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Unisa Accounting Fin - Acc 001 - 2012 PDF
Unisa Accounting Fin - Acc 001 - 2012 PDF
FAC1502/1/2012
98794728
3B2
ACN-Style
CONTENTS
FAC1502/1/2012 (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
comprehensive income (income statement), statements 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 first 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. The studies in
this module is the foundation of all your studies in accounting. 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?
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.)
(vi)
TOPIC A
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.
1 FAC1502/1
CONTENTS
PRESCRIBED TEXTBOOK 2
1 THE NATURE AND FUNCTION OF ACCOUNTING 3
2 THE NATURE OF ACCOUNTING THEORY 9
3 THE FINANCIAL POSITION 14
4 THE FINANCIAL PERFORMANCE (RESULT) 20
5 THE DOUBLE-ENTRY SYSTEM AND THE ACCOUNTING PROCESS 24
PRESCRIBED TEXTBOOK
Your prescribed textbook for this module is About Financial Accounting ± Volume 1 by Berry,
P.R.; Botha, S.M.; de Klerk, E.S.; Doussy, F., et al. Durban: Butterworths. 2008, third edition.
FAC1502/1 2
STUDY UNIT
1
The nature and function of accounting
Learning outcome
Students are able to know and understand the nature and function of accounting.
Contents Page
Key concepts 4
1.1 Introduction 4
1.2 What is Accounting? 4
1.2.1 Definition 4
1.2.2 The nature of accounting 5
1.3 Universal accounting denominator 5
1.4 Forms of ownership 6
1.5 Users of financial information 6
1.5.1 Investors 6
1.5.2 Creditors 6
1.5.3 Employees 6
1.5.4 Government 6
1.5.5 Management 6
1.6 The fields of accounting 6
1.6.1 Financial accounting 6
1.6.2 Management accounting 7
1.7 Exercise and solution 7
Self-assessment 8
3 FAC1502/1
KEY CONCEPTS
. Financial information
. Decision making
. The nature of accounting
. Unit of measurement
. Forms of ownership
. Generally accepted accounting practice
. The fields of accounting
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 very confusing, but if you follow the study guide step by step,
working through all the examples in the prescribed textbook and exercises in this study guide,
the methods and procedures will become clear. To master this subject, you must get as much
practice as you can ± so start early in the semester.
Over the centuries accounting developed together 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 today 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
important to know the procedures used in a manual system in order to understand how a
computerised accounting system works.
GOLDEN RULE
Accounting CAN NOT be studied by merely reading/memorising. You need to practice,
practice and practice also!!
FAC1502/1 4
permanent history of the financial activities of the business. Recording consists of keeping a
chronological diary of measured events in an orderly and systematic manner. Recording
implies that economic events are also classified and summarised.
. The third activity encompasses the communication of the recorded information to interested
users. The information is communicated through the preparation of and distribution of
accounting reports, the most common of which are known as financial statements.
GOLDEN RULE
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
meaning of these words and figures, which are also known as the concepts, principles and
procedures of accounting. This knowledge will eventually enable you to understand the
message which is 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. A knowledge of accounting is therefore also useful in this
area.
5 FAC1502/1
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.
Apart from these main forms of entities, non-profit entities can also be distinguished.
Study paragraph 1.6 and read thoroughly paragraph 1.7 in the prescribed book.
1.5.1 Investors
1.5.2 Creditors
1.5.3 Employees
1.5.4 Government
1.5.5 Management
Two fields of accounting have developed as a result of this distinction as to 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.
FAC1502/1 6
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.
Study paragraphs 1.5 and 1.14 and read paragraph 1.15 of the prescribed book.
GOLDEN RULE
Financial statements must reveal a fair presentation of the financial position, financial
performance and cash flow of an entity.
Exer ci se
Solution
7 FAC1502/1
SELF-ASSESSMENT
Now that you have studied this study unit, can you:
FAC1502/1 8
STUDY UNIT
2
The nature of accounting theory
Learning outcome
Students are able to explain what is meant by the nature of accounting theory, principles,
accounting policy, practice and procedures.
Contents
Page
Key concepts 9
2.1 Accounting principles 10
2.2 Accounting policy 10
2.3 Disclosure of accounting policy 10
2.4 Generally Accepted Accounting Practice (GAAP) 10
2.5 Accounting standards and statements 11
2.5.1 Introduction 11
2.5.2 Framework for the preparation and presentation of financial
statements 11
2.5.2.1 The objective of financial statements 11
2.5.2.2 Underlying assumptions 11
2.5.2.3 Qualitative characteristics of financial statements 11
2.5.2.4 The elements of financial statements 12
2.5.2.5 Recognition and measurement of the elements of
financial statements 12
2.6 Exercise and solution 12
Self-assessment 13
KEY CONCEPTS
. Accounting principles
. Generally accepted accounting practice
. Accounting statements
. Accounting policy
. Going concern
. Qualitative characteristics
. Elements of financial statements
9 FAC1502/1
2.1 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 which 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.
If everyone were to develop his or her own language and grammatical rules, communication
would break down. For this reason we have generally applicable language and grammar rules.
A foundation has therefore been developed over the years for the measurement and
disclosure of the results of financial events (transactions).
FAC1502/1 10
Read paragraph 1.5 of the prescribed book again.
In this study guide, we will sometimes disclose more information in the financial statements
than is required by GAAP. This is done for better explanation and understanding.
These are:
(1) The accrual basis, and
(2) The going concern
11 FAC1502/1
2.5.2.4 The elements of financial statements
GOLDEN RULE
The following are elements of financial statements:
. Elements by which the financial position (assets = equity plus liabilities) is measured:
(1) Assets
(2) Liabilities
(3) Equity
Exer ci se
FAC1502/1 12
Solution
SELF-ASSESSMENT
Now that you have studied this study unit can you explain what is meant by:
. accounting policy?
. disclosure of accounting policy?
. generally accepted accounting practice?
. accounting standards and statements?
13 FAC1502/1
STUDY UNIT
3
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 14
3.1 Introduction 15
3.2 Accounting entity 15
3.3 Financial position 15
3.4 Net asset value 15
3.5 Application of the basic accounting equation (BAE) 15
3.6 The double-entry principle 17
3.7 Revision exercises and solutions 17
3.7.1 Revision exercise 1 17
3.7.2 Revision exercise 2 18
Self-assessment 19
KEY CONCEPTS
. Accounting entity
. Accounting equation
. Financial position
. Assets
. Liabilities
. Equity
. Double-entry
. Net worth
FAC1502/1 14
3.1 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.
Study paragraph 1.7 (again) as well as paragraph 3.2 of the prescribed book.
The net asset value represents the portion by which the assets exceed the liabilities. Net asset
value is therefore also called EQUITY.
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.
15 FAC1502/1
A = E+L
E = A±L
= R30 000 7 R5 000
= R25 000
Exer ci se 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
Equipment = R100 000
Debtors = R40 000
Cash = R10 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
FAC1502/1 16
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.
(b) Equity is the interest which the owner has in the business and which the entity
therefore owes to him.
(c) Liabilities are creditors' interests or interests of parties other than the owner(s).
Liabilities are therefore the debts of the entity.
(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.
17 FAC1502/1
3.7.2 Revision exercise 2
Calculate the missing figures using the BAE.
R
(1) Bank = 4 000
Vehicles = 5 000
Equipment = 7 000
Capital = ?
(2) A = E+L
R190 000 + Bank = R(150 000 + 50 000)
Bank = R(150 000 + 50 000) 7 R190 000
= R10 000
(3) A = E+L
E = A±L
= R(5 000 + 15 000 + 100 000 + 40 000) 7 R50 000
= R160 000 7 R50 000
= R110 000
(4) A = E+L
= R60 000 + R(10 000 + 6 000)
= R76 000
FAC1502/1 18
SELF-ASSESSMENT
Now that you have studied this study unit, can you:
19 FAC1502/1
STUDY UNIT
4
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 20
4.1 Introduction 21
4.2 The financial performance (result) 21
4.3 Income 21
4.4 Expenditure 21
4.5 Influence of profit or loss on equity 21
4.6 Statement of comprehensive income (income statement)
(financial performance) 22
4.7 Statement of changes in equity 22
4.8 Accounting policies and explanatory notes 22
4.9 Revision exercises and solutions 22
4.9.1 Revision exercise 1 22
4.9.2 Revision exercise 2 23
Self-assessment 23
KEY CONCEPTS
. Financial result
. Profit/loss
. Income
. Expenditure
FAC1502/1 20
4.1 Introduction
In paragraph 3.3 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 comprehensive income.
4.3 Income
The objective of every entity is to earn as large an income as possible.
4.4 Expenditure
Expenditure is incurred to earn income.
Exer ci se
A = E + L
R50 000 = R30 000 + R20 000
For the year ended 28 February 20.1 he had the following income and expenditure:
21 FAC1502/1
R
Fees earned 180 000
Salaries expense 100 000
Administrative costs 20 000
Insurance expense 10 000
COMMENTS
. Capital plus profit together form the equity of the owner. See the above exercise Ð
R(30 000 + 50 000) = R80 000.
. Profit is income minus expenditure.
FAC1502/1 22
(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?
SELF-ASSESSMENT
Now that you have studied this study unit, can you:
23 FAC1502/1
STUDY UNIT
5
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 25
5.1 Introduction 25
5.2 The double-entry system 25
5.3 The effect of transactions on the basic accounting equation (BAE) 26
5.4 Transactions which affect only assets, equity and liabilities 26
5.4.1 Capital contributions 26
5.4.2 Acquisition of loans 27
5.4.3 Purchase of assets for cash 28
5.4.4 Buying assets on credit (debt) 28
5.4.5 Payments to creditors 29
5.4.6 Withdrawals by owner 29
5.5 Transactions which give rise to income and expenditure 30
5.5.1 Income (cash) 30
5.5.2 Expenditure (cash) 31
5.5.3 Income (credit) 31
5.5.4 Expenditure (credit) 32
5.5.5 Payments received from debtors 33
5.6 Summary of transactions 33
5.7 Basic form of a statement of financial position 34
5.8 Revision exercises and solutions 34
5.8.1 Revision exercise 1 34
5.8.2 Revision exercise 2 36
FAC1502/1 24
5.9 The general ledger account 38
5.9.1 Assets 38
5.9.2 Equity and liabilities 38
5.10 Balancing an account 38
5.11 Schematic representation 39
5.12 Recording of transactions in ledger accounts 40
5.13 The general ledger 42
5.14 The trial balance 45
5.15 Preparing financial statements 46
5.15.1 The statement of comprehensive income 46
5.15.2 The statement of changes in equity 47
5.15.3 The statement of financial position 48
5.15.4 Notes 49
5.16 Summary 49
5.17 Revision exercises and solutions 50
5.17.1 Revision exercise 1 50
5.17.2 Revision exercise 2 50
5.17.3 Revision exercise 3 51
5.17.4 Revision exercise 4 53
5.17.5 Revision exercise 5 55
Self-assessment 57
KEY CONCEPTS
. Debit and credit . Ledger
. Transactions . Contra account
. Effect on financial position . Folio number
. T-account . Trial balance
5.1 Introduction
We mentioned the double-entry system in paragraph 3.6 in the study guide Ð 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.
25 FAC1502/1
. Determine which account(s) has/have to be debited and which account(s) has/have to be
credited.
. Be sure that the amount(s) debited are equal to the amount(s) credited.
. Be able to indicate the date of the transaction.
. Indicate the name of the contra ledger account in the account in which you are doing the
entry. The contra account is the other account which is involved in the transaction: the one
account refers to the other.
. Indicate the folio number of the subsidiary journal.
Study paragraph 5.2 (up to the beginning of 5.2.4) of the prescribed book.
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.
Bank Capital
R R R
Previous balances 0 0 0
This transaction + 130 000 + 130 000 0
FAC1502/1 26
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.
Transaction Fix-'n-Mat obtained a loan of R25 000 with a payback period of more than a
2 Feb 20.1 year from ABC Bank. The amount was paid into its bank account.
R R R
Balances brought 130 000 130 000 0
down
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.
27 FAC1502/1
5.4.3 Purchase of assets for cash
Transaction Fix-'n-Mat bought equipment from XY Furnishers for R100 000 and paid by
6 Feb 20.1 cheque.
Analysis (1) The asset ``Bank'' decreases by R100 000 since money has been
withdrawn.
(2) The asset ``Equipment'' increases.
COMMENTS
Transaction Fix-'n-Mat bought furniture for R2 000 on credit from Joc Limited.
10 Feb 20.1
FAC1502/1 28
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.
COMMENTS
. The left-hand side and the right-hand side of the BAE decrease.
. The BAE balances after the transaction.
29 FAC1502/1
ASSETS = EQUITY + LIABILITIES
COMMENTS
. Withdrawals are the opposite of capital contributions and reduce capital. Remember,
withdrawals are not expenditure.
. Where the entity pays a personal expense 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.
Transaction Fix-'n-Mat provided services for a client S Silver and received a cheque for
13 Feb 20.1 R1 000.
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
FAC1502/1 30
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.
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.
Analysis (1) C Canon becomes a debtor of Fix-'n-Mat. The asset ``Debtors'' comes
into being and increases by R6 000.
(2) ``Fees earned'' are an income item and equity increases by R6 000.
31 FAC1502/1
ASSETS = EQUITY + LIABILITIES
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.
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
FAC1502/1 32
5.5.5 Payments received from debtors
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
ASSETS = INTERESTS
EQUITY + LIABILITIES
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
33 FAC1502/1
COMMENT
. Note that these totals correspond to the closing balances in paragraph 5.5.5 above.
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 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 Ð 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.
FAC1502/1 34
Transactions:
Required:
Example: On 1 July 20.1 D Paulus received R2 000 in cash for an installation done for Cook
Financing Corporation.
46 300
35 FAC1502/1
5.8.2 Revision exercise 2
The following transactions during January 20.1 relate to F Fox, an attorney.
Required:
Library Income/
Date and Debtors Bank Capital Expendi- Creditors
Equip- ture
ment
Total = +
FAC1502/1 36
Solution: Revision exercise 2
F FOX
(1) ACCOUNTING EQUATION
Non-current assets
Equipment
Library
R48 884
{
(2) STATEMENT OF FINANCIAL POSITION AS AT 31 JANUARY 20.1
ASSETS
R48 884
Note R
25 700
1 700
24 000
37 FAC1502/1
5.9 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 Ð 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 paragraph 5.3 (until the beginning of 5.3.1) in the prescribed book.
5.9.1 Assets
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 38
5.11 Schematic representation
39
Statement of comprehensive income &
statement of financial position and Notes
FAC1502/1
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 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.
Transaction
(5.4.1)
Bank Capital
~ ~
(5.4.2)
Bank Loan
25 000 25 000
~ ~
FAC1502/1 40
(5.4.3)
Equipment Bank
~ ~
(5.4.4)
Furniture Creditors (Joc Ltd)
2 000 2 000
~ ~
(5.4.5)
Bank Creditors (Joc Ltd)
2 000 2 000
~ ~
(5.4.6)
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 an expense resulting from business operations.
(5.5.1)
Bank Income (fees)
1 000 1 000
~ ~
(5.5.2)
Bank Wages
800 800
~ ~
41 FAC1502/1
(5.5.3)
Debtors (C Canon) Income (fees)
6 000 6 000
~ ~
(5.5.4)
Creditors Advertisements
200 200
~ ~
(5.5.5)
Bank Debtors (C Canon)
2 000 2 000
~ ~
GOLDEN RULE
Assets (eg Bank) increase on the Debit (Dr) side and decrease on the Credit (Cr) side of
the account.
Dr Bank Cr
20.1 R 20.1 R
Feb 1 Capital 130 000 Feb 6 Equipment 100 000
2 Loan:ABC Bank 25 000 11 Creditors 2 000
13 Fees earned 1 000 12 Drawings 1 000
28 Debtors 2 000 16 Wages 800
28 Balance c/d 54 200
158 000 158 000
20.1
Mar 1 Balance b/d 54 200
FAC1502/1 42
Dr Equipment Cr
20.1 R
Dr Furniture Cr
20.1 R
Dr Debtors Cr
20.1 R 20.1 R
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.
43 FAC1502/1
Dr Capital Cr
20.1 R
Dr Drawings Cr
20.1 R
20.1 R
Dr Creditors 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
Dr Advertisements Cr
20.1 R
Dr Income (fees) Cr
20.1 R
Feb 13 Bank 1 000
18 Debtors 6 000
7 000
FAC1502/1 44
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.
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 5.13.
FIX-'N-MAT
TRIAL BALANCE AS AT 28 FEBRUARY 20.1
Dr Cr
R R
Bank 54 200
Equipment 100 000
Furniture 2 000
Debtors control 4 000
Capital 130 000
Drawings 1 000
Loan 25 000
Creditors control 200
Wages 800
Advertisements 200
Fees 7 000
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.
45 FAC1502/1
COMMENTS
As mentioned previously, the trial balance serves as a basis for preparing a statement of
comprehensive income, statement of changes in equity, and statement of financial position.
The trial balance represents the information in the ledger. The statement of comprehensive
income shows the entity's financial result and the statement of financial position shows its
financial position.
FIX-'N-MAT
STATEMENT OF 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
FAC1502/1 46
COMMENTS
. Note the title. A statement of comprehensive income is prepared for a period ended,
not on a certain date.
. The profit for the period as determined in the statement of 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.
FIX-'N-MAT
STATEMENT OF CHANGES IN EQUITY FOR THE MONTH ENDED
28 FEBRUARY 20.1
Capital
R
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
5.6.
47 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.
We will now show the statement of financial position of Fix-'n-Mat in narrative form and in
compliance with GAAP.
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
COMMENTS
. See paragraph 5.15.4, 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 5.6.
. The total equity and liabilities of R160 200 corresponds to the total as shown in the
BAE in paragraph 5.6.
. Words and figures between brackets is for explaining purposes only and do not form
part of any financial statement.
FAC1502/1 48
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, 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.
5.15.4 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
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.
R R R
Carrying amount: Beginning of period Ð Ð Ð
Cost Ð Ð Ð
Accumulated depreciation Ð Ð Ð
Additions 100 000 2 000 102 000
Depreciation Ð Ð Ð
Carrying amount: End of period 100 000 2 000 102 000
Cost 100 000 2 000 102 000
Accumulated depreciation Ð Ð Ð
5.16 Summary
We began by explaining the financial position (statement of financial position) and financial
performance (statement of comprehensive income) and then went back to how we enter into a
transaction to set the accounting process in motion.
49 FAC1502/1
5.17 Revision exercises and solutions
5.17.1 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?
. capital
. drawings
. income
. expenditure
(2) Balance
(3) By preparing a trial balance
Non-
Non-current Current Expendi- current Current
assets assets Capital Income ture liabilities liabilities
Furniture
FAC1502/1 50
Solution: Revision exercise 2
Non- Non-
current Current current Current
assets assets Capital Income Expenditure liabilities liabilities
20.1 R
51 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 Ð R600.
R R R R R R
28 Water and Bank 600
electricity 600
FAC1502/1 52
5.17.4 Revision exercise 4
The following transactions during October 20.1 relate to Witblits Electricians:
Required:
Dr Drawings: W Blits Cr
20.1 R
Oct 17 Bank 2 000
53 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 Advertisement 200
Long-term 12 Telephone expense 75
loan 6 000 17 Drawings:
13 Fees earned 500 W Blits 2 000
27 Salaries 2 000
30 Long-term loan 1 500
31 Balance c/d 10 725
16 500 16 500
20.1
Nov 1 Balance b/d 10 725
Dr Sparks Dealers Cr
20.1 R
Oct 3 Equipment 1 000
Dr Advertisement Cr
20.1 R
Oct 9 Bank 200
Dr Fees earned Cr
20.1 R
Oct 13 Bank 500
Dr Salaries Cr
20.1 R
Oct 27 Bank 2 000
Dr Telephone expense Cr
20.1 R
Oct 12 Bank 75
FAC1502/1 54
WITBLITS ELECTRICIANS
(2) TRIAL BALANCE AS AT 31 OCTOBER 20.1
Dr Cr
R R
Capital Ð W Blits 19 000
Drawings Ð 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
Fees earned 500
Advertisement 200
Salaries 2 000
Telephone expense 75
25 000 25 000
Required:
(1) Record the above transactions using a table as illustrated in the following example:
20.1
March 3 Paid telephone account by cheque Ð R1 000.
20.1 R R R R R R
March 3 71 000 71 000
Totals 71 000 71 000
55 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.
P VICTOR
R18 300
{
(2) STATEMENT OF CHANGES IN EQUITY FOR THE MONTH ENDED
R18 300
31 MARCH 20.1
Capital
R
Capital contribution from owner 12 000)
Loss for the period (200)
Drawings (1 000)
Balance at 31 March 20.1 10 800)
FAC1502/1 56
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 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
generally accepted accounting practice.
SELF-ASSESSMENT
Now that you have studied this study unit, can you prepare the following:
. ledger accounts?
. a trial balance?
. a basic statement of comprehensive income?
. a statement of changes in equity?
. a basic statement of financial position?
. certain notes to the financial statements?
57 FAC1502/1
FAC1502/1 58
TOPIC B
Learning outcome
The learner should be able to collect, process, adjust (where necessary) and record
financial information in order to complete the statement of 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.
59 FAC1502/1
CONTENTS
FAC1502/1 60
STUDY UNIT
6
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 62
6.1 Introduction 62
6.2 The accounting cycle 62
6.3 Books of first entry: journals 63
6.4 Types of journals 63
6.5 Cash journals 63
6.5.1 Cash receipts journal 63
6.5.2 Cash payments journal 64
6.6 Credit journals and the general journal 69
6.6.1 Introduction 69
6.6.2 Inventory systems 70
6.6.3 Purchases journal and purchases returns journal 70
6.6.4 Sales journal and sales returns journal 72
6.6.5 General journal 74
6.7 The trial balance 75
6.8 Revision exercise and solution 75
6.9 Settlement discount 83
6.10 Value added tax (VAT) 84
6.10.1 Background 84
6.10.2 Tax period 84
6.10.3 Accounting bases 85
6.11 Revision exercise and solution 90
Self-assessment 99
61 FAC1502/1
KEY CONCEPTS
. Source documents . General ledger
. Accounting cycle . Debtors ledger
. Cash receipts journal . Creditors 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
6.1 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.
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 62
6.3 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.
Let us now go back to the information we had for Fix-'n-Mat in study unit 5. Fix-'n-Mat's cash
receipts journal and ledger accounts would look as follows:
FIX-'N-MAT
CASH RECEIPTS JOURNAL Ð FEBRUARY 20.1 CRJ1
Analysis Sundry accounts
Document Day Details of Bank Current
number receipts income Amount Fol Details
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
63 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 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 principle 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.
FAC1502/1 64
Fix-'n-Mat's cash payments journal and ledger accounts would look as follows:
FIX-'N-MAT
CASH PAYMENTS JOURNAL Ð FEBRUARY 20.1 CPJ1
Cheque Day Details Bank Wages Sundry accounts
number Amount Fol Details
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 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 5.6 and the bank account in paragraph 5.13 of study unit 5.
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.
65 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 principle has to be
applied in the general ledger.
. More analysis columns can be included as is required by the organisation.
Exer ci se 6.1
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 rent 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 66
Solution Exercise 6.1
B3 N5 N6
67 FAC1502/1
(3) BEAUTY'S HAIR
GENERAL LEDGER
Dr Equipment B1 Cr
20.3 R
Jun 2 Bank CPJ1 2 500
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 Rent expense 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 expense N4 Cr
20.3 R
Jun 25 Bank CPJ1 260
FAC1502/1 68
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
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
Rent expense N2 1 000
Stationery N3 80
Telephone expense 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.
69 FAC1502/1
debtors, namely a debtors control account, and one for creditors, namely a creditors
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 debtors control and creditors control.
You can read more about the debtors control and the creditors control accounts in study units
to follow,
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 books of the purchaser. Thus, the trade
discount amount is never recorded in the books 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' books and the settlement
discount received account in the buyers' books. The full amount of the invoice must be paid if
the account is not settled within the stipulated period.
A purchases journal and purchases returns journal have the following formats:
FAC1502/1 70
ABC DEALERS
PURCHASES JOURNAL Ð MAY 20.3 PJ5
6 967 6 967
ABC DEALERS
PURCHASES RETURNS JOURNAL Ð MAY 20.3 PRJ5
272 272
XY Company CL3
71 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 creditors 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 creditors 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.
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.
A sales journal and sales returns journal have the following formats:
ABC DEALERS
SALES JOURNAL Ð 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 72
ABC DEALERS
SALES RETURNS JOURNAL Ð MAY 20.3 SRJ3
Credit
Note No Day Details Fol Sales Debtors
returns
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
G Green DL3
M Moloi DL4
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.
73 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 debtors 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 debtors 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 principle has to be applied in the
general ledger.
NB: Purchases and sales of goods other than merchandise are recorded in the general
journal for the purposes of this module.
ABC DEALERS
GENERAL JOURNAL Ð MAY 20.3 J3
Date Particulars Fol Debit Credit
R R
5 Vehicles 43 000
ORA Motors 43 000
Delivery vehicle bought on credit
per invoice F147
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
refer to source documents.
FAC1502/1 74
. The general journal is a book of first entry. The double-entry principle has to be applied
in the general ledger.
. Theoretically all transactions can be recorded in the general journal.
20.5
March 1 A Apple deposited R50 000 in the entity's current bank account as a capital
contribution.
Paid rent 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.
75 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.
Required:
FAC1502/1 76
Solution: Revision exercise
AA SUPERMARKET
(1) SUBSIDIARY JOURNALS
(a) CASH RECEIPTS JOURNAL Ð MARCH 20.5 CRJ1
Analysis
Document Day Details Fol of Bank Sales Debtors Sundry accounts
number receipts 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 Rent 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 200 200 200
CRR 4 20 Sales 12 570 12 570 12 570
Rec 4 23 S Silver DL2 100 100
CRR 5 Sales 10 238 10 338 10 238
Rec 5 25 R Red DL4 299 299 299
Rec 6 29 S Silver DL2 200 200
CRR 6 Sales 16 742 16 942 16 742
CRR 7 31 Sales 15 284 15 284
Rec 7 G Green DL3 324 324
Rec 8 B Blue DL1 640 16 248 640
146 766 94 753 1 763 50 250
B5 N1 B3
Cheque Day Details Fol Bank Creditors Purchases Wages Sundry accounts
number control
Amount Fol Details
R R R R R
001 1 JHB Letting Agents 2 000 2 000 N8 Rent expense
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 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 Rent expense
020 31 Telkom 595 595 N9 Telephone expense
021 Cash 3 000 1 500 1 500 B8 Drawings
61 344 35 000 8 053 5 700 12 591
B5 B6 N3 N10
77 FAC1502/1
(c) PURCHASES JOURNAL Ð MARCH 20.5 PJ1
Invoice
no Day Details Fol Purchases Creditors
AA SUPERMARKET
(2) LEDGERS
(a) GENERAL LEDGER
Dr Equipment (at cost) B1 Cr
20.5 R
Mar 1 Creditors control J1 10 000
14 Creditors control J1 5 260
15 260
FAC1502/1 78
Dr Water and electricity deposit B2 Cr
20.5 R
Mar 1 Bank CPJ1 1 000
Dr Debtors control 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 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 Creditors control 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
79 FAC1502/1
Dr Sales N1 Cr
20.5 R
Mar 31 Debtors SJ1 2 596
Bank CRJ1 94 753
97 349
Dr Rent income N2 Cr
20.5 R
Mar 6 Bank CRJ1 250
Dr Purchases N3 Cr
20.5 R
Mar 31 Creditors PJ1 38 338
Bank CPJ1 8 053
46 391
Dr Stationery N4 Cr
20.5 R
Mar 14 Bank CPJ1 478
25 Creditors 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 Rent expense N8 Cr
20.5 R
Mar 1 Bank CPJ1 2 000
30 Bank CPJ1 2 000
4 000
FAC1502/1 80
Dr Telephone expense N9 Cr
20.5 R
Mar 31 Bank CPJ1 595
Dr Wages N10 Cr
20.5 R
Mar 31 Bank CPJ1 5 700
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 Ð
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.
81 FAC1502/1
GOLDEN RULE
The total of all the balances of the individual debtor acconts in die subsidiary debtors
ledger MUST equal the balance of the debtors control account in the general ledger.
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 82
GOLDEN RULE
The total of the individual creditor accounts in the subsidiary creditors ledger MUST equal
the balance of the creditors 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
Debtors control B 3 833
Float B 4 500
Bank B 5 85 422
Creditors 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
Rent expense N 8 4 000
Telephone expense N 9 595
Wages N10 5 700
83 FAC1502/1
6.10 Value added tax (VAT)
6.10.1 Background
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.
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 84
6.10.3 Accounting bases
There are only two bases allowed for the calculation of the VAT liability, namely:
. the invoice basis
. the payments basis
Under the 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.
Exer ci se 6.2
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.)
85 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:
Ð L Lion R2 280
Ð 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, debtors, VAT
Input (Dr), settlement discount granted and sundries)
(b) Cash payments journal (analysis columns for bank, purchases, creditors,
settlement discount received, VAT Input, VAT Output (Cr) and sundries)
(c) Sales journal (analysis columns for VAT Output, sales and debtors)
(d) Purchases journal (analysis columns for VAT Input, purchases and creditors)
(e) Sales returns journal (analysis columns for VAT Output, sales returns and
debtors)
(f) Purchases returns journal (analysis columns for VAT Input, purchases returns and
creditors)
(g) General journal
(2) Post the entries recorded 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 86
Solution Exercise 6.2
RUNDU DEALERS
(1) SUBSIDIARY JOURNALS
(a) CASH RECEIPTS JOURNAL Ð MARCH 20.4 CRJ2
Date Details Fol Bank Sales Debtors VAT Input VAT Settlement Sundry accounts
Output discount
granted
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) 2 779 (150) 250
L15 L16
L15 L15
87 FAC1502/1
(c) SALES JOURNAL Ð MARCH 20.4 SJ2
Date Details Fol VAT Output Sales Debtors
R R R
13 L Lion 280 2 000 2 280
W Wolf 140 1 000 1 140
420 3 000 3 420
L16
L15
L16
FAC1502/1 88
(g) GENERAL JOURNAL Ð MARCH 20.4 J2
Date Detail Fol Debit Credit
R R
12 Printing 600
VAT Input L15 84
Stationers Ltd/Creditors control 684
Account received for printing
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 Creditors control PRJ2 98
31 Bank CPJ2 1 120 VAT Control J2 5 627
Debtors control CRJ2 21
Creditors control PJ2 1 785
Creditors control J2 84
5 725 5 725
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
89 FAC1502/1
COMMENTS
% or R
Amount without VAT = 100 1,00
VAT = 14 0,14
; Amount VAT inclusive = 114 1,14
Example: Amount received on 1 March 20.4 = R15 504 (including VAT). (See cash
receipts journal.)
14
VAT = 114 6 R15 504 = R1 904
100
SALES = 114 6 R15 504 = R13 600
or
SALES = R15 504 7 R1,14 = R13 600.
. VAT on cash sales is credited to the VAT Output account because Rundu Dealers
received VAT for payment to the South African Revenue Service.
. VAT on credit sales is credited to the VAT Output account.
. VAT on cash purchases is debited to the VAT Input account.
. VAT on credit purchases is debited to the VAT Input account.
. VAT on sales returns is debited to the VAT Output account. (To cancel the VAT Output
portion of the sales returned.)
. VAT on purchases returns is credited to the VAT Input account. (To cancel the VAT
Input portion of the purchases returned.)
. # VAT on settlement discount granted to debtors is debited to the VAT Input account
(to reduce the amount owed to the South African Revenue Service).
. VAT on settlement discount received from creditors is credited to the VAT Output
account (to increase the amount owed to the South African Revenue Service).
. The balances of the VAT Input and VAT Output accounts are transferred to the VAT
control account to determine what amount must be paid to or to be claimed from the
South African Revenue Service.
. When the difference between the debit and credit sides of the VAT control is a:
. credit, the difference is payable to the South African Revenue Service (current
liability)
. debit, the difference is refundable by the South African Revenue Service (current
asset)
NB: VAT is charged on services, for example telephone account, water and electricity
account and repairs.
FAC1502/1 90
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
Debtors control B4 2 431
Bank B5 2 554
Creditors 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 expense 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
91 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
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, debtors,
settlement discount granted, VAT Input (Dr) and sundries)
(b) Cash payments journal (analysis columns for bank, purchases, creditors,
settlement discount received, wages, VAT Input, VAT Output (Cr) and sundries)
(c) Sales journal (analysis columns for debtors, VAT Output and sales)
(d) Purchases journal (analysis columns for creditors, VAT Input and purchases)
(e) Sales returns journal (analysis columns for debtors, VAT Output and sales
returns)
(f) Purchases returns journal (analysis columns for creditors, 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.
(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 92
SOLUTION: Revision exercise
SUNSHINE GLASS TRADERS
(1) SUBSIDIARY JOURNALS
(a) CASH RECEIPTS JOURNAL ± FEBRUARY 20.4 CRJ2
Date Details Fol Bank Sales Debtors Settlement VAT Input VAT Sundry accounts
discount Output
granted
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 Rent
income
B5 N1 B4 N7 B9 B10
B5 N2 B6 N9 N8 B9 B8
B4 B10 N1
93 FAC1502/1
(d) PURCHASES JOURNAL Ð FEBRUARY 20.4 PJ2
Date Details Fol Creditors 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
FAC1502/1 94
(2) GENERAL LEDGER
Dr Land and buildings (at cost) B1 Cr
20.4 R
Feb 1 Balance b/d 60 000
Dr Inventory: Trading B3 Cr
20.4 R
Feb 1 Balance b/d 6 536
Dr Debtors 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 Creditors 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 4 Furniture J2 3 534
Balance c/d 18 082 26 Printing J2 798
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
95 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 Creditors control PRJ2 70
4 Creditors control J2 434 VAT Control J2 8 999
26 Creditors control J2 98
28 Bank CPJ2 1 890
Debtors control CRJ2 70
Creditors control PJ2 2 240
9 069 9 069
Dr Sales N1 Cr
20.4 R
Feb 1 Balance b/d 13 569
28 Bank CRJ2 10 900
Debtors 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
Creditors control PJ2 16 000
35 955
FAC1502/1 96
Dr Rent 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 expense N5 Cr
20.4 R
Feb 1 Balance b/d 483
26 Bank CPJ2 500
983
Dr Wages N9 Cr
20.4 R
Feb 1 Balance b/d 2 150
28 Bank CPJ2 3 828
5 978
97 FAC1502/1
Dr Stationery N10 Cr
20.4 R
Feb 1 Balance b/d 250
6 Bank CPJ2 200
450
Dr Printing N13 Cr
20.4 R
Feb 26 Printo Limited J2 700
FAC1502/1 98
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
. 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
99 FAC1502/1
STUDY UNIT
7
Adjustments
Learning outcome
Contents Page
Key concepts 101
7.1 Introduction 101
7.2 Short-term adjustments 101
Self-assessment 117
FAC1502/1 100
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
7.1 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. These adjustment
entries are necessary in order to comply with the accrual basis of accounting as well as the
realisation and matching principles.
The three steps relating to adjustments mentioned in paragraph 7.3 (and further on) can be
extended to five steps:
101 FAC1502/1
consecutive periods within a year. This is income which is received in one period but which is
earned in an earlier or a later period. The same applies to expenses which are incurred in
another period.
A prepaid expense is an expense which has been paid during the current financial period,
where all or part of the expense relates to a future financial period. For example, insurance
expenses are usually payable in advance. When the financial year of a business entity ends, it
is therefore possible that a portion of the insurance expense relates to the next financial period.
An adjustment is therefore necessary to match only that portion of the expense which relates to
the current financial period against the income for that period.
On 2 January 20.1 Xa-Xa Dealers paid a new annual insurance premium of R2 400. Its
financial year ends on 28 February 20.1. Using this information we can work out that the actual
amount it spent on insurance up to and including 28 February was only R400, which is R2 400
7 12 = R200 per month for two months, namely January and February. The R2 000 which
was paid in advance represents an asset at that point. The apportionment of the amount
between asset and expenditure elements will be as follows: R400 is an expenditure item in
respect of insurance for the current financial year. This amount must appear in the profit and
loss account and the statement of 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
FAC1502/1 102
CLOSING TRANSFER: 28 FEBRUARY 20.1 J2
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
20.1 R
Feb 28 Insurance J2 400
XA-XA DEALERS
STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.1
(extract)
R
Current assets xxxx
Prepayments 2 000
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 comprehensive income) and R360 is still
owed (to be reflected in the statement of financial position) and must be paid at a future date.
103 FAC1502/1
Accounting entries
The debit balance on the water and electricity expense account has to be increased by R360.
To increase an expense account, a debit entry has to be made. The balance on the water
and electricity account will now reflect the actual expenditure, namely R3 240. This amount can
be written off against the profit and loss account. The outstanding amount of R360 is a liability
on the date of the statement of financial position and it is credited in the accrued expense
account and is shown on the statement of financial position under current liabilities.
JOURNAL ENTRIES J5
ADJUSTMENT ENTRY Ð 28 FEBRUARY 20.1
Water and electricity GL41 360
Accrued expenses GL56 360
Adjustment of water and electricity 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
XA-XA DEALERS
STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.1 (extract)
R
Current liabilities xxxx
Trade and other payables xxxx
Accrued expenses 360
FAC1502/1 104
7.2.3 Consumable inventory adjustments
On 28 February 20.1, the end of its financial year, Xa-Xa Dealers' stationery account shows
that stationery to the value of R500 was purchased during the year. At a physical count it is
determined that R150's worth of stationery is still on hand. With this information the actual
expenditure on stationery can be calculated, namely R500 7 R150 = R350. The apportionment
of the item between actual expenditure (profit and loss account and statement of
comprehensive income) and the asset element (statement of financial position) will be as
follows: R350 represents expenditure on stationery while R150 represents the value of the
stationery that will be used in the future.
Accounting entries
The debit balance in the stationery expense account has to be reduced by R150. To reduce an
expense account a credit entry has to be made. The balance on the stationery account will
now show the actual expenditure, namely R350. This amount can now be written off against
the profit or loss account. The stationery on hand, worth R150, is an asset on the date of the
statement of financial position and is debited in the stationery on hand account and is shown in
the statement of financial position under current assets.
JOURNAL ENTRIES
ADJUSTMENT JOURNAL Ð 28 FEBRUARY 20.1 J3
Inventory: Stationery GL57 150
Stationery GL42 150
Adjustment 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
Dr Inventory: Stationery 57 Cr
20.1 R
Feb 28 Stationery J3 150
105 FAC1502/1
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)
R
Current assets xxxx
Inventories xxxx
Stationery 150
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' rent 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 rent for March 20.1 has already been received.
With this information the actual income received in rent for the year can be determined, that is
R10 400 7 R800 = R9 600 (=R800 6 12).
The apportionment of the item between actual income and the liability (amount owing)
component will be as follows: R9 600 is the actual income and R800 is due to the lessee
because it was paid in advance. Differently stated, the income has not yet been earned.
Accounting entries
The credit balance in the rent income account has to be reduced by R800. To reduce an
income account a debit entry has to be made. The balance on the rent 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 Ð 28 FEBRUARY 20.1 J9
FAC1502/1 106
CLOSING TRANSFER Ð 28 FEBRUARY 20.1 J10
GENERAL LEDGER
Dr Rent 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
XA-XA DEALERS
STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.1 (extract)
R
Current liabilities xxxx
Trade and other payables xxx
Income received in advance 800
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.
107 FAC1502/1
Accounting entries
The credit balance in the commission income account has to be increased by R200. To
increase an income account another credit entry has to be made. The balance on the
commission income account will now reflect the actual income, namely R2 400. This amount
can now be written off against the profit or loss account. The outstanding amount of R200 is an
asset on the day of the statement of financial position and is shown under current assets in the
statement of financial position.
JOURNAL ENTRIES
ADJUSTMENT JOURNAL Ð 28 FEBRUARY 20.1 J11
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
XA-XA DEALERS
STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.1 (extract)
R
Current assets xxx
Trade receivables xxx
Accrued income 200
FAC1502/1 108
7.2.6 Credit losses (Bad debts)
On 25 January 20.1 Xa-Xa Dealers receive a notification that a debtor, A Boeka, is insolvent.
On closer investigation it is established that the debtor still owes R230.
With this information an adjustment must be made in A Boeka's account. The outstanding
amount of R230 must be removed from his account and shown as an expense or loss.
The assets will therefore decrease and an expense or loss component, namely credit losses,
will come into being.
Accounting entries
The debit balance of R230 on A Boeka's account has to be written off, since he is insolvent and
cannot pay. To reduce an asset account, a credit entry has to be made. A Boeka's account in
the debtors ledger will be credited and will now show no balance. The debtors' 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 Ð 25 JANUARY 20.1 J13
GENERAL LEDGER
Dr Credit losses (Bad debts) 62 Cr
20.1 R 20.1 R
Jan 25 Debtors control Feb 28 Profit or loss J14 230
(A Boeka) J13 230
20.1 R
Feb 28 Credit losses J14 230
Dr Debtors control 6 Cr
20.0 20.1 R
Mar 1 Balance b/d xxxx Jan 25 Credit losses J13 230
109 FAC1502/1
DEBTORS 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 10 the writing off of credit losses is explained in detail. The above solution is done
according to method 2 as explained in paragraph 10.4.5.
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 Ð 28 FEBRUARY 20.1 J15
FAC1502/1 110
CLOSING TRANSFER Ð 28 FEBRUARY 20.1 J16
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
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
3
Property, plant and equipment Machinery Total
Carrying amount: Beginning of year Ð Ð
Cost Ð Ð
Accumulated depreciation Ð Ð
Additions 80 000 80 000
Disposals Ð Ð
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)
111 FAC1502/1
7.4 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.
This is the trial balance which is compiled after all the journalised adjustments have been
posted to the general ledger.
Debit Credit
R R
Rent income 6 600
Stationery 350
Water and electricity 1 800
Commission income 5 600
Credit losses 280
Accumulated depreciation: machinery 30 000
Debtors control 11 150
Machinery at cost 200 000
ADDITIONAL INFORMATION:
(a) Only 11 months' rent was received.
(b) Stationery on hand on 30 June 20.2 amounted to R50.
(c) R600 commission was received in advance.
(d) An additional amount of R150 must be written off as irrecoverable.
(e) Provision must be made for depreciation of R30 000 on machinery.
(f) June 20.2's water and electricity account of R160 has not yet been paid.
FAC1502/1 112
Required:
A ABBO
(1) GENERAL LEDGER
Dr Rent 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
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
113 FAC1502/1
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
Debtors control J1 150
430 430
20.2 R
Jun 30 Balance b/d 30 000
Depreciation J1 30 000
60 000
Dr Debtors 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
20.2 R
Jun 30 Balance b/d 200 000
Dr Accrued income 9 Cr
20.2 R
Jun 30 Rent income J1 600
Dr Inventory: Stationery 10 Cr
20.2 R
Jun 30 Stationery J1 50
Dr Accrued expenditure 11 Cr
20.2 R
Jun 30 Water and
electricity J1 160
20.2 R
Jun 30 Commission
income J1 600
FAC1502/1 114
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
20.2 R 20.2 R
Jun 30 Stationery J2 300 Jun 30 Rent income J2 7 200
Water and Commission
electricity J2 1 960 income J2 5 000
Credit losses J2 430
Depreciation J2 30 000
A ABBO
(2) GENERAL JOURNAL
ADJUSTMENT ENTRIES: 30 JUNE 20.2 J1
R R
Accrued income GL9 600
Rent 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
Debtors 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
115 FAC1502/1
A ABBO
(3) CLOSING TRANSFERS J2
R R
Rent 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
A ABBO
(5) NOTES FOR THE YEAR ENDED 30 JUNE 20.2
FAC1502/1 116
SELF-ASSESSMENT
Now that you have studied this study unit can you:
117 FAC1502/1
STUDY UNIT
8
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
FAC1502/1 118
8.6 Preparation of financial statements 140
Self-assessment 168
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 comprehensive income, statement of changes in equity, statement of financial
position and notes.
119 FAC1502/1
8.1 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:
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 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.
FAC1502/1 120
8.3.3 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.
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.
The accounting entries under such a system can be summarised as follows (VAT is ignored in
these examples):
121 FAC1502/1
It is important to note that the difference between the cost of sales and the selling price is the
gross profit which is the amount by which the equity increases.
FAC1502/1 122
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 8.4.2)
. Perpetual inventory system: A physical inventory count will only disclose shortages (or
surpluses) in inventory.
Exer ci se 8.1
123 FAC1502/1
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 Creditors control 50 000 Cost of sales 20 000
Bank 40 000 Balance c/d 20 000
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 Debtors control 75 000
account 100 000 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
* 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
FAC1502/1 124
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 75 000
125 x 1
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.
75 75 000
Thus: 100 x 1
Cost price = R56 250
. The gross profit, which is also called the trading profit, is determined in the
trading account.
. The details which are required to calculate the gross profit or loss are
transferred to the trading account by means of the general journal:
. The sales account is debited and the trading account is credited (sales are
closed).
. The cost of sales account is credited (the account is closed) and the trading
account is debited. The balance on the trading account represents the gross
profit or loss.
. The closing balance of the inventory account (asset) represents the closing
inventory.
125 FAC1502/1
The accounting entries associated with a periodic inventory system can be summarised as
follows (VAT is ignored in the examples):
FAC1502/1 126
When inventory is returned to a creditor:
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.
Exer ci se 8.2
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.
127 FAC1502/1
(3) When goods are sold, the sales account (income) is credited with the selling price and the
contra account, say bank or debtors, is debited.
(4) A physical inventory count is undertaken to determine the closing inventory (usually at cost
price Ð 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
. 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
FAC1502/1 128
Dr Sales Cr
20.1 R 20.1 R
Dec 31 Trading account 100 000 Dec 31 Debtors 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.
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:
129 FAC1502/1
Transaction Perpetual inventory Periodic inventory
system system
Payment of delivery costs Dr Inventory Dr Carriage on purchases
on inventory purchased Cr Bank Cr Bank
or or
Cr Creditor (and creditors Cr Creditor (and creditors
control) if on credit control) if on credit
Use the following information from the books of Gogo Dealers to calculate the cost of sales:
R
Inventory (1 January 20.1) 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:
R
Inventory (1 January 20.1) 95 000
Add: Purchases 260 000
Carriage on purchases 3 600
358 600
Less: Inventory (31 December 20.1) 80 000
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.
FAC1502/1 130
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 rent
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, rent
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
Debtors control B 7 10 100
Creditors 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.
131 FAC1502/1
GOLDEN RULES
All nominal accounts (i.e. income or revenue and expense acounts) MUST be closed off
(made NIL) at the end of the financial period to either the Trading account or the Profit or
Loss account.
Only entities that trade i.e. buy and sell merchandise, will have a Trading account.
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
FAC1502/1 132
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
20.1 R
Jan 31 Balance b/d 91 000
20.1 R
Jan 31 Balance b/d 19 500
Dr Debtors control B7 Cr
20.1 R
Jan 31 Balance b/d 10 100
Dr Creditors 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 Settlement J 150 Jan 31 Balance b/d 77 500
discount granted
Trading account J 77 350
77 500 77 500
Dr Sales returns N2 Cr
20.1 R 20.1 R
Jan 31 Balance b/d 1 500 Jan 31 Trading account J1 1 500
133 FAC1502/1
Dr Purchases N3 Cr
20.1 R 20.1 R
Jan 31 Balance b/d 52 500 Jan 31 Settlement J 250
discount received
Trading account J 52 250
52 500 52 500
Dr Purchases returns N4 Cr
20.1 R 20.1 R
Jan 31 Trading account 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
20.1 R 20.1 R
Jan 31 Balance b/d 950 Jan 31 Profit or loss J2 950
20.1 R 20.1 R
Jan 31 Balance b/d 300 Jan 31 Profit or loss J2 300
20.1 R 20.1 R
Jan 31 Balance b/d 150 Jan 31 Sales J2 150
150 150
FAC1502/1 134
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
20.1 R 20.1 R
Jan 31 Inventory (opening) J 5 000 Jan 31 Sales J 77 350
Purchases J 52 250 Purchases
Sales returns J 1 500 returns J 2 500
Profit or loss Inventory
(Gross profit) J 29 100 (closing) J 8 000
87 850 87 850
COMMENTS
20.1 R R
Jan 31 Sales 150
Settlement discount granted 150
Closing transfer of settlement discount granted
20.1 R R
Jan 31 Trading account N12 5 000
Inventory B4 5 000
Closing transfer of opening inventory
135 FAC1502/1
(2) To transfer purchases to the trading account, the purchases account is credited
(account is closed) and the trading account is debited.
20.1 R R
Jan 31 Trading account N12 52 500
Inventory N3 52 500
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.
J1
20.1 R R
Jan 31 Trading account 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 77 350
Trading account N12 77 350
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
Trading account 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
FAC1502/1 136
(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 77 350
Purchases returns N 4 2 500
Inventory (closing) B 4 8 000
Inventory (opening) B 4 5 000
Purchases N 3 52 250
Sales returns N 2 1 500
Trading account N12 29 100*
Closing off and transfer of above
accounts to trading account
GOLDEN RULE
The trading account, being also a nominal account, is closed off to the profit or loss
account. (See the schematic representation.)
COMMENTS
137 FAC1502/1
CLOSING TRANSFERS OF EXPENDITURE
J2
20.1 R R
Jan 31 Profit or loss N13 150
Stationery N6 150
Closing transfer
(3) To transfer the income accounts to the profit or loss account, the income accounts
such as rent income and commission received are debited (accounts are closed) and
the profit or loss account is credited.
(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 Rent 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.
FAC1502/1 138
(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.)
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
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):
139 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
Debtors control B7 10 100
Creditors control B8 14 700
132 850 132 850
GOLDEN RULE
The post closing trial balance contains only balances of statement of financial position
accounts Ð no nominal accounts.
FAC1502/1 140
TOEKELA DEALERS
STATEMENT OF 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
Rent 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
GOLDEN RULE
TOEKELA DEALERS
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 JANUARY 20.1
Capital
R
Balance at 1 February 20.0 103 400
Total comprehensive income for the year 17 750
Drawings (3 000)
141 FAC1502/1
GOLDEN RULE
The statement of changes in equity is prepared from the information in the capital account.
(See schematic representation.)
A statement of financial position shows the entity's financial position on a specific date,
whereas the profit or loss account or statement of 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 receivables 10 100
Cash and cash equivalents 4 250
Total assets 132 850
COMMENTS
. When the totals of the different assets are calculated and added together, the result is
equal to:
. the equity, plus
. the totals of the different liabilities which are calculated and added together (In the
example there is only one short-term liability, namely creditors.)
. Remember that the balances in the statement of financial position are the opening
balances of the ledger accounts for the next financial period.
FAC1502/1 142
. There are usually more items under trade receivables and trade and other payables
than merely debtors and creditors. These items will be listed under trade receivables
and trade and other payables and will be added up to give the total for trade
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.
8.6.4 Notes
1 Accounting policy: The annual financial statements have been prepared on the historical
cost basis and comply with generally accepted accounting practice.
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.
143 FAC1502/1
Study paragraphs 8.3.3 and 8.4 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.
= 38,2%
= 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.
FAC1502/1 144
HOT-ROD DEALERS
(1) PRE-ADJUSTMENT TRIAL BALANCE AS AT 31 DECEMBER 20.4
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.
145 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 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.
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
Dr Drawings 2 Cr
20.4 R 20.4 R
Dec 31 Balance b/d 4 400 Dec 31 Capital J2 4 400
20.4 R
Dec 31 Balance b/d 180 000
20.4 R
Dec 31 Balance b/d 120 000
20.4 R
Dec 31 Balance b/d 15 000
FAC1502/1 146
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
10 500 10 500
20.5
Jan 1 Balance b/d 6 500
Dr Debtors 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
40 140 40 140
20.5
Jan 1 Balance b/d 40 000
Dr Bank 8 Cr
20.4 R
Dec 31 Balance b/d 5 900
Dr Creditors 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 Trading account J2 253 615 Dec 31 Balance b/d 253 615
Dr Sales returns 13 Cr
20.4 R 20.4 R
Dec 31 Balance b/d 615 Dec 31 Trading account J2 615
147 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 Rent 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 Trading account J2 170 550
Dr Purchases returns 18 Cr
20.4 R 20.4 R
Dec 31 Trading account 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
FAC1502/1 148
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 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
149 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
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
R R
Inventory: Packaging material GL29 175
Packaging material GL22 175
Packaging material on hand at 31 December 20.4
FAC1502/1 150
R R
Prepaid expenses GL25 750
Insurance GL21 750
Insurance prepaid for 3 months
HOT-ROD DEALERS
GENERAL JOURNAL
R R
Inventory: Trading (closing) GL 6 6 500
Sales GL12 253 615
Purchases returns GL18 550
Trading account GL31 260 665
Closing off and transfer of accounts to trading
account
151 FAC1502/1
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
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 253 615
Trading (opening) J2 4 000 Purchases
Purchases J2 170 550 returns 550
Sales returns J2 615 Inventory:
Carriage on Trading
purchases J2 500 (closing) J2 6 500
Profit or loss
(gross profit) J2 85 000
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 Rent income J2 2 640
Credit losses
(Bad debts) J2 370
Depreciation J2 17 025
Capital (profit) J2 28 010
89 000 89 000
FAC1502/1 152
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
Debtors control GL 7 40 000
Bank GL 8 5 900
Accumulated depreciation: vehicles GL 9 41 750
Accumulated depreciation: furniture GL10 4 275
Creditors 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 COMPREHENSIVE INCOME FOR THE YEAR ENDED
31 DECEMBER 20.4
R
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)
153 FAC1502/1
COMMENTS
. Revenue are sales less sales returns R (253 615 7 615) = R253 000.
. Net purchases are purchases less purchases returns R (170 550 7 550) = R170 000.
HOT-ROD DEALERS
(6) STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.4
Capital
R
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
* Debtors R40 000 + Accrued income R880 + Prepaid expenses R2 250 = R43 130.
# Creditors R50 750 + Accrued expenses R100 + Income received in advance
R220 = R51 070.
FAC1502/1 154
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 Generally Accepted Accounting Practice 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.
2
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 (Ð) (26 000) (3 000) (29 000)
Depreciation (Ð) (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 (Ð) (41 750) (4 275) (46 025)
155 FAC1502/1
Periodic inventory system:
(a) Purchases of trading inventory are recorded in the purchases account.
(b) Purchase related costs are recorded in accounts for each specific type of cost
(c) The cost price of sales may be determined in the trading account.
(5) %
Cost price 100
Profit mark-up 20
Selling price 120
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.
FAC1502/1 156
Solution: Revision exercise 2
(1) ENTITY USING A PERPETUAL INVENTORY SYSTEM
157 FAC1502/1
8.9.3 Revision exercise 3
Calculate the gross profit of Zetta Traders for the year ended 30 June 20.2. Zetta Traders use
the periodic inventory system.
R
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
1. Inventory account
2. Purchases account
3. Sales account
4. Trading account
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
FAC1502/1 158
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
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.
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
159 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
* 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).
FAC1502/1 160
8.9.6 Revision exercise 6
The following balances appear, among others, in the ledger of G Grabe, a general dealer,
on 28 February 20.1, the end of his financial year.
R
Capital (1/3/20.0) 159 600
Drawings (total for the year) 5 000
Commission income 1 450
Rent expenses 12 850
Salaries and wages 28 460
Credit losses 260
Stationery 150
Municipal rates and 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?
(6) What is the difference in the equity at the beginning and the end of the financial year?
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
Dr Drawings 2 Cr
20.1 R 20.1 R
Feb 28 Balance b/d 5 000 Feb 28 Capital J2 5 000
161 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 Rent 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 Stationery 7 Cr
20.1 R 20.1 R
Feb 28 Balance b/d 150 Feb 28 Profit or
loss J1 150
FAC1502/1 162
(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
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
163 FAC1502/1
8.9.7 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.
FAC1502/1 164
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 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.
165 FAC1502/1
Solution: Revision exercise 8
NTINI'S STORE
(1) STATEMENT OF 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 (R58 368 7 R1120 ± R440) 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:
Rent income 280
42 008
Distribution, administrative and other expenses (18 128)
Carriage on sales 1 932
Advertisements 1 176
Salaries 15 020
NTINI'S STORE
(2) STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.4
Capital
R
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
FAC1502/1 166
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 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 generally accepted accounting practice.
2 Income represents net sales to customers.
3
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 (Ð) (Ð) (Ð) (Ð)
Depreciation (Ð) (Ð) (Ð) (Ð)
Carrying amount:
End of year 40 000 20 000 30 800 90 800
Cost 40 000 20 000 30 800 90 800
Accumulated depreciation (Ð) (Ð) (Ð) (Ð)
167 FAC1502/1
SELF-ASSESSMENT
Now that you have studied this study unit, can you:
FAC1502/1 168
TOPIC C
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.
169 FAC1502/1
CONTENTS
FAC1502/1 170
STUDY UNIT
9
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 172
9.1 The nature of cash and cash equivalents 172
9.2 Internal control over cash 172
9.3 Reconciliation of the bank statement balance with the
bank account balance 173
171 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
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.
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 9.4) 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.
FAC1502/1 172
9.3 Reconciliation of the bank statement balance with the
bank account balance
9.3.1 Introduction
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.
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.
173 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.
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.
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.
Exer ci se 9.1
The bank reconciliation statement for June 20.0 and the CRJ, CPJ, bank account and bank
statement of Benson Traders for July 20.0 reflect the following:
NB: The ticks (V) indicate that those entries which appear in the books of the entity (i.e. the
bank reconciliation at 30 June 20.0 and the two cash journals for July 20.0) also appear
on the bank statement for July 20.0). They do not require any further attention. You should
also check these by yourself.
FAC1502/1 174
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) V 2 000
Cheques not yet presented for payment
No 11 Ð dated 23/6/20.0 (Donation) *200
No 13 Ð dated 30/6/20.0 (ABC Stores) V 350
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
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
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.
175 FAC1502/1
* The accounts of S Swan and P Saxo in the debtors 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.
R R R R
Balance b/f 01:07 11 350
Deposit 01:07 2 000 V 13 350
Cheque 13 1,20 02.07 350 V 13 000
Unpaid cheque:
S Swan 1,00 07:07 200 V 12 800
Cheque 15 3,50 09:07 2 500 V 10 300
Deposit 7,00 15:07 6 700 V 17 000
Cheque 14 1,50 15:07 900 V 16 100
Cheque 17 1,20 15:07 450 V 15 650
Cheque 16 1,20 20:07 1 200 V 14 450
Deposit 3,10 25:07 3 300 V 17 750
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 V 17 930
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.
FAC1502/1 176
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.
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
Exer ci se 9.2
(b)
Dr Bank Cr
R 20.9 R
Jun 1 Balance b/d 400
177 FAC1502/1
(c) CASH RECEIPTS JOURNAL (bank column only) FOR JUNE 20.9 CRJ 6
R
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
R
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
R R R
1 Balance 460 Dr
4 Deposit 300 V 160 Dr
6 Deposit 150 V 10 Dr
10 Deposit 150 V 140 Cr
12 Cheque 451 160 V 20 Dr
15 Deposit Ð K Nkome 90 70 Cr
20 Cheque 453 116 46 Dr
Cheque ``R/D''
(L Long) 150 196 Dr
26 Deposit 240 V 44 Cr
28 Cheque 454 200 V 156 Dr
Stop order Ð insurance 50 206 Dr
Deposit Ð T Nkwe 40 166 Dr
Deposit 115 V 51 Dr
Error corrected 20 V 31 Dr
29 Bank interest 20 51 Dr
Service fees 10 61 Dr
Cheque 450 40 V 101 Dr
30 Deposit 200 V 99 Cr
FAC1502/1 178
(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.
179 FAC1502/1
(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
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 Ð 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.
FAC1502/1 180
Study paragraph 9.6 of the prescribed book.
Exer ci se 9.3
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.
181 FAC1502/1
Solution Exercise 9.3
DICKSON TRADERS
(1) PETTY CASH JOURNAL Ð JUNE 20.9 PCJ 1
Receipts Payments
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
expense
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 Bal-
Jul 1 ance
b/d 300,00
590,25 590,25
20.9
Jul 1 Balance b/d 300,00
FAC1502/1 182
(b) CASH RECEIPTS JOURNAL Ð JANUARY 20.9 (extract) CRJ 8
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
183 FAC1502/1
(d) BANK STATEMENT Ð 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
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.
FAC1502/1 184
CASH PAYMENTS JOURNAL ± JANUARY 20.9 (extract)
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
(c) Items that appeared in the cash receipts and cash payments jour-
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
185 FAC1502/1
. Cheque No 985, issued on 29 December 20.8 to the
municipality to pay the water and electricity account 2 211
(d) Items that appeared on the bank statement but not in the cash
journals:
. Bank charges 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
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.
FAC1502/1 186
(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
(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.
187 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.
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
FAC1502/1 188
9.5.4 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 Ð R120
. Deposit credited Ð R370
. Cheque No 691 for R416,40
. Dishonoured cheque from D Baloyi Ð R150
. Cheque No 004 for R90 issued by another client of the bank
. Chequebook Ð R28,50, service fee Ð R36,40, interest on overdraft Ð R19,80
. Stop order for insurance premium Ð R290
. Direct deposit of R200 by J Matla for rent
(c) The cash journals reflected the following differences from the bank statement:
. Deposits not yet entered by the bank Ð R1 450,00
. Cheques not yet presented:
No 802 ± dated 3/5/20.8 (DR Limited) Ð R1 964,62
No 803 ± dated 4/5/20.8 (AA Suppliers) Ð 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 Ð R11 258,29
. Cash payments journal Ð R13 428,72
. Bank statement Ð 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.
189 FAC1502/1
Solution: Revision exercise 4
BUWANG TRADERS
(1) CASH RECEIPTS JOURNAL ± MAY 20.8 (extract)
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
FAC1502/1 190
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.
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.
191 FAC1502/1
Solution: Revision exercise 5
PITSI DEALERS
(1) PETTY CASH JOURNAL Ð AUGUST 20.4 PCJ6
Receipts Payments
20.4
Sep 1 b/d 200,00
SELF-ASSESSMENT
Now that you have studied this study unit, can you:
FAC1502/1 192
STUDY UNIT
10
Trade 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 194
10.1 Introduction 194
10.2 Settlement discount granted 194
10.3 Interest charged 196
10.4 Credit losses (bad debts) 196
193 FAC1502/1
10.5 Presentation on the statement of financial position 206
10.6 Debtors control account 206
10.7 Revision exercises and solutions 213
KEY CONCEPTS
. Credit transaction
. Trade debtors
. Credit term
. Settlement discount granted
. Credit losses (Bad debts)
. Current assets
. Allowance for credit losses
. Debtors control
10.1 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.
FAC1502/1 194
Exer ci se 10.1
If VAT at 14% is included in the R2 850, the VAT collected on behalf of the SA Revenue Service
(SARS) (recorded at the date of sale) will amount to R350 and will be recorded in the VAT
Output account.
The selling price recorded in the sales account in the general ledger is R2 500. The fact that
discount has been granted does not affect the original selling price recorded in the general
ledger.
The discount will, however, have an influence on VAT. Although the debtor purchased the
goods for R2 850 the actual income for the business is R2 500. If 2% discount is allowed on the
R2 500 the income for the business is R2 450. VAT (calculated at 14%) on R2 450 is R343.
The original VAT of R350 is therefore overstated and must be reduced by R7, in other words
2% 6 R350. Such adjustments are made in the VAT Input account and NOT in the VAT
Output account. The reason for this is that the net sales (sales less sales returns) multiplied by
the VAT percentage, should result in the amount of VAT Output.
The discount of R57 thus includes VAT of R7, which may be calculated as follows:
57 14
1 X 114 = R7
Dr Sales Cr
R 20.0 R
Mar 1 Debtors control 2 500
Dr VAT Input Cr
20.0 R 20.0 R
Mar 31 Debtors control 7
195 FAC1502/1
Dr VAT Output Cr
R 20.0 R
Mar 1 Debtors control 350
Dr Bank Cr
20.0 R R
Mar 31 Debtors 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 comprehensive income. The influence of discount on VAT was
also discussed in paragraph 6.9.
18 1
R550 + R(550 6 100 x 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 debtors control account. This transaction is recorded by means of a general
journal entry.
FAC1502/1 196
the debtors 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 debtors
control account (a statement of financial position account).
Exer ci se 10.2
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
debtors control account at 30 April was R18 000.
AM TRADERS
GENERAL JOURNAL
Fol Debit Credit
20.0 R R
May 15 Credit losses 660
A Langa/Debtors control 660
Write A Langa's account off as irrecoverable
GENERAL LEDGER
Dr Debtors 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 Debtors control 660
DEBTORS LEDGER
A Langa
Debit Credit Balance
20.0 R R R
May 1 Account rendered 660
Credit losses 660 Ð
197 FAC1502/1
be realised (ie whether the entity will receive its money). 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:
Exer ci se 10.3
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.
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 Debtors control Cr
20.0 R
Jun 30 Balance b/d 20 000
FAC1502/1 198
Dr Credit losses Cr
20.0 R
Jun 30 Allowance for
credit losses 800
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
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 debtors control account remains
R20 000. The debtors' control account will only be credited when actual credit losses
are verified.
. The allowance for credit losses (R800) is deducted from debtors (R20 000). The
R19 200 is shown in the statement of financial position as current assets under trade
receivables.
. The R800 credit losses is closed off to the profit and loss account. By writing off the
R800 in the profit and loss account and deducting it from debtors in the statement of
financial position at 30 June 20.0, the entity has applied the matching and prudence
principles.
Exer ci se 10.4
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.)
199 FAC1502/1
The financial manager determined that the allowance for credit losses account should amount
to R1 200 at 30 June 20.1.
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 Debtors control Cr
20.1 R
Jun 30 Balance b/d 30 000
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
FAC1502/1 200
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 debtors control account before
the balance of R30 000 was calculated on the control account.
. The debtors 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 debtors 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 debtors control account (R30 000) to determine the amount at
which debtors must be taken into account under trade 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).
Exer ci se 10.5
On 30 June 20.2 the outstanding trade debtors of Trio Traders (follows on Exercise 10.4)
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.
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 6 4%) 1 000
Amount needed for adjustment 200
201 FAC1502/1
GENERAL LEDGER
Dr Debtors control Cr
20.2 R
Jun 30 Balance b/d 25 000
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 debtors control account is not affected by changes in the allowance for credit
losses.
. The credit balance that has increased from the original R800 to R1 200 must now be
reduced to R1 000. This has to be done by making a debit entry in the account.
However, the balance carried forward on the allowance for credit losses account will
always be a credit balance.
. The fact that in the years 20.0 and 20.1 the entries in the credit losses account have
been debited does not mean that all the entries posted to the account will be debits. It
is self-evident that if the allowance is decreased, the difference between the existing
and the new allowance has to be added back. The only way this can be done is to
debit the allowance for credit losses account and credit the credit losses account.
10.4.5 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 debtors control
account.
FAC1502/1 202
Exer ci se 10.6
On 30 November 20.0 Trio Traders (follows on Exercise 10.3) 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.
TRIO TRADERS
GENERAL JOURNAL
Debit Credit
20.1 R R
Nov 30 Allowance for credit losses 730
B Down/Debtors control 730
Write B Down's account off as irrecoverable
GENERAL LEDGER
Dr Debtors 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
*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
DEBTORS LEDGER
B Down
Debit Credit Balance
20.0 R R R
Jul 1 Account rendered 730
Nov 30 Allowance for credit losses 730 Ð
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.
Exer ci se 10.7
On 30 November 20.0 Trio Traders (follows on Exercise 10.3) 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.
GENERAL LEDGER
Dr Debtors 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
FAC1502/1 204
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 Debtors control 730 Jun 30 Profit or loss 1 130
20.1
Jun 30 Allowance for
credit losses 400
1 130 1 130
DEBTORS LEDGER
B Down
Debit Credit Balance
20.0 R R R
Jul 1 Account rendered 730
Nov 30 Credit losses 730 Ð
COMMENT
. The amount written off as credit losses in the profit or loss account remains
unchanged. (Refer to previous exercise.)
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.
205 FAC1502/1
10.5 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 GAAP, 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 receivables xx xxx
Cash and cash equivalents x xxx
Total assets xxx xxx
EQUITY AND LIABILITIES
FAC1502/1 206
The procedure can be summarised as follows:
Individual entries in the sales journal Posted to Personal accounts of debtors (debit
side) in the debtors ledger on the day
the transaction took place.
Total of the debtors control column in Posted to Debtors control account (debit side)
the sales journal on the last day of the month.
Individual entries in the sales returns Posted to Personal accounts of debtors (credit
journal side) in the debtors ledger on the day
the transaction took place.
Total of the debtors control column in Posted to Debtors control account (credit side)
the sales returns journal on the last day of the month.
Individual entries in the cash receipts Posted to Personal accounts of debtors (credit
journal side) in the debtors ledger on the day
the transaction took place.
Total of the debtors control column in Posted to Debtors control account (credit side)
the cash receipts journal on the last day of the month.
Exer ci se 10.8
The opening balances on the individual debtors are: debtor A: R450,00, debtor B: R680,00 and
debtor C: R220,00.
JOURNALS
SALES JOURNAL Ð MAY 20.2 SJ1
GL 5
207 FAC1502/1
CASH RECEIPTS JOURNAL Ð MAY 20.2 CRJ1
Date Details Fol Bank Debtors Discount VAT
allowed Input
R R R R
15 A DL1 600,00 670,00 64,00 *6,00
B DL2 400,00 400,00
C DL3 500,00 522,00 20,00 2,00
1 500,00 1 592,00 84,00 8,00
GL5
* Approximation
GL3 GL5
Required:
FAC1502/1 208
Solution Exercise 10.8
GENERAL LEDGER
Dr Debtors 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
Sundry journal discount CRJ1 1 592,00
debits J1 803,00 Sundry journal
credits J1 253,00
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 debtors control account is a summary of ALL transactions related to all the individual
debtor accounts in the debtors ledger.
GOLDEN RULE
What was done (Dr or Cr) to the individual debtor accounts, must be done IN TOTAL to the
debtors control account.
Dr B DL2 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
209 FAC1502/1
Dr C DL3 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
GOLDEN RULE
The total of all the balances of the individual debtor accounts in the debtors ledger must
equal the balance of the debtors 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 debtors 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 debtors control account.
FAC1502/1 210
Exer ci se 10.9
The following information in respect of June 20.1 was obtained from the financial records of
N Nelson:
R
Balance on the debtors control account ± 31 May 20.1 19 190
Totals for the month:
Cash receipts journal:
Debtors column 16 860
Settlement discount granted column 1 470
Sales journal (Debtors column) 19 500
Sales returns journal (Debtors column) 4 615
General journal:
Credit losses written off 751
Certain accounts with debit balances transferred from the creditors
ledger to the debtors ledger 46
Interest charged on overdue accounts 160
List of individual debtors per debtors ledger 16 230
In the process of reconciling the balance on the debtors control account with the list of
balances per debtors 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 debtors control account at 30 June 20.1 properly balanced. Each entry
must indicate the correct contra ledger account.
(2) Reconcile the balance on the debtors control account as determined in 1 above with
the total of the debtors list.
211 FAC1502/1
Solution Exercise 10.9
N NELSON
(1) GENERAL LEDGER
Dr Debtors 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 7 Credit losses GJ 751
1 000) (1) SJ 18 500
Creditors 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 7 2 270) (5) (500)
Incorrect posting of credit note, B Brown
(R30 6 2) (4) and (5) (60)
Correction of error Ð P Pet (75) (635)
Balance as per Debtors 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 debtors or
creditors 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 debtors control account with the list of
debtors, it is very important that you read the question very carefully. As you are reading,
decide what type of error is involved. Also ensure that when you do the control account, you
use the correct contra ledger account.
FAC1502/1 212
10.7 Revision exercises and solutions
10.7.1 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.
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.
Which of the following amounts will be shown as credit losses in the statement of
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}
(c) R1 500
(d) R2 352 {R(1 500 7 800) + R1 652}
* To post a credit loss recovered to the debtors control account is incorrect. The journal entry to
correct the entry is as follows:
213 FAC1502/1
JOURNAL ENTRY J1
20.3 R R
Feb 28 Debtors control 800
Credit losses recovered 800
Reversal of entry made 1/7/20.2
The debtors 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
Debtors control 1 500
Credit losses written off
Dr Debtors 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 Debtors 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.
(1) Balances: R
Debtors 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
FAC1502/1 214
Solution: Revision exercise 3
Calculation:
Dr Debtors 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 debtors 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 10.4.5.)
GENERAL JOURNAL
20.1 R R
Feb 28 Allowance for credit losses 500
J Solomon/Debtors 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
215 FAC1502/1
GENERAL LEDGER
Dr Allowance for credit losses Cr
20.1 R 20.0 R
Feb 28 Debtors control 500 Mar 1 Balance b/d 3 240
Balance c/d 4 265 20.1
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 10.5) 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.
R
Balance of allowance for credit losses account 28/2/20.7 510
Balance of debtors control account 28/2/20.7 10 200
List of individual debtors as per debtors ledger 11 520
Totals for the month:
Cash receipts journal:
Debtors column 69 140
Settlement discount granted column 3 000
Sales column 101 100
Creditors column 1 400
Cash payments journal:
Creditors column 80 000
Debtors 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
FAC1502/1 216
(2) ADDITIONAL INFORMATION:
(a) The debtors column in the cash receipts journal was overcast by R1 000.
(b) The creditors column in the purchases journal was overcast by R2 000.
(c) A sales invoice for the amount of R600 was entered twice in the sales journal and posted
twice to the personal account of B Broad.
(d) Credit note No 31, for R500, was credited to the account of T Thin, but no other entry was
made in the books.
(e) An invoice for the amount of R50 was correctly entered in the purchases journal, but
posted as R150 to the account of N Narrow.
(f) An invoice for the amount of R400 was correctly entered in the sales journal, but posted as
R40 to the account of D Dandy.
(g) A cheque for R900 received from debtor G Great was returned by the bank marked ``R/D''.
The necessary entry was made in the cash payments journal, but no posting was made to
the account of G Great.
(h) The balance of P Pauper's account for R1 420 has still to be written off as irrecoverable.
(i) It was determined that the allowance for credit losses account should amount to R538 at
28 February 20.8.
Required:
(1) Prepare a properly balanced debtors control account for the month ending
28 February 20.8.
(2) Reconcile the total of the list of debtors with the balance on the debtors 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.
Dr Debtors 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 7 Sales 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
217 FAC1502/1
(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 7 40) (D Dandy) 360 1 260
12 780
Less: Duplicate sales invoice (B Broad) (600)
Credit loss (1 420) (2 020)
Balance as per debtors 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 6 5% 538
Add: Credit loss written
off (P Pauper) 1 420
Less: Opening balance
of allowance: 510 910
Amount needed 1 448
GENERAL LEDGER
20.8 R 20.7 R
Feb 28 Debtors 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
FAC1502/1 218
COMMENTS
. Always read the question carefully. Much of the information given in this question has
nothing to do with the debtors control account. Make sure that you know what items
have to be entered in a debtors 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 10.4) 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 debtors control account?
219 FAC1502/1
STUDY UNIT
11
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
. Valuation of inventory
. Historical cost
. Consistency
. Gross profit percentage
. Disclosure in the financial statements
FAC1502/1 220
11.1 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 8, section 8.4.
The following exercise illustrates what can happen when incorrect figures are used.
Exer ci se 11.1
The following information pertaining to three financial years ended 31 December was obtained
from the records of Woud Traders:
221 FAC1502/1
From the statement of 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)
ADDITIONAL INFORMATION
(a) Merchandise amounting to R4 104, received on 31 December 20.1, is included in
inventory but the invoice was only received and recorded in the purchases journal on
10 January 20.2.
(b) An invoice for merchandise with a cost price of R1 740 and a selling price of R2 106,
dispatched Free On Board on 31 December 20.1, was completed and recorded in the sales
journal on 3 January 20.2. These goods were included in the inventory at 31 December
20.1.
(c) The business uses the periodic inventory system.
Required:
Prepare the adjusted statement of 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.
FAC1502/1 222
R
(e) Sales for 20.2 420 000
Less: Selling price of goods dispatched 2 106
Correct amount of sales for 20.2 417 894
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 Ð 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.
There are disadvantages to using historical cost as a basis for valuation. For instance, if the
223 FAC1502/1
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.
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
If only the cost of sales and gross profit are known, then
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:
If the gross profit is expressed as a percentage of sales then the following formula is used:
FAC1502/1 224
Applying the above figures to these formula, we get the following gross profit percentages:
Example
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 comprehensive
income when calculating profit.
225 FAC1502/1
11.7 Revision exercises and solutions
11.7.1 Revision exercise 1
(1) Which combination of the following statements is correct?
(a) Office furniture bought by Furnishop Traders for the new secretary is classified under
property, plant and equipment in the statement of financial position.
(b) The cost of stationery used is included in the calculation of gross profit.
(c) When using the periodic inventory system the cost of sales is calculated after a
physical inventory count has been done.
(d) Closing inventory includes all goods on the premises. This includes goods that have
already been paid for by a purchaser.
(2) What is the difference between cost of goods purchased and cost of sales?
COMMENTS
(2) Cost of goods purchased does not include opening and closing inventory, whereas cost of
sales does.
FAC1502/1 226
ADDITIONAL INFORMATION
Inventory: Trading Ð 28 February 20.4 25 000
Inventory: Packaging material Ð 28 February 20.4 600
Which of the following represents the correct amount of cost of goods purchased and cost of
sales respectively?
R
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.
227 FAC1502/1
11.7.3 Revision exercise 3
From the following information, calculate the gross profit percentage on cost of sales and sales.
M DRY
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 20.6
(extract)
R
Revenue 114 000
Cost of sales (76 000)
Inventory Ð 1/7/20.5 30 000
Purchases 90 000
120 000
Inventory Ð 30/6/20.6 (44 000)
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 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.
FAC1502/1 228
Solution: Revision exercise 4
M DRY
(1) STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 20.7
(estimated)
R
Revenue 120 000
Cost of sales (80 000)
Inventory Ð 30 June 20.6 44 000
Purchases 96 000
140 000
Inventory Ð 30 June 20.7 (60 000)
Gross profit 40 000
COMMENT
SELF-ASSESSMENT
Now that you have studied this study unit, can you
229 FAC1502/1
STUDY UNIT
12
Property, plant and equipment
Learning outcome
Students should be able to record transactions related to property, plant and equipment.
Contents
Key concepts 231
12.1 Introduction 231
12.2 Determination of the cost price of property, plant and
equipment 232
12.3 Safeguarding and control of property, plant and equipment 232
12.4 Recording the purchase of property, plant and equipment 232
12.5 The concept of depreciation 233
12.6 Recording depreciation 233
12.7 Methods of calculating depreciation 233
12.8 Acquisition of property, plant and equipment during the
financial year 243
12.9 Disposal of property, plant and equipment 243
12.10 Revision exercises and solutions 250
12.10.1 Revision exercise 1 250
12.10.2 Revision exercise 2 252
12.10.3 Revision exercise 3 254
12.10.4 Revision exercise 4 257
Self-assessment 258
FAC1502/1 230
KEY CONCEPTS
. Historical cost price
. Tangible non-current assets
. Depreciation
. Accumulated depreciation
. Sale (alienation) of property, plant and equipment
. Disposal of property, plant and equipment
12.1 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).
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. This is to give effect to the matching principle explained earlier in this study
guide.
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.
231 FAC1502/1
12.2 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.
Since the asset accounts in question do not contain any details, it is necessary to keep the
assets register (see paragraph 12.3 and example 12.12 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.
FAC1502/1 232
12.5 The concept of depreciation
Assets are acquired to generate income. Because income is generated, the cost of owning the
asset can be written off (matched) against income earned over the useful life of the asset.
(Refer to paragraph 2.5.4 of the prescribed book on the matching principle.)
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 12.7 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.
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.
Exer ci se 12.1
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:
233 FAC1502/1
(2) general journal entries, and
(3) ledger accounts
to record the depreciation according to
(a) the straight line method,
(b) the diminishing balance method, and
(c) the production unit method (using the given additional information).
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)
The journal entries for the years 20.2, 20.3, 20.4, and 20.5 would be the same as above.
FAC1502/1 234
(a) (3) GENERAL LEDGER
Dr Machinery (at cost) Cr
20.1 R
Jun 1 Bank 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.
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 Ð Ð
Disposals (Ð) (Ð)
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.
FAC1502/1 236
(b) Diminishing balance method
In this case a fixed percentage of the carrying amount is written off annually. Assume that a
percentage of 20% is given.
May 31 R R R R
20
20.1 (End of financial year 1) 460 000 100 x 4601000 92 000 92 000 368 000
20
20.2 (End of financial year 2) 460 000 100 x 3681000 73 600 165 600 294 400
20
20.3 (End of financial year 3) 460 000 100 x 2941400 58 880 224 480 235 520
20
20.4 (End of financial year 4) 460 000 100 x 2351520 47 104 271 584 188 416
20
20.5 (End of financial year 5) 460 000 100 x 1881416 37 683 309 267 150 733
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)
FAC1502/1 238
(b) (3) GENERAL LEDGER
Dr Machinery (at cost) Cr
20.1 R
Jun 1 Bank 460 000
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)
BILGREDON
NOTES FOR THE YEAR ENDED 31 MAY 20.2
Carrying amount:
End of year 294 400 294 400
FAC1502/1 240
(c) (1) ASSET AND DEPRECIATION SCHEDULE: PRODUCTION VOLUME METHOD
Calculation of Anual Accumulated Carrying
Date Cost price depreciation* depreciation depreciation amount
(a) (b) (a) 7 (b)
May 31 R R R R
500
20.1 (End of financial year 1) 460 000 2 000 6 460 000 115 000 115 000 345 000
550
20.2 (End of financial year 2) 460 000 2 000 6 460 000 126 500 241 500 218 500
300
20.3 (End of financial year 3) 460 000 2 000 6 460 000 69 000 310 500 149 500
200
20.4 (End of financial year 4) 460 000 2 000 6 460 000 46 000 356 500 103 500
450
20.5 (End of financial year 5) 460 000 2 000 6 460 000 103 500 460 000 NIL
(c) (2) THE JOURNAL ENTRIES ARE SIMILAR TO THOSE IN (b) (2).
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
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
FAC1502/1 242
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)
If the cost price of the machine is R460 000 and the depreciation rate is 20% per year, the
depreciation to be provided for the first year will be:
20 6
R460 000 6 100 6 12
= R46 000.
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.
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 comprehensive income for
the current financial period.
Exer ci se 12.2
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.
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
FAC1502/1 244
Exer ci se 12.3
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.
20.5 R R
May 31 *Realisation of machinery 460 000
Machinery (at cost) 460 000
Transfer machinery at cost to
realisation account
*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
BILGREDON
(b) NOTES FOR THE YEAR ENDED 31 MAY 20.5
FAC1502/1 246
Study paragraph 12.11 of the prescribed book.
Exer ci se 12.4
Suppose that Bilgredon had sold the machine in exercise 12.3 for R60 000 cash instead of
scrapping it.
Required:
Prepare the journal entries and ledger accounts to record this transaction.
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
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 Bank Cr
20.5 R
May 31 Realisation of
machinery 60 000
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.
FAC1502/1 248
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: Debtor (and Debtors 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
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
comprehensive income.
249 FAC1502/1
12.10 Revision exercises and solutions
12.10.1 Revision exercise 1
The following information relates to Bacinis:
ADDITIONAL INFORMATION
(a) According to the assets register, plant and machinery consist of two Zobo machines of
equal value. Both the machines were purchased and installed on the same date.
(b) Depreciation is written off at 20% per annum by the diminishing balance method.
(c) On 31 January 20.4, management decided to increase production capacity and purchased
a Jojo machine on credit from Maxi Limited for R90 000. One of the Zobo machines was
traded in, reducing the amount owing to Maxi Ltd to R70 500.
(d) On 1 February 20.4, installation charges on the new machine amounting to R6 000 were
paid in cash.
Required:
(1) Prepare journal entries to record the above transactions, excluding cash, for the year
ended 31 August 20.4.
(2) Show the following general ledger accounts for the year ended
31 August 20.4, properly balanced:
(a) Accumulated depreciation
(b) Machinery realisation
(3) Prepare the note regarding property, plant and equipment for the year ended
31 August 20.4
20.4 R R
Jan 31 Plant and machinery (at cost) 90 000
Maxi Ltd 90 000
Jojo machine purchased on credit
FAC1502/1 250
Accumulated depreciation (1) 24 900
Machinery realisation 24 900
Transferring depreciation of
machine traded in
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:
1 Depreciation on machine traded in R
To 31 August 20.3 (R46 600 6 12 ) 23 300
31 August 20.3 ± 31 January 20.4
20 5
1006 126 R(42 500 7 23 300) 1 600
24 900
251 FAC1502/1
2 Trade-in value
R90 0007R70 500 19 500
Jojo machine
20 7
R(90 000 + 6 000)6 100 6 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)
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 by the
straight line method.
(b) The estimated life span of the Cheetah machine is 8 years and the estimated trade-in value
at the end of the term is R9 000.
FAC1502/1 252
Required:
Prepare the following ledger accounts, properly balanced and closed off, for the year
ended 31 December 20.3:
(1) Machinery at cost
(2) Depreciation
(3) Accumulated depreciation
(4) Machinery realisation
(1)
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
1 Balances on 31 December 20.2: R
Machinery: Zebra 40 000
Jaguar 60 000
100 000
Accumulated depreciation:
Zebra: 20% 6 R40 000 6 2 16 000
3
Jaguar: 20% 6 R60 000 6 12 3 000
19 000
2 Depreciation:
Zebra 1 January 20.3 ± 1 July 20.3
6
20%6R40 0006 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:
6
R(105 000 ± 9 000)786 12 6 000
18 000
On 1 October 20.2 he purchased a second machine for R80 000 cash and decided on the
same depreciation policy as before.
On 30 June 20.3 the machine bought during 20.0 was sold for R18 000 cash.
Required:
Prepare the following ledger accounts reflecting all applicable entries, in the books of Box
Traders, properly balanced/closed off at 31 March of each financial year (show all
calculations):
FAC1502/1 254
(1) Machinery at cost
(2) Depreciation
(3) Accumulated depreciation
(4) Machinery realisation
(1)
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
(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
255 FAC1502/1
(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
25 9
(1) 1 July 20.0 to 31 March 20.1: R60 0006 100 6 12 11 250
25
(2) 1 April 20.1 to 31 March 20.2: R60 0006 100 15 000
Second machine
25 6
1 October 20.2 to 31 March 20.3: R80 0006 100 6 12 10 000 25 000
FAC1502/1 256
12.10.4 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
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
257 FAC1502/1
(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
1 Machine X
44 000 4 000
4 10 000 pa
SELF-ASSESSMENT
FAC1502/1 258
STUDY UNIT
13
Other non-current assets
Learning outcome
Students should be able to record transactions related to other non-current assets such as
investments.
Contents
13.4 Types of other financial assets and method of recording them 260
KEY CONCEPTS
. Intangible assets
. Amortisation
. Other financial assets
. Cash investments
. Loans granted
. Investments in shares
. Ordinary shares
. Investment income
259 FAC1502/1
13.1 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 12. In this
study unit other non-current assets (intangible assets and other financial assets) will be
discussed.
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.
FAC1502/1 260
13.4.2 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.
261 FAC1502/1
FAC1502/1 262
TOPIC D
Learning outcome
The learner should be able to explain, valuate and record the transactions pertaining to
current and non-current liabilities and to explain how they are controlled.
263 FAC1502/1
CONTENTS
FAC1502/1 264
STUDY UNIT
14
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
14.1 Introduction 266
14.2 Trade creditors 266
14.3 Sundry current liabilities 267
14.4 Disclosure in the statement of financial position 268
14.5 Creditors control account 268
14.6 Revision exercises and solutions 273
Self-assessment 276
265 FAC1502/1
KEY CONCEPTS
. Trade creditors
. Sundry current liabilities
. Value added tax payable
. Instalments payable on interest bearing borrowings
. Accrued expenses
. Provisions
. Dividends payable
. Profit share payable
. Settlement discount received
14.1 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.
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.
FAC1502/1 266
Dr Creditor: BAD Suppliers Cr
20.1 R 20.1 R
Jan 30 Bank 495 Jan 2 Purchases 500
Settlement
discount received 5
500 500
COMMENTS
To refresh your memory with regard to accrued expenses and income received in advance,
revise study unit 7, which deals with adjustments.
GOLDEN RULE
That portion of a long-term loan or obligation to be repaid within the next 12 months, must
be disclosed as a current liability in the statement of financial position.
267 FAC1502/1
14.4 Disclosure in the statement of financial position
According to generally accepted accounting practice 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
Other financial liabilities X XXX
Current portion of long-term borrowings XX XXX
Current VAT payable X XXX
Exer ci se 14.2
The following balances were taken from the post-adjustment trial balance of Picnic Traders as
at 31 December 20.1:
R
Trade creditors 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 + 13 000) 235 500
Other financial liabilities 34 600
Current VAT payable 4 500
FAC1502/1 268
The creditors control account reflects a summary of the individual creditors' transactions and
the balance of the creditors 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 creditors control account.
Provision can be made in the general journal for analysis columns for the debtors and creditors
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
creditors 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 creditors ledger or when
posting the totals of the journals to the creditors 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 creditors ledger:
. Error/s in posting to either the control account and/or to the creditors ledger, eg a posting to
the debit side of an account instead of to the credit side, or transposition of figures (R123
instead of R231)
. Incorrect balancing of accounts
. Incorrect totalling of one or more columns in the journals
. Incorrect listing of a balance
. Omission of a posting, where an entry in a journal (or the total column) was not posted to the
ledger account/s
269 FAC1502/1
A reconciliation of the creditors control account balance with the total of individual creditors
balances is explained in the following exercise:
Exer ci se 14.3
ADDITIONAL INFORMATION
(a) A credit note of R353 received from S Ismail in respect of goods returned was correctly
entered in the purchases returns journal, but posted to the wrong side of S Ismail's
account.
(b) An invoice of R286 in respect of goods purchased from L Brand was erroneously omitted
from the purchases journal.
(c) According to the monthly statement received from J Zulu, interest of R45 has been
charged on the overdue account. No entry has as yet been made.
(d) According to the creditors ledger the correct balance on C Roux's account at
30 September 20.2 was R14 926.
(e) Wages paid, R880, was analysed to the creditors column in the cash payments journal. No
correction has as yet been made.
(f) The purchases journal was overcast by R1 000. (``Overcast'' means that the total amount is
more than it should be. ``Undercast'' means that the total is less than it should be.)
FAC1502/1 270
Required:
(1) Prepare the creditors control account in the general ledger for September 20.2.
(2) Prepare the corrected accounts of the creditors in the creditors ledger.
(3) Prepare a list of the adjusted creditors' balances as at 30 September 20.2.
TIP-TOP TRADERS
(1) GENERAL LEDGER
Dr Creditors 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 expense J 45
Wages J 880
143 565 143 565
20.2
Oct 1 Balance b/d 35 308
GOLDEN RULE
. The creditors control account is a summary of ALL transactions related to all the
individual creditor accounts in the creditors ledger.
GOLDEN RULE
. What was done (Dr or Cr) to the individual creditor accounts, must be done IN TOTAL to
the creditors control account.
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
271 FAC1502/1
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 expense J 45 4 093 Cr
GOLDEN RULE
The total of all the balances of the individual creditor accounts in the creditors ledger, must
equal the balance of the creditors 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 creditors 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 creditors 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 creditors 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 creditors control account was compiled at 30 September 20.2.
FAC1502/1 272
14.6 Revision exercises and solutions
14.6.1 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.
Dr Debtors control Cr
20.1 R
Dec 31 Sales and VAT 570 000
Dr VAT output Cr
20.1 R
Dec 31 Debtors control 70 000
Required:
Show how the amount will be reflected on the statement of financial position as at
31 December 20.0.
273 FAC1502/1
Solution: Revision exercise 2
MY COMPANY
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.0 (extract)
ASSETS R
COMMENT
R
Balance of creditors control account Ð 31 May 20.1 16 571
Totals for the month
Cash payments journal:
Creditors 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
debtors ledger from creditors ledger 46
List of individual creditors per creditors ledger:
Credit balances 16 812
Debit balances 110
In the process of reconciling the balances on the creditors control account with the list of
individual balances per creditors ledger, the following errors were discovered:
(a) An invoice for R1 787, which had been entered correctly in the purchases journal was
entered against the account of Tims Ltd as R1 878.
(b) Credit note No 63 for R60 was entered correctly in the purchases returns journal, but
erroneously posted as a credit to the account of Ewing Ltd.
(c) A cheque for R90 paid to M Sorry was entered on the debit side of S Sorry's account.
FAC1502/1 274
(d) The total of the list of creditors balances was overcast by R500.
(e) The total of the purchases journal was undercast by R100.
Required:
(1) Prepare the creditors 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 creditors
control account as determined in (1) above.
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)
Debtors 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 8127 R110) 16 702
275 FAC1502/1
SELF-ASSESSMENT
Now that you have studied this study unit, can you:
FAC1502/1 276
STUDY UNIT
15
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
15.1 Introduction 277
15.2 Recording of a non-current liability in the books and its
disclosure in the financial statements 278
15.2.1 Long-term loans and mortgage bonds 278
15.2.2 Debentures 279
15.3 Revision exercises and solutions 281
15.3.1 Revision exercise 1 281
15.3.2 Revision exercise 2 281
Self-assessment 283
KEY CONCEPTS
. Non-current liabilities
. Long term
. Mortgage bond
. Debenture
. Registrar of Deeds
. Insured by
. Disclosure
. Long-term borrowings
15.1 Introduction
A non-current liability is a liability which is payable at the end of the financial period, after a
period of more than one year. The entity usually provides security for this type of loan.
277 FAC1502/1
Study paragraphs 15.1 and 15.2 of the prescribed book.
Exer ci se 15.1
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.
ECO
LEDGER ACCOUNTS
Dr Land Cr
20.1 R
Jan 1 Mortgage:
ABC Bank J 114 000
FAC1502/1 278
ECO
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.1 (EXTRACT)
ASSETS R
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 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.
15.2.2 Debentures
Exer ci se 15.2
A Company wishes to borrow R2 000 000 by means of debentures of R1 000 each at 15%
interest. The public are invited in an advertisement to buy the debentures. The debentures will
be redeemed on 31 December 20.9. Applications for 2 500 debentures are received and 2 000
debentures are allocated on 1 January 20.1.
Required:
Show the entries in the ledger accounts and statement of financial position of A Company
279 FAC1502/1
Solution Exercise 15.2
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 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
COMMENTS
FAC1502/1 280
15.3 Revision exercises and solutions
15.3.1 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?
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.
Required:
281 FAC1502/1
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 Bank Cr
20.1 R
Jun 30 Land 20 000
Dr Interest expense 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 expense 3 400
B BOMB ENTERPRISES
(2) STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30
SEPTEMBER 20.1 (extract)
FAC1502/1 282
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
COMMENTS
. On 30 September 20.1 interest had not yet been paid on the loan because it is payable
annually on 30 June. The first amount of interest will therefore be paid only on 30 June
20.2.
The interest is calculated as follows:
For the year the amount is
17
R80 000 6 100 = R13 600
Because only three months' interest has accrued, the amount that has to be provided
for is:
3
R13 600 6 12 = R3 400
. The interest is shown as an expense in the statement of 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 Ð 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
7.2.2.
SELF-ASSESSMENT
Now that you have studied this study unit, can you describe the following, record the
necessary entries and calculations in the books and show how they will appear in the
statement of financial position:
. long-term loan?
. mortgage?
. debenture?
. interest on loans?
283 FAC1502/1
FAC1502/1 284
TOPIC E
ACCOUNTING REPORTING
Learning outcome
The learner should be able to prepare the financial statements (i.e. the statement of
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
FAC1502/1 286
STUDY UNIT
16
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
16.1 Introduction 288
16.2 Establishment of a sole proprietorship 288
16.3 Further capital contributions and profit 289
16.4 Drawings 290
16.5 The presentation of equity in the statement of changes in
equity and statement of financial position 291
16.6 Revision exercises and solutions 294
16.6.1 Revision exercise 1 294
16.6.2 Revision exercise 2 295
16.6.3 Revision exercise 3 298
Self-assessment 313
KEY CONCEPTS
. Sole proprietor/sole trader
. Equity
. Capital
. Profit/loss for the period/year
. Drawings
. Additional investment
287 FAC1502/1
16.1 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.
Exer ci se 16.1
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.
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
FAC1502/1 288
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.
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 generally accepted accounting practice.
1.2 Property, plant and equipment are shown at valuation.
2 Property, 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 (Ð) (Ð) (Ð)
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.''
289 FAC1502/1
could then find his present capital insufficient. Suppose he decides to invest a further R15 000
cash in the entity on 1 August 20.1. The capital account in the books of the entity (and also the
capital section of the statement of financial position, if we were to prepare one at this stage)
would reflect the increase.
JB TELEVISION SERVICES
GENERAL LEDGER
Dr Capital: J Brewis 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
16.4 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:
FAC1502/1 290
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''.
It is required that full details of equity must be shown in a statement of changes in equity. Any
changes in the course of the financial year, must be shown in the statement as follows:
JB TELEVISION SERVICES
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 28 FEBRUARY 20.2
Capital
R
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
291 FAC1502/1
Only the balance at the end of the year will be shown in the statement of financial position as
follows:
JB TELEVISION SERVICES
STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.2 (extract)
Note R
EQUITY AND LIABILITIES
Total equity 41 000
Capital 41 000
Exer ci se 16.2
Required:
(1) Prepare the statement of 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.
FAC1502/1 292
Solution Exercise 16.2
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
Rent expense 9 000
Depreciation R(1 300 + 3400) 4 700
Profit for the year 18 970
Other comprehensive income for the year Ð
Total comprehensive income for the year 18 970
Capital
R
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
ASSETS Note R
Non-current assets 20 600
Property, plant and equipment 3 20 600
Current assets 6 735
Inventories 640
Trade 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
293 FAC1502/1
JEFF'S MAINTENANCE SERVICES
(4) NOTES FOR THE YEAR ENDED 31 DECEMBER 20.1
1 Accounting policy:
The annual financial statements have been prepared on the historical cost basis and
comply with generally accepted accounting practice.
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)
FAC1502/1 294
16.6.2 Revision exercise 2
The following information relates to Peter Pumpkin, a service entity:
Dr Cr
R R
Land and buildings (at cost) 100 000
Furniture and fittings (at cost) 42 000
Accumulated depreciation Ð 28 February 20.0:
Furniture and fittings 5 000
15% Mortgage secured by land and buildings 30 000
Capital: P Pumpkin Ð 28 February 20.0 80 000
Debtors control 8 100
Creditors control 3 000
Bank overdraft 800
Drawings 7 300
Petty cash 640
Stationery 1 150
Salaries 21 100
Electricity 12 000
Telephone expense 1 860
Fees earned 59 000
Rent income 16 500
Bank charges 150
Required:
(1) Prepare the statement of comprehensive income of Peter Pumpkin for the year
ended 28 February 20.1.
(2) Prepare the statement of changes in equity of Peter Pumpkin for the year ended
28 February 20.1.
(3) Prepare the statement of financial position of Peter Pumpkin as at 28 February 20.1.
(4) Show the notes for the year ended 28 February 20.1.
295 FAC1502/1
Solution: Revision exercise 2
PETER PUMPKIN
(1) STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED
28 FEBRUARY 20.1
Note R
Revenue 2 59 000
Rent income (R1 500 6 12) 18 000
77 000
Distribution, administrative and other expenses (42 815)
Stationery R(1150 7 150) 1 000
Salaries 21 100
Electricity 12 000
Telephone expense 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 loan R(30 000 x 15%) (4 500)
Profit for the year 29 685
Other comprehensive income for the year Ð
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
R
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
FAC1502/1 296
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 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 generally accepted accounting practice.
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.
297 FAC1502/1
16.6.3 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.
FAC1502/1 298
(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 rent 2 200
Wages and salaries 2 300
28 Cash sales 2 750
Purchased a new counter from Counterman for cash 1 100
(a) B Barnard was declared insolvent and could pay nothing in settlement of his account.
(b) Provision is made annually for depreciation on 28 February at 10% pa on the cost of
vehicles as well as furniture and equipment. No vehicles or furniture and equipment were
purchased or sold during the eleven months ended 31 January 20.1.
(c) Inventory on hand at 28 February 20.1 amounted to R60 000.
(d) The telephone account of R264 for February 20.1 was only received on 1 March 20.1.
(e) The bank statement received during March 20.1 indicated a favourable balance of R16 965
on 28 February 20.1. A comparison with the cash journals reflected the following:
(i) Cheques for water and electricity, R671 and rent, R2 200 issued on
27 February 20.1 had not yet been presented at the bank for payment.
299 FAC1502/1
(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.
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) Ð
FAC1502/1 300
CASH PAYMENTS JOURNAL FOR FEBRUARY 20.1 CPJ12
Vat Vat Settlement Sundry accounts
Input Output discount
received
Doc Date Details Fol Bank Purchases Cr Creditors 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 2 700 L9 VAT Control
revenue service 2 700
C135 27 City council 671 61 610 L21 Water & electricity
C136 Rentguy 2 200 200 2 000 L22 Rent expense
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
301 FAC1502/1
SALES RETURNS JOURNAL FOR FEBRUARY 20.1 SRJ12
Credit
Date Details note Fol Returns VAT Output Debtors
R R R
16 C Chetty 201 DL3 100 10 110
100 10 110
L15 L13 L7
R R
28 Credit losses L27 840
VAT Input L12 84
B Barnard/Debtors DL2
control L7 924
B Barnard's account written off
* 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.
FAC1502/1 302
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
303 FAC1502/1
Dr Debtors 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
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 Creditors 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
FAC1502/1 304
Dr VAT Input L12 Cr
20.1 R 20.1 R
Debtors CRJ12 3 Feb 28 Creditors PRJ12 15
Feb 28 Bank CPJ12 712 VAT Control J12 2 048
Creditors PJ12 1 240
Debtors J12 84
Accrued
expenses J12 24
2 063 2 063
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
Trading account J13 241 170 Debtors SJ12 3 700
241 200 241 200
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
Creditors PJ12 12 400 28 Trading account J13 181 200
181 260 181 260
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
19 Bank CPJ12 150 loss J13 364
364 364
FAC1502/1 306
Dr Depreciation L28 Cr
20.1 R 20.1 R
Feb 28 Accumulated Feb 28 Profit or
depreciation: loss J13 9 000
Furniture J12 4 000
Vehicles J12 5 000
9 000 9 000
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 16 965
Outstanding cheques: No 134 671
135 2 200
Correction of error 3 000
Debit balance as per bank account 17 094
19 965 19 965
DEBTORS 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
FAC1502/1 308
Dr E Erasmus DL5 Cr
20.1 R R
Feb 4 Sales SJ1 990
CREDITORS 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 Ð C Chetty 2 090 Creditors Ð 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
Debtors control 4 630
Creditors 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
Rent expense 24 000
Wages and salaries 27 600
Telephone expense 2 342
Settlement discount granted 30
Settlement discount received 60
Credit losses 840
Depreciation 9 000
Accrued expenses 264
Bank charges 45
FAC1502/1 310
Date Details Fol Debit Credit
20.1 R R
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
Rent expense L22 24 000
Wages and salaries L23 27 600
Telephone expense L24 2 342
Credit losses L27 840
Depreciation L28 9 000
Bank charges L30 45
Transfer of income and expenses
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
311 FAC1502/1
KUMANBUY GENERAL DEALER
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 28 FEBRUARY 20.1
Capital
R
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
FAC1502/1 312
3 Property, 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 Ð 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
313 FAC1502/1
STUDY UNIT
17
Nonprofit entities
Learning outcome
Students should be able to record all transactions related to organisations and societies not
for gain.
Contents
Key concepts 315
17.1 Introduction 315
17.2 Receipts and payments statement 315
17.3 Income and expenditure statement 316
17.4 Trading statement 317
17.5 Accumulated fund 317
17.6 Special funds 317
17.7 Exercises 318
17.8 Entrance fees 323
17.9 Comprehensive example 324
17.10 Revision exercises and solutions 330
17.10.1 Revision exercise 1 330
17.10.2 Revision exercise 2 336
Self-assessment 341
FAC1502/1 314
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
17.1 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.
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
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
Investment made at
Interest income 2 332 ABC Bank 5 000
Net proceeds from dance 620
Balance c/d 3 410
Donation 3 520
23 672 23 672
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 comprehensive income) as well as a statement of financial position, similar to
those of an ordinary trading entity, are usually also required.
For all practical purposes the income and expenditure statement is prepared according to the
guidelines provided in GAAP.
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.
FAC1502/1 316
``Expenses''. The income and expenditure 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:
1. Shows the total income and expenditure 1. Shows only actual cash receipts and
for the period, even if not yet received or payments.
paid (applying the accrual principle).
2. Indicates the result of the financial 2. Shows the amount of cash on hand at the
period's transactions by showing a sur- beginning and at the end of a financial
plus or a deficit. period, but does not indicate a surplus or
deficit.
3. Receipts and payments of a capital 3. Receipts and payments of a capital
nature are not brought into account. nature are included.
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.
A nonprofit entity often sets money aside for a specific purpose so that not all the cash is spent
317 FAC1502/1
on expenses of a general nature. Special funds are established for these purposes and they
are usually accounted for separately from the accumulated funds. Donations can then be made
to these funds or a special fund can be established for a conditional donation or legacy.
A separate investment account is usually opened for each special fund in which the capital is
deposited. Such donations and income earned from the investments thereof do not form part of
the general operating income of the organisation and should, as a general rule, not be included
in the income and expenditure statement. Likewise, the applicable expenses should also be
reflected through the fund account and not through the income and expenditure account.
. 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.
17.7 Exercises
Exer ci se 17.1
Special fund
Income from a fund which must be used for a specific expense
On 1 July 20.0 Stear Tennis Club received a donation to the amount of R8 000 from S Star on
the express condition that the income received from the donation may only be used for the
FAC1502/1 318
painting of the tennis courts. On the same date the amount was invested as a fixed deposit at
ABC Bank at an interest rate of 10% per annum. The interest is received annually on 30 June.
No tennis courts were painted during the year ended 30 June 20.1. It was decided, as a
general policy, to invest all surplus interest amounts at ABC Bank as fixed deposits for a year.
During the year ended 30 June 20.2, the tennis courts were painted at a cost of R750. The
surplus interest was invested according to general policy at an interest rate of 10% per annum.
Required:
Show how these transactions will be recorded in the Star fund account of the club.
Dr Star fund Cr
20.1 R R 20.0 R R
Jun 30 Balance c/d 800 8 000 Jul 1 Bank: Capital donation Ð 8 000
20.1
Jun 30 Bank: Interest on investment 800
20.2 20.1
Jun 30 Tennis courts painted 750 Ð Jul 1 Balance b/d 800 8 000
Balance c/d 930 8 000 20.2
Jun 30 Bank: Interest oninvestment(a) 880 Ð
20.2
Jul 1 Balance b/d 930 8 000
CALCULATION
(a) (10% 6 R8 000) + (10% 6 R800) = R880
COMMENTS
. Because the interest earned and the expenses in respect of the tennis courts that were
painted are accounted for in the fund account, these items will not be disclosed in the
income and expenditure statement. The tennis courts were painted during the year.
The recording of these expenses would have been as follows: Debit the painting of
tennis courts account and credit the bank account. On 30 June 20.2, the date on which
the interest was received, the fund account was debited with this expense and the
painting of tennis courts account was credited. (This entry will balance the painting of
tennis courts account.)
. The statement of financial position of the Stear Tennis Club will show the items in
respect of the fund as follows:
319 FAC1502/1
STEAR TENNIS CLUB
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.2 (extract)
ASSETS Note R
Non-current assets
Financial assets: Star fund Ð Fixed deposit at 8 930
10% per annum at ABC Bank
Exer ci se 17.2
SPECIAL FUND
Income from a fund which must be used to purchase property, plant and equipment.
On 1 July 20.0 the Stear Tennis Club received a donation to the amount of R100 000
from S Superstar on the express condition that the revenue from the fund may only be
used for the building of tennis courts. On the same date the amount was invested as a fixed
deposit at ABC Bank at an interest rate of 10% per annum. The interest is received annually on
30 June. No tennis courts were built during the year ended 30 June 20.1. It was decided, as a
general policy, to invest all surplus interest amounts at ABC Bank as fixed deposits for a year.
During the year ended 30 June 20.2, the tennis courts were built at a cost of R70 000.
Required:
Show how these transactions are recorded in the Superstar Fund account of the club.
FAC1502/1 320
Solution Exercise 17.2
Dr Superstar fund Cr
20.1 R R 20.0 R R
Jun 30 Balance c/d 10 000 100 000 Jul 1 Bank: Capital donation Ð 100 000
20.1
Jun 30 Bank: Interest on investment 10 000
20.2 20.1
Jun 30 Accumulated fund 21 000 Ð Jul 1 Balance b/d 10 000 100 000
Balance c/d Ð 100 000 20.2
Jun 30 Bank: Interest oninvestment(a) 11 000 Ð
20.2
Jul 1 Balance b/d Ð 100 000
CALCULATION
(a) (10% 6 R100 000) + (10% 6 R10 000) = R11 000
COMMENTS
. Because a non-current asset was obtained from the income of the fund, the amount
contributed by the fund must be credited to the accumulated fund account. Bear in
mind that the asset account was debited during the year at the date of the purchase.
. The statement of financial position of Stear Tennis Club will show the items in respect
of the fund as follows:
STEAR TENNIS CLUB
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.2 (extract)
ASSETS Note R
Non-current assets 170 000
Property, plant and equipment 1 70 000
Financial assets: Superstar fund Ð Fixed deposit at
10% per annum at ABC Bank 100 000
321 FAC1502/1
STEAR TENNIS CLUB
NOTES FOR THE PERIOD ENDED 20 JUNE 20.2 (extract)
Note 1 (extract)
R
Additions (tennis courts): 70 000
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.
Exer ci se 17.3
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.
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:
R
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.
FAC1502/1 322
The Trueman fund and the related investment will be disclosed as follows in the statement of
financial position:
ASSETS Note R
Non-current assets 10 520
Property, plant and equipment 1 7 000
Financial assets: General fund Ð Fixed deposit at 10%
per annum at ABC Bank
Trueman fund 3 520
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:
R
Revenue 14 140
Membership fees 10 000
Donation received (T Trueman) 3 520
Net proceeds from dance 620
Entrance fees are payable by prospective members when they apply for membership of a club.
The entrance fees are entered on the debit side of the bank account, and are credited to the
entrance fees account.
These fees, being nonrecurrent, must be credited directly to the accumulated fund account
(capitalised) and are not shown in the income and expenditure statement as revenue.
323 FAC1502/1
Study paragraphs 17.5 and 17.6 of the prescribed book.
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 R 800
Received in advance at 28 February 20.2 R1 300
(c) Depreciation on furniture and equipment is calculated at 10% per annum on the diminished
balance. The depreciation for the year ended 28 February 20.2 must still be brought into
account.
(d) Six new members joined the club during the year. The entrance fee of R200 per person is
included in the figure for membership fees received, but should be included in the
accumulated fund.
(e) Inventory of refreshments at 28 February 20.2 amounted to R300.
(f) The interest income (SAL Bank) was received in respect of the Jekyll fund.
(g) The current account Ð Zeeland Bank, had an unfavourable balance of R1 350 at
28 February 20.1.
FAC1502/1 324
Required:
Prepare:
1. The Jekyll fund account in the general ledger of the club for the year ended
28 February 20.2
2. The following statements of the club for the year ended 28 February 20.2:
(a) Refreshments: trading statement
(b) Receipts and payments statement
(c) Income and expenditure statement
3. The statement of financial position of the club as at 28 February 20.2.
4. The property, plant and equipment note.
20.2 R R 20.1 R R
Feb 28 Maintenance: buildings 1 500 Ð Mar 1 Balance b/d Ð 20 000
Balance c/d 100 20 000 20.2
Feb 28 Bank: Interest on investment 1 600
20.2
Mar 1 Balance b/d 100 20 000
R
Revenue 6 200
Cost of sales (3 500)
325 FAC1502/1
PRETORIA MODELLERS' CLUB
2(b) RECEIPTS AND PAYMENTS STATEMENT FOR THE YEAR ENDED
28 FEBRUARY 20.2
R
Bank balance at 28 February 20.1 (1 350)
Receipts 29 100
R
Income 22 500
Membership fees
R(15 000 7 900 + 1 100 + 800 7 1 300 71 200) (a) 13 500
Admission fees (hobbies fair) 6 300
Gross profit on sale of refreshments 2 700
FAC1502/1 326
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 Ð SAL Bank at 8% pa 20 000
Jekyll fund 20 000
327 FAC1502/1
PRETORIA MODELLERS' CLUB
(4) NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.2
Note 3 (extract)
R R R
Carrying amount: Beginning of year 50 000 7 290 57 290
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 expen- Balance c/d 800
diture J *13 500
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.
FAC1502/1 328
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 Accrued income J 800
in advance J 1 300
Income and
expenditure J 13 500*
16 900 16 900
* Balancing figure
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.
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.
COMMENTS
. The above example is an illustration of the treatment of funds. Note the following:
. The income from the Jekyll fund is used to finance an expense item.
. The nonexpendable capital amounts of funds are treated separately from the
unspent portions of the interest which are still available for future applications
(expendable funds).
329 FAC1502/1
. Should the income from a fund be insufficient to cover an expense, the shortage can
be debited to the income and expenditure account of the club.
. In the above example the income and expenditure in respect of the hobbies fair is
merely shown as a calculation in the income and expenditure statement. Had there
been a number of different items pertaining to the fair, it would have been necessary to
prepare a separate trading statement in respect of the hobbies fair.
. Entrance fees are capitalised, that is, credited directly to the accumulated fund
account.
. In the question the opening balance of the accumulated fund is given. If it is not given,
it can be calculated as the difference between the total debit balances and the total
credit balances supplied in any list of balances from which the final statements are to
be compiled.
FAC1502/1 330
ADDITIONAL INFORMATION
(a) Bar inventory at 31 December 20.4 amounted to R2 500.
(b) At 31 December 20.4, dining room inventory was not counted, but it can be assumed that
the usual gross profit margin of 50% on turnover was realised.
(c) At 31 December 20.4, crockery and linen were valued at R5 000.
(d) Implements and tools must be depreciated at 20% per annum, using the diminishing
balance method.
(e) Furniture must be depreciated by R1 000.
(f) Insurance premiums paid during the year, amounting to R1 600, were debited to the
telephone expense account. Half of this amount is to be regarded as insurance prepaid.
(g) The balance of the membership fees account was compiled from the following; an amount
of R1 800 in respect of prepaid membership fees at 31 December 20.3 and cash received
during the year, R82 200. The balance has still to be adjusted for the membership fees in
arrears to the amount of R1 000 and prepaid membership fees to the amount of R2 100 at
31 December 20.4.
(h) A new member's register which is in use was designed and printed at a quoted price of
R100. This transaction has still to be recorded in the books.
(i) The club secretary went on leave before Christmas and was paid his January 20.5 salary
of R1 200 in advance. This amount forms part of the balance of the salaries and wages
account (R35 000).
(j) On 29 December 20.4 a club member deposited an amount of R500 in the club's bank
account as a donation. This donation was only discovered when the bank balance was
compared with the balance of the bank statement and must still be taken into account.
(k) The mortgage loan is secured by a first mortgage over fixed property.
Required:
331 FAC1502/1
Solution: Revision exercise 1
GREEN GOLF CLUB
(1) INCOME AND EXPENDITURE STATEMENT FOR THE YEAR ENDED
31 DECEMBER 20.4
R
Income 141 900 )
FAC1502/1 332
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
333 FAC1502/1
GREEN GOLF CLUB
(3) NOTES FOR THE YEAR ENDED 31 DECEMBER 20.4
Note 3 (extract)
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
FAC1502/1 334
(d) Accumulated fund R
Balance (28 February 20.1) 150 000
Add: Surplus for the year 8 900
Entrance fees 10 500
169 400
COMMENTS
. Entrance fees are not shown in the income and expenditure statement because
. They represent nonrecurrent income.
. They are of a capital nature.
. The current expenses of a club, society or organisation not for gain should be
estimated in advance for the next financial year. The annual membership fees are
then determined by dividing the total budgeted expenses by the number of members.
. Smaller donations received can be regarded as normal revenue, but should a
donation be of a nonrecurrent nature and the amount is material (eg where a
benefactor makes a special donation, or where a testamentary legacy is bequeathed),
then it clearly becomes a receipt of a capital nature. Certain bodies, such as welfare
organisations, often receive large amounts from the proceeds of a street collection, or
from state grants-in-aid. These receipts are naturally not of a capital nature (unless
specifically labelled and awarded as such) and should therefore be disclosed in the
income and expenditure statement.
. Crockery, glassware, linen, et cetera are not current assets, but form part of the
equipment that must be provided before income can be earned.
. Wages do not form part of gross profit and must be shown in the income and
expenditure statement.
. Note that in practice calculations are not shown on final statements [eg insurance
(R40 + 1/2 of R160)]. For examination purposes, you may show calculations in this
manner, on condition that they are clearly indicated as calculations.
335 FAC1502/1
17.10.2 Revision exercise 2
The following information relates to the Spring Tennis Club:
Payments:
Rates and 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
FAC1502/1 336
ADDITIONAL INFORMATION
(a) Entrance fees must be capitalised.
(b) Inventory on hand at 31 December 20.2:
Tennis balls Ð R420
Refreshments Ð R72
(c) Rental of tennis courts amounted to R480 per month.
(d) Unpaid membership fees for 20.1 are irrecoverable.
(e) The club has 84 members and membership fees amount to R20 per month.
(f) Stationery amounting to R120 was purchased on credit and used during the year.
(g) Wages of R360 are still outstanding.
(h) Used equipment with a cost price of R1 200 and accumulated depreciation of R960 at
31 December 20.1 must be written off as from 1 January 20.2.
(i) Provision must be made for depreciation on equipment at 20% per annum on the
diminished balance.
(j) The interest on the fixed deposit at Tradebank may only be used for championship
expenses. The capital amount of the special fund is not expendable.
Required:
20.2 R 20.2 R
Jan 1 Balance b/d 192 Jan 1 Balance b/d 168
Dec 31 Income and ex- Dec 31 Bank Ð 20.1 120
penditure: Bank Ð 20.2 19 920
R(20 6 84 6 12) 20 160 Bank Ð 20.3 48
Balance (prepaid) c/d 48 Credit losses 72
Balance (in ar-
rears) c/d 72
20 400 20 400
20.3 20.3
Jan 1 Balance b/d 72 Jan 1 Balance b/d 48
337 FAC1502/1
SPRING TENNIS CLUB
(2) INCOME AND EXPENDITURE STATEMENT FOR THE YEAR ENDED
31 DECEMBER 20.2
R
Income 29 856)
Visitors' fees 4 860)
Membership fees 20 160)
Interest (savings account) 156)
Donations 4 680)
Expenses (30 364)
Rates and 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)
Rent R(480 6 12) 5 760)
Depreciation (a) 2 616)
Loss on the scrapping of equipment (a) 240)
Championship: shortage (b) 88)
FAC1502/1 338
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 receivables R[72 + 512 (c)] 584
Cash and cash equivalents R[3 960 + 10 504 (d and e)] 14 464
339 FAC1502/1
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) 6 20% 2 496
3
R2 400 6 20% 6 12 120
2 616
(b) Championship shortage R
Expenses 6 400
Income: Entry fees 3 240 Ð
Interest (R25 600 6 12%) 3 072 6 312
Shortage 88
FAC1502/1 340
SELF-ASSESSMENT
Now that you have studied this study unit, can you
341 FAC1502/1
STUDY UNIT
18
Incomplete records
Learning outcome
Contents
Key concepts 343
18.1 Introduction 343
18.2 Disadvantages of using incomplete records 343
18.2.1 Incompleteness 343
18.2.2 No record of non-current assets and non-current liabilities 343
18.2.3 No details of profits and/or losses 343
18.2.4 The final results are unreliable 343
18.3 Calculation of profit/loss from incomplete records 344
18.4 Conversion from a single entry into a double entry system 346
18.4.1 Where subsidiary journals are kept 346
18.4.2 Where minimal records are kept 347
18.5 Revision exercises and solutions 352
18.5.1 Revision exercise 1 352
18.5.2 Revision exercise 2 355
Self-assessment 359
FAC1502/1 342
KEY CONCEPTS
. Incomplete records
. Statement of assets and liabilities
. Conversion to double entry system
18.1 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.
18.2.1 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.
343 FAC1502/1
18.3 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.
Exer ci se 18.1
D Donovan keeps his books on the single entry basis. On 30 April 20.1, his assets and
liabilities are as follows:
R
Furniture and fittings 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
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 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 Ð DJ Bank 5 500
Current liabilities 9 400
Trade and other payables 9 400
* Balancing figure
FAC1502/1 344
On 30 April 20.2 the position appeared to be as follows:
R
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
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)
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:
R
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
345 FAC1502/1
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 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 Ð DJ Bank 5 000
Current liabilities 8 600
Trade and other payables 8 600
Total equity and liabilities 39 050
R
* 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
generally accepted accounting practice.
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.
FAC1502/1 346
The necessary entries for rent, 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.
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 debtors and creditors control accounts. All money received with regard to sales of
inventory must then be credited to the debtors 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 creditors 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.
347 FAC1502/1
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 debtors control account then represents sales, and the
balancing figure on the credit side of the creditors 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 comprehensive income need to be calculated.
Step 7
All the required information is now available and the financial statements can be prepared.
Exer ci se 18.2
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:
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
Rent expense 14 400
Telephone expense 3 420
Advertising 2 100
Insurance 3 250
Sundry expenses 7 650
Bank charges 190
Drawings 35 500
Balance c/d 5 325
You establish that the following must also be taken into account:
FAC1502/1 348
(a) Depreciation is to be written off on the carrying amounts at 20% per annum on vehicles and
at 10% per annum on furniture and fittings.
(b) Balances as at 30 April 20.1:
R
Accrued wages 225
Prepaid insurance 250
Inventory: Merchandise 12 190
Debtors 11 230
Creditors 7 145
Required:
Prepare the annual financial statements for C Caity for the year ended 30 April 20.1.
NB: Notes are not required.
Assets R
Vehicles 15 300
Furniture and fittings 12 600
Inventory 9 680
Debtors 7 930
Bank 7 260
52 770
Liabilities (6 095)
Creditors 5 645
Accrued wages 450
Capital 46 675
Determine the sales and purchases for the year to 30 April 20.1:
Dr Debtors control Cr
R R
Balance: Debtors b/d 7 930 Bank: Debtors 124 538
Sales* 149 600 Cash sales 21 762
Balance: Debtors c/d 11 230
349 FAC1502/1
Dr Creditors control Cr
R R
Bank: Creditors 66 500 Balance: Creditors b/d 5 645
Balance: Creditors c/d 7 145 Purchases* 68 000
73 645 73 645
* Balancing figures
Calculate the amounts to be taken into account in the statement of 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
FAC1502/1 350
C CAITY
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 APRIL 20.1
R
Revenue 149 600
Cost of sales (65 490)
77 680
Inventory: 30 April 20.1 (12 190)
Gross profit 84 110
Distribution, administrative and other expenses: (50 080)
* Vehicles (R15 300 6 20%) = R3 060 + Furniture and fittings (R12 600 6 10%) = R1 260.
C CAITY
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 APRIL 20.1
Capital
R
Balance at 1 May 20.0 46 675
Total comprehensive income for the year 34 030
Drawings (35 500)
351 FAC1502/1
C CAITY
STATEMENT OF FINANCIAL POSITION AS AT 30 APRIL 20.1
ASSETS Note R
Non-current assets 23 580
Capital 45 205
Current liabilities 7 370
Trade and other payables R(7 145 + 225) 7 370
R R
Vehicles (at cost) 24 500 24 500
Furniture and fittings (at cost) 18 800 18 800
Inventory: Trading 20 750 28 400
Debtors 8 700 11 600
Bank (favourable) 1 300 2 700
Long-term borrowing 15 000 10 000
Creditors 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.
(c) An amount of R500 must be written off as irrecoverable.
FAC1502/1 352
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.
Capital 63 350
353 FAC1502/1
Estimated profit
R
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)
Depreciation (5 555)
R
* Balance 1/8/20.1 47 500
* Estimated profit 28 295
* Less: Drawings (18 500)
57 295
FAC1502/1 354
18.5.2 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:
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 expense 4 360
Required:
355 FAC1502/1
Solution: Revision exercise 2
CALCULATIONS
(a) Capital at the beginning of the year:
R
Assets 65 800
Land and buildings 36 000
Vehicles 12 000
Furniture and equipment 2 600
Inventory 13 000
Debtors 2 200
(20 900)
Liabilities
Loan: NKA Bank 8 400
Creditors 7 200
Bank overdraft 5 300
Capital 44 900
FAC1502/1 356
(c)
Dr Debtors 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
(d)
Dr Creditors 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
* Balancing figure
357 FAC1502/1
M MANDOSA
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 20.2
R
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)
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 7 R8 400) (500)
* 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
R
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)
FAC1502/1 358
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 receivables 6 800
Cash and cash equivalents 8 840
* R36 000 + R(12 000 7 1 800) + R(2 600 7 130) = R48 670
SELF-ASSESSMENT
Now that you have studied this study unit, can you
359 FAC1502/1