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

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 (v)

Topic A THE BASIC PRINCIPLES AND SPHERES OF ACCOUNTING 1

STUDY UNIT 1: THE NATURE OF ACCOUNTING THEORY, PRINCIPLES,

ACCOUNTING POLICY, PRACTICE AND PROCEDURES 3

STUDY UNIT 2: THE FINANCIAL POSITION 12

STUDY UNIT 3: THE FINANCIAL PERFORMANCE (RESULT) 18

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

PROCESS 22

Topic B COLLECTING AND PROCESSING THE ACCOUNTING DATA OF

ENTITIES 57

STUDY UNIT 5: PROCESSING ACCOUNTING DATA 59

STUDY UNIT 6: ADJUSTMENTS 98

STUDY UNIT 7: THE CLOSING-OFF PROCEDURE, DETERMINING

PROFIT OF AN ENTITY AND PREPARING

FINANCIAL STATEMENTS 116

Topic C 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

Topic D ACCOUNTABILITY FOR CURRENT AND NON-CURRENT LIABILITIES 263

STUDY UNIT 13: CURRENT LIABILITIES 265

STUDY UNIT 14: NON-CURRENT LIABILITIES 277

Topic E 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 self-

evaluation 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 MEANING

1 Read So as to obtain a broad and basic background, knowledge or

information; do not study.

2 Read thoroughly Necessary theory that needs to be clearly understood. You may be

assessed on this theory through short questions.

3 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.

4 Prepare You must make ready or complete what is required on the basis of

previous study.

(vi)

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 Page

1 THE NATURE OF ACCOUNTING THEORY, PRINCIPLES,

ACCOUNTING POLICY, PRACTICE AND PROCEDURES 3

2 THE FINANCIAL POSITION 12

3 THE FINANCIAL PERFORMANCE (RESULT) 18

4THE DOUBLE-ENTRY SYSTEM AND THE ACCOUNTING

PROCESS 22

FAC1502/1

STUDY UNIT

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 4

1.1 Introduction 4

1.2 What is accounting? 5

1.2.1 Definition 5

1.2.2 The nature of accounting 5

1.3 Universal accounting denominator 6

1.4 Forms of ownership 6

1.5 Users of financial information 6

1.5.1 Investors 7

1.5.2 Employees 7

1.5.3 Lenders 7

1.5.4 Suppliers and other trade payables 7

1.5.5 Customers 7

1.5.6 Government and their agencies 7

1.5.7 Public 7

1.6 The fields of accounting 7

1.6.1 Financial accounting 7

1.6.2 Management accounting 7

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1.7 Accounting principles 8

1.8 Accounting policy 8

1.9 Disclosure of accounting policy 8

1.10 International Financial Reporting Standards (IFRS) 8

1.11 Accounting standards and statements 9

1.11.1 Introduction 9

1.11.2 The Conceptual Framework for Financial Reporting 2010 9

1.11.2.1 The objective of financial statements 9

1.11.2.2 Underlying assumption 9

1.11.2.3 The qualitative characteristics of financial statements 9

1.11.2.4 The elements of financial statements 9

1.11.2.5 Recognition and measurement of the elements of financial

statements 10

1.12 Exercise and solution 10

Self-assessment 11

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 ASSIGN-

MENT.

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 commu-

nicated 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.

Afoundation 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) comparability

(2) verifiability

(3) timeliness

(4) 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) Discuss the nature of accounting.

(2) What is the common unit of measurement in accounting?

(3) Name the four main forms of ownership.

(4) Discuss the different users of financial information.

(5) Differentiate between financial accounting and management accounting.

(6) Name the qualitative characteristics of financial information.

(7) Define the concept of accounting policy.

(8) What is meant by disclosure of accounting policy?

(9) Describe the concept of international financial reporting standards.

(10) Discuss the underlying assumption of financial statements.

(11) Name the fundamental qualitative characteristics of financial statements.

(12) 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

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 Page

Key concepts 12

2.1 Introduction 13

2.2 Accounting entity 13

2.3 Financial position 13

2.4 Net asset value 13

2.5 Application of the basic accounting equation (BAE) 13

2.6 The double-entry system 15

2.7 Revision exercises and solutions 15

2.7.1 Revision exercise 1 15

2.7.2 Revision exercise 2 16

Self-assessment 17

KEY CONCEPTS

.Accounting entity

.Accounting equation

.Financial position

.Assets

.Liabilities

.Equity

.Double-entry

.Net worth

FAC1502/1

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 7LIABILITIES = 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 + L

E = A – L

= R30 000 7R5 000

= R25 000

Exercise 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 = R100 000

Step 1: Trade receivables = R40 000

Step 1: Cash = R10 000

Step 2: Identify the liabilities

Step 1: Trade payables = R20 000

Substitute these amounts into the equation:

A = E + L

E = A – L

= R(100 000 + 40 000 + 10 000) 7R20 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 R EQUITY AND LIABILITIES R

Equipment 100 000 Equity 130 000

Trade receivables 40 000 Trade payables 20 000

Cash in bank 10 000

150 000 150 000

FAC1502/1

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

(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.

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.

FAC1502/1

2.7.2 Revision exercise 2

Calculate the missing figures using the BAE.

(1) Bank = 4 000

Vehicles = 5 000

Equipment = 7 000

Capital = ?

(2) Capital = 150 000

Loan = 50 000

Bank = ?

Machinery = 190 000

(3) Bank = 5 000

Trade receivables = 15 000

Buildings = 100 000

Furniture = 40 000

Trade payables = 50 000

Capital = ?

(4) Capital = 60 000

Loan = 10 000

Trade payables = 6 000

Assets = ?

Solution: Revision exercise 2

(1) A = E + L

E = A – L

= R(4 000 + 5 000 + 7 000) 7R0

= R16 000

(2) A = E + L

R190 000 + Bank = R(150 000 + 50 000)

R190 000 + Bank = R(150 000 + 50 000) 7R190 000

= R10 000

(3) A = E + L

E = A – L

= R(5 000 + 15 000 + 100 000 + 40 000) 7R50 000

= R160 000 7R50 000

= R110 000

(4) A = E + L

= R60 000 + R(10 000 + 6 000)

= R76 000

FAC1502/1

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

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 Page

Key concepts 18

3.1 Introduction 19

3.2 The financial performance (result) 19

3.3 Income 19

3.4 Expenditure 19

3.5 Influence of profit or loss on equity 19

3.6 Statement of profit or loss and other comprehensive income (income

statement) (financial performance) 20

3.7 Statement of changes in equity 20

3.8 Accounting policies and explanatory notes 20

3.9 Revision exercises and solutions 20

3.9.1 Revision exercise 1 20

3.9.2 Revision exercise 2 21

Self-assessment 21

KEY CONCEPTS

.Financial result

.Profit/loss

.Income

.Expenditure

FAC1502/1

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 = E + L

R50 000 = R30 000 + R20 000

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

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Income received 180 000

Salaries expense 100 000

Administrative costs 20 000

Insurance expense 10 000

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 7Expenditure

= R180 000 7R(100 000 + 20 000 + 10 000)

= R180 000 7R130 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.

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(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.

Income received 850 000

Salaries 520 000

Wages 50 000

Telephone expenses 4 000

Stationery 2 000

Interest received 1 000

Insurance 12 000

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 7Expenditure

= R851 000 7R588 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

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 Page

Key concepts 23

4.1 Introduction 23

4.2 The double-entry system 23

4.3 The effect of transactions on the basic accounting equation (BAE) 24

4.4 Transactions which affect only assets, equity and liabilities 24

4.4.1 Capital contributions 24

4.4.2 Acquisition of loans 25

4.4.3 Purchase of assets for cash 26

4.4.4 Buying assets on credit (debt) 26

4.4.5 Payments to creditors 27

4.4.6 Withdrawals by owner 27

4.5 Transactions which give rise to income and expenditure 28

4.5.1 Income (cash) 28

4.5.2 Expenditure (cash) 29

4.5.3 Income (credit) 29

4.5.4 Expenditure (credit) 30

4.5.5 Payments received from debtors 31

4.6 Summary of transactions 31

4.7 Basic form of a statement of financial position 32

4.8 Revision exercises and solutions 32

4.8.1 Revision exercise 1 32

4.8.2 Revision exercise 2 34

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4.9 The general ledger account 36

4.9.1 Assets 36

4.9.2 Equity and liabilities 36

4.10 Balancing an account 36

4.11 Schematic representation 37

4.12 Recording of transactions in ledger accounts 38

4.13 The general ledger 40

4.14 The trial balance 43

4.15 Preparing financial statements 44

4.15.1 The statement of profit or loss and other comprehensive

income 44

4.15.2 The statement of changes in equity 45

4.15.3 The statement of financial position 46

4.15.4 Notes 47

4.16 Summary 47

4.17 Revision exercises and solutions 48

4.17.1 Revision exercise 1 48

4.17.2 Revision exercise 2 48

4.17.3 Revision exercise 3 49

4.17.4 Revision exercise 4 51

4.17.5 Revision exercise 5 53

Self-assessment 55

KEY CONCEPTS

.Debit and credit .Ledger

.Transactions .Contra account

.Effect on financial position .Folio number

.T-account .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.

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.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 =EQUITY +LIABILITIES

Bank Capital

RRR

Previous balances 0 0 0

This transaction + 130 000 + 130 000 0

New balances 130 000 =130 000 +0

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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 =EQUITY +LIABILITIES

Bank Capital Loan:

ABC Bank

RRR

Balances brought

down

130 000 130 000 0

Transaction + 25 000 0 + 25 000

New balances 155 000 =130 000 +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 right-

hand side of the BAE.

.The BAE balances after the transaction.

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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 = EQUITY + LIABILITIES

Equip- Loan:

ment Bank Capital

ABC Bank

R R R R

Balances brought down 0 155 000 130 000 25 000

Transaction +100 000 7100 000 0 0

New balances 100 000 55 000 = 130 000 + 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.

EQUITY LIABILITIESASSETS = +

Furniture Equipment Bank Capital Loan:

Trade

ABC pay-

Bank ables

R R R R R R

Balances

brought down 0 100 000 55 000 130 000 25 000 0

Transaction +2 000 0 0 0 0 +2 000

New balances 2 000 100 000 55 000 = 130 000 + 25 000 2 000

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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.

EQUITY LIABILITIESASSETS = +

Furniture Equipment Bank Capital Loan:

Trade

ABC pay-

Bank ables

R R R R R R

Balances brought

down 2 000 100 000 55 000 130 000 25 000 2 000

Transaction 0 0 72 000 0 0 72 000

New balances 2 000 100 000 53 000 = 130 000 + 25 000 0

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.

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EQUITY LIABILITIESASSETS = +

Furniture Equipment Bank Capital Loan:

Trade

ABC pay-

Bank ables

R R R R R R

Balances brought

down 2 000 100 000 53 000 130 000 25 000 0

Transaction 0 0 71 000 71 000 0 0

New balances 2 000 100 000 52 000 = 129 000 + 25 000 0

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 = EQUITY + LIABILITIES

Furniture Equipment Bank Capital Income/ Loan: Trade

Expend- ABC pay-

iture Bank ables

R R R R R R R

Balances

brought down 2 000 100 000 52 000 129 000 0 25 000 0

Transaction 0 0 +1 000 0 +1 000 0 0

New balances 2 000 100 000 53 000 = 129 000 1 000 + 25 000 0

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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 = EQUITY + LIABILITIES

Furniture Equipment Bank Capital Income/ Loan: Trade

Expenditure ABC pay-

Bank ables

R R R R R R R

Balances

brought down 2 000 100 000 53 000 129 000 1 000 25 000 0

Transaction 0 0 7800 0 7800 0 0

New balances 2 000 100 000 52 200 = 129 000 200 + 25 000 0

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.

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ASSETS = EQUITY + LIABILITIES

Income/ Trade

Trade Furniture Equipment Bank Capital Expenditure

Loan:

payables

receivables ABC Bank

R R R R R R R R

Balances brought

down 0 2 000 100 000 52 200 129 000 200 25 000 0

Transaction + 6 000 0 0 0 0 +6 000 0 0

New balances 6 000 2 000 100 000 52 200 = 129 000 6 200 + 25 000 0

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 = EQUITY + LIABILITIES

Income/ Trade

Trade Furniture Equipment Bank Capital Expenditure

Loan:

payables

receivables ABC Bank

R R R R R R R R

Balances brought

down 6 000 2 000 100 000 52 200 129 000 6 200 25 000 0

Transaction 0 0 0 0 0 7200 0 + 200

New balances 6 000 2 000 100 000 52 200 = 129 000 6 000 + 25 000 200

COMMENTS

.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.

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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 + LIABILITIES

Income/ Trade

Trade Furniture Equipment Bank Capital Expenditure

Loan:

payables

receivables ABC Bank

R R R R R R R R

Balances brought

down 6 000 2 000 100 000 52 200 129 000 6 000 25 000 200

Transaction 72 000 0 0 + 2 000 0 0 0 0

New balances 4 000 2 000 100 000 54 200 = 129 000 6 000 + 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 + LIABILITIES

Trade Income/ Loan: Trade

Date receivables Furniture Equipment Bank Capital Expenditure ABC Bank payables

20.1 R R R R R R R R

Feb

1 +130 000 +130 000

2 +25 000 +25 000

6 +100 000 7100 000

10 +2 000 +2 000

11 72 000 72 000

12 71 000 71 000

13 +1 000 +1 000

16 7800 7800

18 +6 000 +6 000

21 7200 +200

28 72 000 +2 000

+4 000 +2 000 +100 000 +54 200 = +129 000 +6 000 + +25 000 +200

160 200 = 135 000 + 25 200

= 160 200

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 Note R

Non-current assets 102 000

Equipment 100 000

Furniture 2 000

Current assets 58 200

Trade and other receivables 4 000

Cash and cash equivalents 54 200

Total assets 160 200

EQUITY AND LIABILITIES

Total equity 135 000

Capital 135 000

Non-current liabilities 25 000

Long-term borrowings 25 000

Current liabilities 200

Trade and other payables 200

Total equity and liabilities 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 Cash in the bank deposited as opening capital, R25 000.

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

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

4 Installation fees for work done on account for Kannadrift Municipality, R4 200.

6 Vehicle purchased on credit from Virginia Cars Limited, R22 400. This vehicle

was financed by obtaining a loan from Crown Bank at an interest rate of 9% per

annum.

17 Kannadrift Municipality paid R2 200 on their account.

28 Wages paid, R4 000.

29 Cheque drawn for private use, R1 300.

30 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 = E + L

20.1 R R R

July 1 + 2 000 + 2 000 0

Solution: Revision exercise 1

D PAULUS

Date Basic accounting equation

A = E + L

20.1 R R R

June 1 + 25 000 +25 000

Jun e 2 + 9 000 + 9 000

Jun e 3 + 12 000

712 000

Jun e 4 + 4 200 + 4 200

Jun e 6 + 22 400 +22 400

Ju ne 17 + 2 200

72 200

Ju ne 28 74 000 74 000

Ju ne 29 71 300 71 300

Ju ne 30 79 000 79 000

Total 46 300 32 900 13 400

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 R

Jan 3 F Fox deposited as opening capital 20 000

Jan Paid rental for January 20.1 2 300

Jan 4 Bought law library on credit from Book Limited 24 000

Jan 5 Bought a computer for cash from Leo Limited 1 700

Jan 6 Provided services for cash 7 200

Jan 9 Debited D Dunn with fees for services rendered 8 318

Jan 10 Leo Limited repaired equipment on credit 100

Jan 13 F Fox drew a cheque for private use 1 234

Jan 18 F Fox received commission on a property transaction 1 350

Jan 29 Paid the following by cheque

i(i) Salaries 8 350

(ii) Leo Limited (on account) 100

Jan 30 Received payment from D Dunn on his account 1 500

Required:

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

ASSETS = EQUITY + LIABILITIES

Library Trade Income/

Date and receiv- Bank Capital Expendi- Trade payables

Equip- ables ture

ment

Total = +

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

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{

Solution: Revision exercise 2

F FOX

(1) ACCOUNTING EQUATION

ASSETS =EQUITY +LIABILITIES

Library Trade Income/

Date and receiv- Bank Capital Expendi- Trade payables

Equip- ables ture

ment

20.1 R R R R R R

Jan 3 +20 000 +20 000

72 300 72 300

Jan 4 +24 000 + 24 000

Jan 5 + 1 700 71 700

Jan 6 +7 200 +7 200

Jan 9 +8 318 +8 318

Jan10 7100 + 100

Jan13 71 234 71 234

Jan18 +1 350 +1 350

Jan29 78 350 78 350

7100 7100

Jan30 71 500 +1 500

Total +25 700 +6 818 +16 366 = +18 766 +6 118 + +24 000

R48 884 R48 884

F FOX

(2) STATEMENT OF FINANCIAL POSITION AS AT 31 JANUARY 20.1

ASSETS Note R

Non-current assets 25 700

Equipment 1 700

Library 24 000

Current assets 23 184

Trade and other receivables 6 818

Cash and cash equivalents 16 366

Total assets 48 884

EQUITY AND LIABILITIES

Total equity 24 884

Capital 24 884

Current liabilities 24 000

Trade and other payables 24 000

Total equity and liabilities 48 884

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.

.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

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statement of financial position and Notes

in equity to changes

4.11 Schematic representation

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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

130 000 130 000

(4.4.2)

Bank Loan

25 000 25 000

FAC1502/1

~ ~

(4.4.3)

Equipment Bank

100 000 100 000

(4.4.4)

Furniture Trade payables (Joc Ltd)

2 000 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 1 000

(4.5.2)

Bank Wages

800 800

FAC1502/1

~ ~

(4.5.3)

Trade receivables (C Canon) Income (fees)

6 000 6 000

(4.5.4)

Trade payables Advertisements

200 200

(4.5.5)

Bank Trade receivables (C Canon)

2 000 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.

Dr Bank Cr

Date Details Fol Amount Date Details Fol Amount

20.1 R 20.1 R

Feb 1 Capital 130 000 Feb 6 Equipment 100 000

Feb 2 Loan:ABC Bank 25 000 Feb 11 Trade payables 2 000

Feb 13 Income received 1 000 Feb 12 Drawings 1 000

Feb 28 Trade receivables 2 000 Feb 16 Wages 800

Feb 28 Balance c/d 54 200

158 000 158 000

20.1

Mar 1 Balance b/d 54 200

FAC1502/1

Dr Equipment Cr

20.1 R

Feb 6 Bank 100 000

Dr Furniture Cr

20.1 R

Feb 10 Creditors 2 000

Dr Trade receivables Cr

20.1 R 20.1 R

Feb 18 Income received 6 000 Feb 28 Bank 2 000

Balance c/d 4 000

6 000 6 000

20.1

Mar 1 Balance b/d 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

Dr Capital Cr

20.1 R

Feb 1 Bank 130 000

Dr Drawings Cr

20.1 R

Feb 12 Bank 1 000

Dr Loan: ABC Bank Cr

20.1 R

Feb 2 Bank 25 000

Dr Trade payables Cr

20.1 R 20.1 R

Feb 11 Bank 2 000 Feb 10 Furniture 2 000

28 Balance c/d 200 21 Advertisements 200

2 200 2 200

20.1

Mar 1 Balance b/d 200

Dr Wages Cr

20.1 R

Feb 16 Bank 800

Dr Advertisements Cr

20.1 R

Feb 21 Creditors 200

Dr Income (fees) Cr

20.1 R

Feb 13 Bank 1 000

18 Debtors 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 Cr

R R

Bank 54 200

Equipment 100 000

Furniture 2 000

Trade receivables 4 000

Capital 130 000

Drawings 1 000

Loan 25 000

Trade payables 200

Wages 800

Advertisements 200

Income received 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 71 000) = 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 R

Revenue 7 000

Distribution, administrative and other expenses (1 000)

Wages 800

Advertisements 200

Profit for the period 6 000

Other comprehensive income for the period —

Total comprehensive income for the period 6 000

FAC1502/1

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

Balance at 1 February 20.1 130 000

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 Note R

Non-current assets 102 000

Property, plant and equipment 3 102 000

Current assets 58 200

Trade and other receivables 4 000

Cash and cash equivalents (bank) 54 200

Total assets 160 200

EQUITY AND LIABILITIES

Total equity 135 000

Capital 135 000

Total liabilities 25 200

Non-current liabilities 25 000

Long-term borrowings 25 000

Current liabilities 200

Trade and other payables 200

Total equity and liabilities 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 Equipment Furniture Total

R R R

Carrying amount: Beginning of period — — —

Cost — — —

Accumulated depreciation — — —

Additions 100 000 2 000 102 000

Depreciation — — —

Carrying amount: End of period 100 000 2 000 102 000

Cost 100 000 2 000 102 000

Accumulated depreciation — — —

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 EQUITY LIABILITIES

Non-

Non-current Current Expendi- current Current

assets assets Capital Income ture liabilities liabilities

Furniture

Ledger accounts to be classified:

(a) Land and buildings

(b) Bond

(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

Solution: Revision exercise 2

ASSETS EQUITY LIABILITIES

Non- Non-

current Current current Current

assets assets Capital Income Expenditure liabilities liabilities

(a) Land and

buildings

(b) Bond

(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 R

Feb 1 G Goodman deposited as opening capital 50 000

Feb 2 G Goodman transferred personal equipment to his firm 6 000

Feb 4 Paid rental for February by cheque 8 000

Feb 6 Bought furniture on credit from Badman 12 000

Feb 8 Rendered services on credit to R Rudman 30 000

Feb 12 G Goodman drew a cheque for private use 1 000

Feb 16 Issued a cheque to Badman in part payment of their account 5 000

Feb 20 Rendered services for cash to C Coleman 7 000

Feb 27 Received payment from R Rudman on his account 1 300

Feb 28 Paid the following by cheque:

ii(i) Salaries 10 000

i(ii) Wages 2 000

(iii) Telephone 500

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 A = E + L

20.1 Account Account Dr Cr Dr Cr Dr Cr

Feb debited credited

R R R R R R

28 Water and Bank

electricity 600 600

Solution: Revision exercise 3

G GOODMAN

Date General ledger A = E + L

20.1 Account Account

Feb debited credited Dr Cr Dr Cr Dr Cr

R R R R R R

1 Bank Capital 50 000 50 000

2 Equipment Capital 6 000 6 000

4 Rent Bank

expenses 8 000 8 000

6 Furniture B Badman 12 000 12 000

8 R Rudman Income

received 30 000 30 000

12 Drawings Bank 1 000 1 000

16 B Badman Bank 5 000 5 000

20 Bank Income

received 7 000 7 000

27 Bank R Rudman 1 300 1 300

28 Salaries Bank 10 000 10 000

Wages Bank 2 000 2 000

Telephone Bank

expenses 500 500

FAC1502/1

4.17.4 Revision exercise 4

The following transactions during October 20.1 relate to Witblits Electricians:

Date Transactions Amount

20.1 R

Oct 1 W Blits, the owner, deposited as opening capital 10 000

Obtained loan from SA Bank 6 000

Oct 3 Bought equipment on credit from Sparks Dealers 1 000

Oct 9 Issued a cheque for an advertisement in a local news-

paper 200

Oct 12 Paid the telephone account by cheque 75

Oct 13 Received a cheque from H House for services rendered 500

Oct 17 Drew a cheque for private use 2 000

Oct 24 As an additional capital contribution W Blits transfered

his motor vehicle to the business 9 000

Oct 27 Paid salaries by cheque 2 000

Oct 30 Issued a cheque to SA Bank as a repayment on the loan 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 Cr

20.1 R

Oct 1 Bank 10 000

Oct 24 Vehicles 9 000

19 000

Dr Drawings: W Blits Cr

20.1 R

Oct 17 Bank 2 000

Dr Equipment (at cost) Cr

20.1 R

Oct 3 Sparks

Dealers 1 000

FAC1502/1

Dr Vehicles (at cost) Cr

20.1 R

Oct 24 Capital:

W Blits 9 000

Dr Bank Cr

20.1 R 20.1 R

Oct 1 Capital 10 000 Oct 9 Advertisements 200

Long-term Oct 12 Telephone expenses 75

loan 6 000 Oct 17 Drawings:

13 Income received 500 W Blits 2 000

Oct 27 Salaries 2 000

Oct 30 Long-term loan 1 500

Oct 31 Balance c/d 10 725

16 500 16 500

20.1

Nov 1 Balance b/d 10 725

Dr Long-term borrowing (SA Bank) Cr

20.1 R 20.1 R

Oct 30 Bank 1 500 Oct 1 Bank 6 000

31 Balance c/d 4 500

6 000 6 000

20.1

Nov 1 Balance b/d 4 500

Dr Sparks Dealers Cr

20.1 R

Oct 3 Equipment 1 000

Dr Advertisements Cr

20.1 R

Oct 9 Bank 200

Dr Income received Cr

20.1 R

Oct 13 Bank 500

Dr Salaries Cr

20.1 R

Oct 27 Bank 2 000

Dr Telephone expenses Cr

20.1 R

Oct 12 Bank 75

FAC1502/1

WITBLITS ELECTRICIANS

(2) TRIAL BALANCE AS AT 31 OCTOBER 20.1

Dr Cr

R R

Capital — W Blits 19 000

Drawings — W Blits 2 000

Equipment (at cost) 1 000

Vehicles (at cost) 9 000

Bank 10 725

Long-term loan (SA Bank) 4 500

Sparks Dealers 1 000

Income received 500

Advertisements 200

Salaries 2 000

Telephone expenses 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 R

Mar 3 P Victor opened his firm of attorneys and deposited as

opening capital 12 000

Mar 34 Paid rental for March 1 000

Mar 35 Bought a photocopier from Foto-Kop on credit 8 000

Paid Foto-Kop by cheque 2 000

Mar 15 Rendered services on credit to U Wright 3 000

Mar 18 Received a cheque from U Wright 1 800

Mar 21 Bought stationery from AA Dealers on credit 3 000

Mar 23 Deposited cash received for services rendered to U Wrong 1 200

Mar 25 Paid on account to AA Dealers 1 500

Mar 30 Paid salaries by cheque 400

Mar 31 P Victor drew a cheque for private use 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 = EQUITY + LIABILITIES

Trade Equip- Income/ Trade

Date Bank receiv- ment Capital Expendi- payables

ables ture

20.1 R R R R R R

March 3 71 000 71 000

Totals 71 000 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 + LIA-

BILITIES

Trade Income/

receiv- Equip- Expendi- Trade

Date Bank ables ment Capital ture payables

20.1 R R R R R R

Mar 3 + 12 000 + 12 000

Mar 471 000 71 000

Mar 5 + 8 000 + 8 000

72 000 72 000

Mar 15 + 3 000 + 3 000

Mar 18 + 1 800 71 800

Mar 21 73 000 + 3 000

Mar 23 + 1 200 + 1 200

Mar 25 71 500 71 500

Mar 30 7400 7400

Mar 31 71 000 71 000

+ 9 100 + 1 200 + 8 000 =+ 11 000 7200 ++ 7 500

R18 300 R18 300

P VICTOR

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

Capital

Capital contribution from owner 12 000)

Total comprehensive loss for the period (200)

Drawings (1 000)

Balance at 31 March 20.1 10 800)

FAC1502/1

P VICTOR

(3) STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20.1

ASSETS Note R

Non-current assets 8 000

Property, plant and equipment 2 8 000

Current assets 10 300

Trade and other receivables 1 200

Cash and cash equivalents (bank) 9 100

Total assets 18 300

EQUITY AND LIABILITIES

Total equity 10 800

Capital 10 800

Current liabilities 7 500

Trade and other payables 7 500

Total equity and liabilities 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 Equipment Total

R R

Carrying amount: Beginning of period — —

Cost — —

Accumulated depreciation — —

Additions 8 000 8 000

Depreciation — —

Carrying amount: End of period 8 000 8 000

Cost 8 000 8 000

Accumulated depreciation — —

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 Page

5 PROCESSING ACCOUNTING DATA 59

6 ADJUSTMENTS 98

7 THE CLOSING-OFF PROCEDURE, DETERMINING PROFIT

OF AN ENTITY AND PREPARING FINANCIAL STATEMENTS 116

FAC1502/1

STUDY UNIT

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 60

5.1 Introduction 60

5.2 The accounting cycle 60

5.3 Books of first entry: journals 61

5.4 Types of journals 61

5.5 Cash journals 61

5.5.1 Cash receipts journal 61

5.5.2 Cash payments journal 62

5.6 Credit journals and the general journal 67

5.6.1 Introduction 67

5.6.2 Inventory systems 68

5.6.3 Purchases journal and purchases returns journal 68

5.6.4 Sales journal and sales returns journal 70

5.6.5 General journal 72

5.7 The trial balance 73

5.8 Revision exercise and solution 73

5.9 Settlement discount 81

5.9.1 Settlement discount granted 81

5.9.2 Settlement discount received 81

5.10 Value added tax (VAT) 82

5.10.1 Background 82

5.10.2 Tax period 82

5.10.3 Accounting bases 83

5.11 Revision exercise and solution 88

Self-assessment 97

FAC1502/1

KEY CONCEPTS

.Source documents .General ledger

.Accounting cycle .Trade receivables ledger

.Cash receipts journal .Trade payables ledger

.Cash payments journal .Comprehensive taxation

.Purchases journal .Vendor

.Purchases returns journal .Taxable supplies

.Sales journal .Exempted supplies

.Sales returns journal .Settlement discount

.General journal .Value added tax (VAT)

.Output 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 CRJ1

Analysis Sundry accounts

Document Day Details of Bank Current

number receipts income Amount Fol Details

R R R

Rec 1 1 T Tom 130 000 130 000 130 000 Capital

2 2 ABC Bank 25 000 25 000 25 000 Loan:

ABC Bank

3 13 S Silver 1 000 1 000 1 000

4 28 C Canon 2 000 2 000 2 000 C Canon

158 000 1 000 157 000

FAC1502/1

Dr Bank Cr Dr Capital Cr

20.1 R 20.1 R

Feb 28 Receipts 158 000 Feb 1 Bank 130 000

Dr Fees earned Cr Dr Loan: ABC Bank Cr

20.1 R 20.1 R

Feb 18 .... .... Feb 2 Bank 25 000

28 Bank 1 000

Dr C Canon Cr

20.1 20.1 R

Feb 18 .... .... Feb 28 Bank 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 CPJ1

Cheque Day Details Bank Wages Sundry accounts

number Amount Fol Details

R R R

1 6 XY Furnishers 100 000 100 000 Equipment

2 11 Joc Limited 2 000 2 000 Joc Limited

3 12 Cash 1 000 1 000 Drawings

4 16 Cash 800 800

103 800 800 103 000

Dr Bank Cr Dr Equipment Cr

20.1 20.1 R 20.1 R

Feb 28 Feb 28 Payments 103 800 Feb 6 Bank 100 000

Dr Wages Cr Dr Joc Limited Cr

20.1 R 20.1 R 20.1

Feb 28 Bank 800 Feb 11 Bank 2 000 Feb 10 ... ...

Dr Drawings Cr

20.1 R

Feb 12 Bank 1 000

The complete bank account will now take the following form:

Dr Bank Cr

20.1 R 20.1 R

Feb 28 Receipts CRJ1 158 000 Feb 28 Payments CPJ1 103 800

Balance c/d 54 200

158 000 158 000

20.1

Mar 1 Balance b/d 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 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.

Jun 2 Bought R2 500 worth of equipment and R845 worth of consumable inventory from

Head Suppliers and paid by cheque, R3 345.

Jun 5 Fees received for services rendered, R350.

Jun 7 Drew a cheque and paid the assistant’s wages, R200.

Jun 10 Cash banked for services rendered, R556.

Jun 14 Drew a cheque for R500 to pay the week’s wages, R200, the remainder being for Ms

Baloyi’s own use.

Jun 15 Cash register roll total for services rendered, R642.

Jun 17 Bought stationery from Office Suppliers, R80 and paid by cheque.

Jun 19 Fees received for services rendered, R438.

Jun 21 Paid the week’s wages, R200.

Jun 22 Bought shampoo and other requirements from Head Suppliers and paid by cheque,

R550.

Jun 24 Cash register roll total for services rendered, R387.

Jun 25 Issued a cheque to Telkom to pay the telephone account, R260, which included

installation costs of R180.

Jun 28 Cashed a cheque for R1 500. R1 300 was for the owner’s own use and R200 was for

wages.

Jun 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 CRJ1

Document Day Details Analysis Bank Current Sundry accounts

number

of receipts

income Amount Fol Details

Rec 1 1 B Baloyi 10 000 10 000 10 000 B4 Capital

CRR 1 5 Service fee 350 350 350

CRR 2 10 Service fee 556 556 556

CRR 3 15 Service fee 642 642 642

CRR 4 19 Service fee 438 438 438

CRR 5 24 Service fee 387 387 387

CRR 6 30 Service fee 875 875 875

13 248 3 248 10 000

B3 N1

(CRR = Cash register roll)

BEAUTY’S HAIR

(2) CASH PAYMENTS JOURNAL — JUNE 20.3 CPJ1

Consum- Sundry accounts

Cheque Day Details Bank able inven-

number tory Wages Amount Fol Details

1 1 Huurtru Rental

1 000 1 000 N2 expenses

2 City Water and

Treasurer electricity

500 500 B2 deposit

3 2 Head

Suppliers 3 345 845 2 500 B1 Equipment

4 7 Cash 200 200

5 14 Cash 500 200 300 B5 Drawings

6 17 Office

Suppliers 80 80 N3 Stationery

7 21 Cash 200 200

8 22 Head

Suppliers 550 550

9 25 Telkom Telephone

260 260 N4 expenses

10 28 Cash 1 500 200 1 300 B5 Drawings

8 135 1 395 800 5 940

B3 N5 N6

FAC1502/1

BEAUTY’S HAIR

(3) GENERAL LEDGER

Dr Equipment B1 Cr

20.3 R

Jun 2 Bank CPJ1 2 500

Dr Water and electricity deposit B2 Cr

20.3 R

Jun 1 Bank CPJ1 500

Dr Bank B3 Cr

20.3 R 20.3 R

Jun 30 Receipts CRJ1 13 248 Jun 30 Payments CPJ1 8 135

Balance c/d 5 113

13 248 13 248

20.3

Jul 1 Balance b/d 5 113

Dr Capital B4 Cr

20.3 R

Jun 1 Bank CRJ1 10 000

Dr Drawings B5 Cr

20.3 R

Jun 14 Bank CPJ1 300

28 Bank CPJ1 1 300

1 600

Dr Current income N1 Cr

20.3 R

Jun 30 Bank CRJ1 3 248

Dr Rental expenses N2 Cr

20.3 R

Jun 1 Bank CPJ1 1 000

Dr Stationery N3 Cr

20.3 R

Jun 17 Bank CPJ1 80

Dr Telephone expenses N4 Cr

20.3 R

Jun 25 Bank CPJ1 260

FAC1502/1

Dr Consumable inventory N5 Cr

20.3 R

Jun 30 Bank CPJ1 1 395

Dr Wages N6 Cr

20.3 R

Jun 30 Bank CPJ1 800

BEAUTY’S HAIR

(4) TRIAL BALANCE AS AT 30 JUNE 20.3

Fol Debit Credit

R R

Equipment B1 2 500

Water and electricity deposit B2 500

Bank B3 5 113

Capital B4 10 000

Drawings B5 1 600

Current income N1 3 248

Rental expenses N2 1 000

Stationery N3 80

Telephone expenses N4 260

Consumable inventory N5 1 395

Wages N6 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 PJ5

Invoice No Day Details Fol Purchases Trade

payables

R R

1534 3 Grand Wholesalers CL2 1 258 1 258

1535 7 XY Company CL3 983 983

1536 11 AA Limited CL1 2 324 2 324

1537 14 XY Company CL3 437 437

1538 21 XY Company CL3 1 212 1 212

1539 25 Grand Wholesalers CL2 538 538

1540 30 AA Limited CL1 215 215

6 967 6 967

ABC DEALERS

PURCHASES RETURNS JOURNAL — MAY 20.3 PRJ5

Credit note

Day Details Fol Purchases

returns

Trade

payables

R R

C115 10 Grand Wholesalers CL2 158 158

C116 27 XY Company CL3 114 114

272 272

GENERAL LEDGER TRADE PAYABLES LEDGER

Dr Purchases Cr

20.3 R Date Details Fol Debit Credit Balance

May 31 Creditors 6 967 20.3 R R R

May

Dr Trade payables control Cr AA Limited CL1

20.3 R 20.3 R 11 Inv 1536 PJ5 2 324 2 324

May 31 Purchases May 31 Purchases 6 967 30 Inv 1540 PJ5 2215 2 539

returns 272

Dr Purchases returns Cr Grand Wholesalers CL2

20.3 R 3 Inv 1534 PJ5 1 258 1 258

May 31 Creditors 272 10 Credit note

C 115 PRJ5 158 1 100

25 Inv 1539 PJ5 538 1 638

XY Company CL3

7 Inv 1535 PJ5 983 983

14 Inv 1537 PJ5 437 1 420

21 Inv 1538 PJ5 1 212 2 632

27 Credit note

C 116 PRJ5 114 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 SJ3

Invoice

No Day Details Fol Sales Debtors

R R

2018 2 M Moloi DL4 268 268

2019 5 A Abdul DL1 315 315

2020 12 G Green DL3 424 424

2021 14 E Els DL2 176 176

2022 17 G Green DL3 587 587

2023 21 M Moloi DL4 643 643

2024 29 E Els DL2 269 269

2025 30 A Abdul DL1 103 103

2 785 2 785

FAC1502/1

ABC DEALERS

SALES RETURNS JOURNAL — MAY 20.3 SRJ3

Credit

Note No Day Details Fol Sales

returns

Trade

receiv-

ables

R R

D223 8 M Moloi DL4 175 175

D224 19 G Green DL3 114 114

D225 21 E Els DL2 192 192

11281 11281

GENERAL LEDGER

Dr Sales Cr

TRADE RECEIVABLES LEDGER

20.3 R Date Details Fol Debit Credit Balance

May 31 Trade 20.3 R R R

receiv- May

ables 2 785

Dr Trade receivables control Cr A Abdul DL1

20.3 R 20.3 R 5 Inv 2019 315 315

May 31 Sales 2 785 May 31 Sales 30 Inv 2025 103 418

returns 281

Dr Sales returns Cr E Els DL2

20.3 R 14 Inv 2021 176 176

May 31 Trade 21 Credit

receiv-

able 281

Note no

D225 92 84

29 Inv 2024 269 353

G Green DL3

12 Inv 2020 424 424

17 Inv 2022 587 1 011

19 Credit Note

no D224 114 897

M Moloi DL4

2 Inv 2018 268 268

8 Credit

Note no

D223 75 193

21 Inv 2023 643 836

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 J3

Date Particulars Fol Debit Credit

R R

5 Vehicles 43 000

ABC Bank 43 000

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

16 Packaging material 430

Stationery 430

Packaging material per invoice Z214 incorrectly

debited to stationery account

18 Credit losses (Bad debts) 84

F Field 84

F Field’s balance written off as irrecoverable

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 1 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.

2 Purchased merchandise on credit from TR Wholesalers, R23 541.

Purchased packaging material from S Suppliers and paid by cheque, R468.

3 Drew a cash cheque for cash float, R500.

4 Cash sales on opening day, R18 674.

5 Purchased merchandise on credit from the following wholesalers:

BB Dealers R7 832

DBN Distributors R6 965

6 Sublet a storeroom to G Gold and received his cheque for R250.

Cash sales per cash register roll, R12 455.

10 Drew a cheque to pay wages, R1 200.

12 Issued invoices to the following people for goods sold:

B Blue R478

S Silver R693.

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

14 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:

G Green R324.

R Red R299.

16 Cash sales, R8 790.

17 Drew a cash cheque for the following:

Wages R1 500.

Owner’s own use R1 000.

19 Received a cheque from B Blue, R200.

20 Purchased merchandise from TR Wholesalers and paid by cheque, R2 675.

Merchandise sold for cash, R12 570.

21 Goods sold on credit:

B Blue R362.

R Red R178.

23 S Silver paid R100 on his account.

Cash sales, R10 238.

24 Paid R550 to The Newsmaker for placing advertisements.

Drew cash to pay wages, R1 500.

25 Purchased stationery on credit from HI Q, R267.

Issued a receipt to R Red for R299 in part payment of his account.

27 Issued cheques to the following people in part settlement of their accounts:

TR Wholesalers R20 000

BB Dealers R 6 000

DBN Distributors R 5 000

HI Q R 1 000

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

Cash sales, R16 742.

30 Issued cheques for the following:

L Lemon, the manager’s salary, R2 500

EQUIP on account, R1 000

JHB Letting Agents for rental for April, 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 R324

B Blue 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 CRJ1

Analysis Trade

Document Day Details Fol of Bank Sales receiv- Sundry accounts

number receipts ables

control Amount Fol Details

R R R R R

Rec 1 1 A Apple 50 000 50 000 50 000 B7 Capital

CRR 1 4 Sales 18 674 18 674 18 674

Rec 2 6 G Gold 250 250 N2 Rental income

CRR 2 Sales 12 455 12 705 12 455

CRR 3 16 Sales 8 790 8 790 8 790

Rec 3 19 B Blue DL1 200 200 1200

CRR 4 20 Sales 12 570 12 570 12 570

Rec 4 23 S Silver DL2 100 1100

CRR 5 Sales 10 238 10 338 10 238

Rec 5 25 R Red DL4 299 299 1299

Rec 6 29 S Silver DL2 200 1200

CRR 6 Sales 16 742 16 942 16 742

CRR 7 31 Sales 15 284 15 284

Rec 7 G Green DL3 324 1324

Rec 8 B Blue DL1 640 16 248 1640

146 766 94 753 1 763 50 250

B5 N1 B3

(b) CASH PAYMENTS JOURNAL — MARCH 20.5 CPJ1

Cheque Day Details Fol Bank Trade pay- Purchases Wages Sundry accounts

number ables control

Amount Fol Details

R R R R R

001 1 JHB Letting Agents 2 000 2 000 N8 Rental expenses

002 EQUIP CL4 1 000 1 000

003 City Treasurer 1 000 1 000 B2 Water and electricity

deposit

004 2 S Suppliers 468 468 N5 Packaging material

005 3 Cash 500 500 B4 Cash float

006 10 Cash 1 200 1 200

007 13 Z Zulu 5 378 5 378

008 14 HI Q CL5 1 478 1 000 478 N4 Stationery

009 17 Cash 2 500 1 500 1 000 B8 Drawings

010 20 TR Wholesalers 2 675 2 675

011 24 The Newsmaker 550 550 N6 Advertisements

012 Cash 1 500 1 500

013 27 TR Wholesalers CL1 20 000 20 000

014 BB Dealers CL2 6 000 6 000

015 DBN Distributors CL3 5 000 5 000

016 HI Q CL5 1 000 1 000

017 30 L Lemon 2 500 2 500 N7 Salaries

018 EQUIP CL4 1 000 1 000

019 JHB Letting Agents 2 000 2 000 N8 Rental expenses

020 31 Telkom 595 595 N9 Telephone expenses

021 Cash 3 000 1 500 1 500 B8 Drawings

61 344 35 000 8 053 5 700 12 591

B5 B6 N3 N10

FAC1502/1

Invoice Trade

no Day Details Fol Purchases payables

A0001 2 TR Wholesalers CL1 23 541 23 541

A0002 5 BB Dealers CL2 7 832 7 832

A0003 DBN Distributors CL3 6 965 6 965

38 338 38 338

N3 B6

(d) SALES JOURNAL — MARCH 20.5 SJ1

Invoice Trade

No Day Details Fol Sales receivables

F001 12 B Blue DL1 478 478

F002 S Silver DL2 693 693

F003 15 G Green DL3 324 324

F004 R Red DL4 299 299

F005 21 B Blue DL1 362 362

F006 R Red DL4 178 178

F007 29 S Silver DL2 262 262

2 596 2 596

N1 B3

(e) GENERAL JOURNAL — MARCH 20.5 J1

Date Details Fol Debit Credit

R R

1 Equipment B1 10 000

EQUIP/Trade payables control B6 10 000

Shop equipment bought on credit per invoice

Z001

14 Equipment B1 5 260

HI Q/Trade payables control B6 5 260

Computer bought on credit per invoice Z002

25 Stationery N4 267

HI Q/Trade payables control B6 267

Stationery bought on credit per invoice Z003

AA SUPERMARKET

(2) LEDGERS

(a) GENERAL LEDGER

Dr Equipment (at cost) B1 Cr

20.5 R

Mar 1 Trade payables

control J1 10 000

14 Trade payables

control J1 5 260

15 260

FAC1502/1

Dr Water and electricity deposit B2 Cr

20.5 R

Mar 1 Bank CPJ1 1 000

Dr Trade receivables B3 Cr

20.5 R 20.5 R

Mar 31 Sales SJ1 2 596 Mar 31 Bank CRJ1 1 763

Balance c/d 833

2 596 2 596

20.5

Apr 1 Balance b/d 833

Dr Cash float B4 Cr

20.5 R

Mar 3 Bank CPJ1 500

Dr Bank B5 Cr

20.5 R 20.5 R

Mar 31 Receipts CRJ1 146 766 Mar 31 Payments CPJ1 61 344

Balance c/d 85 422

146 766 146 766

20.5

Apr 1 Balance b/d 85 422

Dr Trade payables B6 Cr

20.5 R 20.5 R

Mar 31 Bank CPJ1 35 000 Mar 1 Equipment J1 10 000

Balance c/d 18 865 14 Equipment J1 5 260

25 Stationery J1 267

31 Purchases PJ1 38 338

53 865 53 865

20.5

Apr 1 Balance b/d 18 865

Dr Capital B7 Cr

20.5 R

Mar 1 Bank CRJ1 50 000

Dr Drawings B8 Cr

20.5 R

Mar 17 Bank CPJ1 1 000

31 Bank CPJ1 1 500

2 500

FAC1502/1

Dr Sales N1 Cr

20.5 R

Mar 31 Trade receivables SJ1 2 596

Bank CRJ1 94 753

97 349

Dr Rental income N2 Cr

20.5 R

Mar 6 Bank CRJ1 250

Dr Purchases N3 Cr

20.5 R

Mar 31 Trade payables PJ1 38 338

Bank CPJ1 8 053

46 391

Dr Stationery N4 Cr

20.5 R

Mar 14 Bank CPJ1 478

25 Trade payables

control J1 267

745

Dr Packaging material N5 Cr

20.5 R

Mar 2 Bank CPJ1 468

Dr Advertisements N6 Cr

20.5 R

Mar 24 Bank CPJ1 550

Dr Salaries N7 Cr

20.5 R

Mar 30 Bank CPJ1 2 500

Dr Rental expenses N8 Cr

20.5 R

Mar 1 Bank CPJ1 2 000

30 Bank CPJ1 2 000

4 000

FAC1502/1

Dr Telephone expenses N9 Cr

20.5 R

Mar 31 Bank CPJ1 595

Dr Wages N10 Cr

20.5 R

Mar 31 Bank CPJ1 5 700

(b) TRADE RECEIVABLES LEDGER

B Blue DL1

Date Details Fol Debit Credit Balance

20.5 R R R

Mar 12 Invoice F001 SJ1 478 478

Mar 19 Receipt No 3 CRJ1 200 278

Mar 21 Invoice F005 SJ1 362 640

Mar 31 Receipt No 8 CRJ1 640 —

S Silver DL2

Date Details Fol Debit Credit Balance

20.5 R R R

Mar 12 Invoice F002 SJ1 693 693

Mar 23 Receipt No 4 CRJ1 100 593

Mar 29 Invoice F007 SJ1 262 855

Receipt No 6 CRJ1 200 655

G Green DL3

Date Details Fol Debit Credit Balance

20.5 R R R

Mar 15 Invoice F003 SJ1 324 324

Mar 31 Receipt No 7 CRJ1 324 —

R Red DL4

Date Details Fol Debit Credit Balance

20.5 R R R

Mar 15 Invoice F004 SJ1 299 299

Mar 21 Invoice F006 SJ1 178 477

Mar 25 Receipt No 5 CRJ1 299 178

Debtors list R

S Silver 655

R Red 178

833 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.

TR Wholesalers CL 1

Date Details Fol Debit Credit Balance

20.5 R R R

Mar 2 Invoice A0001 PJ1 23 541 23 541

27 Cheque 013 CPJ1 20 000 3 541

BB Dealers CL 2

Date Details Fol Debit Credit Balance

20.5 R R R

Mar 5 Invoice A0002 PJ1 7 832 7 832

27 Cheque 014 CPJ1 6 000 1 832

DBN Distributors CL 3

Date Details Fol Debit Credit Balance

20.5 R R R

Mar 5 Invoice A0003 PJ1 6 965 6 965

27 Cheque 015 CPJ1 5 000 1 965

EQUIP CL 4

Date Details Fol Debit Credit Balance

20.5 R R R

Mar 1 Invoice Z001 J1 10 000 10 000

Cheque 002 CPJ1 1 000 9 000

30 Cheque 018 CPJ1 1 000 8 000

HI Q CL 5

Date Details Fol Debit Credit Balance

20.5 R R R

Mar 14 Invoice Z002 J1 5 260 5 260

Cheque 008 CPJ1 1 000 4 260

25 Invoice Z003 J1 267 4 527

27 Cheque 016 CPJ1 1 000 3 527

Creditors list R

TR Wholesalers 3 541

BB Dealers 1 832

DBN Distributors 1 965

EQUIP 8 000

HI Q 3 527

18 865 Corresponds to the balance of account B6

FAC1502/1

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

R R

Equipment (at cost) B 1 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 2 500

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

166 464 166 464

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 Credit

R R

Capital 177 150

Land and buildings 144 200

Equipment 29 700

Inventory — 1 November 20.3 19 200

Bank 4 467

W Wolf 1 583

L Lion 770

T Tiger 2 310

VAT input 2 715

VAT output 2 925

Sales 86 400

Purchases 45 650

Distribution, administration and other expenses 20 500

268 785 268 785

FAC1502/1

(b) TRANSACTIONS FOR MARCH 20.4

March 1 Cash sales, R15 504.

5 Paid the account of T Tiger by cheque after deducting R114 discount.

7 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.

12 Received an account from Stationers Ltd for the printing of documents, R684.

13 Credit sales:

— L Lion R2 280

— W Wolf R1 140

14 Sold an old computer to O Old for R285 and received his cheque for the amount

due.

Cash sales, R6 840.

21 Issued a credit note to L Lion for an overcharge on the invoice of the 13th, R57.

23 Paid C Cheetah by cheque for carriage on goods purchased, R1 140.

28 Received a credit invoice from T Tiger for goods purchased, R14 535.

29 Issued cheques for salaries and wages, R5 746 and for purchases from B Bam

R7 980.

30 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)

(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) 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.

FAC1502/1

Solution Exercise 5.2

RUNDU DEALERS

(1) SUBSIDIARY JOURNALS

(a) CASH RECEIPTS JOURNAL — MARCH 20.4 CRJ2

Date Details Fol Bank Sales Trade

receiv-

ables

VAT input VAT

output

Settlement

discount

granted

Sundry accounts

Dr Dr Amount Fol Details

R R R R R R R

1 Sales 15 504 13 600 1 904

7 W Wolf 1 469 1 583 (14*) # (100)

L Lion 713 770 (7) # (50)

14 O Old 285 35 250 Equipment

Sales 6 840 6 000 840

24 811 19 600 2 353 (21)

L15

2 779

L16

(150) 250

* Discount includes 14% VAT therefore

R114

1614

114 = R14

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

(b) CASH PAYMENTS JOURNAL — MARCH 20.4 CPJ2

Date Details Fol Bank Purchases Trade

payables

VAT

input

VAT

output

Settlement

discount

received

Sundry accounts

Cr Amount Fol Details

R R R R R R R

5 T Tiger 2 196 2 310 (14*) (100)

23 C Cheetah 1 140 140 1 000 Carriage

on purchases

29 Cash 5 746 5 746 Salaries and

wages

B Bam 7 980 7 000 980

17 062 7 000 2 310 1 120 (14) (100) 6 746

L15 L15

* Discount includes 14% VAT therefore

R114

1614

114 = R14

FAC1502/1

Trade

Date Details Fol VAT output Sales receivables

R R R

13 L Lion 280 2 000 2 280

W Wolf 140 1 000 1 140

420 3 000 3 420

L16

(d) PURCHASES JOURNAL — MARCH 20.4 PJ2

Trade

Date Details Fol VAT input Purchases payables

R R R

28 T Tiger 1 785 12 750 14 535

1 785 12 750 14 535

L15

(e) SALES RETURNS JOURNAL — MARCH 20.4 SRJ2

Sales Trade

Date Details Fol VAT output returns receivables

R R R

21 L Lion 7 50 57

7 50 57

L16

(f) PURCHASES RETURNS JOURNAL — MARCH 20.4 PRJ2

Purchases Trade

Date Details Fol VAT input returns payables

R R R

30 T Tiger 98 700 798

98 700 798

L15

FAC1502/1

(g) GENERAL JOURNAL — MARCH 20.4 J2

Date Detail Fol Debit Credit

R R

12 Printing 600

VAT input L15 84

Stationers Ltd/Trade payables control 684

Account received for printing

31 VAT control L17 5 627

VAT input L15 5 627

Transfer of VAT input to the

VAT control account

VAT output L16 6 131

VAT control L17 6 131

Transfer of VAT output to the

VAT control account

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 VAT input L15 Cr

20.4 R 20.4 R

Mar 1 Balance b/d 2 715 Mar 31 Trade payables control PRJ2 98

31 Bank CPJ2 1 120 VAT control J2 5 627

Trade receivables

control CRJ2 21

Trade payables control PJ2 1 785

Trade payables control J2 84

5 725 5 725

Dr VAT output L16 Cr

20.4 R 20.4 R

Mar 31 Trade receivables

control SRJ2 7 Mar 1 Balance b/d 2 925

VAT control J2 6 131 31 Bank CRJ2 2 779

Trade receivables control SJ2 420

Trade payables control CPJ2 14

6 138 6 138

Dr VAT control L17 Cr

20.4 R 20.4 R

Mar 31 VAT input J2 5 627 Mar 31 VAT output J2 6 131

Balance c/d 504

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:

%or R

Amount without VAT = 100 1,00

VAT = 14 0,14

;Amount VAT inclusive = 114 1,14

To calculate an amount if VAT was included

114 x Amount given

Example: Amount received on 1 March 20.4 = R15 504 (including VAT). (See cash

receipts journal.)

VAT = 14

114 6R15 504 = R1 904

SALES = 100

114 6R15 504 = R13 600

SALES = R15 504 7R1,14 = 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 Debit Credit

R R

Land and buildings (at cost) B1 60 000

Furniture (at cost) B2 5 320

Inventory: Trading B3 6 536

Trade receivables control B4 2 431

Bank B5 2 554

Trade payables control B6 6 075

Capital B7 75 000

Drawings B8 3 884

VAT input B9 4 337

VAT output B10 4 527

Sales N1 13 569

Purchases N2 9 855

Rent income N3 800

Packaging material N4 964

Telephone expenses N5 483

Water and electricity N6 1 247

Settlement discount granted N7 170

Settlement discount received N8 210

Wages N9 2 150

Stationery N10 250

100 181 100 181

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

Feb 1 The owner, S Shine, increased his capital contribution 15 000

Paid the City Council for water and electricity 3 078

Feb 3 Purchased merchandise from Glasco Ltd and paid by cheque 8 778

Purchased merchandise on credit from Ferguson Limited 9 120

Sold trading inventory on credit to J Jason 13 680

4 Purchased a desk on credit from City Furnitures 3 534

6 Purchased receipt books and pens from Pen and Pencil

and paid by cheque 228

Drew a cheque for the week’s wages 954

8 Paid Glasco Ltd on account 3 992

Received discount 228

10 Cash sales of merchandise 3 876

12 Issued a credit note to J Jason for an overcharge on the 3rd 114

Drew a cheque for the week’s wages 940

15 Cash sales 2 394

Received a cheque from J Jason 5 988

Settlement discount granted to him 342

FAC1502/1

Feb 18 Sold goods on credit to F Brown 4 560

Cash purchases of trading inventory 2 736

Purchased glassware on credit from Glasco Ltd 5 700

20 Returned damaged goods to Glasco Ltd 570

21 Drew a cheque for wages 989

Received damaged goods returned by F Brown and issued a

credit note 228

25 Cash sales 6 156

Received a payment from F Brown 2 552

Discount allowed to him 228

26 Drew a cheque for wages 945

Issued a cheque to Telkom to pay the telephone account 570

Received an account from Printo Limited for the printing of

documents 798

27 Purchased inventory on credit from Glasco Ltd 3 420

Paid Ferguson Limited by cheque and received 5 490

R285 discount

28 Paid the owner’s house instalment by cheque to HP Bank 2 500

Received a cheque from Z Zittace for rental 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)

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

FAC1502/1

SOLUTION: Revision exercise

SUNSHINE GLASS TRADERS

(1) SUBSIDIARY JOURNALS

(a) CASH RECEIPTS JOURNAL – FEBRUARY 20.4 CRJ2

Date Details Fol Bank Sales Trade

receivables

Settlement

discount

granted

VAT input VAT

output

Sundry accounts

Dr Dr Amount Fol Details

R R R R R R R

1 S Shine 15 000 15 000 B7 Capital

10 Cash 3 876 3 400 476

15 Cash 2 394 2 100 294

J Jason 5 988 6 330 (300) (42)

25 Cash 6 156 5 400 756

F Brown 2 552 2 780 (200) (28)

28 Z Zittace 912 112 800 N3 Rental

income

36 878 10 900 9 110 (500) (70) 1 638 15 800

B5 N1 B4 N7 B9 B10

(b) CASH PAYMENTS JOURNAL — FEBRUARY 20.4 CPJ2

Date Details Fol Bank Purchases Trade

payables

Wages Settlement

discount

received

VAT VAT

input output Sundry accounts

Cr Amount Fol Details

R R R R R R R

1 City Council 3 078 378 2 700 N6 Water and

electricity

3 Glasco Ltd 8 778 7 700 1 078

6 Pen and Pencil 228 28 200 N10 Stationery

Cash 954 954

8 Glasco Ltd 3 992 4 220 (200) (28)

12 Cash 940 940

18 Cash 2 736 2 400 336

21 Cash 989 989

26 Cash 945 945

Telkom 570 70 500 N5 Telephone

expenses

27 Ferguson Ltd 5 490 5 775 (250) (35)

28 HP Bank 2 500 2 500 B8 Drawings

31 200 10 100 9 995 3 828 (450) 1 890 (63) 5 900

B5 N2 B6 N9 N8 B9 B8

Date Details Fol Trade VAT output Sales

receivables

R R R

3 J Jason 13 680 1 680 12 000

18 F Brown 4 560 560 4 000

18 240 2 240 16 000

B4 B10 N1

FAC1502/1

(d) PURCHASES JOURNAL — FEBRUARY 20.4 PJ2

Trade

Date Details Fol payables VAT input Purchases

R R R

3 Ferguson Limited 9 120 1 120 8 000

18 Glasco Ltd 5 700 700 5 000

27 Glasco Ltd 3 420 420 3 000

18 240 2 240 16 000

B6 B9 N2

(e) SALES RETURNS JOURNAL — FEBRUARY 20.4 SRJ2

Trade Sales

Date Details Fol receivables VAT output returns

R R R

12 J Jason 114 14 100

21 F Brown 228 28 200

342 42 300

B4 B9 N11

(f) PURCHASES RETURNS JOURNAL — FEBRUARY 20.4 PRJ2

Trade Purchases

Date Details Fol payables VAT input returns

R R R

20 Glasco Ltd 570 70 500

570 70 500

B6 B9 N12

(g) GENERAL JOURNAL — FEBRUARY 20.4 J2

Date Details Fol Debit Credit

R R

4 Furniture B2 3 100

VAT input B 434

City Furnitures/Trade payables control B6 3 534

Desk purchased on credit

26 Printing N13 700

VAT input B9 98

Printo Limited/Trade payables control B6 798

Printing of documents on credit

28 VAT output B10 8 426

VAT control B11 8 426

Transfer of VAT output to the

VAT control account

VAT control B11 8 999

VAT input B9 8 999

Transfer of VAT input to the

VAT control account

FAC1502/1

(2) GENERAL LEDGER

Dr Land and buildings (at cost) B1 Cr

20.4 R

Feb 1 Balance b/d 60 000

Dr Furniture (at cost) B2 Cr

20.4 R

Feb 1 Balance b/d 5 320

4 City Furnitures J2 3 100

8 420

Dr Inventory: Trading B3 Cr

20.4 R

Feb 1 Balance b/d 6 536

Dr Trade receivables control B4 Cr

20.4 R 20.4 R

Feb 1 Balance b/d 2 431 Feb 28

Bank and discount

CRJ2 9 110

28 Sales SJ2 18 240 Sales returns SRJ2 342

Balance c/d 11 219

20 671 20 671

20.4

Mar 1 Balance b/d 11 219

Dr Bank B5 Cr

20.4 R 20.4 R

Feb 1 Balance b/d 2 554 Feb 28 Total payments CPJ2 31 200

28 Total receipts CRJ2 36 878 Balance c/d 8 232

39 432 39 432

20.4

Mar 1 Balance b/d 8 232

Dr Trade payables control B6 Cr

20.4 R 20.4 R

Feb 28

Bank and discount

CPJ2 9 995 Feb 1 Balance b/d 6 075

Purchases returns

PRJ2 570 Feb 4 Furniture J2 3 534

Balance c/d 18 082 Feb 26 Printing J2 798

Feb 28 Purchases PJ2 18 240

28 647 28 647

20.4

Mar 1 Balance b/d 18 082

Dr Capital B7 Cr

R 20.4 R

Feb 1 Balance b/d 75 000

Bank CRJ2 15 000

90 000

FAC1502/1

Dr Drawings B8 Cr

20.4 R

Feb 1 Balance b/d 3 884

28 Bank CPJ2 2 500

6 384

Dr VAT input B9 Cr

20.4 R 20.4 R

Feb 1 Balance b/d 4 337 Feb 28 Trade payables control PRJ2 70

4 Trade payables VAT control J2 8 999

control J2 434

26 Trade payables

control J2 98

28 Bank CPJ2 1 890

Trade receivables

control CRJ2 70

Trade payables

control PJ2 2 240

9 069 9 069

Dr VAT output B10 Cr

20.4 R 20.4 R

Feb 28 Trade receivables Feb 1 Balance b/d 4 527

control SRJ2 42 28 Trade receivables

VAT control J2 8 426 control SJ2 2 240

Bank CRJ2 1 638

Trade payables control CPJ2 63

8 468 8 468

Dr VAT control B11 Cr

20.4 R 20.4 R

Feb 28 VAT input J2 8 999 Feb 28 VAT output J2 8 426

Balance c/d 573

8 999 8 999

20.4

Mar 1 Balance b/d 573

Dr Sales N1 Cr

20.4 R

Feb 1 Balance b/d 13 569

28 Bank CRJ2 10 900

Trade receivables

control SJ2 16 000

40 469

Dr Purchases N2 Cr

20.4 R

Feb 1 Balance b/d 9 855

28 Bank CPJ2 10 100

Trade payables

control PJ2 16 000

35 955

FAC1502/1

Dr Rental income N3 Cr

20.4 R

Feb 1 Balance b/d 800

28 Bank CRJ2 800

1 600

Dr Packaging material N4 Cr

20.4 R

Feb 1 Balance b/d 964

Dr Telephone expenses N5 Cr

20.4 R

Feb 1 Balance b/d 483

26 Bank CPJ2 500

983

Dr Water and electricity N6 Cr

20.4 R

Feb 1 Balance b/d 1 247

Bank CPJ2 2 700

3 947

Dr Settlement discount granted N7 Cr

20.4 R

Feb 1 Balance b/d 170

28 Trade receivables

control CRJ2 500

670

Dr Settlement discount received N8 Cr

20.4 R

Feb 1 Balance b/d 210

28 Trade payables

control CPJ2 450

660

Dr Wages N9 Cr

20.4 R

Feb 1 Balance b/d 2 150

28 Bank CPJ2 3 828

5 978

FAC1502/1

Dr Stationery N10 Cr

20.4 R

Feb 1 Balance b/d 250

6 Bank CPJ2 200

450

Dr Sales returns N11 Cr

20.4 R

Feb 28 Trade receivables

control SRJ2 300

Dr Purchases returns N12 Cr

20.4 R

Feb 28 Trade payables

control PRJ2 500

Dr Printing N13 Cr

20.4 R

Feb 26 Printo Limited J2 700

(3) TRIAL BALANCE AS AT 28 FEBRUARY 20.4

Fol Debit Credit

R R

Land and buildings at cost B1 60 000

Furniture at cost B2 8 420

Inventory: Trading B3 6 536

Trade receivables control B4 11 219

Bank B5 8 232

Trade payables control B6 18 082

Capital B7 90 000

Drawings B8 6 384

VAT control B11 573

Sales N1 40 469

Purchases N2 35 955

Rental income N3 1 600

Packaging material N4 964

Telephone expenses N5 983

Water and electricity N6 3 947

Settlement discount granted N7 670

Settlement discount received N8 660

Wages N9 5 978

Stationery N10 450

Sales returns N11 300

Purchases returns N12 500

Printing N13 700

151 311 151 311

FAC1502/1

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

Adjustments

Learning outcome

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

Contents Page

Key concepts 99

6.1 Introduction 99

6.2 Short-term adjustments 99

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

6.5 Revision exercise and solution 110

Self-assessment 115

FAC1502/1

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

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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

712 = 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 J1

Prepaid expenses GL55 2 000

Insurance GL40 2 000

Adjustment of insurance account

100

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CLOSING TRANSFER: 28 FEBRUARY 20.1 J2

Profit or loss GL60 400

Insurance GL40 400

Transfer of insurance to profit or loss account

GENERAL LEDGER

Dr Insurance 40 Cr

20.1 R 20.1 R

Jan 2 Bank CPJ 2 400 Feb 28 Prepaid expenses J1 2 000

Profit or loss J2 400

2 400 2 400

Dr Prepaid expenses 55 Cr

20.1 R

Feb 28 Insurance J1 2 000

Dr Profit or loss (extract) 60 Cr

20.1 R

Feb 28 Insurance J2 400

XA-XA DEALERS

STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.1

(extract)

Current assets xxxx

Prepayments 2 000

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.

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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 J5

ADJUSTMENT ENTRY — 28 FEBRUARY 20.1

Water and electricity GL41 360

Accrued expenses GL56 360

Adjustment of water and electricity account

CLOSING TRANSFER — 28 FEBRUARY 20.1 J6

Profit or loss GL60 3 240

Water and electricity GL41 3 240

Closing of water and electricity account to profit or

loss account

GENERAL LEDGER

Dr Water and electricity 41 Cr

20.1 R 20.1 R

Feb 28 Balance b/d 2 880 Feb 28 Profit or loss J6 3 240

Accrued expenses J5 360

3 240 3 240

Dr Accrued expenses 56 Cr

20.1 R

Feb 28 Water and

electricity J5 360

Dr Profit or loss (extract) 60 Cr

20.1 R

Feb 28 Water and

electricity J6 3 240

XA-XA DEALERS

STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.1 (extract)

Current liabilities xxxx

Trade and other payables xxxx

Accrued expenses 360

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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 7R150 = 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 acredit 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 J3

Inventory: Stationery GL57 150

Stationery GL42 150

Adjustment of stationery account

CLOSING TRANSFER — 28 FEBRUARY 20.1 J4

Profit or loss GL60 350

Stationery GL42 350

Closing of stationery account

GENERAL LEDGER

Dr Stationery 42 Cr

20.1 R 20.1 R

Feb 28 Balance b/d 500 Feb 28 Inventory:

Stationery J3 150

Profit or loss J4 350

500 500

Dr Inventory: Stationery 57 Cr

20.1 R

Feb 28 Stationery J3 150

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Dr Profit or loss (extract) 60 Cr

20.1 R

Feb 28 Stationery J4 350

XA-XA DEALERS

STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.1 (extract)

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 7R800 = R9 600 (= R800 612).

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 adebit 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 J9

Rental income GL44 800

Income received in advance GL59 800

Adjustment of rental income account

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CLOSING TRANSFER — 28 FEBRUARY 20.1 J10

Rental income GL44 9 600

Profit or loss GL60 9 600

Closing of rental income to profit or loss account

GENERAL LEDGER

Dr Rental income 44 Cr

20.1 R 20.1 R

Feb 28 Income received Feb 28 Balance b/d 10 400

in advance J9 800

Profit or loss J10 9 600

10 400 10 400

Dr Income received in advance 59 Cr

20.1 R

Feb 28 Rental income J9 800

Dr Profit or loss (extract) 60 Cr

20.1 R

Feb 28 Rental income J10 9 600

XA-XA DEALERS

STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.1 (extract)

Current liabilities xxxx

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.

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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 J11

Accrued income GL61 200

Commission income GL45 200

Adjustment of commission income account

CLOSING TRANSFER — 28 FEBRUARY 20.1 J12

Commission income GL45 2 400

Profit or loss GL60 2 400

Closing of commission income to profit or loss

account

GENERAL LEDGER

Dr Commission income 45 Cr

20.1 R 20.1 R

Feb 28 Profit or loss J12 2 400 Feb 28 Balance b/d 2 200

Accrued income J11 200

2 400 2 400

Dr Accrued income 61 Cr

20.1 R

Feb 28 Commission

income J11 200

Dr Profit or loss (extract) 60 Cr

20.1 R

Feb 28 Commission

income J12 2 400

XA-XA DEALERS

STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.1 (extract)

Current assets xxx

Trade and other receivables xxx

Accrued income 200

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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, acredit 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) GL62 230

A Boeka/Trade receivables control DL2/GL6 230

Write off debtor’s account as irrecoverable

CLOSING TRANSFER — 28 FEBRUARY 20.1 J14

Profit or loss GL60 230

Credit losses GL62 230

Closing of credit losses to profit or loss account

GENERAL LEDGER

Dr Credit losses (Bad debts) 62 Cr

20.1 R 20.1 R

Jan 25 Trade receivables Feb 28 Profit or loss J14 230

control(A Boeka) J13 230

Dr Profit or loss (extract) 60 Cr

20.1 R

Feb 28 Credit losses J14 230

Dr Trade receivables control 6 Cr

20.0 20.1 R

Mar 1 Balance b/d xxxx Jan 25 Credit losses J13 230

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TRADE RECEIVABLES LEDGER

Dr A Boeka 2 Cr

20.1 R 20.1 R

Jan 25 Balance b/d 230 Jan 25 Credit losses J13 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 J15

Depreciation GL46 12 000

Accumulated depreciation: machinery GL63 12 000

Adjustment to make provision for depreciation

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CLOSING TRANSFER — 28 FEBRUARY 20.1 J16

Profit or loss GL60 12 000

Depreciation GL46 12 000

Closing of depreciation to the profit or loss

account

GENERAL LEDGER

Dr Depreciation 46 Cr

20.1 R 20.1 R

Feb 28 Accumulated Feb 28 Profit or loss J16 12 000

depreciation:

machinery J15 12 000

Dr Accumulated depreciation: machinery 63 Cr

20.1 R

Feb 28 Depreciation J15 12 000

Dr Profit or loss (extract) 60 Cr

20.1 R

Feb 28 Depreciation J16 12 000

XA-XA DEALERS

STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.1 (extract)

ASSETS Note R

Non-current assets

Property, plant and equipment 3 68 000

XA-XA DEALERS

NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.1

Property, plant and equipment Machinery Total

Carrying amount: Beginning of year — —

Cost — —

Accumulated depreciation — —

Additions 80 000 80 000

Disposals — —

Depreciation (12 000) (12 000)

Carrying amount: End of year 68 000 68 000

Cost 80 000 80 000

Accumulated depreciation (12 000) (12 000)

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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 Credit

R R

Rental income 6 600

Stationery 350

Water and electricity 1 800

Commission income 5 600

Credit losses 280

Accumulated depreciation: machinery 30 000

Trade receivables control 11 150

Machinery at cost 200 000

ADDITIONAL INFORMATION:

(a) Only 11 months’ rental was received.

(b) Stationery on hand on 30 June 20.2 amounted to R50.

(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.

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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

Dr Rental income 1 Cr

20.2 R 20.2 R

Jun 30 Profit or loss J2 7 200 June 30 Balance b/d 6 600

Accrued

income J1 600

7 200 7 200

Dr Stationery 2 Cr

20.2 R 20.2 R

Jun 30 Balance b/d 350 Jun 30 Inventory:

Stationery J1 50

Profit or loss J2 300

350 350

Dr Water and electricity 3 Cr

20.2 R 20.2 R

Jun 30 Balance b/d 1 800 Jun 30 Profit or loss J2 1 960

Accrued

expenditure J1 160

1 960 1 960

Dr Commission income 4 Cr

20.2 R 20.2 R

Jun 30 Income received Jun 30 Balance b/d 5 600

in advance J1 600

Profit or loss J2 5 000

5 600 5 600

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Dr Credit losses (Bad debts) 5 Cr

20.2 R 20.2 R

Jun 30 Balance b/d 280 Jun 30 Profit or loss J2 430

Trade receivables

control J1 150

430 430

Dr Accumulated depreciation: machinery 6 Cr

20.2 R

Jun 30 Balance b/d 30 000

Depreciation J1 30 000

60 000

Dr Trade receivables control 7 Cr

20.2 R 20.2 R

Jun 30 Balance b/d 11 150 Jun 30 Credit losses

(Bad debts) J1 150

Balance c/d 11 000

11 150 11 150

20.2

Jul 1 Balance b/d 11 000

Dr Machinery (at cost) 8 Cr

20.2 R

Jun 30 Balance b/d 200 000

Dr Accrued income 9 Cr

20.2 R

Jun 30 Rental income J1 30 600

Dr Inventory: Stationery 10 Cr

20.2 R

Jun 30 Stationery J1 53 050

Dr Accrued expenditure 11 Cr

20.2 R

Jun 30 Water and

electricity J1 30 160

Dr Income received in advance 12 Cr

20.2 R

Jun 30 Commission

income J1 30 600

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Dr Depreciation 13 Cr

20.2 R 20.2 R

Jun 30 Accumulated June 30 Profit or

depreciation J1 30 000 loss J2 30 000

Dr Profit or loss (extract) 14 Cr

20.2 R 20.2 R

Jun 30 Stationery J2 30300 Jun 30 Rent income J2 07 200

Water and Commission

electricity J2 31 960 income J2 35 000

Credit losses J2 30 430

Depreciation J2 30 000

A ABBO

(2) GENERAL JOURNAL

ADJUSTMENT ENTRIES: 30 JUNE 20.2 J1

R R

Accrued income GL9 600

Rental income GL1 600

To adjust the above

Inventory: Stationery GL10 50

Stationery GL2 50

To adjust the above

Commission income GL4 600

Income received in advance GL12 600

To adjust the above

Credit losses GL5 150

Trade receivabels control GL7 150

To adjust the above

Depreciation GL13 30 000

Accumulated depreciation: machinery GL6 30 000

To make provision for depreciation

Water and electricity GL3 160

Accrued expenditure GL11 160

To adjust the above

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A ABBO

(3) Closing transfers J2

R R

Rental income GL1 7 200

Commission income GL4 5 000

Profit or loss GL14 12 200

Closing off of accounts against the

profit or loss account

Profit or loss GL14 32 690

Stationery GL2 300

Water and electricity GL3 1 960

Credit losses GL5 430

Depreciation GL13 30 000

Closing off of accounts against the

profit or loss account

A ABBO

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

ASSETS Note R

Non-current assets 140 000

Property, plant and equipment 1 140 000

Current assets X XXX

Inventories 50

Trade and other receivables R(11 000 + 600) 11 600

EQUITY AND LIABILITIES

Current liabilities XXX

Trade and other payables 160

Income received in advance 600

A ABBO

(5) NOTES FOR THE YEAR ENDED 30 JUNE 20.2

Property, plant and equipment Machinery Total

R R

Carrying amount:

Beginning of the period 170 000 170 000

Cost 200 000 200 000

Accumulated depreciation (30 000) (30 000)

Depreciation (30 000) (30 000)

Carrying amount:

End of the period 140 000 140 000

Cost 200 000 200 000

Accumulated depreciation (60 000) (60 000)

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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?

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STUDY UNIT

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 Page

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

7.4 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

7.5 Closing-off of nominal accounts 128

7.5.1 Trading account 130

7.5.2 Profit or loss account 135

7.6 Preparation of financial statements 138

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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.

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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.

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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.)

Cr 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 (see above.)

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

and

Cr Trade payables control

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)

Cr Sales (an income which increases equity) (selling price)

Dr Cost of sales (an expense that decreases equity) (cost price)

Cr Inventory (an asset decreases) (cost price)

The transaction is recorded in the cash receipts journal.

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

and

Dr Debtors control

Cr Sales (see above) (selling price)

Dr Cost of sales (see above) (cost price)

Cr 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)

Cr Debtor (the asset decreases because the debtor owes the

business less) (selling price)

and

Cr Debtors control

Cr Cost of sales (this has the opposite effect on equity to the effect when

merchandise was sold) (cost price)

Dr Inventory (the asset increases 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)

Cr 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)

Cr Cost of sales (see above) (cost price)

The transaction is recorded in the general journal

When merchandise is returned to a creditor:

Dr Creditor (because the liability decreases) (cost price)

and

Dr Creditors control

Cr Inventory (an asset is decreased – there is less inventory because of the

goods returned) (cost price)

The transaction is recorded in the purchases returns journal.

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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:

Inventory on 1 January 20.1 10 000

Transactions for year up to 31 December 20.1

Credit purchases 50 000

Cash purchases 40 000

Credit sales (mark-up on cost price is 25%) 75 000

Cash sales (mark-up on cost price is 25%) 25 000

Solution Exercise 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.

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LEDGER ENTRIES

GENERAL LEDGER

Dr Inventory Cr

20.1 R 20.1 R

Jan 1 Balance b/d 10 000 Dec 31 Cost of sales 60 000

Dec 31 Trade payables Cost of sales 20 000

control 50 000 Balance c/d 20 000

Bank 40 000

100 000 100 000

20.2

Jan 1 Balance b/d 20 000

Dr Sales Cr

20.1 R 20.1 R

Dec 31 Trading Dec 31 Trade receivables

account 100 000 control 75 000

Bank 25 000

100 000 100 000

Dr Cost of sales Cr

20.1 R 20.1 R

Dec 31 Inventory 60 000 Dec 31 Trading account 80 000

Inventory 20 000

80 000 80 000

Dr Trading account Cr

20.1 R 20.1 R

Dec 31 Cost of sales 80 000 Dec 31 Sales 100 000

Profit or

loss

(Gross profit*) 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 = 100

Mark-up = 25

Selling price = 125

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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 x75 000

Cost price = R60 000

If the mark-up of 25% is on the selling price:

Selling price = 100

Mark-up = 25

Cost price = 75

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

Thus: 75

100 x75 000

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: Cost price of inventory purchased during the financial year. (This is the total

amount spent on purchases)

Less: Cost price of inventory at the end of the financial year, determined by a physical

inventory count. (This is the unsold inventory)

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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)

Cr 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 (see above)

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

and

Cr Trade payables control

The transaction is recorded in the purchases journal at cost price.

Sale of merchandise for cash:

Dr Bank (the asset increases with the money received)

Cr Sales (an income account which increases equity)

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

Dr Trade receivables control

Cr 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)

Cr Trade receivables (the asset decreases)

and

Cr 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)

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

The transaction is recorded in the cash payments journal.

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When inventory is returned to a creditor:

Dr Trade payables (the liability decreases)

and

Dr Trade payables control

Cr 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)

Cr 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).

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(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 R

Opening inventory at cost price 10 000

Plus: Purchases at cost price 90 000

Inventory available for sale at cost price 100 000

Less: Closing inventory at cost price 20 000

Cost of sales 80 000

Gross profit 20 000*

Sales 100 000

* Balancing figure

.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 Cr

20.1 R 20.1 R

Jan 1 Balance b/d 10 000 Dec 31 Trading account 10 000

20.1

Dec 31 Trading account 20 000

Dr Purchases Cr

20.1 R 20.1 R

Dec 31 Creditors control 50 000 Dec 31 Trading account 90 000

Bank 40 000

90 000 90 000

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Dr Sales Cr

20.1 R 20.1 R

Dec 31 Trading account 100 000 Dec 31 Trade receivables

control 75 000

Bank 25 000

100 000 100 000

Dr Trading account Cr

20.1 R 20.1 R

Dec 31 Inventory (opening) 10 000 Dec 31 Sales 100 000

Purchases 90 000 Inventory (closing) 20 000

Profit or loss

(gross profit)* 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:

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Transaction Perpetual inventory

system

Periodic inventory

system

Payment of delivery costs

on inventory purchased

Dr Inventory

Cr Bank

Cr Trade payables (and

trade receivables control)

if on credit

Dr Carriage on purchases

Cr Bank

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:

Inventory (1 January 20.1) 95 000

Purchases 260 000

Carriage on purchases 3 600

A physical inventory count on 31 December 20.1 indicated that inventory on hand amounted to

R80 000.

Solution:

Inventory (1 January 20.1) 95 000

Add: Purchases 260 000

Add: Carriage on purchases 3 600

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.

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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 Dr Cr

R R

Capital B 1 103 400

Drawings B 2 3 000

Bank B 3 4 250

Inventory – 1 February 20.0 B 4 5 000

Vehicles (at cost) B 5 91 000

Equipment (at cost) B 6 19 500

Trade receivables control B 7 10 100

Trade payables control B 8 14 700

Sales N 1 77 500

Sales returns N 2 1 500

Purchases N 3 52 500

Purchases returns N 4 2 500

Rent income N 5 600

Stationery N 6 150

Wages N 7 10 550

Water and electricity N 8 950

Credit losses (Bad debts) N 9 300

Settlement discount granted N10 150

Settlement discount received N11 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.

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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) 7closing inventory (at cost price) = cost

price of goods sold.

Gross profit = sales 7cost price of goods sold.

Using the details from a previous exercise, we have the following:

R10 000 + R90 000 7R20 000 = R80 000 (cost price of sales)

Gross profit = R100 000 7R80 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 B1 Cr

20.1 R

Jan 31 Balance b/d 103 400

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Dr Drawings B2 Cr

20.1 R 20.1 R

Jan 31 Balance b/d 3 000 Jan 31 Capital J3 3 000

Dr Bank B3 Cr

20.1 R

Jan 31 Balance b/d 4 250

Dr Inventory B4 Cr

20.0 R 20.1 R

Feb 1 Balance b/d 5 000 Jan 31 Trading account J1 5 000

20.1

Jan 31 Trading account J1 8 000

Dr Vehicles (at cost) B5 Cr

20.1 R

Jan 31 Balance b/d 91 000

Dr Equipment (at cost) B6 Cr

20.1 R

Jan 31 Balance b/d 19 500

Dr Trade receivables control B7 Cr

20.1 R

Jan 31 Balance b/d 10 100

Dr Trade payables control B8 Cr

20.1 R

Jan 31 Balance b/d 14 700

Dr Sales N1 Cr

20.1 R 20.1 R

Jan 31 Sales returns J 1 500 Jan 31 Balance b/d 77 500

Settlement

discount granted J 150

Trading account J 75 850

77 500 77 500

Dr Sales returns N2 Cr

20.1 R 20.1 R

Jan 31 Balance b/d 1 500 Jan 31 Sales J1 1 500

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Dr Purchases N3 Cr

20.1 R 20.1 R

Jan 31 Balance b/d 52 500 Jan 31 Purchases returns J 2 500

Settlement

discount received J 250

Trading account J 49 750

52 500 52 500

Dr Purchases returns N4 Cr

20.1 R 20.1 R

Jan 31 Purchases J1 2 500 Jan 31 Balance b/d 2 500

Dr Rent income N5 Cr

20.1 R 20.1 R

Jan 31 Profit or loss J2 600 Jan 31 Balance b/d 600

Dr Stationery N6 Cr

20.1 R 20.1 R

Jan 31 Balance b/d 150 Jan 31 Profit or loss J2 150

Dr Wages N7 Cr

20.1 R 20.1 R

Jan 31 Balance b/d 10 550 Jan 31 Profit or loss J2 10 550

Dr Water and electricity N8 Cr

20.1 R 20.1 R

Jan 31 Balance b/d 950 Jan 31 Profit or loss J2 950

Dr Credit losses (Bad debts) N9 Cr

20.1 R 20.1 R

Jan 31 Balance b/d 300 Jan 31 Profit or loss J2 300

Dr Settlement discount granted N10 Cr

20.1 R 20.1 R

Jan 31 Balance b/d 150 Jan 31 Sales J2 150

150 150

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Dr Settlement discount received N11 Cr

20.1 R 20.1 R

Jan 31 Purchases J 250 Jan 31 Balance b/d 250

250 250

Dr Trading account N12 Cr

20.1 R 20.1 R

Jan 31 Inventory (opening) J 5 000 Jan 31 Sales J 75 850

Purchases J 49 750 Inventory

Profit or loss (closing) J 8 000

(Gross profit) J 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 R R

Jan 31 Sales 150

Settlement discount granted 150

Closing transfer of settlement discount granted

(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 R R

Jan 31 Settlement discount received 250

Purchases 250

Closing transfer of settlement discount received

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 R R

Jan 31 Trading account N12 5 000

Inventory B4 5 000

Closing transfer of opening inventory

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(2) To transfer purchases to the trading account, the purchases account is credited

(account is closed) and the trading account is debited.

20.1 R R

Jan 31 Trading account N12 49 750

Inventory N3 49 750

Closing transfer of purchases account

(3) To transfer sales returns to the trading account, sales returns is credited (account is

closed) and the trading account is debited.

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 R R

Jan 31 Sales N1 75 850

Trading account N12 75 850

Closing transfer of sales account

(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 R R

Jan 31 Purchase returns N4 2 500

Purchases N12 2 500

Closing transfer of purchases returns

(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 R R

Jan 31 Inventory B4 8 000

Trading account N12 8 000

To record the closing inventory in the books

(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 R R

Jan 31 Trading account N12 29 100

Profit or loss N13 29 100

Closing transfer of gross profit to profit or

loss account

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(8) Instead of all the separate closing transfers, a combined entry can be made with the

same effect.

General journal J1

20.1 R R

Jan 31 Sales N 1 75 850

Inventory (closing) B 4 8 000

Inventory (opening) B 4 5 000

Purchases N 3 49 750

Trading account N12 29 100*

Closing off and transfer of above

accounts to trading account

* 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

Dr Profit or loss N13 Cr

20.1 R 20.1 R

Jan 31 Stationery J 150 Jan 31 Trading account J 29 100

Wages J 10 550 (Gross profit)

Water and Rent income J 600

electricity J 950

Credit losses J 300

Capital (Total com-

prehensive income

for the year) J 17 750

29 700 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.

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CLOSING TRANSFERS OF EXPENDITURE J2

20.1 R R

Jan 31 Profit or loss N13 150

Stationery N6 150

Closing transfer

Profit or loss N13 10 550

Wages N7 10 550

Closing transfer

Profit or loss N13 950

Water and electricity N8 950

Closing transfer

Profit or loss N13 300

Credit losses (Bad debts) N9 300

Closing transfer

(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 J2

20.1 R R

Jan 31 Rental income N5 600

Profit or loss N13 600

Closing transfer

(4) Instead of all the individual closing transfers, a combined entry can be made, for

instance:

GENERAL JOURNAL J2

20.1 R R

Jan 31 Rental income N5 600

Profit or loss N13 11 350*

Stationery N6 150

Wages N7 10 550

Water and electricity N8 950

Credit losses (Bad debts) N9 300

Closing off the above accounts against

the profit and loss account

* 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.

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(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 J3

20.1 R R

Jan 31 Profit or loss N13 17 750

Capital B1 17 750

To transfer profit to capital

(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 J3

20.1 R R

Jan 31 Capital B1 3 000

Drawings B2 3 000

To close drawings

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

Dr Capital B1 Cr

20.1 R 20.1 R

Jan 31 Drawings J3 3 000 Jan 31 Balance b/d 103 400

Balance c/d 118 150 Profit or loss J3 17 750

121 150 121 150

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):

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FAC1502/1

POST-CLOSING TRIAL BALANCE AS AT 31 JANUARY 20.1

Fol Dr Cr

R R

Capital B1 118 150

Bank B3 4 250

Inventory B4 8 000

Vehicles (at cost) B5 91 000

Equipment (at cost) B6 19 500

Trade receivables control B7 10 100

Trade payables control B8 14 700

132 850 132 850

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.

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TOEKELA DEALERS

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE

YEAR ENDED 31 JANUARY 20.1

Notes R

Revenue 2 75 850)

Cost of sales (46 750)

Opening inventory 5 000)

Net purchases 49 750)

54 750)

Closing inventory (8 000)

Gross profit 29 100)

Other income: 600)

Rental income 600)

29 700

Distribution, administrative and other expenses (11 950)

Stationery 150)

Wages 10 550)

Water and electricity 950)

Credit losses (Bad debts) 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

Capital

Balance at 1 February 20.0 103 400

Total comprehensive income for the year 17 750

Drawings (3 000)

Balance at 31 January 20.1 118 150

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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 Note R

Non-current assets 110 500

Property, plant and equipment 3 110 500

Current assets 22 350

Inventories 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.

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.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 Income represents net sales to third parties.

3Property, plant and Equipment Vehicles Total

equipment

R R R

Carrying amount:

Beginning of year 19 500 91 000 110 500

Cost 19 500 91 000 110 500

Accumulated

depreciation (—) (—) (—)

Depreciation (—) (—) (—)

Carrying amount:

End of year 19 500 91 000 110 500

Cost 19 500 91 000 110 500

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.

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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 =29 000 6100

Selling price 61 76 000 1

= 38,2%

Gross profit 100 =29 000 6100

Cost of sales 61 47 000 1

= 61,7%

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:

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HOT-ROD DEALERS

(1) PRE-ADJUSTMENT TRIAL BALANCE AS AT 31 DECEMBER 20.4

Fol Debit Credit

R R

Capital GL 1 250 000

Drawings GL 2 4 400

Land and buildings (at cost) GL 3 180 000

Vehicles (at cost) GL 4 120 000

Furniture (at cost) GL 5 15 000

Inventory: Trading — 1 Jan 20.4 GL 6 4 000

Trade receivables control GL 7 40 140

Bank GL 8 5 900

Accumulated depreciation: vehicles GL 9 26 000

Accumulated depreciation: furniture GL10 3 000

Trade payables control GL11 50 750

Sales GL12 253 615

Sales returns GL13 615

Carriage on sales GL14 670

Commission income GL15 480

Rental income GL16 2 860

Purchases GL17 170 550

Purchases returns GL18 550

Carriage on purchases GL19 400

Credit losses (Bad debts) GL20 230

Insurance GL21 2 750

Packaging material GL22 800

Salaries GL23 38 500

Water and electricity GL24 3 300

587 255 587 255

(2) ADDITIONAL INFORMATION:

(a) Inventory on 31 December 20.4 R

Trading inventory 6 500

Packaging material 175

(b) Debtor S Sorry is insolvent; his debt of R140 has to be written off as irrecoverable.

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.

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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 Capital 1 Cr

20.4 R 20.4 R

Dec 31 Drawings J2 4 400 Dec 31 Balance b/d 250 000

Balance c/d 273 610 Profit or loss J2 28 010

278 010 20.5 278 010

Jan 1 Balance b/d 273 610

Dr Drawings 2 Cr

20.4 R 20.4 R

Dec 31 Balance b/d 4 400 Dec 31 Capital J2 4 400

Dr Land and buildings (at cost) 3 Cr

20.4 R

Dec 31 Balance b/d 180 000

Dr Vehicles (at cost) 4 Cr

20.4 R

Dec 31 Balance b/d 120 000

Dr Furniture (at cost) 5 Cr

20.4 R

Dec 31 Balance b/d 15 000

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Dr Inventory: Trading 6 Cr

20.4 R 20.4 R

Jan 1 Balance b/d 4 000 Dec 31 Trading

Dec 31 Trading account J2 6 500 account J2 4 000

Balance c/d 6 500

20.5 10 500 10 500

Jan 1 Balance b/d 6 500

Dr Trade receivables control 7 Cr

20.4 R 20.4 R

Dec 31 Balance b/d 40 140 Dec 31 Credit losses

(Bad debts) J1 140

Balance c/d 40 000

20.5 40 140 40 140

Jan 1 Balance b/d 40 000

Dr Bank 8 Cr

20.4 R

Dec 31 Balance b/d 5 900

Dr Accumulated depreciation: vehicles 9 Cr

20.4 R 20.4 R

Dec 31 Balance b/d 26 000

Depreciation J1 15 750

41 750

Dr Accumulated depreciation: furniture 10 Cr

20.4 R 20.4 R

Dec 31 Balance b/d 3 000

Depreciation J1 1 275

4 275

Dr Trade payables control 11 Cr

20.4 R

Dec 31 Balance b/d 50 750

Dr Sales 12 Cr

20.4 R 20.4 R

Dec 31 Sales returns J2 615 Dec 31 Balance b/d 253 615

Trading account J2 253 000

253 615 253 615

Dr Sales returns 13 Cr

20.4 R 20.4 R

Dec 31 Balance b/d 615 Dec 31 Sales J2 615

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FAC1502/1

Dr Carriage on sales 14 Cr

20.4 R 20.4 R

Dec 31 Balance b/d 670 Dec 31 Profit or loss J2 670

Dr Commission income 15 Cr

20.4 R 20.4 R

Dec 31 Profit or loss J2 1 360 Dec 31 Balance b/d 480

Accrued

income J1 880

1 360 1 360

Dr Rental income 16 Cr

20.4 R 20.4 R

Dec 31 Income received Dec 31 Balance b/d 2 860

in advance J1 220

Profit or loss J2 2 640

2 860 2 860

Dr Purchases 17 Cr

20.4 R 20.4 R

Dec 31 Balance b/d 170 550 Dec 31 Purchases returns J2 550

Trading account J2 170 000

170 550 170 550

Dr Purchases returns 18 Cr

20.4 R 20.4 R

Dec 31 Purchases J2 550 Dec 31 Balance b/d 550

Dr Carriage on purchases 19 Cr

20.4 R 20.4 R

Dec 31 Balance b/d 400 Dec 31 Trading account J2 500

Accrued expenses

J1 100

500 500

Dr Credit losses (Bad debts) 20 Cr

20.4 R 20.4 R

Dec 31 Balance b/d 230 Dec 31 Profit or loss J2 370

Trade receivables J1 140

370 370

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FAC1502/1

Dr Insurance 21 Cr

20.4 R 20.4 R

Dec 31 Balance b/d 2 750 Dec 31 Prepaid

expenses J1 750

Profit or loss J2 2 000

2 750 2 750

Dr Packaging material 22 Cr

20.4 R 20.4 R

Dec 31 Balance b/d 800 Dec 31 Inventory:

Packaging

material J1 175

Profit or loss J2 625

800 800

Dr Salaries 23 Cr

20.4 R 20.4 R

Dec 31 Balance b/d 38 500 Dec 31 Prepaid

expenses J1 1 500

Profit or loss J2 37 000

38 500 38 500

Dr Water and electricity 24 Cr

20.4 R 20.4 R

Dec 31 Balance b/d 3 300 Dec 31 Profit or loss J2 3 300

Dr Prepaid expenses 25 Cr

20.4 R

Dec 31 Salaries J1 1 500

Insurance J1 750

2 250

Dr Accrued income 26 Cr

20.4 R

Dec 31 Commission

income J1 880

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FAC1502/1

Dr Income received in advance 27 Cr

20.4 R

Dec 31 Rent income J1 220

Dr Accrued expenses 28 Cr

20.4 R

Dec 31 Carriage on

purchases J1 100

Dr Inventory: Packaging material 29 Cr

20.4 R

Dec 31 Packaging

material J1 175

Dr Depreciation 30 Cr

20.4 R 20.4 R

Dec 31 Accumulated Dec 31 Profit or loss J2 17 025

depreciation:

vehicles J1 15 750

Accumulated

depreciation:

furniture J1 1 275

17 025 17 025

HOT-ROD DEALERS

GENERAL JOURNAL

(2) ADJUSTMENT ENTRIES — 31 DECEMBER 20.4 J1

R R

Inventory: Packaging material GL29 175

Packaging material GL22 175

Packaging material on hand at 31 December 20.4

Credit losses (Bad debts) GL20 140

Trade receivables control GL 7 140

Write S Sorry’s debt off as irrecoverable

Prepaid expenses GL25 1 500

Salaries GL23 1 500

Salaries prepaid

Carriage on purchases GL19 100

Accrued expenses GL28 100

Carriage on purchases still payable

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R R

Prepaid expenses GL25 750

Insurance GL21 750

Insurance prepaid for 3 months

Rental income GL16 220

Income received in advance GL27 220

Rent received in advance for January 20.5

Accrued income GL26 880

Commission income GL15 880

Commission earned not yet received

Depreciation GL30 17 025

Accumulated depreciation: vehicles GL 9 15 750

Accumulated depreciation: furniture GL10 1 275

Provision for depreciation

HOT-ROD DEALERS

GENERAL JOURNAL

(3) CLOSING ENTRIES — 31 DECEMBER 20.4 J2

R R

Purchases returns GL18 550

Purchases GL17 550

Closing transfer of purchases returns

Sales GL12 615

Sales returns GL13 615

Closing transfer of sales returns

Inventory: Trading (closing) GL 6 6 500

Sales GL12 253 000

Trading account GL31 259 500

Closing off and transfer of accounts to trading

account

Trading account GL31 174 500

Inventory: Trading (opening) GL 6 4 000

Purchases GL17 170 000

Carriage on purchases GL19 500

Closing off and transfer of accounts to trading

account

Trading account GL31 85 000

Profit or loss GL32 85 000

Transfer of gross profit

Commission income GL15 1 360

Rental income GL16 2 640

Profit or loss GL32 4 000

Closing off of accounts against profit or

loss account

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R R

Profit or loss GL32 60 990

Salaries GL23 37 000

Water and electricity GL24 3 300

Carriage on sales GL14 670

Insurance GL21 2 000

Packaging material GL22 625

Credit losses GL20 370

Depreciation GL30 17 025

Closing off of accounts against profit or

loss account

Profit or loss GL32 28 010

Capital GL 1 28 010

Transfer of profit to capital

Capital GL 1 4 400

Drawings GL 2 4 400

Close off drawings against capital

HOT-ROD DEALERS

GENERAL LEDGER

Dr Trading account 31 Cr

20.4 R 20.4 R

Dec 31 Inventory: Dec 31 Sales J2 253 000

Trading (opening) J2 4 000 Inventory:

Purchases J2 170 000 Trading

Carriage on (closing) J2 6 500

purchases J2 500

Profit or loss

(gross profit) J2 85 000

259 500 259 500

Dr Profit or loss 32 Cr

20.4 R 20.4 R

Dec 31 Salaries J2 37 000 Dec 31 Trading account

Water and electricity

J2 3 300 (gross profit) J2 85 000

Carriage on sales

J2 670 Commission

Insurance J2 2 000 income J2 1 360

Packaging material

J2 625 Rental income J2 2 640

Credit losses

(Bad debts) J2 370

Depreciation J2 17 025

Capital

(Total com-

prehensive income

for the year)

J2 28 010

89 000 89 000

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HOT-ROD DEALERS

(4) POST-CLOSING TRIAL BALANCE AS AT 31 DECEMBER 20.4

Fol Debit Credit

R R

Capital GL 1 273 610

Land and buildings (at cost) GL 3 180 000

Vehicles (at cost) GL 4 120 000

Furniture (at cost) GL 5 15 000

Inventory: Trading GL 6 6 500

Packaging material GL29 175

Trade receivables control GL 7 40 000

Bank GL 8 5 900

Accumulated depreciation: vehicles GL 9 41 750

Accumulated depreciation: furniture GL10 4 275

Trade payables control GL11 50 750

Prepaid expenses GL25 2 250

Accrued income GL26 880

Income received in advance GL27 220

Accrued expenses GL28 100

370 705 370 705

HOT-ROD DEALERS

(5) STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR

THE YEAR ENDED 31 DECEMBER 20.4

Revenue 253 000

Cost of sales (168 000)

Inventory (1 January 20.4) 4 000

Net purchases 170 000

Carriage on purchases 500

174 500

Inventory (31 December 20.4) (6 500)

Gross profit 85 000

Other income 4 000

Rental income 2 640

Commission income 1 360

89 000

Distribution, administrative and other expenses (60 990)

Salaries 37 000

Water and electricity 3 300

Carriage on sales 670

Insurance 2 000

Packaging material 625

Credit losses (Bad debts) 370

Depreciation (R15 750 + R1 275) 17 025

Profit for the year 28 010

Other comprehensive income for the year —

Total comprehensive income for the year 28 010

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COMMENTS

.Revenue are sales less sales returns R (253 615 7615) = R253 000.

.Net purchases are purchases less purchases returns R (170 550 7550) = R170 000.

HOT-ROD DEALERS

(6) STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED

31 DECEMBER 20.4

Capital

Balance at 1 January 20.4 250 000)

Total comprehensive income for the year 28 010)

Drawings (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 R

Non-current assets 268 975

Property, plant and equipment 2 268 975

Current assets 55 705

Inventories R(6 500 + 175) 6 675

Trade and other receivables R(40 000 + 880)* 40 880

Prepayments 2 250

Cash and cash equivalents 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.

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HOT-ROD DEALERS

(8) NOTES FOR THE YEAR ENDED 31 DECEMBER 20.4

1 Accounting policy:

1.1 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.

1.2 Property, plant and equipment are shown at cost less accumulated depreciation.

Land and buildings are classified as investment properties and are not depreciated.

Property, plant and Land and Vehicles Furniture Total

equipment buildings

R R R R

Carrying amount:

Beginning of year 180 000 94 000 12 000 286 000

Cost 180 000 120 000 15 000 315 000

Accumulated depreciation (—) (26 000) (3 000) (29 000)

Depreciation (—) (15 750) (1 275) (17 025)

Carrying amount:

End of year 180 000 *78 250 *10 725 268 975

Cost 180 000 120 000 15 000 315 000

Accumulated depreciation (—) (41 750) (4 275) (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.

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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

(5) %

Cost price 100

Profit mark-up 20

Selling price 120

If the selling price is R120, the cost price is R100

If the selling price is R150 000 the cost price is 100

120 6150 000

= R125 000

(6) %

Selling price 100

Profit mark-up 20

Cost price 80

If the selling price is R100, the cost price is R80

If the selling price is R150 000, the cost price 80

100 6150 000

= 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

No Subsidiary journal debited credited + – – + – +

Transactions:

1 Purchased inventory on credit, R4 000.

2 Paid carriage on purchases by cheque, R400.

3 Purchased inventory and paid by cheque, R8 000.

4 Sold half of the inventory on hand for cash, R10 000.

5 Inventory with a cost price of R1 000 was sold on credit for R2 100.

6 Inventory purchased on credit was returned to the seller, R200.

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Solution: Revision exercise 2

(1) ENTITY USING A PERPETUAL INVENTORY SYSTEM

Account in general Assets = Equity + Liabilities

ledger to be

No Subsidiary journal debited credited + – – + – +

1 Purchases journal Inventory 4 000

Trade

payables

control 4 000

2 Cash payments Inventory 400

journal Bank 400

3 Cash payments Inventory 8 000

journal Bank 8 000

4 Cash receipts Cost of

journal sales 6 200

Inventory 6 200

Bank

10 000

Sales

10 000

5 Sales journal Cost of

sales 1 000

Inventory 1 000

Trade receiv-

ables control 2 100

Sales 2 100

6 Purchases returns Inventory 200

journal Trade pay-

ables control 200

(2) ENTITY USING A PERIODIC INVENTORY SYSTEM

Account in general Assets = Equity + Liabilities

ledger to be

No Subsidiary journal debited credited + – – + – +

1 Purchases journal Purchases Trade pay- 4 000

ables control 4 000

2 Cash payments Carriage on-

journal purchases 400

Bank 400

3 Cash payments Purchases 8 000

journal Bank 8 000

4 Cash receipts Bank

10 000

journal Sales

10 000

5 Sales journal Trade receiv-

ables control 2 100

Sales 2 100

6 Purchases returns Trade pay-

journal 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.

Opening inventory on 1 July 20.1 6 000

Total purchases 100 000

Total sales 140 000

Closing inventory (valued on 30 June 20.2) 10 000

Solution: Revision exercise 3

Opening inventory 6 000

Plus: Purchases 100 000

Goods available for sale 106 000

Less: Closing inventory 10 000

Cost of goods sold 96 000

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. Inventory account

2. Purchases account

3. Sales account

4. Trading account

Solution: Revision exercise 4

ZETTA TRADERS

GENERAL LEDGER

Dr Inventory 1 Cr

20.1 R 20.2 R

Jul 1 Balance b/d 6 000 Jun 30 Trading account 6 000

20.2

Jul 1 Trading account 10 000

Dr Purchases 2 Cr

20.2 R 20.2 R

Jun 30 Balance b/d 100 000 Jun 30 Trading account 100 000

Dr Sales 3 Cr

20.2 R 20.2 R

Jun 30 Trading account 140 000 Jun 30 Balance b/d 140 000

156

FAC1502/1

Dr Trading account 4 Cr

20.2 R 20.2 R

Jun 30 Inventory Jun 30 Sales 140 000

(opening) 6 000 Inventory

Purchases 100 000 (closing) 10 000

Profit or loss

(Gross profit) 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

Inventory – 1 August 20.1 2 000

Purchases 3 000

Sales 7 300

Carriage on purchases 250

Customs duties 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 Inventory: Trading 1 Cr

20.1 R 20.1 R

Aug 1 Balance b/d 2 000 Aug 31 Trading account J1 2 000

20.1

Sept 1 Trading account J1 1 500

Dr Purchases 2 Cr

20.1 R 20.1 R

Aug 31 Balance b/d 3 000 Aug 31 Trading account J1 3 000

Dr Sales 3 Cr

20.1 R 20.1 R

Aug 31 Trading account J1 7 300 Aug 31 Balance b/d 7 300

157

FAC1502/1

Dr Carriage on purchases 4 Cr

20.1 R 20.1 R

Aug 31 Balance b/d 250 Aug 31 Trading account J1 250

Dr Customs duties 5 Cr

20.1 R 20.1 R

Aug 31 Balance b/d 800 Aug 31 Trading account J1 800

(2) CLOSING JOURNAL TRANSFER J1

20.1 R R

Aug 31 Sales GL3 7 300

Inventory (closing) GL1 1 500

Inventory (opening) GL1 2 000

Purchases GL2 3 000

Carriage on purchases GL4 250

Customs duties GL5 800

Trading account GL6 2 750*

Closing transfer to trading account

* Balancing figure

(3)

Dr Trading account 6 Cr

20.1 R 20.1 R

Aug 31 Inventory (opening) 2 000 Aug 31 Sales 7 300

Purchases 3 000 Inventory (closing) 1 500

Carriage on

purchases 250

Custom duties 800

Profit or loss

(gross profit) 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).

158

FAC1502/1

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.

Capital (1/3/20.0) 159 600

Drawings (total for the year) 5 000

Commission income 1 450

Rental expenses 12 850

Salaries and wages 28 460

Credit losses 260

Stationery 150

Municipal taxes 850

Required:

(1) Open the above accounts in the ledger, with the totals or balances as given.

(2) 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 1 Cr

20.1 R 20.0 R

Feb 28 Drawings J2 5 000 Mar 1 Balance b/d 159 600

Balance c/d 160 470 20.1

Feb 28 Profit or loss J2 5 870

165 470 165 470

20.1

Mar 1 Balance b/d 160 470

Dr Drawings 2 Cr

20.1 R 20.1 R

Feb 28 Balance b/d 5 000 Feb 28 Capital J2 5 000

159

FAC1502/1

Dr Commission income 3 Cr

20.1 R 20.1 R

Feb 28 Profit or Feb 28 Balance b/d 1 450

loss J1 1 450

Dr Rental expenses 4 Cr

20.1 R 20.1 R

Feb 28 Balance b/d 12 850 Feb 28 Profit or

loss J1 12 850

Dr Salaries and wages 5 Cr

20.1 R 20.1 R

Feb 28 Balance b/d 28 460 Feb 28 Profit or

loss J1 28 460

Dr Credit losses (Bad debts) 6 Cr

20.1 R 20.1 R

Feb 28 Balance b/d 260 Feb 28 Profit or

loss J1 260

Dr Stationery 7 Cr

20.1 R 20.1 R

Feb 28 Balance b/d 150 Feb 28 Profit or

loss J1 150

Dr Municipal taxes 8 Cr

20.1 R 20.1 R

Feb 28 Balance b/d 850 Feb 28 Profit or

loss J1 850

160

FAC1502/1

(2) CLOSING TRANSFERS J1

20.1 R R

Feb 28 Trading account 46 990

Profit or loss GL10 46 990

Transfer of gross profit from trading

account

Commission income GL3 1 450

Profit or loss GL9 41 120*

Rental expenses GL4 12 850

Salaries and wages GL5 28 460

Credit losses GL6 260

Stationery GL7 150

Municipal taxes GL8 850

Closing transfer to profit or loss

account

* Balancing figure

(3) GENERAL LEDGER

Dr Profit or loss 10 Cr

20.1 R 20.1 R

Feb 28 Rental expenses J1 12 850 Feb 28 Trading

Salaries & wages J1 28 460 account

Credit losses J1 260 (Gross profit) J1 46 990

Stationery J1 150 Commission

Municipal taxes J1 850 income J1 1 450

Capital (Total

comprehensive

income for the

year) J2 5 870

48 440 48 440

CLOSING TRANSFERS J2

20.1 R R

Feb 28 Profit or loss GL10 5 870

Capital GL1 5 870

Transfer of profit to capital

Capital GL1 5 000

Drawings GL2 5 000

To close drawings account

(4) R159 600

(5) R160 470 (=R159 600 + R5 870 7R5 000)

(6) R870 (=R5 870 7R5 000) as well as (R160 470 7R159 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:

Capital 88 000

Sundry creditors 5 080

Sundry debtors 3 748

Inventory 12 060

Bank (Dr) 5 316

Petty cash 200

Drawings 4 430

Loan from XY Bank 1 550

Furniture at cost 10 400

Land and buildings at cost 81 668

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) STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED

28 FEBRUARY 20.2

Capital

Balance at 1 March 20.1 88 000

Total comprehensive income for the year 23 192

Drawings (4 430)

Balance at 28 February 20.2 106 762

162

FAC1502/1

H HILTON

(2) STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.2

ASSETS R

Non-current assets 92 068

Property, plant and equiment R(81 668 + 10 400) 92 068

Current assets 21 324

Inventories 12 060

Trade and other receivables 3 748

Cash and cash equivalents R(5 316 + 200)* 5 516

Total assets 113 392

EQUITY AND LIABILITIES

Total equity 106 762

Capital 106 762

Non-current liabilities 1 550

Long-term borrowing 1 550

Current liabilities 5 080

Trade and other payables 5 080

Total equity and liabilities 113 392

* 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) Statement of profit or loss and other comprehensive income

(2) Statement of changes in equity

(3) Statement of financial position

(4) Notes to the financial statements

TRIAL BALANCE AS AT 31 DECEMBER 20.4

Debit Credit

R R

Land and buildings at cost 40 000

Vehicles at cost 30 800

Equipment at cost 20 000

Drawings 3 600

Trade receivables control 78 000

Trade payables control 77 000

Inventory 1/1/20.4 22 080

Cash on hand 1 440

Cash sales 46 840

Rental income 280

Settlement discount received 440

Settlement discount granted 1 152

Purchases 58 368

Carriage on sales 1 932

Advertisements 1 176

Capital 95 284

Credit sales 67 200

Bank 6 840

Salaries 15 020

Carriage on purchases 4 356

Sales returns 600

Purchases returns 1 120

Import duty 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 R

Revenue R(46 840 + 67 200 – 600 – 1 152) 2 112 288

Cost of sales (70 560)

Inventory (1 January 20.4) 22 080

Net purchases R(58 368 71120 – 440) 56 808

Carriage on purchases 4 356

Import duties 2 800

86 044

Inventory (31 December 20.4) (15 484)

Gross profit 41 728

Other income:

Rental income 280

42 008

Distribution, administrative and other expenses (18 128)

Carriage on sales 1 932

Advertisements 1 176

Salaries 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

Capital

Balance at 1 January 20.4 95 284

Total comprehensive income for the year 23 880

Drawings (3 600)

Balance at 31 December 20.4 115 564

164

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NTINI’S STORE

(3) STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.4

ASSETS Note R

Non-current assets 90 800

Property, plant and equipment 3 90 800

Current assets 101 764

Inventories 15 484

Trade and other receivables 78 000

Cash and cash equivalents R(6 840 + 1 440) 8 280

Total assets 192 564

EQUITY AND LIABILITIES

Total equity 115 564

Capital 115 564

Current liabilities 77 000

Trade and other payables 77 000

Total equity and liabilities 192 564

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.

2 Income represents net sales to customers.

Property, plant and Land and Equipment Vehicles Total

equipment buildings

R R R R

Carrying amount:

Beginning of year 40 000 20 000 30 800 90 800

Cost 40 000 20 000 30 800 90 800

Accumulated depreciation (—) (—) (—) (—)

Depreciation (—) (—) (—) (—)

Carrying amount:

End of year 40 000 20 000 30 800 90 800

Cost 40 000 20 000 30 800 90 800

Accumulated depreciation (—) (—) (—) (—)

No depreciation was written off during the financial year.

165

FAC1502/1

SELF-ASSESSMENT

Now that you have studied this study unit, can you:

.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

FAC1502/1

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 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

FAC1502/1

STUDY UNIT

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:

.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

FAC1502/1

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.

172

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BENSON TRADERS

BANK RECONCILIATION STATEMENT AS AT 30 JUNE 20.0

Debit Credit

R R

Favourable balance per bank statement 11 350

Deposit not yet credited (deposited 1/7/20.0) V2 000

Cheques not yet presented for payment

No 11 — dated 23/6/20.0 (Donation) *200

No 13 — dated 30/6/20.0 (ABC Stores) V350

Favourable balance per bank account 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) CRJ 7

Doc no Date Details Bank

15 Cash sales 6 700 V

25 Cash sales 3 300 V

30 Cash sales 1 800 V

Rental income 850

Interest income 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) CPJ 7

Doc no Date Details Bank

14 5 Municipality 900 V

15 7 John’s Wholesalers 2 500 V

16 9 ABC Stores 1 200 V

— 14 S Swan (R/D cheque)* 200 V

17 15 Cash (wages) 450 V

18 30 Telkom 180

19 Cash (wages) 450 V

P Saxo (R/D cheque)* 300

Insurance 500

Bank charges 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 Statement no 3

July 20.0

Details Cheque no Fee Date Debit Credit Balance

R R R R

Balance b/f 01:07 11 350

Deposit 01:07 2 000 V13 350

Cheque 13 1,20 02.07 350 V13 000

Unpaid cheque:

S Swan 1,00 07:07 200 V12 800

Cheque 15 3,50 09:07 2 500 V10 300

Deposit 7,00 15:07 6 700 V17 000

Cheque 14 1,50 15:07 900 V16 100

Cheque 17 1,20 15:07 450 V15 650

Cheque 16 1,20 20:07 1 200 V14 450

Deposit 3,10 25:07 3 300 V17 750

Unpaid cheque:

P Saxo 1,60 30:07 300 17 450

Interest 30:07 80 17 530

Deposit: R Charles 30:07 850 18 380

Cheque 19 1,20 30:07 450 V17 930

XYZ Insurance Co 0.50 30:07 500 17 430

Deposit book 20 17 410

Service fees: July 23 17 387

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.

174

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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 B15 Cr

20.0 R 20.0 R

Jul 1 Balance b/d 12 800 Jul 31 Payments CPJ 7 6 723

31 Receipts CRJ 7 12 730 Balance c/d 18 807

25 530 25 530

Aug 1 Balance b/d 18 807

BANK RECONCILIATION STATEMENT AS AT 31 JULY 20.0

Debit Credit

R R

Favourable balance per bank statement 17 387

Deposit not yet credited (deposited 1/8/20.0) 1 800

Cheques not yet presented for payment:

No 11 — dated 23/6/20.0 (Donation) 200

No 18 — dated 30/7/20.0 (Telkom) 180

Favourable balance per bank account 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

Dr Cr

R R

Debit balance as per bank statement 460

Cheques not yet presented for payment:

No 404 – dated 20/12/20.8 (L Lombard) 50

No 447 – dated 25/5/20.9 (M Mitsi) 25

Deposit not yet credited 115 V

Incorrect entry by the bank 20 V

Credit balance as per bank account 400

535 535

(b)

Dr Bank Cr

R 20.9 R

Jun 1 Balance b/d 400

175

FAC1502/1

Date Details Fol Amount

2 Sales 300 V

5 Sales 150 V

10 L Long 150 V

19 J Dlamini 200 V

25 Sales 240 V

28 Sales 70

1 110

(d) CASH PAYMENTS JOURNAL (bank column only) FOR JUNE 20.9 CPJ 6

Cheque

Number Date Details Fol Amount

450 3 B Nkura 40 V

451 8 R Swart 160 V

452 17 GEM Builders 300

453 18 K Kum & Co 170

454 27 S Soul 200 V

870

(e) BANK STATEMENT FOR JUNE 20.9

Cheques

Date Details etc Deposits Balance

R R R

1 Balance 460 Dr

4 Deposit 300 V160 Dr

6 Deposit 150 V10 Dr

10 Deposit 150 V140 Cr

12 Cheque 451 160 V20 Dr

15 Deposit — K Nkome 90 70 Cr

20 Cheque 453 116 46 Dr

Cheque ‘‘R/D’’

(L Long) 150 196 Dr

26 Deposit 240 V44 Cr

28 Cheque 454 200 V156 Dr

Stop order — insurance 50 206 Dr

Deposit — T Nkwe 40 166 Dr

Deposit 115 V51 Dr

Error corrected 20 V31 Dr

29 Bank interest 20 51 Dr

Service fees 10 61 Dr

Cheque 450 40 V101 Dr

30 Deposit 200 V99 Cr

176

FAC1502/1

(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 CRJ 6

Date Details Fol Bank

2 Sales 300 V

5 Sales 150 V

10 L Long 150 V

19 J Dlamini 200 V

25 Sales 240 V

28 Sales 70 V

30 L Lombard/Trade payables control 50 V

K Nkome 90 V

T Nkwe 40 V

1 290 V

CASH PAYMENTS JOURNAL (bank column only) – JUNE 20.9 CPJ 6

Cheque

Date Details Fol Bank

450 3 B Nkuna 40 V

451 8 R Swart 160 V

452 17 GEM Builders 300 V

453 18 K Kum & Co 170 V

454 27 S Soul 200 V

30 L Long/Trade receivables control 150 V

Insurance 50 V

Interest expenses 20 V

Bank charges 10 V

1 100 V

177

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(2) GENERAL LEDGER

Dr Bank Cr

20.9 R 20.9 R

Jun 30 Receipts CRJ6 1 290 Jun 1 Balance b/d 400

Balance c/d 210 30 Payments CPJ6 1 100

1 500 1 500

20.9

Jul 1 Balance b/d 210

(3) BANK RECONCILIATION STATEMENT AS AT 30 JUNE 20.9

Dr Cr

R R

Credit balance as per bank statement 99

Deposit not yet credited by the bank 70

Cheques not yet presented for payment:

No 447 – dated 25/5/20.9 (M Mitsi) 25

No 452 – dated 17/6/20.9 (GEM Builders) 300

Bank error — cheque No 453 (R170–R116) 54

Credit balance as per bank account 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.

178

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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 Details Cash voucher Amount

4 Stationery 001 25,20

8 Stamps 002 18,10

12 Cleaner’s wages 003 60,00

17 Pro-advertising poster 004 26,50

19 Cleaner’s wages 005 60,00

21 Stamps 006 8,50

23 Paper 007 21,95

26 Cleaner’s wages 008 60,00

27 Taxi fare for messenger 009 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

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Solution Exercise 8.3

DICKSON TRADERS

(1) PETTY CASH JOURNAL — JUNE 20.9 PCJ 1

Receipts Payments

Date Fol Total

Date Details Petty

cash

voucher

Fol Total Wages Postage Station-

ery

Sundries

Amount Fol Details

20.9 R 20.9 R R R R R

Jun 1 CPJ8 300,00 4 Stationery 001 25,20 25,20

30 CPJ8 290,25 8 Stamps 002 18,10 18,10

12 Wages 003 60,00 60,00

17 Pro-ad 004 26,50 26,50 Advertising

19 Wages 005 60,00 60,00

21 Stamps 006 8,50 8,50

23 Paper 007 21,95 21,95

26 Wages 008 60,00 60,00

27 Messenger 009 10,00 10,00 Travelling

expenses

290,25 180,00 26,60 47,15 36,50

30 Balance c/d 300,00 300,00

590,25 590,25 180,00 26,60 47,15 336,50

20.9

Jul 1

Bal-

ance

b/d 300,00

(2) GENERAL LEDGER

Dr Petty cash control Cr

20.9 R 20.9 R

Jun 1 Bank CPJ8 300,00 Jun 30 Petty cash

30 Bank CPJ8 290,25 payments PCJ1 290,25

Balance c/d 300,00

590,25 590,25

20.9

Jul 1 Balance b/d 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 Cr

R R

Debit balance as per bank statement 2 300

Deposit not yet credited 2 100

Cheques not yet presented for payment:

No 846 – dated 18/12/20.8 (B Small) 400

No 849 – dated 21/12/20.8 (L Langa) 300

Credit balance as per bank account 900

3 000 3 000

180

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(b) CASH RECEIPTS JOURNAL — JANUARY 20.9 (extract) CRJ 8

Date Details Analysis of Bank

receipts

R R

1 Sales 1 250

S Singh 300 1 550

5 Sales 1 500

Rental income 500 2 000

18 B Small (cheque 846 cancelled —

cheque 856 re-issued) 400

19 Sales 2 000

M Nkosi 400 2 400

25 Sales 3 000 3 000

30 R Amer 400

Sales 1 200 1 600

10 950

Cheque

number

Date Details Amount Bank

R R

851 3 Purchases 1 500

852 S Sono 100

853 6 Municipality 150

Water and electricity 100

Assessment rates 50

854 10 Purchases 1 300

855 15 Salaries 2 000

856 18 B Small 400

857 20 H Ebrahim 50

858 Purchases 4 000

859 25 Furniture 2 000

860 30 Petty cash 100

861 R Seema 600

12 200

181

FAC1502/1

(d) BANK STATEMENT — JANUARY 20.9

Cheque Cheque

Date Details number etc Deposits Balance

R R R

1 Balance 2 300 Dr

2 100 200 Dr

2 1 550 1 350 Cr

851 1 500 150 Dr

6 2 000 1 850 Cr

7 853 150 1 700 Cr

11 854 1 300 400 Cr

15 855 2 000 1 600 Dr

20 2 400 800 Cr

21 858 4 000 3 200 Dr

26 3 000 200 Dr

857 50 250 Dr

5 000 4 750 Cr

859 2 000 2 750 Cr

28 Interest 15 2 735 Cr

856 400 2 335 Cr

30 860 100 2 235 Cr

Bank charges 35 2 200 Cr

Stop order 500 1 700 Cr

(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 Details Bank

31 Subtotal 10 950

Rental income 5 000

15 950

182

FAC1502/1

CASH PAYMENTS JOURNAL – JANUARY 20.9 (extract)

Date Details Bank

31 Subtotal 12 200

Interest expenses 15

Bank charges 35

Insurance 500

12 750

(2) GENERAL LEDGER

Dr Bank Cr

20.9 R 20.9 R

Jan 31 Receipts CRJ 15 950 Jan 1 Balance b/d 900

31 Payments CPJ 12 750

Balance c/d 2 300

15 950 15 950

20.9

Feb 1 Balance b/d 2 300

(3) BANK RECONCILIATION STATEMENT AS AT 31 JANUARY 20.9

Dr Cr

R R

Credit balance as per bank statement 1 700

Deposit not yet credited 1 600

Cheques not yet presented for payment:

No 849 – dated 27/12/20.8 (L Langa) 300

No 852 – dated 3/1/20.9 (S Sono) 100

No 861 – dated 30/1/20.9 (R Seema) 600

Debit balance as per bank account 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: R

.Cash receipts journal 25 718

.Cash payments journal 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

nals, but not on the bank statement:

.A deposit entered in the cash receipts journal on 31 December 20.8,

banked on 3 January 20.9 792

183

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.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 62

.Interest on bank overdraft 70

.A stop order for an annual donation to a primary school 220

.A ‘‘R/D’’ cheque originally received from debtor, S Scholly 308

.A deposit, paid directly into the bank account of Ontario

Traders, by a tenant F Flee 1 100

(e) Balance of the bank account in the general ledger at

30 November 20.8 (debit) 297

(f) Balance as per bank statement at 31 December 20.8 (favourable) 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 Details Bank

31 Subtotal 25 718

Rental income 1 100

L Marino/Trade payables control 231

27 049

CASH PAYMENTS JOURNAL – JANUARY 20.8 (extract)

Date Details Bank

31 Subtotal 27 115

Bank charges 62

Interest on bank overdraft 70

Donations 220

R Scholly/Trade receivables control 308

27 775

184

FAC1502/1

(2) GENERAL LEDGER

Dr Bank Cr

20.8 R 20.8 R

Dec 1 Balance b/d 297 Dec 31 Payments CPJ 27 775

31 Receipts CRJ 27 049

Balance c/d 429

27 775 27 775

20.9

Jan 1 Balance b/d 429

(3) BANK RECONCILIATION STATEMENT AS AT 31 DECEMBER 20.8

Debit Credit

R R

Credit balance per bank statement 990

Deposit not yet credited by the bank 792

Cheque not yet presented for payment:

No 985 – dated 29/12/20.8 (water and electricity) 2 211

Credit balance per bank account 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: R

.Cash receipts journal 8 658

.Cash payments journal 7 932

(b) Credit balance per bank account in the general ledger at

31 August 20.7 800

(d) Items appearing in the cash journals but not on the bank statement:

.A deposit on 30 September 20.7 808

.Cheque No 2894 issued on 30 September 20.7 to pay the

telephone account 450

(e) Items appearing on the bank statement but not in the cash journals:

.Bank charges 35

.Interest on bank overdraft 85

.A direct deposit made by P Parsons, a debtor 300

.A cheque issued by D Dickensen returned by the bank marked

‘‘R/D’’ (insufficient funds) 90

.A deposit meant for another client of the bank 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 Details Bank

30 Subtotal 8 658

P Parsons/Trade receivables control 300

Pros Limited/Trade payable control (correction of cheque 2867) 63

9 021

CASH PAYMENTS JOURNAL – SEPTEMBER 20.7 (extract)

Date Details Bank

30 Subtotal 7 932

Bank charges 35

Interest on bank overdraft 85

D Dickensen/Trade receivables control 90

8 142

(2) GENERAL LEDGER

Dr Bank Cr

20.7 R 20.7 R

Sep 30 Receipts CRJ 9 021 Sep 1 Balance b/d 800

30 Payments CPJ 8 142

Balance c/d 79

9 021 9 021

20.7

Oct 1 Balance b/d 79

(3) BANK RECONCILIATION STATEMENT AS AT 30 SEPTEMBER 20.7

Debit Credit

R R

Debit balance per bank statement 104

Deposit not yet credited by the bank 808

Cheques not yet presented for payment:

No 2894 – dated 30/9/20.7 (telephone) 450

Debit erroneous deposit 175

Debit balance per bank account 79

808 808

186

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8.5.4 Revision exercise 4

BOOKS OF BUWANG TRADERS

(a) BANK RECONCILIATION STATEMENT AS AT 30 APRIL 20.8

Dr Cr

R R

Credit balance per bank statement 840,60

Credit outstanding deposit 370,00

Debit cheques not yet presented:

No 420 – dated 20/11/20.7 (Donations) 2 000,00

No 691 – dated 17/1/20.8 (LL Traders) 416,40

No 715 – dated 28/2/20.8 (R Rex) 638,80

Credit error on bank statement 120,00

Credit balance per bank account 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

.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

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Solution: Revision exercise 4

BUWANG TRADERS

(1) CASH RECEIPTS JOURNAL – MAY 20.8 (extract)

Date Details Bank

31 Subtotal 11 258,29

Rental income 200,00

Donations (Cheque 420 cancelled) 2 000,00

13 458,29

CASH PAYMENTS JOURNAL – MAY 20.8 (extract)

Date Details Bank

31 Subtotal 13 428,72

D Baloye/Trade receivables control 150,00

Bank charges 64,90

Interest on overdraft 19,80

Insurance 290,00

13 953,42

(2) GENERAL LEDGER

Dr Bank Cr

20.8 R 20.8 R

May 31 Receipts CRJ 13 458,29 May 1 Balance b/d 1 724,60

Balance c/d 2 219,73 31 Payments CPJ 13 953,42

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 Credit

R R

Credit balance per bank statement 977,89

Deposit not yet credited by the bank 1 450,00

Cheques not yet presented for payment:

No 715 – dated 28/2/20.8 (R Rex) 638,80

No 802 – dated 3/5/20.8 (DR Limited) 1 964,62

No 803 – dated 4/5/20.8 (AA Suppliers) 2 134,20

Credit incorrect cheque on bank statement 90,00

Credit balance per bank account 2 219,73

4 737,62 4 737,62

188

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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 Details Cash voucher Amount

4 Cleaner’s wages 072 60

7 Stamps 073 15

11 Cleaner’s wages 074 60

14 Stationery 075 35

18 Cleaner’s wages 076 60

19 Tea, coffee & milk 077 40

25 Cleaner’s wages 078 60

27 Owner took R30 for taxi fare 079 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.

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Solution: Revision exercise 5

PITSI DEALERS

(1) PETTY CASH JOURNAL — AUGUST 20.4 PCJ6

Receipts Payments

Date Fol Total

Date Details Petty

cash

vou-

cher

Fol Total Wages Postage Station-

ery

Sundries

Amount Fol Details

20.4 R 20.4 R R R R R

Aug 1 b/d 200,00 Aug 4 Cleaner’s wages 072 60,00 60,00

15 CPJ6 170,00 7 Stamps 073 15,00 15,00

15 CPJ6 190,00 11 Cleaner’s wages 074 60,00 60,00

14 Stationery 075 35,00 35,00

18 Cleaner’s wages 076 60,00 60,00

Tea, coffee & milk

077 40,00 40,00 Refreshments

25 Cleaner’s wages 078 60,00 60,00

27 Taxi fare – owner 079 30,00 30,00 Drawings

360,00 240,00 15,00 35,00 70,00

30 Balance c/d 200,00 200,00

560,00 560,00 240,00 15,00 35,00 270,00

20.4

Sep 1 b/d 200,00

(2) GENERAL LEDGER

Dr Petty cash control Cr

20.4 R 20.4 R

Aug 1 Balance b/d 200 Aug 31 Petty cash

15 Bank CPJ6 170 payments PCJ6 360

31 Bank CPJ6 190 Balance c/d 200

560 560

20.4

Sep 1 Balance b/d 200

SELF-ASSESSMENT

Now that you have studied this study unit, can you:

.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

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STUDY UNIT

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

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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.

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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:

R2 850 7R(2 850 62

100 )

= R(2 850 757)

= 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% 6R350. 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:

1X14

114 = R7

Solution Exercise 9.1

The accounting entries for the exercise are as follows:

Dr Trade receivables control Cr

20.0 R 20.0 R

Mar 1 Sales 2 850 Mar 31 Bank 2 793

Settlement

discount granted 50

VAT input 7

2 850 2 850

Dr Sales Cr

R 20.0 R

Mar 1 Trade receivables

control 2 500

Dr VAT input Cr

20.0 R 20.0 R

Mar 31 Trade receivables

control 7

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Dr VAT output Cr

R 20.0 R

Mar 1 Trade receivables

control 350

Dr Settlement discount granted Cr

20.0 R R

Mar 31 Trade receivables

control 50

Dr Bank Cr

20.0 R R

Mar 31 Trade receivables

control 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:

194

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BRIO TRADERS

GENERAL JOURNAL

Debit Credit

20.0 R R

Jun 30 Sales 1 350

Allowance for settlement discount granted 1 350

Allowance for settlement discount granted created at

year-end

GENERAL LEDGER

Dr Sales Cr

20.0 R 20.0 R

Jun Allowance for Jun 30 Balance 70 000

settlement discount

granted 1 350

Dr Allowance for settlement discount granted Cr

20.0 R

Jun 30 Sales 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

Revenue/Income/Sales xxx xxx

Less: Settlement discount granted xx xxx

Less: Allowance for settlement discount granted 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.

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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

Current assets xxx xxx

Inventories xx xxx

Trade receivables xx xxx

Less: Allowance for credit losses x xxx

Less: Allowance for settlement discount granted x xxx

Cash and cash equivalents x xxx

Total assets 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(550 618

100 x1

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.

196

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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 Debit Credit

20.0 R R

May 15 Credit losses 660

A Langa/Trade receivables control 660

Write A Langa’s account off as irrecoverable

GENERAL LEDGER

Dr Trade receivables control Cr

20.0 R 20.0 R

May 1 Balance b/d 18 000 May 15 Credit losses 660

Dr Credit losses Cr

20.0 R R

May 15 Trade receivables

control 660

TRADE RECEIVABLES LEDGER

A Langa

Debit Credit Balance

20.0 R R R

May 1 Account rendered 660

Credit losses 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 R R

Jun 30 Credit losses 800

Allowance for credit losses 800

Allowance for credit losses created

at year end

GENERAL LEDGER

Dr Trade receivables control Cr

20.0 R

Jun 30 Balance b/d 20 000

Dr Allowance for credit losses Cr

20.0 R

Jun 30 Credit losses 800

Dr Credit losses Cr

20.0 R

Jun 30 Allowance for

credit losses 800

198

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CLOSING JOURNAL ENTRY

Debit Credit

20.0 R R

Jun 30 Profit or loss 800

Credit losses 800

Closing credit losses off to the profit

or loss account

GENERAL LEDGER

Dr Credit losses Cr

20.0 R 20.0 R

Jun 30 Allowance for Jun 30 Profit or loss 800

credit losses 800

Dr Profit or loss (extract) Cr

20.0 R

Jun 30 Credit losses 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)

Exercise 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.

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Solution Exercise 9.5

The following accounting entries are necessary to adjust the allowance for credit losses:

TRIO TRADERS

GENERAL JOURNAL

Debit Credit

20.1 R R

Jun 30 Credit losses 400

Allowance for credit losses 400

Allowance for credit losses adjusted: R

New allowance 1 200

Existing allowance 800

Amount needed for adjustement 400

GENERAL LEDGER

Dr Trade receivables control Cr

20.1 R

Jun 30 Balance b/d 30 000

Dr Allowance for credit losses Cr

20.0 R

Jul 1 Balance b/d 800

20.1

Jun 30 Credit losses 400

1 200

Dr Credit losses Cr

20.1 R 20.1 R

Jun 30 Balance b/d 730 Jun 30 Profit or loss 1 130

Allowance for

credit losses 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.

200

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.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

Exercise 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

Debit Credit

20.2 R R

Jun 30 Allowance for credit losses 200

Credit losses 200

Allowance for credit losses adjusted: R

Existing allowance 1 200

New allowance (R25 000 64%) 1 000

Amount needed for adjustment 200

201

FAC1502/1

GENERAL LEDGER

Dr Trade receivables control Cr

20.2 R

Jun 30 Balance b/d 25 000

Dr Allowance for credit losses Cr

20.2 R 20.1 R

Jun 30 Credit losses 200 Jul 1 Balance b/d 1 200

Balance c/d 1 000

1 200 1 200

20.2

Jul 1 Balance b/d 1 000

Dr Credit losses Cr

20.2 R 20.2 R

Jun 30 Balance b/d 960 Jun 30 Allowance for

credit losses 200

Profit or loss 760

960 960

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 beacredit 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.

202

FAC1502/1

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 R R

Nov 30 Allowance for credit losses 730

B Down/Trade receivables control 730

Write B Down’s account off as irrecoverable

GENERAL LEDGER

Dr Trade receivables control Cr

20.0 R 20.0 R

Jul 1 Balance b/d 20 000 Nov 30 Allowance for

20.1 credit losses 730

Jun 30 Sales 40 000 20.1

Jun 30 Bank 29 270

Balance c/d 30 000

60 000 60 000

20.1

Jul 1 Balance b/d 30 000

Dr Allowance for credit losses Cr

20.0 R 20.0 R

Nov 30 Trade receivables

control 730 Jul 1 Balance b/d 800

20.1 20.1

Jun 30 Balance c/d 1 200 Jun 30 Credit losses* 1 130

1 930 1 930

20.1

Jul 1 Balance b/d 1 200

*Balancing figure

203

FAC1502/1

Dr Credit losses Cr

20.1 R 20.1 R

Jun 30 Allowance for Jun 30 Profit or loss 1 130

credit losses 1 130

TRADE RECEIVABLES LEDGER

B Down

Debit Credit Balance

20.0 R R R

Jul 1 Account rendered 730

Nov 30 Allowance for credit losses 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 R R

Nov 30 Credit losses 730

B Down/Trade receivables control 730

Write B Down’s account off as irrecoverable

GENERAL LEDGER

Dr Trade receivables control Cr

20.0 R 20.0 R

Jul 1 Balance b/d 20 000 Nov 30 Credit losses 730

20.1 20.1

Jun 30 Sales 40 000 Jun 30 Bank 29 270

Balance c/d 30 000

20.1 60 000 60 000

Jul 1 Balance b/d 30 000

204

FAC1502/1

Dr Allowance for credit losses Cr

20.0 R

Jul 1 Balance b/d 800

20.1

Jun 30 Credit losses 400

1 200

Dr Credit losses Cr

20.0 R 20.1 R

Nov 30 Trade receiv-

ables control 730 Jun 30 Profit or loss 1 130

20.1

Jun 30 Allowance for

credit losses 400

1 130 1 130

TRADE RECEIVABLES LEDGER

B Down

Debit Credit Balance

20.0 R R R

Jul 1 Account rendered 730

Nov 30 Credit losses 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

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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 R

Non-current assets

Current assets xxx xxx

Inventories xx xxx

Trade and other receivables xx xxx

Cash and cash equivalents x xxx

Total assets xxx xxx

EQUITY AND LIABILITIES

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.

206

FAC1502/1

The procedure can be summarised as follows:

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.

Exercise 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 SJ1

Date Debtor Fol Sales VAT output Trade receivables

R R R

2 A DL1 200,00 20,00 220,00

B DL2 400,00 40,00 440,00

C DL3 100,00 10,00 110,00

700,00 70,00 770,00

GL 5

SALES RETURNS JOURNAL — MAY 20.2 SRJ1

Date Debtor Fol Sales returns VAT output Trade receivables

R R R

8 B DL2 40,00 4,00 44,00

C DL3 20,00 2,00 22,00

60,00 6,00 66,00

GL 5

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CASH RECEIPTS JOURNAL — MAY 20.2 CRJ1

Date Details Fol Bank Trade

receivables

Discount

allowed

VAT

input

15 A

DL1

DL2

DL3

600,00

400,00

500,00

670,00

400,00

522,00

64,00

20,00

*6,00

2,00

1 500,00 1 592,00 84,00 8,00

GL5

* Approximation

GENERAL JOURNAL — MAY 20.2 J1

Date

Details Fol Total

Debit Credit

R R

15 C/trade receivables

Furniture

VAT output

Sold furniture on credit to C

DL3 803,00

730,00

73,00

18 Furniture

VAT input

C/trade receivables

Received

furniture back from C

DL3

230,00

23,00

253,00

1 056,00 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

A 450,00

B 680,00

C 220,00

1 350,00

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FAC1502/1

Solution Exercise 9.9

GENERAL LEDGER

Dr Trade receivables control GL5 Cr

20.2 R 20.2 R

May 1 Balance* b/d 1 350,00 May 31 Sales returns SRJ1 66,00

31 Sales SJ1 770,00 Bank and

Furniture J1 730,00 discount CRJ1 1 592,00

VAT output J1 73,00 Furniture J1 230,00

VAT input J1 23,00

Balance c/d 1 012,00

2 923,00 2 923,00

20.2

Jun 1 Balance** b/d 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 ADL1 Cr

20.2 R 20.2 R

May 1 Balance* b/d 450,00 May 15 Bank and

2 Sales SJ1 220,00 discount CRJ1 670,00

670,00 670,00

Dr BDL2 Cr

20.2 R 20.2 R

May 1 Balance* b/d 680,00 May 8 Sales returns SRJ1 44,00

2 Sales SJ1 440,00 15 Bank CRJ1 400,00

31 Balance c/d 676,00

1 120,00 1 120,00

20.2

Jun 1 Balance** b/d 676,00

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FAC1502/1

Dr CDL3 Cr

20.2 R 20.2 R

May 1 Balance* b/d 220,00 May 8 Sales returns SRJ1 22,00

2 Sales SJ1 110,00 15 Bank and

15 Furniture J1 803,00 discount CRJ1 522,00

18 Furniture J1 253,00

31 Balance c/d 336,00

1 133,00 1 133,00

20.2

Jun 1 Balance** b/d 336,00

** List of closing balances of debtors

A —

B 676,00

C 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.

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Exercise 9.10

The following information in respect of June 20.1 was obtained from the financial records of

N Nelson:

Balance on the trade receivables control account – 31 May 20.1 19 190

Totals for the month:

Cash receipts journal:

Trade receivables column 16 860

Settlement discount granted column 1 470

Sales journal (Trade receivables column) 19 500

Sales returns journal (Trade receivables column) 4 615

General journal:

Credit losses written off 751

Certain accounts with debit balances transferred from the creditors

ledger to the trade receivables ledger 46

Interest charged on overdue accounts 160

List of individual debtors per trade receivables ledger 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.

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Solution Exercise 9.10

N NELSON

(1) GENERAL LEDGER

Dr Trade receivables control Cr

20.1 R 20.1 R

Jun 1 Balance b/d 19 190 Jun 30 Bank (3) CRJ 16 860

30 Sales Sales returns SRJ 4 615

R(19 500 7Credit losses GJ 751

1 000) (1) SJ 18 500

Trade payables Sales GJ 75

control (2) GJ 46 Balance c/d 15 595

Interest received GJ 160

37 896 37 896

20.1

Jul 1 Balance b/d 15 595

(2) RECONCILIATION

R R

Total of the list of debtors’ balances 16 230

Less: Error on A Abel’s account

R(2 770 72 270) (5) (500)

Incorrect posting of credit note, B Brown

(R30 62) (4) and (5) (60)

Correction of error — P Pet (75) (635)

Balance as per Trade receivables control account 15 595

Remarks

(1) When an error is made in totalling a journal the mistake only affects the control account; it

cannot affect the debtors list.

(2) 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.

(3) The amount in the debtors column is R16 860. This amount is the total amount received

from debtors including any settlement discount granted.

(4) 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.

(5) 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.

212

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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) The amount payable at the end of 30 days is R712,50.

(b) The amount of interest due after 60 days is R24,66.

(d) 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: R

Trade receivables control 42 000

Credit losses recovered 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.

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) R3 152 {R1 652+R1 500}

(b) R3 088 {R1 588+R1 500}

(d) R2 352 {R(1 500 7800) + R1 652}

Solution: Revision exercise 2

The correct statement is (a), R3 152.

Calculation: R

Credit losses 1 500

Allowance for credit losses 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

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JOURNAL ENTRY J1

20.3 R R

Feb 28 Trade receivables control 800

Credit losses recovered 800

Reversal of entry made 1/7/20.2

The trade receivables control account balance will be increased by this entry and decreased by

the credit loss written off.

JOURNAL ENTRY J2

20.3 R R

Feb 28 Credit losses 1 500

Trade receivables control 1 500

Credit losses written off

Dr Trade receivables control Cr

20.3 R 20.3 R

Feb 28 Balance b/d 42 000 Feb 28 Credit losses J2 1 500

Credit losses Balance c/d 41 300

recovered J1 800

42 800 42 800

20.3

Mar 1 Balance b/d 41 300

Dr Credit losses Cr

20.3 R 20.3 R

Feb 28 Trade receiv-

ables control J2 1 500 Feb 28 Profit or

Allowance for loss* J4 3 152

credit losses* J3 1 652

(creation of

new allowance)

3 152 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: R

Trade receivables control account 28/2/20.0 55 000

Allowance for credit losses 28/2/20.0 3 240

Credit losses recovered 2 500

Credit sales 305 000

Settlement discount granted 4 200

(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.

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Solution: Revision exercise 3

Calculation:

Dr Trade receivables control Cr

20.0 R 20.1 R

Mar 1 Balance b/d 55 000 Feb 28 Bank (2) 270 000

20.1 Settlement discount

Feb 28 Sales 305 000 granted (2) 4 200

Allowance for

credit losses 500

Balance (1) c/d 85 300

360 000 360 000

20.1

Mar 1 Balance b/d 85 300 (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 R R

Feb 28 Allowance for credit losses 500

J Solomon/Trade receivables control 500

Writing off of amount owed by J Solomon

Credit losses 1 525

Allowance for credit losses 1 525

Adjustment of allowance R

Allowance 4 265

*Add: Credit loss written off 500

4 765

Less: Existing allowance 3 240

Amount needed 1 525

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GENERAL LEDGER

Dr Allowance for credit losses Cr

20.1 R 20.0 R

Feb 28 Trade receiv- Mar 1 Balance b/d 3 240

ables control 500 20.1

Balance c/d 4 265 Feb 28 Credit losses 1 525

4 765 4 765

20.1

Mar 1 Balance b/d 4 265

Dr Credit losses Cr

20.1 R 20.1 R

Feb 28 Allowance for Feb 28 Profit or

credit losses 1 525 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:

Balance of allowance for credit losses account 28/2/20.7 510

Balance of trade receivables control account 28/2/20.7 10 200

List of individual debtors as per trade receivables ledger 11 520

Totals for the month:

Cash receipts journal:

Trade receivables column 69 140

Settlement discount granted column 3 000

Sales column 101 100

Trade payables column 1 400

Cash payments journal:

Trade payables column 80 000

Trade receivables column (cheques dishonoured) 3 200

Purchases column 60 000

Sales journal 69 020

Purchases journal 53 800

Sales returns journal (all on credit sales) 1 000

Purchases returns journal 2 150

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(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.

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 Trade receivables control Cr

20.7 R 20.8 R

Mar 1 Balance b/d 10 200 Feb 28 Bank and discount 68 140

20.8 R(69 140 7

Feb 28 Sales 68 420 1 000)

R(69 020 7Sales returns 1 500

600) R(1 000 + 500)

Bank 3 200 Allowance for

(R/D cheques) credit losses 1 420

Balance c/d 10 760

81 820 81 820

20.8

Mar 1 Balance b/d 10 760

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(2) Reconciliation of debtors list

R R

Total of debtors list 11 520

Add: R/D cheque adjustment (G Great) 900

Sales invoice adjustment

R(400 740) (D Dandy) 360 1 260

12 780

Less: Duplicate sales invoice (B Broad) (600)

Credit loss (1 420) (2 020)

Balance as per trade receivables control 10 760

(3) Journalising the allowance for credit losses and the general ledger

GENERAL JOURNAL J2

20.8 R R

Feb 28 Credit losses 1 448

Allowance for credit losses 1 448

Adjustment of allowance

R R

New allowance R10 760 65% 538

Add: Credit loss written

off (P Pauper) 1 420

Less: Opening balance

of allowance: 510 910

Amount needed 1 448

GENERAL LEDGER

Dr Allowance for credit losses Cr

20.8 R 20.7 R

Feb 28 Trade receivables J1* 1 420 Mar 1 Balance b/d 510

Balance c/d 538 20.8

Feb 28 Credit losses** J2 1 448

1 958 1 958

20.8

Mar 1 Balance b/d 538

Dr Credit losses Cr

20.8 R 20.8 R

Feb 28 Allowance for Feb 28 Profit or

credit losses 1 448 loss J3* 1 448

* Journal entries J1 and J3 are obvious and are not shown.

** Balancing figure

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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?

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STUDY UNIT

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 Page

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 229

KEY CONCEPTS

.Valuation of inventory

.Historical cost

.Consistency

.Gross profit percentage

.Disclosure in the financial statements

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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:

20.2 20.1 20.0

Total equity R R R

Capital 332 230 224 230 120 000

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From the statement of profit or loss and other comprehensive income:

20.2 20.1

R R

Revenue 420 000 396 000

Cost of sales (252 000) (237 770)

Opening inventory 151 824 144 000

Purchases 256 176 245 594

408 000 389 594

Closing inventory (156 000) (151 824)

Gross profit 168 000 158 230

Distribution, administrative and other expenses (60 000) (54 000)

Profit for the year 108 000 104 230

Other comprehensive income for the year — —

Total comprehensive income for the year 108 000 104 230

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.

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) Inventory 31/12/20.1 151 824

Less: Merchandise already dispatched 1 740

Correct inventory 31/12/20.1 150 084

(b) Purchases for 20.1 245 594

Add: Correction of goods already received 4 104

Correct amount of purchases for 20.1 249 698

Less: Correction of goods already received 4 104

252 072

(d) Sales for 20.1 396 000

Add: Selling price of goods dispatched 2 106

Correct amount of sales for 20.1 398 106

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(e) Sales for 20.2 420 000

Less: Selling price of goods dispatched 2 106

Correct amount of sales for 20.2 417 894

ADJUSTED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE

INCOME

20.2 20.1

R R

Revenue 417 894 398 106

Cost of sales (246 156) (243 614)

Opening inventory 150 084 144 000

Purchases 252 072 249 698

402 156 393 698

Closing inventory (156 000) (150 084)

Gross profit 171 738 154 492

Distribution, administrative and other expenses (60 000) (54 000)

Profit for the year 111 738 100 492

Other comprehensive income for the year — —

Total comprehensive income for the year 111 738 100 492

ADJUSTED EQUITY OF THE OWNER

Equity (capital) – 20.1 (given) 224 230

Less: Incorrect profit given for 20.1 104 230

Equity – 20.0 120 000

Add: Revised profit for 20.1 100 492

Equity – 20.1 220 492

Add: Revised profit for 20.2 111 738

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 7Cost of sales = Gross profit

_____________________________________________________________________

R300 000 7R200 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

Cost of sales 6100

1= Gross profit percentage on cost of sales

If the gross profit is expressed as a percentage of sales then the following formula is used:

Gross profit

Sales 6100

1= Gross profit percentage on sales

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Applying the above figures to these formula, we get the following gross profit percentages:

Gross profit

Cost of sales 6100

1=R100 000

R200 000 6100

1= 50%

Gross profit

Sales 6100

1=R100 000

R300 000 6100

1= 33 1

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.

Example

Presentation on the statement of financial position:

Current assets R

Inventories R(60 000 + 6 000) 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.

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. (a) (b) (c) (d)

2. (a) (b)

3. (a) (c)

4. (a) (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:

Balances at 28 February 20.4:

Inventory: Trading — 28 February 20.3 20 000

Purchases 106 000

Purchases returns 6 000

Import duty 10 000

Sales 175 000

Sales returns 5 000

Carriage on sales 4 800

Packaging material used 7 200

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ADDITIONAL INFORMATION

Inventory: Trading — 28 February 20.4 25 000

Inventory: Packaging material — 28 February 20.4 600

Which of the following represents the correct amount of cost of goods purchased and cost of

sales respectively?

Cost of goods purchased Cost of sales

1. R116 000 R111 000

2. R110 000 R110 400

3. R116 000 R110 400

4. R110 000 R105 000

Solution: Revision exercise 2

Option 4 is correct.

Cost of goods purchased, R110 000; cost of sales, R105 000.

Calculation:

Purchases 106 000

Purchases returns (6 000)

100 000

Import duty 10 000

Cost of goods purchased 110 000

Cost of sales:

Sales 175 000

Sales returns (5 000)

Revenue 170 000

Cost of sales (105 000)

Opening inventory – 28 Feb. 20.3

20 000

Purchases 110 000

130 000

Closing inventory – 28 Feb. 20.4 (25 000)

Gross profit 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.

20.3 20.2 20.1

R R R

Revenue 600 000 375 000 300 000

Cost of sales (402 000) (255 000) (210 000)

Gross profit 198 000 120 000 90 000

Solution: Revision exercise 3

20.3 20.2 20.1

Gross profit

Cost of sales 6100

R198 000

R402 000 6100

R120 000

R255 000 6100

R90 000

R210 000 6100

= 49,3% = 47,1% = 42,9%

Gross profit

Sales 6100

R198 000

R600 000 6100

R120 000

R375 000 6100

R90 000

R300 000 6100

= 33% = 32% = 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 114 000

Cost of sales (76 000)

Inventory — 1/7/20.5 30 000

Purchases 90 000

120 000

Inventory — 30/6/20.6 (44 000)

Gross profit 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)

Revenue 120 000

Cost of sales (80 000)

Inventory — 30 June 20.6 44 000

Purchases 96 000

140 000

Inventory — 30 June 20.7 (60 000)

Gross profit 40 000

COMMENT

.Calculation of the gross profit percentage on sales 20.5/6:

=R38 000

114 000 6100

1=33 1

To calculate the cost of sales:

Gross profit percentage on sales = Gross profit

Sales 6100

Gross profit = Sales 6gross profit percentage

= R120 000 633

100

= R40 000

Therefore: Cost of sales = Sales 7Gross profit

= R120 000 7R40 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 7Cost of sales

= R44 000 + R96 000 7R80 000

= R60 000

(2) VALUE OF INVENTORY DESTROYED:

R60 000 625% = 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

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 258

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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 non-

current 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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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

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

Calculation of Annual Accumulated Carrying

Date Cost price depreciation depreciation

depreciation amount

(a) Cost price

Lifespan in years (b) (a) – (b)

20%6cost price

May 31 R R R R

20.1 (End of financial year 1) 460 000

460 000

92 000 92 000 368 000

20.2 (End of financial year 2) 460 000

460 000

92 000 184 000 276 000

20.3 (End of financial year 3) 460 000

460 000

92 000 276 000 184 000

20.4 (End of financial year 4) 460 000

460 000

92 000 368 000 92 000

20.5 (End of financial year 5) 460 000

460 000

92 000 460 000 NIL

Total depreciation R460 000

This method is also known as the fixed installment method.

(a) (2) JOURNAL ENTRIES FOR THE FIVE YEARS

GENERAL JOURNAL

20.1 R R

May 31 Depreciation: machinery 92 000

Accumulated depreciation: machinery 92 000

Provision for depreciation on the straight

line method (year 1)

Profit or loss 92 000

Depreciation: machinery 92 000

Closing entry

The journal entries for the years 20.2, 20.3, 20.4, and 20.5 would be the same as above.

234

FAC1502/1

(a) (3) GENERAL LEDGER

Dr Machinery (at cost) Cr

20.1 R

Jun 1 Bank 460 000

Dr Accumulated depreciation: machinery Cr

20.1 R 20.1 R

May 31 Balance c/d 92 000 May 31 Depreciation 20.1 92 000

20.1

June 1 Balance b/d 92 000

20.2 20.2

May 31 Balance c/d 184 000 May 31 Depreciation 20.2 92 000

184 000 184 000

20.2

June 1 Balance b/d 184 000

20.3 20.3

May 31 Balance c/d 276 000 May 31 Depreciation 20.3 92 000

276 000 276 000

20.3

June 1 Balance b/d 276 000

20.4 20.4

May 31 Balance c/d 368 000 May 31 Depreciation 20.4 92 000

368 000 368 000

20.4

June 1 Balance b/d 368 000

20.5 20.5

May 31 Balance c/d 460 000 May 31 Depreciation 20.5 92 000

460 000 460 000

20.5

June 1 Balance b/d 460 000

Dr Depreciation: machinery Cr

20.1 R 20.1 R

May 31 Accumulated May 31 Profit or loss 92 000

depreciation 92 000

The entries would be the same as the above for the years 20.2, 20.3, 20.4 and 20.5.

Dr Profit or loss (extract) Cr

20.1 R

May 31 Depreciation:

machinery 92 000

The entries would be the same as the above for the years 20.2, 20.3, 20.4 and 20.5.

235

FAC1502/1

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)

20.5 20.4 20.3 20.2 20.1

Non-current assets R R R R R

Property, plant and

equipment NIL 92 000 184 000 276 000 368 000

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

R R

Carrying amount:

Beginning of year 368 000 368 000

Cost 460 000 460 000

Accumulated depreciation (92 000) (92 000)

Additions — —

Disposals (—) (—)

Depreciation (92 000) (92 000)

Carrying amount:

End of year 276 000 276 000

Cost 460 000 460 000

Accumulated depreciation (184 000) (184 000)

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.

236

FAC1502/1

(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

Calculation of Annual Accumulated Carrying

Date Cost price depreciation depreciation depreciation amount

(a) 20

100 x carrying (b) (a) – (b)

amount

May 31 R R R R

20.1 (End of financial year 1) 460 000

100

460 000

92 000 92 000 368 000

20.2 (End of financial year 2) 460 000

100

368 000

73 600 165 600 294 400

20.3 (End of financial year 3) 460 000

100

294 400

58 880 224 480 235 520

20.4 (End of financial year 4) 460 000

100

235 520

47 104 271 584 188 416

20.5 (End of financial year 5) 460 000

100

188 416

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 R R

May 31 Depreciation: machinery 92 000

Accumulated depreciation: machinery 92 000

Provision for depreciation at 20% pa on the

diminishing balance method (year 1)

Profit or loss 92 000

Depreciation: machinery 92 000

Closing entry

20.2

May 31 Depreciation: machinery 73 600

Accumulated depreciation: machinery 73 600

Provision for depreciation at 20% pa on the

diminishing balance method (year 2)

Profit or loss 73 600

Depreciation: machinery 73 600

Closing entry

20.3

May 31 Depreciation: machinery 58 880

Accumulated depreciation: machinery 58 880

Provision for depreciation at 20% pa on the

diminishing balance method (year 3)

Profit or loss 58 880

Depreciation: machinery 58 880

Closing entry

20.4

May 31 Depreciation: machinery 47 104

Accumulated depreciation: machinery 47 104

Provision for depreciation at 20% pa on the

diminishing balance method (year 4)

Profit or loss 47 104

Depreciation: machinery 47 104

Closing entry

20.5

May 31 Depreciation: machinery 37 683

Accumulated depreciation: machinery 37 683

Provision for depreciation at 20% pa on the

diminishing balance method (year 5)

Profit or loss 37 683

Depreciation: machinery 37 683

Closing entry

238

FAC1502/1

(b) (3) GENERAL LEDGER

Dr Machinery (at cost) Cr

20.1 R

Jun 1 Bank 460 000

Dr Accumulated depreciation: machinery Cr

20.1 R 20.1 R

May 31 Balance c/d 92 000 May 31 Depreciation 20.1 92 000

20.2 20.1

May 31 Balance c/d 165 600 Jun 1 Balance b/d 92 000

20.2

May 31 Depreciation 20.2 73 600

165 600 165 600

20.3 20.2

May 31 Balance c/d 224 480 Jun 1 Balance b/d 165 600

20.3

May 31 Depreciation 20.3 58 880

224 480 224 480

20.4 20.3

May 31 Balance c/d 271 584 Jun 1 Balance b/d 224 480

20.4

May 31 Depreciation 20.4 47 104

271 584 271 584

20.5 20.4

May 31 Balance c/d 309 267 Jun 1 Balance b/d 271 584

20.5

May 31 Depreciation 20.5 37 683

309 267 309 267

20.5

Jun 1 Balance b/d 309 267

Dr Depreciation: machinery Cr

20.1 R 20.1 R

May 31 Accumulated May 31 Profit or

depreciation 92 000 loss 92 000

20.2 20.2

May 31 Accumulated May 31 Profit or

depreciation 73 600 loss 73 600

20.3 20.3

May 31 Accumulated May 31 Profit or

depreciation 58 880 loss 58 880

20.4 20.4

May 31 Accumulated May 31 Profit or

depreciation 47 104 loss 47 104

20.5 20.5

May 31 Accumulated May 31 Profit or

depreciation 37 683 loss 37 683

239

FAC1502/1

Dr Profit or loss (extract) Cr

20.1 R

May 31 Depreciation:

machinery 92 000

20.2

May 31 Depreciation:

machinery 73 600

20.3

May 31 Depreciation:

machinery 58 880

20.4

May 31 Depreciation:

machinery 47 104

20.5

May 31 Depreciation:

machinery 37 683

BILGREDON

STATEMENT OF FINANCIAL POSITION AS AT 31 MAY (extract)

20.5 20.4 20.3 20.2 20.1

Non-current assets R R R R R

Property, plant and

equipment 150 733 188 416 235 520 294 400 368 000

BILGREDON

NOTES FOR THE YEAR ENDED 31 MAY 20.2

Property, plant and equipment Machinery Total

R R

Carrying amount:

Beginning of year 368 000 368 000

Cost 460 000 460 000

Accumulated depreciation (92 000) (92 000)

Depreciation (73 600) (73 600)

Carrying amount:

End of year 294 400 294 400

Cost 460 000 460 000

Accumulated depreciation (165 600) (165 600)

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.

240

FAC1502/1

Calculation of Anual Accumulated Carrying

Date Cost price depreciation* depreciation depreciation amount

(a) (b) (a) 7(b)

May 31 R R R R

20.1 (End of financial year 1) 460 000

500

2 000

6460 000 115 000 115 000 345 000

20.2 (End of financial year 2) 460 000

550

2 000

6460 000 126 500 241 500 218 500

20.3 (End of financial year 3) 460 000

300

2 000

6460 000 69 000 310 500 149 500

20.4 (End of financial year 4) 460 000

200

2 000

6460 000 46 000 356 500 103 500

20.5 (End of financial year 5) 460 000

450

2 000

6460 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

Dr Machinery (at cost) Cr

20.1 R

Jun 1 Bank 460 000

Dr Accumulated depreciation: machinery Cr

20.1 R 20.1 R

May 31 Balance c/d 115 000 May 31 Depreciation 20.1 115 000

20.2 20.1

May 31 Balance c/d 241 500 Jun 1 Balance b/d 115 000

20.2

May 31 Depreciation 20.2 126 500

241 500 241 500

20.3 20.2

May 31 Balance c/d 310 500 Jun 1 Balance b/d 241 500

20.3

May 31 Depreciation 20.3 69 000

310 500 310 500

20.4 20.3

May 31 Balance c/d 356 500 Jun 1 Balance b/d 310 500

20.4

May 31 Depreciation 20.4 46 000

356 500 356 500

241

FAC1502/1

Dr Accumulated depreciation: machinery (continued) Cr

20.5 R 20.4 R

May 31 Balance c/d 460 000 Jun 1 Balance b/d 356 500

20.5

May 31 Depreciation 20.5 103 500

460 000 460 000

20.5

Jun 1 Balance b/d 460 000

Dr Depreciation: machinery Cr

20.1 R 20.1 R

May 31 Accumulated May 31 Profit or

depreciation 115 000 loss 115 000

20.2 20.2

May 31 Accumulated May 31 Profit or

depreciation 126 500 loss 126 500

20.3 20.3

May 31 Accumulated May 31 Profit or

depreciation 69 000 loss 69 000

20.4 20.4

May 31 Accumulated May 31 Profit or

depreciation 46 000 loss 46 000

20.5 20.5

May 31 Accumulated May 31 Profit or

depreciation 103 500 loss 103 500

Dr Profit or loss (extract) Cr

20.1 R

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)

20.5 20.4 20.3 20.2 20.1

Non-current assets R R R R R

Property, plant and

equipment NIL 103 500 149 500 218 500 345 000

242

FAC1502/1

BILGREDON

NOTES FOR THE YEAR ENDED 31 MAY 20.2

Property, plant and equipment Machinery Total

R R

Carrying amount:

Beginning of year 345 000 345 000

Cost 460 000 460 000

Accumulated depreciation (115 000) (115 000)

Depreciation (126 500) (126 500)

Carrying amount:

End of year 218 500 218 500

Cost 460 000 460 000

Accumulated depreciation (241 500) (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

is 6

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:

R460 000 620

100 66

= 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 R R

May 31 Accumulated depreciation: machinery 460 000

Machinery (at cost) 460 000

Scrapped machine written off

GENERAL LEDGER

Dr Machinery (at cost) Cr

20.1 R 20.5 R

Jun 1 Bank 460 000 May 31 Accumulated

depreciation 460 000

Dr Accumulated depreciation: machinery Cr

20.5 R 20.1 R

May 31 Machinery (at cost) 460 000 May 31 Depreciation 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

460 000 460 000

244

FAC1502/1

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 R R

May 31 *Realisation of machinery 460 000

Machinery (at cost) 460 000

Transfer machinery at cost to

realisation account

Accumulated depreciation: machinery 402 500

Realisation of machinery 402 500

Transfer depreciation to realisation account

Loss on disposal of machinery 57 500

Realisation of machinery 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) Cr

20.0 R 20.5 R

Nov 30 Bank 460 000 May 31 Realisation of

machinery 460 000

245

FAC1502/1

Dr Accumulated depreciation: machinery Cr

20.5 R 20.1 R

May 31 Realisation of May 31 Depreciation

machinery 402 500 (part of year) 57 500

20.2

May 31 Depreciation 126 500

20.3

May 31 Depreciation 69 000

20.4

May 31 Depreciation 46 000

20.5

May 31 Depreciation 103 500

402 500 402 500

Dr Realisation of machinery Cr

20.5 R 20.5 R

May 31 Machinery at cost 460 000 May 31 Accumulated

depreciation 402 500

Loss on disposal

of machinery 57 500

460 000 460 000

Dr Loss on disposal of machinery Cr

20.5 R

May 31 Realisation of

machinery 57 500

BILGREDON

(b) NOTES FOR THE YEAR ENDED 31 MAY 20.5

Property, plant and equipment Machinery Total

R R

Carrying amount:

Beginning of year 161 000 161 000

Cost 460 000 460 000

Accumulated depreciation* (299 000) (299 000)

Depreciation (103 500) (103 500)

Disposals (57 500) (57 500)

Cost (460 000) (460 000)

Accumulated depreciation 402 500 402 500

Carrying amount:

End of year — —

Cost — —

Accumulated depreciation — —

*R57 500 + R126 500 + R69 000 + R46 000

246

FAC1502/1

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 R R

May 31 Realisation of machinery 460 000

Machinery (at cost) 460 000

Transfer machine at cost to

realisation account

Accumulated depreciation: machinery 402 500

Realisation of machinery 402 500

Transfer depreciation to realisation account

Bank* 60 000

Realisation of machinery 60 000

Cash received for machinery

Realisation of machinery 2 500

Profit on sale of machinery 2 500

Sold machinery at a profit

*This entry will normally be recorded in the cash receipts journal.

GENERAL LEDGER

Dr Machinery (at cost) Cr

20.0 R 20.5 R

Nov 30 Bank 460 000 May 31 Realisation of

machinery 460 000

247

FAC1502/1

Dr Accumulated depreciation: machinery Cr

20.5 R 20.1 R

May 31 Realisation of May 31 Depreciation 57 500

machinery 402 500 20.2

May 31 Depreciation 126 500

20.3

May 31 Depreciation 69 000

20.4

May 31 Depreciation 46 000

20.5

May 31 Depreciation 103 500

402 500 402 500

Dr Realisation of machinery Cr

20.5 R 20.5 R

May 31 Machinery at cost 460 000 May 31 Accumulated

Profit on sale of depreciation 402 500

machinery 2 500 Bank 60 000

462 500 462 500

Dr Profit on sale of machinery Cr

20.5 R

May 31 Realisation of

machinery 2 500

Dr Bank Cr

20.5 R

May 31 Realisation of

machinery 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 3

4of the year. If the percentage for a full year is 20%, the pro rata

depreciation in this case would be 9

12 620% 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: Depreciation

Credit: Accumulated depreciation

Now calculate the total accumulated depreciation of the disposed asset.

248

FAC1502/1

2. Transfer the total accumulated depreciation of the disposed asset to the realisation

account (general journal):

Debit: Accumulated depreciation

Credit: Realisation account

3. Transfer the cost price of the disposed asset to the realisation account (general

journal):

Debit: Realisation account

Credit: 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: Bank

Credit: Realisation account

4.2 Sold on credit (general journal):

Debit: Trade receivables (and Trade receivables control account)

Credit: Realisation account

4.3 Asset traded in (general journal):

Debit: The asset account (as part of the cost price of the new asset)

Credit: 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: Realisation account

Credit: Profit on disposal of ... account

6.2 Loss:

Debit: Loss on disposal of ... account

Credit: 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: R R

Plant and machinery (at cost) 85 000

Accumulated depreciation: plant and machinery 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.

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 R R

Jan 31 Plant and machinery (at cost) 90 000

Maxi Ltd 90 000

Jojo machine purchased on credit

Depreciation (1) 1 600

Accumulated depreciation 1 600

Depreciation written off on machine

traded in

Machinery realisation 42 500

Plant and machinery (at cost) 42 500

Transfer cost price of machine traded in

250

FAC1502/1

Accumulated depreciation (1) 24 900

Machinery realisation 24 900

Transferring depreciation of

machine traded in

Maxi Ltd (2) 19 500

Machinery realisation 19 500

Recording trade-in value of Zobo machine

Machinery realisation 1 900

Profit on sale of machinery 1 900

Transferring profit on machine

traded in

Aug 31 Depreciation (3) 15 040

Accumulated depreciation 15 040

Depreciation on plant and machinery

(2) GENERAL LEDGER

(a)

Dr Accumulated depreciation Cr

20.4 R 20.3 R

Jan 31 Machinery Aug 31 Balance b/d 46 600

realisation 24 900 20.4

Jan 31 Depreciation 1 600

20.4 Aug 31 Depreciation 15 040

Aug 31 Balance c/d 38 340

63 240 63 240

20.4

Sep 1 Balance b/d 38 340

(b)

Dr Machinery realisation Cr

20.4 R 20.4 R

Jan 31 Plant and Jan 31 Accumulated

machinery 42 500 depreciation 24 900

Profit on sale of Maxi Ltd 19 500

machinery 1 900

44 400 44 400

CALCULATIONS:

1Depreciation on machine traded in R

To 31 August 20.3 (R46 600 61

2) 23 300

31 August 20.3 – 31 January 20.4

10065

126R(42 500 723 300) 1 600

24 900

251

FAC1502/1

2Trade-in value

R90 0007R70 500 19 500

3Depreciation on machinery still in use

Zobo machine

R(42 500723 300)620

100 3 840

Jojo machine

R(90 000 + 6 000)620

100 67

12 11 200

15 040

(3) BACINIS

NOTES FOR THE YEAR ENDED 31 AUGUST 20.4

Property, plant and equipment Machinery Total

R R

Carrying amount:

Beginning of year 38 400 38 400

Cost 85 000 85 000

Accumulated depreciation (46 600) (46 600)

Additions (R90 000 + R6 000) 96 000 96 000

Depreciation (R1 600 + R15 040) (16 640) (16 640)

Disposals (17 600) (17 600)

Cost (42 500) (42 500)

Accumulated depreciation (24 900) (24 900)

Carrying amount:

End of year 100 160 100 160

Cost (R85 000 + R96 000 – R42 500) 138 500 138 500

Accumulated depreciation (R46 600 + R16 640 – R24 900) (38 340) (38 340)

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.

252

FAC1502/1

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) Cr

20.3 R 20.3 R

Jan 1 Balance b/d 100 000 Jul 1 Machinery

Jul 1 ZYP Company 100 000 realisation 40 000

Jul 1 Bank 5 000 Dec 31 Balance c/d 165 000

205 000 205 000

20.4

Jan 1 Balance b/d 165 000

(2)

Dr Depreciation Cr

20.3 R 20.3 R

Jul 1 Accumulated Dec 31 Profit or loss 22 000

depreciation 4 000

Dec 31 Accumulated

depreciation 18 000

22 000 22 000

(3)

Dr Accumulated depreciation Cr

20.3 R 20.3 R

Jul 1 Machinery Jan 1 Balance b/d 19 000

realisation 20 000 Jul 1 Depreciation 4 000

Dec 31 Balance c/d 21 000 Dec 31 Depreciation 18 000

41 000 41 000

20.4

Jan 1 Balance b/d 21 000

253

FAC1502/1

(4)

Dr Machinery realisation Cr

20.3 R 20.3 R

Jul 1 Machinery (at cost) 40 000 Jul 1 Accumulated

depreciation 20 000

ZYP Company 15 000

Loss on disposal

of machinery 5 000

40 000 40 000

CALCULATIONS

1Balances on 31 December 20.2: R

Machinery: Zebra 40 000

Jaguar 60 000

100 000

Accumulated depreciation:

Zebra: 20% 6R40 000 62 16 000

Jaguar: 20% 6R60 000 63

12 3 000

19 000

2Depreciation:

Zebra 1 January 20.3 – 1 July 20.3

20%6R40 00066

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)7866

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):

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(1) Machinery at cost

(2) Depreciation

(3) Accumulated depreciation

(4) Machinery realisation

Solution: Revision exercise 3

GENERAL LEDGER

(1)

Dr Machinery (at cost) Cr

20.0 R 20.3 R

Jul 1 Bank 60 000 Mar 31 Balance c/d 140 000

20.2

Oct 1 Bank 80 000

140 000 140 000

20.3 20.3

Apr 1 Balance b/d 140 000 Jun 30 Machinery

realisation 60 000

20.4

Mar 31 Balance c/d 80 000

140 000 140 000

20.4

Apr 1 Balance b/d 80 000

(2)

Dr Depreciation Cr

20.1 R 20.1 R

Mar 31 Accumulated Mar 31 Profit or

depreciation (1) 11 250 loss 11 250

20.2 20.2

Mar 31 Accumulated Mar 31 Profit or

depreciation (2) 15 000 loss 15 000

20.3 20.3

Mar 31 Accumulated Mar 31 Profit or

depreciaton (3) 25 000 loss 25 000

20.4

Jun 30 Accumulated Mar 31 Profit or loss

depreciation (4) 3 750 (loss) 23 750

20.4

Mar 31 Accumulated

depreciation (5) 20 000

23 750 23 750

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(3)

Dr Accumulated depreciation Cr

20.2 R 20.1 R

Mar 31 Balance c/d 26 250 Mar 31 Depreciation (1) 11 250

20.2

Mar 31 Depreciation (2) 15 000

26 250 26 250

20.3 20.2

Mar 31 Balance c/d 51 250 Apr 1 Balance b/d 26 250

20.3

Mar 31 Depreciation (3) 25 000

51 250 51 250

20.3 20.3

Jun 30 Machinery Apr 1 Balance b/d 51 250

realisation (6) 45 000 Jun 30 Depreciation (4) 3 750

20.4 20.4

Mar 31 Balance c/d 30 000 Mar 31 Depreciation (5) 20 000

75 000 75 000

20.4

Apr 1 Balance b/d 30 000

(4)

Dr Machinery realisation Cr

20.3 R 20.3 R

Jun 30 Machinery at cost 60 000 Jun 30 Accumulated

Profit on sale of depreciation 45 000

machinery 3 000* Bank 18 000

63 000 63 000

* Balancing figure

CALCULATIONS

Depreciation: R R

(1) 1 July 20.0 to 31 March 20.1: R60 000625

100 69

12 11 250

(2) 1 April 20.1 to 31 March 20.2: R60 000625

100 15 000

(3) First machine

1 April 20.2 to 31 March 20.3: R60 000625

100 15 000

Second machine

1 October 20.2 to 31 March 20.3: R80 000625

100 66

12 10 000 25 000

(4) First machine (sold)

1 April 20.3 to 30 June 20.3: R60 000625

100 63

12 3 750

(5) Second machine (for year)

1 April 20.3 to 31 March 20.4: R80 000625

100 20 000

(6) Accumulated depreciation – First machine

R(11 250 + 15 000 + 15 000 + 3 750) 45 000

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11.10.4 Revision exercise 4

The following information regarding machines X and Y relates to Jingo:

Machine X Machine Y

Date of purchase 1 March 20.0 1 September 20.1

Purchase price (cash) R40 000 R88 000

Installation cost R4 000 R4 000

Estimated useful life 4 years 5 years

Scrap value R4 000 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 Machinery (at cost) Cr

20.1 R 20.1 R

Mar 1 Balance b/d 44 000 Aug 31 Machinery

Sep 1 Bank 92 000 realisation 44 000

20.2

Feb 28 Balance c/d 92 000

136 000 136 000

20.2

Mar 1 Balance b/d 92 000

(2)

Dr Machinery realisation Cr

20.1 R 20.1 R

Aug 31 Machinery 44 000 Aug 31 Accumulated

depreciation 15 000

Bank 26 000

Loss on sale of

machinery 3 000

44 000 44 000

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(3)

Dr Accumulated depreciation Cr

20.1 R 20.1 R

Aug 31 Machinery Mar 1 Balance b/d 10 000

realisation (1) 15 000 Aug 31 Depreciation 5 000

20.2 20.2

Feb 28 Balance c/d 8 000 Feb 28 Depreciation (2) 8 000

23 000 23 000

20.2

Mar 1 Balance b/d 8 000

(4)

Dr Depreciation Cr

20.1 R 20.2 R

Aug 31 Accumulated Feb 28 Profit or loss 13 000

depreciation 5 000

20.2

Feb 28 Accumulated

depreciation 8 000

13 000 13 000

CALCULATIONS:

Depreciation to be written off R

1Machine X

44 0004 000

410 000 pa

1 March 20.0 – 28 Feb 20.1 10 000

1 March 20.1 – 31 Aug 20.1 (10 000

166

12 ) 5 000

15 000

2Machine Y

92 00012 000

516 000 pa

1 Sep 20.1–28 Feb 20.2 (16 000

166

12 ) 8 0003

SELF-ASSESSMENT

Having studied this study unit, can you:

.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?

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STUDY UNIT

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

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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.

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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.

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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.

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CONTENTS

Study unit Page

13 CURRENT LIABILITIES 265

14 NON-CURRENT LIABILITIES 277

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STUDY UNIT

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

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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:

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FAC1502/1

Dr Trade payables: BAD Suppliers Cr

20.1 R 20.1 R

Jan 30 Bank 495 Jan 2 Purchases 500

Settlement

discount received 5

500 500

Dr Settlement discount received Cr

20.1 R 20.1 R

Dec 31 Purchases 5 Jan 30 Trade payables:

BAD

Suppliers 5

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.

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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 R

EQUITY AND LIABILITIES

Total equity

Current liabilities XXX XXX

Trade and other payables XX XXX

Income received in advance X XXX

Other financial liabilities X XXX

Current portion of long-term borrowings XX XXX

Current VAT payable X XXX

Exercise 13.1

The following balances were taken from the post-adjustment trial balance of Picnic Traders as

at 31 December 20.1:

Trade payables 221 000

Accrued interest on loan 1 500

Bank overdraft 34 600

VAT control 4 500

Income received in advance 13 000

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 R

EQUITY AND LIABILITIES

Total equity

Current liabilities 274 600

Trade and other payables R(221 000 + 1 500) 222 500

Income received in advance 13 000

Other financial liabilities 34 600

Current VAT payable 4 500

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.

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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 (deb-

it side) on the last day of the month

Individual entries in the cash pay-

ments 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 (deb-

it 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

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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:

L Brand 6 424

S Ismail 10 285

C Roux 19 426

J Zulu 4 048

40 183

(2) Balance of the trade payables control account in the R

general ledger as at 31 August 20.2: 47 072

(3) Totals of subsidiary journals as at 30 September 20.2:

Purchases journal 96 282

Sales journal 138 195

Purchases returns journal 2 899

Sales returns journal 6 403

Cash receipts journal:

Bank column 210 818

Sales column 98 000

Trade receivables column 118 624

Settlement discount granted column 5 806

Cash payments journal:

Bank column 187 520

Purchases column 87 000

Trade payables column 105 358

Settlement discount received column 4 838

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.

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.)

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Required:

(1) Prepare the trade payables control account in the general ledger for September 20.2.

(2) Prepare the corrected accounts of the creditors in the trade payables ledger.

(3) 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 Trade payables control Cr

20.2 R 20.2 R

Sep 30 Purchases returns PRJ 2 899 Sep 1 Balance b/d 47 072

Bank CPJ 105 358 30 Purchases R(96 282

Balance c/d 35 308 – 1 000 + 286) PJ 95 568

Interest expenses J 45

Wages J 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

Dr Cr Balance

20.2 R R R

Sep 30 Account rendered b/d 6 424 Cr

Purchases PJ 286 6 710 Cr

S Ismail

Dr Cr Balance

20.2 R R R

Sep 30 Account rendered b/d 10 285 Cr

Purchases returns (26R353) J 706 9 579 Cr

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C Roux

Dr Cr Balance

20.2 R R R

Sep 30 Account rendered b/d 14 926 Cr

J Zulu

Dr Cr Balance

20.2 R R R

Sep 30 Account rendered b/d 4 048 Cr

Interest expenses J 45 4 093 Cr

(3) LIST OF ADJUSTED BALANCES PER TRADE PAYABLES LEDGER AS AT

30 SEPTEMBER 20.2:

L Brand 6 710

S Ismail 9 579

C Roux 14 926

J Zulu 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.

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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 Cr

20.1 R 20.1 R

Dec 31 Trading account 500 000 Dec 31 Trade receivables

control 500 000

Dr Trade receivables control Cr

20.1 R

Dec 31 Sales and VAT 570 000

Dr VAT output Cr

20.1 R

Dec 31 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.

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Solution: Revision exercise 2

MY COMPANY

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.0 (extract)

ASSETS R

EQUITY AND LIABILITIES

Total liabilities 600 000

Non-current liabilities 400 000

Long-term borrowings 400 000

Long-term loan secured by a first mortgage over land

and buildings 400 000

Current liabilities 200 000

Current portion of long-term borrowings 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 16 571

Totals for the month

Cash payments journal:

Trade payables column 14 326

Settlement discount received column 1 673

Purchases journal 17 350

Purchases returns journal 3 750

General journal:

Certain accounts with debit balances transferred to

trade receivables ledger from trade payables ledger 46

List of individual creditors per trade payables ledger:

Credit balances 16 812

Debit balances 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.

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(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 Trade payables control Cr

20.1 R 20.1 R

Jun 30 Bank CPJ 14 326 Jun 1 Balance b/d 16 571

Purchases returns PRJ 3 750 Purchases PJ 17 450

Balance c/d 15 991 R(17 350+100)

Trade receivables

control J 46

34 067 34 067

20.1

Jul 1 Balance b/d 15 991

(2) RECONCILIATION

R R

Total of the list of creditors balances

(credit balances less debit balances) (R16 8127R110) 16 702

Less: Tims Ltd R(1 878 – 1 787) 91

Ewing Ltd R(60 62) 120

Overcasting 500 711

Balance of trade payables control account 15 991

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SELF-ASSESSMENT

Now that you have studied this study unit, can you:

.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?

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STUDY UNIT

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

14.3 Revision exercises and solutions 281

14.3.1 Revision exercise 1 281

14.3.2 Revision exercise 2 281

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.

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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 Land Cr

20.1 R

Jan 1 Mortgage:

ABC Bank J 114 000

Dr Mortgage: ABC Bank Cr

20.1 R

Jan 1 Land 114 000

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ECO

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.1 (EXTRACT)

ASSETS R

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

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Solution Exercise 14.2

A COMPANY

LEDGER ACCOUNTS

Dr Bank Cr

20.1 R 20.1 R

Jan 1 Applications Jan 1 Applications

for debentures 2 500 000 for debentures 500 000

Dr Applications for debentures Cr

20.1 R 20.1 R

Jan 1 15% Debentures 2 000 000 Jan 1 Bank 2 500 000

Bank 500 000

2 500 000 2 500 000

Dr 15% Debentures Cr

20.1 R

Jan 1 Applications

for debentures 2 000 000

A COMPANY

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.1 (extract)

ASSETS R

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.

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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

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Solution: Revision exercise 2

B BOMB ENTERPRISES

(1) LEDGER ACCOUNTS

Dr Land Cr

20.1 R

Jun 30 Bank 20 000

17% Mortgage:

Goodfin 80 000

100 000

Dr 17% Mortgage: Goodfin Cr

20.1 R

Jun 30 Land 80 000

Dr Bank Cr

20.1 R

Jun 30 Land 20 000

Dr Interest expenses Cr

20.1 R 20.1 R

Sep 30 Accrued Sep 30 Profit or loss 3 400

expenses 3 400

Dr Accrued expenses Cr

20.1 R

Sep 30 Interest expenses 3 400

B BOMB ENTERPRISES

(2) STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR

THE YEAR ENDED 30 SEPTEMBER 20.1 (extract)

Profit from operations xx xxx

Finance costs: (x xxx)

Interest expenses 3 400

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B BOMB ENTERPRISES

(3) STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20.1 (extract)

ASSETS R

Non-current assets 100 000

Property, plant and equipment 100 000

EQUITY AND LIABILITIES

Total liabilities 83 400

Non-current liabilities 70 000

Long-term borrowings 70 000

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 3 400

Current portion of long-term borrowings 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

R80 000 617

100 = R13 600

Because only three months’ interest has accrued, the amount that has to be provided

for is:

R13 600 63

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

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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 Page

15 FINANCIAL STATEMENTS OF A SOLE PROPRIETORSHIP 287

16 NONPROFIT ENTITIES 314

17 INCOMPLETE RECORDS 342

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STUDY UNIT

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

15.6 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

Self-assessment 313

KEY CONCEPTS

.Sole proprietor/sole trader

.Equity

.Capital

.Profit/loss for the period/year

.Drawings

.Additional investment

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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 R R

Mar 1 Bank 3 000

Equipment 8 000

Motor vehicles 14 000

Capital 25 000

Deposit of cash in the bank account of the

entity and recording of other assets brought

into the entity at valuation

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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 Note R

Non-current assets 22 000

Property, plant and equipment 2 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 The annual financial statements have been prepared on the historical cost basis and

comply with International Financial Reporting Standards.

1.2 Property, plant and equipment are shown at valuation.

2Property, plant and equipment Vehicles Equipment Total

Carrying amount:

Beginning of year 14 000 8 000 22 000

Cost 14 000 8 000 22 000

Accumulated depreciation (—) (—) (—)

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

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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 Cr

20.1 R

Mar 1 Bank 3 000

Equipment 8 000

Motor vehicle 14 000

Aug 1 Bank* 15 000

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

R R

Profit or loss 9 000

Capital: J Brewis 9 000

Transfer of profit for the year

Brewis’s capital will now amount to R49 000:

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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J B TELEVISION SERVICES

GENERAL LEDGER

Dr Capital: J Brewis Cr

20.2 R 20.2 R

Feb 28 Drawings 8 000 Feb 1 Balance b/d 40 000

Balance c/d 41 000 28 Profit or loss

(profit) 9 000

49 000 49 000

20.2

Mar 1 Balance b/d 41 000

Dr Drawings Cr

20.2 R 20.2 R

Feb 28 Bank 8 000 Feb 28 Capital: J Brewis 8 000

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

Balance at 1 March 20.1 25 000

Additional investment 15 000

Total comprehensive income for the year 9 000

Drawings (8 000)

Balance at 28 February 20.2 41 000

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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 R

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 Cr

R R

Bank 580

Trade receivables control 5 515

Inventory: cleaning materials 640

Equipment at cost 13 000

Vehicles at cost 17 000

Accumulated depreciation on equipment 2 600

Accumulated depreciation on vehicles 6 800

Insurance 720

Trade payables control 165

Fees earned 65 895

Capital: J Jefferson — 1 January 20.1 20 200

Drawings 12 000

Wages 18 650

Administrative expenses 12 410

Advertisements 335

Fuel and maintenance 1 110

Depreciation (equipment R1 300, vehicles R3 400) 4 700

Rental expenses 9 000

95 660 95 660

Required:

(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.

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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

Note R

Revenue 2 65 895

Distribution, administrative and other expenses (46 925)

Insurance 720

Wages 18 650

Administrative expenses 12 410

Advertisements 335

Fuel and maintenance 1 110

Rental expenses 9 000

Depreciation R(1 300 + 3400) 4 700

Profit for the year 18 970

Other comprehensive income for the year —

Total comprehensive income for the year 18 970

JEFF’S MAINTENANCE SERVICES

(2) STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED

31 DECEMBER 20.1

Capital

Balance at 1 January 20.1 20 200

Total comprehensive income for the year 18 970

Drawings (12 000)

Balance at 31 December 20.1 27 170

JEFF’S MAINTENANCE SERVICES

(3) STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.1

ASSETS Note R

Non-current assets 20 600

Property, plant and equipment 3 20 600

Current assets 6 735

Inventories 640

Trade and other receivables 5 515

Cash and cash equivalents 580

Total assets 27 335

EQUITY AND LIABILITIES

Total equity 27 170

Capital 27 170

Current liabilities 165

Trade and other payables 165

Total equity and liabilities 27 335

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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.

2 Revenue represents fees earned from clients for services rendered.

3Property, plant and equipment Vehicles Equipment Total

R R R

Carrying amount:

Beginning of year 13 600 11 700 25 300

Cost 17 000 13 000 30 000

Accumulated depreciation (3 400) (1 300) (4 700)

Depreciation for the period (3 400) (1 300) (4 700)

Carrying amount:

End of year 10 200 10 400 20 600

Cost 17 000 13 000 30 000

Accumulated depreciation (6 800) (2 600) (9 400)

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.

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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

Dr Cr

R R

Land and buildings (at cost) 100 000

Furniture and fittings (at cost) 42 000

Accumulated depreciation — 28 February 20.0:

Furniture and fittings 5 000

15% Mortgage secured by land and buildings 30 000

Capital: P Pumpkin — 28 February 20.0 80 000

Trade receivables control 8 100

Trade payables control 3 000

Bank overdraft 800

Drawings 7 300

Petty cash 640

Stationery 1 150

Salaries 21 100

Electricity 12 000

Telephone expenses 1 860

Fees earned 59 000

Rental income 16 500

Bank charges 150

194 300 194 300

(2) 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.

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.

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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 R

Revenue 2 59 000

Rental income (R1 500 612) 18 000

77 000

Distribution, administrative and other expenses (42 815)

Stationery R(1150 7150) 1 000

Salaries 21 100

Electricity 12 000

Telephone expenses 1 860

Bank charges 150

Credit losses 405

Depreciation: Furniture and fittings R(42 000 x 15%) 6 300

34 185

Finance costs: Interest on mortgage R(30 000 x 15%) (4 500)

Profit for the year 29 685

Other comprehensive income for the year —

Total comprehensive income for the year 29 685

PETER PUMPKIN

(2) STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED

28 FEBRUARY 20.1

Capital

Balance at 1 March 20.0 80 000

Total comprehensive income for the year 29 685

Drawings (7 300)

Balance at 28 February 20.1 102 385

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PETER PUMPKIN

(3) STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.1

ASSETS Note R

Non-current assets 130 700

Property, plant and equipment 3 130 700

Current assets 9 985

Inventories 150

Trade and other receivables R(8 100-405+1500) 9 195

Cash and cash equivalents 640

Total assets 140 685

EQUITY AND LIABILITIES

Total equity 102 385

Capital 102 385

Total liabilities 38 300

Non-current liabilities 30 000

Long-term borrowings: 30 000

15% mortgage secured by land and buildings 30 000

Current liabilities 8 300

Trade and other payables R(3 000 + 4 500) 7 500

Other current liabilities 800

Total equity and liabilities 140 685

PETER PUMPKIN

(4) NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.1

1 Accounting policy:

1.1 The annual financial statements have been prepared on the historical cost basis and

comply with International Financial Reporting Standards.

1.2 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 Revenue represents fees earned from clients for services rendered.

3Property, plant and equipment Land and Furniture Total

buildings and fittings

R R R

Carrying amount:

Beginning of year 100 000 37 000 137 000

Cost 100 000 42 000 142 000

Accumulated depreciation (—) (5 000) (5 000)

Depreciation for the period (—) (6 300) (6 300)

Carrying amount:

End of year 100 000 30 700 130 700

Cost 100 000 42 000 142 000

Accumulated depreciation (—) (11 300) (11 300)

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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 R R

Furniture and equipment (at cost) 40 000

Vehicles (at cost) 50 000

Inventory — 1 March 20.0 56 080

Cash in bank 34 091

Accumulated depreciation — 28 February 20.0:

— Furniture and equipment 4 000

— Vehicles 5 000

Debtors: 2 932

— A Abrahams 368

— B Barnard 924

— C Chetty 463

— D Dlamini 1 177

Creditors: 3 651

— K Khoza 2 137

— L Lawson 1 110

— M Mnisi 261

— N Nagel 143

VAT control (credit balance) 2 700

Sales 227 000

Purchases 166 000

Repairs 4 150

Petrol 2 974

Stationery 214

Water and electricity 6 138

Rental expenses 22 000

Wages and salaries 25 300

Telephone expenses 2 102

Capital: K Kuman — 28 February 20.0 169 630

Mr Kuman’s policy is to bank all cash receipts daily.

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(2) TRANSACTIONS, 10% VAT INCLUSIVE, DURING FEBRUARY 20.1:

20.1 R

Feb 1 Cash sales 2 200

2 Received from C Chetty in full settlement of his account 452

3 Paid L Lawson and received R55 discount 1 055

4 Sold goods on credit to E Erasmus 990

6 Received from D Dlamini on his account 507

Received from A Abrahams in full settlement of his account 346

9 Paid K Khoza 2 137

Paid N Nagel in full settlement 132

Paid M Mnisi 261

11 Purchased goods on credit from:

K Khoza 7 040

L Lawson 6 600

12 Returned goods to K Khoza 165

13 Cash sales 5 500

Sold goods on credit to D Dlamini 880

15 Sold goods on credit to C Chetty 2 200

16 C Chetty returned goods 110

17 Cash sales 1 100

18 Paid BB Garage for repairs to vehicles 550

Paid Pump Services for petrol 330

19 Purchased stationery from CSA for cash 165

20 K Kuman withdrew cash from the business 10 000

Cash purchases from P Prins 3 146

25 Paid:

K Khoza on account 3 000

L Lawson on account 2 020

South African Revenue Service for

VAT outstanding on 31 January 20.1 2 700

27 Paid the following:

City Council for water and electricity 671

Rentguy for rental 2 200

Wages and salaries 2 300

28 Cash sales 2 750

Purchased a new counter from Counterman for cash 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.

(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 CRJ12

VAT out-

put

VAT

input

Trade re-

ceivables

Settlement

discount

Sundry accounts

Doc Date Details Fol Bank Sales Dr

granted

Dr Amount Fol Details

R R R R R R R

CI 51–60 1 Cash sales 2 200 2 000 200

R1 2 C Chetty DL3 452 (1) 463 (10)

R2 6 D Dlamini DL4 507 507

R3 A Abrahams DL1 346 (2) 368 (20)

CI 61–73 13 Cash sales 5 500 5 000 500

CI 74–78 17 Cash sales 1 100 1 000 100

CI 79–87 28 Cash sales 2 750 2 500 250

12 855 10 500 1 050 (3) 1 338 (30) —

L4 L14 L13 L12 L7 L25

300

FAC1502/1

CASH PAYMENTS JOURNAL FOR FEBRUARY 20.1 CPJ12

VAT

input

VAT

output

Trade

payables

Settlement

discount

Sundry accounts

Doc Date Details Fol Bank Purchases Cr received Amount Fol Details

R R R R R R R

C123 3 L Lawson CL2 1 055 (5) 1 110 (50)

C124 9 K Khoza CL3 2 137 2 137

C125 N Nagel CL4 132 (1) 143 (10)

C126 M Mnisi CL1 261 261

C127 18 BB Garage 550 50 500 L18 Repairs

C128 Pump Services 330 330 L19 Petrol

C129 19 CSA 165 15 150 L20 Stationery

C130 20 K Kuman 10 000 10 000 L11 Drawings

C131 P Prins 3 146 2 860 286

C132 25 K Khoza CL3 3 000 3 000

C133 L Lawson CL2 2 020 2 020

C134 South African

revenue service

2 700 2 700 L9 VAT control

C135 27 City council 671 61 610 L21 Water & electricity

C136 Rentguy 2 200 200 2 000 L22 Rental expenses

C137 Cash 2 300 2 300 L23 Wages & salaries

Counterman 1 100 100 1 000 L 1 Furniture & equipment

28 Bank 45 45 L30 Bank charges

31 812 2 860 712 (6) 8 671 (60) 19 635

L4 L16 L12 L12 L8 L26

PURCHASES JOURNAL FOR FEBRUARY 20.1 PJ12

Trade

Date Details Invoice Fol Purchases VAT input payables

R R R

11 K Khoza 501 CL3 6 400 640 7 040

L Lawson 502 CL2 6 000 600 6 600

12 400 1 240 13 640

L16 L12 L8

SALES JOURNAL FOR FEBRUARY 20.1 SJ12

Trade

Date Details Invoice Fol Sales VAT output receivables

R R R

4 E Erasmus 901 DL5 900 90 990

13 D Dlamini 902 DL4 800 80 880

15 C Chetty 903 DL3 2 000 200 2 200

3 700 370 4 070

L14 L13 L7

PURCHASES RETURNS JOURNAL FOR FEBRUARY 20.1 PRJ12

Debit Purchases Trade

Date Details note Fol returns VAT input payables

R R R

12 K Khoza 301 CL3 150 15 165

150 15 165

L17 L12 L8

301

FAC1502/1

SALES RETURNS JOURNAL FOR FEBRUARY 20.1 SRJ12

Credit Sales Trade

Date Details note Fol returns VAT output receivables

R R R

16 C Chetty 201 DL3 100 10 110

100 10 110

L15 L13 L7

(2) GENERAL JOURNAL — FEBRUARY 20.1 J12

Date Details Fol Debit Credit

R R

28 Credit losses L27 840

VAT input L12 84

B Barnard/Trade receivables DL2

control L7 924

B Barnard’s account written off

Depreciation L28 9 000

Accumulated depreciation: Vehicles L6 5 000

Furniture and equipment L5 4 000

Depreciation provided at 10%

pa on cost

Telephone expenses L24 240

VAT input L12 24

Accrued expenses L29 264

Telephone account for February outstanding

*VAT control L9 2 048

VAT input L12 2 048

Transfer of VAT input

*VAT output L13 1 416

VAT control L9 1 416

Transfer of VAT output

* 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) L1 Cr

20.1 R 20.1 R

Feb 1 Balance b/d 40 000 Feb 28 Balance c/d 41 000

Feb 28 Bank CPJ12 1 000

41 000 41 000

20.1

Mar 1 Balance b/d 41 000

302

FAC1502/1

Dr Vehicles (at cost) L2 Cr

20.1 R

Feb 1 Balance b/d 50 000

Dr Inventory L3 Cr

20.0 R 20.1 R

Mar 1 Balance b/d 56 080 Feb 28 Trading

20.1 account J13 56 080

Feb 28 Trading Balance c/d 60 000

account J13 60 000

116 080 116 080

20.1

Mar 1 Balance b/d 60 000

Dr Bank L4 Cr

20.1 R 20.1 R

Feb 1 Balance b/d 34 091 Feb 28 Payments CPJ12 31 812

28 Receipts CRJ12 12 855 Balance c/d 15 134

46 946 46 946

20.1

Mar 1 Balance b/d 15 134

Dr Accumulated depreciation: Furniture and equipment L5 Cr

20.1 R 20.0 R

Feb 28 Balance c/d 8 000 Feb 28 Balance b/d 4 000

20.1

Feb 28 Depreciation J12 4 000

8 000 8 000

20.1

Mar 1 Balance b/d 8 000

Dr Accumulated depreciation: Vehicles L6 Cr

20.1 R 20.0 R

Feb 28 Balance c/d 10 000 Feb 28 Balance b/d 5 000

20.1

Feb 28 Depreciation J12 5 000

10 000 10 000

20.1

Mar 1 Balance b/d 10 000

303

FAC1502/1

Dr Trade receivables control L7 Cr

20.1 R 20.1 R

Feb 1 Balance b/d 2 932 Feb 28 Bank and

28 Sales SJ12 4 070 discount CRJ12 1 338

Sales returns SRJ12 110

Credit losses J12 924

Balance c/d 4 630

7 002 7 002

20.1

Mar 1 Balance b/d 4 630

Dr Trade payables control L8 Cr

20.1 R 20.1 R

Feb 28 Bank and Feb 1 Balance b/d 3 651

discount CPJ12 8 671 28 Purchases PJ12 13 640

Returns PRJ12 165

Balance c/d 8 455

17 291 17 291

20.1

Mar 1 Balance b/d 8 455

Dr VAT control L9 Cr

20.1 R 20.1 R

Feb 25 Bank CPJ12 2 700 Feb 1 Balance b/d 2 700

28 VAT input J12 2 048 28 VAT output J12 1 416

Balance c/d 632

4 748 4 748

20.1

Mar 1 Balance b/d 632

Dr Capital L10 Cr

20.1 R 20.0 R

Feb 28 Drawings J13 10 000 Mar 1 Balance b/d 169 630

Profit or

loss J13 14 953

Balance c/d 144 677

169 630 169 630

20.1

Mar 1 Balance b/d 146 677

Dr Drawings L11 Cr

20.1 R 20.1 R

Feb 20 Bank CPJ12 10 000 Feb 28 Capital J13 10 000

304

FAC1502/1

Dr VAT input L12 Cr

20.1 R 20.1 R

Trade receivables CRJ12 3 Feb 28 Trade payables PRJ12 15

Feb 28 Bank CPJ12 712 VAT control J12 2 048

Trade payables PJ12 1 240

Trade receivables J12 84

Accrued

expenses J12 24

2 063 2 063

Dr VAT output L13 Cr

20.1 R 20.1 R

Feb 28 Trade receivables SRJ12 10 Feb 28 Bank CRJ12 1 050

VAT control J12 1 416 Trade receivables SJ12 370

Trade payables CPJ12 6

1 426 1 426

Dr Sales L14 Cr

20.1 R 20.1 R

Feb 28 Settlement dis- J13 Feb 1 Balance b/d 227 000

count granted 30 28 Bank

CRJ12 10 500

Sales returns 100 Trade receivables SJ12 3 700

Trading account J13 241 070

241 200 241 200

Dr Sales returns L15 Cr

20.1 R 20.1 R

Feb 28 Trade receivables SRJ12 100 Feb 28 Sales J13 100

Dr Purchases L16 Cr

20.1 R 20.1 R

Feb 1 Balance b/d 166 000 Feb 28 Settlement dis- J13

28 Bank CPJ12 2 860 count received 60

Trade payables PJ12 12 400 Purchases returns 150

28 Trading account J13 181 050

181 260 181 260

Dr Purchases returns L17 Cr

20.1 R 20.1 R

Feb 28 Purchases J13 150 Feb 28 Trade payables

PRJ12 150

Dr Repairs L18 Cr

20.1 R 20.1 R

Feb 1 Balance b/d 4 150 Feb 28 Profit or

18 Bank CPJ12 500 loss J13 4 650

4 650 4 650

Dr Petrol L19 Cr

20.1 R 20.1 R

Feb 1 Balance b/d 2 974 Feb 28 Profit or

18 Bank CPJ12 330 loss J13 3 304

3 304 3 304

305

FAC1502/1

Dr Stationery L20 Cr

20.1 R 20.1 R

Feb 1 Balance b/d 214 Feb 28 Profit or loss J13 364

19 Bank CPJ12

150

364 364

Dr Water and electricity L21 Cr

20.1 R 20.1 R

Feb 1 Balance b/d 6 138 Feb 28 Profit or loss J13 6 748

27 Bank CPJ12 610

6 748 6 748

Dr Rental expenses L22 Cr

20.1 R 20.1 R

Feb 1 Balance b/d 22 000 Feb 28 Profit or loss J13 24 000

27 Bank CPJ12 2 000

24 000 24 000

Dr Wages and salaries L23 Cr

20.1 R 20.1 R

Feb 1 Balance b/d 25 300 Feb 28 Profit or loss J13 27 600

27 Bank CPJ12 2 300

27 600 27 600

Dr Telephone expenses L24 Cr

20.1 R 20.1 R

Feb 1 Balance b/d 2 102 Feb 28 Profit or loss J13 2 342

28 Accrued

expenses J12 240

2 342 2 342

Dr Settlement discount granted L25 Cr

20.1 R 20.1 R

Feb 28 Trade receivables Feb 28 Sales J13 30

control CPJ12 30

Dr Settlement discount received L26 Cr

20.1 R 20.1 R

Feb 28 Purchases J13 60 Feb 28 Trade payables

control CPJ12 60

Dr Credit losses L27 Cr

20.1 R 20.1 R

Feb 28 Trade receivables J12 840 Feb 28 Profit or loss J13 840

306

FAC1502/1

Dr Depreciation L28 Cr

20.1 R 20.1 R

Feb 28 Accumulated Feb 28 Profit or loss J13 9 000

depreciation:

Furniture J12 4 000

Vehicles J12 5 000

9 000 9 000

Dr Accrued expenses L29 Cr

20.1 R

Feb 28 Telephone

expenses J12 240

VAT input J12 24

264

Dr Bank charges L30 Cr

20.1 R 20.1 R

Feb 28 Bank CPJ12 45 Feb 28 Profit or loss J13 45

Dr Trading account L31 Cr

20.1 R 20.1 R

Feb 28 Inventory J13 56 080 Feb 28 Inventory J13 60 000

Purchases J13 181 050 Sales J13 241 070

Profit or loss

(gross profit) J13 63 940

301 070 301 070

Dr Profit or loss L32 Cr

20.1 R 20.1 R

Feb 28 Repairs J13 4 650 Feb 28 Trading

Petrol J13 3 304 account J13 63 940

Stationery J13 364 Capital (Total com-

Water and prehensive

electricity J13 6 748 income for the

Rental expenses J13 24 000 year) J13 14 953

Wages and

salaries J13 27 600

Telephone

expenses J13 2 342

Credit losses J13 840

Depreciation J13 9 000

Bank charges J13 45

78 893 78 893

307

FAC1502/1

(4) BANK RECONCILIATION STATEMENT AS AT 28 FEBRUARY 20.1

Debit Credit

R R

Credit balance as per bank statement 15 005

Outstanding cheques: No 134 671

135 2 200

Correction of error 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 DL1 Cr

20.1 R 20.1 R

Feb 1 Balance b/d 368 Feb 6 Bank and

discount CRJ12 368

Dr B Barnard DL2 Cr

20.1 R 20.1 R

Feb 1 Balance b/d 924 Feb 28 Credit losses J12 840

VAT output J12 84

924 924

Dr C Chetty DL3 Cr

20.1 R 20.1 R

Feb 1 Balance b/d 463 Feb 2 Bank and

15 Sales SJ12 2 200 discount CRJ12 463

16 Returns SRJ12 110

28 Balance c/d 2 090

2 663 2 663

20.1

Mar 1 Balance b/d 2 090

Dr D Dlamini DL4 Cr

20.1 R 20.1 R

Feb 1 Balance b/d 1 177 Feb 6 Bank CRJ12 507

13 Sales SJ12 880 Feb 28 Balance c/d 1 550

2 057 2 057

20.1

Mar 1 Balance b/d 1 550

308

FAC1502/1

Dr E Erasmus DL5 Cr

20.1 R R

Feb 4 Sales SJ1 990

TRADE PAYABLES LEDGER

Dr M Mnisi CL1 Cr

20.1 R 20.1 R

Feb 9 Bank CPJ12 261 Feb 1 Balance b/d 261

Dr L Lawson CL2 Cr

20.1 R 20.1 R

Feb 3 Bank and Feb 1 Balance b/d 1 110

discount CPJ12 1 110 11 Purchases PJ12 6 600

25 Bank CPJ12 2 020 11 Purchases PJ12 6 600

28 Balance c/d 4 580

7 710 7 710

20.1

Mar 1 Balance b/d 4 580

Dr K Khoza CL3 Cr

20.1 R 20.1 R

Feb 9 Bank CPJ12 2 137 Feb 1 Balance b/d 2 137

12 Returns PRJ12 165 11 Purchases PJ12 7 040

25 Bank CPJ12 3 000

28 Balance c/d 3 875

9 177 9 177

20.1

Mar 1 Balance b/d 3 875

Dr N Nagel CL4 Cr

20.1 R 20.1 R

Feb 9 Bank and

discount CPJ12 143 Feb 1 Balance b/d 143

RECONCILIATIONS

R R

Debtors — C Chetty 2 090 Creditors — L Lawson 4 580

D Dlamini 1 550 K Khoza 3 875

E Erasmus 990

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

Debit Credit

R R

Furniture and equipment (at cost) 41 000

Vehicles (at cost) 50 000

Inventory 56 080

Bank 15 134

Accumulated depreciation:

Furniture and equipment 8 000

Vehicles 10 000

Capital 169 630

Drawings 10 000

Trade receivables control 4 630

Trade payables control 8 455

VAT control 632

Sales 241 200

Sales returns 100

Purchases 181 260

Purchases returns 150

Repairs 4 650

Petrol 3 304

Stationery 364

Water and electricity 6 748

Rental expenses 24 000

Wages and salaries 27 600

Telephone expenses 2 342

Settlement discount granted 30

Settlement discount received 60

Credit losses 840

Depreciation 9 000

Accrued expenses 264

Bank charges 45

437 759 437 759

(7) CLOSING JOURNAL ENTRIES J13

Date Details Fol Debit Credit

20.1 R R

Feb 28 Settlement discount received L26 60

Purchases L16 60

Closing transfer

Sales L14 30

Settlement discount granted L25 30

Closing transfer

Feb 28 Sales L14 100

Sales returns L15 100

Closing transfer of sales returns

Purchases returns L17 150

Purchases L16 150

Closing transfer of purchases returns

Trading account L31 237 130

Inventory L3 56 080

Purchases L16 181 050

Closing transfer

Inventory L3 60 000

Sales L14 241 070

Trading account L31 301 070

Closing transfer

310

FAC1502/1

Date Details Fol Debit Credit

20.1 R R

Trading account L31 63 940

Profit or loss L32 63 940

Transfer of gross profit

Feb 28 Profit or loss L32 78 893

Repairs L18 4 650

Petrol L19 3 304

Stationery L20 364

Water and electricity L21 6 748

Rental expenses L22 24 000

Wages and salaries L23 27 600

Telephone expenses L24 2 342

Credit losses L27 840

Depreciation L28 9 000

Bank charges L30 45

Transfer of income and expenses to profit

or loss account

Capital L10 14 993

Profit or loss L32 14 953

Transfer of loss for the period

Capital L10 10 000

Drawings L11 10 000

Transfer of drawings

KUMANBUY GENERAL DEALER

(8) STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR

THE YEAR ENDED 28 FEBRUARY 20.1

Note R

Revenue 2 241 070)

Cost of sales (177 130)

Inventory: 1 March 20.0 56 080)

Purchases 181 050)

237 130)

Inventory: 28 February 20.1 (60 000)

Gross profit 63 940)

Distribution, administrative and other expenses (78 893)

Repairs 4 650)

Petrol 3 304)

Stationery 364)

Water and electricity 6 748)

Rental expenses 24 000)

Wages and salaries 27 600)

Telephone expenses 2 342)

Credit losses 840)

Depreciation 9 000)

Bank charges 45)

Loss for the year (14 953)

Other comprehensive income for the year —

Total comprehensive loss for the year (14 953)

311

FAC1502/1

KUMANBUY GENERAL DEALER

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 28 FEBRUARY 20.1

Capital

Balance at 1 March 20.0 169 630

Total comprehensive loss for the year (14 953)

Drawings (10 000)

Balance at 28 February 20.1 144 677

KUMANBUY GENERAL DEALER

STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.1

ASSETS Note R

Non-current assets 73 000

Property, plant and equipment 3 73 000

Current assets 80 396

Inventories 60 000

Trade and other receivables 4 630

Current VAT receivable 632

Cash and cash equivalents 15 134

Total assets 153 396

EQUITY AND LIABILITIES

Total equity 144 677

Capital 144 677

Current liabilities 8 719

Trade and other payables R(8 455+264) 8 719

Total equity and liabilities 153 396

KUMANBUY GENERAL DEALER

NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.1

1 Accounting policy:

1.1 The annual financial statements have been prepared on the historical cost basis and

comply with International Financial Reporting Standards.

1.2 Property, plant and equipment:

Depreciation is provided for at 10% on the cost price of vehicles and furniture and

equipment.

2 Revenue is recognised as net sales to customers.

312

FAC1502/1

3Property, plant and Vehicles Furniture and Total

equipment equipment

R R R

Carrying amount:

Beginning of year 45 000 36 000 81 000

Cost 50 000 40 000 90 000

Accumulated depreciation (5 000) (4 000) (9 000)

Additions — 1 000 1 000

Depreciation (5 000) (4 000) (9 000)

Carrying amount:

End of year 40 000 33 000 73 000

Cost 50 000 41 000 91 000

Accumulated depreciation (10 000) (8 000) (18 000)

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

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 341

314

FAC1502/1

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 21-

companies.

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

Example

STEAR TENNIS CLUB

RECEIPTS AND PAYMENTS STATEMENT FOR THE YEAR ENDED 30 JUNE 20.2

Receipts R Payments R

Balance 30/6/20.1 b/d 4 700 Refreshments purchased 1 342

Entrance fees 500 Wages 4 220

Membership fees: 12 000 Tennis balls purchased 360

20.1 750 Tennis courts painted 750

20.2 10 000 Tennis courts built 7 000

20.3 1 250 Stationery and sundry

expenditure 1 590

Interest income 2 332 Investment made at

Net proceeds from dance 620 ABC Bank 5 000

Donation 3 520 Balance c/d 3 410

23 672 23 672

Balance b/d 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

316

FAC1502/1

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 sur-

plus 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

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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

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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

Dr Star fund Cr

Expend-

able

(income)

Non-

expend-

able

(capital)

Expend-

able

(income)

Non-

expend-

able

(capital)

20.1 R R 20.0 R R

Jun 30 Balance c/d 800 8 000 Jul 1 Bank: Capital donation — 8 000

20.1

Jun 30 Bank: Interest on investment 800

800 8 000 800 8 000

20.2 20.1

Jun 30 Tennis courts painted 750 — Jul 1 Balance b/d 800 8 000

Balance c/d 930 8 000 20.2

Jun 30 Bank: Interest on investment

(a)

880 —

1 680 8 000 1 680 8 000

20.2

Jul 1 Balance b/d 930 8 000

CALCULATION

(a) (10% 6R8 000) + (10% 6R800) = 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:

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STEAR TENNIS CLUB

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

ASSETS Note R

Non-current assets

Financial assets: Star fund — Fixed deposit at

10% per annum at ABC Bank

8 930

FUNDS AND LIABILITIES

Funds

Special funds 8 930

Nonexpendable funds (capital)

Star fund 8 000

Expendable funds

Star fund 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.

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Solution Exercise 16.2

Dr Superstar fund Cr

Expend-

able

(income)

Non-

expend-

able

(capital)

Expend-

able

(income)

Non-

expend-

able

(capital)

20.1 R R 20.0 R R

Jun 30 Balance c/d 10 000 100 000 Jul 1 Bank: Capital donation — 100 000

20.1

Jun 30 Bank: Interest on investment 10 000

10 000 100 000 10 000 100 000

20.2 20.1

Jun 30 Accumulated fund 21 000 — Jul 1 Balance b/d 10 000 100 000

Balance c/d — 100 000 20.2

Jun 30 Bank: Interest on investment

(a)

11 000 —

21 000 100 000 21 000 100 000

20.2

Jul 1 Balance b/d — 100 000

CALCULATION

(a) (10% 6R100 000) + (10% 6R10 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 Note R

Non-current assets 170 000

Property, plant and equipment 1 70 000

Financial assets: Superstar fund — Fixed deposit at

10% per annum at ABC Bank 100 000

FUNDS AND LIABILITIES

Funds XX XXX

Accumulated fund XX XXX

Balance: 1 July 20.2 XXXXX

Add: Tennis court built 21 000

Special funds

Nonexpendable funds (capital)

Superstar fund 100 000

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STEAR TENNIS CLUB

NOTES FOR THE PERIOD ENDED 20 JUNE 20.2 (extract)

Note 1 (extract)

Property, plant and equipment Land and buildings

Additions (tennis courts): 70 000

From own funds 49 000

From income:

Superstar fund 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)

Revenue 10 972

Membership fees 10 000

Interest income (donation from T Trueman) 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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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 Note R

Non-current assets 10 520

Property, plant and equipment 1 7 000

Financial assets: General fund — Fixed deposit at 10%

per annum at ABC Bank

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)

Revenue 14 140

Membership fees 10 000

Donation received (T Trueman) 3 520

Net proceeds from dance 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.

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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 R

Land and buildings (at cost) 50 000

Furniture and equipment:

At cost 10 000

Accumulated depreciation (28 February 20.1) 2 710

Membership fees (received) 15 000

Membership fees in arrears (28 February 20.1) 900

Membership fees received in advance (28 February 20.1) 1 100

Telephone expenses 450

Wages 5 000

Water and electricity 4 600

Maintenance of buildings 1 500

Jekyll fund (28 February 20.1) 20 000

Current account — Zeeland Bank (favourable balance) 1 400

Admission fees received (to hobbies fair) 6 300

Hobbies fair expenses 8 200

10% Long-term loan (SAL Bank) — 28 February 20.1 30 000

(Loan secured by first mortgage over land and buildings)

Accumulated fund (28 February 20.1) 25 940

Investment (SAL Bank) 20 000

Interest income — SAL Bank at 8% pa 1 600

Interest expense 3 000

Refreshments:

Inventory (28 February 20.1) 200

Purchases 3 600

Sales 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 R1800

Received in advance at 28 February 20.2 R1 300

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.

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Required:

Prepare:

1. The Jekyll fund account in the general ledger of the club for the year ended

28 February 20.2

2. The following statements of the club for the year ended 28 February 20.2:

(a) Refreshments: trading statement

(b) Receipts and payments statement

3. The statement of financial position of the club as at 28 February 20.2.

4. The property, plant and equipment note.

Solution: Comprehensive example

PRETORIA MODELLER’S CLUB

1 GENERAL LEDGER

Dr Jekyll fund Cr

Expend-

able

(income)

Non-

expend-

able

(capital)

Expend-

able

(income)

Non-

expend-

able

(capital)

20.2 R R 20.1 R R

Feb 28 Maintenance: buildings 1 500 — Mar 1 Balance b/d — 20 000

Balance c/d 100 20 000 20.2

Feb 28 Bank: Interest on investment 1 600

1 600 20 000 1 600 20 000

20.2

Mar 1 Balance b/d 100 20 000

PRETORIA MODELLERS’ CLUB

2(a) REFRESHMENTS: TRADING STATEMENT FOR THE YEAR ENDED

28 FEBRUARY 20.2

Revenue 6 200

Cost of sales (3 500)

Inventory (28 February 20.1) 200

Purchases 3 600

3 800

Inventory (28 February 20.2) (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 (1 350)

Receipts 29 100)

Membership fees 15 000

Hobbies fair admissions 6 300

Interest income 1 600

Refreshments sold 6 200

Payments (26 350)

Telephone expenses 450

Wages 5 000

Water and electricity 4 600

Maintenance of buildings 1 500

Hobbies fair expenses 8 200

Refreshments purchased 3 600

Interest expenses 3 000

Bank balance at 28 February 20.2 (favourable) 1 400)

PRETORIA MODELLERS’ CLUB

2(c) INCOME AND EXPENDITURE STATEMENT FOR THE YEAR ENDED

28 FEBRUARY 20.2

Income 22 500)

Membership fees

R(15 000 7900 + 1 100 + 800 71 300 71 200) (a) 13 500

Admission fees (hobbies fair) 6 300

Gross profit on sale of refreshments 2 700

Expenditure (21 979)

Hobbies fair expenses 8 200

Depreciation on furniture and equipment 729

Interest (SAL Bank bond) 3 000

Telephone expenses 450

Wages 5 000

Water and electricity 4 600

Surplus for the year 521)

326

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PRETORIA MODELLERS’ CLUB

(3) STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.2

ASSETS Note R

Non-current assets 76 561

Property, plant and equipment 3 56 561

Financial assets — SAL Bank at 8% pa 20 000

Jekyll fund 20 000

Current assets 2 500

Inventory (refreshments) 300

Trade and other receivables 800

Cash and cash equivalents 1 400

Total assets 79 061

FUNDS AND LIABILITIES

Funds 47 761

Accumulated fund (b) 27 661

Special funds 20 100

Nonexpendable funds 20 000

Jekyll maintenance fund 20 000

Expendable funds 100

Jekyll maintenance fund 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

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PRETORIA MODELLERS’ CLUB

(4) NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.2

Note 3 (extract)

Property, plant and equipment

Land and

buildings

Furniture

and

equipment

Total

R R R

Carrying amount: Beginning of year 50 000 7 290 57 290

Cost price 50 000 10 000 60 000

Accumulated depreciation — (2 710) (2 710)

Depreciation for the year — (729) (729)

Carrying amount: End of year 50 000 6 561 56 561

Cost price 50 000 10 000 60 000

Accumulated depreciation — (3 439) (3 439)

CALCULATIONS

(a)

Dt Membership fees Cr

20.1 R 20.1 R

Mar 1 Balance b/d 900 Mar 1 Balance b/d 1 100

20.2 20.2

Feb 28 Entrance fees J 1 200 Feb 28 Bank CRJ 15 000

Income and

expenditure J

*13 500

Balance c/d 800

Balance c/d 1 300

16 900 16 900

20.2 20.2

Mar 1 Balance b/d 800 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.

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Dt Membership fees Cr

20.1 R 20.1 R

Mar 1 Accrued income J 900*Mar 1 Income received

in advance J 1 100

20.2 20.2

Feb 28

Entrance fees J 1 200*

Feb 28

Bank

CRJ 15 000

Income received

in advance J 1 300*

Accrued income J 800

Income and

expenditure J 13 500*

16 900*

16 900

* Balancing figure

Dt Accued income (Membership fees in arrears) Cr

20.1 R 20.1 R

Mar 1 Balance

b/d

900 Mar 1 Membership fees J 900

20.2 20.2

Feb 28 Membership fees J 800 Feb 28 Balance c/d 800

1 700 1 700

20.2

Mar 1 Balance b/d 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) Cr

20.1 R 20.1 R

Mar 1 Membership fees J 1 100 Mar 1 Balance c/d 1 100

20.2 20.2

Feb 28 Balance c/d 1 300 Feb 28 Membership fees J 1 300

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).

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.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 R

Green fees and caddy fees received 16 000

Bank (debit balance) 5 500

Crockery and linen at cost — 31 December 20.3 7 000

Sundry debtors 2 100

Sundry creditors 16 000

Telephone expenses 6 600

Dining room:

Purchases 14 500

Wages 10 000

Sales 30 000

Inventory — 31 December 20.3 1 000

Buildings (at cost) 160 000

Land and improvements (at cost) 520 000

Implements and tools:

At cost 21 000

Accumulated depreciation — 31 December 20.3 11 000

Maintenance expenses 10 900

Entrance fees received 10 500

Bar:

Purchases 50 000

Wages 12 000

Sales 100 000

Inventory — 31 December 20.3 3 000

Membership fees 84 000

Furniture:

At cost 25 000

Accumulated depreciation — 31 December 20.3 6 000

Accumulated fund — 31 December 20.3 150 000

Interest expenses (Paid on mortgage to 30 June 20.4) 37 500

Salaries and wages 35 000

Stationery consumed 2 000

15% Mortgage 500 000

Insurance prepaid — 31 December 20.3 400

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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.

(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.)

2. The statement of financial position as at 31 December 20.4.

3. The property, plant and equipment note.

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Solution: Revision exercise 1

GREEN GOLF CLUB

(1) INCOME AND EXPENDITURE STATEMENT FOR THE YEAR ENDED

31 DECEMBER 20.4

Income 141 900 )

Membership fees 82 900)

R(1 800 + 82 200 72 100 + 1 000) (a)

Green fees and caddy fees 16 000)

Income from bar sales 37 500)

Gross profit (b) 49 500

Wages (12 000)

Income from dining room 5 000)

Gross profit (c) 15 000

Wages (10 000)

Donation received 500)

Expenses (133 000)

Salaries and wages R(35 000 – 1 200) 33 800)

Interest on mortgage (15% 6R500 000) 75 000)

Maintenance 10 900)

Telephone expenses R(6 600 – 1 600) 5 000)

Stationery R(2 000 + 100) 2 100)

Insurance R(1 600 + 400 – 800) 1 200)

Depreciation 5 000)

Implements and tools (20% 6R10 000) 2 000

Furniture 1 000

Crockery and linen R(7 000 — 5 000) 2 000

Surplus for the year 8 900

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GREEN GOLF CLUB

(2) STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.4

ASSETS Note R

Non-current assets

Property, plant and equipment 3 711 000

Current assets 14 100

Inventory (refreshments) 3 000

Prepayments R(800 + 1 200) 2 000

Trade and other receivables R(2 100 + 1 000) 3 100

Cash and cash equivalents 6 000

Total assets 725 100

FUNDS AND LIABILITIES

Funds 169 400

Accumulated fund (d) 169 400

Total liabilities 555 700

Non-current liabilities 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)] 53 600

Income received in advance 2 100

Total funds and liabilities 725 100

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GREEN GOLF CLUB

(3) NOTES FOR THE YEAR ENDED 31 DECEMBER 20.4

Note 3 (extract)

Property, plant and

equipment

Land, build-

ing and

improve-

ments

Crockery and

linen

Implements

and tools Furniture Total

R R R R R

Carrying amount:

Beginning of year 680 000 7 000 10 000 19 000 716 000

Cost 680 000 7 000 21 000 25 000 733 000

Accumulated depreciation (—) (—) (11 000) (6 000) (17 000)

Depreciation for the period (—) (—) (2 000) (1 000) (3 000)

Revaluation (—) (2 000) (—) (—) (2 000)

Carrying amount:

End of year 680 000 5 000 8 000 18 000 711 000

Cost 680 000 7 000 21 000 25 000 733 000

Accumulated depreciation (—) (2 000) (13 000) (7 000) (22 000)

CALCULATIONS

(a)

Dr Membership fees Cr

R R

Income and expenditure 82 900 Income received in advance 1 800

Income received in advance 2 100 Bank 82 200

Accrued income 1 000

85 000 85 000

(b) Bar gross profit R R

Sales 100 000

Less: Cost of sales 50 500

Opening inventory 3 000

Purchases 50 000

53 000

Less: Closing inventory 2 500

Gross profit 49 500

Sales 30 000

Less: Cost of sales (R30 000 650%) 15 000

Less: Opening inventory 1 000

Less: Purchases 14 500

15 500

Less: Less: Closing inventory (Balancing figure) 500

Gross profit 15 000

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(d) Accumulated fund R

Balance (28 February 20.1) 150 000

Add: Surplus for the year 8 900

Add: Entrance fees 10 500

169 400

(e) Interest payable R

15% of R500 000 75 000

Less: Paid 37 500

Due 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 +

of R160)]. For examination purposes, you may show calculations in this

manner, on condition that they are clearly indicated as calculations.

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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 R

Equipment (at cost) 21 600

Less: Accumulated depreciation 8 880 12 720

Fixed deposit at Trade Bank (at 12% per annum) 25 600

Inventory: Tennis balls 984

Accrued membership fees 192

Accrued interest on fixed deposit 1 024

Prepaid rental 480

Savings account (favourable) 2 880

Bank (favourable) 8 400

Accumulated fund 26 440

Special fund for championships 25 600

Prepaid membership fees 168

Accrued wages 72

(2) Cash transactions for the year ended 31 December 20.2

Receipts: R

Visitors fees 4 860

Membership fees: 20.1 120

20.2 19 920

20.3 48

Entrance fees 864

Interest received: Fixed deposit 3 584

Savings account 156

Championship entry fees 3 240

Donations 4 680

Payments:

Municipal taxes 3 504

Refreshments 1 800

Stationery 1 512

Tennis balls 5 280

Affiliation fees 120

Championship expenses 6 400

Honorarium 2 880

Wages 3 360

Maintenance 2 232

Rental: Tennis courts 4 800

Equipment (purchased on 30 September 20.2) 2 400

Transfer to savings account 1 080

336

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ADDITIONAL INFORMATION

(a) Entrance fees must be capitalised.

(b) Inventory on hand at 31 December 20.2:

Tennis balls — R420

Refreshments — R72

(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

2. The income and expenditure statement for the year ended 31 December 20.2

3. The statement of financial position as at 31 December 20.2.

4. The property, plant and equipment note to the financial statements.

Solution: Revision exercise 2

SPRING TENNIS CLUB

(1) GENERAL LEDGER

Dt Membership fees Cr

20.2 R 20.2 R

Jan 1 Balance b/d 192 Jan 1 Balance b/d 168

Dec 31 Income and ex-

penditure:

Dec 31

Bank — 20.1

Bank — 20.2

120

19 920

R(20 684 612)

20 160 Bank — 20.3 48

Balance (prepaid)

c/d 48 Credit losses 72

Balance (in ar-

rears) c/d 72

20 400

20.3 20.3

Jan 1 Balance b/d 72 Jan 1 Balance b/d 48

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SPRING TENNIS CLUB

(2) INCOME AND EXPENDITURE STATEMENT FOR THE YEAR ENDED

31 DECEMBER 20.2

Income 29 856)

Visitors’ fees 4 860)

Membership fees 20 160)

Interest (savings account) 156)

Donations 4 680)

Expenses (30 364)

Municipal taxes 3 504)

Credit losses R(192 – 120) 72)

Refreshments R(1 800 – 72) 1 728)

Stationery R(1 512 + 120) 1 632)

Tennis balls R(984 + 5 280 – 420) 5 844)

Affiliation fees 120)

Honorarium 2 880)

Wages R(3 360 – 72 + 360) 3 648)

Maintenance 2 232)

Rental expenses R(480 612) 5 760)

Depreciation (a) 2 616)

Loss on the scrapping of equipment (a) 240)

Championship: shortage (b) 88)

Deficit for the year (508)

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SPRING TENNIS CLUB

(3) STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.2

ASSETS Note R

Non-current assets 37 864

Property, plant and equipment 3 12 264

Financial assets 25 600

Fixed deposit at Trade Bank (at 12% pa) 25 600

Current assets 15 540

Inventories R(420 + 72) 492

Trade and other receivables R[72 + 512 (c)] 584

Cash and cash equivalents R[3 960 + 10 504 (d and e)] 14 464

Total assets 53 404

FUNDS AND LIABILITIES

Funds 52 396

Accumulated fund (f) 26 796

Special funds 25 600

Non-expendable funds

Championships 25 600

Current liabilities 1 008

Trade and other payables

R[120 + 360 + 480 (g)] 960

Income received in advance 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 Equipment Total

R R

Carrying amount: Beginning of year 12 720)12 720)

Cost price 21 600)21 600)

Accumulated depreciation (8 880) (8 880)

Additions (from own funds) 2 400)2 400)

Disposals at carrying amount (240) (240)

Cost price (1 200) (1 200)

Accumulated depreciation 960)960)

Depreciation for the year (2 616) (2 616)

Carrying amount: End of year 12 264)12 264)

Cost price 22 800)22 800)

Accumulated depreciation (10 536) (10 536)

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CALCULATIONS

(a) Loss on sale of equipment and depreciation

Accumulated

Cost price depreciation

R R

Balance 21 600 8 880

Written off (1 200) (960)

20 400 7 920

Purchased 30 Septermber 20.2 2 400

22 800

Loss on scrapping of equipment R(1 200 – 960)

= R240

Depreciation for the year R

R(20 400 – 7 920) 620% 2 496

R2 400 620% 63

12 120

2 616

(b) Championship shortage R

Expenses 6 400

Income: Entry fees 3 240 —

Income: Interest (R25 600 612%) 3 072 6 312

Shortage 88

Interest receivable for the year

(R25 600 612%) 3 072

Interest received 3 584

Less: Accrued interest (31 Dec 20.1) 1 024 2 560

Accrued interest (31 Dec 20.2) 512

(d) Savings account R

Balance 2 880

Add: Deposit 1 080

3 960

(e) Bank

Balance 8 400

Add: Receipts 37 472

45 872

Less: Payments 35 368

Balance 10 504

(f) Accumulated fund

Balance (31 Dec 20.1) 26 440

Add: Entrance fees 864

Less: Shortage for the year 508

Balance (31 Dec 20.2) 26 796

(g) Accrued rental expenses

Payable per annum = R480 612 5 760

Less: Amount paid 4 800

Balance (31 Dec 20.2) 960

Less: Prepaid 31 December 20.1 480

480

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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?

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STUDY UNIT

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

17.5 Revision exercises and solutions 352

17.5.1 Revision exercise 1 352

17.5.2 Revision exercise 2 355

Self-assessment 359

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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:

Furniture and fittings 16 500

Inventory 8 700

Sundry debtors 10 900

Bank (favourable) 2 200

Petty cash 300

Sundry creditors 9 400

Loan: DJ Bank 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 R

Non-current assets 16 500

Property, plant and equipment 16 500

Current assets 22 100

Inventory 8 700

Trade and other receivables 10 900

Cash and cash equivalents R(2 200 + 300) 2 500

Total assets 38 600

EQUITY AND LIABILITIES

Total equity 23 700

Capital *23 700

Total liabilities 14 900

Non-current liabilities 5 500

Long-term borrowing — DJ Bank 5 500

Current liabilities 9 400

Trade and other payables 9 400

Total equity and liabilities 38 600

* Balancing figure

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On 30 April 20.2 the position appeared to be as follows:

Furniture and fittings 16 500

Inventory 9 600

Sundry debtors 11 200

Bank 3 000

Petty cash 400

Sundry creditors 8 600

Loan: DJ Bank 5 000

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 R

Furniture and fittings 16 500

Inventory 9 600

Sundry debtors 11 200

Bank 3 000

Petty cash 400

40 700

Liabilities (13 600)

Loan: DJ Bank 5 000

Sundry creditors 8 600

Capital 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) 27 100)

Capital at the beginning of the period (30 April 20.1) (23 700)

3 400)

Depreciation (1 650)

Drawings 2 500)

Estimated profit for the year 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 R

Non-current assets 14 850

Property, plant and equipment R(16 500–1 650) 14 850

Current assets 24 200

Inventory 9 600

Trade and other receivables 11 200

Cash and cash equivalents R(3 000 + 400) 3 400

Total assets 39 050

EQUITY AND LIABILITIES

Total equity 25 450

Capital *25 450

Total liabilities 13 600

Non-current liabilities 5 000

Long-term borrowing — DJ Bank 5 000

Current liabilities 8 600

Trade and other payables 8 600

Total equity and liabilities 39 050

* Balance: 1 April 20.1 23 700

*Estimated profit 4 250

*Less drawings (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 15 300

Furniture and fittings 12 600

Inventory: Trading 9 680

Trade receivables control 7 930

Trade payables control 5 645

Accrued wages 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 Bank Cr

R R

Balance b/d 7 260 Payments to creditors 66 500

Received from debtors 124 538 Water and electricity 3 300

Cash sales 21 762 Wages 11 925

Rental expenses 14 400

Telephone expenses 3 420

Advertising 2 100

Insurance 3 250

Sundry expenses 7 650

Bank charges 190

Drawings 35 500

Balance c/d 5 325

153 560 153 560

Balance b/d 5 325

You establish that the following must also be taken into account:

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(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:

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 R

Vehicles 15 300

Furniture and fittings 12 600

Inventory 9 680

Trade receivables control 7 930

Bank 7 260

52 770

Liabilities (6 095)

Trade payables control 5 645

Accrued wages 450

Capital 46 675

Determine the sales and purchases for the year to 30 April 20.1:

Dr Trade receivables control Cr

R R

Balance: Trade receivables b/d 7 930 Bank: Trade receivables 124 538

Sales* 149 600 Bank: Cash sales 21 762

Balance: Trade receivables c/d 11 230

157 530 157 530

Balance: Trade receivables b/d 11 230

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Dr Trade payables control Cr

R R

Bank: Trade payables 66 500 Balance: Trade payables b/d 5 645

Balance: Trade payables c/d 7 145 Purchases* 68 000

73 645 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 Insurance Cr

R R

Bank 3 250 Prepaid insurance 250

Profit or loss 3 000

3 250 3 250

Dr Wages Cr

R R

Bank 11 925 Accrued wages 450

Accrued wages 225 Profit or loss 11 700

12 150 12 150

The financial statements can now be prepared.

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C CAITY

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE

YEAR ENDED 30 APRIL 20.1

Revenue 149 600)

Cost of sales (65 490)

Inventory: 1 May 20.0 9 680)

Purchases 68 000)

77 680)

Inventory: 30 April 20.1 (12 190)

Gross profit 84 110)

Distribution, administrative and other expenses: (50 080)

Water and electricity 3 300)

Wages 11 700)

Rental expenses 14 400)

Telephone expenses 3 420)

Advertising 2 100)

Insurance 3 000)

Other expenses 7 650)

Bank charges 190)

Depreciation R(3 060 + 1 260)* 4 320)

Profit for the year 34 030)

Other comprehensive income for the year —)

Total comprehensive income for the year 34 030)

* Vehicles (R15 300 620%) = R3 060 + Furniture and fittings (R12 600 610%) = R1 260.

C CAITY

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 APRIL 20.1

Capital

Balance at 1 May 20.0 46 675

Total comprehensive income for the year 34 030

Drawings (35 500)

Balance at 30 April 20.1 45 205

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C CAITY

STATEMENT OF FINANCIAL POSITION AS AT 30 APRIL 20.1

ASSETS Note R

Non-current assets 23 580

Property, plant and equipment* 23 580

Current assets 28 995

Inventory 12 190

Trade and other receivables 11 230

Prepayments 250

Cash and cash equivalents 5 325

Total assets 52 575

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 73 060) + R(12 600 71 260) = 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:

20.1 20.2

R R

Vehicles (at cost) 24 500 24 500

Furniture and fittings (at cost) 18 800 18 800

Inventory: Trading 20 750 28 400

Trade receivables control 8 700 11 600

Bank (favourable) 1 300 2 700

Long-term borrowing 15 000 10 000

Trade payables control 9 500 11 800

Accrued expenses 2 400 1 200

Prepaid expenses 350 350

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.

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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 R

Non-current assets 43 300

Property, plant and equipment R(24 500+18 800) 43 300

Current assets 31 100

Inventory 20 750

Trade and other receivables 8 700

Prepayments 350

Cash and cash equivalents 1 300

Total assets 74 400

EQUITY AND LIABILITIES

Total equity 47 500

Capital *47 500

Total liabilities 26 900

Non-current liabilities 15 000

Long-term borrowings 15 000

Current liabilities 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 R

Vehicles 24 500

Furniture and fittings 18 800

Inventory 28 400

Trade receivables control 11 600

Bank 2 700

Prepaid expenses 350

86 350

Liabilities (23 000)

Long-term borrowing 10 000

Trade payables control 11 800

Accrued expenses 1 200

Capital 63 350

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Estimated profit

Capital at the end of the financial period 63 350

Capital at the beginning of the period (47 500)

15 850

Drawings 18 500

Adjustments: Credit losses (500)

Adjustments: Depreciation (5 555)

Adjustments: Vehicles (a) 3 675

Adjustments: Furniture and fittings (b) 1 880

Estimated profit for the year 28 295

(a) R(24 500 615%) = R3 675

(b) R(18 800 610%) = R1 880

(2) KACEY TRADERS

STATEMENT OF FINANCIAL POSITION AS AT 31 JULY 20.2

ASSETS R

Non-current assets 37 745

Property, plant and equipment R(24 500 + 18 800 – 5 555) 37 745

Current assets 42 550

Inventory 28 400

Trade and other receivables R(11 600 – 500 + 350) 11 450

Cash and cash equivalents 2 700

Total assets 80 295

EQUITY AND LIABILITIES

Total equity 57 295

Capital *57 295

Total liabilities 23 000

Non-current liabilities 10 000

Long-term borrowings: long-term loan 10 000

Current liabilities 13 000

Trade and other payables R(11 800 + 1 200) 13 000

Total equity and liabilities 80 295

* Balance 1/8/20.1 47 500

*Estimated profit 28 295

*Less: Drawings (18 500)

57 295

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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 36 000

Vehicle 12 000

Furniture and equipment 2 600

Inventory 13 000

Trade receivables control 2 200

His liabilities consisted of the following:

Loan: NKA Bank 8 400

Trade payables control 7 200

Bank (overdraft) 5 300

An analysis of his cash journals revealed the following:

Receipts

Received from debtors and cash sales 139 600

Refunds from creditors in respect of overpayments on accounts 540

Mandosa paid into the business 7 600

Rent income 2 400

Payments

Payments to creditors and suppliers of merchandise 77 400

Loan: NKA Bank paid in full 8 900

Debtor’s cheques dishonoured (R/D) 840

Drawings 34 500

Wages paid 10 000

Telephone expenses 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.

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:

Assets 65 800

Land and buildings 36 000

Vehicles 12 000

Furniture and equipment 2 600

Inventory 13 000

Trade receivables control 2 200

Liabilities

(20 900)

Loan: NKA Bank 8 400

Trade payables control 7 200

Bank overdraft 5 300

Capital 44 900

(b) Bank balance at the end of the year:

Opening balance (5 300)

Receipts 150 140

Received from debtors and cash sales 139 600

Refunds from creditors 540

Mandosa paid into the business 7 600

Rental income 2 400

Payments (136 000)

Payments to creditors and suppliers 77 400

Loan: NKA Bank paid in full 8 900

Debtor’s cheques dishonoured 840

Drawings 34 500

Wages paid 10 000

Telephone expenses 4 360

Closing balance 8 840

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(c)

Dr Trade receivables control Cr

R R

Balance b/d 2 200 Bank 139 600

Bank: R/D cheques 840 Settlement discount

Interest income 200 granted 720

Sales* 144 380 Credit losses 500

Balance c/d 6 800

147 620 147 620

Balance b/d 6 800

(d)

Dr Trade payables control Cr

R R

Bank 77 400 Balance b/d 7 200

Settlement discount Bank 540

received 940 Purchases* 79 000

Balance c/d 8 400

86 740 86 740

Balance b/d 8 400

* Balancing figure

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M MANDOSA

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE

YEAR ENDED 30 JUNE 20.2

Revenue 143 660

Cost of sales (76 060)

Inventory: 1 July 20.1 13 000

Purchases 78 060

91 060

Inventory: 30 June 20.2 (15 000)

Gross profit 67 600

Other income 2 600

Rental income 2 400

Interest received on debtors accounts 200

70 200

Distribution, administrative and other expenses: (16 790)

Wages 10 000

Sundry trade expenses 4 360

Credit losses 500

Depreciation R(1 800 + 130)* 1 930

53 410

Finance charges: Interest on loan (R8 900 7R8 400) (500)

Profit for the year 52 910

Other comprehensive income for the year —

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

Balance at 1 July 20.1 44 900

Contribution during the period 7 600

Total comprehensive income for the year 52 910

Drawings (34 500)

Balance at 30 June 20.2 70 910

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FAC1502/1

M MANDOSA

STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.2

ASSETS R

Non-current assets 48 670

Property, plant and equipment* 48 670

Current assets 30 640

Inventory 15 000

Trade and other receivables 6 800

Cash and cash equivalents 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 71 800) + R(2 600 7130) = 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?

359

FAC1502/1

FAC1502E1_70539340 3..367 FAC1502 Study Guide

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