600)

30 000
(9 400)

Cost
Accumulated depreciation

15.6 Revision exercises and solutions
15.6.1 Revision exercise 1
(1) What is the meaning of the accounting term ‘‘capital’’?
(2) How is the profit of a sole proprietorship treated in the accounting records of the entity at
the end of a financial year?
(3) What is meant by the term ‘‘drawings’’?
(4) How are drawings treated in the accounting records of a sole proprietorship at the end of a
financial year?
(5) What does equity of a sole trader consist of?

Solution: Revision exercise 1
(1) The ‘‘capital’’ of the owner in a sole proprietorship indicates the owner’s initial investment
plus any additional capital investments.
(2) The profit of a sole proprietor for a financial period is transferred to the capital account of
the owner and becomes part of equity at the end of each financial period.
(3) Drawings are cash amounts or merchandise withdrawn from the business entity by the
owner for personal use. Drawings result in a decrease in the equity of the sole
proprietorship because assets of the entity are taken by the owner.
(4) Drawings by the owner are debited to a drawings account during the financial year. At the
end of the financial year the drawings account is closed off to the capital account.
(5) The equity consists of the initial capital invested in the business entity plus all additional
investments, plus the profit for the year (or less the loss) and less the drawings.

FAC1502/1

294

15.6.2 Revision exercise 2
The following information relates to Peter Pumpkin, a service entity:
(1) TRIAL BALANCE OF PETER PUMPKIN AS AT 28 FEBRUARY 20.1

Land and buildings (at cost)
Furniture and fittings (at cost)

100 000
42 000

Accumulated depreciation — 28 February 20.0:
Furniture and fittings

5 000

15% Mortgage secured by land and buildings

30 000

Capital:

80 000

P Pumpkin — 28 February 20.0

Trade receivables control

8 100

Trade payables control

3 000

Bank overdraft
Drawings
Petty cash
Stationery

800
7 300
640
1 150

Salaries

21 100

Electricity

12 000

Telephone expenses

1 860

Fees earned

59 000

Rental income

16 500

Bank charges

150
194 300

(2)

194 300

ADDITIONAL INFORMATION:

(a) Stationery on hand at 28 February 20.1, R150.
(b) It was determined that the allowance for credit losses account should amount to R405 at
28 February 20.1.
(c) Rental income amounts to R1 500 per month and the rental has been charged for the full
financial year.
(d) Provide for interest still outstanding on mortgage.
(e) Provide for depreciation on furniture and fittings at 15% per annum on cost price.

Required:
(1)

Prepare the statement of profit or loss and other comprehensive income of Peter
Pumpkin for the year ended 28 February 20.1.

(2)

Prepare the statement of changes in equity of Peter Pumpkin for the year ended
28 February 20.1.

(3)

Prepare the statement of financial position of Peter Pumpkin as at 28 February 20.1.

(4)

Show the notes for the year ended 28 February 20.1.

295

FAC1502/1

Solution: Revision exercise 2
PETER PUMPKIN
(1)

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR
THE YEAR ENDED 28 FEBRUARY 20.1
Note

Revenue
Rental income (R1 500 6 12)

Distribution, administrative and other expenses
Stationery R(1150 7 150)
Salaries
Electricity
Telephone expenses
Bank charges
Credit losses
Depreciation: Furniture and fittings R(42 000 x 15%)

R
59 000
18 000
77
(42
1
21
12
1

000
815)
000
100
000
860
150
405
6 300

34 185
Finance costs: Interest on mortgage R(30 000 x 15%)

(4 500)

Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year

29 685
—
29 685

PETER PUMPKIN
(2)

FAC1502/1

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
28 FEBRUARY 20.1

Balance at 1 March 20.0
Total comprehensive income for the year
Drawings

Capital
R
80 000
29 685
(7 300)

Balance at 28 February 20.1

102 385

296

PETER PUMPKIN
(3) STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.1
ASSETS
Non-current assets
Property, plant and equipment

Note
3

Current assets
Inventories
Trade and other receivables
Cash and cash equivalents

R
130 700
130 700
9 985
150
9 195
640

R(8 100-405+1500)

Total assets

140 685

EQUITY AND LIABILITIES
Total equity

102 385

Capital

102 385

Total liabilities
Non-current liabilities
Long-term borrowings:
15% mortgage secured by land and buildings

38
30
30
30

300
000
000
000

Current liabilities

8 300

Trade and other payables R(3 000 + 4 500)
Other current liabilities

7 500
800

Total equity and liabilities

140 685

PETER PUMPKIN
(4) NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.1
1

Accounting policy:
1.1
1.2

The annual financial statements have been prepared on the historical cost basis and
comply with International Financial Reporting Standards.
Property, plant and equipment

Land and buildings are classified as investment properties and are not depreciated.
Depreciation has been provided for at 15% per annum on the cost price of furniture and
fittings.
2
3

Revenue represents fees earned from clients for services rendered.
Property, plant and equipment

Land and
buildings
R

Carrying amount:
Beginning of year
Cost
Accumulated depreciation
Depreciation for the period
Carrying amount:
End of year
Cost
Accumulated depreciation

Furniture
and fittings

Total

100 000

37 000

137 000

100 000
(—)

42 000
(5 000)

142 000
(5 000)

(6 300)

(—)
100 000

30 700

130 700

100 000
(—)

42 000
(11 300)

142 000
(11 300)

297

FAC1502/1

15.6.3 Revision exercise 3
This exercise has been compiled to give you some practice in the whole process of recording
and reporting from the point of entries in subsidiary journals up to the preparation of the
financial statements.
Mr K Kuman, who is registered as a VAT vendor, has a general dealer’s business. On
31 January 20.1, the following balances appeared in the ledger of the entity, Kumanbuy
General Dealer: (The VAT period of the entity ends on unequal months.)
(1) LIST OF BALANCES

Furniture and equipment (at cost)
Vehicles (at cost)
Inventory — 1 March 20.0
Cash in bank
Accumulated depreciation — 28 February 20.0:
— Furniture and equipment
— Vehicles
Debtors:
—
—
—
—

A Abrahams
B Barnard
C Chetty
D Dlamini

40
50
56
34

K Khoza
L Lawson
M Mnisi
N Nagel

VAT control (credit balance)
Sales
Purchases
Repairs
Petrol
Stationery
Water and electricity
Rental expenses
Wages and salaries
Telephone expenses
Capital: K Kuman — 28 February 20.0
Mr Kuman’s policy is to bank all cash receipts daily.

FAC1502/1

298

000
000
080
091

4 000
5 000
2 932
368
924
463
1 177

Creditors:
—
—
—
—

3 651
2 137
1 110
261
143
2
227
166
4
2
6
22
25
2
169

700
000
000
150
974
214
138
000
300
102
630

(2)

TRANSACTIONS, 10% VAT INCLUSIVE, DURING FEBRUARY 20.1:

20.1
Feb

1
2
3
4
6
9

Cash sales
Received from C Chetty in full settlement of his account
Paid L Lawson and received R55 discount
Sold goods on credit to E Erasmus
990
Received from D Dlamini on his account
Received from A Abrahams in full settlement of his account 346
Paid K Khoza
Paid N Nagel in full settlement
Paid M Mnisi
Purchased goods on credit from:
K Khoza
L Lawson

12
13
15
16
17
18
19
20
25

Returned goods to K Khoza
Cash sales
Sold goods on credit to D Dlamini
Sold goods on credit to C Chetty
C Chetty returned goods
Cash sales
Paid BB Garage for repairs to vehicles
Paid Pump Services for petrol
Purchased stationery from CSA for cash
K Kuman withdrew cash from the business
Cash purchases from P Prins
Paid:

2 137
132
261

165
5 500
880
2 200
110
1 100
550
330
165
10 000
3 146
3 000
2 020
2 700

Paid the following:
City Council for water and electricity
Rentguy for rental
Wages and salaries

507

7 040
6 600

K Khoza on account
L Lawson on account
South African Revenue Service for
VAT outstanding on 31 January 20.1
27

R
2 200
452
1 055

671
2 200
2 300

Cash sales
Purchased a new counter from Counterman for cash

2 750
1 100

(3) ADDITIONAL INFORMATION
(a) B Barnard was declared insolvent and could pay nothing in settlement of his account.
(b) Provision is made annually for depreciation on 28 February at 10% pa on the cost of
vehicles as well as furniture and equipment. No vehicles or furniture and equipment were
purchased or sold during the eleven months ended 31 January 20.1.
(c) Inventory on hand at 28 February 20.1 amounted to R60 000.
(d) The telephone account of R264 for February 20.1 was only received on 1 March 20.1.
(e) The bank statement received during March 20.1 indicated a favourable balance of R15 005
on 28 February 20.1. A comparison with the cash journals reflected the following:
ii(i) Cheques for water and electricity, R671 and rental, R2 200 issued on 27 February 20.1
had not yet been presented at the bank for payment.

299

FAC1502/1

i(ii) A withdrawal of R3 000 from the personal bank account of Mr Kuman was erroneously
debited to the entity’s account.
(iii) Bank charges to the amount of R45 have not yet been recorded in the cash payments
journal.
The above represented the only differences between the ledger balances and the bank
statement on 28 February 20.1.

Required:
NB: It is in your own interests to do this exercise without referring to the suggested
solution. Then you can compare your answer with the solution.
Although they are not given, you should use your own invoice numbers, receipt
numbers, cheque numbers, et cetera to ensure that the solution is as complete and
realistic as possible.
(1)

Record the transactions for February 20.1 in the relevant subsidiary journals and
close off the journals on 28 February 20.1.

(2)

Prepare journal entries for the adjustments.

(3)

Open the general ledger accounts at 31 January 20.1 and post the subsidiary
journals to the ledger.

(4)

Reconcile the balance of the bank account with that shown on the bank statement.

(5)

Open the individual debtors and creditors accounts in the relevant ledgers, balance
them and reconcile the list of balances with the balances of the control accounts in
the general ledger.

(6)

Prepare a post-adjustment trial balance.

(7)

Prepare the closing journal entries and post to the ledger.

(8)

Prepare the annual financial statements for the year ended 28 February 20.1.

Solution: Revision exercise 3
KUMANBUY GENERAL DEALER
(1) RECORDING OF TRANSACTIONS IN THE SUBSIDIARY JOURNALS
CASH RECEIPTS JOURNAL FOR FEBRUARY 20.1
VAT out- VAT
put
input
Doc

Date

CI 51–60
R1
R2
R3
CI 61–73
CI 74–78
CI 79–87

1
2
6

Details

Fol

Bank

FAC1502/1

13
17
28

Cash sales
C Chetty
D Dlamini
A Abrahams
Cash sales
Cash sales
Cash sales

300

DL3
DL4
DL1

Sales

Trade receivables

2 200
452
507
346
5 500
1 100
2 750

2 000

5 000
1 000
2 500

500
100
250

12 855

10 500

1 050

L14

CRJ12

Settlement
discount
granted
Dr

Sundry accounts

Amount

200
(1)

L13

(2)

463
507
368

(20)

(3)

1 338

(30)

L12

(10)

L25

—

Fol

Details

CASH PAYMENTS JOURNAL FOR FEBRUARY 20.1
VAT
input
Doc

Date

Details

Fol

Bank

Purchases

C123

L Lawson

CL2

1 055

C124

K Khoza

CL3

2 137

C125

N Nagel

CL4

132

C126

M Mnisi

CL1

261

C127

C128

BB Garage

550

Pump Services

330
165

C129

CSA

C130

K Kuman

C131
C132

VAT
output

Trade
payables

Settlement
discount
received

Cr
R

R
(5)

1 110

3 146

(1)

500 L18 Repairs
330 L19 Petrol

150 L20 Stationery
10 000 L11 Drawings

2 860

286
3 000

L Lawson

CL2

2 020

C134

South African
revenue service

(10)

C133

C137

Details

(50)

143

3 000

Fol

261

CL3

C136

Amount

2 137

K Khoza

C135

Sundry accounts

10 000

P Prins
25

CPJ12

2 700

VAT control

2 700

City council

671

Rentguy

2 200

200

2 000 L22 Rental expenses

Cash

2 300

Counterman

1 100

100

1 000 L 1 Furniture & equipment

Bank

610 L21 Water & electricity
2 300 L23 Wages & salaries

45
31 812
L4

45 L30 Bank charges
2 860
L16

712
L12

(6)

8 671

L12

(60)

19 635

L26

PURCHASES JOURNAL FOR FEBRUARY 20.1
Date

Details

Invoice

Fol

501
502

CL3
CL2

PJ12

Purchases
R

K Khoza
L Lawson

VAT input
R

Trade
payables
R

6 400
6 000

640
600

7 040
6 600

12 400

1 240

13 640

L16

L12

SALES JOURNAL FOR FEBRUARY 20.1
Date

Details

Invoice

Fol

901
902
903

DL5
DL4
DL3

SJ12
Sales
R

4
13
15

E Erasmus
D Dlamini
C Chetty

VAT output
R

Trade
receivables
R

900
800
2 000

90
80
200

990
880
2 200

3 700

370

4 070

L14

L13

PURCHASES RETURNS JOURNAL FOR FEBRUARY 20.1
Date

Details

Debit
note

Fol

301

CL3

Purchases
returns
R

K Khoza

PRJ12
VAT input
R

Trade
payables
R

150

165

150

165

L17

L12

301

FAC1502/1

SALES RETURNS JOURNAL FOR FEBRUARY 20.1

Date

Details

Credit
note

Fol

201

DL3

SRJ12

Sales
returns

VAT output

R
16

C Chetty

Trade
receivables

100
100

10
10

L15

110
110

L13

(2) GENERAL JOURNAL — FEBRUARY 20.1
Date

J12

Details

Fol

Debit

Credit

Credit losses
VAT input
B Barnard/Trade receivables
control
B Barnard’s account written off

L27
L12
DL2
L7

R
840
84

Depreciation
Accumulated depreciation: Vehicles
Furniture and equipment
Depreciation provided at 10%
pa on cost

L28
L6
L5

9 000

Telephone expenses
VAT input
Accrued expenses
Telephone account for February outstanding

L24
L12
L29

240
24

*VAT control
VAT input
Transfer of VAT input

L9
L12

2 048

*VAT output
VAT control
Transfer of VAT output

L13
L9

1 416

924

5 000
4 000

264

2 048

1 416

* If the VAT period does not coincide with the end of the financial year the VAT input and VAT output must be closed off
to the VAT control account to determine the amount of VAT owed by or to the SARS that must be disclosed in the
statement of financial position.

(3) GENERAL LEDGER
Dr

Furniture and equipment (at cost)

20.1
Feb 1 Balance
Feb 28

Bank

b/d

R
40 000

CPJ12

1 000
41 000

20.1
Mar 1

FAC1502/1

302

Balance

b/d

41 000

20.1
Feb 28

Balance

L1
c/d

Cr
R
41 000

41 000

Vehicles (at cost)

20.1
Feb 1 Balance

b/d

Dr
20.0
Mar 1
20.1
Feb 28

b/d

Trading
account

J13

R
50 000

Inventory
Balance

R
56 080

20.1
Feb 28

R
Trading
account
Balance

J13
c/d

56 080
60 000

60 000
116 080

20.1
Mar 1

Balance

b/d

116 080

60 000

Bank

20.1
Feb 1 Balance
28 Receipts

b/d
CRJ12

R
34 091
12 855

20.1
Feb 28

L4
Payments
Balance

R
31 812
15 134

CPJ12
c/d

46 946
20.1
Mar 1

Balance

Dr
20.1
Feb 28

b/d

46 946

15 134

Accumulated depreciation: Furniture and equipment
Balance

c/d

R
8 000

20.0
Feb 28
20.1
Feb 28

L5
b/d

R
4 000

Depreciation

J12

4 000
8 000

20.1
Mar 1

20.1
Feb 28

Balance

b/d

Accumulated depreciation: Vehicles
Balance

c/d

R
10 000

Balance

8 000

20.0
Feb 28
20.1
Feb 28

8 000

Balance

b/d

R
5 000

Depreciation

J12

5 000

10 000

10 000
20.1
Mar 1

Balance

b/d

303

10 000

FAC1502/1

Trade receivables control

20.1

Feb

1 Balance
28

Sales

20.1

b/d

2 932

SJ12

4 070

Cr
R

Feb 28

Bank and
discount

CRJ12

1 338

Sales returns

SRJ12

110

Credit losses

J12

924

Balance

c/d

4 630

7 002

20.1
Mar 1

Balance

b/d

4 630
Trade payables control

20.1

Feb 28

20.1

Bank and
discount

L8
R

Feb 1
CPJ12

8 671

Returns

PRJ12

165

Balance

c/d

Balance
Purchases

b/d

3 651

PJ12

13 640

8 455
17 291

17 291
20.1
Mar 1

Balance b/d

8 455

VAT control

20.1

Feb 25
28

Bank
VAT input

20.1

CPJ12

2 700

J12

2 048

Cr
R

Feb

1
28

Balance

b/d

2 700

VAT output

J12

1 416

Balance

c/d

632

4 748

20.1
Mar 1

Balance

b/d

632

Capital

20.1
Feb 28

R
Drawings

J13

10 000

loss

J13

14 953

Balance

c/d

144 677

L10

20.0
Mar 1

Cr
R

Balance

b/d

169 630

Profit or

169 630

169 630
20.1
Mar 1

Drawings

20.1
Feb 20

FAC1502/1

304

Balance

R
Bank

CPJ12

10 000

b/d
L11

20.1
Feb 28

146 677
Cr
R

Capital

J13

10 000

VAT input

20.1

Trade receivables CRJ12
Feb 28 Bank
CPJ12
Trade payables
PJ12
Trade receivables J12
Accrued
expenses
J12

3
712
1 240
84

L12

20.1
Feb 28 Trade payables
VAT control

R
PRJ12
J12

15
2 048

24
2 063

2 063

VAT output

20.1
Feb 28 Trade receivables SRJ12
VAT control
J12

R
10
1 416

L13

20.1
Feb 28 Bank
Trade receivables
Trade payables

CRJ12
SJ12
CPJ12

1 426

Sales
R
J13

J13

30
100
241 070

L14

20.1
Feb 1 Balance
28 Bank
Trade receivables

241 200

Sales returns

20.1
Feb 28 Trade receivables SRJ12

R
100

20.1
Feb 1 Balance
28 Bank
Trade payables

L15

20.1
Feb 28 Sales

L16

20.1
Feb 28 Settlement discount received
Purchases returns
28 Trading account

20.1
Feb 28 Purchases

R
60
150
181 050

J13

Dr
20.1
Feb 1 Balance
18 Bank

181 260

Purchases returns
J13

R
150

20.1
Feb 28 Trade payables

L17

R
4 150
500

R
150

L18

20.1
Feb 28 Profit or
loss

20.1
Feb 1 Balance
18 Bank

J13

4 650
4 650

Petrol
b/d
CPJ12

R
2 974
330

Cr
R

4 650
Dr

PRJ12

Repairs
b/d
CPJ12

J13

181 260
Dr

Cr
R
100

J13

Purchases
R
b/d 166 000
CPJ12 2 860
PJ12 12 400

Cr
R
227 000
10 500
3 700

b/d
CRJ12
SJ12

241 200

Cr
R
1 050
370
6

1 426

20.1
Feb 28 Settlement discount granted
Sales returns
Trading account

L19

20.1
Feb 28 Profit or
loss

Cr
R

J13

3 304

3 304
3 304

305

FAC1502/1

Stationery

20.1
Feb 1 Balance
19 Bank

b/d
CPJ12

L20

R
20.1
214 Feb 28 Profit or loss
150

J13

364

Dr
b/d
CPJ12

L21

R
20.1
6 138 Feb 28 Profit or loss
610

J13

6 748

Dr
b/d
CPJ12

R
22 000
2 000

20.1
Feb 28 Profit or loss

J13

b/d
CPJ12

R
25 300
2 300

20.1
Feb 28 Profit or loss

J13

expenses

b/d
J12

R
20.1
2 102 Feb 28 Profit or loss

J13

Dr
20.1
Feb 28 Purchases

Dr
20.1
Feb 28 Trade receivables

FAC1502/1

306

20.1
Feb 28

L25

Cr
R

Sales

J13

R
60

20.1
Feb 28 Trade payables
control

Credit losses
J12

R
2 342

2 342

Settlement discount received
J13

240

Settlement discount granted

20.1
Feb 28 Trade receivables
control
CPJ12

R
27 600

L24

2 342

27 600

Telephone expenses

20.1
Feb 1 Balance
28 Accrued

R
24 000

L23

27 600

24 000

Wages and salaries

20.1
Feb 1 Balance
27 Bank

R
6 748

L22

24 000

6 748

Rental expenses

20.1
Feb 1 Balance
27 Bank

R
364
364

Water and electricity

20.1
Feb 1 Balance
27 Bank

R
840

20.1
Feb 28

L26
R
CPJ12
L27

Profit or loss

J13

60
Cr
R
840

Dr
20.1
Feb 28

Depreciation
R
Accumulated
depreciation:
Furniture
Vehicles

J12
J12

20.1
Feb 28

L28
Profit or loss

Cr
R
9 000

J13

4 000
5 000
9 000

9 000

Accrued expenses
20.1
Feb 28

L29

Cr
R

Telephone
expenses
VAT input

J12
J12

240
24
264

Dr
20.1
Feb 28

Bank charges
Bank

CPJ12

Dr
20.1
Feb 28

R
45

20.1
Feb 28

L30
R
Profit or loss

J13

Trading account
Inventory
Purchases
Profit or loss
(gross profit)

J13
J13

R
56 080
181 050

J13

63 940

20.1
Feb 28

L31
Inventory
Sales

20.1
Feb 28

301 070

Profit or loss
Repairs
Petrol
Stationery
Water and
electricity
Rental expenses
Wages and
salaries
Telephone
expenses
Credit losses
Depreciation
Bank charges

J13
J13
J13

R
4 650
3 304
364

J13
J13

6 748
24 000

J13

27 600

J13
J13
J13
J13

2 342
840
9 000
45

Cr
R
60 000
241 070

J13
J13

301 070

20.1
Feb 28

L32

Cr
R

Trading
account
J13
Capital (Total comprehensive
income for the
year)
J13

78 893

63 940

14 953

78 893

307

FAC1502/1

(4) BANK RECONCILIATION STATEMENT AS AT 28 FEBRUARY 20.1
Debit

Credit

R
Credit balance as per bank statement
Outstanding cheques: No 134
135
Correction of error

R
15 005

671
2 200
3 000

Debit balance as per bank account

15 134
18 005

18 005

(5) TRADE RECEIVABELS LEDGER, TRADE PAYABLES LEDGER AND APPLICABLE
RECONCILIATIONS
TRADE RECEIVABELS LEDGER
Dr

A Abrahams

20.1
Feb 1 Balance

b/d

R
368

20.1
Feb 6

DL1
R
Bank and
discount

B Barnard

20.1
Feb 1 Balance

b/d

R
924

20.1
Feb 28

CRJ12

Credit losses
VAT output

J12
J12

b/d
SJ12

R
463
2 200

20.1
Feb 2

b/d

CRJ12
SRJ12
c/d

b/d
SJ12

2 090

R
1 177
880
2 057

20.1
Mar 1

FAC1502/1

308

Balance

b/d

463
110
2 090
2 663

D Dlamini

20.1
Feb 1 Balance
13 Sales

Cr
R

Bank and
discount
Returns
Balance

2 663
Balance

R
840
84

DL3

16
28
20.1
Mar 1

924

C Chetty

20.1
Feb 1 Balance
15 Sales

368

DL2

924

1 550

20.1
Feb 6 Bank
Feb 28 Balance

DL4
CRJ12
c/d

Cr
R
507
1 550
2 057

E Erasmus

20.1
Feb 4

Sales

SJ1

DL5

R
990

Cr
R

TRADE PAYABLES LEDGER
Dr

M Mnisi

20.1
Feb 9

Bank

CPJ12

R
261

CL1

20.1
Feb 1

R
Balance

b/d

L Lawson

20.1
Feb 3
25
28

R
Bank and
discount
Bank
Balance

CPJ12
CPJ12
c/d

1 110
2 020
4 580

261

CL2

20.1
Feb 1
11
11

Balance
Purchases
Purchases

7 710
20.1
Mar 1

20.1
Feb 9
12
25
28

Balance

b/d

K Khoza
Bank
Returns
Bank
Balance

CPJ12
PRJ12
CPJ12
c/d

R
2 137
165
3 000
3 875

4 580

CL3

20.1
Feb 1
11

Balance
Purchases

9 177
20.1
Mar 1

20.1
Feb 9

Balance

b/d

N Nagel
Bank and
discount

CPJ12

Cr
R
2 137
7 040

b/d
PJ12

9 177

Cr
R
1 110
6 600
6 600

b/d
PJ12
PJ12

7 710

20.1

143

Feb

3 875

CL4

Cr
R

Balance

b/d

143

RECONCILIATIONS
Debtors — C Chetty
D Dlamini
E Erasmus

R
2 090
1 550
990

Creditors — L Lawson
K Khoza

R
4 580
3 875

Balance of control account

4 630

Balance of control account

8 455

309

FAC1502/1

KUMANBUY GENERAL DEALER
(6) POST-ADJUSTMENT TRIAL BALANCE AS AT 28 FEBRUARY 20.1

Furniture and equipment (at cost)
Vehicles (at cost)
Inventory
Bank
Accumulated depreciation:
Furniture and equipment
Vehicles
Capital
Drawings
Trade receivables control
Trade payables control
VAT control
Sales
Sales returns
Purchases
Purchases returns
Repairs
Petrol
Stationery
Water and electricity
Rental expenses
Wages and salaries
Telephone expenses
Settlement discount granted
Settlement discount received
Credit losses
Depreciation
Accrued expenses
Bank charges

Debit

Credit

R
41
50
56
15

R
000
000
080
134
8 000
10 000
169 630

10 000
4 630
8 455
632
241 200
100
181 260
150
4 650
3 304
364
6 748
24 000
27 600
2 342
30
60
840
9 000
264
45
437 759

(7)

CLOSING JOURNAL ENTRIES

Date

Details

20.1
Feb 28 Settlement discount received
Purchases
Closing transfer
Sales
Settlement discount granted
Closing transfer

310

J13
Fol

Debit
R

Credit
R

L26
L16

L14
L25

L14
L15

100

Purchases returns
Purchases
Closing transfer of purchases returns

L17
L16

150

Trading account
Inventory
Purchases
Closing transfer

L31
L3
L16

237 130

Inventory
Sales
Trading account
Closing transfer

L3
L14
L31

60 000
241 070

Feb 28 Sales
Sales returns
Closing transfer of sales returns

FAC1502/1

437 759

100

150

56 080
181 050

301 070

Date

Details

Fol

20.1

Feb 28

Debit
R
63 940

Trading account
Profit or loss
Transfer of gross profit

L31
L32

Profit or loss
Repairs
Petrol
Stationery
Water and electricity
Rental expenses
Wages and salaries
Telephone expenses
Credit losses
Depreciation
Bank charges
Transfer of income and expenses to profit
or loss account

L32
L18
L19
L20
L21
L22
L23
L24
L27
L28
L30

78 893

Capital
Profit or loss
Transfer of loss for the period

L10
L32

14 993

Capital
Drawings
Transfer of drawings

L10
L11

10 000

Credit
R
63 940

4 650
3 304
364
6 748
24 000
27 600
2 342
840
9 000
45

14 953

10 000

KUMANBUY GENERAL DEALER
(8)

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR
THE YEAR ENDED 28 FEBRUARY 20.1

Revenue
Cost of sales
Inventory: 1 March 20.0
Purchases

Note
2

R
241 070)
(177 130)
56 080)
181 050)
237 130)
(60 000)

Inventory: 28 February 20.1
Gross profit

63 940)

Distribution, administrative and other expenses
Repairs
Petrol
Stationery
Water and electricity
Rental expenses
Wages and salaries
Telephone expenses
Credit losses
Depreciation
Bank charges

(78 893)
4 650)
3 304)
364)
6 748)
24 000)
27 600)
2 342)
840)
9 000)
45)

Loss for the year
Other comprehensive income for the year
Total comprehensive loss for the year

(14 953)
—
(14 953)

311

FAC1502/1

KUMANBUY GENERAL DEALER
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 28 FEBRUARY 20.1

Balance at 1 March 20.0
Total comprehensive loss for the year
Drawings

Capital
R
169 630
(14 953)
(10 000)

Balance at 28 February 20.1

144 677

KUMANBUY GENERAL DEALER
STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.1
ASSETS
Non-current assets
Property, plant and equipment
Current assets
Inventories
Trade and other receivables
Current VAT receivable
Cash and cash equivalents

Note
3

R
73 000
73 000
80 396
60 000
4 630
632
15 134

Total assets

153 396

EQUITY AND LIABILITIES
Total equity

144 677

Capital

144 677

Current liabilities
Trade and other payables R(8 455+264)
Total equity and liabilities

8 719
8 719
153 396

KUMANBUY GENERAL DEALER
NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.1
1

Accounting policy:
1.1
1.2

The annual financial statements have been prepared on the historical cost basis and
comply with International Financial Reporting Standards.
Property, plant and equipment:

Depreciation is provided for at 10% on the cost price of vehicles and furniture and
equipment.
2

FAC1502/1

Revenue is recognised as net sales to customers.

312

Property, plant and
equipment

Vehicles

Carrying amount:
Beginning of year

Furniture and
equipment

Total

R
45 000

36 000

81 000

50 000
(5 000)

40 000
(4 000)

90 000
(9 000)

Additions
Depreciation

—
(5 000)

1 000
(4 000)

1 000
(9 000)

Carrying amount:
End of year

40 000

33 000

73 000

50 000
(10 000)

41 000
(8 000)

91 000
(18 000)

Cost
Accumulated depreciation

SELF-ASSESSMENT
Now that you have studied this study unit, can you
.

describe equity in a sole proprietorship?

record the transactions relating to the establishment of a sole proprietorship?

calculate the amount of equity?

show how the equity is disclosed in the statement of changes in equity and in the
statement of financial position?

313

FAC1502/1

STUDY UNIT

16
Nonprofit entities

Learning outcome
Students should be able to record all transactions related to organisations and societies not
for gain.

Contents
Key concepts

315

16.1 Introduction

315

16.2 Receipts and payments statement

315

16.3 Income and expenditure statement

316

16.4 Trading statement

317

16.5 Accumulated fund

317

16.6 Special funds

317

16.7 Exercises

318

16.8 Entrance fees

323

16.9 Comprehensive example

324

16.10 Revision exercises and solutions

330

16.10.1 Revision exercise 1

330

16.10.2 Revision exercise 2

336

Self-assessment

FAC1502/1

314

341

KEY CONCEPTS
.
.
.
.
.
.
.
.
.
.

Receipts and payments statement
Income and expenditure statement
Trading statement
Statement of financial position
Special funds
Nonexpendable special funds
Expendable special funds
Accumulated fund
Entrance fees
Membership fees

16.1 Introduction
A nonprofit organisation can be defined as an economic entity which has the legitimate goal of
furthering certain interests of the community. Its objective is not to distribute profits to the
members but to use the profits in order to achieve the stated goal. Such an entity is oriented to
render a service to its members, and not to pursue financial gain.
These entities/societies can range from informal social clubs, (for example an activity club for
the elderly) to formal societies (for example schools and churches). Revenue may be acquired
from a variety of sources, such as membership fees, donations, fund raising projects, bequests
and even government subsidies. Membership, and not ownership, is acquired through the
payment of membership fees. Members of a nonprofit organisation can therefore not claim the
same rights in the entity as, for example, shareholders in a company excluding section 21companies.

Study paragraphs 16.1 to 16.3.4 of the prescribed book.

16.2 Receipts and payments statement
Study paragraph 16.4.1 of the prescribed book.
A receipts and payments statement is an analysed and classified summary of the cash
transactions. It is the most elementary version of a statement for a club or association.
Smaller entities which have no other assets than cash will often only prepare a receipts and
payments statement as the annual financial statement.
The statement can be prepared in a T-format where the actual cash received is entered on
the debit side, and the actual cash paid out on the credit side. All the cash received and paid,
whether it was operational revenue/expenses or revenue/expenses of a capital nature, is
recorded in this statement. Prepayments, income received in advance and accrued amounts
received or paid will also be entered because the accrual principle is not applied when this
statement is prepared.
Since this statement is merely a summary of cash transactions, the opening balance of the
statement represents the opening balance of cash on hand (in the bank), and the closing
balance of the statement represents cash on hand (in the bank) at the end of the period.
It is obvious that no financial performance (surplus or shortage) or financial position (as
reflected in the statement of financial position) can be determined from this statement.

315

FAC1502/1

Ex am ple
STEAR TENNIS CLUB
RECEIPTS AND PAYMENTS STATEMENT FOR THE YEAR ENDED 30 JUNE 20.2
Receipts
Balance 30/6/20.1
Entrance fees
Membership fees:

R
b/d

20.1
20.2
20.3

4 700
500
12 000
750
10 000
1 250

Interest income
Net proceeds from dance
Donation

2 332
620
3 520

Payments

Refreshments purchased
Wages
Tennis balls purchased
Tennis courts painted
Tennis courts built
Stationery and sundry
expenditure
Investment made at
ABC Bank
Balance
c/d

1 342
4 220
360

23 672
Balance

b/d

750
7 000
1 590
5 000
3 410
23 672

3 410

This statement can also be prepared in a vertical (narrative) format.
The financial information needs of a larger club or society will require more than the mere
presentation of a receipts and payments statement. An income and expenditure statement
(statement of profit or loss and other comprehensive income) as well as a statement of financial
position, similar to those of an ordinary trading entity, are usually also required.

16.3 Income and expenditure statement
Study paragraphs 16.4.2 and 16.4.3 of the prescribed book.

For all practical purposes the income and expenditure statement is prepared according to the
guidelines provided in IFRS.
It is very important to remember that outstanding and prepaid income and/or expenditure at the
beginning and at the end of the period should be taken into account when preparing the income
and expenditure statement. These prepaid or arrear items at the end of the period should also
be shown on the statement of financial position in the usual way.
An income and expenditure statement is intended to determine the surplus or deficit for an
accounting period.
This statement is very similar to a statement of profit or loss and other comprehensive income
prepared by a trading concern. The layout may differ from that of a statement of profit or loss
and other comprehensive income because all the relevant sources of income, including
investment income, can be shown under the heading ‘‘Income’’ and all the expenses, including
finance costs, can be shown under the heading ‘‘Expenses’’. The income and expenditure

FAC1502/1

316

statement is also prepared according to the accrual principle. The difference between the
revenue (credits) and expenses (debits) represents the surplus/deficit for the accounting
period.
The following is a comparison between an income and expenditure statement and a receipts
and payments statement:
Income and expenditure statement

Receipts and payments statement

1. Shows the total income and expenditure
for the period, even if not yet received or
paid (applying the accrual principle).

1. Shows only actual cash receipts and
payments.

2. Indicates the result of the financial
period’s transactions by showing a surplus or a deficit.

2. Shows the amount of cash on hand at the
beginning and at the end of a financial
period, but does not indicate a surplus or
deficit.

3. Receipts and payments of a capital
nature are not brought into account.

3. Receipts and payments of a capital
nature are included.

16.4 Trading statement
The majority of the bigger clubs do trade in order to generate revenue which they use to
achieve their stated goals, for example, the provision of bar and refreshment facilities to their
members. If the scale on which trading takes place justifies it, a separate trading statement can
be prepared for each operational activity. Therefore it is possible to prepare more than one
trading statement for a specific entity/society. The layout of such a trading statement is similar
to the trading section of a statement of profit or loss and other comprehensive income of an
ordinary trading concern. It closes off with the determination of the gross profit. Since trading
takes place, the term ‘‘gross profit’’ instead of ‘‘surplus’’ is used. The gross profit is carried
forward to the income and expenditure statement. The sales, administrative and general
expenses in respect of each operational activity are deducted from the applicable gross profits
in the income and expenditure statement. (Refer to the income and expenditure statement of
Green Golf Club, paragraph 16.10, revision exercise 1, which is given further on in this study
unit.)

16.5 Accumulated fund
Any initial donations made to begin the organisation, entrance fees, the surplus/deficit for each
period and special funds donated for general expenses will form part of the accumulated fund.
When money is donated for a special purpose, separate investment accounts must be opened
for special funds. This makes it possible to issue meaningful reports on the acquisiton and
utilisation of funds.

16.6 Special funds
Study paragraph 16.3.5 of the prescribed book.

A nonprofit entity often sets money aside for a specific purpose so that not all the cash is spent

317

FAC1502/1

on expenses of a general nature. Special funds are established for these purposes and they
are usually accounted for separately from the accumulated funds. Donations can then be made
to these funds or a special fund can be established for a conditional donation or legacy.
A separate investment account is usually opened for each special fund in which the capital is
deposited. Such donations and income earned from the investments thereof do not form part of
the general operating income of the organisation and should, as a general rule, not be included
in the income and expenditure statement. Likewise, the applicable expenses should also be
reflected through the fund account and not through the income and expenditure account.
Special funds can be divided into two main sections:
Firstly, special funds can be established to save or set aside money for a specific
purpose; eg, to purchase specific equipment. When sufficient funds have been
accumulated or received, the equipment can be purchased with the capital amount as
well as the income earned from the capital, if any.
. Secondly, special funds can be established where only the income earned from the
investment of the capital amount may be applied. It is also possible that such income may
only be spent on stipulated items.
.

This implies that the capital amount of such funds must be invested in a sound security. This
capital amount must remain untouched and will appear under the heading ‘‘Special funds:
Nonexpendable funds’’ in the balance sheet. The investments relating to these funds must
be shown as separate items on the asset section of the statement of financial position.
Cross-references must be given on the statement of financial position.
The funds account must be credited with the investment income. Should the income from
the investment be greater than the expenses involved, the balance will be shown in the
statement of financial position under the heading: ‘‘Special funds: Expendable funds’’.
Obviously, a fund may not incur more expenses than the balance of the expendable portion
thereof. Should the income from a fund be insufficient to pay for all the relevant expenses/
costs, the organisation will have to find alternative means to finance the outstanding
amounts.
The application of the revenue from or/and capital of a special fund may result in an increase in
the assets of the non-profit entity. Although the purchase of such assets is financed by means
of a fund, the increase in the value of the assets concerned must be shown as such on the
asset side of the statement of financial position. Acknowledgement of the fact that an increase
in an asset resulted from a fund can be shown in a note.
The following exercises illustrate fund accounts and their disclosure in the statement of
financial position.

16.7 Exercises
Exercise 16.1
Special fund
Income from a fund which must be used for a specific expense
On 1 July 20.0 Stear Tennis Club received a donation to the amount of R8 000 from S Star on
the express condition that the income received from the donation may only be used for the

FAC1502/1

318

painting of the tennis courts. On the same date the amount was invested as a fixed deposit at
ABC Bank at an interest rate of 10% per annum. The interest is received annually on 30 June.
No tennis courts were painted during the year ended 30 June 20.1. It was decided, as a
general policy, to invest all surplus interest amounts at ABC Bank as fixed deposits for a year.
During the year ended 30 June 20.2, the tennis courts were painted at a cost of R750. The
surplus interest was invested according to general policy at an interest rate of 10% per annum.
Required:
Show how these transactions will be recorded in the Star fund account of the club.

Solution Exercise

16.1

Star fund

20.1
Jun 30

20.2
Jun 30

Balance

Tennis courts painted
Balance

c/d

Expendable
(income)

Nonexpendable
(capital)

20.0

8 000

Jul 1

Bank: Capital donation

20.1
Jun 30

Bank: Interest on investment

800

8 000

750
930

—
8 000

1 680

20.1
Jul 1
20.2
Jun 30

Expendable
(income)

Nonexpendable
(capital)

—
800
800

8 000

b/d

800

8 000

Bank: Interest on investment
(a)

880

—

1 680

8 000

930

8 000

Balance

8 000
20.2
Jul 1

8 000

Balance

b/d

CALCULATION
(a) (10% 6 R8 000) + (10% 6 R800) = R880

COMMENTS
. Because the interest earned and the expenses in respect of the tennis courts that were
painted are accounted for in the fund account, these items will not be disclosed in the
income and expenditure statement. The tennis courts were painted during the year.
The recording of these expenses would have been as follows: Debit the painting of
tennis courts account and credit the bank account. On 30 June 20.2, the date on which
the interest was received, the fund account was debited with this expense and the
painting of tennis courts account was credited. (This entry will balance the painting of
tennis courts account.)
. The statement of financial position of the Stear Tennis Club will show the items in
respect of the fund as follows:

319

FAC1502/1

STEAR TENNIS CLUB
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.2 (extract)
ASSETS
Non-current assets
Financial assets: Star fund — Fixed deposit at
10% per annum at ABC Bank

Note

R
8 930

FUNDS AND LIABILITIES
Funds
Special funds

8 930

Nonexpendable funds (capital)
Star fund
Expendable funds
Star fund

8 000
930

Exercise 16.2
SPECIAL FUND
Income from a fund which must be used to purchase property, plant and equipment.
On 1 July 20.0 the Stear Tennis Club received a donation to the amount of R100 000
from S Superstar on the express condition that the revenue from the fund may only be
used for the building of tennis courts. On the same date the amount was invested as a fixed
deposit at ABC Bank at an interest rate of 10% per annum. The interest is received annually on
30 June. No tennis courts were built during the year ended 30 June 20.1. It was decided, as a
general policy, to invest all surplus interest amounts at ABC Bank as fixed deposits for a year.
During the year ended 30 June 20.2, the tennis courts were built at a cost of R70 000.

Required:
Show how these transactions are recorded in the Superstar Fund account of the club.

FAC1502/1

320

Solution Exercise

16.2

20.1
Jun 30

20.2
Jun 30

Superstar fund

Balance

Accumulated fund
Balance

c/d

Expendable
(income)

Nonexpendable
(capital)

R
10 000

R
100 000

10 000

100 000

21 000
—

—
100 000

21 000

Cr
Expendable
(income)

20.0
Jul 1

Bank: Capital donation

20.1
Jun 30

Bank: Interest on investment

20.1
Jul 1
20.2
Jun 30

Balance

R
—

b/d

Bank: Interest on investment
(a)

Balance

R
100 000

10 000

100 000
20.2
Jul 1

Nonexpendable
(capital)

b/d

10 000

100 000

10 000

100 000

11 000

—

21 000

100 000

—

100 000

CALCULATION
(a) (10% 6 R100 000) + (10% 6 R10 000) = R11 000

COMMENTS
. Because a non-current asset was obtained from the income of the fund, the amount
contributed by the fund must be credited to the accumulated fund account. Bear in
mind that the asset account was debited during the year at the date of the purchase.
. The statement of financial position of Stear Tennis Club will show the items in respect
of the fund as follows:

STEAR TENNIS CLUB
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.2 (extract)
ASSETS
Non-current assets
Property, plant and equipment
Financial assets: Superstar fund — Fixed deposit at
10% per annum at ABC Bank

Note

R
170 000
70 000

100 000

FUNDS AND LIABILITIES
Funds
Accumulated fund
Balance: 1 July 20.2
Add: Tennis court built

XX XXX
XX XXX
XXXXX
21 000

Special funds
Nonexpendable funds (capital)
Superstar fund

100 000

321

FAC1502/1

STEAR TENNIS CLUB
NOTES FOR THE PERIOD ENDED 20 JUNE 20.2 (extract)
Note 1 (extract)
Property, plant and equipment

Land and buildings
R

Additions (tennis courts):

70 000

From own funds
From income:
Superstar fund

49 000
21 000

Remark
The accumulated fund account will be credited with the amount which the fund
contributed to the building of the tennis courts. In other words, the amount of R21 000 will
be added to the balance of the accumulated fund account.

Exercise 16.3
PART OF ACCUMULATED FUND
Income from a fund which must be used to pay general (operational) expenses
On 1 July 20.1 Mr T Trueman donated R3 520 to the club on the express condition that the
capital should be invested. The income from the investment can be used to pay general
(operational) expenses. On the same date the amount was invested as a fixed deposit at
ABC Bank at 10% interest per annum. The income was spent accordingly.

Solution Exercise

16.3

Because the income from the fund has to be used to pay general expenses, an income account
can be opened in the general ledger of the entity. The balance of this account will be disclosed
as follows in the income and expenditure statement:

STEAR TENNIS CLUB
INCOME AND EXPENDITURE STATEMENT FOR THE YEAR ENDED 30 JUNE 20.2
(extract)
R
Revenue
Membership fees

10 972

Interest income (donation from T Trueman)

10 000
10 352

Net proceeds from dance

10 620

The accounting for the capital amount and the related investment is as follows:
Debit bank and credit the accumulated fund account with the capital amount of R3 520. Credit
bank and debit the general investments account of the club which is financed from the
accumulated fund. The investment will still be disclosed separately, but will form part of these
general investments.

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322

The Trueman fund and the related investment will be disclosed as follows in the statement of
financial position:

STEAR TENNIS CLUB
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.2 (extract)
ASSETS
Non-current assets
Property, plant and equipment
Financial assets: General fund — Fixed deposit at 10%
per annum at ABC Bank

Note

R
10 520
7 000

Trueman fund

3 520

FUNDS AND LIABILITIES
Funds
Accumulated fund (includes donation by T Trueman)

10 520

COMMENT
. Assume that there were no conditions and that the donation of R3 520 could be spent
on general expenses. The amount would be debited to the bank account and credited
to the donation received account on the date on which the donation was received. The
donation received will be disclosed in the general income and expenditure statement
as follows:

STEAR TENNIS CLUB
INCOME AND EXPENDITURE STATEMENT FOR THE YEAR ENDED 30 JUNE 20.2
(extract)
R
Revenue

14 140

Membership fees
Donation received (T Trueman)
Net proceeds from dance

10 000
3 520
620

16.8 Entrance fees
Refer to paragraph 16.3.1 of the prescribed book.

Entrance fees are payable by prospective members when they apply for membership of a club.
The entrance fees are entered on the debit side of the bank account, and are credited to the
entrance fees account.
These fees, being nonrecurrent, must be credited directly to the accumulated fund account
(capitalised) and are not shown in the income and expenditure statement as revenue.

323

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Study paragraphs 16.5 and 16.6 of the prescribed book.

16.9 Comprehensive example
The following information relates to Pretoria Modellers’ Club, an association of people who
build model boats as a hobby:
ITEMS ON THE PRE-ADJUSTMENT TRIAL BALANCE AT 28 FEBRUARY 20.2
Land and buildings (at cost)
Furniture and equipment:
At cost
Accumulated depreciation (28 February 20.1)
Membership fees (received)
Membership fees in arrears (28 February 20.1)
Membership fees received in advance (28 February 20.1)
Telephone expenses
Wages
Water and electricity
Maintenance of buildings
Jekyll fund (28 February 20.1)
Current account — Zeeland Bank (favourable balance)
Admission fees received (to hobbies fair)
Hobbies fair expenses
10% Long-term loan (SAL Bank) — 28 February 20.1
(Loan secured by first mortgage over land and buildings)
Accumulated fund (28 February 20.1)
Investment (SAL Bank)
Interest income — SAL Bank at 8% pa
Interest expense
Refreshments:
Inventory (28 February 20.1)
Purchases
Sales

R
50 000
10 000
2 710
15 000
900
1 100
450
5 000
4 600
1 500
20 000
1 400
6 300
8 200
30 000
25
20
1
3

940
000
600
000

200
3 600
6 200

ADDITIONAL INFORMATION
(a) The income from the Jekyll fund may only be used for the maintenance of the buildings of
the club.
(b) Membership fees:
In arrear at 28 February 20.2
Received in advance at 28 February 20.2

R1 800
R1 300

(c) Depreciation on furniture and equipment is calculated at 10% per annum on the diminished
balance. The depreciation for the year ended 28 February 20.2 must still be brought into
account.
(d) Six new members joined the club during the year. The entrance fee of R200 per person is
included in the figure for membership fees received, but should be included in the
accumulated fund.
(e) Inventory of refreshments at 28 February 20.2 amounted to R300.
(f) The interest income (SAL Bank) was received in respect of the Jekyll fund.
(g) The current account — Zeeland Bank, had an unfavourable balance of R1 350 at
28 February 20.1.

FAC1502/1

324

Required:
Prepare:
1.

The Jekyll fund account in the general ledger of the club for the year ended
28 February 20.2

The following statements of the club for the year ended 28 February 20.2:
(a)
(b)
(c)

Refreshments: trading statement
Receipts and payments statement
Income and expenditure statement

The statement of financial position of the club as at 28 February 20.2.

The property, plant and equipment note.

Solution: Comprehensive example
PRETORIA MODELLER’S CLUB
1 GENERAL LEDGER
Dr

Jekyll fund

20.2
Feb 28

Maintenance: buildings
Balance

c/d

Expendable
(income)

Nonexpendable
(capital)

Expendable
(income)

Nonexpendable
(capital)

20.1

1 500

—

100

20 000

1 600

Mar 1

Balance

b/d

20.2
Feb 28

Bank: Interest on investment

Balance

20 000

1 600

20 000
20.2
Mar 1

—

b/d

1 600

20 000

100

20 000

PRETORIA MODELLERS’ CLUB
2(a) REFRESHMENTS: TRADING STATEMENT FOR THE YEAR ENDED
28 FEBRUARY 20.2
R
Revenue
Cost of sales

6 200
(3 500)

Inventory (28 February 20.1)
Purchases

200
3 600

Inventory (28 February 20.2)

3 800
(300)

Gross profit

2 700

325

FAC1502/1

PRETORIA MODELLERS’ CLUB
2(b) RECEIPTS AND PAYMENTS STATEMENT FOR THE YEAR ENDED
28 FEBRUARY 20.2

Bank balance at 28 February 20.1
Receipts
Membership fees
Hobbies fair admissions
Interest income
Refreshments sold
Payments
Telephone expenses
Wages
Water and electricity
Maintenance of buildings
Hobbies fair expenses
Refreshments purchased
Interest expenses
Bank balance at 28 February 20.2 (favourable)

R
(1 350)
29 100)
15
6
1
6

000
300
600
200

(26 350)
5
4
1
8
3
3

450
000
600
500
200
600
000

1 400)

PRETORIA MODELLERS’ CLUB
2(c) INCOME AND EXPENDITURE STATEMENT FOR THE YEAR ENDED
28 FEBRUARY 20.2
R
Income
Membership fees
R(15 000 7 900 + 1 100 + 800 7 1 300 71 200) (a)
Admission fees (hobbies fair)
Gross profit on sale of refreshments
Expenditure
Hobbies fair expenses
Depreciation on furniture and equipment
Interest (SAL Bank bond)
Telephone expenses
Wages
Water and electricity
Surplus for the year

FAC1502/1

326

22 500)
13 500
6 300
2 700
(21 979)
8 200
729
3 000
450
5 000
4 600
521)

PRETORIA MODELLERS’ CLUB
(3) STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.2
ASSETS

Note

Non-current assets
Property, plant and equipment
Financial assets — SAL Bank at 8% pa

76 561
3

56 561
20 000

Jekyll fund

20 000

Current assets

2 500

Inventory (refreshments)
Trade and other receivables
Cash and cash equivalents

300
800
1 400

Total assets

79 061

FUNDS AND LIABILITIES
Funds
Accumulated fund (b)

47 761
27 661

Special funds

20 100

Nonexpendable funds
Jekyll maintenance fund

20 000
20 000

Expendable funds
Jekyll maintenance fund

100
100

Total liabilities

31 300

Non-current liabilities

30 000

Long-term borrowing — SAL Bank (secured by
first mortgage over land and buildings)

30 000

Current liabilities

1 300

Income received in advance

1 300

Total funds and liabilities

79 061

327

FAC1502/1

PRETORIA MODELLERS’ CLUB
(4) NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.2
Note 3 (extract)

Property, plant and equipment

Carrying amount: Beginning of year
Cost price
Accumulated depreciation

Land and
buildings

Furniture
and
equipment

50 000

7 290

57 290

50 000
—

10 000
(2 710)

60 000
(2 710)

(729)

Depreciation for the year

—

Carrying amount: End of year
Cost price
Accumulated depreciation

50 000

6 561

50 000
—

10 000
(3 439)

Total

56 561
60 000
(3 439)

CALCULATIONS
(a)
Dt
20.1
Mar 1
20.2
Feb 28

Membership fees

Balance
Entrance fees
Income and
expenditure
Balance

b/d

R
900

1 200

J
c/d

*13 500
1 300

20.1
Mar 1
20.2
Feb 28

Balance

b/d

R
1 100

Bank
Balance

CRJ
c/d

15 000
800

16 900
20.2
Mar 1

Balance

b/d

800

16 900
20.2
Mar 1

Balance

b/d

1 300

* Balancing figure
Both balances must be disclosed in the statement of financial position: The debit balance of
R800 as a current asset and the R1 300 as a current liability.
The above membership fees account can be replaced by the following three accounts.

FAC1502/1

328

Membership fees

20.1
Mar 1

20.2
Feb 28

Accrued income

Entrance fees
Income received
in advance
Income and
expenditure

R
900*

1 200*

1 300*

13 500*

20.1
Mar 1

R
Income received
in advance

20.2
Feb 28 Bank
Accrued income

1 100

CRJ
J

15 000
800

16 900*

16 900

* Balancing figure
Dt

Accued income (Membership fees in arrears)

20.1
Mar 1

Balance

b/d

R
900

20.2
Feb 28

20.1
Mar 1

Membership fees

R
900

c/d

800

20.2
Membership fees

800

Feb 28

Balance

1 700
20.2
Mar 1

Balance

b/d

1 700

800

The closing balance of this account is shown as a current asset in the statement of financial
position.
Dr

Income received in advance (Membership fees received in advance)

20.1
Mar 1

Membership fees

R
1 100

Balance

c/d

1 300

20.2
Feb 28

20.1
Mar 1

Balance

c/d

R
1 100

Membership fees

1 300

20.2
Feb 28

2 400

2 400
20.2
Mar 1

Balance

b/d

1 300

The closing balance of this account is shown as a current liability in the statement of financial
position.
(b) Accumulated fund = R(25 940 + 521 + 1 200) = R27 661

COMMENTS
. The above example is an illustration of the treatment of funds. Note the following:
. The income from the Jekyll fund is used to finance an expense item.
. The nonexpendable capital amounts of funds are treated separately from the
unspent portions of the interest which are still available for future applications
(expendable funds).

329

FAC1502/1

. Should the income from a fund be insufficient to cover an expense, the shortage can
be debited to the income and expenditure account of the club.
. In the above example the income and expenditure in respect of the hobbies fair is
merely shown as a calculation in the income and expenditure statement. Had there
been a number of different items pertaining to the fair, it would have been necessary to
prepare a separate trading statement in respect of the hobbies fair.
. Entrance fees are capitalised, that is, credited directly to the accumulated fund
account.
. In the question the opening balance of the accumulated fund is given. If it is not given,
it can be calculated as the difference between the total debit balances and the total
credit balances supplied in any list of balances from which the final statements are to
be compiled.

16.10 Revision exercises and solutions
16.10.1 Revision exercise 1
The following information relates to the Green Golf Club:
BALANCES AS AT 31 DECEMBER 20.4
Green fees and caddy fees received
Bank (debit balance)
Crockery and linen at cost — 31 December 20.3
Sundry debtors
Sundry creditors
Telephone expenses
Dining room:
Purchases
Wages
Sales
Inventory — 31 December 20.3
Buildings (at cost)
Land and improvements (at cost)
Implements and tools:
At cost
Accumulated depreciation — 31 December 20.3
Maintenance expenses
Entrance fees received
Bar:
Purchases
Wages
Sales
Inventory — 31 December 20.3
Membership fees
Furniture:
At cost
Accumulated depreciation — 31 December 20.3
Accumulated fund — 31 December 20.3
Interest expenses (Paid on mortgage to 30 June 20.4)
Salaries and wages
Stationery consumed
15% Mortgage
Insurance prepaid — 31 December 20.3

FAC1502/1

330

R
16 000
5 500
7 000
2 100
16 000
6 600
14
10
30
1
160
520

500
000
000
000
000
000

21
11
10
10

000
000
900
500

50
12
100
3
84

000
000
000
000
000

25
6
150
37
35
2
500

000
000
000
500
000
000
000
400

ADDITIONAL INFORMATION
(a) Bar inventory at 31 December 20.4 amounted to R2 500.
(b) At 31 December 20.4, dining room inventory was not counted, but it can be assumed that
the usual gross profit margin of 50% on turnover was realised.
(c) At 31 December 20.4, crockery and linen were valued at R5 000.
(d) Implements and tools must be depreciated at 20% per annum, using the diminishing
balance method.
(e) Furniture must be depreciated by R1 000.
(f) Insurance premiums paid during the year, amounting to R1 600, were debited to the
telephone expense account. Half of this amount is to be regarded as insurance prepaid.
(g) The balance of the membership fees account was compiled from the following; an amount
of R1 800 in respect of prepaid membership fees at 31 December 20.3 and cash received
during the year, R82 200. The balance has still to be adjusted for the membership fees in
arrears to the amount of R1 000 and prepaid membership fees to the amount of R2 100 at
31 December 20.4.
(h) A new member’s register which is in use was designed and printed at a quoted price of
R100. This transaction has still to be recorded in the books.
(i) The club secretary went on leave before Christmas and was paid his January 20.5 salary
of R1 200 in advance. This amount forms part of the balance of the salaries and wages
account (R35 000).
(j) On 29 December 20.4 a club member deposited an amount of R500 in the club’s bank
account as a donation. This donation was only discovered when the bank balance was
compared with the balance of the bank statement and must still be taken into account.
(k) The mortgage is secured by a first mortgage over fixed property.

Required:
Prepare the following statements of Green Golf Club:
1.

The income and expenditure statement for the year ended 31 December 20.4
(NB: Show the calculations of the gross profit for the bar and dining room
separately.)

The statement of financial position as at 31 December 20.4.

The property, plant and equipment note.

331

FAC1502/1

Solution: Revision exercise 1
GREEN GOLF CLUB
(1) INCOME AND EXPENDITURE STATEMENT FOR THE YEAR ENDED
31 DECEMBER 20.4
R
Income
Membership fees
R(1 800 + 82 200 7 2 100 + 1 000) (a)
Green fees and caddy fees
Income from bar sales
Gross profit (b)
Wages
Income from dining room
Gross profit (c)
Wages

141 900 )
82 900)
16 000)
37 500)
49 500
(12 000)
5 000)
15 000
(10 000)

Donation received
Expenses
Salaries and wages R(35 000 – 1 200)
Interest on mortgage (15% 6 R500 000)
Maintenance
Telephone expenses R(6 600 – 1 600)
Stationery R(2 000 + 100)
Insurance R(1 600 + 400 – 800)
Depreciation
Implements and tools (20% 6 R10 000)
Furniture
Crockery and linen R(7 000 — 5 000)
Surplus for the year

FAC1502/1

332

500)
(133 000)
33
75
10
5
2
1
5

800)
000)
900)
000)
100)
200)
000)

2 000
1 000
2 000
8 900

GREEN GOLF CLUB
(2) STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.4

ASSETS

Note

Non-current assets
Property, plant and equipment

711 000

Current assets

14 100

Inventory (refreshments)
Prepayments R(800 + 1 200)
Trade and other receivables R(2 100 + 1 000)
Cash and cash equivalents

3
2
3
6

Total assets

000
000
100
000

725 100

FUNDS AND LIABILITIES
Funds

169 400

Accumulated fund (d)

169 400

Total liabilities
Non-current liabilities

555 700
500 000

Long-term borrowing — 15% mortgage
(Secured by first mortgage over fixed property)

500 000

Current liabilities

55 700

Trade and other payables
R[16 100 + 37 500 (e)]
Income received in advance

53 600
2 100

Total funds and liabilities

725 100

333

FAC1502/1

GREEN GOLF CLUB
(3) NOTES FOR THE YEAR ENDED 31 DECEMBER 20.4
Note 3 (extract)
Property, plant and
equipment

Land, building and
improvements

Crockery and
linen

Implements
and tools

Furniture

Total

Carrying amount:
Beginning of year
Cost
Accumulated depreciation

680 000
680 000
(—)

7 000
7 000
(—)

10 000
21 000
(11 000)

19 000
25 000
(6 000)

716 000
733 000
(17 000)

Depreciation for the period
Revaluation

(—)
(—)

(—)
(2 000)

(2 000)
(—)

(1 000)
(—)

(3 000)
(2 000)

680 000

5 000

8 000

18 000

711 000

680 000
(—)

7 000
(2 000)

21 000
(13 000)

25 000
(7 000)

733 000
(22 000)

Carrying amount:
End of year
Cost
Accumulated depreciation

CALCULATIONS
(a)
Dr

Membership fees

Income and expenditure
Income received in advance

R
82 900
2 100

Income received in advance
Bank
Accrued income

85 000

(b)

Bar gross profit
Sales
Less: Cost of sales
Opening inventory
Purchases
Less: Closing inventory

85 000

3
50
53
2

Dining room gross profit
Sales
Less: Cost of sales (R30 000 6 50%)
Less: Opening inventory
Less: Purchases
Less: Less: Closing inventory (Balancing figure)
Gross profit

FAC1502/1

334

R
100 000
50 500

000
000
000
500

Gross profit
(c)

R
1 800
82 200
1 000

49 500

30 000
15 000
1 000
14 500
15 500
500
15 000

(d)

(e)

Accumulated fund
Balance (28 February 20.1)
Add: Surplus for the year
Add: Entrance fees

R
150 000
8 900
10 500
169 400

Interest payable
15% of R500 000
Less: Paid
Due

R
75 000
37 500
37 500

COMMENTS
. Entrance fees are not shown in the income and expenditure statement because
.
.

They represent nonrecurrent income.
They are of a capital nature.

. The current expenses of a club, society or organisation not for gain should be
estimated in advance for the next financial year. The annual membership fees are
then determined by dividing the total budgeted expenses by the number of members.
. Smaller donations received can be regarded as normal revenue, but should a
donation be of a nonrecurrent nature and the amount is material (eg where a
benefactor makes a special donation, or where a testamentary legacy is bequeathed),
then it clearly becomes a receipt of a capital nature. Certain bodies, such as welfare
organisations, often receive large amounts from the proceeds of a street collection, or
from state grants-in-aid. These receipts are naturally not of a capital nature (unless
specifically labelled and awarded as such) and should therefore be disclosed in the
income and expenditure statement.
. Crockery, glassware, linen, et cetera are not current assets, but form part of the
equipment that must be provided before income can be earned.
. Wages do not form part of gross profit and must be shown in the income and
expenditure statement.
. Note that in practice calculations are not shown on final statements [eg insurance
(R40 + 1/2 of R160)]. For examination purposes, you may show calculations in this
manner, on condition that they are clearly indicated as calculations.

335

FAC1502/1

16.10.2 Revision exercise 2
The following information relates to the Spring Tennis Club:
(1) Statement of financial position items as at 31 December 20.1
R
Equipment (at cost)
Less: Accumulated depreciation
Fixed deposit at Trade Bank (at 12% per annum)
Inventory: Tennis balls
Accrued membership fees
Accrued interest on fixed deposit
Prepaid rental
Savings account (favourable)
Bank (favourable)
Accumulated fund
Special fund for championships
Prepaid membership fees
Accrued wages

21 600
8 880

R
12 720
25 600
984
192
1 024
480
2 880
8 400
26 440
25 600
168
72

(2) Cash transactions for the year ended 31 December 20.2
Receipts:
Visitors fees
Membership fees: 20.1
20.2
20.3
Entrance fees
Interest received: Fixed deposit
Savings account
Championship entry fees
Donations

R
4 860
120
19 920
48
864
3 584
156
3 240
4 680

Payments:
Municipal taxes
Refreshments
Stationery
Tennis balls
Affiliation fees
Championship expenses
Honorarium
Wages
Maintenance
Rental: Tennis courts
Equipment (purchased on 30 September 20.2)
Transfer to savings account

FAC1502/1

336

3
1
1
5
6
2
3
2
4
2
1

504
800
512
280
120
400
880
360
232
800
400
080

ADDITIONAL INFORMATION
(a) Entrance fees must be capitalised.
(b) Inventory on hand at 31 December 20.2:
Tennis balls — R420
Refreshments — R72
(c) Rental of tennis courts amounted to R480 per month.
(d) Unpaid membership fees for 20.1 are irrecoverable.
(e) The club has 84 members and membership fees amount to R20 per month.
(f) Stationery amounting to R120 was purchased on credit and used during the year.
(g) Wages of R360 are still outstanding.
(h) Used equipment with a cost price of R1 200 and accumulated depreciation of R960 at
31 December 20.1 must be written off as from 1 January 20.2.
(i) Provision must be made for depreciation on equipment at 20% per annum on the
diminished balance.
(j) The interest on the fixed deposit at Tradebank may only be used for championship
expenses. The capital amount of the special fund is not expendable.

Required:
Prepare the following account and statements of Spring Tennis Club:
1.

The membership fees account for the year

The income and expenditure statement for the year ended 31 December 20.2

The statement of financial position as at 31 December 20.2.

The property, plant and equipment note to the financial statements.

Solution: Revision exercise 2
SPRING TENNIS CLUB
(1) GENERAL LEDGER
Dt
20.2
Jan 1
Dec 31

Membership fees

Balance
Income and expenditure:
R(20 6 84 6 12)
Balance (prepaid)

b/d

R
192

c/d

20 160
48

20.2
Jan 1
Dec 31

Balance
Bank — 20.1
Bank — 20.2
Bank — 20.3
Credit losses
Balance (in arrears)

b/d

c/d

20 400
20.3
Jan 1

Balance

b/d

R
168
120
19 920
48
72
72
20 400

20.3
Jan 1

Balance

b/d

337

FAC1502/1

SPRING TENNIS CLUB
(2) INCOME AND EXPENDITURE STATEMENT FOR THE YEAR ENDED
31 DECEMBER 20.2

Income
Visitors’ fees
Membership fees
Interest (savings account)
Donations
Expenses
Municipal taxes
Credit losses R(192 – 120)
Refreshments R(1 800 – 72)
Stationery R(1 512 + 120)
Tennis balls R(984 + 5 280 – 420)
Affiliation fees
Honorarium
Wages R(3 360 – 72 + 360)
Maintenance
Rental expenses R(480 6 12)
Depreciation (a)
Loss on the scrapping of equipment (a)
Championship: shortage (b)
Deficit for the year

FAC1502/1

338

R
29 856)
4 860)
20 160)
156)
4 680)
(30 364)
3 504)
72)
1 728)
1 632)
5 844)
120)
2 880)
3 648)
2 232)
5 760)
2 616)
240)
88)
(508)

SPRING TENNIS CLUB
(3) STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.2
ASSETS

Note

Non-current assets

37 864

Property, plant and equipment
Financial assets

12 264
25 600

Fixed deposit at Trade Bank (at 12% pa)

25 600

Current assets

15 540

Inventories R(420 + 72)
Trade and other receivables R[72 + 512 (c)]
Cash and cash equivalents R[3 960 + 10 504 (d and e)]

492
584
14 464

Total assets

53 404

FUNDS AND LIABILITIES
Funds

52 396

Accumulated fund (f)
Special funds
Non-expendable funds
Championships

26 796
25 600
25 600

Current liabilities

1 008

Trade and other payables
R[120 + 360 + 480 (g)]
Income received in advance

960
48

Total funds and liabilities

53 404

SPRING TENNIS CLUB
(4) NOTES FOR THE YEAR ENDED 31 DECEMBER 20.2
Note 3
Property, plant and equipment

Carrying amount: Beginning of year

Equipment

Total

12 720)

Cost price
Accumulated depreciation

21 600)
(8 880)

Additions (from own funds)
Disposals at carrying amount

2 400)
(240)

Cost price
Accumulated depreciation

(1 200)
960)

Depreciation for the year

(2 616)

Carrying amount: End of year

12 264)

Cost price
Accumulated depreciation

22 800)
(10 536)

339

FAC1502/1

CALCULATIONS
(a) Loss on sale of equipment and depreciation

Balance
Written off
Purchased 30 Septermber 20.2

Accumulated
Cost price depreciation
R
R
21 600
8 880
(1 200)
(960)
20 400
7 920
2 400
22 800

Loss on scrapping of equipment R(1 200 – 960)
= R240
Depreciation for the year
R(20 400 – 7 920) 6 20%

R
2 496

R2 400 6 20% 6 12
(b) Championship shortage
Expenses
Income: Entry fees
Income: Interest (R25 600 6 12%)
Shortage

120
2 616
R
3 240
3 072

6 400
—
6 312
88

(c) Interest accrued
Interest receivable for the year
(R25 600 6 12%)
Interest received
Less: Accrued interest (31 Dec 20.1)
Accrued interest (31 Dec 20.2)

3 072
3 584
1 024

2 560
512

(d) Savings account

Balance
Add: Deposit

2 880
1 080
3 960

(e) Bank
Balance
Add: Receipts
Less: Payments
Balance

8
37
45
35
10

400
472
872
368
504

(f) Accumulated fund
Balance (31 Dec 20.1)
Add: Entrance fees
Less: Shortage for the year
Balance (31 Dec 20.2)

26 440
864
508
26 796

(g) Accrued rental expenses
Payable per annum = R480 6 12
Less: Amount paid
Balance (31 Dec 20.2)
Less: Prepaid 31 December 20.1

FAC1502/1

340

5 760
4 800
960
480
480

SELF-ASSESSMENT
Now that you have studied this study unit, can you
.

prepare fund accounts?

prepare receipts and payments statements?

prepare trading statements?

prepare income and expenditure statements?

prepare the statement of financial position reflecting the financial position of the
organisation, including information regarding special funds?

record all calculations required, including those in respect of membership fees?

341

FAC1502/1

STUDY UNIT

17
Incomplete records

Learning outcome
Students should be able to convert to a double-entry system from incomplete records.

Contents
Key concepts

343

17.1

Introduction

343

17.2

Disadvantages of using incomplete records

343

17.2.1 Incompleteness

343

17.2.2 No record of non-current assets and non-current liabilities

343

17.2.3 No details of profits and/or losses

343

17.2.4 The final results are unreliable

343

17.3

Calculation of profit/loss from incomplete records

344

17.4

Conversion from a single entry into a double entry system

346

17.4.1 Where subsidiary journals are kept

346

17.4.2 Where minimal records are kept

347

Revision exercises and solutions

352

17.5.1 Revision exercise 1

352

17.5.2 Revision exercise 2

355

17.5

Self-assessment

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342

359

KEY CONCEPTS
Incomplete records
Statement of assets and liabilities
. Conversion to double entry system
.
.

17.1 Introduction
Sometimes small businesses, non-profit organisations etc, do not adhere to the double entry
system of accounting. It is likely that the owners or management of these small organisations
know very little about basic bookkeeping principles. Because of this, not all transactions are
recorded and minimal accounting records are kept, for example, that of only debtors and
creditors ie personal accounts. This is described as the single entry system of accounting
which, for obvious reasons, leads to incomplete records.
Read paragraph 17.1 of the prescribed book.

17.2 Disadvantages of using imcomplete records
There are many disadvantages attached to the use of the single entry system. These may be
summarised as follows:

17.2.1 Incompleteness
In the discussion on the double entry system the twofold aspect of each transaction was
explained, namely that for each debit entry there must be a corresponding credit entry. This
principle cannot apply where only personal accounts are kept and therefore the records kept
under a single entry system will be incomplete. Apart from personal records, there are
numerous transactions of an impersonal nature and no record of these transactions exist under
the single entry system.

17.2.2 No record of non-current assets and non-current liabilities
Non-current assets and non-current liabilities are impersonal accounts and where only
personal accounts are kept, there will be no reliable record of these assets and liabilities.

17.2.3 No details of profits and/or losses
Because nominal or profit or loss accounts are not kept it is impossible to determine the origin
or existence of a profit or a loss from the accounting records. This lack of reliable information
could adversely affect management, as it is difficult to frame a future policy if there are no
records on which to base it. It is therefore impossible to compare the results of one year with
those of a previous year, or to obtain any statistical information.

17.2.4 The final results are unreliable
Because only a single entry of personal transactions is recorded, a trial balance cannot be
compiled. Furthermore, the balances on the debtors’ and creditors’ accounts may be incorrect
because there are no control accounts with which to reconcile them. Assets and/or liabilities
are also not recorded, and it is obvious, therefore, that any financial statements prepared from
this information will be unreliable.

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17.3 Calculation of profit/loss from incomplete records
For taxation and other purposes, the profits/losses of a business need to be calculated. When
using the single entry system, the profit/loss for a certain period can only be determined by
means of a comparison of the capital at the beginning of the period with the capital at the end of
the period. An increase in capital may be regarded as a profit and a decrease as a loss.
Provision should, however, be made for any additions to capital or withdrawals by the owner.

Study paragraph 17.2 of the prescribed book.

Exercise 17.1
D Donovan keeps his books on the single entry basis. On 30 April 20.1, his assets and
liabilities are as follows:
R
Furniture and fittings
Inventory
Sundry debtors
Bank (favourable)
Petty cash
Sundry creditors
Loan: DJ Bank

16
8
10
2

500
700
900
200
300
9 400
5 500

Firstly, a statement of assets and liabilities must be prepared at 30 April 20.1.

D DONOVAN
STATEMENT OF ASSETS AND LIABILITIES AS AT 30 APRIL 20.1
ASSETS
Non-current assets

16 500

Property, plant and equipment
Current assets
Inventory
Trade and other receivables
Cash and cash equivalents R(2 200 + 300)
Total assets
EQUITY AND LIABILITIES

16
22
8
10
2
38

500
100
700
900
500
600

23
*23
14
5

700
700
900
500

Total equity
Capital
Total liabilities
Non-current liabilities
Long-term borrowing — DJ Bank
Current liabilities

5 500
9 400

Trade and other payables

9 400

Total equity and liabilities
* Balancing figure

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38 600

On 30 April 20.2 the position appeared to be as follows:
R
16 500
9 600
11 200
3 000
400
8 600
5 000

Furniture and fittings
Inventory
Sundry debtors
Bank
Petty cash
Sundry creditors
Loan: DJ Bank

It was also ascertained that D Donovan withdrew R2 500 from the entity during the year.
Furniture and fittings must be depreciated by 10% per annum.

Required:
Calculate the profit or loss for the year and prepare a statement of assets and liabilities as
at 30 April 20.2

Solution Exercise

17.1

The final capital on 30 April 20.2 must be determined first:
Assets
Furniture and fittings
Inventory
Sundry debtors
Bank
Petty cash

R
16 500
9 600
11 200
3 000
400
40 700

Liabilities
Loan: DJ Bank
Sundry creditors
Capital

(13 600)
5 000
8 600
27 100

In order to determine the estimated profit for the year, the difference between the two capital
amounts must be determined, and adjustments made for the drawings and depreciation:
Capital at the end of the financial period (30 April 20.2)
Capital at the beginning of the period (30 April 20.1)
Depreciation
Drawings
Estimated profit for the year

R
27 100)
(23 700)
3 400)
(1 650)
2 500)
4 250)

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A statement of assets and liabilities as at 30 April 20.2 can now be prepared:

D DONOVAN
STATEMENT OF ASSETS AND LIABILITIES AS AT 30 APRIL 20.1
ASSETS

Non-current assets

14 850

Property, plant and equipment R(16 500–1 650)
Current assets
Inventory
Trade and other receivables
Cash and cash equivalents R(3 000 + 400)

14
24
9
11
3

Total assets

39 050

850
200
600
200
400

EQUITY AND LIABILITIES
Total equity
Capital
Total liabilities
Non-current liabilities

25
*25
13
5

450
450
600
000

Long-term borrowing — DJ Bank
Current liabilities

5 000
8 600

Trade and other payables

8 600

Total equity and liabilities

39 050
R

* Balance: 1 April 20.1

* Estimated profit
* Less drawings

23 700

4 250
(2 500)
25 450

Take note of the systematic arrangement and grouping of the items which are essential to
International Financial Reporting Standards.
Study paragraphs 17.3 to 17.6 of the prescribed book.

17.4 Conversion from a single entry into a double entry
system
17.4.1 Where subsidiary journals are kept
Step 1
Prepare a statement of assets and liabilities at the beginning of the period (or use the closing
statement of the previous period). The ‘‘balances’’ as shown in this statement are then
journalised (general journal) and posted to the various general ledger accounts. This procedure
opens the accounts in the general ledger in accordance with the double entry system.
Step 2
The next step is to prepare the various subsidiary journals as discussed in study unit 6. The
cash receipts, cash payments, purchases, purchases returns, sales, sales returns and any
other subsidiary journals, must be prepared.

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The necessary entries for rental, salaries, wages, sundry expenses, purchase or sale of
assets, cash purchases and sales, etc. should be made in the cash journals. It is also essential
to regularly do a bank reconciliation as well as at the end of the period.
The individual debtors’ and creditors’ accounts should be checked carefully. Any mistakes
should be corrected in the general journal.
Step 3
The entries in the subsidiary journals can now be posted to the various ledger accounts.
Step 4
Once satisfied that all the journals have been completed and that all postings have been made
to the ledger accounts, the accounts must be balanced, and a trial balance prepared.
Step 5
Compile the financial statements as previously discussed in this study guide.

17.4.2 Where minimal records are kept
Because of the practical difficulties of constructing a proper set of books on the double-entry
system from incomplete entries, it is sometimes better to start by preparing the statement of
profit or loss and other comprehensive income, statement of changes in equity and statement
of financial position. In the following year proper systematic books and accounts can be kept.
The procedure is as follows:
Step 1
Make a list of all assets and liabilities as at the beginning of the financial period.
Step 2
Calculate the capital as at the beginning of the period.
Step 3
Prepare a summary of the bank account for the year by using cheque counterfoils, deposit slips
and bank statements as reference.
Step 4
Ascertain the balances of the assets and liabilities at the end of the period.
Step 5
The next step is to calculate the figures for purchases and sales. If no distinction can be made
between cash and credit sales and purchases, the amounts can easily be calculated with the
aid of the trade receivables and trade payables control accounts. All money received with
regard to sales of inventory must then be credited to the trade receivables control account.
(This procedure is unnecessary where cash sales and receipts from debtors can be
determined accurately.) Similarly, all payments for purchases of inventory are debited to the
trade payables control account.
Items such as settlement discounts received and granted, purchases or sales returns, interest
received and paid, R/D cheques, credit losses, transfers from debtors to creditors and vice
versa must be correctly debited/credited in the appropriate control accounts.

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After provision has also been made in the control accounts for both opening and closing
balances in respect of debtors, and of creditors, these accounts can be balanced. The
balancing figure on the debit side of the trade receivables control account then represents
sales, and the balancing figure on the credit side of the trade payables control account will
represent purchases.
Step 6
Where accruals and prepayments exist for income and expenditure items, the amounts which
must be disclosed in the statement of profit or loss and other comprehensive income need to be
calculated.
Step 7
All the required information is now available and the financial statements can be prepared.

Exercise 17.2
C Caity runs a small business. She has never kept proper accounting records and asks you to
be her accountant. After thorough investigation you ascertain the following particulars with
regard to her business:
Balances as at 1 May 20.0:
Vehicle
Furniture and fittings
Inventory: Trading
Trade receivables control
Trade payables control
Accrued wages

15
12
9
7
5

R
300
600
680
930
645
450

The analysis of the receipts and payments in her bank account for the year ended 30 April 20.1
was as follows (all receipts were banked and all payments were made by cheque):
Dr

Balance
Received from debtors
Cash sales

Bank

b/d

R
7 260
124 538
21 762

Payments to creditors
Water and electricity
Wages
Rental expenses
Telephone expenses
Advertising
Insurance
Sundry expenses
Bank charges
Drawings
Balance

153 560
Balance

b/d

5 325

You establish that the following must also be taken into account:

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348

c/d

R
66 500
3 300
11 925
14 400
3 420
2 100
3 250
7 650
190
35 500
5 325
153 560

(a) Depreciation is to be written off on the carrying amounts at 20% per annum on vehicles and
at 10% per annum on furniture and fittings.
(b) Balances as at 30 April 20.1:
R
Accrued wages
225
Prepaid insurance
250
Inventory: Merchandise
12 190
Trade receivables control
11 230
Trade payables control
7 145

Required:
Prepare the annual financial statements for C Caity for the year ended 30 April 20.1.
NB: Notes are not required.

Solution Exercise

17.2

The opening capital on 1 May 20.0 must be determined first:
Assets

Vehicles
Furniture and fittings
Inventory
Trade receivables control
Bank

15
12
9
7
7

Liabilities

52 770
(6 095)

Trade payables control
Accrued wages

300
600
680
930
260

5 645
450

Capital

46 675

Determine the sales and purchases for the year to 30 April 20.1:
Dr

Balance: Trade receivables b/d
Sales*

Trade receivables control
R
7 930
149 600

Bank: Trade receivables
Bank: Cash sales
Balance: Trade receivables c/d

157 530
Balance: Trade receivables b/d

R
124 538
21 762
11 230
157 530

11 230

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Bank: Trade payables
Balance: Trade payables

Trade payables control

c/d

R
66 500
7 145

Balance: Trade payables
Purchases*

b/d

73 645

R
5 645
68 000
73 645

Balance: Trade payables

b/d

7 145

* Balancing figures

Calculate the amounts to be taken into account in the statement of profit or loss and other
comprehensive income for any prepayments or accruals.
Dr

Bank

Insurance
R
3 250

Prepaid insurance
Profit or loss

3 250

Bank
Accrued wages

12 150

The financial statements can now be prepared.

FAC1502/1

350

R
250
3 000
3 250

Wages
R
11 925
225

Accrued wages
Profit or loss

Cr
R
450
11 700
12 150

C CAITY
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE
YEAR ENDED 30 APRIL 20.1
R
149 600)
(65 490)

Revenue
Cost of sales
Inventory: 1 May 20.0
Purchases

9 680)
68 000)
77 680)
(12 190)

Inventory: 30 April 20.1
Gross profit
Distribution, administrative and other expenses:

84 110)
(50 080)
3
11
14
3
2
3
7

300)
700)
400)
420)
100)
000)
650)
190)
4 320)

Water and electricity
Wages
Rental expenses
Telephone expenses
Advertising
Insurance
Other expenses
Bank charges
Depreciation R(3 060 + 1 260)*
Profit for the year
Other comprehensive income for the year

34 030)
—)

Total comprehensive income for the year

34 030)

* Vehicles (R15 300 6 20%) = R3 060 + Furniture and fittings (R12 600 6 10%) = R1 260.

C CAITY
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 APRIL 20.1
Capital
R
Balance at 1 May 20.0
Total comprehensive income for the year
Drawings

46 675
34 030
(35 500)

Balance at 30 April 20.1

45 205

351

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C CAITY
STATEMENT OF FINANCIAL POSITION AS AT 30 APRIL 20.1
ASSETS

Note

Non-current assets

23 580

Property, plant and equipment*

23 580

Current assets

28 995

Inventory
Trade and other receivables
Prepayments

12 190
11 230
250

Cash and cash equivalents

5 325
52 575

Total assets
EQUITY AND LIABILITIES
Total equity

45 205

Capital

45 205

Current liabilities

7 370

Trade and other payables R(7 145 + 225)

7 370

Total equity and liabilities

52 575

* R(15 300 7 3 060) + R(12 600 7 1 260) = R23 580

17.5 Revision exercises and solutions
17.5.1 Revision exercise 1
K Kacey, the owner of Kacey Traders has not kept proper accounting records. She is, however,
able to supply the following information:
Balances as at 31 July:

Vehicles (at cost)
Furniture and fittings (at cost)
Inventory: Trading
Trade receivables control
Bank (favourable)
Long-term borrowing
Trade payables control
Accrued expenses
Prepaid expenses

20.1

20.2

R
24
18
20
8
1
15
9
2

500
800
750
700
300
000
500
400
350

24
18
28
11
2
10
11
1

500
800
400
600
700
000
800
200
350

You also establish the following with regard to the year ended 31 July 20.2:
(a) K Kacey drew R18 500 during the year for own use.
(b) Depreciation of 15% per annum on the cost price of vehicles and 10% per annum on the
cost price of furniture and fittings must still be provided for.
(c) An amount of R500 must be written off as irrecoverable.

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Required:
(1)

Calculate the estimated profit/loss of Kacey Traders for the year ended
31 July 20.2.

(2)

Prepare the statement of financial position of Kacey Traders as at 31 July 20.2.

Solution: Revision exercise 1
(1) CALCULATION OF PROFIT/LOSS:
KACEY TRADERS
STATEMENT OF FINANCIAL POSITION AS AT 31 JULY 20.1
ASSETS

Non-current assets

43 300

Property, plant and equipment R(24 500+18 800)
Current assets
Inventory
Trade and other receivables
Prepayments
Cash and cash equivalents
Total assets
EQUITY AND LIABILITIES

43 300
31 100
20 750
8 700
350
1 300
74 400

Total equity
Capital
Total liabilities
Non-current liabilities

47
*47
26
15

500
500
900
000

Long-term borrowings
Current liabilities

15 000
11 900

Trade and other payables R(9 500 + 2 400)

11 900

Total equity and liabilities

74 400

* Balancing figure

Determination of final capital:
Assets

Vehicles
Furniture and fittings
Inventory
Trade receivables control
Bank
Prepaid expenses

24
18
28
11
2

500
800
400
600
700
350

Liabilities

86 350
(23 000)

Long-term borrowing
Trade payables control
Accrued expenses

10 000
11 800
1 200

Capital

63 350

353

FAC1502/1

Estimated profit
R
63 350
(47 500)

Capital at the end of the financial period
Capital at the beginning of the period

15 850
18 500
(500)
(5 555)

Drawings
Adjustments: Credit losses
Adjustments: Depreciation
Adjustments: Vehicles
Adjustments: Furniture and fittings

(a)
(b)

3 675
1 880

Estimated profit for the year

28 295

(a) R(24 500 6 15%) = R3 675
(b) R(18 800 6 10%) = R1 880

(2) KACEY TRADERS
STATEMENT OF FINANCIAL POSITION AS AT 31 JULY 20.2
ASSETS

Non-current assets

37 745

Property, plant and equipment R(24 500 + 18 800 – 5 555)
Current assets
Inventory
Trade and other receivables R(11 600 – 500 + 350)
Cash and cash equivalents
Total assets
EQUITY AND LIABILITIES

37
42
28
11
2
80

745
550
400
450
700
295

57
*57
23
10

295
295
000
000

Total equity
Capital
Total liabilities
Non-current liabilities
Long-term borrowings: long-term loan
Current liabilities

10 000
13 000

Trade and other payables R(11 800 + 1 200)

13 000

Total equity and liabilities

80 295
R

* Balance 1/8/20.1

* Estimated profit
* Less: Drawings

FAC1502/1

354

47
28
(18
57

500
295
500)
295

17.5.2 Revision exercise 2
M Mandosa keeps his books on a single entry basis, but decides to change to the double entry
system and asks for your assistance. You ascertain the following:
On 1 July 20.1 M Mandosa had the following assets:
Land and buildings
Vehicle
Furniture and equipment
Inventory
Trade receivables control

36
12
2
13
2

R
000
000
600
000
200

His liabilities consisted of the following:
Loan: NKA Bank
Trade payables control
Bank (overdraft)

8 400
7 200
5 300

An analysis of his cash journals revealed the following:
Receipts
Received from debtors and cash sales
Refunds from creditors in respect of overpayments on accounts
Mandosa paid into the business
Rent income

139 600
540
7 600
2 400

Payments
Payments to creditors and suppliers of merchandise
Loan: NKA Bank paid in full
Debtor’s cheques dishonoured (R/D)
Drawings
Wages paid
Telephone expenses

77 400
8 900
840
34 500
10 000
4 360

You also ascertain the following:
(a) On 30 June 20.2 M Mandosa had no cash on hand, except that in the bank.
(b) R200 interest was collected on overdue debtors’ accounts.
(c) Settlement discount granted amounted to R720 and settlement discount received, R940,
respectively.
(d) Depreciation must be provided for at 15% per annum on the cost price of vehicles and at
5% per annum on the cost price of furniture and equipment.
(e) Debtors’ accounts, amounting to R500 were written off during the year as irrecoverable.
(f) On 30 June 20.2, Mandosa valued his merchandise inventory at R15 000. Debtors owed
him R6 800 and he owed creditors R8 400.

Required:
Prepare a statement of profit or loss and other comprehensive income and a statement of
changes in equity for the year ended 30 June 20.2, and a statement of financial position at
that date. (Show your calculations of purchases and sales.) (NB: Notes are not required.)

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Solution: Revision exercise 2
CALCULATIONS
(a) Capital at the beginning of the year:
R
Assets

65 800

Land and buildings
Vehicles
Furniture and equipment
Inventory
Trade receivables control

36
12
2
13
2

000
000
600
000
200

(20 900)
Liabilities
Loan: NKA Bank
Trade payables control
Bank overdraft
Capital

8 400
7 200
5 300
44 900

(b) Bank balance at the end of the year:
R
Opening balance
Receipts

(5 300)
150 140

Received from debtors and cash sales
Refunds from creditors
Mandosa paid into the business
Rental income

139 600
540
7 600
2 400

Payments
Payments to creditors and suppliers
Loan: NKA Bank paid in full
Debtor’s cheques dishonoured
Drawings
Wages paid
Telephone expenses
Closing balance

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356

(136 000)
77 400
8 900
840
34 500
10 000
4 360
8 840

Balance
Bank: R/D cheques
Interest income
Sales*

Trade receivables control

b/d

R
2 200
840
200
144 380

Cr
R
139 600

Bank
Settlement discount
granted
Credit losses
Balance

c/d

147 620
Balance

b/d

720
500
6 800

147 620

6 800

(d)
Dr

Bank
Settlement discount
received
Balance

Trade payables control
R
77 400

c/d

940
8 400

Balance
Bank
Purchases*

b/d

86 740

R
7 200
540
79 000

86 740
Balance

b/d

8 400

* Balancing figure

357

FAC1502/1

M MANDOSA
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE
YEAR ENDED 30 JUNE 20.2

Revenue
Cost of sales

R
143 660
(76 060)

Inventory: 1 July 20.1
Purchases
Inventory: 30 June 20.2

13 000
78 060
91 060
(15 000)

Gross profit

67 600

Other income

2 600

Rental income
Interest received on debtors accounts

Distribution, administrative and other expenses:

2 400
200
70 200
(16 790)

Wages
Sundry trade expenses
Credit losses
Depreciation R(1 800 + 130)*

10 000
4 360
500
1 930
53 410

Finance charges: Interest on loan (R8 900 7 R8 400)

(500)

Profit for the year
Other comprehensive income for the year

52 910
—

Total comprehensive income for the year

52 910

* Vehicles (R12 000 x 15%) = R 1800 + furniture and equipment (R2 600 x 5%) = R130

M MANDOSA
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 20.2
Capital

FAC1502/1

Balance at 1 July 20.1
Contribution during the period
Total comprehensive income for the year
Drawings

R
44
7
52
(34

Balance at 30 June 20.2

70 910

358

900
600
910
500)

M MANDOSA
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.2
ASSETS
Non-current assets

R
48 670

Property, plant and equipment*

48 670

Current assets

30 640

Inventory
Trade and other receivables
Cash and cash equivalents

15 000
6 800
8 840

Total assets

79 310

EQUITY AND LIABILITIES
Total equity

70 910

Capital

70 910

Current liabilities

8 400

Trade and other payables

8 400

Total equity and liabilities

79 310

* R36 000 + R(12 000 7 1 800) + R(2 600 7 130) = R48 670

SELF-ASSESSMENT
Now that you have studied this study unit, can you
.

discuss the disadvantages of using incomplete records?

define what is meant by incomplete records?

prepare a statement of financial position?

calculate a profit/loss from incomplete records?

convert a single entry system into a double entry system?

prepare financial statements from incomplete records?

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