Accounting For All-1

IN D
PR SE
T
RE EVI
R
AccountingforAll
Accounting
AccountingforAll
Accounting for All will help first year students to master financial
accounting and cost accounting especially in courses where these
are not major subjects. The content is accessible as it is written in an
easy-to-understand manner which enables students to work through
each chapter independently. The teaching methodology takes a step-
by-step approach and is supported by extensive explanatory examples
and revision questions.
Accounting for All will benefit any student who requires a fundamental
understanding of financial accounting and cost accounting principles
and concepts, as it applies to the world of business.
Lecturer support material is made available to prescribing institutions.
About the author

Madri Schutte is currently a part-time lecturer at the Tshwane
University of Technology (TUT), where she presents the subject
M Schutte
Accounting for Personnel Practitioners. Previously, she was a full-time
senior lecturer in the cost accounting department. She holds a PhD in
Business Management (Cost Accounting) from Vista University, and
has made a solid contribution to academia with extensive lecturing
experience in MBA cost accounting modules, as well as other financial
accounting and cost accounting service modules. She has over
twenty years experience in private practice and she is a member of
AccountingforAll
SAIPA (South African Institute of Professional Accountants). Her
passion for teaching and learning is evident in her involvement in
authoring other financial accounting and cost accounting textbooks.
ISBN:978-1-48510-218-2
M Schutte
www.juta.co.za
www.jutaacademic.co.za
WK15-ACCOUNTING FOR ALL.indd 2-4 3/10/2013 6:41 PM

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Accounting for All
M Schutte
Accounting for All
First published 2015

Print published as Accountancy the easy way by Madri Scheepers
ISBN 978-0-620-42500-1
First edition 2004
Revised reprint 2015
Accounting for All by Madri Schutte (Juta & Co., 2014)
Juta and Company (Pty) Ltd

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© 2015 Juta & Company (Pty) Ltd
ISBN 978 1 48510 374 5 (Print)

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CONTENTS
Preface xvii
Terminology xviii
CHAPTER 1
BASIC CONCEPTS IN ACCOUNTANCY – ACCOUNTING
PROCESS
Page
1.1 Introduction 1
1.2 Definition of accounting 1
1.3 Purpose of accounting 1
1.4 External users of financial statements 2
1.5 The term financial position 2
1.6 The term financial performance 2
1.7 Types of reports of accounting 2
1.8 Elements of financial statements 3
1.9 Underlying assumptions of financial accounting 3
1.9.1 The accruals basis 3
1.9.2 The going concern assumption 3
1.10 Qualitative characteristics of financial accounting 3
1.10.1 Understandability 3
1.10.2 Reliability 3
1.10.3 Relevance 3
1.10.4 Comparability 4
1.11 Dual concepts 4
1.12 Definition of an account 4
1.13 What is a transaction? 4
1.14 Starting a business 4
1.15 Classifications of accounts 5
1.15.1 What is an asset? 5
1.15.2 What is a liability? 5
1.15.3 What is income? 6
1.15.4 What is an expense? 6
1.16 Explanation of concepts 7
1.16.1 Capital (liability) (credit balance) 7
1.16.2 Drawings (subtracted from capital = we can say it’s
a negative liability) (debit balance) 7
1.16.3 Debtor (trade receivables) (asset) 8
1.16.4 Creditor (trade and other payables) (liability) 8
1.16.5 Settlement discount received (income) 8
1.16.6 Settlement discount granted (expense) 8
1.16.7 Credit losses (expense) 8
1.16.8 Credit losses recovered (income) 8
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1.16.9 Depreciation (expense) 8
1.16.10 Returns 8
1.17 What is the accounting process? 9
1.18 Accounting process in detail 9
1.19 Financial reports 10
Questions 12
CHAPTER 2
BUSINESS TRANSACTIONS AND SOURCE DOCUMENTS
2.1 Introduction 15
2.2 What is a business transaction? 15
2.3 The principle of double entry based on the principle of duality 15
2.3.1 Accounting equation 15
2.3.2 The principle of double entry 16
2.3.3 Influence of a transaction on the accounting equation 16
2.4 Summary of different accounts in accounting 19
2.5 Inventory systems 21
2.5.1 Perpetual inventory system 21
2.6 Calculation of profit, selling price and cost price 23
2.7 Types of business transactions 27
2.8 How transactions are recorded 28
2.8.1 The books of a business 28
2.9 Source documents the starting point of the recording process 28
2.10 Cash transactions and documents 30
2.10.1 Receive money/receipt 30
2.10.2 Cheque payments/cheque and cheque counterfoil 31
2.10.3 Make a cash sale/cash invoice 31
2.10.4 Bank deposit slip 32
2.10.5 Cash invoice from a supplier 33
2.11 Credit transactions and documents 34
2.11.1 Tax invoice issued by us (credit sales) 34
2.11.2 Tax invoice received by us (credit purchases) 35
2.12 Returns 35
2.12.1 Sales returns (we issued the credit note) 36
2.12.2 Purchases returns (credit note received from supplier) 36
2.13 Discounts 36
2.13.1 Settlement discounts (also see chapter 1) 37
2.13.2 Trade discounts 37
2.13.3 Quantity discount 37
2.13.4 Cash discounts 37
2.14 Subsidiary journals 37
2.14.1 Cash journal/cash receipts and payments journal 38
2.14.2 Petty cash book 38
2.14.3 Purchases journal/creditors journal 38
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2.14.4 Purchases returns journal/creditors allowances journal 38
2.14.5 Sales journal/debtors journal 38
2.14.6 Sales returns journal/debtors allowances journal 38
2.14.7 General journal 38
2.15 Summary 39
2.15.1 Summary cash – source document 39
2.15.2 Summary sales – source documents and subsidiary journals 40
2.15.3 Summary purchases – source documents and subsidiary
journals 41
2.16 How the books link together 43
Questions 44
CHAPTER 3
RECORDING TRANSACTIONS (DOUBLE-ENTRY SYSTEM)
3.1 Introduction 53
3.2 The ledger account 53
3.3 The ledger 54
3.4 When to debit or credit asset, owner’s equity and liability accounts 55
3.5 Balancing the accounts 58
3.6 When to debit or credit income or expense accounts 60
3.6.1 The difference between assets and expense, capital
and income 60
3.6.2 Statement of financial position items 60
3.6.3 Statement of profit or loss and other comprehensive
income items 60
3.6.4 Income and capital 61
3.6.5 How to record income and expense transactions 61
Questions 66
CHAPTER 4
INTRODUCTION TO VAT
4.1 Introduction 71
4.2 What is VAT? 71
4.3 Registration for VAT 72
4.4 At what rate is VAT paid? 72
4.5 How to identify transactions where VAT is charged 73
4.6 How to identify transactions where VAT can be recovered 73
4.7 How to calculate VAT 75
4.8 Discount 76
4.9 Calculating VAT due to, or receivable from the Receiver 77
Questions 79
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CHAPTER 5
BOOKS OF PRIME ENTRY
5.1 Introduction 82
5.2 Cash receipts and payments journal 82
5.2.1 What is a cash receipts/payments journal (cash book)? 83
5.2.2 Source documents for cash journal entries 83
5.2.3 Recording transactions in the cash journal 84
5.2.4 Cash receipts journal 85
5.2.5 Posting cash receipts to the ledger 87
5.2.6 Posting from the cash payment journal to the ledger 92
5.2.7 Settlement discount granted and received 100
5.2.8 Recording of VAT 108
5.3 Petty cash 128
5.3.1 What is petty cash used for? 128
5.3.2 The imprest system 128
5.3.3 Petty cash vouchers 128
5.3.4 Security and control 129
5.3.5 Receipts into petty cash 129
5.3.6 Purpose of the petty cash book 130
5.3.7 Topping up the float and balancing the petty cash book 133
5.3.8 Posting petty cash transactions 135
5.3.9 Postings from the petty cash book with VAT column 137
5.4 Purchases journal/creditors journal 139
5.4.1 Checking suppliers’ invoices 140
5.4.2 Security and controls 140
5.5 The purchases returns journal/creditors allowance journal 144
5.5.1 Posting the purchases journal and purchases returns
journal to the ledger 145
5.5.2 Posting from the purchases returns journal to the general
ledger 148
5.5.3 Posting of VAT in the purchases returns journal 149
5.5.4 Creditors ledger and creditors control account 153
5.6 Sales and sales returns journal/debtors and debtors allowances
journal 168
5.6.1 What is a sales invoice? 168
5.6.2 Internal control 169
5.6.3 What is a sales journal/debit journal? 170
5.6.4 Calculating discounts allowed 173
5.6.5 Sales returns journal/debtors allowance journal 174
5.6.6 Posting sales journal and sales returns journal 176
5.6.7 What is the debtors ledger? 176
5.6.8 What is the debtors control account? 177
5.6.9 How to reconcile the debtors control account with the
debtors ledger 183
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5.7 Recording bad debts (credit losses) and correcting errors 186
5.8 Correction of errors 190
Questions 201
CHAPTER 6
BANK RECONCILIATION STATEMENT
6.1 Introduction 216

6.2 What is a bank reconciliation statement? 216
6.3 Comparing the records 216
6.4 Reconciliation procedure 217
6.5 Comparison of the bank statement with the cash receipts journal
and cash payments journal (or the bank account) of the current
month with the bank reconciliation statement of the previous month 225
Questions 229
CHAPTER 7
THE TRIAL BALANCE

7.2 What is a trial balance? 244
7.3 When all balances are correct but a balance is omitted 247
7.4 Errors not revealed by the trial balance 248
7.5 Errors revealed by the trial balance 250
7.6 Correcting errors in the books of account and/or trial balance 251
Questions 260
CHAPTER 8
PROPERTY, PLANT AND EQUIPMENT

8.2 Characteristics of assets 277
8.3 Classification of assets 277
8.4 Fixed assets vs current assets 277
8.4.1 Tangible vs intangible assets 279
8.4.2 Investments 281
8.5 Capital and revenue expenses 281
8.6 Depreciation 282
8.7 Financial year 283
8.8 Accumulated depreciation 284
8.9 Carrying value 284
8.10 Cost price 285
8.11 Scrap value 286
8.12 Lifespan 286
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8.13 Depreciation methods 286
8.13.1 Straight-line method 287
8.13.2 Reducing balance method 289
8.14 Calculation of depreciation for a period shorter than twelve months 292
8.14.1 Straight-line method 292
8.14.2 Reducing balance method 293
8.15 Disclosure of the purchase of a fixed asset in the financial records 294
8.16 Disclosure of depreciation and accumulated depreciation in the
financial records 295
8.17 Recording the purchase of a fixed asset 296
8.18 Recording depreciation and accumulated depreciation 297
8.19 Disposal/trade-in of a fixed asset 297
8.19.1 Sale of a fixed asset 297
8.19.2 Trading-in of an asset 302
8.19.3 Scrapping of a fixed asset 303
Questions 304
CHAPTER 9
INVENTORY

9.2 Inventory can be categorised as follows 310
9.2.1 Direct material 310
9.2.2 Indirect material 311
9.2.3 Work in process 311
9.2.4 Finished goods 311
9.2.5 Trading inventories 311
9.3 Cost of goods sold 311
9.4 Calculation of closing inventory units 312
9.5 Inventory valuation methods 313
9.5.1 FIFO 314
9.5.2 Weighted average method 314
9.5.3 LIFO 314
9.6 Inventory recording methods 314
9.6.2 Periodic inventory system 316
9.7 Calculation of gross profit 317
9.8 Calculation of cost of sales 317
9.9 Valuation of closing inventory 318
9.9.1 Inventory valuation using the perpetual inventory system 319
9.9.2 Inventory valuation using the periodic inventory system 321
Questions 324
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Contents
CHAPTER 10
YEAR-END ADJUSTMENTS

10.2 The accounting cycle 332
10.3 Accounting concepts 332
10.3.1 The ‘going concern’ concept 332
10.3.2 The ‘accrual’ concept 332
10.3.3 The ‘comparability’ concept 333
10.3.4 The ‘prudence’ concept 333
10.4 Adjustments 334
10.4.1 Accrued expenses 335
10.4.2 Prepaid expenses 335
10.4.3 Accrued income 341
10.4.4 Income received in advance 343
10.5 The post-adjustment trial balance 348
10.6 Close the nominal accounts 349
10.6.1 Final accounts 350
10.6.2 The trading and profit and loss accounts 352
10.6.3 What are the reasons for final accounts? 366
Questions 368
CHAPTER 11
FINANCIAL STATEMENTS OF A SOLE TRADER

11.2 Revision 372
11.3 Post-adjustment trial balance 377
11.4 Close the nominal accounts 378
11.5 Financial statements 381
11.5.1 Statement of profit or loss and other comprehensive income
(income statement) 382
11.5.2 Statement of financial position (balance sheet) 383
11.6 Reversing entries 387
Questions 388
CHAPTER 12
FINANCIAL STATEMENTS OF COMPANIES

12.2 Formation of a company 408
12.3 Types of companies 408
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12.4 Comparison between business entities 408
12.4.1 Difference between public and private companies 408
12.4.2 Comparison between close corporation and company 409
12.4.3 Comparison between a partnership and a private company 409
12.4.4 Comparison between sole trader and partnership 409
12.5 Share capital 410
12.6 Reserves 411
12.7 Recording of transactions regarding shares issued 411
12.8 Recording of transactions regarding dividends 413
12.9 Recording of transactions regarding taxation 415
12.10 The appropriation account 417
12.11 Financial statements of companies 421
Questions 428
CHAPTER 13
STATEMENT OF CASH FLOW

13.2 Concepts 433
13.2.1 Cash 433
13.2.2 Funds 434
13.2.3 Investment activities 435
13.2.4 Financing activities 435
13.2.5 Operating activities 435
13.2.6 Cash flows from operating activities 436
13.2.7 Cash flows from investment activities 436
13.2.8 Cash flows from financing activities 437
13.3 Calculation of certain concepts 437
13.4 Format statement of cash flow (IAS 7) 442
Questions 452
CHAPTER 14
INTERPRETATION OF FINANCIAL STATEMENTS

14.2 Data and information flow in an accounting cycle 461
14.3 Purpose of the analysis of financial statements 462
14.4 Users of financial statements 462
14.5 Accounting ratios 463
14.5.1 Profitability ratios 463
14.5.2 Liquidity ratios 464
14.5.3 Solvency ratios 466
14.6 Limitations of ratios 470
Questions 474
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Contents
CHAPTER 15
BASIC COST ACCOUNTING

15.2 The concept: cost 483
15.3 Cost classification 484
15.3.1 Manufacturing costs 484
15.3.2 Commercial costs (non-manufacturing costs) 486
15.4 Expired and unexpired costs 486
15.4.1 Expired costs 486
15.4.2 Unexpired costs 487
15.5 Product and period costs 489
15.5.1 Product costs 489
15.5.2 Period costs 489
15.6 Allocating cost to cost objects 491
15.6.1 Direct costs 491
15.6.2 Indirect costs 491
15.7 Other cost terms, in decision making 492
15.7.1 Opportunity cost 492
15.7.2 Sunk costs 493
15.8 Summary 493
Questions 495
CHAPTER 16
MANUFACTURING CONCERN

16.2 Terminology 503
16.2.1 Direct material 503
16.2.2 Indirect material 503
16.2.3 Direct labour 503
16.2.4 Indirect labour 503
16.2.5 Overheads 503
16.2.6 Primary cost 504
16.2.7 Manufacturing cost 504
16.2.8 Work in process 504
16.2.9 Finished products 504
16.2.10 Cost of sales 504
16.3 Activities typical of any manufacturing enterprise 504
16.3.1 Procurement of material 504
16.3.2 Labour cost 504
16.3.3 Overheads 504
16.3.4 Production 505
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16.3.5 Storage 505
16.3.6 Sales 505
16.4 Product cost flows 505
16.5 Inventory accounts in a manufacturing enterprise 505
16.6 Accounting procedures in a manufacturing enterprise 506
16.7 Steps to follow in doing the general ledger entries of a
manufacturing enterprise 506
16.8 The manufacturing statement 514
16.9 The statement of profit or loss and other comprehensive income 515
16.10 Cost flows in a trading environment 518
16.10.1 Cost of sales in a manufacturing organisation 518
16.10.2 Cost of sales in a trading organisation 518
Questions 519
CHAPTER 17
COST BEHAVIOUR

17.2 Cost behaviour 527
17.3 Fixed costs 528
17.3.1 Fixed manufacturing costs 528
17.3.2 Semi-fixed manufacturing costs 530
17.4 Variable costs 530
17.4.1 Variable manufacturing costs 531
17.4.2 Semi-variable manufacturing costs 534
Questions 536
CHAPTER 18
BUDGETS

18.2 Budgeting and budget control 538
18.2.1 Budgets 539
18.2.2 Budget control 539
18.3 The functions of budgets and budget control 539
18.3.1 Planning 539
18.3.2 Co-ordination 539
18.3.3 Control 540
18.4 Aims of budget control 540
18.5 Advantages of budgeting 541
18.6 Disadvantages of budgeting 541
18.7 Important aspects in the preparation of budgets 541
18.7.1 Human factor 542
18.7.2 Budget period 542
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Contents
18.7.3 Budget committee 542
18.7.4 Resource constraints 543
18.8 Preparation of the master budget 543
18.9 Sales budget 545
18.10 Production budget 545
18.11 Materials purchasing budget 546
18.12 Direct labour budget 547
18.13 Manufacturing overheads budget 548
18.14 Cost of sales budget 550
18.15 Cash budget 553
Questions 556
CHAPTER 19
COST-VOLUME-PROFIT ANALYSIS

19.2 The marginal statement of profit or loss and other comprehensive
income 570
19.3 Marginal income 570
19.3.1 Marginal income per unit (MI/unit) 570
19.3.2 Marginal income in total 570
19.4 MIR (marginal income ratio) 573
19.5 Break-even point 575
19.5.1 Break-even point in units 576
19.5.2 Break-even point in Rand value 576
19.6 Break-even point and profit planning 578
19.7 Margin of safety (MS) 580
19.8 Applying CVP analysis 582
19.8.1 Change in selling price 582
19.8.2 Change in variable costs 583
19.8.3 Change in fixed costs 585
19.8.4 Change in sales volume 586
19.9 Basic assumptions about cost-volume-profit analysis 588
Questions 590
CHAPTER 20
PAYROLL

20.2 Productivity 595
20.3 Factors that influence labour productivity 596
20.3.1 Humanitarian factors that influence labour productivity 596
20.3.2 External factors that influence labour productivity 596
20.3.3 Personnel administration 597
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20.4 Employment records 597
20.4.1 Personnel records 597
20.4.2 Clock cards 597
20.4.3 Time tickets 597
20.4.4 Job cards 598
20.4.5 Production reports 598
20.4.6 General expectations 598
20.5 Terminology 599
20.5.1 Salary 599
20.5.2 Wages 599
20.5.3 Commission 600
20.5.4 Bonus 601
20.5.5 Fringe benefits 601
20.5.6 Total income = gross income 601
20.5.7 Taxable income 602
20.5.8 Net income 602
20.5.9 Retirement funding 602
20.6 Deductions from gross income 602
20.6.1 Deductions imposed by law or company regulation 603
20.6.2 Deductions made voluntarily 604
20.7 Medical tax credit 605
20.8 Calculation of taxable income 605
20.9 Remuneration methods 606
20.9.1 Fixed salary remuneration 606
20.9.2 Time-based remuneration 606
20.9.3 Shift work remuneration 608
20.9.4 Piecework remuneration 608
20.10 Payroll and payroll analysis 609
Questions 611
CHAPTER 21
BUSINESS ETHICS

21.2 Definition of business ethics 616
21.3 Business ethics and law 617
21.4 Business ethics and corporate social responsibility (CSR) 617
21.5 Characteristics or features of business ethics 617
21.6 Need or importance of business ethics 618
21.7 Rules or principles of business ethics 619
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PREFACE
Accounting for All will help first year students to master financial
accounting and cost accounting especially in courses where these are not
major subjects.
The content is written in an interactive way so that it:
 Enables students to master the different topics by means of working

through the chapters on their own and only consulting the lecturer with
those problems they don’t understand.
 Enables lecturers to fulfil the role of facilitator because the contents of

this publication replace, to a certain extent, the lessons which they
normally would present in class.
The author tried to create a new method of writing which complies with the
requirements of SAQA regarding outcomes based education.
TERMINOLOGY
Old term New term

Statement of profit or loss and other
Income statement
comprehensive income
Balance sheet Statement of financial position
Debtors Accounts receivable
Creditors Accounts and other payables
Sales Revenue
Bad debts Credit losses
Bad debts recovered Credit losses recovered
Allowance for bad debts Allowance for credit losses
Cash flow statement Statement of cash flow
Discount allowed Settlement discount granted
Discount received Settlement discount received

CHAPTER 1
BASIC CONCEPTS IN ACCOUNTANCY
ACCOUNTING PROCESS
1.1 Introduction
Accountancy stems originally from the need to keep records. Therefore
accountancy can be defined as:
The orderly and systematic recording of transactions within a business, during a
certain period.
From the definition it is clear that there are a few concepts that must be explained.
The following outcomes will be achieved in this chapter:
 Define the term accounting
 Explain the purpose of accounting
 List the external users of financial statements
 Explain the term financial position
 Explain the term financial performance
 List the types of reports
 List the elements of financial statements
 Discuss the underlying assumptions of financial accounting
 Discuss the qualitative characteristics of financial accounting
 Discuss the term dual concepts
 Define the term account
 Explain the accounting process
 Explain the term transaction
 Explain the concepts:
– assets
– liabilities
– income
– expenses
– owner’s equity
1.2 Definition of accounting

 Identity – determine the nature of transactions
 Measuring – determine the value of transactions
 Recording – record transaction in the accounting record
 Reporting – report the financial results
1.3 Purpose of accounting

To provide financial information regarding the economic activities of an entity to
the user of financial statements.
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1.4 External users of financial statements

 Investors – Use the information to determine the profitability and the
financial state of affairs for possible further investment and/or withdrawals.
 Controlling interest – Owners and shareholders use the information to
determine if the funds they have invested in the entity have been
appropriately utilised and well managed.
 Creditors – Are interested in the financial results in order to determine
whether the entity will be able to pay its debts.
 Customers – Want to be sure that the entity will be able to deliver
goods/services.
 Employees – Need job security with regard to remuneration and career
opportunities.
 The community – Is dependent on profitable entities for donations.
 State institutions – Are dependent on the payment of taxes and levies. The
financial statements provide the information on which the calculations are
done.
1.5 The term financial position

Financial position
Indicates the state of affairs at a specific point in time (statement of financial
position).
All assets and liabilities go to the statement of

financial position.
1.6 The term financial performance

Financial performance
Indicates the financial performance in terms of profit and loss for a specific
period (statement of profit or loss and other comprehensive income).
All income and expenses go to the statement of profit or loss and other
comprehensive income.
In the statement of profit or loss and other comprehensive income we calculate
the gross and net profit for a specific period.
1.7 Types of reports of accounting

 Statement of financial position
 Statement of profit or loss and other comprehensive income
 Statement of changes in equity
 Explanatory notes
 Statements of cash flow
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Chapter 1 Basic concepts in accountancy
1.8 Elements of financial statements

 Assets
 Liabilities
 Equity
 Income
 Expenses
1.9 Underlying assumptions of financial accounting

1.9.1 The accruals basis
Transactions are recorded for accounting purposes when they occur and not when
the cash is received or paid.
1.9.2 The going concern assumption
It is an assumption that the entity will continue to operate in the foreseeable
future. Hence it is assumed that the entity has neither the intention nor the need to
liquidate or curtail its operations materially.
1.10 Qualitative characteristics of financial accounting

1.10.1 Understandability
To achieve the stated aims of reporting, the financial statements should be
understandable to the average user who has a reasonable knowledge of business
and a willingness to study the information with the necessary diligence. This does
not mean, however, that information should be excluded from the financial
statements if it is too complex for certain readers to understand.
1.10.2 Reliability
Reliability means that the users of financial reports should be able to rely on
information that faithfully represents the economic circumstances and events that
it purports to represent. The term ‛reliability’ does not mean ‛absolute accuracy’
but rather refers to information that the user can trust.
Information is reliable when it does not contain material errors and is free from
bias.
Reliable information will, inter alia:
 Be representationally faithful;
 Reflect the substance rather than the form of events;
 Be neutral;
 Be prudent in instances of uncertainty, and
 Be complete.
1.10.3 Relevance
As already mentioned, the purpose of financial statements is to provide
information to users. This information should assist users to make the decisions
they need to make; for example, if a supplier wishes to supply goods to the entity,
the financial statements should provide sufficient information regarding the
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ability of the entity to pay its creditors. The information contained in the financial
statements is not useful and therefore not relevant if these decisions cannot be
made.
1.10.4 Comparability
To meet their needs, users of financial information should be given comparable
information in order to identify trends over time and between similar companies.
1.11 Dual concepts

The dual concept determines that the financial position of an entity is defined in
terms of the accounting equation. Each transaction has a dual effect in order to
ensure that the accounting records comply with the dual concept. This means that
the accounting equation must always balance. Refer to chapter 2.
Another term for the duality concept is the double-entry system. This determines
that each transaction influences at least two accounts. One is debited and the other
is credited. Refer to chapter 3.
1.12 Definition of an account

An account is a formal record of the transactions of an entity with regard to a
specific item. The increases and decreases in each asset, liability, equity, and
income and expense item are recorded in the general ledger accounts.
Management is responsible for the activities and assets of an entity and will
therefore scrutinise the movements in the individual accounts.
1.13 What is a transaction?

A transaction is an agreement between two parties where the one sells something
to the other, or renders a service that can be expressed in terms of a monetary
value.
1.14 Starting a business

In order to start a business, money is required. In accounting terms this money is
called capital.
For the successful operation of a business the following items are necessary:
 Buildings
 Vehicles
 Equipment
 Inventory (articles you want to sell)
 Personnel
4
1.15 Classifications of accounts

In order to start a business we need certain ‛things’. All these things can be
classified as either one of the following:
 Assets
 Liabilities
 Income
 Expenses Equity
 Capital
 Drawings
1.15.1 What is an asset?

An asset is something of value which is the property of the business. A business
owns a vehicle, equipment and inventory for example. An asset must comply with
the following three requirements:
 Value – the item must have a value.
 Ownership – the business must have a right of possession on the asset.
 Measurable cost – the asset must have been obtained at a measurable cost by
the business.
Classification of assets
 Fixed assets: Articles of value with a lifetime of more than one year. A fixed
asset is used to earn income.
 Investments: Money invested for a period of more than one year.
 Current assets: Articles of value with a lifetime of less than one year which
are easily convertible into cash.
1.15.2 What is a liability?
A liability is the enforceable responsibility of a business to pay a certain amount
at a certain time to a creditor. It is a debt, the value of something the business
owes; eg business owes money to the bank and suppliers.
Classification of liabilities
 Owner’s equity: This is the interest of the owner in the business. Owner’s
equity can also be expressed by the following equation:
Owner’s equity = Capital + Profit – Drawings
 Long-term liabilities: These are obligations negotiated by a business which

are payable over a period of more than one year.
 Current liabilities: These are obligations negotiated by a business which are
payable within one year.
Total assets = Total liabilities
5
Accounting for All
Total assets (all debit balances)

Fixed assets Investments Current assets
Land & buildings Fixed deposits Inventory
Furniture Debtors (trade
Equipment receivables)
Machinery Petty cash
Vehicles Bank
Total liabilities (all credit balances)

Owner’s equity Long-term liabilities Current liabilities
Capital Loan (long-term) Creditors (trade and other
+ Profit Bond on property payables)
– Drawings Bank overdraft
Loan (short-term)
 Accumulated depreciation
Accumulated depreciation is classified as a negative asset.
It is subtracted from the cost price of the specific asset eg in the statement of
financial position it will be revealed as follows:
Cost price Accumulated Carrying

depreciation value
R R R
Vehicles 100 000 25 000 75 000
 Allowance for credit losses
Allowance for credit losses is classified as a negative asset.
It is subtracted from debtors eg in the statement of financial position it will be
revealed as follows:
Current assets
Debtors 10 000
Allowance for credit losses (400)
9 600
All assets and liabilities (including capital and drawings) go to the statement of
financial position.
Total assets = Total liabilities + equity in the statement of financial position.
1.15.3 What is income?
The income of a business is the money received from its normal daily operations.
In other words, the business receives a value in exchange for goods or services
sold.
1.15.4 What is an expense?
An expense is the amount spent by a business during its normal daily operations
(excluding capital expenses).
6
Profit = Income – Expenses

All income and expense accounts go to the statement of profit or loss and other
The difference between the income and expenses gives us a picture of the
financial results (statement of profit or loss and other comprehensive income) of a
business during a certain period.
The following are examples of income and expense accounts:
EXPENSES INCOME
(All debit balances) (All credit balances)
 Cost of sales  Sales
 Interest paid  Interest received
 Rent paid  Rent received
 Settlement discount granted  Commission received
 Electricity and water  Services rendered
 Credit losses  Settlement discount received
 Salaries  Dividends received
 Insurance  Credit losses recovered
 Fuel
 Repairs and maintenance
 Consumable goods
 Stationery
 Advertising
 Telephone
 Depreciation
 Licensing and registration
 Freight on sales
 Delivery cost
 Inventory deficit
 Cleaning material
 Packing material
See summary of all income, expenses, assets and liabilities in chapter 2.
1.16 Explanation of concepts

1.16.1 Capital (liability) (credit balance)
The contribution by the owner (anything).
1.16.2 Drawings (subtracted from capital = we can say it’s a negative
liability) (debit balance)
Anything the owner takes from the business.
7
Accounting for All
1.16.3 Debtor (trade receivables) (asset)

A debtor is a person who owes money to the business; in other words, the
business has sold something to him on credit.
1.16.4 Creditor (trade and other payables) (liability)
A creditor is a person to whom the business owes money; in other words the
business bought something from him on credit.
1.16.5 Settlement discount received (income)
This refers to the discount the business receives if it paid its debts to a creditor on
time.
1.16.6 Settlement discount granted (expense)
This refers to the discount the business allows if a debtor pays his debt on time.
1.16.7 Credit losses (expense)
If a debtor is unable to pay his debt, the amount must be written off as
irrecoverable.
1.16.8 Credit losses recovered (income)
It may happen that we receive some of the money of a debtor’s debt which has
been previously written off as ‛credit losses’; then we call it credit losses
recovered.
1.16.9 Depreciation (expense)
The amount by which the fixed assets are reduced on an annual basis.
1.16.10 Returns
It can happen that we bought something (purchases) and we are not happy with
the purchase eg wrong colour, wrong size, faulty products etc. Then we return the
purchases we are not happy with to the supplier from where we bought it.
The same can happen with a debtor who bought from us (sales for us) and the
debtor is for some or other reason unhappy with the purchase; then he returns the
products he bought back to us.
We get two types of returns:
1. When we return something to a supplier–
 purchases returns (income)(subtracted from purchases)
 returns outwards
2. When a debtor returns something to us–
 sales returns (expense)(subtracted from sales)
 returns inwards
8
1.17 What is the accounting process?

The accounting process in a simplified diagram:
Transaction → Source → Books → Statement of financial

document position
Statement of profit or loss
and other comprehensive
income
In short the accounting process is the flow from the start of a transaction until it
has been recorded in the financial statements and used by internal as well as
external users.
1.18 Accounting process in detail
Transaction takes place
Record transaction in the journals
Post journals to the general ledger and balance accounts
Prepare pre-adjustment trial balance
Record adjustments in the general journal and post to ledgers
Prepare post-adjustment trial balance
Record closing journal entries and post to the general ledger
Prepare financial statements
Analysis and interpretation
Use by internal and external users
9
Accounting for All
1.19 Financial reports

Financial reports
Statement of Statement of profit or

financial position loss and other
At a particular Over a particular

point in time period of time
Assets – Liabilities Income – Costs

(expenses)
We can see that the statement of profit or loss and other comprehensive income
contains information about business assets, liabilities and owner’s share. The
statement of profit or loss and other comprehensive income shows the business’s
income and expenses.
Example 1.1
Classify the following items as assets, liabilities, income or expenses:
A L I E
1. Bank 
2. Capital 
3. Buildings 
4. Depreciation 
5. Rent paid 
6. Inventory 
7. Transport costs 
8. Repairs 
9. Services rendered 
10. Settlement discount granted 
11. Sales (revenue) 
12. Salaries and wages 
13. Water and electricity 
14. Debtors (trade receivables) 
15. Interest received 
10
16. Mortgage on land and buildings 

17. Investment 
18. Interest paid 
19. Vehicles 
20. Stationery 
21. Settlement discount received 
22. Rates and taxes 
23. Profit 
24. Equipment 
25. Creditors (trade and other payables) 
26. Bank overdraft 
27. Drawings (negative liability) 
28. Credit losses 
11
Accounting for All
Questions
Question 1.1
Classify the following items by using the letters:
A = Asset; L = Liability; I = Income; E = Expense
Item Value ALIE

Cash in the bank R2 100.00
Owner’s capital R3 000.00
Delivery van R4 000.00
Bank loan R4 000.00
Office furniture R 900.00
Display stands R1 000.00
Money owed by business R1 000.00
Question 1.2
Classify the following items by using the letters:
A = Asset; OE = Owner’s equity; L = Liabilities
Statement of financial position item Value AEL

Vehicle R 8 000.00
Bank overdraft R 2 000.00
Inventory R 1 500.00
Somebody owes you money (debtor) R 350.00
Money you owe to a supplier (creditor) R 250.00
Petty cash R 50.00
Land & buildings R40 000.00
You owe Brilliant Bookkeepers (Pty) Ltd R 250.00
for accounting services rendered
The owner deposits money in the business R30 000.00
Favourable balance in the bank R 1 600.00
Profit R10 000.00
Machinery R14 500.00
Bond loan R18 000.00
Instalment sale agreement (creditor) R 1 400.00
12
Tax payable R 2 600.00

You sent an invoice to a customer for shoes R 1 000.00
sold.
You received an account from an R 500.00
organisation for a display cabinet.
Short-term loan R 2 000.00
Question 1.3
Indicate whether the following items are A = Assets, L = Liabilities,
E = Expenses, I = Income
ALEI
Depreciation
Credit losses
Insurance
Sales
Inventory
Purchases
Purchases returns
Sales returns
Freight on sales
Accumulated depreciation
Capital
Drawings
Vehicles
Bank
Petty cash
Debtors
Creditors
Returns outwards
Credit losses recovered
Interest received
13
Accounting for All
Question 1.4
Give the definition of the following:
1. Debtor
2. Creditor
3. Credit losses
4. Owner’s equity
5. Capital
6. Drawings
7. Long-term liabilities
8. Non-current assets
9. Fixed assets
10. Expenses
Question 1.5
1. What is the definition of accounting?
2. Give five external users of financial statements.
3. What is meant by the term ‛financial position’?
4. Give the five types of reports we get in financial accounting.
5. What are the elements of financial accounting?
6. Give the qualitative characteristics of financial accounting.
7. What do you understand with the ‛dual concept’?
8. Give the accounting process in detail.
9. What is meant by returns? Give the two types of returns that we get in
practice, also mention all the names they can be called.
14
CHAPTER 2
BUSINESS TRANSACTIONS AND SOURCE
DOCUMENTS
2.1 Introduction
When a business starts trading it becomes involved in a number of different
business transactions. These transactions are usually to do with the buying and
selling of goods and services. The job of the bookkeeper is to keep a daily record
of these transactions. In this chapter you will study the different types of
transactions a business may engage in and the documents that are used.
 Understand the legal implications of a business transaction
 Understand the principle of double entry in accounting
 Apply the effect of transactions on the accounting equation
 Understand perpetual inventory system
 Understand how to calculate profit, selling price, cost price
 Identify the different types of business transactions associated with buying,
selling and returning of goods and services
 Explain the purpose of various source documents used to record business
transactions
 Match source documents to the relevant business transaction
 Identify the source document used for a transaction
 Identify the subsidiary journal for a transaction
2.2 What is a business transaction?

A business operates by exchanging goods and services for money. Whenever you
buy something from a café or supermarket you exchange your money for the
goods you want. Your purchase is a business transaction.
2.3 The principle of double entry based on the principle of

duality
2.3.1 Accounting equation
Total assets = Total liabilities
or Assets = Owner’s equity + liabilities
or Owner’s equity = Assets – liabilities
Owner’s equity = Capital + profit – drawings
And profit = Income – expenses

Accounting for All
2.3.2 The principle of double entry

According to the principle of double entry there is a corresponding credit for each
debit. This means that each transaction influences the accounting equation twice.
Total debits = Total credits
2.3.3 Influence of a transaction on the accounting equation

Always ask yourself the following three questions before you determine the effect
of a transaction on the equation:
1. Which accounts are involved in the transaction?
2. What type of account is it (asset, liability, income or expense)?
3. Did the asset, liability, income or expense increase or decrease?
All income and expense accounts will affect owner’s equity

because owner’s equity is calculated as follows:
Capital – drawings + profit = Income – expenses
Transactions (assets and liabilities)
Example 2.1
In this example only transactions with assets and liabilities will be discussed.
Indicate the influence of the following transactions on the accounting equation:
Solution:
Owner’s = Assets – Liabilities
equity
1. The owner deposits R50 000 into the bank account of the business.
O A L
+ 50 000 = + 50 000 –
2. Purchases vehicles from G Roux on credit for R10 000.
O A L
= + 10 000 – + 10 000
3. Purchases typewriters and pays by cheque, R5 000.
O A L
= + 5 000 –
– 5 000
16
Chapter 2 Business transactions and source documents
4. Sells one of the vehicles on credit to C Crog for R1 000.
O A L
= + 1 000 –
– 1 000
5. Obtains a long-term loan from the bank for R10 000.
O A L
= + 10 000 – + 10 000
6. The owner withdraws R500 for his own use.
O A L
– 500 = – 500 –
7. C Crog pays his debt of R1 000 to the business.
O A L
= – 1 000 –
+ 1 000
8. Pays the amount due to G Roux, R10 000.
O A L
= – 10 000 – – 10 000
Transactions (income and expenses)

Example 2.2
In this example only transactions with income and expenses will be discussed.
Indicate the influence of the following transactions on the accounting equation:
Transactions:
1. Buy stationery from the CAN on credit, R500.
2. Pay the salaries of personnel, R8 000.
3. Receive interest on investment at the bank, R800.
4. Pay the water and electricity bills by cheque, R300.
5. Receive R6 000 from A for services rendered during the month.
17
Accounting for All
Solution:
Owner’s = Assets – Liabilities

equity
1. – 500 = – + 500
2. – 8 000 = – 8 000 –
3. + 800 = + 800 –
4. – 300 = – 300 –
5. + 6 000 = + 6 000 –
18
2.4 Summary of different accounts in accounting
Assets = Liabilities
DEBIT balances CREDIT balances
Non-current Investments + Current assets = Equity + Liabilities
assets
Owner’s initial capital – Current Long-term
drawings
 Land,  Fixed  Trading + –  Overdraft bank  Loans from a
buildings deposit inventory Profits Losses (debit  Creditors (trade bank (longer than
 Display stands  Cash in bank balance) and other 12 months)
 Equipment  Petty cash payables)  Bond on a
19
Income – Income –  Loans (shorter property
 Vehicles  Debtors (trade
Expenses Expenses than 12 months)
 Furniture receivables)
Accounting for All
Drawings Capital
DEBIT balance CREDIT balance
Expenses Income
DEBIT balance CREDIT balance
 Accounting fees  Goods sold (sales)

 Advertising  Interest received
 Delivery costs  Settlement discount received
 Bank charges  Rent received
 Printing  Dividends received
 Wages  Credit losses recovered
 Purchases  Services rendered
 Rent paid  Inventory surplus
 Settlement discount granted
 Stationery
 Telephone
 Credit losses
 Water and electricity
 Insurance
 Depreciation
 Salaries
 Interest paid
 Cost of sales
 Consumable goods
 Inventory deficit
 Packaging costs
 Freight/carriage paid on
purchases
 Freight/carriage paid on sales
 Cleaning materials
 Maintenance
 Repairs
 Licensing and registration
 Professional fees eg audit fees
20
2.5 Inventory systems

Before we start with entries of the accounting equation, we first need to
understand the following about inventory.
In accounting we can keep record of all transactions regarding inventory in two
different record-keeping methods.
These two systems are explained in detail in chapter 9.
It is important to know however, that for the purposes of the questions on the
accounting equation and general journal which follow here, we will use the
perpetual inventory system.
2.5.1 Perpetual inventory system
Buying (purchasing of inventory)
With this method we always debit the inventory account when we buy inventory.
Inventory is an asset therefore assets will increase.
Summary of buying inventory
 Buying inventory cash  Buying inventory on credit
Debit inventory Debit inventory
Credit bank Credit creditors
Purchases returns
When we return inventory to a supplier our inventory decreases and we have to
show that effect in the inventory account. Inventory will decrease (credit).
Summary of purchases returns
 We return to the supplier
Debit creditors
Credit inventory
Selling
When we sell inventory on the perpetual inventory system, sales increase with the
selling price (credit) and bank or debtors will also increase (debit).
The account which goes hand in hand with sales is cost of sales. Cost of sales is
an expense (debit). On the perpetual inventory system we also have to show the
effect of the sales transaction on inventory. When we sell, inventory decreases
(credit) with the cost price.
Summary of sales on perpetual inventory system
 Buy inventory cash  Buy inventory on credit
Debit inventory Debit inventory
Credit bank Credit creditors
21
Accounting for All
 Sell inventory cash  Sell inventory on credit

Debit bank
Credit sales }SP Debit COS
Credit inventory
SP
Debit COS CP Debit COS CP

Credit inventory Credit inventory
Sales returns
Sales returns is like the ‛opposite of sales’. It is the reverse entry of sales at
selling price. Sales decrease now (debit).
The same will happen with inventory. Inventory comes back into the business and
increases again (debit). Cost of sales is also not applicable any more and we have
to make the reverse entry for COS. In other words COS credit.
Summary of sales returns on perpetual inventory system
 Debtor returns goods to us
Debit sales
SP
Credit debtors
Debit inventory
CP
Credit COS
Example 2.3
Effect on the accounting equation using the perpetual inventory system.
Transactions:
1. Buy inventory cash for R7 500.
2. Buy inventory on credit from PCC Plumbers for R12 000.
3. Sell inventory cash for R10 000, cost price = R8 000.
4. Sell inventory on credit to Sylvia Plumbers for R25 000, cost price =
R18 000.
5. We return inventory to PCC Plumbers to the value of R500.
6. Sylvia Plumbers returns goods to us with a selling price of R1 700 and a cost
price of R1 300.
Solution:
The effect on the accounting equation will be
O A L
1. = + 7 500 –
– 7 500
2. = + 12 000 – + 12 000
22
3. + 10 000 (SP) = + 10 000 (SP) –
– 8 000 (CP) = – 8 000 (CP) –
4. + 25 000 (SP) = + 25 000 (SP) –
– 18 000 (CP) = – 18 000 (CP) –
5. = – 500 – – 500
6. – 1700 (SP) = – 1700 (SP) –
+ 1 300 (CP) = + 1 300 (CP) –
Transaction no 6 is exactly the opposite of transaction no 4.
Transaction no 5 is exactly the opposite of transaction no 2.
NB When selling inventory on the perpetual inventory system we make two

double entries:
Debit
 Entry for selling price Credit
 Entry for cost price Debit

Credit
2.6 Calculation of profit, selling price and cost price
As just explained, we need to make two double entries when we are selling
inventory on the perpetual inventory system. For the purpose of the questions that
follow or the accounting equation, as well as the questions of the general ledger in
chapter 3, we are assuming that the perpetual inventory system is used.
In a transaction you will be given for example the selling price. You then have to
calculate the cost price to make the cost price entry.
Eg AVG Enterprises sold inventory cash for R15 000. They have a mark-up
policy of 20% on cost price.
 Cost price = R7 500
Effect on the accounting equation:
Owner’s equity = Assets – Liabilities

+ 15 000 = + 15 000 –
– 12 500 = – 12 500 –
23
Accounting for All
But how do we calculate the cost price?

There are a few steps you should follow to get to the answer:
 First: see what the business is making a profit on.
 Second: complete your table.
 Third: use the value given to calculate the amount you need.
Example 2.4
Making a profit of 25% on cost price:
Cost price = 100
Profit = 25
Selling price = 125
Cost price (CP) + Profit (P) = Selling price (SP)
This is just a standard table we use to do these calculations. In other words we
equal one amount to 100% and work further from that.
We take the cost price to be ‛100’ because they are making a profit on cost price.
Then we add the profit of 25 and that gives us the selling price of 125.
Example 2.5
Making a profit of 25% on selling price, then the table will look like this:
Cost price = 75
Profit = 25
Selling price = 100
Now selling price is ‛100’ because we are making a profit on selling price.
Remember CP + P = SP
75 + 25 = 100
Example 2.6
Making a profit of 15% on cost price and selling inventory for R7 000 cash.
Step 1
Cost price = 100
Profit = 15
Selling price = 115 7 000
Step 2
Take the amount given; write it next to the one it represents on the table.
R7 000 = Selling price.
24
Step 3
Take the amount given with the

the number it represents x amount
on the table you want
They gave us selling price; we want cost price so it will be:

7 000
x 100 = Cost price
115
= R6 087
Effect on accounting equation: Selling price = R7 000

Cost price = R6 087
OE = A – L
+ 7 000 = + 7 000 –
– 6 087 = – 6 087 –
Example 2.7
Making a profit of 15% on selling price and selling inventory for R8 000 cash.
Step 1
Cost Price = 85
Profit = 15
Selling Price = 100 8 000
Step 2
Take the amount given; write it next to the one it represents on the table.
R8 000 = Selling price.
Step 3
Take the amount given with the

the number it represents x amount
on the table you want
8 000
x 85 = Cost price
100
= R6 800
25
Accounting for All
Effect on the accounting equation: Selling price = 8 000

Cost price = 6 800
OE = A – L
+ 8 000 = + 8 000 –
– 6 800 = – 6 800 –
Example 2.8
Making a profit of 20% on selling price. Sell inventory with a cost price of
R11 000.
Step 1
Cost price = 80 11 000
Profit = 20
Selling price = 100
Step 2
11 000 = Cost price
Step 3
11 000
80 x 100 = Selling price = R13 750
Effect on the accounting equation: Selling price = 13 750

Cost price = 11 000
OE = A – L
+ 13 750 = + 13 750 –
– 11 000 = – 11 000 –
Please note that in this example the amount of the transaction which was given,
was the cost price, so you had to calculate the selling price.
You know from chapter 1 that all accounts in accounting can be classified as
either:
 Asset
 Liability
 Income
 Expense
 Capital Affect owner’s equity
 Drawings
26
Remember that we are using the perpetual inventory system where you have to
make an entry for selling price and cost price when you sell inventory.
2.7 Types of business transactions
Transaction => Cash or Credit
 Buying  Selling  Buying  Selling

 Paying  Receiving
money money
Subsidiary 1 2 3 4
Cash payment Cash receipt Creditors Debtors
journal journal (CPJ) journal (CRJ) journal (CJ) journal (DJ)
Returns
 Returns outwards  Returns inwards

or or
 Purchases returns  Sales returns
5 6
Other subsidiary journals Creditors Debtors
allowance allowance
7
journal (CAJ) journal (DAJ)
Petty cash
All transactions paid out of petty cash eg postage, coffee, refreshments.
8
General journal
All transactions which cannot be entered into one of the subsidiary journals
1 – 7 will be entered into the general journal eg:
 The owner took inventory for his own use.
 Charge interest on a debtor’s account.
 Write an amount off as credit losses.
 Depreciation for the year.
 Adjusting the allowance for credit losses.
 Recovering of credit losses.
27
Accounting for All
2.8 How transactions are recorded

Why do we record the transactions of a business?
There are three main reasons:
 To keep track of what is going on in the business (so Mojani Traders doesn’t
forget to pay people or ask for money).
 To get useful information about the business (such as where has all the money
gone?).
 For statutory reasons.
Now we will turn our attention to how the transactions are recorded.
2.8.1 The books of a business
Transactions are recorded in the books of the business. These are broadly divided
into:
 Books of original entry (journals); and
 The general ledger.
We know that transactions are first entered onto source documents.
A business deals with a lot of transactions and as the bookkeeper you record the
transactions in a subsidiary journal. Entries in the journals are recorded in date
order.
Subsidiary journals are a kind of halfway station between the source documents
and the ledger.
From the subsidiary journals, you transfer the transactions to individual accounts
in the general ledger. A general ledger consists of all statement of financial
position and statement of profit or loss and other comprehensive income
accounts; that is all asset, liability, income and expense accounts.
The simplified process looks like this:
Transaction  Source  Subsidiary  Ledger  Financial

doc journal reports
2.9 Source documents the starting point of the recording

process
We have said that when transactions take place in Mojani Traders, details are
immediately recorded on a trade document or voucher referred to as a source
document.
Depending on the nature and scope of an organisation’s activities a great variety
of source documents will be created.
28
PURCHASE/BUYING
CASH CREDIT RETURNS
 Cheque counterfoil  External  External credit

 External receipt suppliers’ invoice note (credit note
(receipt received) (invoice received) received)
 Electronic transfer
 Bank deposit slip
SALES
CASH CREDIT RETURNS
 Internal cash  Internal sales  Internal credit

register slip invoice (issued) note (issued)
(issued)
 Internal COD sales
receipt (issued)
29
Accounting for All
PAYMENTS
TO CREDITORS FROM PETTY CASH PAID TO A SUPPLIER

OF A SERVICE
 Cheque counterfoil  Petty cash voucher  Cheque counterfoil

 External monthly  Cash slip (original)  External monthly
statements (received) statements
(original) (original)
 Electronic transfer  Electronic transfer
 Bank deposit slip  Bank deposit slip
2.10 Cash transactions and documents

Every time a business receives money a receipt is made out, signed, and given to
the person who made the payment.
The cash receipt is an internal source document. A typical example is shown
below.
2.10.1 Receive money/receipt
R e c e ip t B o o k V o u c h e r
1 D a te R C
R E C E IV E D fr o m
O N TV A N G van
th e s u m o f
d ie s o m v a n
Rand
C e n ts
Sent
[Typ
W ith th a n k s /M e t d a n k
[Type a
30
2.10.2 Cheque payments/cheque and cheque counterfoil

Date 2/1/x1
40-50-60-02
T Smart Shoes
o
For Capital Contribution
Balance
Rainbow Bank
Broadway Branch
_____ 2/ _______20
_ 1 _
x
1/2/20x6
6
Bt Fwd 8 Bright Rd, Johannesburg 2091
Deposits
-
Total
Pay Smart Shoes
or bearer
This cheque 6 000 00
Six Thousand Rand Only R6
Sub Total
000.00 Mojani Traders
Withdrawals - M Mojani
Balance
Cd Fwd ¹ 0885 405060?:8004628091 ¹ 02
Here is a copy of the cheque you received from Mr Mojani the owner.
1. Who is the drawer? ______________________________________
What is the meaning of the word ‛drawer’ – Drawer – the person or business that
makes out a cheque.
2. Who is the payee? ______________________________________
What is the meaning of the word ‛payee’ – Payee – the person or business to
whom the cheque is paid.
2.10.3 Make a cash sale/cash invoice
When a business makes a cash sale, cash is received into the business. But instead
of a cash receipt an internal cash sale slip (invoice) is issued.
Following is an example of a sales slip, made out in duplicate, for the sale of
clothes. The copy is the source document.
MOJANI TRADERS
CASH SALE No
KONTANTVERKOPE DATE 1/2/x6
M Cash
Clothes 500 00
31
Accounting for All
2.10.4 Bank deposit slip

MULTI PURPOSE SLIP
RAINBOW DATE: __________________

RAINBOW LIMITED REGISTERED BANK
BRANCH WHERE THE ACCOUNT IS KEPT _________________________________________________________
CREDIT _______________________________________________________________________________________
STATE NAME IN BLOCK LETTERS
NOTE: CHEQUES, ETC. HANDED IN TO BE COLLECTED AND TO BE MADE AVAILABLE AS CASH WHEN PAID.
WHILE ACTING IN GOOD FAITH AND EXERCISING REASONABLE CARE, THE BANK WILL NOT ACCEPT RESPONSIBILITY FOR
ENSURING THAT DEPOSITORS / ACCOUNT-HOLDERS HAVE LAWFUL TITLE TO CHEQUES, ETCETERA, COLLECTED.
Cash RAND CENTS
CHEQUES
CHEQUES // STATE
STATENAME
NAMEOPOF DRAWER
DRAWER
FOR BANK USE ONLY ACCOUNT NUMBER
8 0 0 3 5 7 0 9 2 0
JOHANNESBURG 1996 456-3999
DEPOSITED BY______________________________________________________________________________
(Reg. No. 63/00007/05) Rainbow Limited 01/96 4-3TS
32
2.10.5 Cash invoice from a supplier

When a business purchases supplies, the supplier should issue a cash invoice.
This is proof that the supplier has been paid and is an important external source
document. An example is shown below.
F o o tw e a r S u p p lie s
4 5 H ig h S tre e t
J o h a n n e sb u rg
2001
T e l: ( 0 1 1 ) 1 2 3 4 5 4 6 7 C ash In v o ic e N o : 1764
D a te : 1 7 /0 1 /x 6
VAT No : 2345689
S. Shoes
O u r re f: R c
1254 L a d ie s s h o e s 1 750 00
1724 M e n s b o o ts 2 100 00
P a id
D is c o u n t _ _ _ _ _ _ _ _ _ %
S u b - to ta l
VAT @ ____14___ % 539 00
TOTAL 4 389 00
Summary of source documents used for cash transactions

Transaction Source document
Payment of supplier services by cheque Cheque counterfoil
Making a cash sale Internal cash slip
Receipt of cash Receipt (received)
Paying money into a bank account Duplicate deposit slip, receipt received
Pay by electronic transfer Electronic transfer proof of payment
33
Accounting for All
2.11 Credit transactions and documents

So far we have looked at the source documents associated with cash transactions.
Now we will discuss various credit transactions of Mojani Traders. Also, the
source documents used to record these transactions in the books of the business.
The credit transactions we will cover are:
 Paying a supplier’s (purchase) invoice
 Issuing a sales invoice
 Issuing a sales credit note
2.11.1 Tax invoice issued by us (credit sales)
On an invoice issued the following will appear:
 The name and address of the supplier
 The name and address of the customer
 The date it was issued
 An invoice number
 The total amount owed
Mojani Traders
Mabasa Traders
16
16Kings
KingsRoad
Road
Johannesburg 2000
Invoice Number : 123456
Tax Invoice
Date : 0101/x6
Account Number : 3365
J Sm ith Esq. Telephone Num ber (011) 432 2222

Electrom arket Ltd VAT Registration Number 924 4614 29
112 Peters Road Rainbow Bank Code 40-50-60
Pretoria
Account Number 8003570920
1000
Item Code Description Quantity Unit Price Net Am ount
13679A Shoes 5 100.00 500.00
SALES VALUE : : 500.00
VAT AT 14% : 70.00
AMOUNT PAYABLE : 570.00
Terms: Payment is due within 30 days of invoice date
A business sells its goods for cash and also allows its customers to buy on credit.
34
A credit sale is when a customer takes delivery of their goods (or makes use of a
service) but only pays for them later.
A business issues a sales invoice with the goods. The original copy goes to the
customer together with a delivery note. A duplicate is kept as a source document
to record the sale in the books of the business.
2.11.2 Tax invoice received by us (credit purchases)
A typical credit sales invoice is shown below. Note that it contains details of both
the supplier and the customer.
Deloyds
M a b a sTraders
a T rad e rs T a x In v o ic e N o . 0 0 01
P .O . B o x 9 8 7
S EL B Y
Telephone
Telep h o n (0 1 1 ) 4 3 2 -2 2 2 2
Account
A cco u n t . 73421
ea
F (0 1 1 ) 4 3 2 -2 2 1 0 No
Fax
x
VVAT
AT Reg.
R e g No.
. N 924
o . 94614
24 4614 Date/Tax
D a t e /T apoint
x p o in t 3 / 4 / x 6
29
In v o ic e t o : Mojani
J . J o h nTraders
s on
1 5 4 M a in R o a d
16 Kings Road
Jo h a n n e s b u r g
Johannesburg 2000
Product
Pro d u c Description
D e s c r ip t io Quantity
Q u a n t it Unit
U n it Total
T o t al
t C ode
Code n y RP R
r ic e A mR
R ount
c c
0700 C as ual 3 R 150.0
R150.00 R 450.0
R450.00
1 s hoes 0 0
C om m ents :
T O T A L In c lu s iv e @ R450.00
R 450.0
14% 0
R e g i s t e re d N o . : 8 2 2
2.12 Returns
Mr Smit bought three pairs of shoes from Mojani Traders on account. On delivery
he discovered a fault on the stitching on one of the pairs. Mr Smit returned the
shoes to Mojani Traders.
Returns occur when goods bought or sold are sent back to where they came from.
Mojani Traders may receive returned goods from customers, like Mr Smit, and it
may return goods to suppliers. Both cases involve the issue or receipt of an
important source document – a credit note.
35
Accounting for All
2.12.1 Sales returns (we issued the credit note)

Credit notes are issued when goods have been returned for some reason or an
invoice needs to be adjusted.
Mojani Traders issued a credit note to Mr Smit for the value of the damaged
goods (an internal source document). This has the effect of cancelling the amount
from the invoice. Credit notes can be treated like negative invoices.
2.12.2 Purchases returns (credit note received from supplier)
This is a document issued by someone to whom your company is indebted
reflecting a reduction in the amount owed as compared with the original invoice.
Such a document may be issued in circumstances where, for example, there has
been a mistake on the original invoice as regards price or quantity of goods
delivered. As in the case of invoices, a credit note is not a legally enforceable
document on its own and merely constitutes an advice to your company that an
amount recorded in its books as owing by you has been adjusted in terms of an
underlying agreement or administrative correction.
Credit note issued by us (sales returns)
M a b aTraders
Mojani s a T ra d e rs T a x C r e d it N o t e N o . X001
P .O . B o x 9 8 7
P.O
S E LBox
B Y 987
SELBY
Telephone
Te lep h o n (0 1 1 ) 4 3 2 - A cco u n t . 73414
e a
F (2021212) 4 3 2 - No
Fax
x 2210
V AT R e g . N o . 9 2 4 4 6 1 4 DDaat tee/ T/ Ta ax xp po ion in
t t 1 0 /4 /x 6
29
C r e d it S . S w a n e p o el
: 1 8 H e id e lb e r g R o a d
S EL
BY
Product
P r o d uCode
c Description
D e s c r ip t io Quantity
Q u a n t it Unit
U nRit Total Rl
T o ta
t Code n y PR
r ic e A mR
ount
c c
0700 School 1 R 80.0
R80.00 R 80.0
R80.00
9 t ro u s e rs 0 0
R e a s o n f o r c r e d i t:
T O T A L C R E D IT R80.00
R 80.0
W ron g D elive ry V Ac lTu s iv e @
In
14%
0
R e g i s t e re d N o . : 8 2 2
2.13 Discounts
A business has certain policies regarding payments: when a customer purchases
large quantities and pays cash, he receives a 10% discount. Mojani Traders also
36
gives a 5% discount to certain loyal customers who purchase trading inventory

from it.
A discount is a decrease in the price of goods below the normal price. There are
three main types of discount.
Each type can either be given (allowed) to a customer or be received (granted)
from a supplier. The main discounts are settlement discounts, trade discounts and
cash discounts.
2.13.1 Settlement discounts (also see chapter 1)
Settlement discount granted: A business grants discounts to customers to
encourage them to settle their accounts on time. Their terms of payment include
for example a 2.5% settlement discount.
Settlement discount received: When a business pays an account on or before the
required date it may receive a discount from the supplier.
2.13.2 Trade discounts
We saw that Mojani Traders offered trade discount to a customer who is in the
same line of business. Another example is a building supplies business such as a
hardware store, which may offer discounts to plumbers and electricians and other
people in the building trade. This helps to attract the customers on whose business
the supplier most depends.
2.13.3 Quantity discount
Mojani Traders often gives a trade discount to customers who buy large quantities
on a regular basis. A quantity discount reduces the unit price of goods, eg if you
purchase 500 units, the unit price is R1.00. If you purchase 10 000 of the same
units the unit price decreases to R0.95.
2.13.4 Cash discounts
A business also gives cash discounts to encourage customers to pay for goods
immediately with cash rather than on credit. This provides the business with a
useful source of cash with which to pay outstanding debts.
2.14 Subsidiary journals

From the source documents we enter each transaction into the books of prime
entry – also called subsidiary journals.
A subsidiary journal is a journal where the same types of transactions are entered.
All cash received transactions = cash receipts journal

OR
All cash payment transactions = cash payments journal
37
Accounting for All
2.14.1 Cash journal/cash receipts and payments journal

The cash journal/cash book is the businesses book of prime entry for recording
transactions involving cash payments and cash receipts.
 Cash receipts journal
All cash received by the business
 Cash payments journal
All payments made by the business
2.14.2 Petty cash book
The petty cash book is another book of first entry in which all small payments and
receipts from petty cash are recorded from the petty cash vouchers.
2.14.3 Purchases journal/creditors journal
The purchases journal is the book of first entry in which credit purchases of
trading are recorded from the suppliers’ credit invoices.
2.14.4 Purchases returns journal/creditors allowances journal
The purchases returns journal is the book of first entry in which credit purchases
returns of trading are recorded from the suppliers’ credit notes. (Returns
outwards) (Credit note received)
2.14.5 Sales journal/debtors journal
The sales journal is the book of first entry in which credit sales are recorded from
the duplicates of invoices.
2.14.6 Sales returns journal/debtors allowances journal
The sales returns journal is the book of first entry in which returns from
customers are recorded from the duplicates of credit notes. (Returns inwards)
(Credit note issued)
2.14.7 General journal
Any transaction which cannot be entered into any of the above subsidiary
journals, will be entered into the general journal.
Source document → journal voucher.
38
2.15 Summary
2.15.1 Summary cash – source document
CASH
Paid to a Paid to Received Paid by

supplier of creditors from debtors’ petty cash
a service sales
Cheque Cheque Receipt Petty cash

counterfoil counterfoil issued voucher
and cheque and cheque
requisition requisition
Bank Bank Bank

deposit slip deposit slip deposit slip
Cash Cash EFT proof

receipt receipt of payment
received received received
EFT proof EFT proof Cash slip

of payment of payment
39
Accounting for All
2.15.2 Summary sales – source documents and subsidiary journals

The following diagram shows which journals are used to record cash, credit and
return sales from various source documents.
SALES
Cash sales Sales returns Credit sales

(returns
inwards)
Cash Duplicate Duplicate sales

register slip credit note invoice
issued
OR OR
Invoice
issued Invoice
Credit note issued
issued
Bank deposit
slip EFT proof
of payment
Cash journals Sales Debtors

or cash book returns Journal
journal
or
debtors
allowances
journal
Cash receipts (DAJ)
journal
40
2.15.3 Summary purchases – source documents and subsidiary

journals
PURCHASES/BUYING
CREDIT PURCHASES CASH CHEQUE

PURCHASES RETURNS PURCHASES EFT
(RETURNS OUTWARDS) DIRECT BANK
DEPOSIT
Purchase invoice Credit note Petty cash Cheque counterfoil

or received voucher
invoice received Deposit slip
Cash register Bank statement

slip received
EFT proof
of payment
Creditors Creditors Petty cash Cash book

journal returns book
journal
or
Creditors Cash payments
allowances journal journal
(CAJ)
41
A SCHEMATIC ILLUSTRATION OF THE ACTIVITIES, SOURCE DOCUMENTS AND THE APPROPRIATE JOURNALS IN WHICH THEY ARE ENTERED
A SCHEMATIC ILLUSTRATION OF THE ACTIVITIES, SOURCE DOCUMENTS AND THE APPROPRIATE SUBSIDIARY JOURNALS IN WHICH THEY ARE ENTERED
A A
PAYMENTS SALES C
C PURCHASES
T
T I
Accounting for All
I V
V I
I T
To From Y
T Credit Returns Cash Cash Returns Credit
Creditors Debtors
Y
Petty Cash Bank Acct
D D
42
O O
C C
U Purchases Credit Petty cash Cheque counterfoil and COD Internal Cash Credit Sales U
Purchase External Petty Cash Cheque counterfoil and COD Internal Cash
register Internal Sales
M invoice note voucher Invoice/monthly statement receipt note invoice M
invoice Credit Note Voucher Invoice / Monthly Statement Receipt Register Slip Credit Note Invoice
received received EFT Proof of transfer receipt issued slip Issued issued issued E
E N
N received T
T
Bank
BankDeposit slip
deposit Slip
J J
O
O
U
U R
R N
N Purchases
Purchases Purchases
Purchases Petty
Petty Cash
cash Cash
Cashjournals
Journals cash
or or Sales returns
Sales Returns Sales journal A
Sales Journal
A Journal
journal Returns Journal
returns journal Book Cashbook
book (CRJ + CPJ) Journal
journal (DAJ) L
book
L (CAJ)
THE GENERAL JOURNAL WILL BE USED TO RECORD THE TRANSACTIONS WHICH CANNOT BE RECORDED IN ONE OF THE ABOVE MENTIONED JOURNALS
42
2.16 How the books link together

The following diagram shows how the books of prime entry link up with the
general ledger, the statement of financial position, and the statement of profit or
loss and other comprehensive income
SUBSIDIARY JOURNAL
Purchases Sales Debtors Creditors CRJ + Petty General

returns returns journals journals CPJ cash journal
journals journals
(CAJ) (DAJ)
The ledger
Adjustments and trial balance
Statement of financial position

Statement of profit or loss and
other comprehensive income
We have seen from the examples, that the first step in the accounting process is
recording the source documents, eg sales slips. The next step is to transfer the
information from the source documents into the subsidiary journal. The subsidiary
journals are books of prime entry.
You are probably beginning to realise by now that there is no one system of
bookkeeping which is used in exactly the same way by every organisation. One
of the difficulties is getting familiar with terminology used. This is complicated
further by the fact that different names are used for the same thing.
43
Accounting for All
Questions
Question 2.1
Cafe 43 is a coffee shop that makes a profit of 40% on cost price. Their turnover
for the three months of the first quarter of the year was:
January 2013 R100 000

February 2013 R120 000
March 2013 R145 000
Required:
Calculate the profit and cost price for each month.
Question 2.2
B Bobs Enterprises made a profit of R35 000 for the year 2013. They estimate
that their profit will increase to R50 000 in 2014.
They want you to calculate the selling price and the cost price for the two years.
In 2013 their mark-up was 60% on selling price and in 2014 it will be 40% on
cost price.
Question 2.3
Bobby’s Manufacturers makes a profit of 22% on cost price. Calculate the
missing figures below.
Cost price R30 000

Profit R17 000
Selling price R70 000 R25 000
Question 2.4
Angie’s (Pty) Ltd uses the perpetual inventory system and makes a profit of 20%
on selling price. Calculate the missing figures below.
Selling price R40 000

Cost price R20 000
Profit R10 000 R28 000
Question 2.5
Rockster (Pty) Ltd makes a profit of 35% on selling price. Calculate the missing
figures below.
Profit R32 000

Selling price R38 000
Cost price R75 000 R12 000
44
Question 2.6
During March 2013 the following transactions occurred in the business of F&W
Samramy, a general dealer. The business uses the perpetual inventory system
(ignore VAT).
2013
Mar 1 Mr Samramy deposited an additional R20 000 cash into the bank
account of the business.
2 Paid for an advertisement in the Cape August (newspaper) per
cheque, R75.
6 Sold merchandise on credit to R Maposa, R10 000 (cost price
R8 000).
7 Received an account for repairs to the vehicle of the owner, R800.
This amount is still payable by the business.
10 Received a credit invoice from E Terror for goods purchased,
R15 000.
12 Received a cheque from S Vink in full settlement of his account,
R800. S Vink owed the business R850.
13 Paid a creditor, J van As, R1 200 by cheque, after he granted the
business a discount of R20.
20 Received a credit note from E Terror for damaged goods sent back
to him, R2 000.
25 Cash sales, R8 000 (cost price R6 000).
30 Received interest on a fixed deposit at the Uno Building Society,
R2 000.
Required:
Make use of the example and indicate the influence of each transaction on the
accounting equation.
Example:
2013
Mar 31 Purchased vehicles cash, R30 000.
Date O A L
31 0 = + 30 000 – 0
– 30 000
45
Accounting for All
Question 2.7
The following transactions were taken from the books of Pretty Lady Carpet
Cleaners for the month of May 2013 (ignore VAT).
2013
May 1 The owner took a business cheque, to pay his private telephone
account of R120.
2 Services rendered to Puma Wholesalers on credit at a value of R2 000.
3 Paid R320 to a creditor.
4 The owner used his private cheque account to buy a delivery van for
the business to the amount of R35 000.
5 Received R700 from a debtor in full settlement of his account of R760.
6 Issued a cheque to Boland Bank for R2 200; R2 000 was for
redemption of a loan and the balance for interest due.
7 Bought cleaning materials on credit, R880.
8 Sold an old typewriter for R80 cash.
9 The bank charges on the bank statement amounted to R95.
Required:
Indicate the effect of each transaction on the accounting equation.
Question 2.8
Indicate the effect of the following transactions on the accounting equation using
the following symbols +; –; 0 (ignore VAT).
Example:
1. The owner deposited R10 000 in the bank account of the business.
O A L
+ 10 000 = + 10 000 – 0
Transactions:
1. Received R15 000 from a debtor, H Mhlangu, in full settlement of his account
of R15 300.
2. A debtor’s debt of R1 500 must be written off as irrecoverable.
3. Received a credit note from Ramara for damaged goods, returned R200.
4. The owner took merchandise for his own private use, R2 000.
5. Paid carriage on goods purchased by cheque, R1 200.
6. Sold goods to A Aphane on credit, R15 000. Cost price, R12 000.
46
Question 2.9
Indicate the effect of the following transactions on the accounting equation.
Assume a favourable bank balance and that the perpetual inventory system is in
use (ignore VAT).
Transactions:
1. The owner took goods for his own use, R750.
2. M Mabasa paid his account of R670 with a cheque for R660 in full settlement
of his account.
3. Bought a motor vehicle on credit from Kholers Ltd for R37 000. A trade
discount of 10% was applicable.
4. Received a note from the bank with M Mabasa’s cheque attached to the note
‛Refer to drawer’ (see 2).
5. Issued a receipt to G Gomez for rent for the month, R250.
6. Received a bank statement which indicated the following expenses: Service
fees, R25; Interest on bank overdraft, R10; a stop order to Mutual and Federal
for insurance: for the enterprise, R210, for the owner, R150.
7. Gave stationery of R260 to P Pulani to settle our account.
8. Issued a credit note to W Methebe for goods returned, R240. The business
works with a mark-up of 20% on selling price.
9. A debtor’s debt of R500 must be written off as irrecoverable.
Question 2.10
Indicate which subsidiary journal and source document will be used in each of the
following examples:
1. Buy a vehicle cash.
2. Sell merchandise on credit.
3. Receive payment from a debtor.
4. Pay a creditor, and receive discount.
5. Buy a vehicle on credit.
6. Charge a debtor’s account with interest.
7. Receive money for renting out a storeroom.
8. Receive a credit note for goods returned to supplier.
9. Issue a credit note for goods returned by a debtor.
10. Write an amount off as credit losses.
Question 2.11
The following transactions took place during the month of January 2013 in the
books of Moremi Traders:
2013
Feb 1 Cash sales, R14 000 (cost price R11 000).
2 Received a cheque from R Rama to settle his debt of R40 000.
3 Bought stationery on credit from B Bambo, R900.
4 Purchased merchandise cash from C Ambe, R7 000.
5 Paid by cheque for petrol for the private vehicle of the owner, R500.
47
Accounting for All
6 Received rent in cash from R Rambo, R1 200.

7 Issued an invoice for goods to R Khoza, R5 000 (cost price R3 000).
8 Received a credit note from B Bambo for stationery returned, R100.
9 Charged a debtor C Zuma R100 interest on his overdue account.
Required:
For each transaction identify the source document involved.
Question 2.12
The following transactions occurred during June 2013 in the books of JKR
Manufacturers:
2013
Jun 1 Sold inventory on credit to Smith for R10 000 cost price = R8 000.
2 Bought goods cash for R1 140.
3 Sold merchandise cash for R7 980 cost price = R4 000.
4 Owner took inventory for his own use with a cost price of R300 and
selling price of R600.
5 Received a credit note from B Joy for goods returned, R1 200.
6 Issued a credit note to Bob for goods returned, cost price = R800,
selling price = R1 000.
7 Wrote R114 off from a debtor as credit losses.
8 Received R8 800 from a debtor in full settlement of his account of
R10 000.
9 Received the bank statement, bank charges amounted to R456.
Required:
Indicate which source document will be used for each transaction.
Question 2.13
The following transactions were obtained from the books of Mavuso Traders.
Transactions:
1. W Willers the owner deposited R200 000 as his capital contribution into the
bank account of the business.
2. Received a credit invoice as well as the equipment purchased from Luma Ltd
for, R660.
3. Willers the owner took goods at cost price for his own use, R120.
4. Bought goods from Eve on credit R670, less 10% trade discount.
5. Received Hudson’s account for repairs to the shop shelves, R420.
6. Paid cash for stationery bought from ABC Ltd, R128.
7. Returned unsatisfactory goods to Eve, R70.
8. Debtor S Sorry who owes R10 000 is insolvent. His estate can only pay 40
cents in the Rand.
9. Paid L Loots by cheque R171 and received 5% discount on the original
amount of R180.
10. The owner transferred his private vehicle, worth R5 000, to the business. He
did not receive cash for it.
48
Required:
Indicate the source document applicable for each transaction.
Question 2.14
The following transactions occurred in the books of Cash for All CC, during May
2013:
2013
May 1 The owner gave a typewriter to the value of R600 to the business.
3 Sold inventory cash for R4 000, cost price R1 800.
5 Paid wages by cheque, R600.
6 Withdrew R10 000 from fixed deposit.
7 Bought inventory on credit for R14 000.
9 Returns inwards, cost price = R1 000, selling price = R2 300.
10 Sold a vehicle for R14 000 cash.
15 Paid a creditor R15 000 in full settlement of their account of R16 000.
16 Received a credit note for goods returned, R600.
24 Wrote R990 off from a debtor as credit losses.
Required:
Indicate which subsidiary journal will be used for each transaction eg:
Pay advertising cash – CPJ.
Question 2.15
The following transactions occurred in the books of Temba Cafe in October 2013:
2013
Oct 1 Issued a cheque to P Maila for the monthly rent, R3 000.
2 Purchased goods on credit from J Mmala, R5 000.
3 Credit sales to C Cane, R1 140. Mark-up is 25% on selling price.
4 Purchased inventory cash from A Appel, R2 600. Received trade
discount of 10%.
5 Returned damaged goods to J Mmala, R1 026.
6 Received R800 from a debtor B Boroto in full settlement of his
account of R880.
7 The owner withdrew R500 cash for his own use.
8 Paid N Mokwena R1 000 in full settlement of our account of R1 068.
9 C Cane returned goods to the value of R285.10.
10 The cheque of B Boroto on 6 Oct was returned by the bank with the
message ‛refer to drawer’.
Required:
Indicate the subsidiary journal applicable for each transaction.
49
Accounting for All
Question 2.16
The following transactions appeared in the books of Abco Traders for the period
ended 28 February 2013. The perpetual inventory system is in use (ignore VAT).
1. Cheque issued to P Shai for the monthly rent, R3 000.
2. Purchased inventory on credit from J Mala amounting to R50 000.
3. Credit sales to C Can, R11 140. Cost price R8 912.
4. Cash purchase of inventory from A Apple for R20 600. Trade discount of
10% is given.
5. Returned damaged goods to J Mmala, R1 026.
8. Issued a receipt to B Boroto, a debtor, for R800. Discount of R80 is allowed.
10. M Matlawa charged R150 interest on our overdue account.
12. Cash sales, R5 900. Cost price, R4 720.
15. The owner withdrew R500 for school fees of his children.
18. Paid M Matlawa R2 500 on account.
19. Paid N Nkoana R1 000 in full settlement of our account of R1 068.
22. Received R3 400 for equipment sold to S Semenya.
28. C Can returned goods amounting to R2 850. Cost price R2 280.
Required:
Indicate the subsidiary journal applicable for each transaction.
Question 2.17
1. The owner deposited R200 000 as his capital contribution.
2. Purchased land and buildings costing R105 000, for cash.
3. Purchased equipment costing R65 000, on credit.
4. Purchased materials for R1 800 and paid by cheque.
5. Received a loan of R45 000 from ABSA Bank.
6. Paid R3 900 for advertising.
7. Received R9 700 for services rendered.
8. Services rendered on credit, R15 200.
9. Paid R13 000 for salaries.
Required:
For each of the above transactions write all the possible source documents and in
which subsidiary journal the transaction would be entered.
Question 2.18
The following transactions took place during November 2013 in the books of
Prime Time (Pty) Ltd:
2013
Nov 1 Purchased furniture cash, R1 800.
2 Cash sales, R900.
3 Purchased a computer on credit for R2 500 from Mercury.
4 The owner took goods with a selling price of R180.
5 Paid Mercury and received a 2% discount.
50
6 Purchased goods on credit from Moon Wholesalers, R3 400.

7 Sold goods on credit to S Sun, R1 700.
8 Returned goods to Moon Wholesalers to the value of R240.
9 S Sun returned goods of R360.
10 Paid the following by cheque:
Wages, R950.
Water and electricity, R560.
Telephone, R240.
Required:
For each transaction indicate the subsidiary journal as well as the source
document which will be applicable.
Question 2.19
The following transactions occurred during September 2013 in the books of Spa
de la Veille:
2013
Sep 1 Sold inventory for R2 000 cash.
2 Bought merchandise on credit from LBW Suppliers for R14 000.
3 Paid for advertising, R7 000.
4 Sold goods on credit for R8 000 to Robbies (Pty) Ltd.
5 Bought stationery on credit for R3 500 from Charlie’s Enterprises.
6 Sold a vehicle for R12 000 cash.
7 Paid salaries and wages of R28 000.
8 The owner took a typewriter for his own personal use; cost price of the
typewriter was R1 600.
9 Wrote R2 000 off from vehicles, being the depreciation for the year.
10 Received a credit note from LBW Suppliers to the value of R1 000.
11 Issued a credit note to Robbies (Pty) Ltd for R100.
12 Bought a machine on credit from LLT (Pty) Ltd for the amount of
R25 000.
13 Received R16 000 from Brown-Brown for rent.
14 Bank charges on the bank statement amounted to R1 500.
15 Paid interest on bank overdraft, R1 700.
Required:
Indicate which subsidiary journal and source document is applicable for each
transaction.
Question 2.20
The following transactions were taken from the books of PCC Electrical:
2013
Feb 1 Dadel started business with R300 000 in the bank.
2 Bought inventory for R8 700 by cheque.
3 Bought a building for R185 000 on credit from Benta Ltd.
4 Cash sales R8 100, cost price = R6 000.
51
Accounting for All
5 Paid Benta Ltd R40 000 by cheque on account.

6 Bought pens, paper and pins on credit from PNA R900.
7 Sold goods on credit to Stoko for R2 100, cost price = R1 800.
8 Paid water and electricity cash, R128.
9 Withdrew goods from inventory for private use at cost R135.
10 Stoko made a payment of R950 on his account.
11 Received rent from sub-tenant R4 250.
Required:
Indicate the source document and subsidiary journal applicable for each
transaction.
52
CHAPTER 3
RECORDING TRANSACTIONS
(DOUBLE-ENTRY SYSTEM)
3.1 Introduction
In the previous chapter we saw how a business started. We examined the different
types of transactions that are involved in running a business and the source
documents that are created to record these transactions.
We also learnt how details of these source documents are used to determine which
journals they must be recorded in before being posted to the ledger.
In this chapter you will learn how to post entries to the general ledger using the
double-entry system.
We will distinguish between transactions affecting the statement of financial
position and statement of profit or loss and other comprehensive income.
 Identify the accounts involved in different transactions
 Classify accounts as asset, liability, income and expense accounts
 Recognise when to debit or credit an account by applying the basic rules for
the increasing/decreasing of asset, liability, income and expense accounts
 Record transactions as debits or credits in general ledger accounts correctly
 Calculate the balance of an account
Before we discuss the recording of transactions affecting the statement of
financial position and statement of income, it is important to first discuss the
ledger account and when to debit or credit a ledger account.
3.2 The ledger account

As the business grew and the number of transactions increased, the bookkeeper
found it very time-consuming to balance the equation every time she recorded a
transaction. So she decided to open an account for each individual statement of
financial position or statement of profit or loss and other comprehensive income
item.
Using accounts to record business transactions is much more efficient than trying
to balance the accounting equation. Increases and decreases in assets, liabilities,
income and expenses are recorded according to the type of item. Each item is then
allocated to an account.
The method of recording transactions in accounts is called the double-entry
system of accounting.
Accounting for All
What is an account?
An account is a record of the increases, decreases and balances in an individual
item of asset, liability, equity, income or expense.
What is double-entry?
This is based on the accounting equation (A = O/E + L) and as seen in chapter 2
every transaction affects two items (accounts) on the equation.
In order to record both aspects of a transaction, the books must be able to show
increases and decreases.
To do this, an account is divided into a debit side and a credit side.
Debits and credits
Account
The left-hand side is called the The right-hand side is called the
debit side. credit side.
When an entry is made on the When an entry is made on the

left-hand side it is called a debit. right-hand side it is called a
credit.
The symbol for debit is Dr. The symbol for a credit is Cr.
The golden rule is

Every debit ... … has a credit
Accounts written out in this form are called ‛T’ accounts because their shape
resembles a T.
3.3 The ledger

Separate accounts are opened in the general ledger for every asset, owner’s
equity, liability, income and expense item.
The form of a formal ledger account is as follows:
Debit side Credit side

NAME OF ACCOUNT
NUMBER
Date Particulars Folio Debit Date Particulars Folio Credit
amount amount
Dr Cr
54
Chapter 3 Recording transactions
Notice how the layout of both sides is the same.
Debit Office furniture account Credit

a. Jun 1 b. Cash c. 1 000
In the above example, office furniture has been bought for cash on a. Jun 1.
The office furniture account increases (and is debited) by an amount
c. R1 000 from b. cash account which will be credited (the contra entry).
3.4 When to debit or credit asset, owner’s equity and liability

accounts
Up to now we have been using the accounting equation to show how transactions
increase or decrease the value of assets, liabilities, and owner’s equity.
The nature of an account determines whether it will be increased or decreased by
debit and credit entries.
Assets = Owners’ equity + Liabilities
To increase an asset To increase an equity To increase a

debit it account credit it liability credit it
To decrease an asset To decrease an equity To decrease a

credit it account debit it liability debit it
Example 3.1
Let’s record some transactions to see how double entries are made.
Ask these questions to help decide how to enter the transaction:
 What type of transaction is it (cash, credit, return)?
 Which two accounts are involved?
 What types of accounts are they (asset, liability, equity)?
 Did the account increase or decrease?
 If an asset increases then debit the account. If a liability or owner’s equity
increases then credit the account. If an asset decreases then credit the account.
If a liability or owner’s equity decreases then debit the account.
The basic debit and credit rules for increasing
or decreasing an account.
55
Accounting for All
Example:
Office furniture is bought for cash (R2 000) on 1 June. Two accounts are involved
(office furniture and bank/cash). Office furniture is an asset account that increases
and is therefore debited. Bank/cash is also an asset account that decreases,
therefore credited.
+ Bank – + Furniture –
Jun 1 Furniture 2 000 Jun 1 Bank 2 000
Example 3.2
The bookkeeper of Mojani Traders recorded the following transactions using the
double-entry system:
Date Transaction Amount

Jun 1 Owner invested savings to open the business R6 000
Jun 2 Borrowed money from the bank R4 000
Jun 8 Bought a desk for cash R1 000
Jun 10 Bought equipment and tools on credit from tool supply R2 000
56
Solution:
Assets = Owner’s equity + Liabilities
Dr Bank Cr Dr Capital Cr Dr Bank loan Cr
Jun 1 Capital 6 000 Jun 1 Bank 6 000 Jun 2 Bank 4 000
Jun 2 Bank loan 4 000 Jun 8 Furniture 1 000
Furniture Tool supply (creditors)
57
Jun 8 Bank 1 000 Jun 10 Tools & eq 2 000
Tools & equip
Jun 10 Tool supply 2 000

Accounting for All
What did you learn?

Make sure you understand how these entries were recorded before continuing.
Did you notice the following?
 Use of the date as a reference to match entries between accounts.
 Use of the word creditors for the liability account (tool supply). Creditors are
people to whom you owe money; in this case it is for tools and equipment
bought on credit.
 Reference to the contra entry in each account.
 That the sum of all the debit entries less the credit entries of the asset accounts
(the balance of the accounts), equals the balance of all the equity and liability
accounts (do it and see).
 How different accounts are increased or decreased by debit or credit entries
(more about this later).
Summary of debits and credits
Debits Credits
Assets Liabilities
Expenses Income
Drawings Capital
All of the above All of the above
+ – – +
debit credit debit credit
Accounting Accounting Accounting

procedure procedure procedure
To increase an asset, To increase the To increase a
debit, and to owners’ equity, credit, liability, credit, and
decrease, credit the and to decrease, debit to decrease, debit
asset account the equity account the liability account
3.5 Balancing the accounts

The bookkeeper makes a lot of entries and has to check that the accounts are
correct. To do this she balances the accounts at the end of the month.
This is how she balances the accounts:
How to balance an account
 Add up both sides of the account, debits and credits. (Make a note of the
totals rather than write them in yet.)
 Find the difference between the two sides. This is the balance.
58
 Add the difference (the balance) to the smaller side. This is known as carrying
the balance forward and is shortened to c/o (carried over). The balance should
always be added to the smaller side. This makes both sides equal.
 Write the totals in on the same line on both sides.
 Bring the balance forward to start the next period below the totals. The
balance brought forward is shortened to b/f.
Alternative terms for carried forward are carried over or carried down.
Alternative terms for brought forward are brought over or brought down.
Example 3.3
Debit Bank Credit
Jun 1 Owner’s equity 6 000 Jun 5 Supplies 3 000

2 Bank loan 4 000 8 Furniture 1 000
9 Balance c/f 6 000
10 000 10 000
Jun 10 Balance b/f 6 000
The total of the debit side is The total of the credit side is R4 000
R10 000
The difference of R6 000 is the
balance which is added to the smaller
side. In this case this is the cash the
business still has.
Note the date of the balance c/o.
This makes both sides equal
The balance is brought forward to So the balance is entered twice – once
start the next period. Note the date. on the credit side and once on the debit
side. This is an example of double-
entry.
The balancing process is the same even if

the account only has one entry.
Debit Loan Credit
Jun 30 Balance b/f 4000 Jun 2 Cash 4000

4000 4000
Jul 1 Balance b/f 4 000
59
Accounting for All
3.6 When to debit or credit income or expense accounts

Only income and expense transactions can affect the statement of profit or loss
and other comprehensive income.
It is important that you are able to recognise the difference between income and
expense transactions. Income less expenses equals profits, and that’s what the
owner of the business is interested to know.
The statement of profit or loss and other comprehensive income in its simplest
form adds all the income items and subtracts all the expense items. The remainder
is profit.
The first thing you need to know is the difference between assets and expenses,
income and capital.
3.6.1 The difference between assets and expense, capital and income
When money goes out of the business to pay for something it is not necessarily an
expense.
When money comes into the business it is not necessarily income.
It depends what the money is used for and where it has come from.
3.6.2 Statement of financial position items
Up to now, we have seen money go out of a business to:
 buy things like office furniture and vehicles
 pay off a loan or
 be used by the owner (drawings)
We have seen money come into Mojani Traders in the form of investment by the
owner and as loans from the bank.
We have also seen how these transactions are recorded in accounts and used to
provide information about the financial position of the business ie the statement
of financial position.
3.6.3 Statement of profit or loss and other comprehensive income items
Now we will see how money going out of the business to pay for things like:
 rent,
 telephone bills, and
 wages
is recorded.
And we will see how money coming into the business from sales and interest is
recorded.
Records of these transactions are used to provide information about the financial
results of the business, ie the statement of profit or loss and other comprehensive
income.
60
The owner of a business buys the following items:

 stationery
 cleaning materials
 inventory of shoes
 display stands for the shoes
Which of these items would increase the assets of the business?
___________________________________________________
___________________________________________________
___________________________________________________
___________________________________________________
3.6.4 Income and capital
Income is money that comes into the business from sales, services rendered and
from things like interest received. Income also comes from profits that are put
back into the business.
Capital is money that comes into the business from owners or is borrowed from
the bank.
3.6.5 How to record income and expense transactions
Income and expense transactions are recorded in accounts using the double-entry
system. These accounts are really owner’s equity accounts that have been
separated to make it easier to prepare the statement of profit or loss and other
The basic debit and credit rule for income and expense items
To understand how income and expense accounts are debited or credited, you
have to remember that these accounts are linked to owner’s equity.
Owner’s equity appears on the right-hand side (the credit side) of the accounting
equation. It is like a loan from the owner to the business. It has a credit balance.
The value of credit entries is greater than the debit entries.
Expenses have the effect of decreasing owner’s equity. This is because, as a result
of the expense, the owner’s share in the business is reduced. The more expenses
there are the more they decrease the owner’s equity.
Expense accounts have debit balances because they decrease the owner’s equity.
To increase an expense account, you debit it.

To increase an income account, you credit it.
61
Accounting for All
Debit Owner’s equity Credit

– +
Decrease on debit side Increase on credit side
Expense Income
Debit Credit Debit Credit
+ – – +
Increase on Decrease on Decrease on Increase on
debit side credit side debit side credit side
Accounting procedure Accounting procedure
To increase expenses debit expense To increase income credit income

account (because it decreases account (because it increases
owner’s equity) and to decrease owner’s equity) and to decrease
expenses credit the expense account income, debit the income account
(because it increases owner’s (because it decreases owner’s
equity) equity)
You will never open an owner’s equity account in the general ledger.
Example 3.4
June 5. The business pays the rent of the building R500.
 Two accounts are affected (double-entry). Bank and rent.
 The bank account is an asset that decreases (credited).
 Rent account is an expense that increases (debited).
Dr Bank Cr Dr Rent Cr
Jun 5 Rent 500 Jun 5 Bank 500
62
Example 3.5
Follow the rest of this example to see how the bookkeeper of Mojani Traders
recorded these trading transactions.
Date Transaction Amount

Feb 2 Buy trading inventory from Footwear Supplies (Pty) R4 200
Ltd for cash
Feb 9 Received cash for sale of clothes and deposit in the R3 000
bank. COS, R1 000
Feb 10 Buy trading inventory from Footwear supplies on R1 200
credit
Feb 11 Received cash for sale of shoes and deposit in bank. R1 900
COS, R1 200
Feb 12 Pay the following expenses by cheque
– shop rent R400
– wages R100
– stationery R40
– petrol R40
Feb 13 Sell clothes on credit. COS, R1 600 R2 000
63
Solution:
Dr Bank Cr Dr Sales Cr Dr Creditor – Footwear supplies Cr
Feb 9 Sales 3 000 Feb 2 Inventory 4 200 Feb 9 Bank 3 000 Feb 10 Inventory 1 200
Accounting for All
Feb 11 Sales 1 900 Feb 12 Shop rent 400 Feb 11 Bank 1 900 Balance 1 200
Wages 100 Feb 13 Debtor 2 000
Stationery 40 Balance 6 900
Petrol 40
____ Balance b/d 120
4 900 4 900
Balance b/d 120
64
Dr Debtors Cr Dr Shop rent Cr
Feb 13 Sales 2 000 Feb 12 Bank 400

Balance 400
Dr Inventory Cr Dr Cost of Sales Cr

Feb 2 Bank 4 200 Feb 9 C.O.S. 1 000 Feb 9 Inv 1 000
Feb 10 Creditors 1 200 Feb 11 C.O.S. 1 200 Feb 11 Inv. 1 200
Feb 13 C.O.S. 1 600 Feb 13 Inv. 1 600
____ Feb 28 Bal 1 600 3 800
5 400 5 400
Mar 1 Bal b/d 1 600
Assets = Owner's equity + Liabilities
Dr Wages Cr
Feb 12 Bank 100
Dr Stationery Cr
Feb 12 Bank 40
65
Dr Petrol Cr
Feb 12 Bank 40
Accounting for All
Questions
Question 3.1
The following transactions were obtained from the books of Zastron Traders.
They use a perpetual inventory system.
1. The owner deposits his own money into his business account, R280 000.
2. Purchases a delivery van and pays with a cheque, R140 000.
3. Purchases inventory on credit from Bambi Traders, R15 000.
4. Sells goods on credit to M Savimbi, R5 000. Cost price R1 500.
5. Deposits money from cash sales, R4 800. Cost price R1 400.
6. Pays for the following expenses by cheque:
Shop rent, R2 500
Telephone, R1 200
Salaries, R18 000.
7. The owner withdraws money for his personal use, R1 000.
8. Received from M Savimbi, R2 000 as part payment of his account.
9. Issues a cheque to Bambi Traders for payment of our account, R15 000.
10. Cash sales, R8 000. Cost price R2 500.
Required:
Enter the above-mentioned transactions in the general ledger and balance each
account (ignore VAT).
Question 3.2
The following transactions were obtained from the books of Mavuso Traders.
They use a perpetual inventory system.
1. W Willers, the owner deposited R200 000 as his capital contribution into the
bank account of the business.
2. Received a credit invoice as well as the equipment purchased from Luma Ltd
for R660.
3. Willers the owner took goods at cost price for his own use, R120.
4. Bought goods from Eve on credit R670, less 10% trade discount.
5. Received Hudson’s account for repairs to the shop shelves, R420.
6. Paid cash for stationery bought from ABC Ltd, R128.
7. Returned unsatisfactory goods to Eve, R70.
8. Debtor (R10 000) S Sorry is insolvent. His estate can only pay 40 cents in the
Rand.
9. Paid L Loots by cheque R171 and received 5% discount on the original
amount of R180.
10. The owner transferred his private vehicle, worth R5 000, to the business. He
did not receive cash for it.
Required:
Record the above-mentioned transactions in the general ledger and balance each
account (ignore VAT).
66
Question 3.3
The following transactions appeared in the books of N Mathibe Traders during
February 2013. They use the perpetual inventory system (ignore VAT). Mark-up
is 25% on selling price
2013
Feb 1 Issued a cheque to P Maila for the monthly rent, R3 000.
2 Purchased goods on credit from J Mmala, R5 000.
3 Credit sales to C Cane, R1 140.
4 Purchased inventory cash from A Appel, R2 600. Received trade discount of
10%.
6 Received R800 from a debtor B Boroto in full settlement of his account of
R880.
7 The owner withdrew R500 cash for his own use.
8 Paid N Mokwena R1 000 in full settlement of our account of R1 068.
9 C Cane returned goods to the value of R285.
10 The cheque of B Boroto on the 6 Feb is returned by the bank with the
message ‛refer to drawer’.
Required:
Answer the above transactions using the following columns:
Transaction nr, account DR, account CR, owner’s equity +/–, assets +/– and
liabilities +/–.
Question 3.4
The following transactions appeared in the books of Abco Traders for the period
ended 28 February 2013. The perpetual inventory system is in use (ignore VAT).
2013
Feb 1 Cheque issued to P Shai for the monthly rent, R3 000.
2 Purchased inventory on credit from J Mala amounting to R50 000.
3 Credit sales to C Can, R11 140. Cost price R8 912.
4 Cash purchase of inventory from A Apple for R20 600. Trade discount
of 10% is given.
8 Issued a receipt to B Boroto, a debtor, for R800.
Discount of R80 is allowed.
10 M Matlawa charged R150 interest on our overdue account.
12 Cash sales, R5 900. Cost price, R4 720.
15 The owner withdrew R500 for school fees of his children.
18 Paid M Matlawa R2 500 on account.
19 Paid N Nkoana R1 000 in full settlement of our account of R1 068.
22 Received R3 400 for equipment sold to S Semenya.
28 C Can returned goods amounting to R2 850. Cost price R2 280.
Required:
Record the above-mentioned transactions by using the following columns: date;
account DR; account CR; amount.
67
Accounting for All
Question 3.5
The following transactions appeared in the books of Masula Traders during
March 2013. Goods are sold at a mark-up of 25% on selling price. No VAT
applicable.
2013
Mar 1 Cash sales, R2 681.44.
2 Credit sales to P Davis, R8 815.65.
3 Paid railage on goods purchased, R114.25.
4 The owner took goods for private use, marked R230.99.
Required:
Enter the transaction indicating which accounts are debited/credited and the effect
on OE, A and L.
Question 3.6
The following transactions took place during the month of January 2013. The
perpetual inventory system is used.
2013
Jan 1 Cash sales, R14 500. Mark-up, 25% on selling price.
2 Received a cheque from A Aramis to settle his debt of R12 000.
Bought stationery on credit from B Bennie, R700.
3 Cash purchases of merchandise from R Rundle, R7 500.
Paid by cheque for petrol for the private vehicle of Mr Boroto (owner),
R60.
6 Paid carriage on purchases, R720.
Received a cheque for R10 000 from P Puma in full settlement of his
account and allowed him R112 discount.
Received rent in cash from R Roberts, R1 500.
9 Issued an invoice for goods sold to R Ronald, R14 800. Cost price,
R6 000.
11 Received a credit note from B Bennie for stationery, R50.
15 R Ronald pays us R17 900 in full settlement of his account of
R18 000.
18 Credit sales, R17 600. Mark-up, 10% on cost price.
24 The bank informed us that the cheque from R Ronald has been
dishonoured.
28 R Ronald pays us R7 000 and the balance on his account of R2 000
must be written off as irrecoverable.
30 Charged A Aramis R100 interest on his overdue account.
30 Bought inventory on credit for R30 000.
Required:
Enter all transactions into the general ledger accounts.
68
Question 3.7
The following balances appeared in the records of TJ’s at 1 March 2013:
R
Bank 20 862.25
Debtors 41 582.16
Creditors 3 814.26
Transactions for March 2013:

2013
Mar 1 Received an invoice from POPS for trading inventory purchased, on
credit, R26 211.23.
3 Sold goods on credit and issued invoices to:
R Lemmer R299.99
R Legodi R467.89
4 The owner took inventory for own use at the selling price of R161.27.
6 Received a cheque from P Ervin, R19 000 in full settlement of his
account.
9 Returned damaged inventory to POPS, R209.23.
11 P Ervin’s cheque was returned by the bank with a debit note ‛Refer to
Drawer’.
13 P Ervin is insolvent. Received a first and final dividend of 65c in the
Rand and wrote the balance off as irrecoverable.
15 Cash sales per cash register roll, R19 252.52.
Telephone R520.14
Wages R3 000
29 Charged J Roelof’s account with 19% interest per year for two
months. He owes us R9 000.
Required:
Enter all transactions into the general ledger of TJ’s. TJ’s makes a profit of 22%
on selling price. They use the perpetual inventory system.
Question 3.8
The following transactions appeared in the books of Xumalo Traders during
February 2013. Xumalo Traders use the perpetual inventory system and maintain
a mark-up of 25% on cost price (ignore VAT).
2013
Feb 1 Cash sales, R57 000.
3 Cash purchases of inventory, R128 000. Trade discount of 5% must
still be taken into account.
6 C Chabalala charged our overdue account with R80 interest.
12 Paid N Rambo R1 800 in full settlement of our account of R2 000.
15 Purchased inventory on credit from KOO, R2 398.78.
69
Accounting for All
16 Received damaged goods from P Davis, R159.79. Issued a credit note

to him.
27 Received a credit note from KOO for trade discount, R145.34.
28 Sold inventory for R11 400 to a debtor.
Required:
Enter all the transactions into the general ledger of Xumalo Traders.
Question 3.9
The following ledger accounts were taken from the books of Zig-Zag Ltd:
Dr Bank Cr Dr Inventory Cr
1/10 Bal b/f 10 000 Salaries 5 000 1/10 Bal b/f 15 000 COS 4 000
Sales 60 000 Fuel 7 000 Bank 25 000 COS 7 000
Debtors 18 000 Creditors 20 000 Creditors 30 000
Water&Elec 37 000
Inventory 25 000
Dr Sales Cr Dr Debtors Cr
Debtors 35 000 1/10 Bal b/f 35 000 Bank 18 000
Debtors 55 000 Sales 35 000
Bank 60 000 Sales 55 000
Dr Water and electricity Cr Dr Creditors Cr

Bank 37 000 Bank 20 000 1/1 Bal b/f 60 000
Inventory 30 000
Stationery 4 000
Dr Salaries Cr Dr Fuel Cr
Bank 5 000 Bank 7 000
Dr Stationery Cr Dr Cost of Sales Cr

Creditors 4 000 Inventory 4 000
Inventory 7 000
Required:
Calculate the balances of each of the above accounts.
70
CHAPTER 4
INTRODUCTION TO VAT
4.1 Introduction
When a business is registered for VAT, and charges VAT on its sales, such a
business can claim the VAT it has paid. It can be claimed back from the South
African Revenue Service. It keeps accurate records of how much VAT the
business is paying on purchases and charging on sales. Its VAT documents are
kept and stored safely.
In this chapter we will give you some background information on VAT. This will
help you to understand how it is recorded in the business accounts.
 State who must register for VAT
 State the difference between input and output VAT
 Identify transactions where VAT is charged
 Identify transactions where VAT is claimed back
 Calculate the VAT portion from inclusive amounts
 Understand the legal implications of VAT
4.2 What is VAT?

VAT stands for ‛Value Added Tax’. It is a tax on the value-added portion of sales.
What is meant by ‛value added’? This refers to the profit portion of a sale. For
example:
A manufacturer Mojani Traders produces shoes and the material cost price was
R1 000, to which they added the VAT payable (VAT 14%).
Material cost (including VAT 14%) R1 140

14
Less VAT that can be reclaimed (1 140 x ) R 140
114
Net cost to Mojani Traders R1 000

Value added (after labour and profit) R1 000
Selling price (excluding VAT) R2 000
VAT charged ( 14 x 2 000) R 280
100
Total price to customer (including VAT) R2 280
Accounting for All
So VAT of R140 was paid by the business. The business charged VAT of R280
on the selling price. The difference between the VAT charged on sales and the
VAT paid on purchases goes to the South African Revenue Service.
 R280 – R140 = R140
When a business sells goods which are liable for VAT, the VAT is charged to the
customer.
If the customer uses these goods in his business, then he can claim the VAT back.
The VAT charged on the sales invoice is called output VAT and the VAT claimed
back is called input VAT.
What is output and input VAT?
Output VAT: VAT charged on anything that goes out of a business. Includes sales
of goods and fixed assets.
Input VAT: VAT paid on anything that comes into a business.
The difference between the output VAT and the input VAT is what the South
African Revenue Service receives (or pays out).
4.3 Registration for VAT

Any enterprise that provides over R1 000 000 worth of taxable goods and services
a year must register for VAT.
An enterprise that provides less than this may register if it wants to, and if it meets
certain conditions.
A business that is not registered for VAT cannot charge VAT on its sales. It must
still pay VAT on its purchases but cannot claim this VAT back. Only a business
registered for VAT may reclaim its input VAT.
4.4 At what rate is VAT paid?

This depends on the item. Most items attract VAT at the standard rate. This rate
is set by the South African Revenue Service (presently 14%). Goods on which
VAT is charged at this rate are called standard-rated.
 Zero-rated – Some items such as exported goods and petrol attract VAT at a
zero rate – 0%. Zero-rated goods are still taxable but at a rate of zero. Certain
essential foods are also zero-rated as a way of providing VAT relief for
people with low incomes.
 Exempt – Some items are exempt (excluded) from VAT, for example interest
on loans.
72
Chapter 4 Introduction to VAT
4.5 How to identify transactions where VAT is charged

The basic rule is that VAT should be charged at the standard rate on all supplies
of goods and services by a business registered for VAT (ie a registered vendor).
You should be aware of the exceptions to this rule. Certain items are exempt from
VAT or attract VAT at 0%.
The difference is important for when you want to reclaim input VAT on
purchases.
If you operate a concern that provides VAT exempt items such as rented
accommodation, you cannot reclaim the VAT (input VAT) paid on the purchases
used to provide the items.
If you operate a concern that provides zero-rated goods such as petrol and certain
foodstuffs, you can reclaim VAT paid on your purchases.
Examples of VAT exempt items
VAT is not charged on these items:
 Interest on loans, overdrafts, mortgage bonds
 Life assurance premiums
 Pension and provident fund contributions
 Payments into medical aid funds
 Rent charged for accommodation
 Taxi, bus and train fares
 School fees
 Salaries
 Donations
 Cash withdrawals by the owner
Examples of zero-rated items
VAT is not charged on these items (but you may claim the input VAT on
purchases used to supply them):
 Exported goods
 Petrol
 Some foods such as brown bread and maize meal
 Sale of a business
4.6 How to identify transactions where VAT can be recovered

The basic rule is VAT paid on purchases that are then used to provide taxable
supplies, can be recovered from the South African Revenue Service.
You should be aware of the exceptions to this rule.
Let us take a closer look at a VAT invoice.
73
Accounting for All
A VAT invoice should include both the VAT registration number of the seller and
the purchaser.
Mojani
M abasaTraders
Traders
P O B o x 987
SE L B Y 2 001
VAT Reg No: 14823451

Invoic e N u m b er : 1 23456
Ta x Invoice
D ate : 0 1/01/20xx
Acc ou nt N u m ber : 3 365
J S m ith Es q. T ele ph on e N um be r (011 ) 43 2 2222

E le ctro m arke t L td V A T R eg istra tio n N u m b er 924 4 614 29
1 12 P eters R o ad
P reto ria
1 000 VAT No: 1432789
Item C o de D escrip tion Q ua ntity U nit P rice N et A m ou n t
13679A S h o es 5 100.00 50 0.00
S A LE S V A LU E : 50 0.00
V A T A T 14% : 70.00
A M O U N T P A YAB LE : 57 0.00
T erm s: P aym en t is d u e w ith in 3 0 d ay s o f in v o ic e d ate
If you are a registered vendor, then to determine if VAT can be reclaimed, you
need to ask the following questions:
1. Is the document a VAT invoice?
A VAT invoice must include the following information:
 the words ‛tax invoice’ written on it clearly
 the supplier’s name, address and VAT registration number
 the invoice number and date
 a description of the goods or services supplied
 the quantity bought
 the total amount charged and an indication if it includes or excludes the
VAT amount
74
2. Was VAT charged? If no VAT has been charged, the item may be exempt or
zero-rated.
3. Is the VAT recoverable? The VAT on certain purchases is not recoverable.
The main transactions affected are those involving:
 food for use in a staff canteen
 milk, tea, coffee, alcohol
 motor cars
4.7 How to calculate VAT

 Calculate VAT from an amount exclusive of VAT
If a product such as genuine leather boots, imported from Italy, has a price before
VAT of say R1 000 and VAT is to be added, then you simply multiply the price
by the standard rate (presently 14%).
VAT = R1 000 x 14% = R140

The total amount charged will then be:
R1 000 + R140 = R1 140
 Calculate VAT from an amount inclusive of VAT
Suppose that you know the total price charged and you want to find out the price
before VAT was added. Many people make the mistake of calculating 14% of the
total price and then taking this amount away from it.
Let’s see what happens when you do this.

R1 140 x 14% = R159.60
R1 140 – R159.60 = R980.40
This way obviously doesn’t work – we should get back to the original price of
R1 000.
To calculate the VAT charged from a VAT inclusive amount you multiply the
inclusive amount by 100/(100 + VAT rate).
In our case this is 100/(100 + 14) or 100/114
R1 140 x 100/114 = R1 000 which is correct.
You can also work out the amount for VAT if you use the formula 14/114. This
is called the VAT fraction.
R1 140 x 14/114 = R140 which is the VAT added.
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Accounting for All
What is VAT inclusive and VAT exclusive?

VAT exclusive – No VAT has been added to the sales value.
VAT inclusive – VAT of 14% has already been added to the
sales value.
To summarise:
 To work out the original price we use the formula (if the amount is inclusive
of VAT):
100 x amount
114 1
 To work out the amount of VAT added in a VAT inclusive amount, we use the
formula:
14 x amount
114 1
4.8 Discount
If a business gives us trade discount, or cash discount or bulk discount, the
discount must be deducted before the VAT amount can be calculated.
Example 4.1
Pretty Belinda sold goods to Alirah for R3 000. She gave Alirah a trade discount
of 5%. Calculate the value of the sales invoice.
Solution: R
Price of goods excl VAT 3 000
– Trade discount @ 5% (150)
Amount after discount 2 850
VAT @ 14% on R2 850 399
Total amount including VAT 3 249
Example 4.2
Garth Enterprises sold the following items at the following amounts. Calculate the
VAT for each amount.
1. R10 000 excl VAT
2. R10 000 incl VAT
3. R1 700 incl VAT
4. R25 000 excl VAT
76
Solution: 14
1. R10 000 x 100 = R1 400
14
2. R10 000 x = R1 228
114
3. R1 700 x 14 = R209
114
14
4. R25 000 x = R3 500
100
Example 4.3
Mabonzi had the following transactions. Complete the table.
1. Sold inventory for R5 000 excl VAT.
2. Purchased goods at R2 000 (excluding VAT) received a bulk discount of
12%.
3. Sold inventory for R12 000 including VAT.
Solution:
14
1. VAT = 5 000 x = 700
100
2. [R2 000 – ( 12 x 2 000)] x 14 = 246,40
100 100
3. 12 000 x 14 = 1 474
114
Amount VAT Amount

excl VAT incl VAT
1. 5 000 700 5 700
2. 2 000 – 240 = 1 760 246.40 2 006.40
3. 10 526 1 474 12 000
4.9 Calculating VAT due to, or receivable from the Receiver

Suppose a business sells goods for R12 540 including VAT in a two-month
period.
It buys goods worth R10 260 over the same period (incl VAT).
What amount will it pay to or receive from the Receiver for the period?
To find the output VAT multiply R12 540 with the VAT fraction
R12 540 x 14 = R1 540
114
77
Accounting for All
To find the input VAT multiply R10 260 with the VAT fraction
R10 260 x 14 = R1 260
114
VAT payable = Output VAT – input VAT
= R1 540 – R1 260
= R 280 → Payable to SARS
Recording VAT
Recording the sales and purchases transactions above in the general ledger.
Dr Sales Cr Dr VAT output Cr
Bank 11 000 Bank 1 540
Dr VAT input Cr
Bank 1 260
Dr Bank Cr Dr Purchases Cr
Sales 12 540 Purchases 10 260 Bank 9 000
 To calculate the VAT amount charged from an inclusive amount multiply the
VAT inclusive amount by the VAT fraction, which is the VAT rate/100 + VAT
rate. Assuming a VAT rate of 14% the VAT fraction is 14/114.
 To calculate the output VAT multiply total sales inclusive of VAT charged x
the VAT fraction.
 To calculate input VAT multiply total purchases inclusive of VAT paid x the
VAT fraction.
78
Questions
Question 4.1
Customer Value of goods VAT Total invoice
sold (excl VAT) amount
Pierce R10 000
Anneh R25 000
Micke R50 000
Niche R18 000
Question 4.2
Tobile R15 000
Beaty R12 000
Cyril R22 000
Question 4.3
Princess R 200
Klaas R1 800
Question 4.4
Skolile Enterprises sell goods to Mobanju for R17 500. They give a bulk discount
of 2½%. Calculate the total amount of the invoice.
Question 4.5
Maluka sells goods to Princess with a catalogue value of R10 000. These goods
are subject to a trade discount of 25%. If Princess settles her account before the
end of the month she gets another 2½% discount. Three weeks later Maleka sells
goods to Precious with a catalogue price of R17 000. The terms are: bulk discount
12%, cash discount 12%.
Required:
Calculate the VAT for both these transactions.
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Accounting for All
Question 4.6
The following transactions took place during January 2013 in the business of
A Amos. VAT of 14% is included in all prices where applicable.
2013
Jan 1 Sold merchandise on credit to C Carlos, R22 800 cost price (mark-up
10% on cost price).
2 A debtor’s debt of R2 800 must be written off.
3 Purchased stationery cash, R1 400.
4 Paid salaries for the month, R36 000.
Required:
4.6.1 Calculate the amount for VAT included in each transaction.
4.6.2 Indicate whether it is input or output VAT.
Question 4.7
The following transactions occurred during January 2013 in the business of
Dunlopp. Dunlopp uses the perpetual inventory system and maintains a mark-up
of 18% on cost price. VAT of 14% is included in all prices where applicable.
2013
Jan 1 Cash sales according to cash register roll R3 000.
2 The owner borrowed R7 000 from Union Bank and deposited the
cash in the current account of the business.
3 Purchased merchandise on credit from Firestone R2 350.
4 A debtor, Zala’s, debt of R300 must be written off as irrecoverable.
5 The owner withdrew R600 cash to pay his private telephone
account.
6 Received a credit note from Firestone for damaged goods returned,
R350.
7 The bank charges on the bank statement amounted to R75.
Required:
Calculate VAT for each transaction.
Question 4.8
Indicate the effect of the following transactions on the accounting equation using
the following columns:
No Subsidiary Acc Acc Amount OE A L

journal debit credit
The business is using the perpetual inventory system. VAT of 14% is included in
all prices where applicable (calculate to two decimals).
1. Purchased merchandise cash from Rambo Suppliers, R15 700.
2. Purchased equipment on credit from Expo Office Outfitters, R28 400.
3. Sold goods on credit to P Swan, R8 400. Cost price R6 140.35.
80
4. Received R1 500 from S Dube as payment for the month’s rent.

5. Received R950 from a debtor, G Rabe, in full settlement of his debt of
R1 000.
6. The owner took goods at cost price to the value of R800 for his own private
use.
7. A debtor R Zwane’s debt of R1 200 must be written off as irrecoverable.
8. Received a credit note from Expo Office Outfitters for damaged equipment,
R7 500.
9. Cash sales, R2 700. Cost price R1 973.68
10. Charged a debtor’s overdue account of R1 800 with interest at 16% pa for
three months.
Question 4.9
Show the effect of the following transactions on the accounting equation by using
the following columns (show the amounts):
No Acc debit Acc credit Amount OE A L
The business uses the perpetual inventory system. VAT of 14% is included in all
amounts where applicable. A mark-up of 20% on cost price is maintained (all
calculations to the nearest R).
1. Purchased merchandise on credit from C Zikwe, R11 400.
2. Cash sales, R22 800.
3. Donated R5 000 to the local Red Cross.
4. The owner took inventory for own use. Selling price R650.
5. A debtor’s debt of R600 must be written off as irrecoverable.
81
CHAPTER 5
BOOKS OF PRIME ENTRY
5.1 Introduction
In chapter 2 we have seen that there are two main types of transactions that exist
namely, cash – and credit transactions. There are, however, transactions that are
neither cash nor credit, for example the recording of depreciation on fixed assets.
We have reached the stage in the accounting cycle where information is collected
from the source documents to be recorded in the applicable subsidiary journals.
Therefore it is important to identify the relevant transaction types, as similar
transactions are grouped together and recorded into a specific subsidiary journal.
 Identify the relevant transaction types and source documents to be recorded in
the applicable subsidiary journal
 Record transactions in the following subsidiary journals:
– General journal
– Cash receipts journal
– Cash payments journal
– Debtors journal
– Creditors journal
– Debtors allowance journal
– Creditors allowance journal
– Petty cash journal
– Post subsidiary journals to general ledger, subsidiary ledger
– Prepare a trial balance (including correction of errors)
– Reconcile subsidiary ledgers with control accounts
5.2 Cash receipts and payments journal

Cash in a business, like oil in an engine, keeps a business running smoothly. But
it is not practical to keep a lot of cash on business premises. So cash is kept in a
bank account. All cash received is deposited into the account. Cheques are used to
make payments.
In this section you will learn how a business keeps a record of all the money
deposited into and paid out of its bank account.
This is the function of the cash journal (cash book). This section explains how to
record cash receipts and payments in the cash journal.
At the end of this section you will be able to:
 Receive and check money
 Check payments
 Record cash receipts and payments in a cash journal
 Calculate cash discounts
 Record settlement discount granted and received in the cash journal
Chapter 5 Books of prime entry
 Record VAT in the cash journal

 Transfer cash journal entries to correct ledger accounts
 Identify discrepancies in cash receipts and payments
5.2.1 What is a cash receipts/payments journal (cash book)?
A cash journal is a record of all the money that a business deposits and takes out
of its bank account. It is a record of the cash transactions of a business.
The term cash includes any transactions that can take place through a bank
account. This means that payments made by cheque or even debit orders are
recorded in the cash journal.
While you will often find in one book the cash receipts and cash payments (cash
book), it is common practice to use separate books for cash receipts and cash
payments. In this section we will refer to these books as cash receipts journal and
cash payments journal.
5.2.2 Source documents for cash journal entries
We have said that a cash book is divided into two sections – cash receipts journal
and cash payments journal.
Entries in both journals are recorded from source documents. If you studied
chapter 2 you will have learnt about these documents, but you may be familiar
with them already.
The following source documents are applicable to cash journals:
 Receipt duplicates
A receipt is issued when cash is received for payment of an account. The
customer keeps the original and a copy is kept by the business. A record is made
on the receipts side of the cash journal.
When a customer pays by cheque, the paid cheque acts as evidence of payment.
When the cheque is deposited, the deposit slip is the source document for an entry
on the receipts side of the cash journal.
 Deposit slips
When cheques and cash are deposited in the bank account, the duplicate deposit
slip (stamped by the bank) is used to record receipts into the cash journal.
 Cash slip or cash sale invoice
When goods are sold for cash, a cash sale slip is completed, either automatically
as with a cash register roll, or manually written out. Copies act as source
documents for the cash receipts journal.
 Cheque counterfoils
Completed cheque counterfoils (stubs) are source documents for payments made
by cheque.
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Accounting for All
 Cash purchase invoices

Goods bought for cash from a supplier are recorded on purchase invoices issued
by the supplier. These act as source documents for payments recorded in the cash
payments journal, with the cheque counterfoil.
5.2.3 Recording transactions in the cash journal
On the next page are examples of typical pages from a cash receipts journal and a
cash payments journal.
Read through the explanation of the columns so you can follow how to enter
transactions into these books.
CASH RECEIPTS JOURNAL

Date Particulars Fol Sundry Cash Debtors Analysis Bank
sales
Explanation of columns
Date record the date when the cash entry takes place
Particulars record details of transactions and say whether it is a cash sale or
cash received as payment of an account
Folio use to indicate where the item has been posted in the ledger
Sundry column to record items other than debtors and cash sales, such
as refunds
Cash sales analysis column to record cash received from cash sales
Debtors record payment of accounts by customers who have bought on
credit (debtors)
Analysis use to summarise all monies received until it is banked with a
deposit slip
Total bank record all money (cash and cheques) paid into the bank (only
the totals of deposit slips will appear in this column)
84
CASH PAYMENTS JOURNAL

Date Cheque Particulars Fol Sundry Cash Creditors Total
no purchases bank
Explanation of columns
Date record the date the payment is made
Cheque number record the cheque number for reference
Particulars record details of transactions and say whether it is a cash
purchase or cash paid as payment of an account
Folio reference number to say where in ledger item is found
Sundry payments all payments other than cash purchases and creditors
Cash purchases goods bought for resale and paid for in cash
Creditors payments made to suppliers for goods bought on credit
Total bank record all money drawn from the bank account, every
cheque amount will appear in this column
So far we have seen which source documents are used to record cash transactions
in the cash journals. You have also seen what a typical cash receipts journal and
cash payments journal looks like.
The next thing is to learn how receipts and payments are recorded in the cash
journals. We will first look at the cash receipts journal and then the cash payments
journal.
5.2.4 Cash receipts journal
Receipts of money should be checked before they are recorded in the cash
journals.
Some businesses divide the tasks of receiving money and recording it in the cash
journal between different people in the organisation.
Remember the source documents for the cash receipts journal are:
 Receipts
 Deposit slips
 Cash slip or cash sales invoice
 Credit card vouchers
85
Accounting for All
Example 5.1
See how the following receipts are entered in the cash receipts journal below.
DATE TRANSACTION AMOUNT
1 Aug Cash sale (sales slip #001) R80
Payment by debtor: Smith (receipt #1) R200
Payment by debtor: Jones (receipt #2) R150
Cash sale (sales slip #2) R20
Deposit slip (1) R450
4 Aug Cash from sale of asset (receipt #3) R2 000
Payment by debtor: Wilson (receipt #4) R280
Cash sale (sales slip #3) R100
Deposit slip #2 R2 380

Date Particulars Fol Sundry Cash Debtors Analysis Total
sales bank
Aug
1 Cash sale 80.00 80.00
Cash sale 20.00 20.00
Debtor: Smith 200.00 200.00
Debtor: Jones 150.00 150.00 450.00
4/8 Sale of asset 2 000.00 2 000.00

Debtor: Wilson 280.00 280.00
Cash sale R100 100.00 2 380.00
2 000.00 200.00 630.00 2 830.00
 Payments from debtors are entered in the debtors column.

 The analysis column is used to summarise all receipts for the day. Only the
total for the day is entered in the bank column. (The total of the deposit slip.)
The monies received are kept in the analysis column until they are deposited.
Source documents for cash receipts include: cash receipts, cash invoices and till
slips. The total of the day’s receipts is banked at the end of the day and the deposit
slip is the source document. The amount on the deposit slip is made up of the cash
receipts, cash invoices and till slip.
ANALYSIS COLUMN = TOTAL BANK COLUMN

Cash receipts + cash sale = Total on deposit slip
invoices + till slips
86
Sale of an asset for cash is a sundry item
The totals of the columns across = the sum of the total bank
R2 000 + R200 + R630 = R2 830
5.2.5 Posting cash receipts to the ledger

We have seen how payments received from customers are entered in the cash
receipts journal.
Details of the payment are also posted to the individual customer accounts in the
general ledger.
87
Diagram showing posting of cash receipts journal to accounts in the general ledger.

CASHRECEIPTS JOURNAL CRB6
Date Particulars Folio Sundries Cash sales Debtors Analysis Bank
19XX
Accounting for All
Jun 7 Cash Sales 220.00 220.00 220.00

10 J Smith - Payment on account S13 330.00 330.00 330.00
14 Cash Sales 400.00 400.00 400.00
20 Interest on investment 801 150.00 150.00 150.00
25 E Swart S17 1 100.00 1100.00 1 100.00
R150.00 620.00 R1 430.00 R2 200.00
N1 B1
88
Individual amounts in the particulars column Individual amounts in the sundries The totals of these summary
are credited to the debtor’s accounts in the column are credited to the appropriate columns are posted to the
general ledger. accounts in the general ledger. general ledger
Example 5.2
Follow how entries are made from the cash receipts journal to the general ledger accounts by studying the account records on the
next page.
Notice how receipts are posted to the credit side of customer accounts in the ledger.
CASH RECEIPTS JOURNAL CRB3

Date Particulars Fol Details Sundries Cash sales Debtors Analysis Total
of sundry
Apr
3 G Smith Receipt 21 4 200.00 200.00 200.00
5 K Nel Receipt 22 2 420.00 420.00 420.00
6 Cash Sales 36 – 51 3 440.00 3 440.00 3 440.00
7 S Botha Receipt 23 5 422.00 422.00 422.00
89
8 Cash sales 56 – 60 2 470.00 2 470.00 2 470.00
21 J Jones Receipt 24 3 814.00 814.00 814.00
30 P Peers Receipt 25 7 Rent 750.00 750.00 750.00
750.00 5 910.00 1 856.00 8 516.00
1 6
Accounting for All
Posting of cash receipts journal to general ledger accounts

Dr Cash sales 1 Cr
Apr 30 Bank CRB3 5 910.00
K Nel 2
Apr 5 Bank CRB3 420.00
J Jones 3
G Smith 4
S Botha 5
Bank 6
April 30 Cash receipts CRB3 8 516.00
Rent received 7
90
Example 5.3
Follow how the payments listed below are recorded in the cash payments journal.
Date Transaction Amount Chq

no
Aug 1 Payment of supplier: BB Boots R200.00 11
Cash purchase: Nike R1 200.00 12
2 Tough Takkies R300.00 13
Petty cash R50.00 14
3 Stationery R250.00 15
Sinderela Slippers R2 500.00 16
4 XXX Shoe sales R1 000.00 17
91
Date Chq Particulars Fol Details of Sundry Cash Creditors Total
no sundry purchases bank
Aug 1 11 Creditor: BB Boots 200.00 200.00
12 Cash purchase: Nike 1200.00 1 200.00
Accounting for All
2 13 Creditor: Tough Takkies 300.00 300.00

14 Cash Petty cash 50.00 50.00
3 15 CAN stationers Stationery 250.00 250.00

16 Creditor: Sinderela Slippers 2 500.00 2 500.00
4 17 Creditor xxx Shoes 1 000.00 1 000.00
92
300.00 1 200.00 4 000.00 5 500.00
5.2.6 Posting from the cash payment journal to the ledger
Amounts paid to creditors are posted on a daily basis to the appropriate accounts in the general ledger.
Totals of the cash journal analysis columns, eg, stationery, (not the total column itself) are posted at the end of the period to the
appropriate general ledger accounts.
The diagram on the next page illustrates the posting process from the cash journal (payments) to the ledger accounts.
CASH PAYMENTS JOURNAL CPB
Date Cheque Details Folio Sundries Cash Creditors Bank
Purchases
19xx
May 3 3 Transnet carriage on purchases 511  30.00 30.00
5 4 Rental for May 512  300.00 300.00
7 5 Cash Purchases 400.00 400.00
18 6 Abel & Co. A3  400.00 400.00
14 7 Cash Purchases 280.00 280.00
25 8 R Outfitters R6  50.00 50.00
31 9 Salaries 513  700.00 700.00
1 030.00 680.00 450.00 2 160.00
93
Amounts are posted individually Payments to creditors are posted Totals are posted to the general
from the sundries column to the individually during the month to ledger at the end of the month.
general ledger. creditors accounts in the general ledger.
Example 5.4
Below is a copy of the cash payments journal showing payments made to suppliers.
Study how the entries are posted to the ledger accounts on the next page.
Accounting for All
CASH PAYMENTS JOURNAL CPB3

Date Chq Particulars Folio Details of Sundries Cash Stationery Creditors Total
sundry purchases
July
10 26 Tough Shoes 2 13 895.00 13 89500
12 27 Capital Motors (R&M) 6 Repairs and 384.00 384.00
maintenance
18 28 XXX Shoe Sales 1 1 162.00 1 162.00
94
20 29 Sinderela Slippers 3 945.00 945.00
22 30 SA Industries 312.00 312.00
26 31 CAN 120.00 120.00
28 32 Boots Company 130.00 130.00
30 33 Mabasa Pumps 4 500.00 500.00
384.00 442.00 120.00 16 502.00 17 448.00
7 8 5
Please note that the totals of the analysis columns should cross cast (R384 + 442 + 120 + 16 502 = 17 448.00).
GENERAL LEDGER
Dr XXX Shoe Sales 1 Cr

Jul 18 Bank CPB3 1 162.00
Tough Shoes 2
Jul 10 Bank CPB3 13 895.00
Sinderela Slippers 3
Jul 20 Bank CPB3 945.00
Mabasa Pumps 4
Bank 5
Jul Cash CPB3 17 448.00
30 payments
Repairs and maintenance 6

Cash purchases 7
Stationery 8
Example 5.5
On 1 May 2013 C Magangane had the following favourable balance in the bank –
R5 400.
During the month he had the following transactions:
1. Record the transactions in the appropriate cash journals.
2. Post the cash journal entries to the correct ledger accounts.
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Accounting for All
Receipts issued: duplicates

Nr Date To For Amount
R1 2 J Bengu Rent 340.00
R2 3 NBS Loan 5 000.00
R3 6 S Smith On account 150.00
R4 8 O Hlope On account 155.00
R5 10 A Adams On account 100.00
R6 19 P Louw On account 260.00
R7 26 J Kekane Payment of account 125.00
Cheque counterfoils
Nr Date To For Amount
011 3 Syfrets Fixed deposit 2 500.00
012 5 S Jones Goods 420.00
013 7 E Els On account 260.00
014 9 W Mandela Equipment 850.00
015 10 SNT Goods 50.00
016 12 D Hanekom On account 150.00
017 17 D Jones Rent 500.00
018 20 C Magangane Cash 1 000.00
019 30 Eskom Electricity 250.00
020 30 Cash Salaries 3 000.00
021 31 Telkom Telephone 250.00
Cash register slips – weekly sales

Date Amount
5 850.00
12 1 500.00
19 1 125.00
26 1 500.00
Cash register slips – weekly sales
Date Amount
5 6 190.00
12 1 905.00
19 1 385.00
26 1 625.00
96
Solution:
Date Particulars Fol Details of Sundry Cash Debtors Analysis Total
sundry sales bank
2 J Bengu (rent) 2 Rent 340 340
3 NBS Loan 3 Loan 5 000 5 000
5 Sales 850 850 6 190
6 S Smith 5 150 150
8 O Hlope 6 155 155
10 A Adams 7 100 100
12 Sales 1 500 1500 1 905
19 P Louw 8 260 260
Sales 1 125 1 125 1 385
26 J Kekane 9 125 125
Sales 1 500 1 500 1 625
5 340 4 975 790 – 11 105
(4) (1)

Date Chq Particulars Fol Details of Sundry Cash Creditors Total
no sundry purch bank
May 011 Syfrets 10 Investment 2 500 2 500
3
5 012 D Jones 420 420
7 013 E Els 12 260 260
9 014 W Mandela 13 Equipment 850 850
10 015 SNT 50 50
12 016 D Hanekom 14 150 150
17 017 D Jones 15 Rent 500 500
20 018 C Magangane 16 Capital 1 000 1 000
30 019 Eskom 17 Electricity 250 250
30 020 Cash 18 Salaries 3 000 3 000
31 021 Telkom 19 Telephone 250 250
8 350 470 410 9 230
(11) (1)
97
Accounting for All
General Ledger
Dr Bank 1 Cr
May Balance b/f 5 400.00 May Total payments CPB1 9 230.00
1 31
31 Total receipts CRB 11 105.00 Balance c/o 7 275.00
1
16 505.00 16 505.00
Jun 1 Balance b/f 7 275.00
Rent 2
May Bank CRB1 340.00
2
Loan 3
May Bank CRB1 5 000.00
3
Sales 4
May Bank CRB1 4 975.00
31
S Smith 5
6
O Hlope 6
8
A Adams 7
10
P Louw 8
19
98
Dr J Kekane 9 Cr
26
Investment 10
May Bank (011) CPB1 2 500.00
1
Purchases 11
May Bank CPB1 470.00
31
E Els 12
May Bank (013) CPB1 260.00
7
Equipment 13
May Bank (014) CPB1 850.00
9
D Hanekom 14
May Bank (016) CPB1 150.00
12
Rent 15
May Bank (017) CPB1 500.00
17
Capital 16
May Bank (018) CPB1 1 000.00
20
Electricity 17
May Bank (019) CPB1 250.00
30
99
Accounting for All
Dr Salaries 18 Cr
May Bank (020) CPB1 3 000.00
30
Telephone 19
May Bank (021) CPB1 250.00
31
5.2.7 Settlement discount granted and received

So far in this chapter you have practised recording transactions from source
documents into the cash journals, and posting to general ledger accounts.
These transactions have not included discounts.
Discounts offered by a business to its customers are referred to as settlement
discounts granted. When a business takes advantage of discounts offered by
suppliers, it is referred to as settlement discounts received.
 Discount allowed (settlement discount granted)
To encourage debtors to settle their accounts promptly, a business may offer a
settlement discount to debtors, if they keep to the set payment conditions.
A business may, for example, offer a 2,5% settlement discount if the account is
settled within 30 days of the date of statement. In such a case, the 97,5% would be
accepted by the organisation as full payment.
According to Circular 09/06 settlement discount granted to debtors for the prompt
settlement of invoices should be estimated at the date of selling and therefore be
deducted directly from the selling price. This should be done by using an account
called the allowance account for settlement discount. This means that we will no
longer use a settlement discount granted account any more.
Example 5.6
1 September Sold goods on credit to a debtor, R10 000.
20 September The debtor paid us, R9 500 in full settlement of his account (after
5% discount was allowed for early payment within 30 days).
100
The two transactions will be recorded as follows:
General journal
Debit Credit
R R
1 Debtors 10 000
Sept
Allowance for settlement
discount granted 500
Sales/revenue 9 500
20 Bank 9 500
Sept
Allowance for settlement 500
discount granted
Debtors 10 000
The allowance for settlement discount granted is a temporary account and will
always balance off.
What will happen if the debtor pays late and does not qualify for the early
payment discount?
Example 5.7
Let us take the same two transactions as in example 5.6 but change the date of the
second transaction to 20 October. This means that the debtor did not pay within
30 days and did not qualify for the 5% discount.
101
Accounting for All
The two transactions will be recorded as follows:
General journal
Debit Credit
R R
1 Debtors 10 000
Sept
Allowance for settlement
discount granted 500
Sales/revenue 9 500
20 Bank 10 000
Oct
Debtors 10 000
Allowance for settlement 500

discount granted
Sales/revenue 500
As a result of the late payment by the debtor, the estimated settlement discount
will not be granted. The settlement discount must be written back and taken into
account against the sales.
In all the examples and discussions to follow you can presume the following:
– The debtor did qualify for the settlement discount.
– The discount allowed column in the cash receipts journal represents the
settlement discount granted account (new name).
– The discount allowed account in the general ledger represents the allowance
for settlement discount granted (new name).
 Recording settlement discount granted in the cash receipts journal
Settlement discount granted is recorded in the cash receipts journal before being
posted to general ledger accounts.
To record payments made by customers, which include settlement discounts
granted, we make use of the following columns:
– Debtors: The gross amount receivable from the debtor (in other words,
before settlement discount granted) is recorded in this column.
– Settlement discount granted: Settlement discount granted by the
organisation is recorded in this column. (Please note that this column must be
deducted during cross casting).
– Bank: The actual payment received from the debtor.
102
Example 5.8
Example of cash receipts journal with column for settlement discount granted

Date Particulars Folio Sundries Cash sales Debtors Discount Total
Apr 2 Cash sales 18 – 19 740.00 740.00
3 J Johnson receipt 12 1 225.00 6.00 219.00
3 G Groenewald receipt 13 4 375.00 375.00
4 E Pienaar receipt 14 Capital 2 000.00 2 000.00
5 B Barry receipt 15 2 1 238.00 31.00 1 207.00
7 S Swanepoel receipt 16 6 3 000.00 3 000.00
10 Cash sales 20 – 31 2 840.00 2 840.00
103
2 000.00 3 580.00 4 838.00 37.00 10 381.00
(21) (14)
Please note that the totals of the analysis columns should cross cast (R2 000 + R3 580 + R4 838 – R37 = R10 381).
Notice how the discount column is deducted.
Accounting for All
 Posting settlement discount granted to general ledger accounts

When a business gives discounts to customers who pay their accounts on or
before the required date, the business is allowing the customer to pay less than
they owe.
This represents a loss to the business. It will receive less money than was
originally recorded when the sale was made. The way this loss is recorded in the
accounts of the business reflects the effect of settlement discount granted on its
assets and owner’s equity.
We record the transaction in three places in the ledger:
 the individual customer (debtors) account
 the owner’s equity account, settlement discount granted
 the bank account
Example 5.9
Use the information in example 5.8
Follow how postings are made to individual accounts and to the discounts
allowed account and bank account from the previous example of a cash receipts
journal page.
The posting of the debtors’ payments and the settlement discount granted to the
general ledger.
Only the accounts affected by discounts are shown
Dr J Johnson 1 Cr
Apr 3 Bank and discount CRB1 225.00
B Barry 2
Apr 5 Bank and discount CRB1 1 238.00
Bank 3
Apr 3 Debtors CRB1 219.00
5 Debtors CRB1 1 207.00
Discount allowed/settlement 4
discount granted
Apr 3 Debtors CRB1 6.00
5 Debtors CRB1 31.00
104
Notice how:
 The full amount is posted to the credit side of the debtor’s account, to
decrease the amount owed to the business.
 Settlement discount granted plus bank (debits) is equal to the credit entry.
On the credit side : 225 + 1 238 = 1 463.00
On the debit side : 219 + 1 207 + 6 + 31 = 1 463.00
 Recording discounts received (settlement discount received) in the
cash payments journal
To encourage the prompt settlement of their accounts, creditors will usually offer
settlement discounts if payments are made timeously.
If a creditor allows a 5% discount if settlement is made within 30 days of date of
statement, the 95% would be accepted by the creditor as full payment.
Discount received (settlement discount received) is recorded in the cash payments
journal before being posted to general ledger accounts.
105
Example 5.10
Example of cash payments book showing creditors and settlement discount received columns
Accounting for All

Date Chq Particulars Fol Details of sundry Sundries Cash Stationery Creditors Discount Total
no purchases
Jul 2 26 TVL Metals 1 13 895.00 (695.00) 13 200.00
12 27 Capital Motors Repairs, maintenance 384.00 384.00
(R&M)
18 28 XX Sales 1 162.00 1 162.00
20 29 Sappi Paper 2 945.00 (47.00) 898.00
22 30 SA Industries 312.00 312.00
26 31 CNA 120.00 120.00
106
28 32 JB Sales 130.00 130.00
30 33 Paper Products 500.00 500.00
384.00 442.00 120.00 16 502.00 (742.00) 16 706.00
6 5 4 3
Please note that the totals of the analysis columns should cross cast (R384 + 442 + 120 + 16 502 – 742 = R16 706).
Note how settlement discount received is

deducted.
 Posting discount received (settlement discount received) to general

ledger accounts
When a business receives discounts from suppliers, the business pays less than
they owe.
This represents an income to the business. Settlement discount received increases
the owner’s equity of the business because less money is paid than what they owe.
We record the transaction in three places in the ledger:
 the individual supplier’s (creditor’s) account
 the owner’s equity account, settlement discount received
 the bank account
Example 5.11
Follow how postings are made to individual accounts and to the settlement
discount received and bank account from the previous example cash payments
journal page.
Only the accounts affected by discounts are shown.
STATEMENT OF FINANCIAL POSITION CHAPTER

Dr TVL Metals 1 Cr
Jul 2 Bank and discount CPB1 13 895.00
Sappi Paper 2
Jul 20 Bank and discount CPB1 945.00
Bank 3
Jul 2 Creditor CPB1 13 200.00
20 Creditor CPB1 898.00
Settlement discount received 4

Jul 2 Creditor CPB1 695.00
20 Creditor CPB1 47.00
Notice how:
The credit entries (bank and settlement discount received) equal the debit entry.
On the debit side: TVL Metals R13 895.00

Sappi Paper R 945.00
Total R14 840.00
107
Accounting for All
On the credit side: Bank R13 200.00

Bank R 898.00
Discount received R 695.00
Discount received R 47.00
Total R14 840.00
5.2.8 Recording of VAT

Mojani Traders is registered for VAT and charges VAT on its sales. Mojani
Traders can claim the VAT it has paid.
Example 5.12
Recording output VAT
7 May Tombelo Traders sells goods R200 plus VAT, R28 for cash.
14 May Cash sales R400, VAT R56.
Check how these two transactions are recorded in the cash receipts journal.

MAY
Date Details Fol Sundries Cash VAT Debtors Discount Bank

sales allowed
May
7 Cash sales 200.00 28.00 228.00
14 Cash sales 400.00 56.00 456.00
Notice how the full amount (R228) is recorded in the bank and the sales amount
(R200) in the sales column and the VAT amount (R28) in the VAT column (R200
+ R28 = R228).
Example 5.13
Recording input VAT in the cash payments journal
May 3 Pays Transet, carriage on purchases R30 plus VAT R4.20 by cheque.
May 5 Pays rental R300 and VAT R42 per cheque.
May 7 Cash purchases R400 plus VAT R56.
Check how these transactions are recorded in the cash payments journal.
108
Cash payments journal: May 19 CRB6
Date Details Fol Sundries Cash purchases VAT Creditors Discount rec Bank
May 3 Transet carriage on N1 30.00 4.20 34.20
purchases
5 Rental for May N3 300.00 42.00 342.00
7 Cash purchases 400.00 56.00 456.00
Notice again that the full amount of the cheque R34.20 is recorded in the total bank column. The R30 carriage on purchases
is recorded in the sundries column and the VAT amount in the VAT column (R30 + R4.20 = R34.20).
The posting of VAT and settlement discount granted to the general ledger
Follow how the bookkeeper posts from the cash receipts journal to the general ledger.
Look specifically at the VAT and settlement discount granted postings.
109
Example 5.14 CASH RECEIPTS JOURNAL
CRB
D a te D e t a il s F o l io S u n d r ie s C a sh S a le s VAT D e b to r s D is c o u n t B ank
a l lo w e d
M ay
Accounting for All
7 C a sh S a le s 200 28 228
10 J . S m i th : 7 330 (9 ) 321
P aym ent on
account
14 C a sh S a le s 400 56 456
20 In te re st o n 6 150 150
i n v e s tm e n t
25 E S w a rt 8 1 100 (3 0 ) 1 070
R150 R 600 84 R 1 430 R (3 9 ) 2 225
110
4 1 2 5 3
I n d i v i d u a l a m o u n ts in th e d e b to r s I n d i v i d u a l a m o u n ts in th e s u n d r ie s T h e to ta l s o f th e s e s u m m a r y
c o lu m n a re c re d ite d to th e d e b to r s c o l u m n a r e c r e d it e d t o t h e a p p r o p r i a te c o lu m n s a r e p o s te d t o t h e G e n e r a l
a c c o u n ts i n th e G e n e r a l l e d g e r a c c o u n t s i n th e G e n e r a l L e d g e r Ledger
D t B a n k a n d D i s c o u n t a l lo w e d D t B ank D t B a n k a n d D i s c o u n t a ll o w e d
C t D e b to rs C t R e le v a n t i n c o m e a c c o u n t C t S a le s a n d V A T

GENERAL LEDGER
Dr VAT output account 1 Cr

May
30 Cash sales CRB 84.00
Bank 3
May
30 Total CRB 2 225.00
receipts
Sales 4
May
30 Cash CRB 600.00
Settlement discount granted 5

May
30 Debtors CRB 39.00
Interest on investment 6
May
20 Bank CRB 150.00
J Smit 7
May
10 Bank & CRB 330.00
discount
E Swart 8
May
25 Bank & CRB 1 100.00
discount
Notice how:
 The full amount owing by J Smith, R330, is recorded in the ‘Debtors’
column, because ‘Bank’ plus ‘Settlement discount granted’ are posted to the
general ledger:
Bank + Settlement discount granted = Debtors
J Smith 321 + 9 = 330

E Swart 1 070 + 30 = 1 100
The total amount for settlement discount granted is posted at the end of the month
to the debit side of the settlement discount granted column in the general ledger.
111
Accounting for All
This is because settlement discount granted is an expense account. A debit entry

increases an expense account and decreases owner’s equity.
Example 5.15
Record the cash receipts, cash payments journals for N Tovey Sportshop from the
following source documents.
Record the opening balances in the general ledger.
Post from the subsidiary journals to the relevant ledger accounts and balance the
ledger accounts.
R
Favourable balance in the bank 5 400
Creditors Nike 1 710
Adidas 1 095
Kennex 525
Debtors J Rodes 105
H Cronje 575
G Adams 230
M Fish 510
Capital 63 490
Furniture and equipment 85 000
Loan NBS 25 000
* NB Remember the effect of discount on VAT
Remittance advice/Cheque counterfoil
To: Cash
DATE FOR AMOUNT

1/6/2013 Petty cash 500.00
CHEQUE NO: 002 500.00
To: Nike
DATE FOR AMOUNT

1/6/2013 Running shoes 1 500.00
VAT 210.00
CHEQUE NO: 003 1 710.00
112
To: Amprop
DATE FOR AMOUNT

5/6/2013 Rent 1 000.00
VAT 140.00
CHEQUE NO: 004 1 140.00
To: Cash
DATE FOR AMOUNT

10/6/2013 Wages 1 000.00
CHEQUE NO: 005 1 000.00
To: Adidas
DATE FOR AMOUNT

11/6/2013 Shirts 1 100.00
VAT 154.00
CHEQUE NO: 006 1 254.00
To: Kennex
DATE FOR AMOUNT

12/6/2013 Rackets 1 600.00
VAT 224.00
CHEQUE NO: 007 1 824.00
113
Accounting for All
To: Nike
DATE FOR AMOUNT

25/6/2013 Account 1 710.00
Discount 60.00
CHEQUE NO: 008 1 650.00
To: Eskom
DATE FOR AMOUNT

28/6/2013 Electricity 250.00
VAT 35.00
CHEQUE NO: 009 285.00
To: Adidas
DATE FOR AMOUNT

30/6/2013 Account 1 095.00
Discount 95.00
CHEQUE NO: 010 1 000.00
To: Cash
DATE FOR AMOUNT

30/6/2013 Salaries 2 500.00
CHEQUE NO: 011 2 500.00
114
To: Cash
DATE FOR AMOUNT

30/6/2013 Petty cash 200.00
CHEQUE NO: 012 200.00
 Tovey journals
Cash sale receipt
No 1
Received from J Smal Date 5/6/2013

Description R c
Nikes Pegasus 255 00
Vat Reg No: VAT Rate 14% 35 70

283 6424 241 Total 290 70
Initials K White
 Tovey journals
Cash sale receipt
No 2
Received from D Cullinan Date 12/6/2013

Description R c
Running shorts 150 00
Large bat 850 00
Cricket pads 500 00

283 6424 241 Total 1 710 00
Initials K White
 Tovey journals
Cash sale receipt
No 3
Received from Sharper Image Date 19/6/2013

Description R c
Gym equipment 1 150 00

283 6424 241 Total 1 311 00
Initials K White
115
Accounting for All
 Tovey journals
Cash sale receipt
No 4
Received from NSL Date 26/6/2013

Description R c
Soccer shorts 1 000 00
Soccer shirts 710 00
Soccer balls 1 500 00

283 6424 241 Total 3 659 40
Initials K White
 Tovey journals
Cash sale receipt
No 5
Received from SARFU Date 30/6/2013

Description R c
Rugby jerseys 1 150 00
Shorts 250 00

283 6424 241 Total 1 596 00
Initials K White
Receipt journal voucher
111 Date R C
2/6/2013
RECEIVED from J Rodes 105 00
Less discount 5 00
the sum of 100 00
One hundred Rand

Zero Cents 0
With thanks K White
116
112 Date 5/6/2013 R C

RECEIVED from H Cronje 575 00
Less discount 25 00
the sum of 550 00
Five hundred and fifty Rand

Zero Cents 0
With thanks K White
113 Date 26/6/2013 R C

RECEIVED from G Adams 200 00
Less discount 15 00
the sum of 185 00
One hundred and eighty-five Rand

Zero Cents 0
With thanks K White
114 Date 30/6/2013 R C

RECEIVED from M Fish 340 00
Less discount 30 00
the sum of 310 00
Three hundred and ten Rand

Zero Cents 0
With thanks K White
117
Accounting for All
MUL T I PURPO SE SL IP
RAINBOW
RAINB OW LIM ITED R EGISTE RED B ANK
DATE:
DAT_05/06/2013____
E: __ 05/ 06 /20 xx__ ___ __
BRANCH W HERE T HE ACCO UNT IS KEPT _ __Cen turi on_ ___ __ __ ___ __ ___ __ __ ___ __ __ ___ __ ___ __ __ ___ __
CREDIT _ __ N To vey S po rtsh op__ __ __ ___ __ __ ___ __ ___ __ __ ___ __ __ ___ __ ___ __ __ ___ __ ___ __ __ ___ __ __
STATE N AM E IN BLO CK LET TERS
NOT E: CHEQUES, ETC. HANDED IN TO BECOLLECTED ANDT O BE MADE AVAIL ABLEASCASH WHEN PAID.
WHILE ACT ING IN GOOD F AIT H AND EXERCISING REASONABL ECARE, T HE BANK WILL NOT ACCEPT RESPONSIBILIT YF OR
ENSURING THAT DEPOSITORS / ACCOUNT -HOL DERSHAVE LAWFUL T ITLE TO CHEQUES, ET CETERA, COLLECTED.
Cash RAND C EN TS
390 70
CHEQUES / ST ATE N AM E O F DRAWER
1 H Cronje 550 00
R 940 70
FO R BANK USE ONL Y ACCOUN T N UMB ER
8 0 0 3 5 7 0 9 2 0
JOH ANN ESBU RG 199 6 456 -39 99
DE P OS ITE D BY __ __ __ BBoss ___ __ ___ __ __ ___ __ __ ___ __ ___ __ __ ___ __ __ ___ __ ___ __ __ ___ __ ___ __ __
( Reg . N o. 63 /00 007 /0 5) Rai nb o w L imit ed 01 /9 6 4 -3T S
118
M ULT I PURPOSE SL IP
RAINBOW DAT E: __ 12 /06 /20 xx__ __ __ _

DATE: _12/06/2013____
RA IN BO W LIMITED REG ISTER ED BA NK
BRANCH WHERE THE ACCOU NT IS KEPT _ __ Centuri on ___ __ __ __ ___ __ __ __ ___ __ __ __ ___ __ __ __ ___ __ __ _
CREDI T __ _N Tove y S portsh op_ _ __ __ __ ___ __ __ __ ___ __ __ __ ___ __ __ __ ___ __ __ __ ___ __ __ ___ __ __ __ ___
STATE N AM E IN BLO CK LETTER S
NOTE: CHEQUES, ET C. HANDED IN TO BECOLLECTEDAND TO BEMADEAVAILABLE ASCASH WHEN PAID.
WHIL EACTING IN GOOD FAITH AND EXERCISING REASONABLE CARE, THE BANKWILL NOT ACCEPT RESPONSIBIL ITY FOR
ENSURING THAT DEPOSITORS/ ACCOUNT -HOLDERSHAVE LAWF UL TITL ET O CHEQUES, ET CETERA, COLLECTED.
Cas h RAND CENT S
CHEQ UES / ST AT E NAM E OF D RAWER
1 D Cullinan 1 710 00
R 1 710 00
F OR B ANK USE O NL Y ACC OUNT NU MBER
8 0 0 3 5 7 0 9 2 0
J OH ANN ESBU RG 19 9 6  4 56 -3 9 9 9
DEP OS IT E D BY __ ___ _BBoss ___ __ __ __ ___ __ __ __ ___ __ __ __ ___ __ __ ___ __ __ __ ___ __ __ __ ___ __ __ __ _
( Reg . No . 6 3/0 00 07/ 05 ) Ra in bo w Li m ite d 0 1/9 6 4-3 T S
119
Accounting for All
MUL T I PUR PO SE SL IP
RAINBOW
RAINB OW LIM ITED R EGIST ERED B AN K
DAT E: _ _1 9/0 6/2 0xx_ __ ___ _
DATE: _19/06/2013____
BRANCH W HERE T HE ACCO UNT IS KEPT _ __ Centuri on ___ __ ___ __ __ ___ __ __ ___ __ __ ___ __ __ ___ __ __ ___ _
CREDIT _ __ N T ovey S po rtshop _ __ ___ __ __ ___ __ __ ___ __ ___ __ __ ___ __ __ ___ __ __ ___ __ __ ___ __ __ ___ __ _
STATE N AM E IN BLO CK LETTER S
NOT E: CHEQUES, ETC. HANDED IN TO BE COLLECTED AND TO BEMADEAVAILABLE AS CASH WHENPAID.
WHILE ACT ING IN GOOD FAIT H AND EXERCISING REASONABLE CARE, THE BANK WILL NOT ACCEPT RESPONSIBILITY FOR
ENSURING THAT DEPOSITORS / ACCOUNT -HOLDERSHAVE LAWF UL TITLE TO CHEQUES, ETCETERA, COLLECTED.
Cash RAN D CENT S
CHEQUES / ST ATE N AME O F DRAWER
1 Sharper Image 1 311 00
R 1 311 00
FO R BANK USE ON LY ACCO UNT NUM BER
8 0 0 3 5 7 0 9 2 0
J O HAN NESB UR G 19 96  4 56- 39 99
DEP OS IT ED BY_ ___ __ BBoss __ ___ __ __ ___ __ __ ___ __ __ ___ __ __ ___ __ __ ___ __ ___ __ __ ___ __ __ ___ __ _
( Reg . N o. 63 /00 00 7/0 5) Ra in bo w Li mi te d 01/ 96 4- 3T S
120
M UL T I PURPO SE SLIP
RAINBOW
R AINB OW LIM ITED REG ISTER ED BA NK
DATE: _26/06/2013____
DAT E: __ 26/ 06/ 20x x___ __ __
BR AN CH WHER E THE ACCOUNT I S KEPT ___ Centuri on_ __ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ __ ___ __ __
C REDIT _ __N Tov ey S portsho p___ __ ___ __ ___ __ __ ___ __ ___ __ ___ __ ___ __ ___ __ __ ___ __ ___ __ ___ __ ___ _
STAT E NAM E IN BLO CK LETTERS
NOTE: CHEQUES, ETC. HANDED INT O BE COLLECTED AND TO BEMADE AVAILABLEAS CASH WHEN PAID.
WHILE ACT IN G IN GOOD FAITH AND EXERCISING REASONABLE CARE, T HEBANK WILL NOT ACCEPT RESPONSIBILITY FOR
ENSURING T HAT DEPOSITORS/ ACCOUNT-HOLDERS HAVE LAWF UL TITLE TO CHEQUES, ETCETERA, COLLECT ED.
C ash RAND CENT S
185 00
C HEQUES / STAT E NAM E OF DRAW ER
1 NS L 3 659 40
R 3 844 40
F OR BANK USE ONL Y ACCO UNT NUM BER
8 0 0 3 5 7 0 9 2 0
JOH ANN ESBU RG 19 96 45 6-3999
DE P OSI TE D BY __ ___ _BBoss__ __ __ ___ __ ___ __ ___ __ ___ __ ___ __ __ ___ __ ___ __ ___ __ ___ __ ___ __ __ __
( Reg . No . 63/ 000 07 /05 ) Ra in bo w Lim i ted 01 /96 4- 3T S
121
Accounting for All
MUL T I PURPO SE SLIP
RAINBOW DAT E: __3 0/ 06/ 20xx ___ __ __

DATE: _30/06/2013____
RAINB OW LIM ITED RE GISTER ED BA NK
BR ANCH WH ER E TH E ACCOUNT I S KEPT ___ Centuri on_ __ ___ __ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ _
CREDIT _ __N To vey S portsho p_ __ __ ___ __ ___ __ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ __ ___ __ ___ _
STAT E NAM E IN BLO CK LETTERS
NOT E: CHEQUES, ETC. HANDED INT O BE COLLECTED AND TO BE MADE AVAILABLEASCASH WHEN PAID.
WHILE ACT ING IN GOOD FAITH AND EXERCISING REASONABLE CARE, T HEBANK WILL NOT ACCEPT RESPONSIBILITY FOR
ENSURING T HAT DEPOSITORS/ ACCOUNT-HOLDERS HAVE LAWF UL TITLE TO CHEQUES, ET CETERA, COLLECT ED.
Cash RAND CENT S
310 00
CHEQUES / STAT E NAM E OF DRAW ER
1 SARFU 1 596 00
R 1 906 00
F O R BANK U SE ONL Y ACCOU NT NUM BER
8 0 0 3 5 7 0 9 2 0
J OH ANN ESBUR G 1 9 9 6  4 5 6 -39 9 9
DE P OSI TE D BY __ ___ _ BBoss__ __ __ ___ __ ___ __ ___ __ ___ __ ___ __ ___ __ __ ___ __ ___ __ ___ __ ___ __ ___ _
( Reg . No . 63/ 000 07 /05 ) Ra in bo w Lim i ted 01 /96 4- 3T S
122
Solution:

Date Particulars Folio Detail of Sundries VAT Cash sales Debtors Discount Analysis Total bank
sundries
June 5 Sales (1) 35.70 255.00 290.70
2 J Rodes (111) 5 (0.62) 105.00 4.38 100.00
5 H Cronje (112) 6 (3.07) 575.00 21.93 550.00 940.70
12 Sales (2) 210.00 1 500.00 1 710.00 1 710.00
19 Sales (3) 161.00 1 150.00 1 311.00 1 311.00
26 G Adams (113) 7 (1.84) 200.00 13.16 185.00
Sales (4) 449.40 3 210.00 3 659.00 3 844.40
29 M Fish (114) 8 (3.68) 340.00 26.32 310.00
30 Sales (5) 196.00 1 400.00 1 596.00 1 906.00
123
– 1 042.89 7 515.00 1 220.00 65.79 9 712.10
13 14 15 1
Date Cheque Particulars Folio Detail of Sundries VAT Cash Discount Creditors Total bank
No sundries purchases
June 1 002 Cash 12 Petty cash 500.00 500.00
Accounting for All
1 003 Nike 210.00 1 500.00 1 710.00

5 004 Amprop 18 Rent 1 000.00 140.00 1 140.00
10 005 Cash 19 Wages 1 000.00 1 000.00
11 006 Adidas 154.00 1 100.00 1 254.00
12 007 Kennex 224.00 1 600.00 1 824.00
25 008 Nike 2 (7.37) 52.63 1 710.00 1 650.00
28 009 Eskom 20 Electricity 250.00 35.00 285.00
30 010 Adidas 3 (11.67) 83.33 1 095.00 1 000.00
124
30 011 Cash 19 Salaries 2 500.00 2 500.00
30 012 Cash 12 Petty cash 200.00 200.00
5 450.00 743.96 4 200.00 135.96 2 805.00 13 063.00

13 17 16 (1)
GENERAL LEDGER
Dr Bank 1 Cr
June 1 Balance b/f 5 400.00 June 30 Payments CPB1 13 063.00
30 Receipts CPB1 9 712.20 Balance c/f 2 049.20
15 112.20 15 112.20
July 1 Balance b/f 2 049.20
Nike 2
June 25 Bank CPB1 1 710.00 June 1 Balance b/f 1 710.00
Adidas 3
June 30 Bank CPB1 1 095.00 June 1 Balance b/f 1 095.00
Kennex 4
June 30 Balance c/f 525.00 June 1 Balance b/f 525.00
525.00 525.00
July 1 Balance b/f 525.00
J Rodes 5
June 1 Balance b/f 105.00 June 2 Bank CPB1 105.00
H Cronje 6
June 1 Balance b/f 575.00 June 5 Bank CPB1 575.00
J Adams 7
Jun 1 Balance b/f 230.00 Jun 26 Bank CPB1 200.00
30 Balance c/f 30.00
230.00 230.00
125
Accounting for All
Dr M Fish 8 Cr
Jun 1 Balance b/f 510.00 Jun 29 Bank CPB1 240.00
Balance c/f 270.00
510.00 510.00
Capital 9
Furniture & equipment 10

Loan NBS 11
VAT input 13
Jun 30 Bank CPB1 743.96
30 Petty cash PC1 34.30
778.26
VAT output 13
Jun 30 Bank CRB1 1 042.89
Sales 14
Jun 30 Bank CPB1 7 515.00


Jun Bank CPB1 135.96
30
126
Dr Purchases 17 Cr
Rent 18
Wages 19
30 Bank CPB1 2 500.00
30 Petty cash PC1 50.00
3 550.00
Electricity 20
Refreshments 21
Jun 30 Petty cash PC1 134.52
Postage 22
Stationery 23
Maintenance 24
Entertainment 25
Jun 16 Petty Cash PC1 39.90
127
Accounting for All
5.3 Petty cash

Most businesses need a ready source of cash to pay for minor expense items. It is
not always convenient to pay for everything with a cheque. So a small amount of
cash is kept to cater for small payments.
Cash forms part of the assets of a business however large or small the amount and
as such must be managed and controlled.
5.3.1 What is petty cash used for?
Petty cash is a ready source of cash to pay for small expenses that arise from day
to day. These are things like postage, milk, tea and coffee, delivery of parcels,
transport costs, etc.
Since it is not practical to pay for these items by cheque, a cash fund is kept.
Sometimes employees pay for things out of their own pocket; for example taxi
fares incurred on official business, and then claim the expense back from petty
cash. Some organisations may not allow this practice. They may have a policy of
always drawing money for expenses before they are incurred, even if the exact
cost is not known.
5.3.2 The imprest system
Another name for the cash float is the imprest amount.
The imprest system is the term used to describe how a cash float is kept at a pre-
set level. It is similar to the way the water level in a cistern is topped up whenever
the level drops after ‛flushing’.
Using this system, a set amount of money is maintained in the petty cash fund by
topping it up to this level on a regular basis.
In Mojani Traders this amount is R200. During the month, as payments are made
for various expenses, the amount of cash left in the petty cash box goes down.
When it starts to get low, the person in charge of petty cash draws money from
the bank to top it up to R200 again (the imprest amount).
The amount of money that is drawn must equal the amount of petty cash
payments since the float was last topped up.
For example, suppose the petty cash payments at Mojani Traders for the month
added up to R125. If we started with R200 there should be R75 left in the box.
The petty cash will then be topped up to the imprest amount of R200 by drawing
a cheque for R125 from the bank.
5.3.3 Petty cash vouchers
Petty cash vouchers are important source documents.
They provide the proof of where the money from the fund has gone.
128
An example of a completed petty cash voucher is shown below.
PETTY CASH VOUCHER 001 Date 20.2.2013
AMOUNT
Rand Cents
O.K. Bazaars
Tea, milk and sugar 7 75
Signature
B Smith.................................
Account
Refreshments......................
Authorised by
B Boss..............................................
A completed voucher should include:

 the reason for the payment
 the amount paid
 name and signature of the person receiving the cash
 an authorising signature
 the date of issue
 identifying number
 the account/cost centre it should be allocated to
5.3.4 Security and control
Whenever cash is involved there must be security. Some measures you can take
are listed below:
 Vouchers are numbered in sequence. The number may be pre-printed or
written in. This makes it possible to detect missing vouchers.
 Vouchers should be signed by the person receiving the cash as well as the
person authorising the payment.
 A receipt should be attached to the voucher as proof that the money was used
for the intended purpose.
 Completed vouchers should be kept in the petty cash box until the float is
next topped up.
 Regular checks should be made to ensure that the amount of cash in the box
plus the total value of vouchers in the box equals the float.
 Blank petty cash vouchers should be kept in a safe place at all times.
5.3.5 Receipts into petty cash
So far we have only dealt with money going out of petty cash. Money is also
received by petty cash.
129
Accounting for All
To replenish the float, a cheque is usually drawn from the business bank account
for the amount needed to bring the cash in the box up to the imprest amount.
Money may also be collected from staff members when they pay for personal use
of business equipment and facilities. For example, a parent may use the
photocopier to copy a child’s school project, or someone may buy stamps for their
own use.
Some businesses prefer to enter any money received straight into the cash book of
the business. However, using petty cash may be more convenient.
A cash receipt must be issued to the person paying in the money. The receipt
should state the amount of money received, who it is from and for what purpose.
The cashier usually signs the receipt and a copy kept as proof of the amount
received.
All petty cash transactions are recorded in the petty cash book.
The petty cash book is a record of cash put into the petty cash box and of
payments made from petty cash. People use this record to check that the correct
amount is in the petty cash box.
5.3.6 Purpose of the petty cash book
The petty cash book:
 provides a record of every petty cash transaction
 enables posting of petty cash expenses to ledger accounts
The pages of a petty cash book usually spread over a double page and have a large
number of columns. An example appears on the next page.
The design of the pages of a petty cash book may vary but in general:
The left-hand side of the page (the debit side – shaded) is used to record the cash
received into the petty cash box (for example to top up the float). This is a
memorandum because the payments to petty cash will be recorded in the
payments cash book.
The right-hand side (the credit side) is used to record all payments made from
petty cash. This side typically has columns to record expenses such as:
 postage and stationery
 refreshments
 casual labour
 office expenses
 cleaning materials
Each time there is a payment from petty cash, the petty cashier records it on a
separate line in the petty cash book.
A new page is started whenever the float is topped up to the imprest amount or at
the end of each month.
130
Example of a petty cash book
PETTY CASH BOOK Folio ref
JANUARY 2013
Date Details Amount Date Details Voucher Total Refresh- Postage Casual Station- Folio Sundry Remark
# ments labour ery
Example 5.16
131
The petty cashier at Temba Traders starts a petty cash book on January 1 with a cash float of R50.
During the month the following payments are made from petty cash:
Date Detail Voucher number Amount

Jan 3 Stamps from post office 1 R7.00
Jan 10 Paid casual labour one hour 2 R12.00
Jan 12 Tea & coffee from café 3 R8.00
Jan 15 Repairs (glass) 4 R9.00
Jan 20 Paper and pens 5 R11.00
On the next page you can see how these transactions are recorded in the petty cash book.
PETTY CASH BOOK – TEMBA TRADERS PCB1
JANUARY 2013
# ments labour ery
Jan 1 CB3 50.00 Jan 3 Stamps 1 7.00 7.00
Accounting for All
10 Wages 2 12.00 12.00

12 Tea & coffee 3 8.00 8.00
15 Repairs 4 9.00 9.00 Repairs
20 Paper & pens 5 11.00 11.00
47.00 8.00 7.00 12.00 11.00 9.00
h i j k m
132
5.3.7 Topping up the float and balancing the petty cash book
Whenever the petty cash float needs to be topped up, the petty cash book must be
balanced. Balancing means to find the difference between the two sides of an
account.
In this case it means finding the difference between the amount that has been
received into petty cash and the amount that has been paid out.
Follow the cashier at Rondo Traders as she balances the petty cash book, tops up
the float, and starts a new page for the month. As you work through this
procedure it may help to follow the example of a balanced petty cash book on the
next page.
1. The first thing she does is total the payments column (g – R47).
2. Then she cross checks her addition by adding up the totals of the item
columns (h, i, j, k, and m). She compares this total with the total payment
column. If the totals are the same she knows her arithmetic is correct.
3. She totals the receipt column (c). At this stage she has only received R50.
4. Then she calculates the difference between total payments (g – R47) and
total receipts (c – R50). She checks that this number equals the amount of
cash in the box.
5. She draws a cash cheque for the exact amount needed to top up the float.
(The value of the total payments column (g – R47)).
6. She records receipt of this cheque in the receipt column and adds it to the
existing receipts total (20 Jan).
7. Then she calculates the difference between the total receipts (R97) and total
payments (R47). This number (R50) is written beneath total payments as the
balance carried forward and added to it. This balance of R50 is also recorded
into the sundry column (m) for balancing purposes.
8. She checks that the total in the receipts column is now the same as the total
payments column (g) and draws a double line beneath the figures to indicate
that they are balanced totals.
9. Finally the opening balance (which is the same as the balance carried
forward in step 7) is recorded in the receipts column (c) as the balance
brought down.
10. This balance is the amount of money in the cash box.
133
Example of a balanced petty cash book
PETTY CASH BOOK – RONDO TRADERS PCB1

JANUARY 2013
a b c d e f g h i j k l m n
Accounting for All
# ments labour ery

Jan 1 001 50.00 Jan 3 Stamps 1 7.00 7.00
10 Wages 2 12.00 12.00
12 Tea & coffee 3 8.00 8.00
20 Paper & pens 5 11.00 11.00
20 002 47.00 47.00 8.00 7.00 12.00 11.00 9.00
31 Balance c/o 50.00 50.00
97.00 97.00 8.00 7.00 12.00 11.00 59.00
Feb 1 Bal b/f 50.00
134
You should now be able to record entries in the petty cash book, top up the float
and balance the book on your own.
5.3.8 Posting petty cash transactions
So far you have learnt how to enter details from the source documents (petty cash
vouchers) to the petty cash book. The next step is to post the petty cash payments
to the appropriate accounts in the general ledger.
Every petty cash payment should be posted to an expense or income account in
the general ledger. (The ledger is dealt with in more detail in chapter 3: recording
and processing credit transactions.)
There should be a separate general ledger account for each of the expenditure
items for which there is an analysis column in the petty cash book. For example
stationery, refreshments, postage will have their own accounts.
Only the payment of the petty cash is posted to the relevant ledger accounts. The
receipt side is not posted as it acts purely as a memorandum column.
Totals from the analysis columns are posted to the relevant ledger accounts as
follows:
Debit the relevant expense accounts with the column totals
Credit the petty cash account with the sum of the total column
Example 5.17
See how the entries in the petty cash book shown on the next page are posted to
the appropriate ledger accounts.
135
PETTY CASH BOOK – DEXTER TRADERS
JANUARY 2013 PC1
# ments labour ery
Jan 1 CB3 50.00 Jan 3 Stamps 1 7.00 7.00
10 Wages 2 12.00 12.00
Accounting for All
12 Tea & coffee 3 8.00 8.00

20 Paper & pens 5 11.00 11.00
20 CB4 47.00 10 47.00 8.00 7.00 12.00 11.00 12 9.00
31 Balance c/o 50.00 50.00
97.00 97.00 8.00 7.00 12.00 11.00 59.00
Feb 1 Bal b/f 50.00 20 18 31 15
Now turn over to see how these entries are posted to ledger accounts.
136
Dr Petty Cash 10 Cr
Jan 31 Expenses PC1 47.00
Refreshments 20
Jan 31 Petty cash PC1 8.00
Postage 18
Casual labour 31
Stationery 15
Repairs 12
5.3.9 Postings from the petty cash book with VAT column
The bookkeeper of Rambo Traders records the petty cash payments in a petty
cash book. She makes provision for a VAT column.
Follow how the bookkeeper posts the totals from the petty cash book to the
general ledger.
Look specifically at the VAT column.
137
Example 5.18
PETTY CASH BOOK PC1

January 20xx
January2013
Date Details Amount Date Details Voucher Total VAT Refresh Postage Statio- Folio Sundry Remark
Accounting for All
# -ments nery
Jan 1 Balance b/f 220.00 Jan 1 Coffee 1 11.40 11.40
2 Stamps 2 5.70 0.70 5.00
10 KFC 3 171.00 171.00
21 Pens & Paper 4 22.80 2.80 20.00
210.90 3.50 182.40 5.00 20.00
31 Balance c/o 9.10 9.10
220.00 220.00 3.50 182.40 5.00 20.00 9.10
Feb 1 Balance b/f 9.10
138
The totals of these columns are posted to Individual amounts in the sundries
the General Ledger at the end of each column are debited to the appropriate
month. accounts in the General Ledger.
Dt Expense account Dt Expense account
Ct Petty Cash Control Ct Petty Cash Control
GENERAL LEDGER
Dr Petty cash control Cr

Jan 31 Expenses CPB1 210.90
VAT
Jan 31 Petty cash CPB1 3.50
Refreshments
Postage
Stationery
5.4 Purchases journal/creditors journal

The purchases journal/creditors journal is a record of all items bought on credit
for the month. It gives details:
 in date order
 of what the business has bought
 from whom and
 for how much
It is important to know that the purchases/creditors journal is not limited only to
the purchase of goods or merchandise on credit but to all credit purchases.
Remember: An entry in the purchases/creditors journal does not mean that an
account has actually been debited or credited.
The source document used is an original credit purchase invoice.
The information to be recorded will depend on the information needed. A
business can design their purchases journal to capture a lot of detail or only the
essentials.
You may also want to capture details of the goods received, but many businesses
consider this too time-consuming.
139
Accounting for All
Instead you may include columns in the journal to record amounts spent on items
bought regularly such as stationery, packaging, advertising etc. For example, if a
business wanted to record the purchase of men and women’s shoes they would
have columns that would record this information.
Below is an example of what a page in a purchases journal may look like.
Purchases journal: Name of business PJ2

Date Supplier Invoice Fol Total VAT Purchases Stationery Packaging Fol Sundries Remarks
no amount
Did you notice that:

 there is a column referring to purchases. This refers to all goods bought for
resale purposes, in other words, trading inventory.
 there is a folio reference in the top right hand corner reading PJ2. This refers
to the second page of the business’s purchases journal.
5.4.1 Checking suppliers’ invoices
Before the bookkeeper of a business enters any invoices into the
purchases/creditors journal, he/she makes sure everything is in order.
5.4.2 Security and controls
1. First make sure that the person responsible for ordering the goods checks the
invoice and signs it, thus authorising payment.
2. If VAT is being charged make sure that the invoice is a tax invoice.
3. Check that there is evidence of receiving the goods. This could be in the
form of a signed delivery note, or a signature in a goods received book, or a
goods received note (GRN).
4. Check that the details on the invoice – especially pricing details – match the
details given on the order (a copy of which she filed when the order was
placed) and on the delivery note.
5. Check the calculations on the invoice, especially if it has been manually
produced. (See ‛Checking invoice calculations’.)
6. When satisfied that all the details match up, enter the invoice in the
purchases/creditors journal.
140
Example 5.19
During March the bookkeeper of Mojani Traders receives the following purchase
invoices from various suppliers. She satisfies herself that the details are correct
and the goods have been received before entering them into the purchases journal.
F o o tw e a r S u p p lie s (P ty ) L td . In v o ic e N o . F W 1 0 5 9
P .O . B o x 4 2 5
P r e to r ia
0001
T e le p h o n e (0 1 2 ) 6 5 4 5 6 5 6 A c c o u n t N o . 7 0 0 /5 5 1
V A T R e g . N o .: 4 8 2 3 9 8 4 0 1 0 D a t e : 15-03-2013
1 5 -0 3 -2 0 x x
In v o ic e to : M a b a s a T ra d e rs O rd e r No.
SS001
P .O . B o x 3 2 1
S e lb y 2 0 0 1
P ro d u c t D e s c rip tio n Q u a n tity U n it P r ic e T o ta l A m o u n t

Code R c R c
00167D M S iz e 9 D o c M a r t in s ( B l a c k ) 2 3 2 0 .0 0 6 4 0 .0 0
00174RS P a ir s J o g g in g S h o e s 6 2 4 0 .0 0 1 2 0 0 .0 0
C o m m e n ts : S u b -T o ta l 1 8 4 0 .0 0
VAT @ 14% 2 5 7 .6 0
TOTAL R 2 0 9 7 .6 0
R e g is t e r e d N o . : 7 5 / 5 1 0 6 9 / 2
141
Accounting for All
S h o e C o lo u r s L td In v o ic e N o . AB 489
P .O . B o x 3 6 8
P r e to ria
0001
T e le p h o n e (0 1 2 ) 4 6 5 7 9 8 9 Account N o. 5027
V A T R e g . N o .: 61 254 0632 D a t e : 18-03-2013

1 8 -0 3 -2 0 x x
In v o ic e to : M a b a s a T ra d e rs O rd e r N o . S S 0 0 2
P .O . B o x 3 2 1
S e lb y 2 0 0 1
P ro d u c t D e s c r ip t io n Q u a n tit y U n it P r ic e T o ta l A m o u n t
C ode R c R c
BD 250G B lu e D y e 3 4 0 .0 0 1 2 0 .0 0
R D 250G R e d D ye 6 4 0 .0 0 2 4 0 .0 0
C o m m e n ts : S u b -T o ta l 3 6 0 .0 0
VAT @ 14% 5 0 .4 0
TO T AL R 4 1 0 .4 0
R e g is t e r e d N o . : 7 8 /1 2 3 4 5 /1
O ffic e S u p p lie s (P ty ) L td In v o ic e N o . 109

P .O . B o x 2 3 0
Jo h an n es b u rg
2000
T e le p h o n e (0 1 1 ) 7 8 9 6 5 6 5 Account N o. 55005
V A T R e g . N o .: 24 567 9132 D a t e : 18-03-2013

1 8 -0 3 -2 0 x x
In v o ic e to : M a b a s a T ra d e rs O rd e r N o . S h a u n
P .O . B o x 3 2 1
S e lb y 2 0 0 1
P ro d u c t D e s c r ip tio n Q u a n tity U n it P r ic e T o ta l A m o u n t
Code R c R c
IN V 1 0 0 g B B o x e s I n v o ic e s 2 1 1 0 .0 0 2 2 0 .0 0
C o m m e n ts : S u b -T o ta l 2 2 0 .0 0
VAT @ 14% 3 0 .8 0
TO TAL 2 5 0 .8 0
R e g is t e r e d N o . : 8 6 /2 0 4 0 6 /1
142
Solution:
PURCHASES JOURNAL – MOJANI TRADERS

PJ1
Date Name of supplier Invoice Folio Total VAT Purchases Packaging Stationery Folio Sundries Remarks
no
19x6
Mar 15 Footwear supplies FW1059 2 097.60 257.60 1 840.00
18 Shoe colours AB489 410.40 50.40 360.00 Dyes
19 Office supplies 109 250.80 30.80 220.00
143
* The dyes are bought to colour the shoes and are not for resale.
5.5 The purchases returns journal/creditors allowance journal
Example 5.20
The bookkeeper of Temba Traders captured details of the above credit note in the purchases returns journal as follows:
Accounting for All
PURCHASES RETURNS JOURNAL – TEMBA TRADERS PRJ1

Date Name of supplier Credit note Fol Total VAT Purchases Packaging Stationery Fol Sundries Remarks
no
19x6
Mar 15 Footwear Supplies CR38 364.80 44.80 320.00
– 1 Doc Martins
144
Notice how this example of a purchases returns journal includes the name of the supplier’s account that must be debited as well as a
brief description of the returned goods.
5.5.1 Posting the purchases journal and purchases returns journal to the ledger
Example 5.21
At the end of March the bookkeeper from Rambo Traders has to post the transactions recorded in the month’s purchases journal, to
the relevant accounts in the general ledger.
Postings must be made to individual creditor’s accounts in the general ledger and the total to the purchases account in the general
ledger. See if you can follow her postings.
Note: We will deal with postings to the creditors control account later.
PURCHASES JOURNAL – RAMBO TRADERS PJ3
A B C D E F G H I J K L
Date Name of supplier Invoice Folio Total VAT Purchases Stationery Packaging Folio Sundries Remarks
no
145
19x7
Mar 15 Footwear supplies FW1059 2 097.60 257.60 1 840.00
18 Shoe colours AB489 410.40 50.40 360.00 Dyes

19 Office supplies 109 250.80 30.80 220.00
24 Boots & All BA601 4 560.00 560.00 4 000.00
25 Office supplies 110 136.80 16.80 120.00
26 The Shoe Box SB01 285.00 35.00 250.00
7 740.60 950.60 5 840.00 340.00 250.00 360.00
CHECK THAT: E = F + G + H+ K
Accounting for All
General ledger of Rambo Traders
Dr Purchases 1 Cr
Mar 31 Creditors PJ3 5 840.00
Stationery 2
Mar 31 Creditors PJ3 340.00
Packaging 3
Dyes 4
Footwear supplies 5
Mar 15 Purchases PJ3 2 097.60
Shoe colours 6
Mar 18 Dyes PJ3 410.40
VAT control account 21

146
Dr Office supplies 7 Cr
Mar 19 Stationery PJ3 250.80
25 Stationery PJ3 136.80
Boots & All 8

Mar 24 Purchases PJ3 4 560.00
The Shoe Box 9

Mar 26 Packaging PJ3 285.00
Posting purchases returns

Credit notes received from suppliers are recorded in the purchases returns
journal. These entries must also be posted to ledger accounts. The books to which
postings are made are the same as for purchases but the entries will be different.
147
Example 5.22
5.5.2 Posting from the purchases returns journal to the general ledger
When goods are returned to the suppliers the VAT (input) must also be adjusted.
Accounting for All
July 10 return goods purchased from Abel & Co R100.00 + VAT R14.00.
July 25 return goods to S Evert & Co R70.00 + VAT R9.80.
PURCHASES RETURNS JOURNAL PRJ67

Date Details Credit note # Folio Total VAT Purchases Folio Sundries Remarks
148
10 Abel & Co 22 114.00 14.00 100.00
25 S Evert & Co 24 79.80 9.80 70.00
193.80 23.80 170.00
5.5.3 Posting of VAT in the purchases returns journal

Date Details Credit note # Folio Total VAT Purchases Folio Sundries Remarks
Jul 10 Abel & Co 22 114.00 14.00 100.00
25 S Evert & Co 24 79.80 9.80 70.00
193.80 23.80 170.00
Debit individual The total of these

transactions to the columns is posted
creditors account monthly to the general
149
ledger
(Cr) (Cr)
VAT Purchases
See next page for detail See next page for detail
Accounting for All
General ledger of Rambo Traders
Dr VAT control account 21 Cr

Jul 31 Creditors PJ7 206.64 Jul 31 Creditors PRJ7 23.80
Abel & Co 22
Jul 10 Purchases PRJ7 114.00 Jul 7 Purchases PJ7 410.40
22 Purchases PJ7 769.50
R Outfitters 23
Jul 14 Purchases PJ7 51.30
28 Purchases PJ7 51.56
S Evert & Co 24
Jul 25 Purchases PRJ7 79.80 Jul 20 Purchases PJ7 307.80
Johns Brothers 25
Jul 26 Purchases PJ7 82.08
Purchases 1
Jul 31 Creditors PJ7 1 476.00 Jul 31 Creditors PRJ7 170.00
150
Example 5.23
Practise posting from the May purchases journals to the general ledger with the following example:
PURCHASES JOURNAL – TAMMY TRADERS PJ5

Date Invoice Creditor Folio Total VAT Purchases Packaging Stationery Folio Sundry Remarks
no
May
4 X210 XXX Shoe Sales 2 650.00 325.50 2 325.00
11 TT11 Tough Takkies 5 654.40 694.40 4 960.00
15 S21 Sinderela 1 077.30 132.30 945.00
Slippers
20 FT213 Folio Stationers 83.22 10.22 73.00
21 BB14 BB Motors 129.00 – 129.00 Petrol
151
26 PP215 Mabasas Pumps 762.66 93.66 669.00
28 TT16 Tough Takkies 10 1 250.90 8 935.00
185.90
20 542.98 2 506.98 16 220.00 1 614.00 73.00 129.00
PURCHASES RETURNS JOURNAL – TAMMY TRADERS PRJ5

Date Credit Creditor Folio Total VAT Purchases Packaging Stationery Folio Sundry Remarks
note
May
8 151 XXX Shoe 171.00 21.00 150.00
Sales
30 152 Folio Stationers 26.22 3.22 23.00
197.22 24.22 150.00 23.00
Accounting for All
Solution:
GENERAL LEDGER
Dr Tough Takkies 10 Cr
May 11 Purchases PJ5 5 654.40
28 Purchases PJ5 10 185.90
XXX Shoe Sales 11

May 8 Purchases PRJ5 171.00 May 4 Purchases PJ5 2 650.50
Sinderela Slippers 12
May 15 Packaging PJ5 1 077.30
Folio Stationers 13
May Stationery PRJ5 26.22 May 20 Stationery PJ5 83.22
30
BB Motors 14
May 21 Petrol PJ5 129.00
Mabasas Pumps 15
May 26 Packaging PJ5 762.66
152
Dr VAT control account 21 Cr

May Creditors PJ5 2 506.98 May Creditors PRJ5 24.22
31 31
Purchases 1
May Creditors PJ5 16 220.00 May Creditors PRJ5 150.00
30 30
Packaging 3
May Creditors PJ5 1 614.00
30
Stationery 2
May Creditors PJ5 73.00 May Creditors PRJ5 23.00
30 30
Petrol 16
May Creditors PJ5 129.00
21
5.5.4 Creditors ledger and creditors control account

 Introduction
Large organisations may have hundreds of customers and suppliers all buying and
selling on credit. Keeping all these supplier and customer accounts as part of the
general ledger can make the general ledger very large and difficult to control. To
make it easier to manage, the individual customer and supplier accounts are taken
out of the general ledger and put into separate ledgers called subsidiary ledgers.
153
Accounting for All
The subsidiary ledger for suppliers is called the creditors ledger and for customers
the debtors ledger. They are also sometimes referred to as the purchases ledger
and the sales ledger respectively. There may be many thousands of transactions in
these ledgers in any one month which can easily lead to errors in posting.
In this section you will learn how entries are posted from the journals to
subsidiary ledgers and how to check the accuracy of these postings using a control
account.
– Explain the principles and purpose of control accounts
– Post purchases journal entries to the creditors control account and the
creditors ledger
– Reconcile the balance of the control account with the balance of the creditors
ledger
 What is a subsidiary ledger?

When an organisation has hundreds of customers and suppliers, all buying and
selling on credit, it is common practice to open a separate ledger for creditors and
a separate ledger for debtors. These are called subsidiary ledgers.
The accounts that are normally grouped together to form subsidiary ledgers are
the individual customer and supplier accounts. All the other accounts are kept
together in two sections in the general ledger – one for statement of financial
position accounts and one for nominal accounts.
 What is a control account?
To check the accuracy of the postings to the individual ledger accounts, a control
account is opened in the general ledger.
The control account for credit purchases is called the creditors control account.
The control account for credit sales is called the debtors control account.
In this section we will look at the creditors control account.
 How do control accounts work?
Another name for ‛control account’ is ‛total account’. This gives a clue to how
they work. The following steps outline the process of transferring totals to the
creditors control account.
1. The total value of credit purchases (money owing to suppliers) in a period is
transferred from the total column of the purchases journal to the credit side
of the creditors control account in the general ledger.
2. The total value of returns to suppliers in the same period is transferred from
the total of the purchases returns journal to the debit side of the creditors
control account in the general ledger.
154
3. The total value of payments made to suppliers in the same period, is

transferred from the creditors column of the cash payments journal or cash
book to the creditors control account on the debit side (Module 2).
The difference between the total value of credit purchases, credit purchase returns
and the total value of payments made, is the balance of the control account.
The process for posting from the journals to the debtors and creditors ledger can
be illustrated in the following way:
Posting From Journal to Subsidiary Ledgers
Purchase Invoice from Footwear

Supplies R1 140 (VAT inclusive)
Purchases Journal: Footwear Supplies

R1 140, Purchases R1 000, VAT R140.
Creditors General Ledger

(Subsidiary) Ledger
Balance Sheet Section Income Statement Section
Footwear Supplies’ Credit Creditors Control Account
account R1 140 R1 140
R 1140 Debit Purchases account
(credit) R 1000
R1 000
Debit VAT control account R140
Single entry in
Creditors Ledger
Double entry in General Ledger
 How to check the double entry

This brings us to a ‛control’ issue in that the balance of the creditors control
account must always be the same as the balance of the creditors ledger. If there is
a discrepancy, it must be investigated.
Let’s see why this must be so.
First of all we know that every credit purchase recorded in the purchases journal
is posted to the credit side of an individual account in the creditors ledger. Every
credit purchase returned to the supplier is posted to the debit side of an individual
account in the creditors ledger.
We also know that every payment made to a supplier is first recorded in the cash
payments book. Every payment made is posted to the debit side of the individual
accounts in the creditors ledger. This decreases the outstanding balance.
So, each individual account in the creditors ledger contains a record of credit
purchases made from and payments made to the supplier.
155
Accounting for All
The balance of each individual account in the creditors ledger must therefore
represent the amount still owing to that supplier. To find the balance, we deduct
the value of payments made from the value of purchases made.
Now, if you balance all the accounts in the creditors ledger and add them up, you
will find the total amount owing to all the suppliers (creditors).
This amount should equal the balance of the creditors control account because this
value also represents the total amount owed by the business to its creditors.
The balance on the creditors control account must equal the sum of the individual
balances on the personal accounts in the purchases ledger.
Example 5.24
Posting Rambo Traders’ July purchases journal and purchases returns journal to
the general ledger.
During July Rambo Traders received purchases invoices from the following
suppliers:
156
PURCHASES JOURNAL – RAMBO TRADERS PJ7
Date Creditor Invoice # Fol Total Purchases VAT Packaging Stationery Fol Sundries Remarks
19x6
Jul 1 Footwear Supplies 1061 228.00 200.00 28.00
1 Boots & All BA313 171.00 150.00 21.00
1 Sinderella Slippers S9203 342.00 300.00 42.00
10 Tough Takkies 9225 456.00 400.00 56.00
10 Mabasas Pumps 1117 399.00 350.00 49.00
17 XXX Shoe Sales X018 285.00 250.00 35.00
1 881.00 R1 650.00 R231.00
The following goods were returned to suppliers and credit notes received:
157
PURCHASES RETURNS JOURNAL – RAMBO TRADERS PRJ7
Date Creditor Credit Folio Total Purchases VAT
note #
19x6
Jul 18 XXX Shoe Sales CN203 57.00 50.00 7.00
R57.00 R50.00 R7.00

Accounting for All
During August the following payments were made to suppliers and recorded in
the cash journal:

Date Chq no Particulars Fol Sundry Cash Creditors Total
purchases Bank
Aug 3 2022 Footwear Supplies 228.00 228.00
3 2023 Tough Takkies 200.00 200.00
12 2024 Sinderella Slippers 342.00 342.00
12 2025 Mabasa’s Pumps 150.00 150.00
R920.00 R920.00
Solution:
CREDITORS LEDGER
Dr Footwear Supplies CL1 Cr

Aug 3 Cheque no CPB8 R228 Jul 1 Inv no 1061 PJ7 R228
2022
Boots & All CL2

Jul 1 Inv no PJ7 R171.00
BA313
Sinderella Slippers CL3

Aug 12 Cheque no CPB8 R342.00 Jul 1 Inv no S9203 PJ7 R342.00
2024
Tough Takkies CL4

Aug 3 Cheque no CPB8 R200 Jul 10 Inv no 9225 PJ7 R456
2023
Balance c/f R256
R456 R456
Aug 1 Balance b/f R256
158
Dr Mabasa Pumps CL5 Cr

Aug 12 Cheque CPB8 R150 Jul 10 Inv no 1117 PJ7 R399
no 2025
Balance c/f R249
R399 R399
Aug 1 b/f R249
XXX Shoe Sales CL6

Jul 8 CN203 PRJ7 R57 Jul 17 Inv no X018 PJ7 R285
Balance c/f R228
R285 R285
GENERAL LEDGER
Bank 27
Aug 31 Creditors CPB8 R920.00
Creditors control account 26

Jul 3 Purchases PRJ7 R57 Jul 31 Purchases & PJ7 R1 881
& VAT VAT
Aug 31 Bank CPB8 R920
Balance c/f R904
R1 881 R1 881
Balance b/f R904
VAT control account 21

1996 1996
Dec 31 Creditors PJ7 R231 Dec 31 Creditors PRJ7 R7
Balance c/f R224
R231 R231
159
Accounting for All
NOMINAL ACCOUNTS SECTION
Dr Purchases 1 Cr
Jul 31 Creditors PJ7 R1 650 Jul 31 Returns PRJ7 50
 How to reconcile the creditors control account with the creditors ledger
We have said that the balance of the creditors control account should equal the
sum of the individual creditors’ balances extracted from the creditors ledger.
Reconciling these balances is an important procedure and should be done often.
This ensures that any errors are discovered early.
The first thing you do is total all the separate balances on the individual creditors’
accounts (after making sure the balances are correct).
Then you compare the total from the creditors ledger with the balance of the
creditors control account.
Try the next exercise to see if you understand.
Example 5.25
The first step in reconciling the balances is to total the balances of the individual
accounts in the creditors ledger. The creditors ledger shows the following
balanced accounts:
CREDITORS LEDGER
Dr J & B Furnishers CL1 Cr

Jun 8 Credit note PRJ1 150.00 Jun 4 Invoice PJ2 2 325.00
84 320
Jul 18 Cheque 28 CPB 1 162.00
30 Balance c/f 1 103.00
2 325.00 2 325.00
Aug 1 Balance b/f 1 013.00
Bradlows CL2
Jul 10 Cheque 26 CPB 13 895.00 Jun 11 Invoice PJ2 4 960.00
X106
28 Invoice PJ2 8 935.00
X118
13 895.00 13 895.00
160
Dr Wetherleys CL3 Cr
Jul 20 Cheque 29 CPB 945.00 Jun 15 Invoice PJ2 945.00
AB48
Bears CL4
Jun 30 Credit note PRJ1 23.00 Jun 20 Invoice PJ2 73.00
162 109
73.00 73.00
Aug 1 Balance b/f 50.00
Lewis Stores CL5

Jun 21 Invoice 27 PJ2 129.00
Jul 1 Balance b/f 129.00
Joshua Door CL6

Jul 30 Cheque 33 CPB 500.00 Jun 26 Invoice PJ2 669.00
1009
669.00 669.00
Aug 1 Balance b/f 169.00
Solution:
Prepare a creditors list
Account Balance
J & B Furnishers 1 013.00
Bradlows –
Wetherleys –
Bears 50.00
Lewis Stores 129.00
Joshua Door 169.00
Total 1 361.00
The next step is to compare this total with the balance of the creditors control
account. The total of the list of creditors must always be the same as the closing
balance of the creditors control accounts.
161
Accounting for All
Let’s have a look at it.

GENERAL LEDGER
Dr Creditors control 1 Cr
Jun 30 Total returns PRJ1 173.00 Jun 30 Total PJ2 18 036.00
purchases
Jul 31 Total payments CPB 16 502.00
Balance b/f 1 361.00
18 036.00 18 036.00
Aug 1 Balance b/f 1 361.00
Example 5.26
You are working as an accounting trainee for Big Shoes (Pty) Ltd. Post the entries
and totals from the journals to the creditors ledger and creditors control account.
1. Do the postings of the purchases journal, purchases returns journal and cash
payments book, as given below, to the appropriate accounts in the creditors
and general ledger.
2. Balance all the accounts as at the end of February.
3. Total the balances of the individual creditor’s accounts and check that it
agrees with the balance of the creditors control account.
162
PURCHASES JOURNAL – BIG SHOES (PTY) LTD PJ1
Jan 12 ABC Shoes 180 5 266.80 4 620.00 646.80
18 Hush Puppies X201 1 071.60 940.00 131.60
21 Doc Khumalos 640 220.02 27.02 193.00
22 B & H Casuals B071 3 260.40 2 860.00 400.40
30 Little Feet F664 547.20 67.20 480.00
31 Rally Sport Shoes 194 297.54 36.54 261.00 Dyes
10 663.56 8 420.00 1 309.56 480.00 193.00 261.00
PURCHASES RETURNS JOURNAL – BIG SHOES (PTY) LTD PRJ1
163
Date Account debited and description Credit Folio Total Purchases VAT
Note #
Jan 19
22 Hush Puppies 7 273.60 240.00 33.60
Doc Khumalos 81 220.02 193.00 27.02
493.62 433.00 60.62
Note: Only the cash payments journal is shown.
CASH PAYMENTS JOURNAL – BIG SHOES (PTY) LTD CPB2

Date Cheque Particulars Folio Detail of Sundries VAT Cash Discount Creditors Total bank
no sundries purchases
Accounting for All
Feb 6 63 Simpsons 197.68 1 412.00 1 609.68

12 64 ABC Shoes 231.00 5 266.80 5 035.80
15 65 Jakaranda 53.20 380.00 433.20
16 66 B & H Casuals 143.00 3 260.40 3 117.20
23 67 Little Feet 250.00 250.00
25 68 Wages 2 800.00 2 800.00
28 69 Rally Sports 150.00 150.00
2 800.00 250.88 1 792.00 (374.00) 8 927.20 13 396.08
164
Solution:
CREDITORS LEDGER
Dr ABC Shoes CL1 Cr

Feb 12 Cheque 64 CPB2 5 266.80 Jan 12 Invoice 180 PJ1 5 266.80
Hush Puppies CL2

Jan 19 Credit note 7 PRJ1 273.60 Jan 18 Invoice PJ1 1 071.60
X201
Feb 28 Balance c/f 798.00
1 071.60 1 071.60
Mar 1 Balance b/f 798.00
Doc Kumalos CL3

Jan 22 Credit note 81 PRJ1 220.02 Jan 21 Invoice 640 PJ1 220.02
B&H Casuals CL4

Feb 16 Cheque 66 CPB2 3 260.40 Jan 22 Invoice B071 PJ1 3 260.40
Little Feet CL5

Feb 23 Cheque 67 CPB2 250.00 Jan 30 Invoice F664 PJ1 547.20
547.20 547.20
Rally Sports Shoes CL6

Feb 28 Cheque 69 CPB2 150.00 Jan 31 Invoice 194 PJ1 297.54
Balance c/f 147.54
297.54 297.54
165
Accounting for All
GENERAL LEDGER
Dr Bank 1 Cr
Feb 28 Payments CP 13 396.08
B2
Creditors control 2
Jan 31 Total PRJ1 493.62 Jan 31 Total PJ1 10 663.56
Feb 28 Bank CPB2 8 927.20
Balance c/f 1 242.74
10 663.56 10 663.56
Mar 1 Balance b/f 1 242.74
VAT control 3
Jan 31 Creditors PJ1 1 309.56 Jan 31 Creditors PRJ1 60.62
Feb 28 Bank COB2 250.88 Balance c/f 1 499.82
1 506.44 1 506.44
Purchases 4
Jan 31 Creditors PJ1 8 420.00 Jan 31 Creditors PRJ1 240.00
Feb 28 Bank CPB2 1 792.00 Feb 28 Balance c/f 9 972.00
10 212.00 10 212.00
Stationery 5
Jan 31 Creditors PJ1 193.00 Jan 31 Creditors PRJ1 193.00
Packaging material 6
Jan 31 Creditors PJ1 480.00
166
Dr Dyes 7 Cr
Jan 31 Creditors PJ1 261.00
Wages 8
Jan 31 Bank CPB2 2 800.00

Feb 28 Bank CP 374.00
B2
List of creditors
CREDITOR BALANCE
ABC SHOES Nil
Hush Puppies 798.00
Doc Khumalos Nil
B&H Casuals Nil
Little Feet 297.20
Rally Sports Shoes 147.54
BALANCE AS PER CREDITORS CONTROL ACCOUNT 1 242.74
167
Accounting for All
5.6 Sales and sales returns journal/debtors and debtors

allowances journal
A business can sell goods on credit. It allows customers to buy now and pay later.
This is good business but it means the owner needs to keep track of which
customers have paid and who still owes money.
It is the job of the bookkeeper to keep a record of credit sales and the amount
owed by customers (debtors).
Sometimes customers return goods because they are not satisfied with them.
Details of these returns also need to be recorded.
 Record credit sales in a sales journal
 Calculate discounts allowed
 Record sales returns in a sales returns journal
Before we continue, let’s look at a sales invoice, and the information that appears
on it.
5.6.1 What is a sales invoice?
Just like you will find a purchase invoice received from a supplier, you will find a
sales invoice issued with every order taken and delivered. An invoice is normally
only issued when goods are sold on credit, representing a formal demand for
payment.
Following is an example of an ordinary sales invoice. Please note that although all
invoices will show certain information, that there is no standard format for sales
invoices.
168
M a b a s a T ra d e r s In v o ic e N o . 0 0 0
P .O . B o x 3 2 1
S e lb y
2001
V A T R eg. N o. 468912 Acco u n t N o . 1234
T e le p h o n e (0 1 1 ) 4 3 2-2 2 2 2 D a te 1 /1 /x 1
1/1/2013
Fax (0 1 1 ) 4 3 2-2 2 1 0
In v o ic e to : D e liv e r to :
P . Power P . Power
P .O . B o x 4 4 4 1 2 3 B rig h t R o a d
J o h a n n e s b u rg J o h a n n e s b u rg
2000 2000
P ro d u c t D e s c rip tio n Q u a n tit y U n it P ric e T o ta l A m o u n t

Code R c R c
00203 B la c k s c h o o l s h o e s s iz e 6 2 5 5 .0 0 1 1 0 .0 0
C o m m e n ts : S u b-T o ta l 1 1 0 .0 0
VAT @ 14% 1 5 .4 0
TO TAL 1 2 5 .4 0
R e g is te r e d N o .: 8 2 2 4 7 4 2
D is c o u n t o f 2 % fo r p a y m e n t w ith in 3 0 d a y s .
5.6.2 Internal control

It is important to any business that the invoices are made out correctly. To ensure
this, a business may do a check on its invoices.
Looking at the invoice above let’s continue. Suppose P Power received the shoes
only to find that the one pair of school shoes was brown instead of black. She has
no use for a brown pair of school shoes and therefore returns it to Mojani Traders.
Mojani Traders now has to adjust Mrs Power’s account to indicate that she only
owes money for one pair of shoes. To do this correction, they issue a credit note,
looking like the following:
169
Accounting for All
M a b a s a T ra d e rs In v o ic e N o . 0 0 0
P .O . B o x 3 2 1
S e lb y
2001
V A T R eg. N o. 468912 Account N o . 1234
T e le p h o n e (0 1 1 ) 4 3 2-2 2 2 2 D a te 2 / 1 /x 1
Fax (0 1 1 ) 4 3 2-2 2 1 0
C r e d it to :
P . P ower
1 2 3 B rig h t R o a d
J o h a n n e s b u rg
2000
P ro d u c t D e s c r ip t io n Q u a n tity U n it P ric e T o ta l A m o u n t
Code R c R c
00203 B la c k s c h o o l s h o e s s iz e 6 1 5 5 .0 0 5 5 .0 0
C o m m e n ts : S u b -T o ta l 5 5 .0 0
1 P a ir o f b ro w n s h o e s s e n t in s te a d
o f b la c k s h o e s . VA T @ 14% 7 .7 0
TO TAL 6 2 .7 0
R e g is te re d N o .: 8 2 2 4 7 4 2
Now that we have looked at a sales invoice and a credit note, let’s continue with
the journals used to record credit sales and credit sales returns.
5.6.3 What is a sales journal/debit journal?
A sales journal is a book in which a business keeps a record of its credit sales. It is
similar to a purchases journal with sales recorded instead of purchases.
Details of the sales are listed in date order. There are no debits and credits.
Individual entries and totals are posted from the journal to appropriate ledger
accounts.
The sales journal contains almost the same information as the purchases journal.
The main difference is that instead of recording the supplier’s name you record
the customer’s name.
The invoice number relates to your own invoice numbering system. Invoices are
numbered in sequence so you can quickly see if any are missing.
170
The column headings of your sales journal will depend on what information about
the sales you want to capture.
For example, Mojani Traders may want to separate sales of mens’ shoes from
ladies’ shoes. As the bookkeeper you would record these sales in two different
columns.
Sales can be split to suit your needs.
Below is an example of the column headings that Mojani Traders may have in its
sales journal.
Sales journal/Debtors journal SJ

Date Name of Invoice Folio Total Sales VAT Folio Sundries Remarks
customer no
As you can see the sales journal is almost the same as the purchases journal.
Other information that you may find in a sales journal includes:
 Number of items sold
 Unit prices
 Trade discounts allowed
Example 5.27
Follow how the bookkeeper of Temba Traders records details of the following
invoices, 14% VAT inclusive, in the sales journal.
Date No Customer Amount

March 5 101 Mr J Johnson R225.00
March 10 102 The Sports Centre R1 238.00
March 15 103 S Swanepoel – display stands R4 000.00
March 20 104 Long Walkers R675.00
March 30 105 Walk for Life R458.00
171
Solution:
SALES JOURNAL/DEBTORS JOURNAL

SJ3
A B C D E F G H I J
Date Debtor Invoice no Fol Total Sales VAT Fol Sundries Remarks
Accounting for All
Mar J Johnson 101 225.00 197.36 27.64

5
10 Sports Centre 102 1 238.00 1 085.96 152.04
15 S Swanepoel 103 4 000.00 491.23 3 508.77 Display stands
20 Long Walkers 104 675.00 592.10 82.90
30 Walk for Life 105 458.00 401.75 56.25
172
6 596.00 2 277.17 810.06 3 508.77
Check that: E = F + G + I
5.6.4 Calculating discounts allowed

 Trade discount
Temba Traders offers certain customers trade discount on their purchases.
The owner often has to give quotes over the telephone and needs to calculate
discounts and VAT.
Follow how the bookkeeper of Temba Traders explains to the owner how this is
done using the following example.
Example 5.28
A customer who is normally allowed 10% trade discount wants to buy goods
worth R1 500.
Quote them a price including VAT.
The discount is deducted from the price before VAT is calculated.
(List price excl VAT) less (discount) plus (VAT) = amount due.
R1 500 – R150 (10%) = R1 350

R1 350 x 14% = R 189
R1 350 + R189 = R1 539
Calculate the total amount due in the following cases:

1. A customer who normally receives 25% trade discount, orders goods worth
R3 650.
2. A customer orders goods worth R2 000 and gets 10% trade discount.
3. A customer who receives 5% trade discount, orders goods worth R500.
Solution:
1. R3 120.75
2. R2 052
3. R541.50
 Settlement discount
As we have said before when we discussed the cash receipts journal (chapter 6)
Circular 09/06 requires that settlement discount granted to debtors for the prompt
settlement of invoices should be estimated at the selling date and therefore
directly deducted from the selling price.
173
Accounting for All
Example 5.29
Transaction
20 October: Sold goods on credit to A Bentley, R10 000 (a settlement
discount of 5% will be allowed for prompt payments).
Required:
Record the transaction in the sales journal (ignore VAT).
Solution:
SALES JOURNAL
Date Debtor Invoice Fol Total Sales Allowance
no discount
20 October A Bentley 10 10 000 9 500 500
This means that if it is the policy of the business to allow a settlement discount, a
new column will be added to the sales journal, namely an allowance account for
settlement discount.
In the examples to follow you can presume that no settlement discount was
allowed by the business.
5.6.5 Sales returns journal/debtors allowance journal
In the same way that you may return things that you have bought, your customers
may return goods they have bought from you.
Assuming the goods were bought on credit, this has the effect of reducing the
amount that they owe you.
These transactions have to be recorded. The first place this is done is in the sales
returns journal.
In the same way that a supplier will send you a credit note when you send goods
back that you have bought on credit, you must issue a credit note for goods
returned by your customers.
Security and controls
Because credit notes have the effect of reducing the amount owing they must be
strictly controlled.
Credit notes must be signed by a person authorised to issue credit notes, and the
details checked before being entered in the sales returns journal.
174
Example 5.30
Follow how the bookkeeper of Rambo Traders records internal credit notes (VAT of 14% included).
Date No Customer Amount

March 11 45 J Johnson R450.00
March 21 46 Long Walkers R75.00
March 30 47 Walk for Life R201.00
SALES RETURNS JOURNAL/DEBTORS ALLOWANCES JOURNAL SRJ3

Date Account credited and description Credit Folio Total Sales VAT
note no
March 11 J Johnson – damaged goods 45 45.00 39.48 5.52
21 Long Walkers 46 75.00 65.78 9.22
175
30 Walk for Life 47 201.00 176.31 24.69
321.00 281.57 39.43
 The date is the date the credit note was issued.

 The credit notes are numbered in sequence so you can see if any are missing.
Accounting for All
5.6.6 Posting sales journal and sales returns journal

You have seen how the creditors control account was used to check the accuracy
of postings to the creditors ledger. You also saw how the control account tells the
owner how much money is owed to suppliers.
It is equally important to know how much money is owed by customers. This
information is available from the debtors control account.
In this section you will see how totals from the sales journal and receipts side of
the cash receipts book are posted to the debtors control account.
You will also practise checking that the balance of the debtors control account
equals the sum of the balances in the debtors ledger.

 Post sales journal entries to the debtors control account and debtors ledger
 Post the cash receipts book to the debtors control account and debtors ledger
 Record and post VAT and discount
 Record bad debt
 Correct errors in the general ledger
 Reconcile the balance of the control account with the balance of the debtors
ledger
5.6.7 What is the debtors ledger?
The debtors ledger is a collection of customer accounts – a subsidiary ledger.
It fulfils the same function as the creditors ledger, but for customers rather than
suppliers.
Suppose a customer is buying shoes regularly from Mojani Traders on credit. By
opening an account for the customer, a number of needs are met:
 The customer is able to contact the business at any time and find out from the
accounting staff how much he owes.
 The business can inform the customer by means of statements of account how
much he owes.
 The owners of the business can check that the customer does not go over
his/her credit limit.
 The business can record payments made by the customer and calculate how
much is still owed.
176
5.6.8 What is the debtors control account?

In the same way that total credit purchases and total payments to suppliers are
posted to the creditors control account, total credit sales and payments from
customers are posted to the debtors control account.
To transfer totals to the debtors control account:
The total value of credit sales (money owed by customers) in a period, is
transferred from the total column of the sales journal to the debtors control
account in the ledger.
The balance on the debtors control account must equal the sum of the individual
balances on the personal accounts in the debtors ledger.
177
Example 5.31
SALES JOURNAL
SALES JOURNAL: JUNE 2013 SJ6
Accounting for All
Date Invoice Detail Folio Sales VAT Total

2013
Jun 3 609 J Smith DL1  300.00 42.00 342.00
8 610 R Robins DL3  700.00 98.00 798.00
13 611 E Swart DL2  1 000.00 140.00 1 140.00
25 612 J Smith DL1  500.00 70.00 570.00
R2 500.00 350.00 2 850.00
N1 B1 B2
178
Individual amounts are debited to the debtors’ accounts The totals of these columns are posted to the general ledger at
in the debtors ledger. the end of each month.
SEE NEXT PAGE FOR DETAIL SEE NEXT PAGE FOR DETAIL
Solution:
DEBTORS LEDGER GENERAL LEDGER
Dr J Smith DL1 Cr Dr VAT control B1 Cr

Jun 3 Invoice 609 SJ6 342.00 Jun 30 Debtors SJ6 350.00
25 Invoice 612 SJ6 570.00
E Swart DL2 Debtors control B2

Jun 30 Invoice 611 SJ6 1 140.00 Jun 30 Sales SJ6 2 850.00
179
R Robins DL3 Sales N1
Jun 30 Invoice 610 SJ6 798.00 Jun 30 Debtors SJ6 2 500.00
The VAT charged on sales (output VAT) is

posted to the credit side of the VAT control
account, because it increased the liability
account (money owed to the Receiver of
Revenue.)
Example 5.32
Help the bookkeeper of Rondo Traders post the May entries in the sales journal, sales returns journal, and cash book to the
appropriate ledger accounts.
SALES JOURNAL – MAY 2013 SJ5

Accounting for All
Date Invoice Debtor Folio Total Sales VAT Folio Sundries Remarks
no
May
1 28 K Nel 478.80 420.00 58.80
5 29 J Jones 927.96 814.00 113.96
8 30 G Smith 228.00 28.0 200.00 Shelves
17 31 R Robins 199.50 175.00 24.50
25 32 S Botha 963.30 845.00 118.30
180
28 33 J Jones 241.68 212.00 29.68
3 039.24 2 466.00 373.24 200.00
SALES RETURN JOURNAL – MAY 2013 SRJ5

Date Credit Debtor Folio Total Sales VAT Folio Sundries Remarks
note no
May
26 131 S Botha 39.90 35.00 4.90
29 132 J Jones 15.96 14.00 1.96
55.86 49.00 6.86
CASH RECEIPTS JOURNAL – MAY 2013 CRB5
Date Particulars Folio Sundries Cash sales VAT Debtors Discount Total
May
5 K Nel receipt 22 478.80 11.00 467.80
6 Cash sales 36 – 51 3 440.00 481.60 3 921.60
8 Cash sales 56 – 60 2 470.00 345.80 2 815.80
13 G Smith receipt 21 228.00 5.00 223.00
21 J Jones receipt 24 814.00 20.00 794.00
27 S Botha receipt 23 422.00 422.00
30 P Peers receipt 25 – rent 750.00 750.00
750.00 5 910.00 827.40 1 942.80 (36.00) 9 394.20
181
Accounting for All
Solution:
GENERAL LEDGER
Dr Debtors control 1 Cr
Mar 31 Sales SJ5 3 039.24 Mar 31 Sales SRJ5 55.86
Bank CRB3 1 942.80
31 Balance c/f 1 040.58
3 039.24 3 039.24
April 1 Balance b/f 1 040.58
Bank 2
Mar 31 Receipts CRB5 9 394.20
Shelves 3
May 8 Debtors SJ5 200.00
VAT control 7
May 31 Debtors SRJ3 6.86 May 31 Debtors SJ3 373.24
Balance c/f Bank 827.40
1 200.64 1 200.64
Sales 4
May 31 Debtors SRJ5 49.00 May 31 Debtors SJ5 2 466.00
Balance c/f 8 327.00 Bank CRB5 5 910.00
8 376.00 8 376.00
Rent received 5
May 30 Bank 750.00

May 31 Debtors CRB5 36.00
182
DEBTORS LEDGER
Dr K Nel DL1 Cr
May 1 Invoice 28 SJ5 478.80 May 5 Receipt 22 CRB5 478.80
J Jones DL2

5 Invoice 29 SJ5 927.96 29 Credit SRJ5 15.96
note 132
1 169.64 1 169.64
Apr 1 Balance b/f 339.68
G Smith DL3
R Robins DL4
May 17 Invoice 31 SJ5 199.50
S Botha DL5
May 25 Invoice 32 SH5 963.30 Mar 26 Credit note SRJ5 39.90
131
27 Receipt 23 CPB3 422.00
963.30 963.30
Jun 1 Balance b/f 501.40
5.6.9 How to reconcile the debtors control account with the debtors
ledger
We have said that the balance of the debtors control account should equal the sum
of the individual debtors’ balances in the sales ledger.
Reconciling these balances is an important procedure and should be done often.
This ensures that any errors are discovered early.
The first thing you do is total all the separate balances on the individual debtors
accounts (after making sure the balances are correct).
Then you compare the total from the debtors ledger with the balance of the
debtors control account.
You should be able to reconcile these balances on your own. The following
exercise will give you practice.
183
Accounting for All
Example 5.33
The first step to reconcile the balances is to total the balances of the individual
accounts in the debtor ledger.
Then compare this total with the balance of the debtors control account.
Look at the following debtors ledger:
1. Balance all the accounts as at the end of April.
2. Total the balances of the individual debtors accounts and check that it agrees
with the balance of the debtors control account.
DEBTORS LEDGER
Dr K Nel DL1 Cr
Apr 1 Invoice 28 SJ3 420.00 Apr 5 Receipt 22 B3 420.00
J Jones DL2
Apr 5 Invoice 29 SJ3 814.00 Apr 26 Credit note 132 SRJ1 14.00
28 Invoice 33 SJ3 212.00 Apr 21 Receipt 24 CRB3 814.00
G Smith DL3
Apr 8 Invoice 30 SJ3 200.00 Apr 3 Receipt 21 CRB3 200.00
R Robins DL4
Apr 17 Invoice 31 SJ3 175.00
S Botha DL5
Apr 25 Invoice 32 SJ3 845.00 Apr 26 Credit Note 131 SRJ1 35.00
7 Receipt 23 CRB3 422.00
Total these balances :

Account Balance
Total
184
Compare the total of the balances from the debtors ledger with the balance of the
debtors control account. Are they the same?
Solution:
Dr Debtors control Cr
Apr 30 Sales SJ3 2 666.00 Apr 30 Sales SRJ1 49.00
30 Bank B3 1 856.00
Balance c/f 761.00
2 666.00 2 666.00
May 1 Balance b/f 761.00
K Nel DL1
J Jones DL2
Apr 5 Invoice 29 SJ3 814.00 Apr 26 Credit note SRJ1 14.00
132
28 Invoice 33 SJ3 212.00 Apr 21 Receipt 24 CRB3 814.00
1 026.00 1 026.00
G Smith DL3
R Robins DL4
Apr 17 Invoice 31 SJ3 175.00
S Botha DL5
Apr 25 Invoice 32 SJ3 845.00 Apr Credit note SRJ1 35.00
26 131
7 Receipt 23 CRB3 422.00
845.00 845.00
185
Accounting for All
Total of these balances :

Account Balance
K Nel Nil
J Jones 198.00
G Smith Nil
R Robins 175.00
S Botha 388.00
Total 761.00
This total equals the balance of the debtors control account.
Dr Debtors control Cr
Apr 30 Sales SJ3 2 666.00 Apr 30 Sales SRJ1 49.00
30 Bank B3 1 856.00
Balance c/f 761.00
2 666.00 2 666.00
5.7 Recording bad debts (credit losses) and correcting

errors
A basic rule of accounting is that all transactions must be entered in a subsidiary
book before being posted to the ledgers. The general journal is a book of first
entry – a subsidiary book – and is used for transactions that are not cash, credit or
returns. It is often referred to as the journal, and entries made in it are termed
journal entries.
Some of the transactions entered in the journal affect the debtors control and
creditors control accounts, and it is therefore necessary to have analysis columns
for the control accounts.
This is what the general journal looks like:
JOURNAL OF TAMMY TRADERS
Account
Date Folio Debit Credit
R R
Account to be debited x
Accounted to be credited x
(Narrative to explain the transaction)
Every journal entry must have a narrative explanation of the transaction. After the
journal entry has been completed, a line should be drawn under the narrative to
indicate the end of the transaction.
186
The six columns provide:

 a debit and credit column for the journal entry
 a debit and credit column for the debtors control
 a debit and credit column for the creditors control
What are bad debt/credit losses?
Bad debt or credit losses (new name) occur when a debtor does not pay the
amount owing, and the business decides that the amount is irrecoverable because
the debtor has been declared insolvent or cannot be traced.
The amount owing is written off as a loss and recorded in a nominal account
called ‛Credit losses’. The debtors account is closed, and the asset debtors control
is reduced.
Take VAT into account.
Example 5.34
On 17 March it was decided to write off D Davey’s account of R150 as he had
disappeared and could not be traced.
Follow how the bookkeeper of Rambo Traders records credit losses.
Solution:
The bookkeeper’s first procedure is to make a journal entry.
JOURNAL OF RAMBO TRADERS
Account
Day Folio Debit Credit
R R
Mar 17 Bad debt 131.58
VAT 18.42
D Davey 150
Debtor disappeared and cannot be traced
 Credit losses are debited, because it decreases the owner’s equity.

 D Davey and debtors control are credited; the asset accounts decreased.
 VAT is debited because we can claim it back from the Receiver as we have not
received it from the debtor but it was paid over to the Receiver of Revenue
when the sale was recorded.
In a journal entry the bookkeeper of Rambo Traders always writes the account to
be debited first and the account to be credited on the second line.
187
Accounting for All
The bookkeeper’s next procedure is to post the journal entries daily to the
general ledger.
DEBTORS LEDGER
Dr D Davey DL1 Cr
Mar 1 Balance b/f 150.00 Mar 17 Bad debt 150.00
GENERAL LEDGER OF RAMBO TRADERS

Debtors control
Mar 17 VAT GJ 150.00
Bad debts/credit losses N1

Mar 17 D Davey 131.58
VAT
Mar 17 D Davey SR 18.42
 The journal entry tells you what to do in the ledger.

 D Davey’s balance in the debtors ledger is nil.
 The double entry happens in the general ledger (debit credit losses account
and credit debtors account).
Example 5.35
The bookkeeper of Temba Traders asks you to enter the following transactions in
the journal and to post the accounts to the general ledger and the debtors ledger.
Transactions:
20 March 20xx
B Roode has left the country. Write off his outstanding account of R350.
23 March 20xx
J Nel, a debtor, is declared insolvent. The outstanding balance is R225.
188
Solution:
JOURNAL OF TEMBA TRADERS
Account
R R
Mar 20 Bad debt/Credit losses N1 307.02
VAT N2 42.98
B Roode DL1 350.00
Debtor left country
23 Bad debt/Credit losses N1 197.37
VAT N2 27.63
J Nel DL2 225.00
Debtor declared insolvent
DEBTORS LEDGER
Dr B Roode DL1 Cr
Mar 1 Balance b/f 350.00 Mar 20 Bad debt GJ 350.00
J Nel DL2
Mar 1 Balance b/f 225.00 Mar 23 Bad debt GJ 225.00
GENERAL LEDGER OF TEMBA TRADERS

Dr Debtors control B1 Cr
Mar 1 Balance b/f 575.00 Mar 31 Journal GJ 575.00
credits
Bad debts/credit losses N1

Mar 20 B Roode GJ 350.00
23 J Nel GJ 225.00
VAT N2
Mar 20 B Roode GJ 42.98
23 J Nel GJ 27.63
189
Accounting for All
5.8 Correction of errors

The general journal is also used to make adjustments arising from accounting
errors. For example, if the bookkeeper of Rambo Traders posts items to the wrong
account or enters the wrong amounts, she corrects this in the general journal. The
entry will depend on the error.
Let’s look at an example of an error and see how she corrects this:
Example 5.36
On 20 March, cash received from A Mabusa, R150, was posted in error to BA
Mabusa’s account.
This error affects the accounts of A Mabusa and BA Mabusa.
A Mabusa’s account is too large and must be reduced by crediting the account
with the payment; therefore debit BA Mabusa’s account to reverse the wrong
entry.
Both of them are debtors and must also be recorded in the debtors control column
in the journal.
This is what the entry in the journal looks like:
Solution:
Account
Mar 20 BA Mabusa 150
A Mabusa 150
Incorrect posting error corrected
 This entry had no effect on the debtors control: (money owed to Mojani
Traders) debit R150 = credit R150.
 The error in BA Mabusa’s account is corrected and the right entry is made in
A Mabusa’s account.
Example 5.37
Help the bookkeeper of Rambo Traders to correct the following errors by making
entries in the general journal:
25 March
Cash received from K Smit, R210, was posted in error to KA Smith’s account
(debtors).
27 March
Cash paid to Footwear Supplies, R200, was posted in error to Shoes Supplier’s
account (creditors).
190
Solution:
Account
R R
Mar 25 KA Smith 210
K Smit 210
Correcting posting error
Mar 27 Footwear Supplies 200
Shoes Supplies 200
Correcting posting error
The recording of credit transactions in the appropriate summarising journal
Example 5.38
CLIVE RICE SALES

(a clothing sales concern)
1. Record the attached source documents of Clive Rice Sales in the appropriate
summarising journals.
2. Post the summarising journals to the appropriate general ledger accounts and
debtors and creditors ledger.
3. Balance off the general ledger accounts and reconcile debtors and creditors
control account with relevant subsidiary ledgers.
No 42
TAX INVOICE
VAT No: 4040124572
............2 – 6 –2013....
M Clive Rice Sales
P O Box 31101
JOHANNESBURG
Bought of Carducci SA (Pty) Ltd
CAPE TOWN
Quantity Description Unit price Total
10 Grey suits 5 x 36 cm, 5 x 38 cm 200.00 2 000.00
VAT 14% 280.00
2 280.00
191
Accounting for All
TAX INVOICE No 94
VAT No: 4651123472
............14 – 6 – 2013....
M Clive Rice Sales
P O Box 31101
JOHANNESBURG
Bought of Manley's Men's Wear
DURBAN
25 White long sleeved shirts 40.00 1 000.00
10 Pin stripe ties 8.00 80.00
VAT 14% 151.20
1 231.20
TAX INVOICE No 68
VAT No: 425223472
............21 – 6 – 2013....
M Clive Rice Sales
P O Box 31101
JOHANNESBURG
Bought of Paper House
PRETORIA
10 Invoice books (100) 13.60 136.00
5 Receipt books 36.00 180.00
VAT 14% 44.20
360.20
TAX INVOICE No 53
VAT No: 4131224831
............28 – 6 – 2013....
M Clive Rice Sales
P O Box 31101
JOHANNESBURG
Bought of Jordans’ Shoes SA
GEORGE
30 Pairs brown New York shoes 35.00 1 050.00
VAT 14% 147.00
1 197.00
192
TAX CREDIT No 53
VAT No: 4040124572
9 – 6 – 2013
M Clive Rice Sales
P O Box 31101
JOHANNESBURG
Cr by Carducci SA (Pty) Ltd

CAPE TOWN
1 Grey suit 36 cm – returned damaged 200.00 200.00
VAT 14% 28.00
228.00
TAX CREDIT No 20
VAT No: 4651123472
24 – 6 – 2013
M Clive Rice Sales
P O Box 31101
JOHANNESBURG
Cr by Manley's Men's Wear

DURBAN
10 Pin stripe ties – not stitched 8.00 80.00
properly
VAT 14% 11.20
91.20
TAX INVOICE No 64
VAT No: 4710155500
............2 – 6 – 2013....
M C van Zyl
P O Box 7007
BLOEMFONTEIN
Bought of Clive Rice Sales
JOHANNESBURG
2 Carducci white long sleeved 60.00 120.00
shirts 36 cm
1 Manley’s tie 48.00 48.00
VAT 14% 23.52
191.52
193
Accounting for All
TAX INVOICE No 65
VAT No: 4710155500
............15 – 6 – 2013....
M G le Roux
P O Box 343
CAPE TOWN
JOHANNESBURG
1 Casio cash register CX-300 437.00 437.00
VAT 14% 61.18
498.18
TAX INVOICE No 66
VAT No: 4710155500
............20 – 6 – 2013....
M L Barnard
P O Box 671
PRETORIA
JOHANNESBURG
1 Denim Levis jeans 32 cm 79.99 79.99
2 Adidas casual shirts 72.00 144.01
VAT 14% 31.36
255.36
TAX INVOICE No 67
VAT No: 4710155500
............27 – 6 – 2013....
M J Cook
P O Box 9689
JOHANNESBURG
JOHANNESBURG
1 Pierre Cardin suit 401.00 401.00
1 Pair Jordan black shoes 89.00 89.00
VAT 14% 68.60
558.60
194
TAX CREDIT No 16
VAT No: 4710155500 24 – 6 – 2013
M C van Zyl
P O Box 7007
BLOEMFONTEIN
Cr by Clive Rice Sales

JOHANNESBURG
1 Carducci white l/s shirt – stained 67.20 67.20
VAT 14% 9.41
76.61
TAX CREDIT No 17
VAT No: 4710155500 24 – 6 – 2013
M L Barnard
Cr by Clive Rice Sales

JOHANNESBURG
1 Adidas casual shirt 60.00 60.00
1 Levis jeans 32 cm 96.80 96.80
VAT 14% 21.96
178.76
195
Solution:
PURCHASES JOURNAL PJ6
Jun 2 Carducci SA 42 CL1 2 280.00 2 000.00 280.00
14 Manley’s Mens 94 CL2 1 231.20 1 080.00 151.20
21 Paper House 68 CL3 360.20 44.20 316.00
Accounting for All
28 Jordans’ Shoes 53 CL4 1 197.00 1 050.00 147.00
5 068.40 4 130.00 622.40 316.00

B1 N1 B3 N3
196
Date Creditors Invoice Folio Total Purchases VAT
Jun 9 Carducci SA 53 CL1 228.00 200.00 28.00
24 Manley’s Men’s 20 CL2 91.20 80.00 11.20
319.20 280.00 39.20

B1 N1 B3
SALES JOURNAL
SJ6
Date Debtor Invoice # Fol Total Sales VAT Fol Sundries Remarks
Jun 2 C Van Zyl 64 DL1 191.52 168.00 23.52
15 J le Roux 65 DL2 498.18 437.00 61.18
20 L Barnard 66 DL3 255.36 224.00 31.36
27 J Cook 67 DL4 558.60 490.00 68.60
1 503.66 1 319.00 184.66

B2 N2 B3
197
SALES RETURNS JOURNAL
SRJ6
Date Account credited and description Credit Folio Total Sales VAT
note #
Jun 24 C Van Zyl 16 DL1 76.61 67.20 9.41
24 L Barnard 17 DL3 178.76 156.80 21.96
255.37 224.00 31.37

B2 N2 B3
Accounting for All
GENERAL LEDGER
Dr Creditors control account B1 Cr

Jun 30 Purchases PRJ6 319.20 Jun 30 Purchase PJ6 5 068.40
5 068.40 5 068.40
Jul 1 Balance b/f 4 749.20
Debtors control B2
Jun 30 Sales SJ6 1 503.66 Jun 30 Sales SRJ6 255.37
1 503.66 1 503.66
VAT control B3
Jun 6 Creditors PJ6 622.40 Jun 6 Creditors PRJ6 39.20
6 Debtors SRJ6 31.37 6 Debtors SJ6 184.66
Balance c/f 429.91
653.77 653.77
Purchases N1
Jun 30 Creditors PJ6 4 130.00 Creditors PRJ6 280.00
4 130.00 4 130.00
Sales N2
Jun 30 Debtors SRJ6 2240.00 Jun 30 Debtors SJ6 1 319.00
1 319.00 1 319.00
Stationery N3
Jun 30 Creditors PJ6 316.00 Jun 30 Balance c/f 316.00
198
CREDITORS LEDGER
Dr Carducci SA (Pty) Ltd CL1 Cr

Jun 9 Credit note 53 PRJ6 228.00 Jun 2 Invoice 42 PJ6 2 280.00
30 Balance c/f 2 052.00
2 280.00 2 280.00
Manley’s Men’s Wear CL2

Jun 24 Credit note 20 PRJ6 91.20 Jun 14 Invoice 94 PJ6 1 231.20
30 Balance c/f 1 140.00
1 231.20 1 231.20
Paper House CL3

Jun 30 Balance c/f 360.20 Jun 21 Invoice 68 PJ6 360.20
Jordan’s Shoes SA CL4

Jun 30 Balance c/f 1 197.00 Jun 28 Invoice 53 PJ6 1 197.00
DEBTORS LEDGER
Dr C van Zyl DL1 Cr

Jun 2 Invoice 64 SJ6 191.52 Jun 24 Credit note SRJ6 76.61
16
191.52 191.52
G le Roux DL2
Jun 15 Invoice 65 SJ6 498.18
L Barnard DL3
Jun 20 Invoice 66 SJ6 255.36 Jun 24 Credit note SRJ6 178.76
17
255.36 255.36
199
Accounting for All
Dr J Cook DL4 Cr
Jun 27 Invoice 67 SJ6 558.60 Jun 30 Balance c/f 558.60
Balance of creditors control account: R4 749.20
Balances of creditors in the creditors ledger
Account Balance
Carducci SA 2 052.00
Manley’s Men’s Wear 1 140.00
Paper House 360.20
Jordan’s Shoes 1 197.00
TOTAL 4 749.20
Balance of debtors control account: R1 248.29

Balances of debtors in the debtors ledger
Account Balance
C van Zyl 114.91
G le Roux 498.18
L Barnard 76.60
J Cook 558.60
TOTAL 1 248.29
200
Questions
Question 5.1
The following transactions were obtained from the books of B&J Distributors for
the month of July 2013:
2013
Jul 1 Buy a vehicle from Cosmos Motors on credit for the amount of
R22 000.
2 Sell inventory on credit to AZZ with a cost price of R200 and a selling
price of R350.
3 Pay the telephone account for July, R260.
4 Receive R600 from a debtor (ACE) in settlement of the account.
5 Sell inventory for cash to Cash Ltd, for R650. Cost price R400.
6 Buy inventory on credit from Bargain Centre for R3 000.
7 Receive R20 000 from the owner of the business, being an increase in
capital.
8 Buy inventory on credit from Credit Ltd, for R1 200.
9 Receive a credit note for R300 for goods returned by the business to
Bargain Centre.
10 Sell an old vehicle on credit to Tikkie Ltd, for R10 000.
11 Issue a credit note for goods returned by AZZ for R50.
12 Buy inventory from BB Ltd, for R3 000 cash.
13 Return faulty inventory to Credit Ltd, and receive their credit note for
R240.
14 Sell inventory on credit to Nasie Ltd For R700. Cost price was R600.
15 The owner of the business takes inventory for private use.
Selling price R150.
Cost price R100.
16 Buy inventory for R2 200 and issue a cheque.
Required:
5.1.1 Record the above transactions in the correct subsidiary journals (ignore
VAT).
5.1.2 Do all the postings to the general ledger.
5.1.3 Prepare a trial balance.
201
Accounting for All
Question 5.2
The following transactions took place during March 2013 in the books of AV
Connection Traders:
2013
Mar 2 Sold inventory on credit for R6 000 to Multi Broadcast. Cost price R4 800.
6 Sold inventory for R10 000 cash. Cost price R8 000.
8 Buy stationery for cash, R200.
9 Pay the rent for the month, R11 000.
10 Receive R30 000 from debtors.
11 Buy inventory on credit from EGI, worth R70 000.
12 Sold inventory on credit to Mario Distributors for R25 000. Cost price
R18 000.
14 Buy a vehicle on credit for R40 000 from BP.
18 Receive a credit note for goods returned to EGI, R1 000.
19 Issue a credit note for goods returned by Multi Broadcast, R600. Cost price
R450.
21 Pay salaries, R15 000.
24 Depreciation on vehicles for the month, R2 000.
26 Sold inventory for cash, R4 000. Cost price R2 600.
28 Bought inventory for cash, R5 000.
Required:
5.2.1 Prepare all the relevant subsidiary journals (ignore VAT).
5.2.2 Do all the postings to the general ledger.
5.2.3 Prepare a trial balance.
202
Question 5.3
Record the following transactions in the correct columns, as in the example.
Example:
a. The owner of AB Distributors deposited R20 000 in the bank account of the
business as his capital contribution.
Transaction Subsidiary Account Account Amount

no journal debited credited
a. Cash receipts Bank Capital R20 000
journal
Transactions:
1. Purchase land and buildings on credit from MG Properties, R150 000.
2. Purchase inventory from Makro, R5 200 on credit.
3. Pay salaries and wages by cheque, R12 800.
4. Cash sales of inventory, R3 000.
5. Pay the annual insurance premium to CE Insurance Company by cheque,
R2 000.
6. Buy vehicles from Zero Garage, R60 000 cash.
7. Sell a used typewriter to a worker, R50 cash.
8. Purchase stationery on credit from Proes Street Stationeries, R350.
9. Pay the interest on the loan at Alpha Bank per cheque, R300.
10. Receive a cheque of R500 from a debtor, A Mans.
11. Pay our debt to a creditor, B Ben, by cheque in full settlement of our
account of R3 000.
12. Sell inventory on credit to C Coetzee, R1 500.
13. Return damaged goods to Makro, and receive their credit note, R200.
14. Issue a credit note to C Coetzee for damaged goods returned, R300.
15. The owner of B&J Distributors withdrew R2 000 cash for his own use.
203
Accounting for All
Question 5.4
During April 2013 the following transactions occurred in the business of BM
Rhapsody, a general dealer:
2013
Apr 1 Mr Rhapsody deposited an amount of R200 000 cash in the bank
account of the business.
2 Paid for an advertisement in the Cape August (newspaper) per
cheque, R750.
6 Sold merchandise on credit to R Maposa, R100 000 (cost price
R80 000).
7 Received an account for repairs to the vehicle of the owner, R800.
This amount is still payable by the business.
10 Received a credit invoice from E Terror for goods purchased,
R15 000.
12 Received a cheque from S Vink in full settlement of his account of
R800.
13 Paid a creditor, J van As, R1 200 by cheque.
20 Received a credit note from E Terror for damaged goods sent back to
him, R2 000.
25 Cash sales, R8 000 (cost price R6 000).
28 Received interest on a fixed deposit at the Uno Building Society,
R2 000.
29 Issue a credit note to R Maposa for damaged goods returned, R5 000
(cost price R3 000).
30 The owner took goods for his own private use at cost price, R2 000.
Required:
5.4.1 Record the above transactions in the correct subsidiary journals of BM
Rhapsody (ignore VAT).
5.4.2 Post only to the following general ledger accounts:
Debtors control
Cost of sales
204
Question 5.5
The following transactions were obtained from the books of R Rampa Traders for
the month of May 2013:
2013
May 1 The owner deposits his own money into his business account,
R280 000.
2 Purchases a delivery van and pays with a cheque, R140 000.
3 Purchases inventory on credit from Bambi Traders, R15 000.
4 Sells goods on credit to M Savimbi, R5 000. Cost price R1 500.
5 Deposits money from cash sales, R4 800. Cost price R1 400.
6 Pays for the following expenses by cheque:
Shop rent, R2 500
Telephone, R1 200
Salaries, R18 000
7 The owner withdraws money for his personal use, R1 000.
8 Received from M Savimbi, R2 000 as part payment of his account.
9 Issues a cheque to Bambi Traders for payment of our account,
R15 000.
10 Cash sales, R8 000. Cost price R2 500.
Required:
5.5.1 Record the above transactions in the correct subsidiary journals (ignore
VAT).
5.5.2 Post only to the following two general ledger accounts:
– Debtors control
– Creditors control
205
Accounting for All
Question 5.6
Record the following transactions (including cash transactions) in the general
journal of AJAX Traders (ignore VAT):
2013
Feb 5 A debtor, A Bantam’s, debt of R5 000 must be written off as
irrecoverable.
8 Bought stationery on credit from S Samuels, R8 000.
10 Issued an invoice for goods to R Ronaldi, R60 000.
Cost price, R48 000.
15 Received rent in cash from T Tamara, R7 500.
25 Charged A Amcor R1 000 interest on their overdue account.
28 Depreciation on vehicles for the financial year, R15 000.
Question 5.7
Use the information of question 5.1.
Required:
Record the transactions for July in the general journal of B&J Distributors
(including cash transactions).
Question 5.8
Use the information of question 5.2.
Required:
Record the transactions in the general journal of AV Connection Traders
(including cash transactions).
Question 5.9
Use the information of question 5.12 on page 209 in this chapter (ignore VAT).
Required:
Record only the transactions that will normally appear in the general journal of
Xumalo Traders.
Ignore VAT
206
Question 5.10
The following balances appeared in the books of Boroto Traders on 1 January
2013:
R
Land & buildings 60 000
Plant & machinery 50 000
Inventory 75 000
Bank 18 000
Debtors: A Aramis 41 500
R Ronald 7 600
P Puma 17 900
Capital: Boroto 186 800
Long-term loan 27 700
14 700
Creditors: B Bennie
R Nickelson 5 800
R Gould 35 000
The following transactions took place during the month of January 2013:
2013
Jan 1 Cash sales, R14 500. Mark-up, 25% on selling price.
2 Received a cheque from A Aramis to settle his debt to date. Bought
stationery on credit from B Bennie, R700.
3 Cash purchases of merchandise from R Rundle, R7 500.
Paid by cheque for petrol for the private vehicle of Mr Boroto, R60.
6 Paid carriage on purchases, R720.
Received a cheque from P Puma in full settlement of his account and
allowed him R112 discount.
Received rent in cash from R Roberts, R1 500.
9 Issued an invoice for goods to R Ronald, R480. Cost price, R370.
11 Received a credit note from B Bennie for stationery, R50.
15 R Ronald pays us R7 900 in full settlement of his account.
18 Cash sales, R17 600. Mark-up, 10% on cost price.
24 The bank informed us that the cheque from R Ronald has been
dishonoured.
28 R Ronald pays us R7 000 and the balance on his account must be
written off as irrecoverable.
30 Charged A Aramis R100 interest on his overdue account.
207
Accounting for All
Required:
5.10.1 Record the above transactions in the correct subsidiary journals.
5.10.2 Post to the following accounts:
Trading inventory
VAT input
VAT output
Debtors control
Creditors control
Question 5.11
The following balances appeared in the records of TJ’s on 1 March 2013:
R
Bank 20 862.25
VAT (Cr) 1 309.21
List of individual debtor’s balances:

R
P Lemmer 12 112.20
J Roelof 9 416.53
R Legodi 817.25
P Ervin 19 236.18
List of individual creditor’s balances:

R
Topsport 2 915.21
POPS 899.05
Transactions for March 2013:

2013
Mar 1 Received an invoice from POPS for trading inventory purchased, on
credit, R6 211.23
3 Sold goods on credit and issued invoices to:
R Lemmer R299.99
R Legodi R467.89
4 The owner took inventory for own use at the selling price of R161.27.
6 Received a cheque from P Ervin, R19 000 in full settlement of his
account.
8 Paid the VAT for February 2013 to the Receiver of Revenue.
208
9 Returned damaged inventory to POPS, R209.23.

11 P Ervin’s cheque was returned by the bank with a debit note ‘Refer to
Drawer’.
13 P Ervin is insolvent. Received a first and final dividend of 65c in the
Rand and write the balance off as irrecoverable.
15 Cash sales per cash register roll, R19 252.52.
Telephone R 520.14
Wages R 3 000
29 Charge J Roelof’s account with 19% interest per year for two months.
Required:
5.11.1 Enter the above transactions in the correct subsidiary journals of TJ’s.
Sales are made at a constant mark-up of 25% on cost price. All
transactions include, where applicable, VAT at 14%.
5.11.2 Post to the following accounts in the general ledger:
VAT input
VAT output
Debtors control
Creditors control
Inventory
Cost of sales
Question 5.12
The following transactions appeared in the books of Xumalo Traders during
February 2013. All transactions include VAT of 14% where applicable. Xumalo
Traders use the perpetual inventory system and maintain a mark-up of 25% on
cost price.
2013
Feb 1 Cash sales, R57 000.
3 Cash purchases of inventory, R28 000. Trade discount of 5% must
still be taken into account.
6 C Chabalala charged our overdue account with R80 interest.
12 Paid N Rambo R1 800 in full settlement of our account of R2 000.
13 Received R2 500 from a debtor, S Seroto, in full settlement of his
account of R2 580.
14 A debtor, T Toronto cannot pay his debt of R2 600; write his
account off as credit losses.
16 Issued a credit note to K Kumble for damaged goods returned,
R200.
18 The owner, W Xumalo, took goods for private use, R230.
25 Paid railage on goods purchased, R114.
209
Accounting for All
Required:
Record all the above-mentioned transactions in the general journal of Xumalo
Traders (cash transactions included).
(All calculations to the nearest Rand)
Question 5.13
The following balances, as at 31 January 2013, were obtained from the general
ledger of Blue Bull Traders:

Shop equipment 160 000
Accumulated depreciation – shop equipment 48 000
Trading inventory (1/3/2012) 76 000
Debtors 110 000
Bank (favourable) 10 000
Capital – Blue Bull 502 000
Creditors 50 000
Purchases 235 400
Settlement discount received 6 000
Salaries 44 000
Advertising costs 8 000
Bank charges 2 000
Water and lights 6 100
Sales 355 500
VAT – control (receivable) 6 000
Settlement discount granted 4 000
Additional information:
The books of first entry for February 2013 were recorded and summarised as
follows:
Cash receipts journal – February 2013
Sundry Sales Debtors Discount VAT Bank

0 12 000 23 000 2 800 1 288 33 488
Cash payments journal – February 2013
Sundry Purchases Creditors Discount VAT Bank

4 435 7 400 17 300 450 998 29 683
210
Sundry consists of:
Salaries R 4 000
Bank charges 50
Water & lights 385
Debtors journal – February 2013
Sales VAT Debtors

19 400 2 716 22 116
Creditors journal – February 2013
Purchases VAT Creditors

9 240 1 294 10 534
General journal – February 2013
Debit Credit
R R
Credit losses 150
VAT – control 21
Debtors control 171
Piet Pompies, a debtor, is insolvent
Advertising 400
Purchases 400
Correcting of an allocation error
Required:
5.13.1 Open the general ledger accounts and post the books of first entry to the
general ledger.
5.13.2 Balance the general ledger accounts off properly.
211
Accounting for All
Question 5.14
The following information was taken from the books of Wasp Traders on 28
February 2013:
Information:
1. Totals of debtors and creditors lists:
1 February 28 February
2013 2013
R R
Debtors list: debit 4 896

credit 106 153
Creditors list: debit 234 200
credit 3 934
2. Balance of trading inventory account at 1 February 2013, R18 684.

Total of trading inventory lists at 28 February 2013, R19 124.
3. Column totals of journals (subsidiary books) at 28 February 2013.
Cash receipts journal

Sundry Cost of Sales Creditors Debtors Discount Bank
accounts sales control control allowed
R2 714 R3 100 R4 810 R486 R4 278 R320 R12 032
Cash payments journal

Sundry Trading Wages Debtors Creditors Discount Bank
accounts Inventory control control received
R844 R1 680 R400 R270 R7 658 R404 R10 448
Debtors journal
Sales Cost of sales Total
R3 560 R2 840 R3 560
Creditors journal
Trading Equipment Stationery Sundry Total
inventory accounts
R5 288 R1 712 R184 R1 514 R8 698
Debtors allowance journal

Sales Cost of sales Total
R160 R100 160
212
Creditors allowance journal

Trading Equipment Stationery Sundry accounts Total
Inventory
R448 R382 R88 R74 R992
General journal
Debtors control Creditors control
R194 R78 R92 R202
Required:
Use the information to draw up the following general ledger accounts and balance
these accounts at 28 February 2013:
Debtors control account

Creditors control account
Cost of sales
Question 5.15
The following information was extracted from the books of Baxter Ltd. You are
required to use the appropriate information and prepare the debtors control
account and the creditors control account in the general ledger.
2013 R
May 1 Credit balances of debtors 340
Credit balances of creditors 10 694
Debit balances of debtors 6 698
Debit balances of creditors 70
May 31 Totals of subsidiary journals

Debtors journal 12 428
Creditors returns journal 206
Inventory in cash payments journal 5 978
Settlement discount granted in cash receipts journal 244
Sundry expenses in cash payments journal 1 512
Debtors in cash receipts journal 16 420
Debtors allowances journal 410
Creditors journal 8 354
Settlement discount received in cash payments 110
journal
Creditors in cash payments journal 8 700
Sales in cash receipts journal 16 800
Creditors in cash receipts journal 90
Debtors in cash payments journal 2 920
213
Accounting for All
Information taken from the general journal R

Credit losses written off 1 220
Profit on sale of machinery 2 400
Machinery sold on credit 12 400
Settlement discount granted on dishonoured cheque 50
Credit losses recovered from V Vet 380
Interest charged on debtors’ accounts 92
Interest charged on creditor’s accounts 64
Other journal debits: debtors’ column 262
Other journal debits: creditors’ column 502
Other journal credits: debtors’ column 374
Other journal credits: creditors’ column 328
Balances at 31 May
Debtors with credit balances 308
Creditors with debit balances 186
Discounts are included in the debtors’ and creditors’ columns in the cash receipts
journal and cash payments journal.
Question 5.16
Mr L City keeps his ledgers on a control system. The following transactions took
place during January 2013:
R
Purchases of merchandise on credit 23 000
Purchases of merchandise for cash 27 900
Purchases of equipment on credit 17 800
Sales of merchandise on credit 78 600
Sales of merchandise for cash 25 100
Sales of equipment on credit 23 380
Returns inwards 250
Returns outwards 370
Cash received from debtors 54 000
Payments to creditors 79 000
Credit losses written off 250
Dishonoured cheque originally received from a debtor 1 150
Discount on this cheque 15
Journal debits
– Debtors ledger 170
– Creditors ledger 80
Journal credits
– Debtors ledger 189
– Creditors ledger 160
Credit balance in debtors ledger transferred to creditors ledger 250
214
The debtors control account at 1 January 2013 contained the following balances:
Debit balance R 34 749

Credit balance R 34
The creditors control account at 1 January 2013 contained the following balances:
Debit R 179
Credit R 31 779
On 31 January 2013 there was a credit balance of R500 in the debtors ledger.
Required:
A debtors control and creditors control account for January 2013.
Question 5.17
The following information was extracted from the subsidiary books of K Tsele
Traders:
R
2013
Jan 1 Debit balances of debtors 300 000
Credit balances of creditors 150 000
31 Total of total column in debtors journal 120 000
Total of creditors allowances journal 20 000
Sundry expenses column in cash payments 60 000
journal
Debtors column in cash receipts journal 140 000
Total column in debtors allowances journal 15 000
Total of creditors journal 100 000
Creditors column in cash payments journal 130 000
Sales in cash receipts journal 200 000
Credit losses written off in general journal 60 000
Machinery sold on credit 90 000
Credit losses recovered 25 000
Interest charged on debtor’s accounts 15 000
Sundry journal debits: debtors 5 000
Sundry journal credits: debtors 1 000
Sundry journal debits: creditors 2 000
Sundry journal credits: creditors 6 000
Required:
Prepare the debtors and creditors control accounts in the general ledger of K Tsele
Traders.
215
CHAPTER 6
BANK RECONCILIATION STATEMENT
6.1 Introduction
You have learnt how a business keeps a record of its cash receipts and payments
in the cash journals. You also know that the bank keeps a similar record of these
transactions. In theory the two records should be the same but in practice this is
rarely the case.
In this section you will learn how to compare the bank’s records with the cash
journal records and identify the differences that occur.
 Carry out steps to reconcile the cash journals of an entity with the bank
statement
 Identify outstanding entries on the bank statement and in the cash
journals/cash book
 Complete a reconciliation statement
6.2 What is a bank reconciliation statement?

To reconcile means to ‛bring to agreement’ or make compatible. So when you do
a bank reconciliation you are ensuring that the records of the business agree with
the records of the bank.
The records of the business are contained in the cash receipts journal and the cash
payments journal (cash book).
The records of the bank are reported in a monthly bank statement which is sent to
the business.
Drawing up a bank reconciliation statement brings the cash receipts and the cash
payments journals into line with the bank statement.
The process ensures that all entries in the cash journals are accounted for in the
bank statement, and that all entries in the bank statement are accounted for in the
cash journals.
6.3 Comparing the records

To bring the records into agreement you first have to check that the items that
appear on the bank statement appear in the cash receipts journal and cash
payments journal (cash book).
Chapter 6 Bank reconciliation statement
A typical bank statement looks like this:

Rainbow Bank
Cluster traders
PO Box 321 Bank statement
Selby 2000 March 2013
Date & code Cheque Cheque and Deposits Balance
number other debits
R R R
Mar 1 3 000 3 000
Mar 1 CB 5.00 2 995.00
Mar 1 CO 8.10 2 986.90
Mar 2 2 650.00 5 636.90
Mar 4 021 38.40 5 598.50
Mar 5 SO 45.00 5 553.50
Mar 6 022 3 000.00 2 553.50
Mar 7 LF 11.20 2 542.30
Mar 10 023 300.00 2 242.30
Mar 15 1 100.00 3 342.30
Mar 16 024 80.50 3 261.80
Mar 17 025 1 930.00 1 331.80
Mar 26 5 810.00 7 141.80
Mar 26 026 550.10 6 591.70
Mar 30 028 133.45 6 458.25
Mar 30 IU 1 120.00 5 338.25
LIST OF CO = Commission LF = Ledger fees
ABBREVIATIONS SO = Stop order – insurance IU = Item unpaid
CB = Cheque book
One of the columns in the above statement is headed ‛Cheques and other debits’.
These represent cheques that Cluster Traders has issued to pay its expenses. They
are recorded in the cash payments journal of the business and are therefore
credits.
So, entries in the cash receipts journal will appear as credits in the bank statement
(the bank owes you). Entries in the cash payments journal will appear as debits in
the bank statement (you owe the bank).
The same argument can be applied where a business makes use of a cash book.
The cash receipts journal represents the debit side of the cash book and the cash
payments journal the credit side.
6.4 Reconciliation procedure

1. Compare each item on the bank statement with items in the cash receipts
journal and cash payments journal.
Mark the items which appear in both the bank statement and the cash
journals with a (^). These items are in agreement.
217
Accounting for All
2. Go through the bank statement and look for any items not marked with a (^).
Mark these o/s for outstanding.
3. Make a list of all the o/s items on the bank statement.
Your list may include the following items:
 Service fees
 Transaction levy
 Interest on overdraft
 Stop order payment
 Dishonoured cheques
 Interest paid by the bank
 Errors (wrong account debited or credited)
4. These items must be entered into either the cash receipts journal or the cash
payments journal (sometimes referred to as the supplementary cash journals).
You are supplementing your books with the information not yet recorded.
For example service fees will be entered into the cash payments journal.
Interest paid by the bank will be entered into the cash receipts journal.
5. When all o/s items have been entered in the cash journals you can mark them
with a (^) to show they are now in agreement. At this stage all the items on
the bank statement will be marked (^).
6. If all the items in the cash journals are also marked, then the balance shown
on the bank statement should agree with the difference between the total
columns of the cash receipts journal and cash payments journal.
Bank statement balance = Total cash receipts journal less total cash
payments journal.
7. If the balances do not agree, the next thing to do is check the cash journals
for any unmarked items. These are items which appear in the cash journals
but do not appear on the bank statement.
8. Items which appear in the cash journals but do not appear on the bank
statement are entered in a bank reconciliation statement.
An example of a bank reconciliation statement is shown below. Compare it
with the example of a bank statement shown previously.
Bank reconciliation statement as at 31 March 2013

R R
Favourable balance as per cash journal 5 328.25
+ Outstanding cheques nos 027 350.00
029 410.00 760.00
6 088.25
– Outstanding deposits 750.00
Favourable balance as per bank statement 5 338.25
218
Unpresented cheques are those which have been issued by the business but not
presented by the person who received the cheque.
Outstanding deposits are those deposits which were not cleared by the bank at the
time the statement was printed.
Example 6.1
Shown below are copies of the following documents:
 A bank statement for March
 Cash receipts journal
 Cash payments journal
Rainbow Bank
Gunston Traders
Bank statement
March 2013
Date & code Cheque Cheque and Deposits Balance
number other debits
R R R
Mar 1 3 000.00 3 000.00
Mar 1 CB 5.00 2 995.00
Mar 1 CO 8.10 2 986.90
Mar 2 2 650.00 5 636.90
Mar 4 021 38.40 5 598.50
Mar 5 SO 45.00 5 553.50
Mar 6 022 3 000.00 2 553.50
Mar 7 LF 11.20 2 542.30
Mar 10 023 300.00 2 242.30
Mar 15 1 100.00 3 342.30
Mar 16 024 80.50 3 261.80
Mar 17 025 1 930.00 1 331.80
Mar 26 5 810.00 7 141.80
Mar 26 026 550.10 6 591.70
Mar 30 028 133.45 6 458.25
Mar 30 IU 1 120.00 5 338.25
LIST OF ABBREVIATIONS CO = Commission LF = Ledger fees
CB = Cheque book SO = Stop order– IU = Item unpaid
insurance
219
Accounting for All
Cash receipts journal

Date Particulars Folio Sundries Cash sales Debtors Analysis Total bank
Mar 1 Capital per
receipt 6 (11) 3 000.00 3 000.00
2 Cash sales 18 –19 1 850.00 1 850.00
2 Debtors per 7 800.00 800.00 2 650.00
15 Cash sale 20 1 100.00 1 100.00
26 Debtors 8 –12 5 810.00 5 810.00 5 810.00
30 Cash sale – 21 750.00 750.00 750.00
3 000.00 3 700.00 6 610.00 13 310.00
Cash payments journal

Date Cheque Particulars Folio Sundries Cash Creditors Total
no purchases bank
Mar 021 Van Schaiks (16) 38.40 38.40

4 Stationery
6 022 Sailboard Man
paid account 3 000.00 3 000.00
10 023 Rentkor – rent (17) 300.00 300.00
16 024 Petty cash (18) 80.50 80.50
17 025 New Wave Co
Cash purchase 1 930.00 1 930.00
26 026 Sailboard Sail Co –
account 550.10 550.10
27 027 Nedbank (19) 350.00 350.00
instalment
30 028 Strong Line Co
Cash purchase 133.45 133.45
31 029 Cash wages (20) 410.00 410.00
1 178.90 2 063.45 3 550.10 6 792.45

(14) (15)
220
Carry out the following steps to see how the cash reconciliation statement is
drawn up from the bank statement, the cash receipts journal and the cash
payments journal.
1. Compare deposits in the bank statement with those in the cash receipts
journal.
2. Mark off the cheques on the bank statement that are also in the cash
payments journal.
3. Mark as outstanding any items on the bank statement that do not appear in
the cash journals. Make a list of them.
You should mark the following:
Cheque book (CB) R8.10

Commission (CO) R5.00
Ledger fees (LF) R11.20
Total bank charges = R24.30
Stop order – insurance (SO) R45.00
Unpaid cheque (IU) R1 120.00
4. Enter these items in the supplementary bank account. Remember, the bank
has already reduced your account by these amounts.
5. Post to the ledger accounts and do a supplementary bank account.
5.1 Post to the following ledger accounts:
Debtors
Bank Charges
Insurance
5.2 Do a bank reconciliation on 31 March 2013.
Solution:
Dr Supplementary bank account Cr
Mar 31 Total CRJ 13 310 Mar 31 Total CPJ 6 792.45
Bank charges 24.30
Insurance 45.00
Debtors 1 120
(unpaid ch)
Balance b/d 5 328.25
13 310 13 310
Apr 1 Bal b/f 5 328.25
Mark these same items on the bank statement as no longer outstanding. All
items on the bank statement should now be marked.
221
Accounting for All
Insurance 22
Mar 31 Bank CB10 45.00
Bank charges 21
Mar 31 Bank CB10 24.30
Debtors 12
Mar 31 Bank CB10 1 120.00
6. Check the cash journals for unmarked items.
You should notice the following:
In cash receipts journal In cash payments journal

Cash sale on 30 Mar R750 Cheque no 27 R350.00
Cheque no 29 (cash wages)
R410.00
7. Draw up reconciliation statement as per example below.
Bank reconciliation statement as at 31 March 2013

Debit Credit
R R
Balance per bank statement 5 338.25
Debit outstanding cheques 027 350
029 410
Credit outstanding deposits 750
Balance per bank account 5 328.25
6 088.25 6 088.25
Remember that once you have recorded these items they

must still be posted to the ledger accounts.
To make sure that you do understand let us look at another example.
222
Example 6.2
Reconcile the bank statement with the bank account shown overleaf.
Bank statement of J&J Ewing for September 2013

Date Particulars Debits Credits Balance
R R R
Balance 371.00
5 Deposit 500.00 871.00
Cheque 008 450.00 421.00
Cheque book 4.00 417.00
Service fee .60 416.40
7 Cheque 009 200.00 216.40
11 Deposit 192.00 408.40
Cheque 011 38.50 369.90
25 Deposit 400.00 769.90
Cheque 013 68.00 701.90
Service fee 1.00 700.90
Deposit 40.00 740.90
28 Cheque 014 34.76 706.14
29 S/O (insurance) 50.00 656.14
Cheque 015 375.00 281.14
Dr Bank account – September 2013 Cr

30/9 Balance b/f 371.00
4 Debtors 500.00 2 Equipment 450.00
11 Debtors 192.00 8 Purchases 200.00
25 Debtors 400.00 10 Creditors 84.00
27 Rent paid 40.00 12 Stationery 38.50
30 Debtors 224.46 18 Telephone 35.20
24 Creditors 68.00
25 Freight 34.76
30 Salaries 375.00
30 Balance b/d 442.00
1 724.46 1 727.46
1/10 Balance b/f 442.00
223
Accounting for All
Solution:
You have to adjust your bank account with the items
that appear on the bank statement but not yet recorded
in your books.
At this point in time your bank account in the general ledger looks like this:
The outstanding items are:
 Insurance R50
 Bank charges R5.60
Record these items in your supplementary cash book. These items must still be
posted to the ledger accounts.
Dr Supplementary bank account Cr

Oct 1 Balance b/f 442.00 30 Bank charges 5.60
Insurance 50.00
Balance c/o 386.40
442.00 442.00
1 Balance b/f 386.40
Use the adjusted balance of R386.40 on the bank reconciliation statement.
Bank reconciliation statement for September 2013

Debit Credit
R R
Balance per bank statement 281.14
Debit outstanding cheques 010 84.00
012 35.20
Credit outstanding deposits 224.46
Balance per bank account 386.40
505.60 505.60
Notice how:
 We debit the cheques not yet presented for payment.
 We credit the outstanding deposits.
224
6.5 Comparison of the bank statement with the cash receipts

journal and cash payments journal (or the bank account)
of the current month with the bank reconciliation
statement of the previous month
When a bank reconciliation statement is prepared in successive months (as occurs
in practice), the bank statement should be compared with the previous month’s
bank reconciliation statement.
From this the following deductions can be made:
 The entries on the bank reconciliation statement for month one, such as
outstanding deposits and outstanding cheques, will probably appear in the
bank statement for month two.
 When the bank statement for month two is received, it must be compared
with the bank reconciliation statement for month one and the cash book or
bank account for month two.
 A cheque which has not been presented may appear in the bank reconciliation
statement for more than one month. A cheque usually expires after six months
– only then is it not paid by the bank.
This principle is clearly illustrated in the following exercise.
Example 6.3
Use the information in the books of Naidoo Traders to complete the following:
6.3.1 Compare the bank statement with the bank reconciliation statement on 31
July and with the bank account for August.
6.3.2 Prepare a supplementary cash book.
6.3.3 Prepare the bank reconciliation statement on 31 August 2013.
Information
1. Bank reconciliation statement at July 2013
Debit Credit
R R
Balance per bank statement 6 780
Debit outstanding cheques 326 295
328 1 325
330 3 450
Credit outstanding deposits 7 275
Balance per bank account 8 985
14 055 14 055
225
Accounting for All
2.
Dr Bank account – August 2013 Cr
Balance b/d 8 985 331 7 Telephone 274
7 Debtors 5 293 332 7 Wages 1 800
14 Sales 6 275 333 8 Purchases 7 275
21 Debtors 6 979 334 10 Creditors 5 560
28 Debtors 8 555 335 12 Stationery 3 385
31 Sales 7 440 336 14 Wages 2 100
337 20 Equipment 3 600
338 21 Wages 2 200
339 24 Creditors 6 345
340 28 Wages 2 300
341 30 Drawings 1 000
342 31 Purchases 3 360
343 31 Creditors 4 440
31 Bal b/f 112
43 527 43 527
1 Bal b/f 112
3. The credit of R1 500 on the bank statement on 17 August is for rent

deposited directly by the tenant.
Items in the bank statement not in bank account
Service fee R 133
Credit card levy R 24
Bank charges R 157
S Samules (unpaid cheque) R 250
Water & electricity R 267
Rent received R1 500
Interest received R 123
226
Items in bank account not in bank statement

Deposit R7 440
Cheque numbers 341 R1 000
342 R3 360
343 R4 440
RSA Bank Ltd – August 2013

4. Bank statement of Naidoo Traders
Credits (+)
(deposits, etc)
Debits (–)
Description (Cheques, etc) Date Balance
R R
Balance brought forward 2013-08-01 6 780.00
Previous Bank Recon (credit) 7 275.00+ 2013-08-01 14 055.00
Cheque no 328 1 325.00– 2013-08-01 12 730.00
Cheque no 330 3 450.00– 2013-08-02 9 280.00
Cheque no 331 274.00– 2013-08-02 9 006.00
Cheque no 326 295.00– 2013-08-03 8 711.00
Cheque no 332 1 800.00– 2013-08-07 6 911.00
Debtors (credit) 5 293.00+ 2013-08-07 12 204.00
Service fee 115.00– 2013-08-08 12 089.00
City Council 267.00– 2013-08-09 11 822.00
Cheque no 333 7 275.00– 2013-08-09 4 547.00
Cheque no 335 3 385.00– 2013-08-12 1 162.00
Cheque no 334 5 560.00– 2013-08-13 4 398.00
Cheque no 336 2 100.00– 2013-08-14 6 498.00
Sales (credit) 6 275.00+ 2013-08-14 223.00
Unpaid cheque 250.00– 2013-08-15 473.00
Credit card levy 24.00– 2013-08-16 497.00
Credit 1 500.00+ 2013-08-17 1 003.00
Cheque no 337 3 600.00– 2013-08-20 2 597.00
Cheque no 338 2 200.00– 2013-08-21 4 797.00
Debtors (credit) 6 979.00+ 2013-08-21 2 182.00
Cheque no 339 6 345.00– 2013-08-25 4 163.00
Debtors (credit) 8 555.00+ 2013-08-28 4 392.00
Cheque no 340 2 300.00– 2013-08-29 2 092.00
Interest on credit balance 123.00+ 2013-08-30 2 215.00
Levy on debit transactions 18.00– 2013-08-31 2 197.00
Note:
1. The payment of R267 to the City Council is for a debit order for water and
electricity.
2. The unpaid cheque was received from S Samuels on 14 August and
dishonoured on account of insufficient funds.
227
Accounting for All
Solution:
Dr Supplementary cashbook Cr
31 Rent 1 500 Balance b/f 112
Interest 123 Bank charges 157
Debtors 250
Water & electricity 267
Balance b/d 837
1 623 1 623
1 Balance b/f 837
Bank reconciliation statement

Debit Credit
R R
Debit outstanding cheques 341 1 000
342 3 360
343 4 440
Credit outstanding deposits 7 440
Balance per bank account 837
9 637 9 637
The purpose of a bank reconciliation is to ensure that the records of the business
(contained in the bank account) agree with the records of the bank (reported in the
bank statement).
The records may differ because of:

 differences in timing and content
 errors in recording
The bank reconciliation statement brings the records in the cash receipts and
payments books into line with the bank statement.
228
Questions
Question 6.1
Dr Bank account of L Tshebe for August 2013 Cr
Doc Date Details Fol Amount Doc Date Details Fol Amount
no no
1 Balance b/f 479.30 188 1 Creditors 280.00
2 Deposit 313.00 189 6 Purchases 494.00
10 Deposit 587.30 190 10 B Brown 176.55
14 Deposit 300.00 191 15 Transport
20 Deposit 484.45 costs 85.00
31 Deposit 296.65 P Pelser
(cheque
refused) 65.00
192 20 Printing
costs 110.00
193 26 Telephone 28.40
194 29 W Willers 410.20
195 31 Salaries 520.00
Balance b/o 291.55
2 460.70 2 460.70
1 Balance b/f 291.55
229
Accounting for All
Bank statement of L Tshebe for August 2013

Date Transaction description Debit Credit Balance
Aug R R R
1 Balance 479.30 Cr
Deposit (debtor) 181.94 661.24
2 Deposit (debtor) 313.00 974.24
3 Cheque no 188 280.00 694.24
7 Cheque no 189 494.00 200.24
Cheque book fees 14.20 186.04
Debit order (insurance) 166.40 19.64
10 Deposit 587.30 606.94
14 Deposit order (salary) 300.00 306.94
Cheque unpaid (P Pelser) 65.00 241.94
Bank charges 1.10 240.84
Deposit (bill receivable) 300.00 540.84
17 Cheque no 190 176.55 364.29
20 Deposit 484.45 848.74
25 Cheque no 191 85.00 763.74
28 Deposit (rent) 110.00 873.74
Bank charges 8.50 865.24
31 Cheque no 195 520.00 345.24
Cheque unpaid (V Vos) 25.49 319.75 Cr
Remarks:
1. Deposit on the first, was made by a debtor, A Spies.
Required:
Prepare the supplementary cash book and the bank reconciliation at the end of
August 2013.
230
Question 6.2
Bank statement of K Kumalo, 862 Code Avenue, Pretoria Sept 2013
Date Numbers Debit Credit Balance
R R R
1/9/2013 1 200
5/9/2013 250 1 450
6/9/2013 810 210 1 240
9/9/2013 620 1 860
12/9/2013 811 32 1 828
18/9/2013 813 52 1 776
80 1 856
20/9/2013 812 644 1 212
21/9/2013 S/F 1 1 211
C/U 80 1 131
28/9/2013 840 1 971
816 300 1 671
29/9/2013 815 24 1 647
S/O 250 1 397
30/9/2013 100 1 497
S/F 2 1 495
C/B 8 1 487
List of abbreviations:
C/B = Cheque book Int = Interest

R/D = Refer to drawer S/O = Stop order
C/U = Cheque unpaid E/C = Error corrected
S/F = Service fee S/D = Sundry debits
231
Accounting for All
The cash book for September is as follows:

Dr Supplementary bank account of K Kumalo for September 2013 Cr
Doc no Date Details Fol Amount Doc no Date Details Fol Amount
1 Balance 1 200 810 3 P Prins 210
D8 5 Deposit 250 811 9 Stationery 32
D9 8 Deposit 620 812 12 Purchases 644
D10 18 Deposit 80 813 Fuel 52
D11 28 Deposit 840 814 21 S Louw 106
D12 30 Deposit 240 815 25 Telephone 24
816 28 Salaries 300
817 Purchases 200
30 Balance 1 662
3 230 3 230
1 Balance 1 662
 The unpaid cheque of R80 on 21 September 2013 was received from K
Kostner a debtor and was deposited on 18 September 2013. The dishonoured
cheque and a debit note were attached to the bank statement.
 The stop order of R250 on 29 September 2013 is for an insurance premium
paid monthly.
 The deposit of R100 on 30 September 2013 is for rent which the tenant,
P Nel, paid directly into the bank account of K Kumalo.
Required:
Compile the supplementary bank account for September 2013 and prepare a bank
reconciliation at 30 September 2013.
Question 6.3
The following information was taken from the records of Circle Ltd:
Summary of entries on the debit side of the bank account for December 2013
Date Details Bank
R
1 M Matla 3 000
3 W Willemse 7 500
4 Commission received 500
7 Rent received 4 000
8 M Hanza 2 200
12 C Jamwell 2 800
20 000
232
Summary of entries on the credit side of the bank account for December
2013
Date Details Cheque Bank
no
R
4 D Sheepers 150 500
7 Inventory 151 2 400
12 Water and lights 152 1 600
15 A le Roux 153 80
16 Salaries and wages 154 1 250
18 Telephone 155 250
20 Rent paid 156 2 300
21 Inventory 157 7 300
23 M Norton 158 920
16 600
Bank reconciliation statement, as at 30 November 2013

Debit Credit
R R

Debit: Outstanding cheques
No 140 2 200
No 145 2 800
No 146 1 000
Credit: Outstanding deposits 1 700
Balance per bank account 500
6 500 6 500
233
Accounting for All
Bank statement for the month of December 2013

Date Details Debit Credit Balance
R R R
1 Balance 4 800 Cr
1 Deposit 1 700 6 500
2 Deposit 3 000 9 500
4 Deposit 7 500 17 000
5 150 500 16 500
5 140 2 200 14 300
6 Deposit 500 14 800
8 146 1 000 13 800
9 151 2 400 11 400
10 Deposit 4 000 15 400
11 Deposit 1 200 16 600
13 152 1 600 15 000
16 153 80 14 920
16 154 1 250 13 670
20 155 250 13 420
24 157 7 300 6 120
26 D/O 170 5 950
30 Interest 25 5 975
31 Bank charges 430 5 545 Cr
1. The deposit on 11 December was made by a debtor, Mr Barnardo who paid
the amount directly into the business’s bank account.
2. The debit order is for insurance.
Required:
Prepare the supplementary cash book and the bank reconciliation statement for
December 2013.
Question 6.4
The following information was obtained after comparing the cash books of XYZ
(Pty) Ltd, with their bank statement on 31 October 2013:
2013
Oct 1 Cash book balance on 31 October 2013, R780 (Cr).
3 Unfavourable balance per bank statement, R1 167.
4 The bank debited the company’s account with a cheque drawn by VWX
(Pty) Ltd, by mistake, R240.
5 A deposit of R87 which was paid directly into the company’s account by
debtor D Buys, has not yet been recorded in the books.
6 Cheque no 330 for R303, issued on 14 October 2013, has not been
presented to the bank for payment.
234
7 A deposit of R400 recorded in the cash receipts journal does not appear
on the bank statement.
8 Bank charges of R32 and bank interest of R17 appear on the bank
statement, but have not been recorded in the records of XYZ (Pty) Ltd.
9 No entry has been made in the company’s records relating to a cheque
returned by the bank and marked ‛refer to drawer’. The cheque amounted
to R88 and was received from S van Wyk in settlement of his account.
Required:
6.4.1 Compile the supplementary bank account.
6.4.2 Beginning with the balance per bank statement, prepare the bank
reconciliation as at 31 October 2013.
Question 6.5
After comparing the cash book for September 2013 and bank reconciliation
statement at 31 August 2013 of G Giant with their bank statement at
30 September 2013, the following differences were found:
R
1. Debit balance of the bank account in general ledger at 5 869
31 August 2013.
2. Favourable balance as per bank statement at 30 September 2013. 7 394
3. Items that appeared on the bank reconciliation statement at
31 August 2013 but not on the bank statement of September 2013:
3.1 Cheque no 214 issued to a creditor on 28 July 2013. 202
4. Items that appeared in the cash receipts and cash payments journals,
but not on the bank statement:
4.1 A deposit by G Giant on 30 September 2013. 4 833
4.2 Cheque no 288. 619
5. Items that appeared on the bank statement but not in the cash journals:
5.1 Bank charges (ledger fees). 53
5.2 Interest on bank overdraft. 72
5.3 A stop order in respect of an annual donation to the University
of Pretoria. 300
5.4 An R/D cheque that was originally received from debtor John
Silver. 440
5.5 A deposit which was paid directly into the bank account of
G Giant by a tenant, Peter Gold. 2 800
6. Cheque no 197 for R345 issued on 15 March 2013 is stale and must be
cancelled. The cheque was issued to C Cloud for an advertising campaign.
7. The bank credited, erroneously, the account of G Giant with a deposit for
White Shark for R3 707.
235
Accounting for All
8. Cheque no 273 issued to a creditor B Taylor for R1 850 was erroneously

entered in the cash payments journal as R1 400.
Required:
6.5.1 The supplementary cash book for September 2013.
6.5.2 The bank reconciliation statement at 30 September 2013.
Question 6.6
The given information was taken from the books of Flintstone after the bank
account had been compared with the bank statement but before any corrections or
supplementary entries were made. Take the differences between the bank account
and the bank statement into consideration and do the following:
6.6.1 Prepare the supplementary entries in the bank account for 31 August
2013.
6.6.2 Take the given information into consideration and prepare the bank
reconciliation statement at 31 August 2013.
Bank reconciliation statement of Flintstone at 31 July 2013
Debit Credit
R R
Debit balance according to the bank statement 144
Credit outstanding deposit 900
Debit cheques not yet presented for payment:
No 400 238
No 406 766
No 407 454
Credit balance according to the bank account 702
1 602 1 602
After the necessary comparisons were made the following was found:
1. Debit side total of bank account (total money received during August 2013)
R29 100.
2. Credit side total of bank account (total money paid during August 2013)
R24 440.
3. The debit side of the bank account showed a deposit of R946 on 30 August
2013 which does not appear on the bank statement of August 2013.
4. The credit side of the bank account showed the following cheques which had
not yet been presented to the bank for payment:
No 416 – R788.
No 439 – R540.
5. A cheque received from Charlie Brown for R396 was returned by the bank
on 28 August 2013 marked ‛R/D’.
236
6. Cheque no 400 for R238 was issued in March 2013 in favour of ‛Good
News’ for an advertisement. The advertisement was not placed. Payment of
the cheque was stopped and must be cancelled.
7. Cheque no 620 for R490 was received from Garfield on 26 August 2013 and
deposited. This cheque was dishonoured by the bank because it was post-
dated for September 2013. This cheque was held for redepositing later.
8. The bank statement had the following transactions but it did not appear on
the bank account of August 2013:
 Cheque no 407, R454
 The outstanding deposit from a debtor on 31 July 2013, R900.
 Little Lotta deposited the rental for August 2013, of
R1 200 directly into the bank account of the business.
 A stop order in favour of Superb Insurance for fire insurance, R500.
 A deposit of R760 which was erroneously deposited into the bank
account of Flintstone instead of Flightstone.
 A cheque for R150 drawn on the personal account of Fred Flintstones
(the owner), was debited to the business bank account in error.
 Cheque no 224 for the amount of R196, drawer P Jonty was received on
20 August 2013 and deposited. The cheque was dishonoured by the
bank due to insufficient funds.
 Service fees, R134 and interest on credit balance, R126.
 On 31 August 2013 the bank statement showed a balance of R5 564
(Cr).
Question 6.7
The given information has been taken from the books of Our Store.
Instructions:
6.7.1 Compare the bank statement of September 2013 with the bank
reconciliation statement on 31 August 2013, as well as with the bank
account of September 2013. Make the supplementary entries in the bank
account on 30 September 2013.
6.7.2 Draw up the bank reconciliation statement at 30 September 2013.
237
Accounting for All
Data:
Bank reconciliation statement of Our Store at 31 August 2013
Debit Credit
R R
Debit balance according to bank statement 374
Credit outstanding deposit 396
Debit deposit wrongly credited 200
Debit outstanding cheques:
No 215 58
No 216 208
No 219 224
No 221 390
Credit balance according to bank account 1 058
1 454 1 454
Dr Bank account – September 2013 Cr

1 Sales 700 Balance b/d 1 058
12 Sales 488 222 2 Equipment 240
28 Debtors 710 223 12 Creditors 60
30 Sales 480 225 18 Creditors 265
226 20 Telephone 40
227 22 Creditors 242
228 26 Creditors 244
229 30 Salary 1 300
30 Balance b/f 1 071
3 449 3 449
30 Bal b/d 1 071
238
Bank statement of Our Store at September 2013

Number Cheques, Deposits Date Balance
etc
R
20x3-09-01 300.00 Dr
EC 200.00 20x3-09-01 500.00
396.00 20x3-09-01 104.00
219 224.00 20x3-09-01 328.00
700.00 20x3-09-02 372.00 Cr
222 240.00 20x3-09-03 132.00
420.00 20x3-09-03 552.00
54.00 20x3-09-10 606.00
223 60.00 20x3-09-12 546.00
448.00 20x3-09-12 994.00
UN 142.00 20x3-09-15 85200
493 80.00 20x3-09-16 772.00
225 265.00 20x3-09-19 507.00
224 47.00 20x3-09-19 460.00
710.00 20x3-09-20 1 170.00
2 150.00 20x3-09-21 3 320.00
IN 24.00 20x3-09-21 3 296.00
215 85.00 20x3-09-22 3 211.00
226 40.00 20x3-09-22 3 171.00
227 224.00 20x3-09-27 2 947.00
UN 60.00 20x3-09-28 2 887.00
80.00 20x3-09-28 2 967.00
228 244.00 20x3-09-28 2 723.00
65.00 20x3-09-29 2 788.00
PT 200.00 20x3-09-30 2 588.00
PT 90.00 20x3-09-30 2 498.00
PT 1 400.00 20x3-09-30 1 098.00
PT 100.00 20x3-09-30 998.00
SF 28.00 20x3-09-30 970.00
TL 3.00 20x3-09-30 967.00
PT 500.00 20x3-09-30 467.00 Cr
ABBREVIATIONS:
UN = Unpaid cheque
SF = Service fee
PT = Stop order
EC = Error corrected
TL = Tax levy
IN = Interest
239
Accounting for All
 Cheque no 216 was issued to the Joly Recreation Club as a donation. The
club was disbanded and the cheque must be cancelled.
 The deposit of R420 made on 3 September 2013 by B Malherbe was in
payment of rent for September 2013.
 The deposit of R54 made on 10 September 2013 was deposited into the
account of OS Traders and erroneously credited against the account of Our
Store by the bank.
 The unpaid cheque for R142 was received from K Kotze on 12 September,
but dishonoured because of insufficient funds.
 The unpaid cheque for R60 was received from V Vosloo on 28 September
2013, but dishonoured because it was dated 3 October 2013. Retain the
cheque to be redeposited later.
 Cheque no 493 for R80 was erroneously debited on the bank statement of Our
Store. It was drawn by OS Traders.
 The deposit made on 12 September 2013 was erroneously credited by the
bank as R448 instead of R488.
 The amount shown on the bank statement for cheque no 227 is incorrect.
 The deposit on 21 September 2013 was for an expired fixed deposit at BB
Bank, R2 000 and interest on the fixed deposit for the last six months, R150.
 The deposit of R80 was made on 28 September 2013 by debtor P Pieterse as
payment on his account.
 The deposit of R65 on 29 September 2013 was made by S Sorry in settlement
of his debt which has already been written off as irrecoverable during August
2013.
 The amount of cheque no 224 on 15 September, issued to Brain and Son was
completely omitted from the bank account.
 Cheque no 215 issued to BB Motors for fuel during August 2013 is correct on
the bank statement. The amount was entered incorrectly in the cash payments
journal of August 2013.
 The stop orders which appear on the bank statement are for the following
monthly payments:
– To Best Insurance Company for insurance premium of the company,
R200.
– To Life Insurance Company for the personal life insurance premium of
the owner A Allen, R90.
240
– To employee N Simons for his monthly salary, R1 400.

– To Lenders Limited for the repayment of a loan, R500.
 The stop order for R100 on the bank statement has been erroneously
debited to Our Store. It should have been debited against the account of
OS Traders.
Question 6.8
Use the given information to do the following in the books of Visser Stores.
6.8.1 Complete the bank account for June 2013.
6.8.2 Prepare the bank reconciliation statement at 30 June 2013.
Bank reconciliation statement of Visser Stores at 30 May 2013
Debit Credit
R R
Debit balance as per bank statement 2 072.65
Credit outstanding deposit 1 570.73
Debit cheques not presented for payment:
No 3928 225.00
No 4162 477.90
No 4169 309.00
Credit post-dated cheque deposited 367.50
Debit amount credited by mistake 163.50
Credit balance as per bank account 1 309.82
3 248.05 3 248.05
Additional information in respect of the bank reconciliation statement:
 Cheque 3928 was issued in favour of ML Sports Club as a donation. The
club has ceased to exist.
 The bank statement for June was received on 30 June 2013 and showed a
debit balance of R1 557.40. The bank account showed a debit balance of
R1 320 on 30 June 2013. A comparison of the bank statement for June with
the bank account for June exposed the following differences.
1. Entries on the bank statement which do not appear on the bank account.
Credit entries:
Deposit, R1 570.73
Deposit, R1 000. (This amount was deposited on the current account by the
lessee, P Els.)
Mistake of previous month, debited on bank statement of June 2013,
R163.50
241
Accounting for All
Debit entries:
Error corrected, R163.50
Unpaid cheque, R2 457.12. This cheque was received from S Roux. The
cheque was dishonoured because of insufficient funds.
Unpaid cheque R187 from A Cube because of insufficient funds.
Stop order, R136.35. (This stop order is in favour of WAG Insurance

Company for an insurance premium.)
Unpaid cheque, R78.50. (This cheque was not signed by the drawer, K
Loubser. As soon as Loubser signs the cheque it will be redeposited.)
Cheque, 9908, R45. (The drawer of this cheque is Victor Stores and not
Visser Stores.)
Cash handling fee, R7.80.
Tax levy, R6.90.
Service fees, R36.50.
Interest on overdraft, R24.33.
2. Entries on debit side of bank account which do not appear on the bank
statement.
Deposit, R2 427.30
3. Entries on credit side of bank account which do not appear on the bank
statement.
Cheque 4209, R361 (dated 27 June 2013).
Cheque 4211, R479 (dated 10 July 2013).
4. Errors traced.
Cheque 4200 for R327, issued in favour of JJ Motors on 25 June 2013 to pay
for repairs, was entered on the credit side of the bank account as R372.
Question 6.9
The following information was taken from the records of Delta Traders on
31 October 2013.
On 31 October 2013 the bank account had a balance of R2 260. On 31 October
2013 the bank statement had a favourable balance of R1 316.
From a comparison between the bank statement and the bank account for October
2013, the following differences were noted:
1. Cheque no 530, issued on 20 September 2013 for R400, in favour of City
Primary School as a donation had not yet been cashed on 31 October 2013.
On enquiry it was found that the cheque was lost. The cheque must be
cancelled and replaced by cheque no 670 (issued on 31 October 2013).
2. A deposit of R2 970 had not yet been credited by the bank.
242
Notes
CHAPTER 7
THE TRIAL BALANCE
7.1 Introduction
In the previous chapters the source documents, subsidiary journals and posting to
the ledger were discussed. In this chapter we are going to check whether we have
applied the principle of double-entry. Remember the basis of double-entry
bookkeeping: for every debit there must be an equal credit entry. If the double-
entry bookkeeping system was accurately followed, the total of the debit column
should equal the total of the credit column. To summarise, the purpose of the trial
balance is to check whether a debit entry was made for every credit entry.
 Draw up a list of all the balances in the general ledger
 Compile a trial balance from a list of balances
 Check whether your trial balance balances
 Identify errors and their possible sources
 Correct errors using a suspense account
 Correct errors using the general journal
7.2 What is a trial balance?

The trial balance is a format where we take all the balances of all the accounts.
This list of balances, extracted from the general ledger is what we call the trial
balance.
Because of the double-entry principle in accounting (for every debit, there is a
credit) the trial balance will balance. (Debit side will be equal to credit side.)
The trial balance has two columns next to each other on the right-hand side. First
column is the debit column; second column is the credit column.
Example 7.1
Trial balance of..................................................as at 31 December 2013
Debit Credit
The total of the debit side must be the same as the total of the credit side. If the
total of all the amounts in the debit column add up to R105 000, then the total of
the credit column must also add up to R105 000.
Chapter 7 The trial balance
Furthermore the trial balance consists of two sections.

These two sections can be explained as follows.
Balance sheet Nominal

section accounts section
All assets and All income and

liabilities expenses
accounts accounts
The trial balance is just used as a worksheet to correct balances and to check the
accuracy of the double-entry bookkeeping system.
Remember, maybe only the amount of the accounts will be given to you. You
must know that all:
Assets Liabilities
Expenses Income
Drawings Capital
Debit balances Credit balances
245
Accounting for All
Example 7.2
The following balances were taken from the books of Xerox Disks at 28 February
2013:
R
Office equipment @ cost 3 000
Accumulated depreciation: office equipment 1 500
Delivery vehicles @ cost 112 000
Accumulated depreciation: delivery vehicles 7 000
Trading inventory: 28 February 2013 61 200
Trade receivables 13 000
Allowance for credit losses 400
Bank 30 040
Capital: Xerox 177 000
Drawings: Xerox 24 000
Trade and other payables 41 400
Cost of sales 152 500
Salaries 11 400
Rent paid 3 480
Advertisements 1 200
Insurance 960
Municipal costs 1 280
Sundry operating costs 240
Sales 187 000
Required:
Prepare the trial balance of Xerox Disks at 28 February 2013.
Solution:
Trial balance of Xerox Disks as at 28 Feb 2013
Debit Credit
Statement of financial position section R R
Acc dep: office equipment 1 500
Vehicles @ cost 112 000
Acc dep: vehicles 7 000
Inventory 61 200
Bank 30 040
Capital 177 000
Drawings 24 000
246
Nominal accounts section

Sales 187 000
Salaries 11 400
Rent paid 3 480
Advertising 1 200
Insurance 960
414 300 414 300
7.3 When all balances are correct but a balance is omitted

It can happen that all the balances are correct and on the correct side but a certain
balance was omitted, eg the bank account. The amount for the bank will then be
the total of the debit side less the total of the credit side.
In other words, the bank account will be the account ‛used’ to balance the debit
column and credit column of the trial balance.
Example 7.3
Trial balance of Excelscior as at 30 June 2013
Debit Credit
Vehicles 20 000
Drawings 10 000
Capital 60 000

Sales 200 000
Salaries 25 000
Water & electricity 15 000
220 000 300 000
* Note: The bank balance was omitted.
The total of the debit side is R220 000, and the total of the credit side is
R300 000. Thus the debit side is deficient by R80 000. This will be the bank
balance.
247
Accounting for All
Solution: Debit Credit

Vehicles 20 000
Drawings 10 000
Capital 60 000
Bank 80 000

Sales 200 000
Salaries 25 000
300 000 300 000
Because the credit side was bigger than the debit side the bank balance is a debit.
If the debit side was bigger than the credit side, the bank balance would have been
a credit balance.
7.4 Errors not revealed by the trial balance

The fact that the total of the debit column balances with the total of the credit
column does not necessarily imply that your accounting records are accurate.
The following types of errors will not show on a trial balance.
 Omission of a transaction
When a transaction has been omitted it means that neither a debit nor a credit
entry has been made and therefore it will not affect any balances.
For example:
Suppose Mojani Traders purchased stationery on account but due to work
pressure the bookkeeper did not process the invoice immediately. The invoice was
then misplaced and never entered into the accounting system. This invoice cannot
create an imbalance on the trial balance.
 Posting to a wrong account
It may happen that two accounts are debited and credited respectively, but that
one of the two accounts in the transaction has been incorrectly identified. As long
as a debit and equal credit entry was made, the trial balance will balance.
For example:
Mojani Traders receives and processes an expense claim that a member of staff
incorrectly allocated to project A instead of project B. In the general ledger
project A is debited and the bank account credited. A double-entry showing the
same amount on the debit and the credit side of the general ledger has been made.
This entry cannot create an imbalance on the trial balance.
248
 Compensating error
A compensating error occurs when an error on one side of the ledger, eg R20, is
cancelled by another error of exactly the same amount, R20, on the other side of
the ledger.
For example:
The following two postings were done in the books of Archie Andrews:
Debit bank R100 and Debit creditors R120

Credit debtors R120 Credit bank R100
leaving R20 on the leaving R20 on the
credit side debit side
Balances
If the two errors balance one another out, it cannot create an imbalance on the trial
balance.
 Principle error
If principles of bookkeeping and the double-entry system are not applied or
understood, errors of principle are made.
For example:
Suppose a creditor was paid R100 for goods received and the following entry was
made:
Debit bank R100

Credit creditors R100
instead of
Debit creditors R100
Credit bank R100
If the debit and the credit side of the general ledger show the same entry, R100,
irrespective of whether it was posted to the right account or not, the mistake will
not show on the trial balance because there was an equal debit and credit entry.
Even though the error can’t be found on the trial balance, it can be found. Most of
these errors will come to light when doing the month end reconciliations. A
supplier’s invoice not captured will show on his statement. A cheque or a receipt
that wasn’t captured will show on the bank statement. In the event of a posting to
a wrong account, the same principle will apply. A customer will soon let you
know if you didn’t process a payment or have entered an invoice incorrectly.
All errors will eventually be found.
249
Accounting for All
When the error is found, the correcting entry will be made in the general journal
from where it will be posted to the general ledger.
7.5 Errors revealed by the trial balance
When the debit column of the trial balance does not balance with the credit
column, an error must have been made.
 Transposition error
If the difference between the two columns is divisible by nine, there is a good
chance that the reason for the error was transposition. A transposition error is
where two numbers are turned around when the amount is posted.
 Omission error
It may happen that the accountant/bookkeeper posts one side of a transaction but
somehow forgets to post the other side of the transaction. In such a case the
accountant should look for an amount equal to the difference between the two
columns of the trial balance.
 Error of commission
Where an error of commission has been made the difference between the
balancing columns of the trial balance will be divisible by two. The amount to
look for is the balancing difference, divided by two. The correction will be for the
total of the difference in the trial balance.
Difference
between debit ÷ 2 = amount to
and credit look for
column
Apart from the errors listed above, many other may occur, including:
 The column totals of the trial balance were incorrectly calculated. When the
columns don’t balance, your first reaction should be to check your
calculations.
 The balances of the ledger accounts were incorrectly transferred to the trial
balance. This may be due to:
– an account completely omitted
– a debit balance transferred as a credit balance, or vice versa
– a ledger balance entered twice onto the trial balance (this can happen
when the business has many accounts).
 The balance of a ledger account was incorrectly calculated.
 A posting from the general journal to the general ledger was done incorrectly,
either the wrong amount has been transferred or a debit entry has been made
when it should have been a credit entry.
250
7.6 Correcting errors in the books of account and/or trial

balance
Regardless of the reason for the error, it has to be corrected as soon as it is found.
One method of correcting these errors is to make use of a suspense account.
A suspense account is a temporary account which is opened when an imbalance is
found anywhere in the books of account, for example:
 when a trial balance does not balance
 when recording a transaction where only one part of the double-entry can be
correctly made
 when a control account does not balance with the supporting ledger
The general journal will normally be used to correct accounting entries. Entries
into the general journal are based on the double-entry bookkeeping system
requiring a debit and a credit entry. Errors corrected by the suspense account refer
to errors where one part of the transaction has already been recorded and only a
single correcting entry is required. With these types of errors, the general journal
cannot be used as a correcting tool.
Example 7.4
At the end of the accounting period the bookkeeper finds that the total on the
debit side of the trial balance does not balance with the total on the credit side.
The debit side is R893 less than the credit side.
Trial balance of ... for the period ended....

Debit Credit
Total R R
24 365.00 25 258.00
Difference 893.00
To correct the error temporarily the bookkeeper adds another entry to the trial
balance (which is only a worksheet) called the suspense account. In the column
with the lesser amount he now enters the difference of R893.00. This will be a
single entry, not a double entry since the other half of the entry caused the
imbalance. If we make a double entry, the difference between the two columns
will remain as is.

Debit Credit
Total R R
24 365.00 25 258.00
Suspense account 893.00
Total 25 258.00 25 258.00
251
Accounting for All
The bookkeeper will now continually be reminded that there is an error to look for
whilst the trial balance will, for the time being, balance.
Suppose purchases of R893 were not posted to the purchases account.
The initial entry looked as follows:
Debit purchases R893

Credit creditors R893
Although the creditors control account was credited with R893 the bookkeeper
forgot to post the double entry to the purchases account.
The correction is firstly recorded on the trial balance. The discrepancy on the trial
balance (the credit side is R893 bigger than the debit side) is firstly entered onto
the debit side of the suspense account in the ledger with the second correcting
double entry going through on the credit side of the suspense account and the
debit side of the purchases account. This leaves the suspense account with a nil
balance.
The trial balance will now look as follows:

Debit Credit
R R
Total 24 365.00 25 258.00
Suspense account (1) 893.00 (2) 893.00
Purchases (2) 893.00
Total 25 258.00 25 258.00
The entry to correct the error is entered into the general journal and posted to the
general ledger.
Debit Credit
Debit purchases R R
893.00
Credit suspense account 893.00
To correct error in suspense account
The purchases account will now reflect the correct total and the suspense account
will have a nil balance.
Let’s look at how we will use the suspense account to correct an error of
transposition, omission and commission.
252
Example 7.5
At the end of the financial year, 31 December 2013, the bookkeeper finds that the
total of the debit column exceeds the credit column by R270 (an amount divisible
by nine). Since she does not know the reason for the imbalance she decides to put
the R270 into a suspense account until she can give more attention to it. She
makes an entry on her trial balance and credits the suspense account with R270.
When the bookkeeper finally has a chance, she again works through the
transactions in the general ledger. She finds that a sales transaction involving
credit sales of R45 968.75, has correctly been posted to debtors but when she
posted the other part of the double entry, she posted it as R45 698.75, changing
the figures of the original amount.
To correct the error and to close off the suspense account, the bookkeeper asks
you to write the correcting transaction in the general journal.
Solution:
Transposition error
Debit Credit
R R
Debit suspense account 270.00
Credit sales 270 000
Correct transposition error previously entered into
suspense account
Example 7.6
The trial balance of a business balances as follows:

Debit Credit
R R
Total 21 300 26 640
The accountant paid the weekly office staff R5 340 at the end of the week. The
amount was correctly entered into the cash book but the accountant forgot to
complete the double entry by debiting the salaries and wages account with the
same amount.
Due to time pressure, the accountant takes the amount of R5 340 and as a
temporary measure opens a suspense account debiting it with R5 340. He also
makes an entry onto the worksheet to balance the trial balance temporarily.
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Accounting for All

Debit Credit
R R
Total 21 300 26 640
Suspense account 5 340
Total 26 640 26 640
When he has more time, he searches for the source of the mistake, finds it and
asks you to put the necessary journal entry through to bring the trial balance to
balance.
Solution:
Error of omission
Debit Credit
R R
Debit wages and salaries expenses 5 340.00
Credit suspense account 5 340.00
Wages not previously entered now corrected
Again the result of correcting the initial entry will be that the suspense account is
closed off with a NIL balance.
Example 7.7
Debit Credit
R R
Total 48 755.25 47 709.25
When totalling the columns of the trial balance Mr CA finds that the debit column
is R1 046 more than the credit column. When dividing the amount by two, Mr CA
starts looking for the amount of R523 in his ledgers.
254
To balance his trial balance he opens a suspense account on his worksheet and in
the general ledger, crediting it with R1 046.

Debit Credit
R R
Total 48 755.25 47 709.25
Suspense account 1 046.00
Eventually Mr CA finds that R523 received from a customer was accurately

recorded in the cash book but instead of crediting the debtors control account with
the payment, someone debited the account with R523.
The debtors control account now has R523 on its debit side which should be on
the credit side. One credit entry of R523 will rectify the debit entry but another
entry is still necessary, the double entry debiting cash book (done) and crediting
the debtors control (which was in the first place not done).
Solution:
Error of commission
Debit Credit
R R
Debit suspense account 1 046.00
Credit debtors control account 1 046.00
Debtors account incorrectly debited with receipt
of R523. Correct error of commission
The trial balance will look like this:
Trial Balance of ... for the period ended....

Debit Credit
R R
Total 48 755.25 47 709.25
Suspense account (2)1 046.00 (1) 1 046.00
Debtors control account (2) 1 046.00
49 801.25 49 801.25
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Accounting for All
If you did not understand the explanation, look at how it will be shown in a
‘T-account’:
Dr Bank Cr
Debtors control a/c 523.00
Debtors control account

Cash 523.00 Suspense a/c 1 046.00
(i and ii)
Suspense account
Debtors 1 046.00 #2 1 046.00
(i) R523 to cancel #1

Debtors control a/c
(ii) R523 to equal #1 cash
It may happen that more than one error occurs during one accounting period. In
such a case, all errors will be reflected in one suspense account. There won’t be
different suspense accounts for different mistakes.
Example 7.8
The bank statement shows that R150 was directly deposited into the business
account. The bookkeeper wants to enter the amount into the cash book (debit
entry) but does not know where to post the equal credit entry. He opens a
suspense account, crediting it with R150. When the bookkeeper determines the
source of the income, he will transfer the amount from the suspense account to the
source account, eg Mr A Ncube, a debtor.
The first entry will look like this:
Debit cash R150
Credit suspense account R150
They cancel one The correcting entry will look like this:
another out
Debit suspense account R150
Credit Mr A Ncube R150
The result is:

Debit cash R150
Credit Mr A Ncube R150
256
Example 7.9
The balances from the debtors’ ledger January 2014 are:
Matemba Beauty Salon R205

Roxette Health and Skin Care R175
Love Your Body Salon R234
Prestige Health and Beauty R297
Balance of debtors outstanding R911
The debtors control account in the general ledger however, shows a balance of
R908 on 31 Jan 2014. The balance on 1 January 2014 was R297.
Dr Debtors control account Cr
Balance b/f 297 Cash receipts 8 390
Sales 9 001 Balance c/f 908
9 298 9 298
Balance b/d 908
If all entries were done correctly the debtors ledger and the debtors control
account should balance, but they don’t. Whilst looking for the possible mistake,
the bookkeeper decides to do an entry that will, in the meantime, balance the two
accounts. It will also give him time to find the mistake. To correct the discrepancy
the bookkeeper does the following entry in the general journal from where he
posts it to the general ledger:
Debit debtors control account R3

Credit suspense accounts R3
Discrepancy between control account and debtors
ledger
Once the reason for the mistake has been determined, the money will be
transferred out of the suspense account to the appropriate account, making the
balance of the suspense account NIL and in actual fact closing the suspense
account.
Example 7.10
Masembola Incorporated supplies you with the following list of balances from
their accounts as at 31 August 2013.
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Accounting for All
Required:
Prepare the trial balance and add up the debit and credit columns for the year
ending 31 August 2013.
R
Inventory as @ 1 September 2013 79 000
Purchases 370 000
Sales 800 520
Settlement discount allowed 12 000
Returns in 17 200
Returns out 15 600
Salaries & wages 94 200
Credit losses 9 205
Carriage in 3 000
Carriage out 5 400
Other operating expenses 98 115
Allowance for credit losses 2 400
Cash on hand 1 600
Bank overdraft 40 300
Capital 20 000
Motor vehicles 100 000
Plant & equipment 65 700
 Motor vehicles 10 000
 Plant and equipment 13 400
258
Solution:
Trial balance of Masembola for August 2013
Debit Credit
Inventory 79 000
Cash on hand 1 600
Capital 20 000
Accumulated depreciation 65 700
– Motor vehicles 10 000
– Plant & equipment 13 400

Purchases 370 000
Sales 800 520
Returns in 17 200
Returns out 15 600
Credit losses 9 205
Carriage inwards 3 000
Carriage outwards 5 400
946 620 946 620
259
Accounting for All
Questions
Question 7.1
The following balances were obtained from the general ledger of Brando Ltd at
28 February 2013:
R
Drawings 16 000
Vehicles 100 000
Equipment (@ cost price) 40 000
Accumulated depreciation on vehicles 36 000
Accumulated depreciation on equipment 8 000
Loan: WIN Bank 20 000
Fixed deposit: ZON Bank 15 000
Trading inventory (28/2/20x7) 17 800
Bank 4 300
Sales 250 000
Carriage on sales 550
Rent expense 15 600
Stationery 3 800
Insurance 4 800
Interest paid 350
Credit losses 400
Water and electricity 10 800
Credit losses recovered 220
Required:
Prepare the trial balance at 28 February 2013.
The capital balance was omitted.
260
Question 7.2
The following balances pertain to the accounting records of Awsome Traders at
31 December 2013:
R
Capital 494 275
Drawings 23 700
Loans from ABC Bank
(obtained 1 October 20x7 @ 22% pa) 110 550
Land & buildings @ cost 150 000
Plant & machinery @ cost 120 000
Accumulated depreciation – plant & machinery 52 500
Motor vehicles @ cost 127 950
Accumulated depreciation – motor vehicles 26 250
Fixed deposit – Bull Bank (15%) 100 000
Consumables stores 10 050
Petty cash 450
Rent received 6 750
Sales 769 200
Insurance 4 500
Telephone 8 700
Interest expense 21 750
Stationery expense 7 500
Commission earned 22 200
Inventory 375 000
Required:
Prepare the trial balance of Awsome Traders at 31 December 2013.
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Accounting for All
Question 7.3
The following balances were taken from the books of Finestone Traders at
28 February 2013:
R
Trading inventory: 28 February 20 x 2 61 200
Cash in bank 30 040
Capital 165 300
Drawings 24 000
Purchases 157 400
Purchases returns 4 900
Salaries 11 400
Rent paid 3 480
Insurance 960
Sales 190 000
Sales returns 3 000
Required:
Prepare the trial balance at 28 February 2013.
Vehicles at cost price was omitted.
262
Question 7.4
The following trial balance was prepared by an inexperienced bookkeeper:
Trial balance at 28 February 2013
Debit Credit
R R
Capital 190 000
Sales 82 000
Trading inventory 50 000
Drawings 1 000
Consumable stores 2 000
Vehicles 30 000
Salaries 12 000
Furniture 10 000
Credit losses 4 000
400 000 208 000
Required:
You were asked to assist the bookkeeper to balance the trial balance and to
prepare the correct trial balance for 28 Feb 2013.
263
Accounting for All
Question 7.5
R Steel, a general dealer, asked you to compile the trial balance of his business,
on 30 November 2013.
He provided you with the following information:
R Steel General Dealers

R
Capital: R Steel 148 500
Drawings: R Steel 12 200
Long-term loan (18% pa from North Bank) 66 000
Plant and machinery @ cost 75 000
Accumulated depreciation: plant & machinery 15 000
Furniture and fittings @ cost 12 000
Petty cash 100
Bank 227 100
Sales 315 700
Sales returns 600
Purchases 207 100
Petrol & oil 4 000
Insurance 1 800
Rent received 3 500
Wages & salaries 55 500
Stationery 4 600
Rent paid 5 000
Interest on loan 6 600
Commission expense 16 900
Interest received 9 900
Required:
Compile the trial balance of R Steel as at 30 November 2013.
264
Question 7.6
The following list of amounts was taken from the books of Wiollempie CC on
31 October 2013:
R
Bank 20 000
Capital 120 000
Drawings 24 000
Inventory 24 000
Investment 70 000
Loan 30 000
Sales 300 000
Credit losses 4 000
Salaries 150 000
Rent paid 18 000
Rent received 22 000
Interest paid 58 000
Commission paid 75 000
Commission received 16 000
Depreciation 28 000
Short-term loan 18 000
Required:
You are required to compile a correct trial balance as at 31 October 2013.
265
Accounting for All
Question 7.7
Heart-to-Heart presents you with the following figures for the month of December
2013:
R
Depreciation 50 000
Capital 305 000
Drawings 20 000
Furniture 50 000
Vehicles 140 000
Accumulated depreciation: furniture 10 000
vehicles 75 000
Inventory 30 000
Bank ?
Petty cash 2 000
Sales 800 000
Wages 32 000
Advertising 15 000
Bank charges 3 500
Salaries 420 000
Rent expense 66 000
Stationery 145 000
Credit losses 15 000
Required:
Compile the trial balance for Heart-to-Heart as at 31 December 2013. (Calculate
the bank account as the balancing figure.)
266
Question 7.8
The trial balance below was compiled by Mr Dumm Dumm, on 31 May 2013:
Debit Credit
R R
Depreciation 28 000
Bank
Inventory 13 000
Vehicles 44 000
Equipment 28 000
Capital 80 000
Telephone 1 600
Advertising 800
Sales 90 000
Drawings 9 200
Investment 35 000
Credit losses 2 750
Insurance 14 000
Consumable goods used 4 000
Required:
Compile the correct trial balance of Mr Dumm Dumm as at 31 May 2013. Keep
in mind that some of the balances were put in as a credit instead of a debit, or vice
versa. The bank balance is the balancing figure.
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Accounting for All
Question 7.9
Zig-Zag Producers provide you with a list of balances as at 31 December 2013:
R
Licensing & registration 4 000
Advertising 27 000
Maintenance 28 000
Inventory as @ 31 January 2012 26 000
Purchases 600 000
Sales 1 700 000
Returns inward 20 000
Returns outward 25 000
Carriage in 4 000
Carriage out 16 000
Cash on hand 15 800
Bank ?
Capital 90 000
Plant & equipment 132 000
Plant and equipment 80 000
Short-term investment 20 000
Savings account 14 000
Required:
Compile the trial balance for Zig-Zag Producers at 31 December; keep in mind
that the bank balance has been omitted.
268
Question 7.10
The following general ledger was taken from Ice for You as at 30 September
2013:
Dr Capital Cr Dr Equipment Cr
Bal b/f 200 000 Bal b/f 30 000
Drawings Accumulated dep equipment
Bal b/f 25 000 Bal b/f 15 000
Sales Insurance
Bal b/f 450 000 Bal b/f 8 000
Debtors Rent received
Bal b/f 26 000 Bal b/f 23 000
Creditors Inventory
Bal b/f 27 000 Bal b/f 17 000
Salaries Bank
Bal b/f 50 000 Bal b/f 304 000
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Accounting for All
Dr Cost of sales Cr Dr Fuel Cr
Bal b/f 230 000 Bal b/f 18 000
Long-term loan Stationery
Bal b/f 30 000 Bal b/f 10 000
Vehicles Credit losses
Bal b/f 45 000 BaBal b/f 5 000
Acc depreciation vehicles Commission earned
Bal b/f 16 000 Bal b/f 7 000
Required:
Compile the trial balance as at 30 September 2013.
Question 7.11
The following list of balances was supplied to you by Mr Bobo on 31 January
2013:
R
Capital 40 000
Drawings 2 000
Fees earned 20 000
Telephone 1 000
Investment – fixed deposit 6 000
270
At closer investigation the following is revealed:

 The debit side of the salaries and wages account was under allocated by
R2 000.
 The debit side of the interest received account was under allocated by R1 000.
 The credit side of the municipal cost account was over allocated by R1 000.
 The credit side of the telephone account was under allocated by R500.
 The balance of the bank account was completely omitted.
Required:
Prepare the correct trial balance for Mr Bobo on 31 January 2013.
Question 7.12
The following trial balance was prepared by Mr Dlamini, a financial accounting
student at 31 December 2013:
Debit Credit
R R
Telephone 200
Debtors 20 000
Creditors 14 000
Interest received 350
Sales 68 000
Vehicles 21 200
Capital 30 100
Drawings 3 000
Inventory 20 280
130 100 130 100
You were appointed as the new accountant and must take the following errors into
account irrespective of the errors in the trial balance:
1. Credit sales to debtors of R2 000 was recorded as R200 in the accounts of the
debtors. The amount in the sales account is correct.
2. The debit side of the telephone account was added up by R15 too little.
3. The sales account was debited with an amount of R80 instead of credited
with R80.
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Accounting for All
4. Goods purchased on credit, to the amount of R4 000 were not recorded in the
creditors accounts. It was posted correctly to the inventory account.
5. The balance of the bank account was not taken into account.
Required:
Prepare the correct trial balance for Mr Dlamini on 31 December 2013.
Question 7.13
The following balances appear in the books of Elani Traders at 30 June 2013:
R
Capital 85 780
Drawings 6 000
Vehicles 99 200
Accumulated depreciation: vehicles 6 000
Loan from Wessen Bank 4 000
Debtors control 10 470
Creditors control 8 580
Trading inventory (1 July 20x1) 8 260
Purchases 121 600
Sales 173 700
Credit losses 1 610
Telephone 1 920
Advertising 440
You have been asked by the owner to help with the preparation of the trial
balance for June 2013.
On further investigation you discovered that the following has not been taken into
account:
1. A cancellation of a discount of R130 on a dishonoured cheque was omitted.
2. The owner’s son worked for the business during the holiday. His salary of
R1 500 was recorded as drawings.
3. The debit side of the creditors control account was totalled by R400
too little.
4. An amount of R800, paid for advertisements was not posted to the ledger
account although it was posted correctly to the bank account.
272
5. Credit losses of R120 written off against a debtor’s account were not
recorded.
6. Purchases of R600 were posted twice to the purchases account.
7. Total cash receipts of R81 360 according to the cash receipts journal was
recorded as R81 630 on the debit side of the bank account.
8. The creditors journal was totalled by R500 too much.
9. Goods sold on credit for R340 were recorded as R430 in the debtors journal.
Required:
Prepare a corrected trial balance for Elani Traders at 30 June 2013.
(Show all your calculations.)
Question 7.14
The balances below appeared in the accounting records of Bamboo Traders on 31
March 2013:
R
Capital 42 303
Drawings 3 000
Vehicles 49 600
Loan from Dollar Bank 2 000
Debtors control 5 235
Creditors control 4 290
Inventory 4 130
Purchases 60 800
Sales 86 890
Sales returns 300
Credit losses 805
Telephone 960
Advertisement 220
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Accounting for All
The following errors and omissions must still be taken into account:
1. Discount of R75 on a cancelled cheque should be cancelled and posted to the
relevant account.
2. Purchases of R600 were posted twice to the purchases account.
3. The owner’s son worked at the business during the holidays. His salary of
R850 was seen as drawings and directly debited against the capital account.
4. Credit losses recovered of R80 were recorded by crediting the debtors ledger
and debiting the bank account.
5. Goods sold on credit for R440 were recorded in the debtors journal as R404.
6. Total cash payments of R5 068 appeared in the cash payments journal but
were posted to the bank account as R5 086.
7. Further investigation showed that the total of the debit side of the creditors
control account was under allocated by R250.
8. An amount of R300 paid in respect of the telephone account was not posted
from the relevant journal to the ledger. (It was however posted correctly to the
bank account.)
9. Trading inventory with a purchase price of R88 was donated by the owner to
the local old age home. The transaction has not yet been recorded.
Required:
Prepare the correct trial balance of Bamboo Traders at 31 March 2013.
(Show your calculations in brackets)
Question 7.15
The trial balance below was compiled by Mr Dumm, at 31 July 2013:
Debit Credit
R R
Bank (debit balance) 3 500
Inventory 13 000
Vehicles 44 000
Creditors 26 000
Equipment 28 000
Capital 91 750
Telephone 1 600
Advertising 800
274
Sales 90 000
Drawings 9 200
Investment 35 000
Credit losses 2 750
Insurance 14 000
Consumable goods used 4 000
Debtors 25 000
Required:
Compile a correct trial balance for Mr Dumm as at 31 July 2013, taking the
following additional information into consideration, as well as the fact that the
loan account balance has been left out.
1. Insurance was debited with the amount of R300 instead of credited.
2. An amount of R900 for ‛returns inwards’ was not included in the above trial
balance at all. Selling price = R900; cost price = R600.
3. The credit side of equipment was over allocated by R2 000.
4. The debit side of settlement discount received was over allocated by R150.
5. The following entry was made on a transaction for R170 credit losses to be
written off as irrecoverable:
Debtors – debit
Credit losses – credit
6. The amount for the loan was omitted.
275
CHAPTER 8
PROPERTY, PLANT AND EQUIPMENT
8.1 Introduction
Depreciation is the reduction of the cost price of a fixed asset due to normal wear
and tear over the asset’s lifespan. Depreciation is calculated on fixed assets. When
a fixed asset is purchased for R20 000 in 20X0 then it is not realistic to show this
fixed asset in the statement of financial position at a value of R20 000 in 20X2.
The value of the fixed asset depreciates with time. Depreciation is therefore the
method used which results in a slow reduction of the asset’s original purchase
price.
Although depreciation itself is not a current cash outflow, it does have an indirect
effect on cash outflows for income taxes.
Take note, that if an asset was bought eg in the middle of the financial year,
depreciation must be calculated on a pro rata basis up to the end of the first
financial year.
Management normally sets a fixed asset and depreciation policy that includes,
amongst other things, the method of depreciation and the annual percentage for
each type of asset, which will determine the amount to be allocated. Before the
four methods of depreciation can be discussed, the student must get acquainted
with certain definitions.
The disclosure of assets is controlled by IAS16.

 Understand the characteristics of assets
 Distinguish between:
– Fixed assets and current assets
– Tangible and intangible assets
– Capital and revenue expenditure
 Calculate depreciation using the following methods:
– Straight-line method
– Reducing balance method
 Calculate accumulated depreciation
 Calculate carrying value of an asset
Chapter 8 Property, plant and equipment
8.2 Characteristics of assets

An object or item will be classified as an asset if the following four requirements
are met:
 Value
The item must have a monetary value. In other words you can get money for it if
you sell it. It is disclosed in the statement of financial position at a value.
 Right of ownership
The asset ‛belongs’ to someone, be it a company, individual or more than one
person.
Ownership must be established without a doubt. You must have the right of
possession.
 Measurable cost
The business, person or owner must have acquired the object at a measurable cost.
In other words a cost price is attached to the object, which is used continuously in
calculating the actual worth of the asset.
All of the three requirements above must
be met in order for any item/object to be
classified as an asset.
8.3 Classification of assets

All assets can be classified as one of the following:
Fixed assets Current assets

or non-current assets
Tangible fixed assets

Current assets
Intangible fixed assets
Investments
8.4 Fixed assets vs current assets

The main difference between fixed assets and current assets is the period for
which they can be used.
Fixed assets have a long-term use for the business, whilst current assets will
belong to the business for a relatively short time.
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Accounting for All
Fixed assets normally have a lifespan of more than 12 months. It is purchased

with the purpose of using it for a period longer than one year. Current assets
change with the daily operation of the business and have a lifespan of less than 12
months.
To summarise:
Fixed asset Current asset
Lifespan > 12 months < 12 months
Size Large Small
Cost High Low
The frequency of Seldom Often

purchase
Reasons for purchase Investment Trade
See if you can follow the classification of assets in a toy manufacturing business.
Example 8.1
Machine Plastic/material
used
Lifespan ± 5 years ± 3 months
Size Large Small
Cost R55 000 R10 000
Frequency of purchase Seldom Often
Reasons for purchase Investment Trade
Examples:
Examples of fixed assets are:
 Machinery
 Equipment
 Furniture
 Vehicles
278
Examples:
Examples of current assets are:
 Debtors
 Bank (if in a debit balance)
 Inventory
Example 8.2
Mr P Pencil asked you to classify the following items in his business as either
fixed- or current assets.
Inventory
Debtors
Computer
Fax machine
Chairs and tables
Solution:
Inventory – Current asset
Debtor – Current asset
Computer – Fixed asset
Fax machine – Fixed asset
Chairs and tables – Fixed asset
8.4.1 Tangible vs intangible assets

Fixed assets or non-current assets can be classified further into:
 Tangible fixed assets
 Intangible fixed assets
 Investments
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Accounting for All
Tangible assets
The largest category of fixed assets is tangible assets.
Examples:
 Land and buildings
 Machinery
 Vehicles
 Equipment
 Furniture
Intangible assets
 Intangible assets are not of a physical nature
 They don’t depreciate, they amortise
 They are not used up in the running of the business
 They do not vary with the day to day operation of the business
Examples:
 Copyrights, trademarks, patents, etc. The slogan ‛just do it’ is an intangible
asset for Nike.
 Research cost on incomplete projects.
Example 8.3
Classify the following fixed assets as tangible or intangible assets.
Tangible Intangible
Equipment
Furniture
Patent
Trademark
Vehicles
Solution:
Equipment – Tangible asset
Furniture – Tangible asset
Patent – Intangible asset
Trademark – Intangible asset
Vehicles – Tangible asset
280
8.4.2 Investments
Investments are also under the classification of fixed assets, remember:
Fixed assets
Tangible fixed assets
Intangible fixed assets
Investments
Investments, classified under fixed assets, are investments, invested for a period
longer than 12 months. The money is invested in a bank and will earn interest.
The investment amount itself is classified under fixed assets – investments are
disclosed on the statement of financial position. The interest earned on the
investment is disclosed under ‛income’ on the statement of profit or loss and other
Examples:
 Fixed deposits (investments) made at a bank for a period longer than 12
months.
 Investments in shares, for example in unit trusts.
 Sundry investments, like a pension fund or retirement annuity.
8.5 Capital and revenue expenses

In order to own an asset, it has to be purchased. This is an outlay of capital or an
expense for the business. Just as there is a distinction between the different types
of assets, there is also a distinction between the expenses incurred with the
purchase of the assets.
Capital expenditure
Capital expenditure goes hand in hand with fixed assets. The purchase of a fixed
asset or the improvement to a fixed asset will be classified as capital expenditure.
Capital expenditure is recorded in the statement of financial position.
A capital expenditure to purchase a fixed asset will result in an entry made to the
debit side of the specific fixed asset.
Revenue expenditure
The purchase of current assets like inventory is revenue expenditure. In other
words it is expenses which occur in the normal daily activity of the business to
‛earn’ revenue or income.
Revenue expenditure items are all accounted for in the statement of profit or loss
and other comprehensive income. It can be matched against the revenue generated
during that specific period.
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Accounting for All
8.6 Depreciation
Depreciation is calculated on fixed assets (capital expenditure).
Depreciation is a steady reduction of the original value of a fixed asset due to
normal wear and tear of the asset.
If a vehicle was purchased for R50 000 in 2013 the value of the vehicle at the end
of 2013 is not R50 000 any more.
The amount of depreciation will depend on the method used to calculate
depreciation.
Depreciation can be calculated on any one of four different methods. This will be
discussed later.
Whichever method is used to calculate the amount of depreciation, this will be the
amount of depreciation to be written off from the fixed asset. Depreciation is the
amount of the calculation (on one of the four methods) for one specific
year/period. Depreciation is an expense account which goes to the statement of
profit or loss and other comprehensive income. In a trading company,
depreciation will be shown in the statement of profit or loss and other
comprehensive income under ‛other expenses’.
In a manufacturing company, the depreciation of the company can either be
depreciation on assets used in the factory or depreciation on assets not used in the
factory. If it is for example, depreciation on a machine in the factory, the amount
of depreciation for that specific year will be classified as an overhead which is
shown on the manufacturing statement. If it is depreciation on the delivery
vehicle, the amount of depreciation will be classified as an expense in the
statement of profit or loss and other comprehensive income.
Example 8.4
Year Depreciation Statement of Manufacturing
profit or loss statement
and other
comprehensive
income
2012 – Vehicle R4 000 R4 000

– Machinery
in factory R5 000 R5 000
2013 – Vehicle R7 000 R7 000
– Machinery
in factory R5 000 R5 000
282
8.7 Financial year

A financial year comprises the reporting period of the organisation. It normally
stretches over a period of 12 months, not necessarily a calendar year.
For example, if the financial year end of a company is 28 February and the
company opened its business on 1 March 2011, then the first financial year will
be the year ending 28 February 2012. The first year to calculate depreciation on
assets will then also be the year ending 28 February 2012; the second year will be
the year ending 28 February 2013 etc.
If the financial year is from 1 March 2011 until 28 February 2012, then we call it
the 2012 financial year, in other words, the year in which the financial year ends,
is the year we refer to as the financial year.
Example 8.5
Sasia Ltd opened their business on 1 April 2009; their financial year end is
31 December.
First financial year = 2009 – 1 April 2009 – 31 December 2009

Second financial year = 2010 – 1 January 2010 – 31 December 2010
Third financial year = 2011 – 1 January 2011 – 31 December 2011
Fourth financial year = 2012 – 1 January 2012 – 31 December 2012
The percentage at which the asset must be remunerated for depreciation purposes
is per annum. In other words if the business only had the asset in a specific
financial year for five months for example, then depreciation must only be
calculated for five months. Depreciation is calculated then ‛pro rata’. This will
happen when a new asset is purchased during the year, as well as when an asset is
sold during the year.
Example 8.6
Jackie Ltd opened their company on 1 August 2009; their financial year end is 28
February.
First financial year = 2010 – 1 August 2009 – 28 February 2010

Second financial year = 2011 – 1 March 2010 – 28 February 2011
Third financial year = 2012 – 1 March 2011 – 28 February 2012
Fourth financial year = 2013 – 1 March 2012 – 28 February 2013
In the first financial year, depreciation has to be calculated for only seven months
(1 August 2009 – 28 February 2010). The depreciation amount must be calculated
pro rata in order to get the depreciation for seven months – this is assuming that
the fixed assets were also bought on date of opening (1 August 2009).
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Accounting for All
The ‛pro rata’ calculation of depreciation can also occur, not only in the year the
asset was bought, but also in the year the asset is sold.
Before depreciation is discussed further, it is necessary to explain a few other
concepts.
8.8 Accumulated depreciation

Accumulated depreciation is calculated by adding the current year’s depreciation
amount to the depreciation written off in previous years.
Accumulated depreciation is classified as a negative asset. This is because the
amount of accumulated depreciation of a specific year is deducted from the cost
price of the fixed asset. Both accumulated depreciation and fixed assets go to the
statement of financial position and not like depreciation to the statement of profit
or loss and other comprehensive income.
Example 8.7
Year Depreciation Accumulated

depreciation
2009 R4 000 R 4 000
2010 R4 500 R 8 500 (4 000 + 4 500)
2011 R4 500 R13 000
Note, that in the first year of calculating depreciation, the amount of depreciation
that goes to the statement of profit or loss and other comprehensive income and
the amount for accumulated depreciation in the statement of financial position is
the same. This is because accumulated depreciation is calculated by adding the
current year’s depreciation to the previous year’s depreciation. In the first year
there are no ‛ previous year’s’ depreciation amounts.
8.9 Carrying value

In the statement of financial position, the amount that will influence the total
amount of assets will be the carrying value. So after calculation of depreciation
and accumulated depreciation the carrying value can be calculated. The ‛value’ of
assets is a more realistic amount, because the cost price is remunerated by the
accumulated depreciation.
Carrying value is calculated as follows:
Carrying value = cost price – accumulated depreciation
284
Example 8.8
Fixed assets Cost Accumulated Carrying value

price depreciation
Vehicles R32 000 R4 000 R28 000 (R32 000 – R4 000)
Machinery R60 000 R7 000 R53 000 (R60 000 – R7 000)
Equipment R20 000 R3 000 R17 000 (R20 000 – R3 000)
Computer equipment R15 000 R2 000 R13 000 (R15 000 – R2 000)
8.10 Cost price

The cost price of an asset is the amount paid for the asset excluding VAT and
including all transport costs paid to get the asset in the company in a working
condition. Machinery for example, the cost price will be: purchase amount +
transport cost + cost of implementing the machine in the factory. In other words,
cost price is the purchase price plus any additional costs to get the fixed asset in
an operational condition. Documentation fees, VAT and finance charges are not
part of the cost price of an asset.
Example 8.9
Mr Dean bought a vehicle on 15 March 2013. He financed the vehicle through
Stannic on a finance lease.
Cost price R 80 000 ( including VAT )

Finance charges R 60 000
Documentation fees R 106
R140 106
Deposit paid R 8 000
Principal debt R132 106
Solution:
The cost price of the vehicle in the statement of financial position will be:
R70 175 (R80 000/114 x 100)
Example 8.10
Strijdom Ltd bought a machine for the factory on 11 July 2013 for cash.
Cost price R70 000

Freight paid R 2 000
Import tax R 3 000
VAT R 9 800
Total cash paid R84 800
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Accounting for All
Strijdom Ltd also paid R2 999 (including VAT) to implement the machine in the
factory.
Required:
Calculate the cost price of the machine.
Solution:
The cost price of the machine in the statement of financial position will be:
R77 630 (70 000 + 2 000 + 3 000 + 2 630).
8.11 Scrap value

Scrap value is the amount which is estimated by the company when, after the
lifespan of the asset, the asset will be scrapped. After the lifespan, the carrying
value will equal the scrap value. (Not in the reducing balance method, but in all
the other methods.)
8.12 Lifespan
When the asset is bought, the lifespan of the asset will be estimated. This is the
number of years, estimated by the company, that the company will have use of the
asset. After the lifespan period has expanded the asset will be scrapped (or sold).
If the lifespan for example is four years, then depreciation will be calculated for
four years and the asset will have a value in the statement of financial position for
four years.
8.13 Depreciation methods

There are four different methods to use to calculate depreciation. Normally one
method is used for a specific type of asset. The method to be used is the choice of
the company, although if doing financial statements for SARS, the methods and
rates prescribed by them must be used in calculating depreciation. In practice it
can happen that the company decides to use method A for example to calculate
depreciation on vehicles, but SARS prescribes method B for calculating
depreciation on vehicles. If this happens, then an adjustment for the correct
amount of depreciation calculated on method B (prescribed by SARS) must be
done in the financial statements provided for SARS.
The four different depreciation methods are:
 Straight-line method
(Also sometimes referred to as the cost price method or the fixed instalment
method)
 Reducing balance method
(Also sometimes referred to as the diminishing balance method)
286
 Sum of the digit method

 Production unit method
We will only cover the explanation to calculate depreciation on:
 Straight-line method
 Reducing balance method
8.13.1 Straight-line method

With this method, the amount of depreciation will be the same every year.
The formula for calculating depreciation is:
Depreciation = (Cost price – scrap value) x %
or = (Cost price – scrap value)

Lifespan
Example 8.11
Robynne Enterprises bought a vehicle with a cost price of R45 000 on 1 March
2011. Lifespan is four years and the scrap value is R5 000. Financial year ends on
28 February.
The depreciation for each year on the straight-line method will be calculated as
follows:
Solution:
The first year to calculate depreciation will be the year ending 28 February 2012.
Depreciation at 28 February 2012 = Cost price – scrap
Lifespan
= R45 000 – R5 000

4
= R10 000
The depreciation to go to the statement of profit or loss and other comprehensive

income for this year (2012) will be R10 000.
The accumulated depreciation at 28 February 2012 is R 10 000, this will go to the
statement of financial position.
The carrying value at 28 February 2012 is R35 000.
(Cost price – accumulated depreciation) (R45 000 – R10 000).
The second year for calculating depreciation is the year ending 28 February 2013.
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Accounting for All

Lifespan
= R45 000 – R5 000

4
= R10 000
Depreciation = Statement of profit or loss and other
comprehensive income = R10 000
Accumulated
depreciation = Statement of financial position = R20 000
Carrying value = Statement of financial position = R25 000
The third year for calculating depreciation is the year ending 28 February 2014.

Lifespan
= R45 000 – R5 000

4
= R10 000
Accumulated
The fourth year for calculating depreciation is the year ending 28 February 2015.

Lifespan
= R45 000 – R5 000

4
= R10 000

Accumulated
288
After the lifespan, which was four years, the carrying value = scrap value.
Because the lifespan is four years, depreciation is calculated for four years.
In the example used, the lifespan of the asset was four years, so the formula for
calculating the depreciation on the straight-line method was:
Cost price – scrap

Lifespan
Instead of using this formula, the other formula for calculating depreciation on the
straight-line method could have been used:
Depreciation = (Cost price – scrap) %

= (R45 000 – R5 000) 25%
= R10 000
The 25% is referred to as the depreciation rate. Since the lifespan is four years,
the depreciation rate is 25%: (100/4 = 25).
If the depreciation rate is given, then the lifespan can also be calculated. In other
words, whether the lifespan or the depreciation rate is given, any one of the two
formulas can be used to calculate the depreciation on the straight-line method.
Simply recalculate the depreciation rate, if the lifespan is given, or vice versa.
For example: depreciation rate is 20%, thus the lifespan is five years: (100/20)
Calculation of the depreciation can either be:
(Cost price – scrap) 20%
or (Cost price – scrap)

5
The answer in both formulas will be the same.
8.13.2 Reducing balance method

The formula for calculating depreciation on the reducing balance method is:
(Cost price – accumulated depreciation) x %
The reducing balance method is the only method where scrap value is not taken
into account when calculating the depreciation. On the reducing balance method,
the depreciation amount reduces every year. This is also the only method where
the carrying value will never get to zero. As the years go by, the amount of
depreciation will just decrease and decrease.
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Accounting for All
Example 8.12
Katie (Pty) Ltd, bought a machine on 1 March 2009 for R80 000. The scrap value
is R7 000. The financial year end is 28 February. Depreciation is calculated at
15% per year.
The depreciation for each year on the reducing balance method will be calculated
as follows:
The first year to calculate depreciation will be the year ending 28 February 2010.
Solution:
Depreciation at = (Cost price – accumulated depreciation) 15%
28 February 2010 = (R80 000 – 0) 15%
= R12 000
Depreciation = Statement of profit or loss and

other comprehensive income = R12 000
Accumulated
In the first year of calculating depreciation, the accumulated depreciation is zero,

since accumulated depreciation is calculated by adding all the previous year’s
depreciation and the current year’s depreciation together. The first year after the
asset is bought; no depreciation had been calculated yet, so the depreciation is
zero and therefore the accumulated depreciation as well.
Also note, that although the scrap value is given, (R7 000) it is not used in the
formula in this method.
290
The second year of calculating depreciation will be the year ending 28 February
2011.
Depreciation at = (Cost price – accumulated depreciation) %

28 February 2011 = (R80 000 – R12 000) 15%
= R10 200

Accumulated

The third year of calculating depreciation will be the year ending 28 February
2012.
Depreciation at = (Cost price – accumulated depreciation) %

28 February 2012 = (R80 000 – R22 200) 15%
= R8 670

other comprehensive income = R 8 670
Accumulated
The fourth year of calculating depreciation will be for the year ending
28 February 2013.
Depreciation at = (Cost price – accumulated depreciation) 15%

28 February 2013 = (R80 000 – R30 870) 15%
= R7 370

Accumulated
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Accounting for All
In this particular example, no lifespan was given for the asset; therefore
depreciation will be calculated continuously for every year. If a lifespan was also
given, say for example three years, then depreciation will only be calculated for
three years. But on the reducing balance method, the depreciation rate must be
given in order to be able to calculate the depreciation. The lifespan is just an
indication of the number of years over which the asset must be written off. As
with the straight-line method, where the lifespan can also be used to calculate the
depreciation rate (4 years = 25% and 5 years = 20%) the lifespan of the reducing
balance method cannot be used to calculate the depreciation rate and vice versa.
This is because of the formula used for calculating depreciation on the reducing
balance method.
8.14 Calculation of depreciation for a period shorter than

twelve months
All the depreciation formulas must be adjusted to calculate the depreciation pro
rata if the asset was bought in the middle of the year, except the production unit
method.
On the production unit method, depreciation is calculated at a certain amount per
unit produced. It is not a rate given per annum that has to be calculated pro rata.
8.14.1 Straight-line method
If the depreciation rate is for example 20%, it means depreciation has to be
calculated at 20% per annum.
Example 8.13
Pippies Manufacturers bought equipment to a value of R100 000 (excluding

VAT). Scrap value is R10 000. The depreciation rate is 15% and the financial
year ends 31 December. The equipment was bought on 1 August 2010.
Required:
Calculate the depreciation for the first two financial years on the straight-line
method.
Solution:
First financial year 31 December 2010

= (R100 000 – R10 000) x 5/12 x 15%
= R5 625
292
Second financial year 31 December 2011

= (R100 000 – R10 000) x 15%
= R13 500
Because Pippies only had the equipment for five months in the first year,
depreciation is calculated pro rata (5/12) for only five months.
8.14.2 Reducing balance method

As with the straight-line method, the depreciation rate is the depreciation
percentage to be written off per annum. Therefore if the asset was bought in the
middle of the year, the depreciation must be adjusted pro rata for the number of
months the company had the asset in the first year.
Example 8.14
Tobacco Industries bought a delivery vehicle on 30 September 2012 for R79 800
(including VAT). Scrap value is R5 000. Financial year end is 28 February.
Required:
Calculate the depreciation for the first two years on the reducing balance method
at a 25% depreciation rate.
Solution:
First financial year 28 February 2013
Depreciation = (Cost price – accumulated depreciation) x %

= *(R70 000 – R0) x 25% 5/12
= R7 292
* R70 000 = R79 800/114 x 100
Second financial year 28 February 2014
Depreciation = (Cost price – accumulated depreciation) x %

= (R70 000 – R7 292) x 25%
= R15 677
In the first financial year, Tobacco Industries only had the vehicle for five months,
so depreciation is calculated for only five months, by adjusting the formula and
multiplying it by 5/12.
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Accounting for All
Which method to use and how to decide

As mentioned, there are four methods on which depreciation can be calculated.
Each method has its own advantages. Whichever method is used is completely up
to the discretion of the business. Whenever a method is chosen on a specific type
of asset classification, it will be disclosed under the accounting policy of the
business. A different type of method can be used on each type of asset.
The depreciation method chosen should be applied consistently for each type of
asset during the lifespan.
The following table gives some guidelines to help determine which method
(straight-line method vs reducing balance method) will be the best to use:
Straight-line method Reducing balance method

Asset with low maintenance cost Asset with expected higher
maintenance cost
Asset provides equal benefits during Asset produces greater benefits in the
its lifespan beginning of lifespan
8.15 Disclosure of the purchase of a fixed asset in the financial
records
Example 8.15
Mr Singa bought a machine on 1 April 2013 cash. He started his business on the
same date. His financial year end is 31 December. The cost price of the machine
was R80 000 (excluding VAT), with an estimated lifespan of five years and a
scrap value of R7 000. The depreciation at 31 December 2013 on the machine
was calculated at R10 950.
The machine is a fixed asset and is disclosed on the statement of financial
position under the heading: ‛Fixed assets’.
Solution:
Statement of financial position of Mr Singa as at 31 December 2013:
Debit Credit
Non-current assets R R
Fixed assets xxx
Machine 80 000
Less: Accumulated depreciation (xx)
294
8.16 Disclosure of depreciation and accumulated depreciation

in the financial records
The depreciation amount, calculated for a specific year is classified as an expense;
this will affect net profit and is therefore a statement of profit or loss and other
comprehensive income item.
Accumulated depreciation on the other hand is classified as a negative asset and is
subtracted from the cost price of the asset to determine carrying value.
Carrying value = cost price – accumulated depreciation n
Accumulated depreciation is a statement of financial position item.
Example 8.16
Pinky Pong provides you with the following information for the year ending 31
December 2013:
Cost price of vehicles – R40 000

Depreciation – R 4 000
Accumulated depreciation – R 8 000
Required:
8.16.1 Do the journal of the depreciation for the year.
8.16.2 Show how depreciation will be disclosed on the statement of profit or loss
and other comprehensive income.
8.16.3 Show how depreciation will be disclosed on the statement of financial
position.
Solution:
General journal of Pinky Pong
Debit Credit
R R
Depreciation 4 000
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Statement of profit or loss and other comprehensive income of Pinky Pong

for the year ending 31 December 2013
R
Sales xx
– COS (xx)
Gross profit xx
+ Other income xx
xx
– Other expenses
Depreciation (4 000)
Net profit
Statement of financial position of Pinky Pong as at 31 December 2013

Debit Credit
Non-current assets R R
Fixed assets 32 000
Vehicles 40 000
Less: Accumulated depreciation (8 000)
You are referred to IAS16 for the disclosure requirements for fixed assets,
depreciation and accumulated depreciation in the financial statements.
8.17 Recording the purchase of a fixed asset

When an asset is purchased, the asset increases, therefore the asset account will be
debited.
Example 8.17
XRZ Co bought equipment on 1 July 2013 for R25 000 on credit.
The journal entry will look like this:
Solution:
General journal of XRZ Co
Debit Credit
R R
Equipment 25 000
Creditors 25 000
Purchase of equipment
296
8.18 Recording depreciation and accumulated depreciation

If depreciation is calculated, the entry will always be:
Depreciation Debit
Accumulated depreciation Credit
Depreciation is an expense item, which increases, and therefore has to be debited.

Accumulated depreciation is a negative asset (works like a liability) and
increases, therefore has to be credited.
Example 8.18
The depreciation on vehicles at Sollies (Pty) Ltd for the year 2013 was calculated
at R7 000.
How will the journal entry look?
Solution:
General journal of Sollies (Pty) Ltd
Debit Credit
R R
Depreciation 7 000
Depreciation on vehicles
8.19 Disposal/trade-in of a fixed asset

8.19.1 Sale of a fixed asset
The sale of a fixed asset involves an accounting transaction and like all other such
transactions will first of all have to be recorded into a prime book of entry. With
the sale of a fixed asset there are three prime books involved; the general journal,
if it is a cash transaction the cash receipts book, and if it is a credit transaction, the
sales/debtors journal.
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Sale of fixed asset
General Cash receipts Sales

journal journal journal
General ledger
Statement of profit or Statement of

loss and other financial
comprehensive income position
When a business decides to get rid of any fixed asset, it has the following options
to consider.
It can:
 sell it
 scrap or destroy it
 use it as a trade-in
No matter what the business decides to do with the asset, certain entries have to
be made indicating that the asset is no longer owned by the business.
Remember, up until now the asset has been shown at cost in the general ledger,
depreciation has been accumulating yearly, decreasing the value of the asset, and
appearing as an annual expense on the statement of profit or loss and other
comprehensive income. It should be obvious that when a company gets rid of an
asset all these issues should be addressed.
The asset should be taken out of the books completely and accumulated
depreciation should be taken into account to determine the real value of the asset
(this is especially important in the case of a trade-in or sale).
It is possible to make either a profit or a loss on the disposal of a fixed asset. A
profit on the sale of a fixed asset is treated like ‛other income’ whilst a loss is seen
as an expense.
298
To summarise, the following adjustments should be made:

 the sale of the asset should be recorded (be it cash or credit)
 in the general ledger, the fixed asset account and the accumulated
depreciation account should be closed off
 any profit or loss made on the sale of a fixed asset should be recorded and
reflected in the statement of profit or loss and other comprehensive income
Let’s look at the entries relating to the purchase of a fixed asset and then at the
entries relating to the sale or scrapping of a fixed asset.
Purchase of a fixed asset Sale of a fixed asset
1. Debit fixed asset 1. Debit asset disposal account
Credit bank/creditor Credit fixed asset
2. Debit depreciation 2. Debit accumulated depreciation
Credit accumulated depreciation Credit asset disposal
3. Debit bank/debtor account
Credit asset disposal
4. Debit asset disposal
Credit profit on sale of fixed
asset
or
5. Debit loss on sale of fixed asset
Credit asset disposal
In the table above you will notice that a new account is being introduced called
the ‛asset disposal’ account.
This account is a temporary account that only comes into existence when a fixed
asset is disposed of. All the accounts that pertain to the particular transaction are
closed off to this account, (ie the fixed asset and the accumulated depreciation
account). An entry is then made that will vary according to whether you sell or
scrap the asset (the sale price of the asset) and the balance left in the account will
either be the profit or the loss that came as a natural result of the whole
transaction.
Every time a fixed asset is sold, an ‛asset disposal’ account will be opened in the
general ledger. Then, as soon as the transaction has been completed, the account
will be closed off to a nil balance, taking the balance of the account to another
account in the general ledger called the ‛profit/(loss) on sale of fixed assets’
account.
This profit or loss is, in other words, the difference between the net carrying value
of the asset and the sale price of the asset (if any).
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The explanation and examples to follow will make the concept of the disposal of
fixed assets account clearer.
Example 8.19
Gastro International bought a machine for R155 000 on 1 July 2010. Suppose that
on 1 January 2013 the machine was sold for R85 000 cash. Depreciation of 20%
according to the straight-line method must be taken into account. Look at how
this transaction affects the accounts. Remember that the depreciation account is an
expense account which is closed off (the account has no balance to bring forward
in the next accounting period) at the end of the accounting period to the profit and
loss account and will, therefore, have no opening balance on 1 January 2013. The
financial year ends 30 June.
Solution:
Dr Bank (cash) 1 Cr
2013 2010
Jan 1 Asset disposal 4 85 000 Jul 1 Machinery 2 155 000
Machinery 2
2010 2013
Jul 1 Bank 1 155 000 Jan 1 Asset disposal 4 155 000
155 000 155 000
Accumulated depreciation 3
2013 2011
Jan 1 Asset disposal 77 500 Jun 30 Depreciation exp 31 000
2012
Jun 30 Depreciation exp 31 000
2013
Jun 30 Depreciation exp 15 500
77 500 77 500
300
Dr Asset disposal 4 Cr
2013 2012
Jan 1 Machinery 2 155 000 Jan 1 Accumulated 3 77 500
Profit on sale 2 7 500 depreciation
of fixed asset Bank 1 85 000
162 500 162 500
Profit on sale of fixed asset 5

2013
Profit and 7 500 Jan 1 Profit on sale 4 7 500
loss account of fixed asset
(at end of
accounting
period)
7 500 7 500
Example 8.20
Suppose that Gastro International sold the machine for R72 000 instead of
R85 000. Look at the accounts below to see what the effect of this sale will be on
the asset disposal account.
Solution:
Dr Asset disposal 4 Cr
2013 2013
Jan 1 Fixed asset 155 000 Jan 1 Accumulated 3 77 500
account depreciation
Bank/debtor 1 72 000
Loss on sale 5 500
of fixed asset
155 000 155 000
Loss on sale of fixed asset 5

2013
Jan 1 Asset 5 500 Profit and loss 5 500
disposal account (at
end of
accounting
period)
5 500 5 500
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8.19.2 Trading-in of an asset

It happens regularly that one asset is traded in on another. The trade-in value
allowed by the supplier is deducted from the selling price of the new asset and the
purchaser pays or undertakes to pay the balance still outstanding. Like the sale of
an asset, the trade-in of an asset may also give rise to a profit/loss situation.
Example 8.21
Diesel and Dugga decided not to sell a machine but to rather trade it in on a new
machine costing R100 000.
Cost price of machine 1/10/2004 R175 000
Accumulated depreciation – 01/07/2010 R131 250
Net carrying value – 01/07/2010 R43 750
Date traded 1 July 2010
Required:
Do the general journal entries for all the transactions.
Solution:
General Journal of Diesel and Dugga
Tr
no Details Fol Debit Credit
R R
1 Debit plant & machinery 175 000
Credit supplier/creditor or bank 175 000
Purchased new asset
2 Debit plant & machinery 100 000
Trade in old machinery for new machine
Receive money for the sale of fixed asset
3 Debit asset disposal 100 000
Old machine – asset disposal
4 Debit disposal of fixed asset 175 000
Credit fixed asset account 175 000
Transfer cost price of asset being sold
5 Debit accumulated depreciation 131 250
Credit disposal of fixed asset 131 250
Transfer depreciation accumulated of asset now
being sold
6 Debit asset disposal 56 250
Credit profit with sale of fixed asset 56 250
Profit on disposal of machine
302
8.19.3 Scrapping of a fixed asset

Sometimes an asset is not worth enough to trade it in or to sell and the best thing
to do is to scrap it. The entries for this kind of example are the same as with the
sale or trade-in of a fixed asset. The entries in the general journal will look as
follows: If cost price of the vehicle was R100 000, accumulated depreciation to
date is R80 000. Scrap value of vehicle is R20 000.
Required:
Do the general ledger entries to scrap the vehicle from the books.
Tr
no Details Fol Debit Credit
R R
1 Debit asset disposal account 100 000
Credit fixed assets (the one scrapped) 100 000
Transfer cost price of asset being scraped
2 Debit accumulated depreciation 80 000
Credit asset disposal account 80 000
Transfer accumulated depreciation on asset
now being scraped
3 Debit loss on scrapping of asset 20 000
Credit asset disposal account 20 000
Transfer loss on scrapping of a fixed asset
303
Accounting for All
Questions
Question 8.1
XXX Computers bought furniture on 30 April 2013. The total invoice price was
R12 325 (including VAT). XXX had to pay transport costs of R2 000.
Required:
Calculate the cost price of the furniture.
Question 8.2
Gietie Enterprises bought a new vehicle on 1 May 2013. He financed the vehicle
on a lease through FFB Bank and total finance charges over the 60-month period
will be R89 990. The cost price of the vehicle was R90 000 (excluding VAT).
Gietie also had to pay an admin cost of R700 and licence and registration fees of
R250. Transport costs for railage paid from Cape Town to Pretoria amounted to
R3 200.
Required:
Calculate the cost price of the vehicle.
Question 8.3
BTY (Pty) Ltd bought a machine on 1 March 2009 for R15 000 (excluding VAT).
The scrap value, after a lifespan of five years is estimated at R2 000. BTY (Pty)
Ltd’s financial year end is 28 February.
It is estimated that the machine will produce 130 000 units during its lifespan. The
following units were produced in each year:
Year ending 28/02/2010 – 25 000 units
Depreciation rate is 20%.

Required:
Calculate the depreciation for each year on
8.3.1 The straight-line method.
8.3.2 Reducing balance method.
8.3.3 Production unit method.
304
Question 8.4
Use the same information as question 8.3, but the purchase date of the machine
changed to 1 June 2013.
Required:
Calculate the depreciation for each year on
8.4.1 The straight-line method.
8.4.3 Production unit method.
Question 8.5
Zoé Manufacturers bought a vehicle with a cost price of R57 000 (VAT included)
on 28 February 2013. Their financial year end is 31 December. Scrap value is
estimated at R3 000, after the lifespan of four years. It is also estimated that the
vehicle will drive ± 150 000 km during its lifespan.
Required:
Calculate the depreciation, accumulated depreciation and carrying value over the
asset’s lifespan if Zoé Manufacturers uses the straight-line method.
Question 8.6
Pita Furniture gave us the following extract of equipment purchased:
Date purchased 30 June 2011

Scrap value R3 000
Purchase price R25 000 (VAT exclusive)
Financial year end 28 February
Depreciation rate 33%
Lifespan 3 years
VAT R3 500
Required:
Calculate the depreciation, accumulated depreciation and carrying value over the
asset’s lifespan on
Question 8.7
Emma (Pty) Ltd purchased an industrial sewing machine for R68 400 (including
VAT) on 1 August 2013. The financial year end is 30 June. Scrap value is
estimated at R5 000, after a lifespan of four years.
Required:
Calculate the depreciation, accumulated depreciation and carrying value for the
year ending 30 June 2014, on the straight-line method.
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Accounting for All
Question 8.8
Rob’s Ferreira bought tools to the value of R20 000 (excluding VAT), on 29
September 2011. The financial year end is 28 February. The scrap value of the
tools, after a useful lifespan of four years is estimated at R1 000. Rob’s Ferreira
uses the reducing balance method to calculate depreciation. Depreciation rate is
15%.
Required:
Calculate the depreciation, accumulated depreciation and carrying value for the
years ending 28 February 2012 and 2013.
Question 8.9
XYZ (Pty) Ltd provides you with the following information:
Machine A Machine B
Date of purchase 1/9/2013 1/9/2013

Purchase price (excluding VAT) R100 000 R180 000
Implementation cost R25 000 –
Estimated useful life 5 years 6 years
Realisable value at end of useful life R5 000 R6 000
Estimated number of units to be produced in
lifespan 500 000 units 600 000 units
Machines A + B will produce the following units for the years ended:
Machine A Machine B
30/6/2014 40 000 units 20 000 units

30/6/2015 20 000 units 25 000 units
30/6/2016 60 000 units 45 000 units
30/6/2017 65 000 units 30 000 units
Required:
Calculate depreciation, accumulated depreciation and carrying value for both
machines on the following methods for the years ending 30 June 2014, 30 June
2015, 30 June 2016, and 30 June 2017.
8.9.1 Machine A = Production unit method
8.9.2 Machine B = Reducing balance method at 22% depreciation rate pa
306
Question 8.10
The following information appears in the books of Steel Stores for the year ended
30 June 2013.
Balances at 1 July 2013
R
Vehicles 54 100
Transactions:
2012
July 1 Sold a vehicle with a cost price of R26 000 (VAT excluded) on credit
to Renny Motors for R10 300 (VAT included). The carrying value on
the date of sale was R8 840.
2013
Jan 31 Purchased a new vehicle on account from Morris Motors for R43 500
(VAT included).
June 30 Provide depreciation on vehicles at 10% pa according to the straight-

line method.
Required:
Show the following ledger accounts for the financial year ended 30 June 2013.
Vehicles
Accumulated depreciation on vehicles
Asset disposal/realisation
(Show all calculations to the nearest R)
Question 8.11
The following balances appear in the books of Allan Joss Traders on 1 January
2013:
R
Vehicles 170 000
The following transactions occurred during the financial year ended 31 December
2013. Depreciation is calculated at 10% per annum according to the fixed
instalment method.
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Accounting for All
Transactions:
2013
April 1 An old vehicle, which originally cost R35 000 (VAT excluded) on
1 October 2010, was traded in on a new vehicle for R24 000. The
new vehicle cost R54 000.
2013
July 1 Purchase a new vehicle for R60 000 cash.
Required:
Enter the above-mentioned transactions in the following ledger accounts in the
general ledger. VAT of 14% is included in all figures where applicable.
Vehicles
Accumulated depreciation: vehicles
Asset disposal
Creditors control
(Show all calculations to the nearest Rand)
Question 8.12
The following balances were taken from the accounting records of Venda Traders
at 28 February 2012:
R
Vehicles 280 000
It is the policy of the business to depreciate vehicles at 15% per annum according
to the reducing balance method. VAT of 14% is included where applicable.
The following transactions occurred during the financial year ended 28 February
2013:
2012
Oct 1 Purchase a vehicle on credit from Benz Motors, R90 000.
2013
Jan 1 Sold an old vehicle, originally purchased on 1 March 2010 for
R60 000 (VAT excluded), on credit to W Wallis for R45 000.
308
Required:
Record the above-mentioned transactions in the following ledger accounts for the
financial year ended 28 February 2013.
Vehicles
Accumulated depreciation: vehicles
Asset disposal
Vehicles
(Show all calculations to the nearest R)
Question 8.13
On 1 March 2012 the beginning of the financial year, Bokomo Traders owned
two vehicles with a total cost of R180 000.
The accumulated depreciation on the two vehicles amounted to R33 800 on
1 March 2012.
Depreciation on vehicles is calculated at 20% per annum on the straight-line
method.
On 1 September 2012 a vehicle which cost R80 000 on 1 March 2010 was sold
cash for R60 000 and a new vehicle with a cost price of R140 000 was purchased
on credit.
Required:
Use the above information and prepare the following ledger accounts for the year
ended 28 February 2013. (All amounts exclude VAT)
Vehicles
Accumulated depreciation on vehicles
Asset disposal
Depreciation
309
CHAPTER 9
INVENTORY
9.1 Introduction
Most organisations use concrete inputs that can be observed in the product or
service and also intangible inputs that cannot be seen or touched in the product or
service. For example, the supply of direct labour and other supporting services are
intangible inputs, which cannot be stockpiled; while raw material, which is a
concrete substance, may be stockpiled for future usage. Similarly, finished
products may be stored until sold.
The misuse, overstocking and theft of inventory are often major problems of an
organisation’s inventory management. The purpose of inventory management is
to minimise inventory costs.
The balance between goods purchased and sold, is inventory.
The closing inventory of the current period becomes the

opening inventory of the next period.
Opening inventory refers to the balance (value and quantity) of goods (or raw
material) the business had on hand on the first day of the financial year. Closing
inventory refers to the balance (value and quantity) of goods (or raw material) the
business had on hand on the last day of the financial year.
Inventory is controlled by accounting statement AC 108.
 Understand the different inventory categories
 Determine cost of goods sold
 Calculating and valuing of opening and closing inventory on
– FIFO method
– Weighted average method
 Calculate gross profit on both inventory systems
 Do the valuation on the two inventory record-keeping methods
– Periodic inventory system
– Perpetual inventory system
9.2 Inventory can be categorised as follows

9.2.1 Direct material
Direct material or primary material is an independent cost element and can
normally be described as the main ingredient the product is made of and it is
usually visible in the finished product and can easily be traced to it. Examples of
primary materials are furniture factories, using wood to produce units of furniture.
Another example would be the ink and plastic used to produce pens.
Chapter 9 Inventory
9.2.2 Indirect material

Indirect material or secondary material is not the main ingredient the product is
made of and is sometimes visible and sometimes not visible in the finished
product, eg oil used in the manufacturing of furniture, or the nails, screws and
staples in the TV cabinet. It is difficult to trace it to a specific product but it can
easily be traced to the process. It contributes to the conversion of primary
materials into finished goods. Indirect materials are classified as overhead costs.
9.2.3 Work in process
Work in process or incomplete work is partially completed product units but
cannot be classified as a finished product. Normally work in process contains all
three cost elements because direct materials and a portion of labour and overheads
are already allocated to it. Work in process units can be in any stage/phase of
incompletion from 1% to 99% of a completed product.
9.2.4 Finished goods
Finished goods are units of product that have been completed but have not yet
been sold to customers.
9.2.5 Trading inventories
Trading inventories consist of finished products obtained from factories or
wholesalers for resale purposes. Trading organisations only have trading
inventories and not raw materials, work in process and finished goods, inventories
as in the case of manufacturing organisations.
9.3 Cost of goods sold

Cost of goods sold is calculated as follows:
Opening inventory xx
+ Purchases xx
Total inventory available to sell xx
– Closing inventory (xx)
Cost of inventory sold xx
Example 9.1
Mr Bamboo had the following transactions regarding inventory during the first
week of May 2013:
Units Value
Monday – Inventory in shop 50 R250
Tuesday – Goods received from supplier 100 R500
Thursday – Goods sold 50 R250
Friday – Goods in shop at the end of the day 100 R500
311
Accounting for All
How do we calculate cost of goods sold?
Cost of goods sold =

Units Value
Opening inventory 50 R250
+ Purchases 100 R500
Total inventory available to sell 150 R750
– Closing inventory (100) (R500)
Cost of inventory sold 50 R250
The cost price of one item is R5. How do we know this? Opening inventory was
50 units at a value of R250. (R250 ÷ 50) = R5/units or:
Inventory purchased at a total value of R500 for 100 units, thus price per unit is
(R500 ÷ 100 units) = R5/u.
Total price (value)
Cost price per unit =
Number of units
Cost of inventory sold, must be the cost you paid for the number of units sold.
In other words if we sold 100 units, then cost of goods sold must be the cost for
100 units.
9.4 Calculation of closing inventory units

In the previous demonstrations, the units of closing inventory were given. But
how do we calculate closing inventory units?
Closing inventory units are calculated as follows:
Opening inventory units xx

+ Purchases units xx
Inventory units available to sell xx
– Units sold (xx)
Closing inventory units xx
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Chapter 9 Inventory
Example 9.2
Sing (Pty) Ltd had opening inventory of 2 000 units on 1 March 2013. During
March 2013 they sold 5 000 units. Their purchases for March 2013 were 4 000
units.
How many units are in closing inventory?
Closing inventory units =
Units
Opening inventory units 2 000

+ Purchases units 4 000
Units available to sell 6 000
– Units sold (5 000)
Closing inventory units 1 000
The calculation of units in closing inventory is relatively simple. The problem

arises when different inventory recording systems are used and the valuation of
the units in closing inventory can be done with different valuation methods.
9.5 Inventory valuation methods

Material purchases do not pose any problem in arriving at the cost thereof since
each item purchased has its own value. When materials are issued to production
lines a valuation method for the issuing thereof is required. This is the result of
purchase prices that are subject to constant change, which include amongst others,
inflation, exchange rate changes, changes in suppliers, etc.
The most popular methods to valuate inventory issues are as follows:
 FIFO method (first-in-first-out)
 LIFO method (last-in-first-out)
 Weighted average method
 Standard cost method
In this subject we are only going to explain the two most popular methods which
are:
 FIFO method
 Weighted average method
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Accounting for All
9.5.1 FIFO
FIFO is an inventory issuing method that issues the oldest inventory first to the
production departments. Thus, FIFO assumes that items received first will be
issued first resulting in a lower cost of sales figure, a higher profit and a higher
closing inventory value than the other methods.
9.5.2 Weighted average method
With the weighted average cost method a new average cost is calculated every
time a receipt is entered in the inventory ledger account. The calculation is done
by adding the latest total inventory value, to the newest receipt value, divided by
the total quantity of inventory. The average inventory price is the figure used to
value the next inventory issue made to production and also the closing inventory.
Using the weighted average method, the cost of sales figure and the closing
inventory balance will fall somewhere between the values recorded for the FIFO
and LIFO methods.
9.5.3 LIFO
LIFO method is no longer used in practice.
Note that the price per unit can only change with a transaction between the
supplier and the company, eg purchases of material. The price of material cannot
change with a transaction in the company itself, eg issuing of material.
9.6 Inventory recording methods

There are two inventory recording methods, namely:
 Perpetual inventory system
 Periodic inventory system
These two systems are just the manner how transactions regarding inventory will
be recorded in the books. The main differences between the two inventory
recording methods are perpetual and periodic. The table below lists the
differences:
Perpetual inventory system Periodic inventory system
 Has an inventory account.  Has an inventory account.
 Has no purchase account.  Has a purchase account.
 All transactions regarding inventory are  No transactions are entered
entered into the inventory account, so during the period into the
the value of the inventory is known after inventory accounts, but an
each transaction. inventory count has to be
performed to determine the
value of the closing inventory.
 The amount of the cost of sales is  Cost of sales has to be
entered into the books after each sales calculated at the end of the
transaction. period as no entries are made
during the period for cost of
sales.
314
Chapter 9 Inventory
 Cost of sales need not be calculated as  Cost of sales needs to be

the cost of sales (Rand value) is calculated at the end of the
recorded in the cost of sales account. period. It is calculated as
follows:
+ Purchases xx
+ Import tax xx
+ Freight paid xx
Cost of goods available xx
COS xx
 No physical stock take (actual count of  Physical stock take
number of units) is necessary. determines the value of the
closing inventory.
 The four-column method is
 By using the four-column method the not used to evaluate closing
valuation of closing inventory can be inventory.
determined.
These two methods differ in the way each inventory transaction is recorded into
the ledger, whether it is sales, purchases or the valuation of closing inventory.
The two methods differ in the way inventory transactions are entered into the
books. Inventory transactions being:
 Purchases of inventory
 Sales of inventory
 Returns of inventory
The debit and credit entries when purchasing and selling inventory on the two
different methods will be as follows:
Also refer back to chapter 2 for a detailed explanation.
Inventory account = Debit
Bank/creditors = Credit
Bank/debtors = Debit (selling price)
Sales account = Credit (selling price)
and
Cost of sales account = Debit (cost price)
Inventory = Credit (cost price)
When units are sold, an entry is made in the inventory account, at the cost price of
the inventory sold.
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Accounting for All
9.6.2 Periodic inventory system

Purchases account = Debit
Bank/creditors = Credit
Bank/debtors = Debit (selling price)
Sales account = Credit (selling price)
When units are sold, no entry is made in the inventory account. A physical
inventory count is done at the end of the period to determine the closing
inventory.
Example 9.3
Mojo had the following transactions regarding inventory for November 2013:
1. Bought inventory cash for R12 000.
2. Sold inventory cash for R25 000, CP was R20 000.
3. Bought inventory on credit for R35 000.
4. Return to supplier, inventory with value of R3 000.
5. Sold inventory on credit for R18 000, CP was R15 000.
6. Received goods back from a debtor to the value of R5 000, CP was R4 000.
Required:
Entered the above transactions into the general journal if Mojo uses
9.3.1 Perpetual inventory system.
9.3.2 Periodic inventory system.
Solution:
9.3.1 Perpetual inv system 9.3.2 Periodic inv system
R R R R
1. Inventory 12 000 Purchases 12 000
Bank 12 000 Bank 12 000
2. Bank 25 000 Bank 25 000

Sales 25 000 Sales 25 000
COS 20 000
Inventory 20 000
3. Inventory 35 000 Purchases 35 000

Creditors 35 000 Creditors 35 000
316
Chapter 9 Inventory
4. Creditors 3 000 Creditors 3 000

Inventory 3 000 Purchases 3 000
5. Debtors 18 000 Debtors 18 000

Sales 18 000 Sales 18 000
COS 15 000
Inventory 15 000
6. Sales 5 000 Sales 5 000

Debtors 5 000 Debtors 5 000
Inventory 4 000
COS 4 000
9.7 Calculation of gross profit

Gross profit is calculated as follows:
Sales xx
– Cost of sales (xx)
Gross profit xx
On the perpetual inventory system, cost of sales is not calculated with the same
calculation as on the periodic inventory system. The perpetual inventory system
has no purchases account (refer to chapter 2) therefore it cannot be calculated by:
using opening inventory, purchases and closing inventory. On the perpetual
inventory system, the cost of sales amount is known after each sales transaction.
On the periodic inventory system, cost of sales has to be calculated. This is done
as follows: (also refer to chapter 2)
Cost of sales =
+ Purchases xx
Inventory available for sales (xx)
Cost of sales xx
9.8 Calculation of cost of sales

Claus (Pty) Ltd provides you with the following information:
Sales R200 000

COS R110 000
317
Accounting for All
The gross profit on the perpetual inventory system will be calculated as follows:
R
Sales 200 000
– COS (110 000)
Gross profit 90 000
The following is available from Ella’s Boutique
R
Opening inventory 14 000
Purchases 50 000
Sales 100 000
Closing inventory 8 000
The gross profit on the periodic inventory system will be calculated as follows:
R
Sales 100 000
– COS (56 000)
+ Purchases 50 000
Inventory available to sell 64 000
– Closing inventory (8 000)
Gross profit 44 000
9.9 Valuation of closing inventory

The two inventory valuation methods, which we will use, namely, FIFO and
weighted average can be used with both the perpetual inventory system and
periodic inventory system in operation. In other words valuation of inventory can
be either:
Inventory recording method Valuation method
FIFO
 Perpetual inventory system
Weighted average
or
FIFO
 Periodic inventory system
Weighted average
In a given question, firstly, determine which inventory system is in use, and then
which valuation method must be applied.
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Chapter 9 Inventory
Whichever one of the two inventory valuation methods must be used, FIFO or
weighted average, the steps in doing the valuation will always be the same.
9.9.1 Inventory valuation using the perpetual inventory system
1. Use four columns to carry out the valuation, namely:
 Date
 Received
 Issued
 Balance
2. The received, issued and balance column must all have the following three
columns:
 Units quantity
 Unit price
 Amount
The valuation of inventory on the perpetual inventory system will look as
follows:
Date Received Issued Balance
Units Unit Total Units Unit Total Units Unit Total
quantity price amount quantity price amount quantity price amount
3. All units received will be entered into the received column.

4. All units issued will be entered into the issued column.
 The way in which units are issued will differ, depending which
valuation method is used eg FIFO or weighted average.
5. After each transaction, whether units were received or issued, the new
balance must be entered into the balance column.
 This is one of the characteristics of the perpetual inventory system.
After each transaction, the value of inventory is available.
6. Cost of sales is the value of the total of the issued column.
Example 9.4
Transactions recorded with reference to a certain material commodity in Buck-
Buck CC
1 May Opening inventory 100 units at R5.00 per unit
5 May Received 120 units at R5.75 per unit
6 May Received 180 units at R6.00 per unit
7 May Issued 200 units
9 May Return to supplier (purchased on 6 May) 20 units
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Accounting for All
Required:
Calculate the value of closing inventory on the perpetual inventory system, using
the following valuation methods
9.4.1 FIFO method.

9.4.2 Weighted average method.
Perpetual inventory system
Four columns are used to do the valuation:
 Date
 Received
 Issued
 Balance
Solution:
9.4.1 Inventory ledger card using the FIFO method:
(perpetual inventory system)
Qty Price Amount Qty Price Amount Qty Price Amount
1 May 100 5.00 500.00
5 May 120 5.75 690.00 120 5.75 690.00
6 May 180 6.00 1 080.00 180 6.00 1 080.00
7May 100 5.00 500.00 20 5.75 115.00
100 5.75 575.00 180 6.00 1 080.00
8 May 20 5.75 115.00
130 6.00 780.00 50 6.00 300.00
9 May (20) 6.00 (120.00) 30 6.00 180.00
10 May 20 6.00 120.00 10 6.00 60.00
From the above solution it can be observed that the closing inventory is 10 units
valued at R60. The cost of sales is the total of the issued columns amount value
which is R2 090.
320
Chapter 9 Inventory
Solution:
9.4.2 Inventory ledger card using the weighted average method:
(perpetual inventory system)
Qty Price Amount Qty Price Amount Qty Price Amount
1 May 100 5.00 500.00
5 May 120 5.75 690.00 220 5.41 1190.00
6 May 180 6.00 1 080.00 400 5.68 2270.00
7 May 200 5.68 1136 200 5.68 1136.00
8 May 150 5.68 852 50 5.68 284.00
9 May (20) 6.00 (120.00) 30 5.47 164.00
10 May 20 5.47 109.40 10 5.47 54.70
From the above solution it can be observed that the closing inventory is 10 units
valued at R54.70. The cost of sales is the total of the issued column, which is
R2 097.40.
(R1 136 + R852 + R109.40)
The differences in balances are because FIFO’s balance was valued at the latest
price and weighted average method and has been valued at the weighted average
price.
Note that the price per unit can only change after the receipts of the latest order, in
other words, with a transaction between the company and supplier for the next
order.
With both methods the quantity of the closing inventory is the same, eg 10 units,
only the value differs.
9.9.2 Inventory valuation using the periodic inventory system
1. Write down below one another, all inventory available eg opening balance
and all inventory received (purchases) (in exactly the order in which they
were received).
2. Calculate the number of units left over in closing inventory available eg
opening balance and all inventory received (purchases) less all inventory
issued.
3. Execute the valuation:
 FIFO – from the bottom
 Weighted average – take the weighted average price
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Accounting for All
4. Cost of sales is calculated as follows:

+ Purchases xx
On the periodic inventory system, regardless of which valuation method is used,
the steps will always be the same.
Example 9.5
Use the same information as given in the previous example of Buck-Buck CC, but
use the periodic inventory system on:
9.5.1 FIFO valuation method
9.5.2 Weighted average method
9.5.3 Calculate the cost of sales
Solution:
Periodic inventory system
Step 1
Units R/U R
100 x 5.00 = 500
120 x 5.75 = 690
160 x 6.00 = 960
380 x 5.66 = 2 150
Step 2
Closing inventory = 10 units
Step 3
Evaluate the closing inventory monetary values.
9.5.1 FIFO method = 10 units x R6.00 = R60.00

9.5.2 Weighted average = 10 units x R5.66 = R56.60
method
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Chapter 9 Inventory
Step 4
9.5.3 Calculation of the cost of sales (COS)
FIFO Weighted
average
R R
+ Purchases 1 650 1 650
2 150 2 150
– Closing inventory (60) (56.60)
Cost of sales 2 090 2 093.40
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Accounting for All
Questions
Question 9.1
Mackensie Manufacturers provides you with the following figures:
Purchases R100 000

Carriage on purchases R7 000
Carriage on sales R5 000
Import tax R8 000
Closing inventory R12 000
Opening inventory R20 000
Sales returns R15 000
Purchases returns R6 000
Sales R300 000
Required:
Calculate gross profit.
Question 9.2
Nicolson’s Enterprises ask you to assist their bookkeeper in calculating the
missing amount for purchases. The other figures available are:
Sales R500 000

Sales returns R50 000
Purchases returns R20 000
Carriage inwards R15 000
Carriage outwards R25 000
Cost of sales R
Inventory 1/3/2013 R25 000
Inventory 31/12/2013 R35 000
Purchases ?
Cost of sales R350 000
Gross profit ?
324
Chapter 9 Inventory
Question 9.3
Freddies Café makes a profit of 15% on cost price. They use the periodic
inventory system.
The following transactions occurred during the month of October 2013:
2013
Oct 9 Sold inventory cash with selling price of R10 000.
12 Sold inventory on credit to Fedunja for R7 000.
18 Purchased inventory for R90 000 cash.
23 Fedunja returned some of the units he bought on 12 Oct. The cost
price of the units is R2 000.
25 Purchased inventory on credit from CJ Stores for R11 000.
26 We received a credit note from CJ Stores for goods returned to the
value of R500.
27 Freight paid on purchases, R7 000.
Required:
Journalise the above transactions.
Question 9.4
Rainy Day Weather Coats provides you with the following transactions regarding
their inventory for December 2013:
2013
Dec 8 Bought inventory and paid cash R10 000.
10 Bought inventory on credit for R15 000 from Pompei Manufacturers.
15 Sold inventory on credit to Azalea Outlet for R22 000.
18 Import duties on purchases amounts to R5 000, still due.
23 Received a credit note from Pompei Manufacturers to the value of
R1 000.
28 Sold inventory cash to Brooklyn Enterprises with a selling price of
R17 000.
30 Azalea returned some inventory bought on 15 Dec with a selling price
of R7 000.
Required:
Rainy Day makes a profit of 25% on selling price and they use the periodic
inventory system.
325
Accounting for All
Question 9.5
Maburja Enterprises uses the perpetual inventory system to keep record of their
inventory. They make a profit of 30% on cost price.
The following transactions occurred during December 2013:
2013
Dec 1 Bought inventory cash for R3 000.
5 Sold inventory on credit to Banfanfana for R1 000.
13 Bought inventory on credit for R4 000, from WXY Stores.
20 Sold inventory with a cost price of R2 000 cash.
23 Issued a credit note to Banfanfana for goods returned, R750.
28 Received a credit note from WXY Stores for R500.
30 Carriage paid on purchases to the total amount of R8 500.
Required:
Question 9.6
Robzzz Properties sell their properties at cost price plus 20%. They use the
perpetual inventory system.
The following properties were sold during November 2013:
2013
Nov 3 Property Waterkloof for R1 200 000 cash.
15 Property Soshanguve for R900 000 cash.
18 Property Merlyn for R2 000 000 cash.
Required:
Journalise the transactions in the books of Robzzz Properties.
Question 9.7
Grey-Grey has the following transactions for inventory during the month of May
2013. Grey-Grey uses a perpetual inventory system.
2013
May 1 Opening balance – 500 units at R3 per unit.
6 Purchase inventory – 600 units at R3.30 per unit.
11 Issue 800 units – selling price R9 per unit.
13 Factory returns 20 units issued on 11 May.
16 Purchase inventory – 800 units at R3.40 per unit.
23 Issue 1 000 units with a selling price of R10 per unit.
28 Return 100 units to the supplier purchased on 16 May.
Required:
Calculate, using the FIFO method and the weighted average method
9.7.1 The value of closing inventory.
9.7.2 Gross profit.
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Chapter 9 Inventory
Question 9.8
From the following information obtained from AV Connection (Pty) Ltd, you are
required to calculate the gross profit and the closing inventory on the FIFO and
the weighted average method:
2013
Jan 1 Opening balance, 1 200 units with a total cost of R4 800.
15 Purchased 700 units, total cost = R2 870.
18 Purchased 800 units, total cost = R3 360.
19 Issued 1 800 units.
25 Returned 200 units, bought on 18 January.
28 Factory returned 120 units, issued on 19 January.
30 Issued 300 units.
Selling price for all sales was R12 per unit.

AV Connection (Pty) Ltd uses a perpetual inventory system.
Required:
Calculate the value of closing inventory and gross profit on:
9.8.1 FIFO method.
Question 9.9
Boje Retailers use a periodic inventory system and provides you with the
following information for their inventory during August 2013:
Balance on 1 August, 300 units at R5 each.
2013
Aug 5 Issued 100 units.
9 Purchased 2 000 units at R6 each.
12 Returned 100 units to the supplier, bought on 9 August.
14 Purchased 1 500 units at R6.50 each.
22 Issued 2 000 units.
28 Factory returned 100 units, issued on 22 August.
29 Issued 500 units.
Selling price is R20 per unit.

Required:
Calculate the value of closing inventory and gross profit on:
9.9.1 FIFO method.
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Accounting for All
Question 9.10
Kallis and Sons provided you with the following information for the month of
September 2013:
2013
Sep 1 Balance of 300 units, value R30 000.
11 Purchased 400 units, value R45 000, cash.
15 Sold 600 units, at selling price R95, cash.
17 Purchased 450 units, value R50 850 on credit.
19 Returned 14 units to supplier, bought on 17 September.
23 Sold 200 units, at selling price R130 on credit.
Required:
Calculate the value of closing inventory and gross profit if Kallis & Sons uses the
periodic inventory system, on
9.10.1 FIFO method.
9.10.3 Journalise the above transactions on the periodic inventory system.
Question 9.11
Bibi Manufacturers provides you with the transactions regarding the material they
use in their manufacturing process.
They sell all their material products at R20 per unit.
The following transactions regarding material took place during May 2013:
2013
May 2 Opening balance – 100 units, total price R900.
5 Purchase 50 units at R10 each, cash.
8 Sold 120 units cash.
16 Sold 10 units on credit.
21 Purchased 500 units at total price of R6 000, on credit.
24 Returned to supplier 150 units bought on 21 May.
27 Sold 360 units on credit.
29 Factory returned, five units, issued on 27 May, cost price = R60.
Required:
Calculate gross profit and value of closing inventory if
9.11.1 FIFO method is used on perpetual inventory system.
9.11.2 Weighted average method is used on periodic inventory system.
9.11.3 Journalise all the above transactions if the perpetual inventory system is
used. Calculate gross profit.
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Chapter 9 Inventory
Question 9.12
The following information was obtained from the inventory records of Selinas
(Pty) Ltd:
2013
Aug 1 Balance of R3 880.
9 Purchased inventory for R3 200, cash.
10 Purchased inventory for R3 960 on credit.
15 Sold 500 units with a selling price of R13 each, cash.
Cost price = R4 000.
21 Sold 700 units with a selling price of R14 each, on credit.
Cost price = R6 000.
Required:
Journalise all the above transactions on
9.12.3 A physical stock count revealed that the inventory value on 31 August
amounted to R1 040. Calculate the gross profit on both methods.
Question 9.13
Obay Retailers had the following transactions for inventory during March:
2013
Mar 1 Opening balance – R3 000.
5 Purchases for R10 000 on credit.
17 Sales for R7 000 cash, cost price amounted to R5 000.
21 Sales for R1 500 cash, cost price amounted to R900.
25 Purchased inventory cash for R1 100.
27 Purchased inventory on credit for R14 000.
29 Sold inventory with a cost price of R5 000, for R8 500 on credit.
Physical inventory count revealed that inventory on hand at 31 March amounted
to R27 100.
Required:
Journalise the above transactions on
9.13.3 Calculate the gross profit for both inventory systems.
329
CHAPTER 10
YEAR-END ADJUSTMENTS
10.1 Introduction
The life of a business is divided into accounting periods which in turn can be
divided into accounting cycles.
When a business opens its doors for trading, the financial year-end must be
determined, for example as 30 September. The management wants quarterly
financial reports whilst the managing director wants management accounts at the
end of every month in order to keep a tight control over the income and
expenditure (the profit) of the business.
Within this scenario we can already identify three accounting periods:
 the financial year (one accounting period = 12 months)
 quarterly financial reporting (accounting period = 3 months)
 monthly management accounts (accounting period = 1 month)
The importance of this is that an ‘accounting period’ does not necessarily always
refer to a specific period. It refers to the period that you are accounting for and
reporting on, be it a month, six months or a year.
During each one of these periods though, the accounting cycle remains the same,
starting with a transaction and ending in a report on the financial progress of the
business.
Chapter 10 Year-end adjustments
A typical accounting cycle, to be found in every accounting period, could look as

follows:
1. Transaction
2. Record in journal (prime book)
3. Post to the general ledger
4. Balance the accounts in the

general ledger
5. Extract a trial balance

6. Use a working sheet
7. Adjust the accounts in the trial
balance
8. Draw up a post-adjustment trial

balance
9. Post adjustments to general

ledger and close the nominal
accounts
Financial accounting
10. Prepare the final accounts and
Reporting
financial statements
Management
accounting

 Understand the accounting concepts applicable on year-end
adjustments
 Record and understand the following year-end adjustments:
– Accrued expenses
– Prepaid expenses
– Accrued income
– Income received in advance
– Inventory adjustments
 Record the necessary closing entries for all nominal accounts
 Prepare the final accounts of a business
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Accounting for All
10.2 The accounting cycle

For a student of accounting, the accounting cycle determines the knowledge
needed to move from the very first step of recording a transaction, to the last step,
the drawing up of financial statements. The accounting cycle directs the total
accounting process. Every transaction will eventually be reflected in the financial
reports of the business.
In previous chapters you looked at basic accounting, including the whole
accounting system, ledger accounting and the concept of double-entry
bookkeeping, up to posting to the general ledger.
In this chapter we will build on this knowledge and focus on the next steps in our
journey which will eventually lead us to our destination, financial reporting.
If you look at the diagram of the accounting cycle (on page 331) you will see that
we are now at step 7 namely ‛Adjust the accounts in the trial balance’.
It is important to notice that these year-end adjustments can be made by means of
general journal entries.
Before we discuss the year-end adjustments it is important that we must first
discuss the following accounting concepts:
(You are referred to the IASB Framework)
10.3 Accounting concepts

10.3.1 The ‘going concern’ concept
According to GAAP the ‘going concern concept’ means that ‛the business entity
will continue in operational existence for the foreseeable future. This means in
particular that the statement of profit or loss and other comprehensive income and
statement of financial position assume no intention or necessity to liquidate, or
curtail significantly, the scale of operation’.
The ‘going concern’ concept implies that the business will continue with its
operations as is and will continue existing in the foreseeable future. The main
factor here is that assets in the statement of financial position should be valued at
their ‘break-up’ value, in other words at the amount that the business would earn
from their sale if the business was closed.
10.3.2 The ‘accrual’ concept
GAAP states that ‛Revenue and costs are accrued (that is, recognised as they are
earned or incurred, not as money is received or paid), matched with one another
so far as their relationship can be established or justifiably assumed, and dealt
with in the statement of profit or loss and other comprehensive income for the
period to which they relate’.
332
The only provision is that where the matching concept is inconsistent with the
prudence concept, the latter prevails. Revenue and profits dealt with in the
statement of profit or loss and other comprehensive income are matched with
associated costs and expenses by including in the same account, the cost incurred
in earning them (so far as these are material and identifiable).
The matching or accruals concept implies that income and costs or expenses are
recognised as they are earned or incurred and recorded in the financial statements
of the period to which they relate. This is to ensure that financial statements are a
correct reflection of the income for the period.
10.3.3 The ‘comparability’ concept
‛There is consistency of accounting treatment of like items within each
accounting period and from one period to the next.’
The comparison of financial statements covering different periods will only have
meaning if the items within them have, over the different periods, been dealt with
in a consistent manner. It is a question of comparing apples with apples.
The matter of comparability forms part of the qualitative characteristics of
financial statements (IASB Framework).
The basic assumptions are:
 similar items should be given similar accounting treatment, and
 the same treatment should be applied to similar items from one accounting
period to the next.
10.3.4 The ‘prudence’ concept
‛Revenue and profits are not anticipated, but are recognised by inclusion in the
statement of profit or loss and other comprehensive income only when realised in
the form of cash or of other assets, the ultimate cash realisation of which can be
assessed with reasonable certainty. Provision is made for all known liabilities
(expenses and losses) whether the amount of these is known with certainty or is a
best estimate in the light of the information available.’
The prudence concept is also referred to as the concept of conservatism. This is
because the concept has a rather pessimistic point of departure. Where there are
various ways of accounting for a certain transaction, accountants will normally go
for the method that will understate assets and income.
Income is not brought into account until it is realised whilst expenses will be
brought into account as soon as they are known. Revenues and profit are not
anticipated, they have to be realised in the form of cash or other assets. All known
expenses are, however, provided for irrespective of whether the amount is known
with certainty or whether it is just an estimate (it must be a good estimate though).
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Accounting for All
All these concepts in one way or another refer to income and expenses. To give
effect to these concepts, all the income and expense accounts and the facts
pertaining to them, have to be examined. Where adjustments are necessary they
have to be made. These adjustments must be done before the preparation of the
financial statements. If you are using a worksheet to write up your trial balance,
you will firstly do your adjustments on your worksheet, which you will then use
as a basis for making entries into the general journal. Only then will the
adjustments be posted to the general ledger. Remember that the financial reports
are compiled using the information in the general ledger.
10.4 Adjustments
Adjustments can be divided into two categories – long-term adjustments and
short-term adjustments.
Long-term adjustments refer to adjustments to income and expense accounts
where the income that has been received or the expense that has been incurred,
pertains to a whole series of future periods. The total duration of the future
periods is normally an estimate.
An example of a long-term adjustment is depreciation of a fixed asset.
Depreciation is an expense that is calculated on the value of a fixed asset over the
lifespan of the asset. At the end of the accounting period, an adjustment reflecting
either the depreciation of the previous year, or a provision for the following year,
has to be made. Since we dealt with depreciation extensively, it will not be
discussed again.
Short-term adjustments refer to adjustments to income and expense accounts
where the income received or the expenses incurred, pertain to the period either
immediately following or immediately preceding the current period.
We will concentrate on short-term adjustments, which include:
 accrued expenses
 prepaid expenses
 accrued income
 prepaid income
 inventory adjustments
At the end of an accounting period, when the accounts are balanced and closed
off, a transaction may have occurred without a source document having been
generated by the supplier or received by the customer. This source document may
only be received in the following accounting period.
An example of this is a telephone bill. A business with a financial year-end on 31
August, may receive a telephone bill in September, reflecting calls made in
August and rental covering October.
334
When we looked at the accounting principles we mentioned that they guide the
year-end adjustment process and that all of them in one way or another affect the
income and expense accounts of the business. The accrual concept is however,
the most important concept to keep in mind when closing off income and expense
accounts at the end of the accounting period.
The accrual concept states, in essence, that once revenue has been recognised for
a period, then the cost and expenses incurred to achieve that revenue MUST be
set off against that revenue. The basis for preparing the primary financial reports
is therefore to take account of transactions when they happen and not when
payment takes place. Only in this way is it possible to determine the real profit or
loss for the period accounted for.
Let’s look at our telephone account. The calls made in August, it is assumed,
helped or contributed to the income received in August. Do you think the October
rental made any contribution to the August income?
Of course not! Normally when receiving the telephone account you will enter it
into the purchases journal, debiting telephone expenses and crediting trade and
other payables. According to the matching concept, you will however have to
account for the expenses pertaining to August (the previous accounting period) in
the August expense account and not in the September expense account (which is
when you received the invoice). This implies that the telephone expense account
of the previous accounting period has to be adjusted so as to reflect the August
expenses. The situation as illustrated with the telephone account raises the point
that at the end of the financial accounting period, there might be exceptional items
of income and expenditure that need to be accounted for in a special way.
Accrued and prepaid expenses are the two items which will be encountered most
frequently, so they will be explained in detail. Note that ‘accruals’ and
‘prepayments’ only refer to income and expense items.
10.4.1 Accrued expenses
Accrued expenses are expenses that were incurred in the current accounting
period but, due to certain circumstances, have not been paid. These expenses have
to be written off against the income of the current accounting period even though
they have not yet been paid. Remember the example of the telephone bill? This is
an example of an accrued expense.
10.4.2 Prepaid expenses
Prepayments are payments you have made in one accounting period even though
some of it is only due in the next accounting period. Even though the expense was
paid in full, only the part due for payment in the current accounting period should
be matched against the income of the current accounting period.
An example is rent. It is customary that rent has to be paid in advance. So if the
company paid R600 for rent on 27 August for September, it has actually paid
(R600) for a benefit (office space) it will only receive at a later point in time.
335
Accounting for All
To make sure that we all understand the same thing, let’s look at a simple
example.
Example 10.1
(Accrued expenses)
Big Buck’s Buckets started business as manufacturers and distributors of
containers on 1 January 2012. The electricity bills are paid quarterly, and for the
year ending 31 January 2012 were as follows:
30 April 2012 R2 789.00

31 July 2012 R3 210.05
31 October 2012 R2 956.54
31 January 2013 R3 110.52
Big Buck’s Buckets’ year-end however, runs from 1 January until 31 December.
Solution:
The total of the electricity bills received during 2012 was R8 955.59 (2 789 +
3 210.05 + 2 956.54). The electricity used during November and December 2012
was only invoiced at the end of January 2013.
However, according to the accrual concept, expenditure must be accounted for as
it occurs. Since a part of the invoice dated 31 January 2013 includes November
and December of 2012 electricity costs, the total amount spent on electricity
during 2012 of R8 955.59 is incorrect. A part of the electricity bill still needs to
be added and accounted for in the 2012 financial accounting period. Since it
reflects a payment due, it is an accrual and in this case an accrued expense.
The electricity expense account in the general ledger will look as follows:
Dr Electricity Cr
30/4/12 Bank 2 789.00 31/12/12 Balance c/f 8 955.59
31/7/12 Bank 3 210.05 (provisional)
31/10/12 Bank 2 956.54
8 955.59 8 955.59
31/12/12 Balance b/f 8 955.59
The entry in the trial balance will look like this:

Details Acc Pre-adjusted trial balance Adjustments
R R R R
Electricity 8 955.59
336
Now try to follow the calculation.
The total electricity charge for 2012 will be:
R
Paid during 2012 8 955.59
November and December (accrued 2/3 x 3 110.52) 2 073.68
Step 1 Do the adjustment on your trial balance (worksheet).

R R R R
Electricity 8 955.59 2 073.68
Accrued expense 2 073.68
(new account on
worksheet)
Step 2 Using the worksheet as the basis, do an entry in the general

journal.
R R
Debit electricity account 2 073.68
Credit accrued expenses 2 073.68
Step 3 Post the adjustment to the general ledger, changing the balance
of the account. Do you now understand why we first do only a
provisional balancing?
Dr Electricity Cr
30/4/12 Bank 2 789.00 31/12/12 Balance c/f 8 955.59
31/7/12 Bank 3 210.05 (provisional)
31/10/12 Bank 2 956.54
8 955.59 8 955.59
31/12/12 Balance b/f 8 955.59
Accrued exp GJ 2 073.68
Accrued expenses (statement of financial position account)

R
31/12/12 Electricity GJ 2 073.68
337
Accounting for All
Since the other electricity invoices were accounted for as they were received or
paid, the only adjustment necessary to the electricity account at the end of the
financial period, is for the outstanding months. Now the electricity account in the
general ledger and on the statement of profit or loss and other comprehensive
income will show that the electricity expenses for 2012 were in actual fact
R11 029.27 and not R8 955.59.
Example 10.2
(Prepaid expenses)
On 1 January 2013 Big Betty opened a swimwear shop for extra-large people.
Her rent has to be paid in advance on a quarterly basis and in total it amounts to
R20 000 per year. Her payments for the year ending 31 December 2013 were as
follows:
1 January 2013 R5 000

25 March 2013 R5 000
25 June 2013 R5 000
25 September 2013 R5 000
25 December 2013 R5 000
Look at the illustration below which was drawn as an aid to do the calculation. In
this illustration it is clear that one payment was made before year-end for the
benefit of the next year.
R 5000 R 5000 R 5000 R 5000
R 5000
F A J A O D F
J
M M J S N J M
25 September
25 June
Begining of financial year
25 December
25 March
End of financial year
338
The rent expense account in the general ledger will look as follows:
Dr Rent Cr
1/1/13 Bank 5 000 31/12/13 Balance c/f 25 000
25/3/13 Bank 5 000 (provisional)
25/6/13 Bank 5 000
25/9/13 Bank 5 000
25/12/13 Bank 5 000
25 000 25 000
31/12/13 Balance b/f 25 000
The entry on the trial balance will look as follows:

R R R R
Rent 25 000.00
Solution:
On 31 December 2013 Big Betty’s accountant tells her that her rental expenses in
the general ledger for the 2013 year amount to R25 000. Big Betty informs him
that although she has paid R25 000, the rental due for 2013 is in actual fact only
R20 000 and that R5 000 is for the first quarter of 2014.
The amount of R5 000 which relates to the next accounting period, but has been
paid in the current accounting period, is the prepaid expense. It is an expense that
has been paid before the benefit (value received) of the payment has been
received.
Step 1 Do the adjustment on your worksheet.
Details Acc Pre-adjusted trial Adjustments

balance
R R R R
Rent 25 000.00 5 000.00
Prepaid expenses 5 000.00
(new account on
worksheet)
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Accounting for All
Step 2 Make an entry in the general journal. The double entry in

the general journal necessary to correct the situation, will
look as follows:
Debit prepaid expenses 5 000

Credit rent expenses 5 000
Step 3 Post the entry from the general journal to the general ledger.
A new account ‛Prepaid expenses’ is opened to
accommodate the entry.
Dr Rent Cr
1/1/13 Bank 5 000 31/12/13 Balance c/f 25 000
25/3/13 Bank 5 000 (provisional)
25/6/13 Bank 5 000
25/9/13 Bank 5 000
25/12/13 Bank 5 000
25 000 25 000
31/12/13 Balance b/f 25 000 31/12/13 Prepaid exp GJ 5 000
Prepaid expenses (statement of financial position account)

31/12/13 Rent prepaid GJ 5 000
 Statement of financial position items

In both examples the accruals and prepayments are shown as statement of
financial position items.
The accrued expense represents a financial obligation that still needs to be met. It
is treated as a current liability like trade and other payables. It is accounted for as
an outstanding debt by the company.
Prepaid expenses represent a financial obligation that were met in advance and are
therefore accounted for as a current asset (like trade receivables). There is now an
obligation on the party paid to deliver the benefit for the payment. This party is
now in debt to the business.
In the examples above, two new accounts were introduced, namely prepaid
expenses and accrued expenses. Look at the accounts in the general ledger as
shown on the next page and make a note of what entries are posted where.
340
Dr Prepaid expenses Cr
Entry on the last day of the accounting Balance c/f
period for the adjustment
Balance b/f on the first day of the new On the first day of the new financial
financial accounting period year take balance to the relevant
expense account(s) leaving the balance
in this account, as nil
Accrued expenses
Balance c/f Entry on the last day of the accounting
On the first day of the new financial Balance b/f on the first day of the new
year take balance to the relevant financial accounting period
expense account(s) leaving the balance
in this account, as nil
Looking at the examples above, you will notice that the double entry of all
accruals and prepayments is reversed in the next accounting period.
10.4.3 Accrued income
Accrued income is income earned during a specific period but not yet received.
Examples of accrued income are:
 Interest receivable
 Rent receivable
Accrued income falls into the same category as trade receivables, where you have
delivered value but have not received your earnings from it. The difference is that
trade receivables refer to revenue whilst accrued income refers to all other income
accounts. Like trade receivables, however, it is treated as a current asset on the
The easiest way to understand a new concept is by way of example, so see if you
can follow the next demonstration.
Example 10.3
Asbestos (Pty) Ltd has, through the years, invested some of its income in fixed
deposits. The one fixed deposit it has with Postbank pays 10% interest a year,
payable every six months in arrears.
Date of current year-end 28-02-2013

10% Fixed deposit R60 000
Interest received R3 000
341
Accounting for All
Looking at the investment, it was found that the deposit was made on 1 March
2012 and that the interest is payable half-yearly in arrears on 28 February and
31 August.
Let’s see if an illustration could help with our calculation.
1 year = R6000
Earned Accrued
6 months 6 months
R3000 R3000
31/8/20x1 31/8/20x2
31/8/2013
31/8/2012
1/3/2012
1/3/20x1 28/2/20x2 28/2/20x3
28/2/2013 28/2/2014
R60 000 @ 10% p.a.
R60 000 @ 10% p.a.
currently
currently
Invest
Invest
Solution:
So the accrued income on 28 Feb 2013 is:
Yearly interest to be earned R6 000

Half-yearly interest to be earned R3 000
Interest earned covers two periods over a year:
1 March – 31 August
1 September – 28 February
The amount to be accrued is R3 000, for the period 1 Sept 2013 until 28 Dec
2013.

balance
R R R R
Interest received 3 000 3 000
Accrued income 3 000 3 000
(new account on
worksheet)
342
Step 2 Record the transaction accounting for the accrued

income in the general journal.
Debit accrued income 3 000

Credit interest received 3 000
being interest at 10% for Sep – Feb
Step 3 Post the entry from the general journal to the

general ledger. A new account ‛accrued income’ is
opened to accommodate the entry.
Dr Interest received Cr
31/8/12 Bank 3 000
28/2/13 Balance b/f 3 000
(provisional)
Accrued GJ 3 000
income
Accrued income (statement of financial position account)

28/2/13 Interest GJ 3 000
received
Accrued income is debited, because it is an asset on the statement of financial

position that increases.
Interest received is credited as an income account in the nominal accounts section
of the general ledger.
Accrued income is accounted for in the same way as prepaid expenses.
10.4.4 Income received in advance
If it is possible for a customer to pay for goods or services in advance, it follows
that the company or person supplying the goods or services, is receiving income
in advance.
The business has received money before it has delivered the benefit of the
payment. This places a burden on the business and actually becomes a liability to
the business.
A payment received in advance is called deferred income. In the current
accounting period it is treated as a liability but in the next accounting period, it
will be treated as income.
As a liability account it will increase on the credit side and decrease on the debit
side.
343
Accounting for All
Example 10.4
Calcu-data has a policy that states that when a customer places an order a 20%
deposit has to be paid in advance. On 30 December 2012, one day before the
financial year-end, Snoekie Zikalala places an order worth R10 000 and gives a
cheque of R2 000 to Calcu-data. Because of year-end Calcu-data only delivers the
goods on 20 January 2013. The money is paid into the bank with the other half of
the double entry posted to revenue.
Solution:

balance
R R R R
Revenue 289 590 2 000
Income received 2 000
in advance
(new account on
worksheet)
Step 2 Do the correction in the general journal
Debit revenue (income account) 2 000

Credit income received in advance 2 000
(statement of financial position account)
Step 3 Post the entry from the general journal to the

general ledger.
Dr Revenue Cr
31/12/13 Balance c/f 289 590 31/1212 Bank 45 690
Trade 243 900
receivables
289 590 289 590
31/12/13 Income GJ 2 000 31/12/12 Balance b/f 289 590
received in
advance
Income received in advance (statement of financial position account)

31/12/13 Revenue GJ 2 000
344
After year-end, the money will be transferred from the accrued income account to
the trade receivables account of Snoeki Zikalala.
Now you have been introduced to two more accounts, namely prepaid income and
accrued income.
Dr Income received in advance Cr

Balance c/f Entry on the last day of the
accounting period for the adjustment
Take balance to the relevant income Balance b/f on the first day of the next
account leaving balance as nil on first accounting period
day of new financial year
Accrued income
Entry on the last day of the accounting Balance c/f
Balance b/f on the first day of the next Take balance to the relevant income
accounting period account leaving balance as nil on first
day of new financial year
Example 10.5
Biggie Best makes up accounts each year to 28 February. The rent is payable
quarterly in advance on 1 January, 1 April, 1 July and 1 October.
The municipal levy is set by the local town council in respect of a year running
from 1 January to 31 December. The levy is paid in two equal instalments each
year. The payments are made in advance on 1 January and 1 July.
The annual rental for the calendar years 2011 and 2012 was R48 000 and R57 600
respectively. On 1 January 2013 the rent was raised to R63 360 per year.
The municipal levy for the past two years has been; for 2011 R12 000, for 2012
R14 400 and for 2013 R15 600.
What is the charge for rent and the municipal levy on the statement of profit or
loss and other comprehensive income for the year ended 28 February 2013? What
accruals or prepayments will be carried forward at year-end?
345
Accounting for All
Solution:
The rent charge for the 2012/13 year will be
(R57 600 x 10/12) + (R63 360 x 2/12) = R58 560
The municipal levy for the 2012/13 year will be
(R14 400 x 10/12) + (R15 600 x 2/12) = R14 600
Dr Rent Cr
(1) Balance b/f 4 800 Statement of profit or loss 58 560
income
(2) Bank 59 040 Prepaid expenses 5 280
63 840 63 840
(1) (R57 600 x 1/12) = R4 800

(2) (R57 600 x 9/12) + (R63 360 x 3/12) = R59 040
Municipal levy
(1) Balance b/f 4 800 Statement of profit or loss 14 600
income
(2) Bank 15 000 Prepaid expenses 5 200
19 800 19 800
(1) (R14 400 x 4/12) = R4 800

(2) (R14 400 x 6/12) + (R15 600 x 6/12) = R15 000
Example 10.6
You receive the following pre-adjustment trial balance from Goofy’s Guns and
Toys as well as some additional information that needs attention.
Trial balance of Goofy’s Guns and Toys at 30 June 2013
Debit Credit
R R
Revenue 98 000
Purchases 40 000
Telephone 3 000
Salaries 15 000
Rent 7 000
800
346
Insurance paid
Capital: Goofy Rogers 20 000
Drawings: Goofy Rogers 1 200
Furniture & equipment 60 000
Accumulated depreciation: F & E 6 000
Bank 5 000
144 000 144 000
1. Accrued interest on the long-term loan is R2 400
2. Revenue of R13 000 has not been invoiced
3. Insurance of R200 was prepaid on 30 June
4. Allowance for credit losses of 1% of trade receivables has to be made
5. Depreciation on furniture and equipment of R1 500 must be provided for
6. Salaries in arrear was R3 000
7. An amount of R800 was still due on the telephone
Required:
10.6.1 Enter the necessary adjustments in the general journal.
10.6.2 Change the trial balance accordingly.
Solution:
General journal
Date Details Fol Debit Credit
R R
Credit losses 120
Record allowance for credit losses at
1% of outstanding trade receivables
Accrued interest 2 400
Record interest accrued
Revenue 13 000
Record revenue earned not yet invoiced
Prepaid insurance 200
Insurance 200
Record insurance prepaid
Depreciation: furniture and equipment 1 500
Acc dep: furniture and equipment 1 500
Record provision for depreciation
347
Accounting for All
Salaries 3 000
Accrued salaries 3 000
Record salaries in arrear
Telephone 800
Accrued telephone 800
Record telephone expense in arrears
NEW Trial balance of Goofy’s Guns And Toys

at 30 June 2013
Debit Credit
R R
Revenue 111 000
Purchases 40 000
Telephone 3 800
Salaries 18 000
Rent 7 000
Insurance paid 600
Capital: Goofy Rogers 20 000
Drawings: Goofy Rogers 1 200
Furniture and equipment 60 000
Accumulated depreciation: F & E 7 500
Bank 5 000
Depreciation expenses 1 500
Accrued telephone 800
Accrued salaries 3 000
Prepaid insurance 200
Credit losses 120
Accrued interest 2 400
164 820 164 820
This trial balance is called a post-adjustment trial balance because it is prepared

after all the adjustments are taken into account.
10.5 The post-adjustment trial balance

The shaded areas on the accounting cycle indicate where we are in the process of
financial accounting. The next step involves the closing of the trial balance before
we move back to the general ledger to close the accounts there.
348
The accounting cycle

1. Balance the Close off/balance all
accounts in the accounts in the
general ledger general ledger
2. Extract a trial Collect all balances

balance
4. Adjust the accounts Adjust the necessary

balances
5. Draw up a post-
Use the new
adjustment trial
adjusted balances
balance
The post-adjustment trial balance must be prepared after all the year-end
adjustments have been recorded in the general journal and posted to the general
ledger.
10.6 Close the nominal accounts

Now that you have completed your post-adjustment trial balance, which includes
all year-end adjustments, we return to the general ledger to do the final
adjustments, to balance the statement of financial position accounts and to close
off income and expense accounts.
349
Accounting for All
Let’s reflect on the accounting cycle.

1. Balance the accounts in Close off/balance all
the general ledger accounts in the general
ledger
2. Extract a trial balance Collect all balances
4. Adjust the accounts Adjust the necessary

balances
5. Draw up a post-
adjustment trial balance Use the new adjusted
balances
Close off income and

6. Close the nominal expense accounts to the
accounts trading, profit and loss
account
10.6.1 Final accounts

At financial year-end, the income and expense accounts are closed off to the
trading and profit and loss accounts. The reason for closing these accounts is to
determine the net profit or loss made for the year. The trading and profit and loss
accounts are called final accounts. The diagram below illustrates their relationship
and function.
Income accounts Trading account Gross profit
Close off accounts to the

nce
and ala
gb
e.g Jun 30 Balance c/f enin
=op
Jun 30 Balance b/f
Profit and loss Net profit/loss
Expense accounts
account
less
expenses
Profit/(loss)
Nominal accounts Final accounts Financial results
350
The final accounts of a business are:

1. drawn up at the end of the financial accounting period (normally once a year)
2. according to double-entry accounting principles
3. in the general ledger
4. with the purpose of showing the financial results of the business
5. for that particular financial accounting period (normally a year)
The process involves:
 Closing off all the nominal accounts (in other words the income and expense
accounts in the general ledger).
 Transferring their totals (using the general journal) to the final accounts.
At the start of the new financial period, the balance of all the nominal accounts
will be nil.
Certain accounts are closed off to the trading account and others to the profit and
loss account.
It is important to note that the final accounts are temporary accounts drawn up so
that the business can determine its financial results.
Final accounts will differ from industry to industry as indicated in the table
below. They are designed to meet the individual needs of every business.
Industry Final accounts
 Service business/non-  The profit and loss account, also called
trading business the income and expense account.
 Trading business  A trading account to determine gross
profit
 A profit and loss account to determine
net profit
 Manufacturing business  A manufacturing account to determine
the cost of manufacturing
 A trading account to determine gross
profit
 A profit and loss account to determine
net profit
 Companies  Trading account
 Profit and loss account
 Appropriation account
 Partnerships  Trading account
 Appropriation account
After having extracted the trial balance, the next step in the process of preparing
the financial statements is to draw up the final accounts.
351
Accounting for All
10.6.2 The trading and profit and loss accounts

To draw up the trading and profit and loss accounts, involves steps.
The first step is to identify all the income and expense accounts in the general
ledger and to balance them.
The balances of these accounts are now transferred to the trading and profit and
loss accounts in the general ledger respectively. These accounts work according to
the double entry bookkeeping system. These entries will close off all the income
and expense accounts in the general ledger to a nil balance.
Example 10.7
The trading account is used to determine the gross profit of the business. It only
comes into existence on the last day of the financial year-end. It is a temporary
account in the general ledger and will not have a balance to bring forward in the
next accounting period. The revenue account and all the accounts used to
calculate cost of goods sold are closed off to the trading account.
The following is an example of a trading account with notes to explain the entries.
Knowing and understanding the contents of the trading account is essential, as
you will be applying this knowledge in several different ways in accounting
practice.
Dr Trading account Cr
Date Details Amount Date Details Amount
2013 2013
Aug 31 Opening (2) 300 Aug 31 Revenue (1) 2 000
inventory
Purchases (2) 700 Closing (2) 400
(inventory) inventory
Aug 31 Profit and loss (3) 1 400
account (gross
profit)
2 400 2 400
We will look at each entry and show where it has originated. You will notice that
the date of each entry is the same. This date is the date that this account comes
into existence and is closed off.
352
Notes:
1. Revenue
The revenue account (also referred to as turnover or sales income in the statement
of profit or loss and other comprehensive income) is closed off to the trading
account. To close the revenue account and transfer the balance to the trading
account, we need to do the following:
 Firstly, the account is provisionally balanced (as shown) on the last day of the
accounting period. Normally you would have expected this balance to be
brought forward on the first day of the next month, but it is brought forward
on the credit side on the same day.
 Secondly, if any changes or adjustments are necessary, they are made. The
balance of R2 000 b/f on the credit side is a pre-adjustment balance. The
general journal is used for any adjustments.
 Thirdly, the account is closed off to the trading account as shown below:
Dr Revenue account Cr
2013 2013
Aug Balance c/f 2 000 Aug Trade 1 500
31 31 receivables
Bank 500
2 000 2 000
Aug Trading account (1) 2 000 Aug Balance b/f 2 000
31 31
2 000 2 000
2. Opening inventory, purchases, closing inventory

These accounts refer to the product that the business sells. They are all closed
off to the trading account. The closing-off process is the same as that of the
revenue account. Again take note of the dates.
353
Accounting for All
Dr Purchases Cr
2013 2013
Aug Trade and other 700 Aug Balance c/f 700
31 payables 31
700 700
Aug Balance b/f 700 Aug Trading 700
31 31 account
(before any YE (after any YE
adjustments) adjustments)
Inventory
2013 2013
Aug Balance (opening 300 Aug Trading account 300
31 balance) 31
300 300
Aug Trading account 400
31 (closing balance)
In the inventory account you will see two entries to the trading account. The first
entry of R300 on the credit side refers to the transfer of the opening inventory
value to the trading account. This entry clears the inventory account. The second
entry of R400 is the value of closing inventory as assessed on the last day of the
accounting period. The other half of the double entry is in the trading account.
Leaving this value in the inventory account means that the business will reflect an
asset valued at R400 on the statement of financial position. The R400 will be
brought forward as the balance of opening inventory on the first day of the new
accounting period. Entering the R400 into the trading account means the
statement of profit or loss and other comprehensive income will show closing
inventory of R400.
If the business had an amount for carriage in, it could have been:
1. Posted to the purchases account and as such transferred to the trading account.
2. Entered into a separate general ledger account called carriage in, which would
also have been closed off to the trading account.
3. The balance of the trading account is transferred to the profit and loss
account. This balance represents the gross profit (revenue less cost of goods
sold) of the business.
354
Gross profit is the difference between the income generated from revenue and the
cost price of the goods sold. All the operating expenses, for example advertising,
administration and finance costs, are written off (deducted from) against the gross
profit. Any amount remaining is the net profit of the business.
Sales/Revenue – Cost of goods sold = Gross profit.
Example 10.8
The trading account calculates the gross profit of the business. The profit and
loss account calculates the net profit.
The profit and loss account is of a temporary nature. It comes into existence on
the last day of the financial accounting period, usually at year-end. The balance is
closed off to the capital account and it will not have a balance to bring forward in
the next accounting period.
If there is a net profit, owner’s equity will increase.

If there is a net loss, owner’s equity will decrease.
In the previous example the balance of the trading account (transaction 3) is

transferred to the profit and loss account. Now take a look at the profit and loss
account and see how the process of closing off the nominal accounts continues.
355
Accounting for All
Solution:
Dr Profit and loss account Cr
2013 2013
Aug Settlement 58 Aug Settlement 75
31 discount received 31 discount granted (1)
(3)
Advertising (3) 250 Trading account (2) 1 400
Administration (3) 500
Rental (3) 120
Capital: owner (4) 547
(net profit)
1 475 1 475
We will look at each entry and show where it has originated. You will notice that
the date of each entry is the same. This is the date the account comes into
existence and is also closed off.
Notes:
1. Settlement discount received
All income accounts in the nominal account section of the general ledger will
be closed off to the credit side of the profit and loss account. The accounting
transaction in the general journal will be recorded as follows:
Debit Income account, eg 75
Settlement discount received
Credit Profit and loss account 75
Narrative: Closing transfer
2. Trading account
This is the balance of the trading account (the gross profit) that is transferred
to the profit and loss account. This transfer closes off the trading account with
a nil balance. The double entry in the general journal will read:
Debit Trading account 1 400
1 400
Credit Profit and loss account
Narrative: Transfer of gross profit
356
3. Expense accounts
All expense accounts in the general ledger will be closed off to the debit side
of the profit and loss account. Expense accounts are debit accounts which will
normally have a debit balance at the end of the accounting period. To close
this account off and have a nil balance to carry forward to the next year, it has
to be credited with the outstanding balance. The double entry in the general
journal will read:
Debit Profit and loss account 500

500
Credit Expense account, eg
administration cost
Narrative: Closing transfer
4. Capital
The balance of the profit and loss account represents the net profit of the
business. Further deductions are made from net profit, eg tax. Looking at
these deductions now will just confuse you and it falls outside the scope of
this unit. It will be dealt with later. It is important, though, to remember that
the net profit is not necessarily the amount that will be transferred into the
capital account of the owner. In some companies with share capital, it will be
put into a reserve account. This net profit, after all deductions such as tax and
dividends, is called the retained earnings of the business.
 Trading, profit and loss account
Sometimes the trading and the profit and loss accounts are combined into
one account – the trading, profit and loss account. The transactions
remain the same. The trading account section will be closed and the
balance (the gross profit) brought forward on the credit side of the profit
and loss account section.
357
Accounting for All
The combined trading, profit and loss account will have the following
format:
Example 10.9
Dr Trading, profit and loss account Cr

2013 2013
Jun Opening inventory 300 Jun Revenue 2 000
30 30
Purchases 700 Closing inventory 400
Gross profit 1 400
2 400 2 400
Expenses 928 Jun Gross profit 1 400
30
Net profit 547 Income received 75
(transfer to capital
1 475 1 475
account)
Having considered these examples you should now have some idea of what is
referred to when accountants talk about the final accounts of a business, the gross
profit and the net profit.
If you’re not clear about what has been explained up to this point, look at the
following example. Taking the accounting equation as our point of departure in
classifying the accounts, see if you can follow the steps.
When determining profit or loss, we only use the income and expense accounts.
These accounts are the same as those used in the previous example.
TA = Trading account
358
Example 10.10
General ledger – 31 August
(showing balances at the end of the month)
Dr Bank Cr Dr Capital Cr Dr Trade and other payables Cr

31/8 Balance 31/8 Balance 1 653 31/8 Balance 650
1 500
Trade receivables Revenue

31/8 Balance 950 31/8Balance 2 000
Inventory Purchases
01/8 Balance 300 31/8 Balance 700
Administration costs
31/8 Balance 500
Advertising costs
31/8 Balance 250
Settlement discount granted

31/8 Balance 58
Rental expenses
31/8 Balance 120

31/8 Balance 75
359
Accounting for All
The steps to follow when closing off all nominal accounts to the final accounts:
Example 10.11
Step 1
Record the transfer of all the accounts relating to the cost of the goods sold, to the
trading account in the general journal. This will include revenue, purchases and
inventory.
31/8 Debit Trading account 300
Credit Inventory
300
(opening inventory)
Closing entry
31/8 Debit Trading account 700
Credit Purchases 700
Closing entry
31/8 Debit Revenue 2 000
Credit Trading account 2 000
Closing entry
31/8 Debit Inventory 400
(closing inventory)
Credit Trading account 400
Closing entry
Step 2
Record the transfer of all income and expense (cost) accounts to the profit and
loss account in the general journal.
31/8 Debit Profit and loss 1 178
Credit Advertising 250
Administration 500
Rental 120
Closing entries for cost accounts for August
31/8 Debit Discount received 75
Credit Profit and loss 75
Closing entries for income accounts for August
360
Step 3
Post the entries in the general journal to the appropriate ledger accounts.
(showing step 2 and step 3)

Trade and
Dr Bank Cr Dr Capital Cr Dr other payables Cr
31/8 Bal 1 500 31/8 Bal 1 653 31/8 Bal 650
Trade receivables Trading account

31/8 Bal 950 31/8 Purch 700 31/8Revenue
2 000
Inventory 300 Inventory 400
Inventory Profit and loss

01/9Bal 300 31/8 TA 300 31/8 Advert. 250 Disc rec 75
(opening (opening
inventory) inventory ) Admin 500
300 300 Disc all 58

31/8 TA 400 Rent 120
(closing
inventory)
Revenue
31/8 TA 31/8 Balance
2 000 2 000
Purchases
31/8 Bal 700 31/8 TA 700
Administration costs
31/8 Bal 500 31/8 P&L 500
Advertising costs
31/8 Bal 250 31/8 P&L 250
361
Accounting for All
Dr Settlement discount granted Cr

31/8 Bal 58 31/8 P&L 58
Rental expenses
31/8 Bal 120 31/8 P&L 120

31/8 P&L 75 31/8 Bal 75
Step 4
Calculate the balance of the trading account and record the transfer of the balance
(gross profit) to the profit and loss account in the general journal.
31/8 Debit Trading account 1 400

Credit Profit and loss 1 400
Closing entry
362
Step 5
Post the general journal entry from step 4 to the profit and loss account in the
general ledger.
(showing step 4 and step 5)

Trade and other
Dr Bank Cr Dr Capital Cr Dr payables Cr
31/8 Bal 1 500 31/8 Bal 700 31/8 Bal 650

31/8 Bal 950 31/8 Purch 31/8 Revenue
700 2 000
Inventory Inventory
300 400
P&L 1 400
2 400 2 400

01/9 Bal 300 31/8 TA 300 31/8 Advert 31/8 TA
250 1 400
300 300 Admin 500 Disc rec 75
31/8 TA 400 Disc all 58
Rent 120
Step 6
Calculate the balance of the profit and loss account and record the transfer of the
balance (net profit) to the capital account, in the general journal.
31/8 Debit Profit and loss 547

Credit Capital 547
Closing entry of income for August
(in the case of a profit)
363
Accounting for All
Step 7
Post the entry in the general journal from step 6 to the appropriate accounts in the
general ledger. The balance of both the trading account and the profit and loss
account should now be nil.
(showing step 6)

Dr Bank Cr Dr Capital Cr Dr Trade and other payables Cr
31/8 Bal 1 500 31/8 Bal 2 200 31/8 Bal 1 653 31/8 Bal 650
31/8 P&L 547
2 200 2 200
Bal b/f 2 200

31/8 Bal 950 31/8 Purch 31/8 Revenue
700 2 000
Inventory 300 Inventory 400
P&L 1 400
2 400 2 400

01/9 Bal 300 31/8 TA 300 31/8 Advert. 31/8 TA 1400
250
300 300 Admin 500 Disc 75
31/8 TA 400 Disc 58

Rent 120
Capital 547
1 475 1 475
After having completed the closing off process, only the assets, owner’s equity and
liabilities, in other words the statement of financial position items, will remain.
The closing balances of these statement of financial position items will be the
opening balances for the new financial period.
The trading, profit and loss account is not yet balanced. It will be balanced against
the capital account when we work with all the other accounts that are neither
income nor expense accounts.
364
The items gathered in the trading, profit and loss account are the same items we
will find in the statement of profit or loss and other comprehensive income, just
presented in a different format.
In the general ledger of Peter’s Plastics there were other accounts besides the
income and expense accounts. Now that we have closed off all the income and
expense accounts, it is time to give attention to the remaining accounts. These
accounts are: cash, bank, capital, creditor, trade receivables, motor vehicles and
plant and equipment. These are all the statement of financial position accounts, all
the assets and liabilities.
Aside from all of these accounts there is also one other account left, the trading,
profit and loss account that was opened previously. The balance of this account
represents the profit (credit balance) or loss (debit balance) of the business. This
account is closed off to the capital account.
Example 10.12
The following information for the year ended 31 December 2013 relates to XYZ
Trading Company, given to you by the bookkeeper.
He asks you to help him determine:
10.12.1 the gross profit of the company, and
10.12.2 whether the company has made a profit or a loss for the year.
R
Advertising 1500
Delivery costs 2 560
Depreciation – motor vehicles 2 750
Accumulated depreciation – MV 3 691
Bank charges 656
Purchases 37 500
Rent paid 2 620
Stationery 1 960
Salaries 20 580
Trade & other payables 2 600
Inventory (31/12/2012) 9 600
Cash on hand 3 000
Revenue 97 685
Inventory on hand at 31 December 2013 amounted to R8 700.
365
Accounting for All
Solution:
10.12.1 and 10.12.2
General ledger of XYZ Trading Company
1 January 2013 – 31 December 2013
Dr Trading, profit and loss account Cr
Date Details Fol Amount Date Details Fol Amount
2013 2013
Dec 31 Opening 9 600 Dec 31 Revenue 97 685
inventory
Purchases 37 500 Closing 8 700
inventory
Gross profit 59 285
106 385 106 385
Dec 31 Advertising 1 500 Dec 31 Gross profit 59 285
Bank charges 656
Delivery 2 560
costs
Depreciation 2 750
Rent paid 2 620
Salaries 20 580
Stationery 1 960
Net profit 26 659
59 285 59 285
10.6.3 What are the reasons for final accounts?

You may wonder why a business needs to draw up final accounts. The main
reasons are:
 Legal requirements
By law, all limited companies are obliged to prepare accounts, usually yearly, in a
specific format laid out in the Companies Act (Act 61 of 1973). These accounts
form part of the company’s annual report which must be disclosed at the annual
general meeting of the company. In addition, public companies are also required
to supply their members with an interim (in-between) report showing the accounts
and financial position of the company for the first half of the financial year.
366
 Control measure
The final accounts give the management of the business, irrespective of the type
of business, an idea of how well or poorly the business is doing. If management
needs to exercise close control over financial matters, they may request final
accounts as often as once a month. In this way they would be able to manage the
business more efficiently and take corrective measures quickly as and when
necessary.
 Profit sharing
If a business has profit sharing, in other words certain members, share in the
profit of the business, it is important to the business to know if it is making a
profit or a loss. Both the trading and the profit and loss accounts are used to
determine the profit of the business.
 Tax requirements
Businesses are legally required to pay tax on all profit made. To determine the
amount of tax due, the business has to determine whether it has actually made a
profit or a loss. The profit taxed is the net profit as calculated in the profit and loss
account.
It doesn’t matter what the reason is for preparing the accounts, generally all the
items are recorded in the same way. The presentation of the final accounts may
however, vary from business to business.
– The trading, profit and loss account is reported on the statement of profit or
loss and other comprehensive income of the business at the end of the
accounting period.
– All the statement of financial position items in the general ledger are balanced
at the end of the accounting period with the balance brought forward on the
first day of the following accounting period.
– Financial accounting aims at external reporting.
– Management accounting aims at internal reporting.
367
Accounting for All
Questions
Question 10.1
The following balances were taken from the books of Fatima Traders:
R
Furniture 61 200
Provision for doubtful debts 400
Cash @ bank 30 040
Capital: Fleming 165 300
Drawings: Fleming 24 000
Purchases 157 400
Salaries 11 400
Rent paid 3 480
Advertisement 1 200
Insurance 960
Revenue 190 000
Revenue returns 3 000
1. The delivery vehicles were purchased on 1 October 2011 and depreciation
must be provided according to the reducing balance method at 15%.
2. Trading inventory on hand at 28 February 2013 amounted to R120 000.
3. The balance for rent paid includes an amount of R1 000 for March 2013.
4. The provision for credit losses must be 5% of the trade receivables on 28
February 2013.
5. Depreciation on office equipment must be provided at 5% of the cost price.
Required:
10.1.1 Journalise all adjustments.
10.1.2 Prepare a post-adjustment trial balance.
368
Question 10.2
The following information was extracted from the books of Pinto Traders:
Trial balance of Pinto Traders at 30 June 2013

Debit Credit
R R
STATEMENT OF FINANCIAL
POSITION SECTION
Capital 93 177.00
Drawings 11 340.00
Land & buildings 97 350.00
Vehicles (cost price) 42 750.00
Equipment 17 760.00
Inventory 14 622.00
Allowance for credit losses 645.00
– Vehicles 12 750.00
– Equipment 5 760.00
Trade receivables 11 763.00
Trade and other payables 15 860.00
Fixed deposit 12% 18 000.00
Bond 18% 36 000.00
Bank 2 048.00
Petty cash 300.00
Cash float 450.00
Cost of sales 129 600.00
Revenue 207 560.00
Trade receivables allowance 390.00
Salaries & wages 20 664.00
Telephone 927.00
Stationery 972.00
Credit losses 150.00
Packing material 1 200.00
Insurance 1 440.00
Advertising 1 945.00
Settlement discount granted 441.00
Water & electricity 1 734.00
Discount received 687.00
Interest – bank overdraft 399.00
Interest – investment 1 200.00
Interest – received 216.00
Interest – bond 1 140.00
Profit on sale of asset 504.00
Loss on sale of asset 225.00
Bank charges 845.00
376 407.00 376 407.00
369
Accounting for All
Adjustments:
1. Stock lists on 30 June 2013 show the following
Trading inventory R14 562
Packing material R 360
Stationery R 342
2. Wages paid in advance, R540.
3. Carriage on purchases payable to Els Transport was not entered in the books,
R475.
4. Write P Pienaar’s account off as bad debts, R163.
5. Adjust the provision for bad debts to 5% of trade receivables.
6. Calculate depreciation on the diminishing balance method:
– 20% on vehicles
– 5% on equipment
7. One quarter of insurance was prepaid.
8. The fixed deposit was made on 1 January 2013.
9. The bond was negotiated on 31 December 2012.
(Show all calculations.)
Required:
10.2.1 Journalise the adjustments.
The exercises in chapter 11 will give you more exposure to adjustments.
370
CHAPTER 11
FINANCIAL STATEMENTS OF A SOLE
TRADER
11.1 Introduction
The financial statements of a business must be prepared at the end of a financial
period.
In the previous chapters you have learned that the life of a business can be divided
into accounting periods or financial periods: the financial period for financial
statements differs from six to 12 months.
The objective of financial statements is to provide a wide range of users with
useful information regarding the financial position, performance and cash flows
of a business. This information is required for meaningful economic decisions.
Financial statements also give account of management’s capability to manage the
resources entrusted to them.
In meeting this objective, financial statements should provide information which
can assist users in predicting the business’s future cash flows, in particular the
timing and certainty of the generating of cash and cash equivalents, such as
payments by debtors or interest received on an investment. To reach this goal,
financial statements provide information about:
 the assets controlled by a business (which are sources of probable future
inflows of cash or other economic benefits);
 its liabilities (which are sources of probable future outflows of cash or other
economic benefits);
 its net income (which represents the change in the economic resources and
obligations of the business from period to period, excluding contributions
from, and distributions to, owners; in other words capital and drawings); and
 its historical cash flows (as an indicator of potential future cash flows).
This information assists users of financial statements in assessing the ability of a
business to pay cash dividends and interest, and to settle its obligations as they
fall due.
The management of a business carries the primary responsibility for the
preparation and presentation of the financial statements of the business.
A complete set of financial statements includes the following components:
 a statement of financial position
 a statement of profit or loss and other comprehensive income
 statement of changes in equity
 a cash flow statement, and
 notes to the financial statements.
Accounting for All

 Compile a statement of profit or loss and other comprehensive income and
statement of financial position from a trial balance given
 Enter adjusting entries into the general journal for
– Accrued expenses
– Prepaid expenses
– Accrued income
– Income received in advance
– Errors and omissions
– Consumable stores on hand
– Allowance for credit losses
– Depreciation
 Post adjusting entries to the general ledger
 Draft a post-adjustment and post-closing trial balance
 Pass closing entries in the general journal and post to the general ledger
including the trading, profit and loss accounts
 Draft the annual financial statements in a form suitable to the users and
according to Generally Accepted Accounting Practice (GAAP)
 Pass the necessary, reversing entries at the new financial year via the general
journal to the general ledger
 Use a worksheet for the purpose of displaying all the adjustments and
determining the figures to be used in the statement of profit or loss and other
comprehensive income and statement of financial position
11.2 Revision
Because there are events taking place which affect the performance and position
of the business but are not captured on source documents at a particular moment
in time, it is necessary to make adjustments to the records before finalising the
financial statements. This approach is known as the accrual system of accounting,
which applies the principle of matching expenses incurred (but not necessarily
paid) against the revenue earned (but not necessarily received in cash) in a given
period.
The following notes on adjustments are very important, and can be used as
guidelines to a better understanding of adjustments:
 At first determine the financial period.
 Remember that the accounting concepts used in year-end adjustments as the
guiding principles, remain applicable.
 The following accounts are only temporary accounts that are used to enable
the business to prepare its financial statements:
Accrued expenses
Prepaid expenses
372
Chapter 11 Financial statements of a sole trader
Accrued income
Income received in advance
Consumable stores on hand
The above-mentioned accounts should be

correctly classified as an asset, liability,
income or expense.
Prepaid expenses – Asset (debit balance)

Accrued expenses – Liability (credit balance)
Accrued income – Asset (debit balance)
Income received in advance – Liability (credit balance)
Consumable stores on hand – Asset (debit balance)
Allowance for credit losses – Liability (credit balance)
Inventory deficit – Expense (debit balance)
Inventory surplus – Income (credit balance)
 Apply the rules of the subject, using the following ‛T’ accounts, when you
determine which account is to be debited or credited, namely:
A L I E
+ – – + – + + –
Example 11.1
You received the following pre-adjustment trial balance from Mabunda Traders as
well as some additional information that needs attention:
373
Accounting for All
Pre-adjustment trial balance of Mabunda Traders at 28 February 2013

Debit Credit
R R
STATEMENT OF FINANCIAL POSITION
SECTION
Capital: Mabunda 250 000

Drawings: Mabunda 40 000
Land & buildings @ cost price 220 000
Vehicles @ cost price 90 000
Equipment @ cost price 70 000
Bank 25 000
18% Bond on property 120 000

Revenue 367 000
Salaries 90 000
Telephone 1 280
Insurance 4 500
Stationery 720
Advertising 3 500
Credit losses 1 200
851 200 851 200
 A debtor S Carstens is insolvent and his debts of R500 must be written off as
irrecoverable.
 The allowance for credit losses must be adjusted to 5% of outstanding trade
receivables.
 The interest on the bond was not taken into account and was still payable.
 The telephone account of R200 for February 2013 was still due.
 Included in insurance was an amount of R1 500, a premium which had been
paid for the 12 months ending 30 June 2013.
 Stationery on hand at 28 February 2013: R220.
374
 The rent received for February was still due: R3 000.

 It is the policy of the business to depreciate vehicles at 10% pa on cost price,
and equipment at 10% pa according to the reducing balance method.
Required:
Enter the necessary adjustments in the general journal and post it to the general
ledger.
Solution:
General journal
R R
2013 Credit losses 500

Feb 28 Trade receivables 500
Record credit losses: S Carstens

Credit losses 775
Record allowance for credit losses at
5% of outstanding trade receivables
Interest on bond 21 600

Accrued expenses 21 600
Record interest accrued
Telephone 200
Accrued expenses 200
Record telephone accrued
Prepaid expenses 500

Insurance 500
Record insurance prepaid
Consumable stores on hand 220

Stationery 220
Record stationery on hand
Accrued income 3 000

Rent received 3 000
Record accrued rent
Depreciation 14 000
Accumulated depreciation on:
Vehicles 9 000
Equipment 5 000
Record depreciation on vehicles at 10%
on cost price and equipment
at 10% on reducing balance
375
Accounting for All
General ledger
Dr Credit losses Cr Dr Trade receivables Cr

Balance b/f 1 200 Prov for B/D 775 Balance b/f 45 000 Credit losses 500
Trade
receivables 500
Allowance for credit losses Interest on bond

Credit losses 775 Balance b/f 3 000 Accr expenses
21 600
Accrued expenses Telephone

Interest 21 600 Balance b/f 1 280
Telephone 200 Accr expenses 200
Prepaid expenses Insurance

Insurance 500 Balance b/f 4 500 Prep expenses 500
Consumable stores on hand Stationery

Stationary 220 Balance b/f 720 Con stores 220
Accrued income Rent received

Rent received 3 000 Balance b/f 33 000
Accr income 3 000
Depreciation Acc depreciation: vehicles

Acc depr: Balance 18 000
vehicles 9 000 Depr 9 000
Acc depr:
equipment 5 000
Acc depreciation: equipment

Balance 20 000
Depr 5 000
376
11.3 Post-adjustment trial balance

We are going to use the same information as in the example discussed in step 7.
Before we look at task 2, we must first discuss a few guidelines regarding the
post-adjustment trial balance:
Guidelines:
 The post-adjustment trial balance can only be prepared after all the
adjustments have been taken into account.
 The new balances of the accounts affected by the adjustments must be taken
into account in the post-adjustment trial balance.
 The balances of all the accounts in the post-adjustment trial balance will be
used to prepare the statement of profit or loss and other comprehensive
income and statement of financial position of a business.
Example 11.2
Use the same information as in the example of Mabunda Traders.
Required:
Prepare a post-adjustment trial balance at 28 February 2013.
What you are doing now, is exactly the same as the work that you have done in
the previous chapters. The only difference lies in the fact that we are not using
a worksheet.
Solution:
Post-adjustment trial balance of Mabunda Traders at 28 February 2013
Debit Credit
R R
SECTION
Capital: Mabunda Traders 250 000
Drawings 40 000
Equipment @ cost 70 000
Accumulated depreciation: equipment 25 000
Bank 25 000
377
Accounting for All
Revenue 367 000

Salaries 90 000
Telephone 1 480
Insurance 4 000
Stationery 500
Advertising 3 500
Credit losses 925
Depreciation 14 000
889 225 889 225
11.4 Close the nominal accounts

Again you are referred to the work you have done in step 9 of chapter 13. If you
remember correctly you have learned:
 That the income and expense accounts are closed off to the trading and profit
and loss accounts at financial year-end.
 That the reason for closing these accounts is to determine the net profit or loss
for the year.
 That the trading and profit and loss accounts are called final accounts.
 That final accounts will differ from industry to industry.
Guidelines:
 The closing of the nominal accounts of a business can also be expressed as
the closing entries of the business.
 Closing entries can only be finalised at the end of a financial period after all
the adjustments have been taken into account.
 Closing entries can only be made to income and expense accounts.
 The word closing indicates what is to be done. Close off all the income and
expense accounts and transfer their balances to the final accounts.
 Journal entries are used to record closing entries.
 At the start of a new financial period the balance of all the nominal accounts
will be nil.
 Final accounts (trading, profit and loss) are temporary accounts drawn up
with a view to determine the financial results of the business.
 Revenue and cost of sales must be balanced off against the trading account.
 All other income and expense accounts are balanced against the profit and
loss account.
 Do not forget to do the closing entries for: gross profit, net profit and
drawings.
378
Example 11.3
Use the same information as in the example of Mabunda Traders.
Required:
11.3.1 Journalise the closing entries of Mabunda Traders.
11.3.2 Post to the general ledger.
Solution:
11.3.1
General journal
R R
2013 Revenue 367 000
Feb 28 Trading account 367 000
Closing entry
Trading account 210 000

Closing entry
Profit and loss account 136 005

Salaries 90 000
Telephone 1 480
Insurance 4 000
Stationery 500
Advertising 3 500
Credit losses 925
Depreciation 14 000
Closing entry

Closing entry
Trading account 157 000

Closing entry – gross profit

Closing entry – net profit

Drawings 40 000
Closing entry
379
Accounting for All
11.3.2
General ledger
Dr Revenue Cr Dr Cost of sales Cr

Trading acc 367 000 Balance 367 000 Balance 210 000 Trading acc 210 000
Salaries Telephone
Balance 90 000 Profit & loss 90 000 Balance 1 480 Profit & loss 1 480
Insurance Stationery
Balance 4 000 Profit & loss 4 000 Balance 500 Profit & loss 500
Advertising Rent received

Balance 3 500 Profit & loss 3 500 Profit & Balance
loss 36 000 36 000
Settlement discount received Credit losses

Profit & loss 200 Balance 200 Balance 925 Profit & loss 925
Interest on bond Depreciation

Balance 21 600 Profit & loss 21 600 Balance 14 000 Profit & loss 14 000
Capital: Mabunda Drawings

Drawings 40 000 Balance 250 000 Balance 40 000 Capital acc 40 000
Balance 267 195 Profit & loss
______ 57 195
307 195 307 195
Balance 267 195
Profit and loss account Trading account

Salaries 90 000 Trading acc 157 000 Cost of sales Revenue 367 000
Telephone 1 480 Rent received 36 000 210 000
Insurance 4 000 Discount rec 200 Profit & loss
Stationery 500 157 000 _______
Advertising 3 500 367 000 367 000
Credit losses 925
Interest on
bond 21 600
Depreciation 14 000
Capital 57 195
(Net profit) ______ ______
193 200 193 200
380
Example 11.4
Use the information of example 11.2 and 11.3.

Required:
Compile the trial balance of the remaining accounts.
Final trial balance of Mabunda Traders at 28 February 2013
Debit Credit
R R
SECTION
Capital 267 195

Bank 25 000
503 220 503 220
11.5 Financial statements

The financial statements make out the last two components of the accounting
cycle.
 The main objective of financial statements is the external reporting of general
financial information.
 Financial statements must be prepared once a year at the end of a financial
period in order to show the financial results and the financial position of the
business.
 The financial statements of a sole trader consist of a statement of profit or loss
and other comprehensive income and statement of financial position.
 The financial statements of a business are based on historical information.
381
Accounting for All
11.5.1 Statement of profit or loss and other comprehensive income

(income statement)
The statement of profit or loss and other comprehensive income of a business
reflects the financial results of a business for a certain period. This period is
known as the financial period.
The purpose of the statement of profit or loss and other comprehensive income is
to determine whether a business has shown a profit or a loss. This means that only
income and expense accounts will appear in the statement of profit or loss and
other comprehensive income.
For a sole trader it is important to distinguish between the format of the statement
of profit or loss and other comprehensive income of a service concern and trading
concern.
Example 11.5
Service concern
Statement of profit or loss and other comprehensive income of U Kingma,
Medical Practitioner, for the year ended 28 February 2013
INCOME R
Services rendered 90 000
91 000
EXPENSES 22 500
Salaries 11 000
Telephone 1 500
Rent paid 6 000
Stationery 1 000
Rates and taxes 3 000
NET INCOME FOR THE YEAR 68 500
A service concern renders a service; it does not trade a physical product.
382
Example 11.6
Trading concern
Statement of profit or loss and other comprehensive income of Jolly Patrolly
Traders for the year ended 30 June 2013
R
Revenue (sales) 200 000
– Cost of sales Trading account section 90 000
Gross profit 110 000
Other income: 7 000
Rent received 6 000
Gross income 117 000
– Expenses 20 500
Salaries 9 000
Bank charges 800
Telephone Profit and loss account section 1 200
Rent paid 6 000
Credit losses 1 000
Depreciation 1 000
Stationery 1 500
Net profit for the year 96 500
A trading concern purchases goods or merchandise with the aim of selling it at a
profit.
11.5.2 Statement of financial position (balance sheet)
The statement of financial position reflects the financial position (state) of a
business at a particular date/time. Only asset and liability accounts will appear in
a statement of financial position.
The statement of financial position shows the total assets owned by the business
at that specific time, the total liabilities of the business and the owner’s equity.
The owner’s equity (assets less liabilities) represents the net worth of the
business.
Asset and liability accounts are not closed off at the end of a financial period, but
their balances are transferred to the next financial period as opening balances.
One can say that the statement of financial position is based on the accounting
equation; therefore the assets must always be equal to the equity and liabilities.
383
Accounting for All
The statement of financial position for a service and trading concern has the same
format for example:
Example 11.7
Statement of financial position of Temba General Dealers as at
28 February 2013
ASSETS
NON-CURRENT ASSETS
Cost price Acc Carrying value
depreciation
Land & buildings 15 000 – 15 000
Vehicles 5 000 1 000 4 000
20 000 1 000 19 000
INVESTMENTS 2 000
Fixed deposit 2 000
CURRENT ASSETS 33 000

Inventory 14 000
Bank 9 000
54 000
EQUITY AND LIABILITIES
OWNERS EQUITY 38 000
Capital 10 000
+ Net profit 34 000
– Drawings (6 000)
NON-CURRENT LIABILITIES 4 000
Loan: Wesbank 4 000
CURRENT LIABILITIES 12 000
54 000
384
Example 11.8
The following list of balances pertains to the accounting records of Alien Traders
on 31 December 2013:
List of balances on 31 December 2013
R
Capital – A Alien 483 275
Drawings – A Alien 23 700
Loans from ABC Bank (obtained 1 October 2011 110 550
at 22% pa)
Accumulated depreciation – plant & machinery 52 500
Petty cash 450
Rent received 6 750
Revenue 769 200
Insurance 4 500
Telephone 8 700
Stationery expense 7 500
Inventory 375 000
Required:
Compile a statement of profit or loss and other comprehensive income and a
385
Accounting for All
Solution:
Statement of profit or loss and other comprehensive income of Alien Traders
for the year ending 31 December 2013
R
Revenue 769 200
– COS (453 000)
+ Other income 39 950
Rent received 6 750
356 150
– Expenses (155 025)
Advertising 15 000
Insurance 4 500
Telephone 8 700
Interest 21 750
Stationery 7 500
201 125
Statement of financial position of Alien Traders as at 31 December 2013

ASSETS
NON-CURRENT ASSETS Cost price Acc dep Carrying
value
Land & buildings 150 000 – 150 000
Plant & machinery 120 000 52 500 67 500
Vehicles 127 950 26 250 101 700
319 200
LONG-TERM INVESTMENTS
Fixed deposit Bull Bank 100 000
419 200
– Allowance for credit losses (5 700) 108 300
Bank 439 200
Petty cash 450
Inventory 375 000
1 352 200
386

EQUITY 660 700
Capital 483 275
+ Net profit 201 125
– Drawings (23 700)
LONG-TERM LIABILITIES
Loan ABC Bank
1 352 200
11.6 Reversing entries

In this chapter we said that the following accounts are temporary accounts that are
used to enable the business to prepare its financial statements:
 Accrued expenses
 Prepaid expenses
 Accrued income
 Income received in advance
 Consumable stores on hand
Therefore, according to Generally Accepted Accounting Practice, these accounts
must be cancelled at the beginning of the next financial year, by means of
reversing journal entries.
Example 11.9
There was an accrued expense of R50 on the telephone account. The journal entry
for this adjustment at the end of the financial period will be:
General journal
R R
2013 Telephone 50
Feb 29 Accrued expenses 50
Telephone account in arrears
The reversing journal entry for this temporary account at the beginning of the next
financial period will be:
General journal
R R
2013 Accrued expenses 50
March 1 Telephone 50
Reversing entry
387
Accounting for All
Questions
Question 11.1
The following trial balance comes from the records of Diamond Corporation for
the year ending 30 June 2013:
Debit Credit
R R
Revenue 180 000
Depreciation 18 000
Rent paid 36 000
Advertising 7 000
Vehicles 45 000
Credit losses 4 500
Salaries in arrear 7 400
Salaries 48 700
Rent paid in advance 10 000
Interest received in advance 18 600
Capital 56 600
Investment (two years) 76 400
Returns inwards 3 300
Stationery on hand 4 000
Drawings 2 000
Required:
Prepare the statement of profit or loss and other comprehensive income and
statement of financial position for Diamond Corporation as at 30 June 2013.
388
Question 11.2
The following balances were taken from the books of Robzter Traders as at
31 December 2013:
R
Cleaning material 12 000
Machinery @ cost 200 000
Inventory (31 Dec 2013) 25 000
Bank 607 600
Salaries 36 000
Revenue 1 000 000
Sales returns 5 000
Purchases 350 000
Advertising 21 000
Accumulated depreciation on machinery 40 000
Investment (six months) 28 200
Long-term lease (36 months) 400 000
Capital 10 000
Cleaning material on hand (31 Dec 2013) 2 000
Drawings 27 000
Depreciation 23 000
Inventory 1 Jan 2013 40 000
Required:
statement of financial position for the year ending 31 December 2013.
389
Accounting for All
Question 11.3
The following balances pertain to the records of Muller & Muller (Pty) Ltd as at
28 February 2013:
R
Revenue 580 000
Telephone 14 000
Inventory (28 Feb 2013) 24 000
Fuel 10 000
Maintenance 18 000
Commission received 9 000
Rent paid 156 000
Accumulated depreciation on plant and machinery 4 000
Stationery @ cost 15 000
Fixed deposit (five years) @ 5% 100 000
Stationery on hand (28 Feb 2013) 2 000
Loan (three years) 76 000
Loan payable within eight months 52 000
Income received in advance 8 000
Insurance in arrears 60 000
Capital 49 000
Depreciation 14 000
Drawings 14 000
Bank 144 000
Required:
statement of financial position for the year ending 28 February 2013.
390
Question 11.4
Sammy (Pty) Ltd provides you with the following list of balances on
31 December 2013:
R
Bank 114 000
Capital 40 000
Drawings 14 000
Revenue 500 000
Purchases 160 000
Inventory (1 Jan 2013) 14 000
Stationery 7 000
Income received in advance 8 000
Prepaid expenses 4 000
Expenses in arrear 12 000
Accrual income 16 000
Returns inwards 5 000
Returns outwards 6 000
Carriage on purchases 13 000
Freight on sales 4 000
Depreciation 16 000
Licensing and registration 16 000
Sundry operating costs 33 000
Inventory deficit 2 000
Inventory (31 Dec 2013) 18 000
Rent paid 48 000
Loan short-term 40 000
Mortgage on buildings 100 000
Fuel & oil 18 000
Fuel & oil on hand 31 Dec 2013 4 000
32-day deposit 35 000
391
Accounting for All
Required:
Compile the statement of profit or loss and other comprehensive income and
statement of financial position for the year ending 31 December 2013.
Question 11.5
The following figures were taken from the records of MoMo Ltd on 30 June
2013:
R
Accumulated depreciation – office furniture 8 600
Accumulated depreciation – vehicles 18 000
Advertising 4 500
Bank 47 500
Bank charges 800
Capital 107 000
Cleaning material 2 200
Depreciation 28 000
Drawings 30 000
Fixed deposit 15 000
Fuel 12 200
Insurance 19 000
Inventory (30/6/2013) 44 600
Interest on loan (short-term) 10 000
Interest on fixed deposit (short-term) 2 000
Loan (long-term) 200 000
Office furniture 45 000
Rent paid 131 800
Rent received 5 000
Salaries 420 000
Revenue 1 200 000
Sales returns 10 000
Stationery 11 000
Telephone 18 000
Vehicles 120 000
Trading inventory deficit 400
Consumable stores on hand 6 000
392
Required:
Compile the statement of profit or loss and other comprehensive income and
statement of financial position as at 30 June 2013.
Question 11.6
The general ledger accounts below were taken from Goldie Enterprises on
1 March 2013:
Bank Capital
1/3 Balance b/f 1/3 Balance b/f
50 000 55 000
Stationery Stationery on hand

9 000 6 000
Trade receivables Trade and other payables

76 000 32 000
Revenue Purchases
450 000 120 000
Inventory Advertising
28/2/12 Balance b/f 1/3 Balance b/f
17 000 17 000
1/3/12 Balance b/f
12 000
Telephone Depreciation
66 000 33 000
Vehicles Machinery
66 000 40 000
Credit losses recovered Accrued expenses

2 000 5 000
Income received in advance Accrued income

4 000 11 000
393
Accounting for All
Prepaid expenses Allowance for credit losses

7 000 10 000
Credit losses Petty cash

3 000 1 000
Loan – employees
1/3 Balance b/f
48 000
Required:
Use the balances in the general ledger on 1 March 2013 to compile a statement of
profit or loss and other comprehensive income as well as a statement of financial
position.
Question 11.7
The following balances were taken from the books of Cosmos Traders on 28
February 2013:
R
Office equipment at cost 3 000
Trading inventory: 28 February 2013 61 200
Bank 30 040
Capital: Cosmos 177 000
Drawings: Cosmos 24 000
Salaries 11 400
Rent paid 3 480
Insurance 960
Revenue 187 000
394
1. Accrued salaries, R2 000.
2. Prepaid insurance, R120.
3. The balance for rent paid includes an amount of R1 000 for March 2013.
4. The allowance for credit losses must be 5% of the trade receivables on 28
February 2013 and equals R650.
5. Depreciation on office equipment and vehicles was calculated at 5% on cost
price:
Office equipment: R150
Vehicles: R5 600
Required:
11.7.1 Journalise all adjustments.
11.7.2 Prepare a post-adjustment trial balance.
11.7.3 Prepare a statement of profit or loss and other comprehensive income and
a statement of financial position for the year ended 28 February 2013.
Question 11.8
The following list of balances was obtained from the books of R Ramapela as at
31 December 2013:
R
Capital: Ramapela 143 100
Vehicles 200 000
Inventory (31 December 2013) 50 000
Bank 20 000
Petty cash 100
Revenue 450 000
Credit losses 4 500
Rates & taxes 2 000
Rent paid 8 000
Interest paid 1 500
Stationery 2 500
Depreciation: vehicles 20 000
395
Accounting for All
1. Prepaid rent, R1 200.
2. Salaries of R30 000 are still owed to employees.
3. The allowance for credit losses of R3 000 must be created.
4. Interest received in advance, R500.
Required:
11.8.1 Prepare a statement of profit or loss and other comprehensive income for
the year ending 31 December 2013.
11.8.2 Prepare a statement of financial position as at 31 December 2013.
Question 11.9
The following information was obtained from the accounting records of Brando
Traders on 28 February 2013 the end of the accounting period of the entity:
Pre-adjustment trial balance of Brando Traders at 28 February 2013
Debit Credit
R R
SECTION
Capital 66 100
Drawings 16 000
Vehicles 100 000
15% Loan: WIN Bank 20 000
10% Fixed deposit: ZON Bank 15 000
Bank 4 300

Revenue 250 000
Carriage of sales 550
Rent expense 15 600
Stationery 3 800
Insurance 4 800
Credit losses 750
396

384 600 384 600
1. A physical inventory taking revealed the following:
Stationery on hand, R200.
2. Depreciation must be provided for as follows:
– Vehicles (20% pa on cost price) R20 000.
– Equipment (10% pa on reducing balance method) R3 200.
3. No interest was paid during the year on the loan from WIN Bank
(interest rate 15%).
4. No interest was received during the year on the fixed deposit
(interest rate 10%).
5. An additional amount of R200 must be written off as credit losses.
6. The allowance for credit losses must be adjusted to R250.
7. Included in insurance is a prepaid amount of R1 500.
Required:
11.9.1 Show the necessary general journal entries for the above-mentioned
adjustments.
11.9.2 Prepare the statement of profit or loss and other comprehensive income
for the year ended the 28 February 2013.
11.9.3 Prepare the statement of financial position as at 28 February 2013.
Question 11.10
R Steel, a general dealer, asked you to prepare the financial statements of his
business. He supplied you with the following information:
Pre-adjustment trial balance of R Steel at 31 December 2013

Debit Credit
R R
Capital: R Steel 148 500
Drawings: R Steel 12 200
Long-term loan (18% pa from North Bank) 66 000
Accumulated depreciation: Plant and machinery 15 000
Furniture & fittings @ cost 12 000
397
Accounting for All

Petty cash 100
Bank 227 100
Revenue 315 700
Sales returns 600
Purchases 207 100
Petrol & oil 4 000
Insurance 1 800
Rent received 3 500
Stationery 4 600
Rent paid 5 000
Commission expense 16 900
857 600 857 600
The following information must still be taken into account:

1. A physical inventory count on 31 December 2013 revealed the following
inventory on hand:
Merchandise, R132 700
Stationery, R776
Petrol and oil, R1 000.
2. Insurance prepaid, R1 200.
3. Rent was received in advance, R875.
4. R400 must be written off trade receivables as irrecoverable.
5. The allowance for credit losses must be adjusted to R3 696.
6. The trial balance accounts for rent paid for 10 months only.
7. The loan from North Bank was negotiated on 1 April 2013. Provide for
interest accrued of R2 310.
8. No depreciation has been recorded yet. The rates and methods of
depreciation for the various categories of fixed assets are as follows:
Plant and machinery at 15% pa on reducing balance method, R9 000.
Furniture and fittings, R250.
Motor vehicles, R3 100.
398
Required:
for the year ended 31 December 2013.
11.10.3 Prepare the statement of financial position at 31 December 2013.
Question 11.11
The following is the pre-adjustment trial balance of Natalie Enterprises at
28 February 2013.
Trial balance of Natalie Enterprises at 28 February 2013

Debit Credit
STATEMENT OF FINANCIAL POSITION R R
SECTION
Capital 74 000
Drawings 5 000
Equipment 30 000
Bank 1 500
Revenue 120 500

Trade receivables allowance 500
Stationery 2 000
Insurance 3 500
Rent received 6 000
Credit losses 1 500
245 000 245 000
399
Accounting for All
1. On 28 February 2013 Natalie Enterprises has stationery to the value of R500
on hand.
2. Included in insurance is a premium of R1 200 paid on a policy for the 12
months ended 31 August 2013.
3. From 1 March 2012 Excelsior Enterprises rent a building from Natalie
Enterprises at R400 per month. On 1 March 2012 an amount of R6 000 was
received from Excelsior Enterprises.
4. The allowance for credit losses must be adjusted to 10% of the outstanding
trade receivables.
5. Depreciation on equipment is written off as 10% pa on the diminishing
amount method, by Natalie Enterprises.
6. On 28 February 2013 wages and salaries to the amount of R10 000 were still
due to employees.
Required:
and statement of financial position of Natalie Enterprises for the year
ended 28 February 2013 (show your calculations).
Question 11.12
The following trial balance pertains to the accounting records of Alien Traders on
31 December 2013:
List of balances on 31 December 2013

R
Capital – A Alien 494 275
Drawings – A Alien 23 700
Loans from ABC Bank (obtained 1 October 2013 at 22% pa) 110 550
Accumulated depreciation – plant and machinery 52 500
400
Petty cash 450

Rent received 6 750
Revenue 769 200
Insurance 4 500
Telephone 8 700
Interest expenses 21 750
Stationery expenses 7 500
Inventory 375 000
1. A physical inventory take held on 31 December 2013 revealed the following:
Consumable stores on hand 2 400
Stationery on hand 500
2. Advertisements paid cover the six-month period ending 31 March 2014.
3. Included in insurance is an amount of R3 600 in respect of an insurance
contract covering the period 1 March 2013 to 28 February 2014.
4. Rent was received in cash on 30 June 2013 covering the next 15 months.
5. Included in trade receivables is an amount of R300 received in cash from B
Botham. His account was written off as irrecoverable in 2011.
6. Write off R4 500 as irrecoverable and adjust the allowance for credit losses
to 6% of trade receivables.
7. The telephone account for December 2013 of R520 was only received on 4
January 2014.
8. Depreciation must still be provided for as follows:
– Plant and machinery at 15% pa on the reducing balance.
– Motor vehicles at 12.58% per annum on cost price.
9. Commission earned includes an amount of R3 216 which relates to the 12
months ending 30 June 2014.
10. The interest on the long-term loan is payable at the end of every three
months. Provide for any accrued interest. No entry was made for interest on
loan.
11. The fixed deposit was made on 1 May 2013. No interest has yet been
received.
401
Accounting for All
Required:
11.12.2 Prepare a statement of profit or loss and other comprehensive income
for the year ended 31 December 2013.
11.12.3 Show only the current assets and current liabilities of the statement of
financial position at 31 December 2013.
Question 11.13
The following balances were taken from the books of Roxanne Financial Services
on 29 February 2013:
R
Capital: Roxanne 42 223

Drawings: Roxanne 4 500
Office equipment @ cost price 12 300
Delivery vehicles @ cost price 5 625
Accumulated depreciation on 1 March 2013
– Office equipment 2 460
– Delivery vehicles 4 275
Fixed deposit 30 000
Cash 244
Purchases 30 600
Revenue 91 350
Insurance 2 214
Stationery 735
Sales returns 1 560
Carriage on purchases 525
Interest on investment 2 700
Telephone 1 350
Rent paid 9 900
402
1. Credit losses of R735 must still be written off.
2. Salaries and wages in arrear are R75.
Unused stationery on hand is R57.
3. The insurance was paid for the period 1 July 2013 to 30 June 2013.
4. Depreciation is calculated by using the diminishing balance method:
– Office equipment 15% per year.
– Delivery vehicle 25% per year.
5. R Reagan’s private home phone account of R150 for February 2013 was paid
by the business and allocated to the telephone account.
6. Inventory on hand after a physical inventory taking on 28 February 2013 is
R9 600.
7. Trade discount of R300 for a credit purchase transaction was not accounted
for.
8. The advertisement is paid from 1 April 2012 to 31 March 2013 due to a
contract that has been signed.
9. The interest on the fixed deposit is calculated at 9% per year.
Required:
11.13.1 Journalise all adjustments in the general journal.
11.13.2 Show the closing entries for the year ending 29 February 2013.
11.13.3 A statement of profit or loss and other comprehensive income for the
year ending 29 February 2013.
Question 11.14
The following information is obtained from the accounting records of Balfour
Traders on 28 February 2013, the end of the accounting period of the entity.
Pre-adjustment trial balance of Balfour Traders at 28 February 2013
Debit Credit
STATEMENT OF FINANCIAL POSITION R R
SECTION
Capital 66 100
Drawings 16 000
Vehicles (@ cost price) 100 000
Loan: LG Bank 20 000
Fixed deposit: INFO Bank 15 000
403
Accounting for All

Bank 4 300

Revenue 250 000
Rent expense 15 600
Stationery 3 800
Insurance 4 800
Credit losses 750
384 600 384 600
Adjustments:
1. A physical inventory take showed the following:
Trading inventory on hand R17 650
Stationery on hand R 200
2. Depreciation must be provided as follows:
– Vehicles: 20% per annum on the diminishing balance
– Equipment: 10% per annum on cost price
3. The loan from LG Bank was obtained on 31 December 2012. Interest is
payable at the end of each six months at 15% per annum.
4. The fixed deposit was made on 1 September 2012. The interest rate
amounted to 10% per annum. As yet no interest was received.
5. An additional amount of R200 must be written off as irrecoverable.
6. Adjust the allowance for credit losses to 5% of trade receivables.
7. Rent was paid for the period 1 March 2012 till 31 March 2013.
8. Insurance included an amount of R1 800 in respect of additional insurance
taken out which was paid for the period 1 January 2013 till 31 December
2013.
Required:
11.14.2 Show the closing entries for the year ended 28 February 2013.
11.14.3 Prepare the financial statements of Balfour Traders for the year ended
28 February 2013.
404
Question 11.15
The following figures were obtained from Bomo Wholesalers as on 30 June 2013:
R
Accumulated depreciation – off furniture 6 600
Accumulated depreciation – vehicles 12 000
Advertising 4 500
Bank 22 600
Bank charges 2 700
Capital 97 400
Cleaning materials 3 100
Depreciation 16 000
Drawings 15 000
Fixed deposit @ 7,5% 15 000
Fuel 11 800
Insurance 14 000
Inventory 30 June 2013 45 000
Interest paid on long-term loan 10 000
Interest received on fixed deposit 1 000
Long-term loan @ 14% 100 000
Office furniture @ cost 40 000
Rent paid 22 000
Salaries 420 000
Revenue 900 000
Sales returns 10 000
Stationery 8 900
Telephone 14 500
Adjustments:
1. Rent paid was paid only for 11 months.
2. Physical inventory count revealed the following on hand on 30 June 2013.
Inventory R44 600
Cleaning material R 2 000
405
Accounting for All
3. The long-term loan was negotiated at 1 January 2013.

4. The fixed deposit was made on 31 August 2011.
5. Rent received consists of amounts received for two store rooms rented out:
 no 1 – R12 000 for period 1 September 2012 until 31 August 2013.
 no 2 – R18 000 for period 1 July 2012 until 30 June 2013.
6. Write an amount of R3 320 off as credit losses.
7. Adjust the allowance for credit losses to 5% of outstanding trade receivables.
Required:
11.15.1 Journalise all the adjustments
11.15.2 Compile a statement of profit or loss and other comprehensive income
and statement of financial position on 30 June 2013.
406
CHAPTER 12
FINANCIAL STATEMENTS OF
COMPANIES
12.1 Introduction
A company is generally defined as an association of persons with a common goal
which is to make a profit. A company is further recognised by law as being a legal
person which is independent of its shareholders. This means that the shareholders
of a company are not liable for the debts of the company.
Companies are governed by the new Companies Act 71 of 2008 which was
gazetted on 9 April 2008. It became effective on 1 May 2011, replacing the
Companies Act 61 of 1973. The Companies Act is administered by the Registrar
of Companies who must ensure that all the legal requirements with regard to
companies are adhered to.
Some of the most noticeable charges between the old and new Act are the
following:
 Shares may no longer be issued at par value.
 Close Corporations (CCs) may no longer be created although existing CCs
may choose to convert to a company or remain as a CC until dissolution or
deregistration.
 Companies are divided into non-profit companies and profit companies.
 Financial statements must be published within six months after the financial
year-end (previously it was nine months).
 The Fourth Schedule disclosure requirements fall away.
 Companies now have the contractual powers of a natural person.
 Record the issue of shares
 Record all dividend transactions in the records of the company and disclose
the entries in the statement of financial position and statement of profit or loss
and other comprehensive income
 Record the transactions for taxation in the records of the company and
disclose the entries in the statement of financial position and statement of
profit or loss and other comprehensive income
 Prepare the appropriation account of a company
 Draft a statement of financial position and statement of profit or loss and
other comprehensive income of a company
Accounting for All
12.2 Formation of a company

The procedure for the formation and registration of a company is laid down by the
Companies Act. According to this Act a Memorandum of Incorporation (MOI)
must be drawn up by an attorney and submitted to the Registrar of Companies
with the prescribed forms.
The contents of the MOI may deviate depending on the type of company. The
following are only a few aspects that will be covered in the MOI:
 Purpose for which the company was formed and its main business activity
 The name of the company
 Particulars of the share capital
 Meetings
 Voting rights and procedures
 Borrowing capacity
 Powers and duties of directors
12.3 Types of companies

The new Companies Act identifies the following types of companies:
 Profit companies
 Non-profit companies
Profit companies can be further divided into:
– State-owned company
– Private company
– Personal liability company
– Public company
In this chapter we are going to concentrate only on private and public companies.
12.4 Comparison between business entities

12.4.1 Difference between public and private companies
PUBLIC COMPANY PRIVATE COMPANY
1 The name ends with the word 1 The name ends with the word
‛Limited’ (abbreviated Ltd) ‛Proprietary Limited’
(abbreviated (Pty) Ltd)
2 May be listed on a stock 2 May not be listed on a stock
exchange exchange
3 Minimum number of 3 Minimum number of shareholders
shareholders seven and one and may have maximum of 50
maximum unlimited shareholders
4 Shares are freely transferable 4 Shares are not freely transferable
5 Shares may be offered to the 5 Shares may not be offered to the
general public general public
408
Chapter 12 Financial statements of companies
12.4.2 Comparison between close corporation and company

CLOSE CORPORATION COMPANY
1 Legal person 1 Legal person
2 Unlimited life 2 Unlimited life
3 Limited liability 3 Limited liability
4 1 – 10 members 4 As above
5 Members conduct business 5 Directors conduct business
6 Tax paid at fixed rate 6 Tax paid at fixed rate
7 Part of profit divided – 7 Part of profit divided – dividends
distributions to members
8 Owners’ equity: members’ 8 Owners’ equity: share capital and
contributions and reserves reserves
12.4.3 Comparison between a partnership and a private company
PARTNERSHIP PRIVATE COMPANY
1 Not a legal person 1 Separate legal person
2 Limited life 2 Unlimited life
3 No limited liability for debts 3 Shareholders have limited liability
– partners are liable for debts
4 Maximum of 20 partners and 4 Maximum of 50 shareholders and a
a minimum of two partners minimum of one shareholder
5 Partners conduct business 5 Shareholders appoint directors to
conduct business
6 Partnership not taxed but the 6 Taxation paid at a fixed rate
individual partners applicable to companies
7 Profit divided between 7 Part of profit divided – dividends
partners
12.4.4 Comparison between sole trader and partnership
SOLE TRADER PARTNER
1 No agreement 1 Written agreement
2 Owner acts as an agent of 2 Each partner acts as an agent
business
3 Income is taxed in hands of 3 Income taxed in hands of partners
the owner
4 Limited life 4 Limited life
5 Not a legal person 5 Not a legal person
6 Unlimited liability 6 Unlimited liability
7 One owner 7 Two to 20 owners
8 Owner’s equity: one capital 8 Owner’s equity: capital and current
account account for each partner
9 Profit transferred to capital 9 Profit divided and transferred to
account at year end current accounts at year end
409
Accounting for All
Limited life: Business is dissolved when owner/a partner withdraws

from the business.
Legal person: Liable for debts.
Unlimited liability: Totally liable for all debts of the business.
12.5 Share capital

Authorised share capital and issued share capital
The share capital of a company is the money received from the shareholders for
the shares they have bought in the company. The share capital can be divided into
the authorised share capital and issued share capital. The particulars of the share
capital must appear in the memorandum of the company.
The authorised share capital is the maximum number of shares that may be
issued to the shareholders of the company.
The issued share capital is the actual number of shares already issued to
shareholders.
It is important to remember that only the amount of the issued share capital must
be taken into account in the financial statements.
Types of shares
Shares are classified into different types of shares in accordance with the rights
and privileges attached to the shares. The main types of shares are ordinary shares
and preference shares.
 Ordinary shares
Are held by ordinary shareholders, who are effectively the owners of the
company. Ordinary shareholders have the right to vote at general shareholders’
meetings of the company and they control the company. Ordinary shareholders
may receive dividends out of profits once the dividends to be paid on preference
shares have been declared.
 Preference shares
Are owned by preference shareholders and usually have preferential rights over
ordinary shares. Preference shareholders receive a dividend before the ordinary
shareholders. This is normally at a fixed percentage rate each year. A preference
shareholder normally does not have voting rights, unless his dividend falls in
arrears. This means that the business still owes him his dividend. Preference
shares can be divided into different types of preference shares. In this unit we will
only mention these types and will not discuss it:
– Cumulative preference shares
– Participating preference shares
– Convertible preference shares
– Redeemable preference shares
410
12.6 Reserves
Reserves are profits not paid out as dividends and retained in the business. It is
part of the owners’ equity of a company. Reserves can be divided into
distributable reserves and non-distributable reserves.
Distributable reserves consist of:
 Retained earnings which are the cumulative balance of undistributed profits.
 General reserve which is created by a decision of the directors to transfer
money from profits after tax and before dividends are distributed.
Distributable reserves can be used to pay out dividends.
Non-distributable reserves consist of:
 Capital redemption reserve fund account, which is created when preference
shares are redeemed.
 Revaluation of non-current assets reserve.
 Increase replacement value reserve.
On this level it is important that you must know that these two accounts are non-
distributable reserves. Furthermore you must know that non-distributable reserves
cannot be used to pay out dividends.
12.7 Recording of transactions regarding shares issued
By means of a prospectus a public company will invite the public to buy shares at
a certain price. An investor wishing to subscribe to the shares in a company must
complete an application form. Application forms with a payment of the full issue
value of the shares must be sent to the company.
Example 12.1
On 1 July 2013 A Ltd offered 100 000 ordinary shares of R1 each to the public.
All the applications and payments were received and allotted.
Required:
Show the general journal entries for the above-mentioned transactions.
411
Accounting for All
Solution:
General journal A Ltd
R R
2013 Bank 100 000
July 1 Application account 100 000
Money received from applicants
Application account 100 000

Ordinary share capital account 100 000
100 000 ordinary shares allotted
Explanation:
 The application account is a temporary account that is used to record the
money received from the shareholders before the amount is allocated to the
correct accounts.
 According to the Companies Act the share capital account (ordinary and
preference) can only be credited with the amount for the number of shares
issued.
What will the entries be if more applications than offered are received?
Example 12.2
1 September 2013
Beta LTD offered 100 000 ordinary shares of R1 each to the public. Applications
for 110 000 shares were received. The 100 000 ordinary shares were allotted and
the unsuccessful applications refunded.
1 November 2013
50 000 preference shares of R0.50 each were offered to the public. The necessary
applications were received and allotted.
Required:
Solution:
General journal Beta Ltd
R R
2013 Bank 110 000
Sept 1 Application account 110 000
Applications for 110 000 shares
412

Ordinary share capital 100 000
Allotment of 100 000 shares

Bank 10 000
10 000 unsuccessful applications
refunded
2013 Bank 25 000

Nov 1 Application account 25 000
Applications for 50 000 preference

Preference share capital 25 000
Allotment of 50 000 shares
12.8 Recording of transactions regarding dividends

Dividends are a distribution of profits from the company to shareholders
according to the number of shares held in the company. Dividends may only be
paid from profits which are legally available for distribution for example
distributable reserves. The directors of a company normally propose the dividend
which is then approved by a general meeting of shareholders.
A dividend is only due and payable once it has been declared. Normally dividends
are declared at the end of a financial year although an interim dividend can be
declared during the year. An interim dividend is a dividend declared in the middle
of the financial year.
The following is a summary of the accounting treatment of transactions regarding
dividends:
Debit Credit
 Dividends declared
Ordinary dividend/ xxx
Preference dividend xxx
Shareholders for dividends xxx
 Dividends paid previously declared

Shareholders for dividends xxx
Bank xxx
 Closing entry
Appropriation account xxx
Ordinary dividend/ xxx
Preference dividend xxx
413
Accounting for All
Explanation:
 Closing entries are necessary because the ordinary and preference dividend
accounts are expense accounts.
 An entry must be made on the date of declaration.
 The shareholders for dividends account is a liability.
 Preference dividends should always be declared before ordinary dividends.
 Remember dividends are always calculated on the issued share capital.
Example 12.3
On 28 February 2013 the authorised and issued share capital of Gato Ltd
consisted of the following:
Authorised share capital

80 000 ordinary shares of R1 each
40 000 10% preference shares of R0.50 each
Issued share capital

60 000 ordinary shares of R1 each
30 000 10% preference shares of R0.50 each
On 28 February 2013 the directors declared a final dividend of 5c per ordinary

share as well as the final dividend for the preference shares.
The dividends declared on 28 February 2013 will be paid on 15 March 2013.
Required:
Show the general journal entries for both dates.
Solution:
General journal Gato Ltd
R R
2013 Ordinary dividend 3 000
Feb 28 Preference dividend 1 500
Shareholders for dividends 4 500
Dividends declared
2013 Shareholders for dividends 4 500

Mar 15 Bank 4 500
Dividends declared paid
The 10% on preference shares indicates the dividend preference shareholders are
going to receive. Therefore the calculation of the preference dividend will be as
follows: 10% x R15 000 = R1 500
414
12.9 Recording of transactions regarding taxation

A company must pay tax separate from its shareholders. The taxation payable by
a company can only be calculated once the profit for the year is known. At the
end of a financial year the company will raise an estimated taxation liability
called a provision for taxation because their assessment which shows the actual
amount due has not yet been received.
It is furthermore required from companies to make provisional payments to the
South African Revenue Services. These payments are based on an estimation of
the taxable income for the year or on the latest assessment received. Half of the
estimated amount is payable on 31 August each year and the other half on 28
February.
The following is a summary of the accounting treatment of transactions regarding
taxation:
Debit Credit
 Provisional tax payments
SARS xxx
Bank xxx
 Provision for taxation

Taxation xxx
SARS xxx
 Payment of taxation provided

SARS xxx
Bank xxx
 Closing entry
Profit and loss account xxx
Taxation xxx
Explanation:
 Closing entries are necessary because the taxation account is an expense.
 The SARS account is normally a liability but it can be an asset when SARS
owes an amount to the company.
Example 12.4
On 1 March 2013 the capital position of Zuma Ltd was as follows:
Authorised capital, R600 000 consisting of ordinary shares of R2 each.
Issued capital, R400 000.
415
Accounting for All
On 1 March 2013 the following credit balances, amongst others, appeared in the
books of the company:
Debit Credit
R R
Retained earnings 540 000
SARS (income tax) 1 500
The following transactions, regarding taxation and dividends, occurred during the
financial year ended 28 February 2014:
2013
July 15 The income tax due in respect of the previous financial year was
paid by cheque.
Aug 25 The total provisional income tax liability of the company was
estimated at R240 000. A cheque for half of the amount was
posted to SARS on 30 August.
2014
Feb 28 – A cheque was issued to pay the rest of the provisional tax
payable.
– The net income of the company before tax amounted to
R940 000. Provide for income tax at a rate of 28%.
– The directors declared a final dividend of 5c per ordinary
share.
Required:
Solution:
General journal Zuma Ltd
R R
2013 SARS 1 500
July 15 Bank 1 500
Income tax due paid by cheque
2013 SARS 120 000

Aug 30 Bank 120 000
Provisional tax paid by cheque
2014 SARS 120 000

Feb 28 Bank 120 000
Provisional tax paid by cheque
416
Taxation 263 200

SARS 263 200
Provide for tax at a rate of 35%
(35% x R840 000)
Ordinary dividend 10 000

A final of 5c per share declared
Appropriation account 10 000

Ordinary dividend 10 000
Closing entries
Profit and loss 263 200

Taxation 263 200
Closing entries
Explanation:
 Although the provisional tax was calculated on 25 August 2013, the
transaction must be recorded on the date when the cheque was issued.
 Because the taxation and ordinary or preference dividend accounts are
expense accounts, they must be balanced off against the appropriation and
profit and loss account.
12.10 The appropriation account

If you remember, in the case of the sole trader and partnerships a trading account
and profit and loss account were used to close off nominal accounts. This remains
the same for companies; however, as for partnerships, an additional account, the
appropriation account is introduced. This account is part of the final accounts of
companies in the general ledger. The sole objective is to determine the profit that
remains after the tax payable to SARS, the dividends payable to shareholders and
any transfer to reserves are taken into account. This profit is called the retained
earnings at the end of the financial year.
The retained earnings at the end of the year are carried over to the next financial
year and not divided between the shareholders like partnerships.
The following accounts will be balanced off against the appropriation account:
 Retained earnings at the beginning of the year
 Ordinary dividend
 Preference dividend
Transfer to reserves for example general reserve, is only a book entry and not a
closing entry. A book entry means that an amount is transferred from one account
to another.
417
Accounting for All
Example 12.5
Use the information of Zuma Ltd (example 12.4).
The directors decided to transfer R5 000 to general reserve.
Required:
After the entries for Zuma Ltd and the additional information are taken into
account; prepare the appropriation account for the year ended 28 February 2013.
Solution:
Dr Appropriation account for the year ended 28 February 2013 Cr
Transfer to general reserve 5 000 Profit and loss
Ordinary dividend 10 000 (Profit after tax) 676 800
Retained earnings at the end Retained earnings at 540 000
of the year 1 201 800 beginning of year
________ ________
1 216 800 1 216 800
The following is a comprehensive example including transactions regarding

shares issued, taxation, dividends as well as the appropriation account.
Example 12.6
The following information was extracted from the books of Redro Limited:
1. On 1 March 2013 the capital position of the company was as follows:
– Authorised share capital:
Ordinary shares of R2 each, R1 000 000
10% preference shares of R0.50 each, R50 000
– Issued share capital:
Ordinary shares, R800 000
10% preference shares, R40 000
2. On 1 March 2013 the following credit balance amongst others, appeared in
the books of the company:
Retained earnings R760 000
SARS (income tax) R3 000
3. The income tax due in respect of the previous financial year was paid by
cheque on 15 July 2013.
4. On 25 August 2013 the provisional income tax liability of the company was
estimated at R120 000. A cheque for this amount was posted to SARS on
29 August 2013.
418
5. On 31 August 2013 an interim dividend of 10c per ordinary share as well as

an interim dividend for preference shares was declared payable on 15
September 2013.
6. On 1 September 2013 R200 000 was received from ordinary shareholders for
new shares issued to the public.
7. On 20 February 2014 the total provisional income tax liability of the
company was estimated at R268 000. A cheque for payment of the final
provisional tax of the company for the year was posted to SARS on 25
February 2013.
8. On 28 February 2014 the company declared a final ordinary dividend of 15c
per share as well as the preference dividend, payable on 15 March 2013.
9. The profit of the company before taxation amounted to R980 000. The rate at
which the company is taxed is 28%.
Provide for the final amount due to SARS for income tax. This amount will be
paid after receiving the final assessment from the Receiver.
Required:
Show the following ledger accounts in the general ledger of the company for the
year ended 28 February 2014:
SARS
Taxation
Ordinary dividend
Preference dividend
Ordinary share capital
Appropriation account
Shareholders for dividends
Solution:
General ledger: Redro Ltd
Dr SARS (income tax) Cr
2013 2013
July 15 Bank 3 000 Mar 1 Balance b/f 3 000
Aug 29 Bank 120 000
2014 2014
Feb 25 Bank 148 000 Feb 28 Taxation b/f 274 400
28 Balance c/f 6 400
277 400 277 400
2014
Mar 1 Balance b/f 6 400
419
Accounting for All
Dr Taxation Cr
2014 Receiver of 2014 Profit &
Feb 28 Revenue 274 400 Feb 28 loss 274 400
Ordinary dividend
2013 Shareholders 2014 Appropriation
Aug 31 for dividends 40 000 Feb 28 acc 115 000
2014 Shareholders
Feb 28 for dividends 75 000
115 000 115 000
Preference dividend
2013 Shareholders 2014 Appropriation
Aug 31 for dividends 4 000 Feb 28 acc 8 000
2014 Shareholders
Feb 28 for dividends 4 000
8 000 8 000
Ordinary share capital

2013
Mar 1 Balance b/f 800 000
Sept 1 Bank 200 000
1 000 000
Appropriation account
2014 Ordinary 2014 Profit after
Feb 28 dividend 115 000 Feb 28 taxation 705 600
Preference Retained earnings

dividend 8 000 at the beginning of
the year 760 000
Retained
earnings at the
end of the year 1 342 600
1 465 600 1 465 600
420
Dr Shareholders for dividends Cr

2013 2013 Ordinary
Sept 15 Bank 44 000 Aug 31 dividend 40 000
2014 Preference
Feb 28 Balance b/f 79 000 dividend 4 000
2014 Ordinary
Feb 28 dividend 75 000
Preference
dividend 4 000
123 000 123 000
2014
Mar 1 Balance b/d 79 000
12.11 Financial statements of companies

The objective of financial statements is to provide information about the financial
position, performance and changes in financial position of an entity, which is
useful to a wide range of users in making economic decisions (IASB Framework).
The Framework for the Preparation and Presentation of Financial Statements
(IASB Framework) provides guidelines and rules for compiling a complete set of
financial statements.
A complete set of financial statements includes the following components:
 a statement of financial position
 a statement of profit or loss and other comprehensive income
 a statement of changes in equity
 a statement of cash flows and
 accounting policies and explanatory notes
In this chapter we are going to concentrate only on the statement of profit or loss
and other comprehensive income, statement of financial position and statement of
changes in equity.
The following is an example for the presentation of the statement of financial
position and statement of profit or loss and other comprehensive income of a
fairly small company.
421
Accounting for All
Example 12.7
Statement of financial position of Dolfin Ltd at 28 February 2013
R
ASSETS
NON-CURRENT ASSETS 29 300
Property, plant & equipment 2 20 000
Goodwill @ cost price –
Other investments
Investments in subsidiaries } Financial
assets
3
4
1 300
8 000

Inventories 5 11 500
Cash and cash equivalents 400
Total assets 54 200

TOTAL EQUITY 6 35 200
Share capital: Ordinary 20 000
Preference 2 000
Surplus at revaluation of land & buildings 7 500
NON-CURRENT LIABILITIES 7 13 000
Bank overdraft 700
54 200
422
Statement of profit or loss and other comprehensive income of Dolfin Ltd for
the year ended 28 February 2013
R
Revenue 18 260 000
Cost of sales (215 183)
Gross profit 44 817
Other operating income –
Investment income 300
Administration & distribution costs (40 000)
Profit on ordinary activities before interest 19 5 117
Finance cost 10 (1 950)
Profit on ordinary activities before taxation 3 167
Taxation 11 (1 267)
Total comprehensive income 1 900
Notes to the financial statements
Statement of changes in equity
Share Surplus at Retained
capital revaluation earnings Total
Opening balance 22 000 5 000 5 400 32 400
Revaluation at beginning
of year 2 500 2 500
Ordinary dividend (1 000) (1 000)
Preference dividend (600) (600)
Profit for the year 1 900 1 900
22 000 7 500 5 700 35 200
Example 12.8
Rocky Limited are registered with 120 000 ordinary shares of R5 each, of which
100 000 shares have been issued. Their annual accounting period ends on the last
day of February.
The company’s pre-adjustment trial balance, as well as adjustment and additional
information for February 2013, is given.
Required:
for the year ended 28 February 2013.
12.8.2 Prepare the statement of financial position at 28 February 2013.
12.8.3 Prepare the statement of changes in equity.
423
Accounting for All
Pre-adjustment trial balance of Rocky Limited on 28 February 2013

Debit Credit
R R
SECTION
Retained earnings: 1 March 2012 36 904
Vehicles 32 000
Equipment 29 200
Bank 132 420
Cash float 120
Investment 100 000
Dividends paid 50 000
SARS 71 036
(Provisional income tax payments)
Loan @ 16% secured by a mortgage bond over 60 000
Land & buildings

Revenue 581 600
Insurance 994
Telephone & postage 1 464
Salaries 34 800
Credit losses 858
Interest on mortgage 9 600
Rates 2 026
Bank charges 586
Directors’ fees 51 700
Audit fees 1 590
Dividends received 400
1 220 360 1 220 360
424
Adjustments and additional information:

1. The water and electricity account for February 2013 has been received but
has not been paid, R206.
2. A debtor, N Roux’s account, must be written off as irrecoverable, R156.
3. The allowance for credit losses must be adjusted to 2% of trade receivables.
4. The company’s accounting policy stipulates, inter alia, that depreciation
must be written off:
– On vehicles at 20% per annum on cost (an additional vehicle was bought
on 30 November 2012 at a total cost of R18 000).
– On equipment at 10% per annum according to the diminishing balance
method.
5. One of the directors was overseas during February 2013 and his
remuneration of R2 300 for February has not been paid.
6. Used equipment, originally costing R3 000, was used as trade-in (valued
R2 050) on 28 February 2013 at Rip Traders, for new equipment to the value
of R8 000. The accumulated depreciation on this equipment until the date of
sale amounted to R1 310. These transactions have still to be recorded.
7. The bank statement was received after the pre-adjustment trial balance had
been drawn up. Service fees of R30 and cash handling fees of R8 were
debited against the bank statement and have still to be taken into account.
8. The income tax which is still owed for the accounting period amounts to
R3 576.
9. A final dividend of 42c per share has been declared.
10. R10 000 on the mortgage was paid on 30 November 2012.
11. Inventory is valued at cost on a first-in first-out basis. A physical inventory
taking showed that the trading inventory is R72 820.
12. Other investments consist of:
30 000 ordinary shares of R2 each in X Limited
(market value, R55 000) R60 000
40 000 ordinary shares of R1 each in Z (Pty) Ltd
(director’s valuation, R38 000) R40 000
425
Accounting for All
Solution:
12.8.1
Statement of profit or loss and other comprehensive income of Rocky
Traders for the year ended 28 February 2013
R
Revenue 7 581 600
– Cost of sales 302 800
+ Other operating income 360
Administration and distribution costs (105 538)
Profit on ordinary activities before interest 8 174 022
Finance cost 9 (10 800)
Taxation 10 (74 612)
12.8.2
Statement of financial position of Rocky Traders at 28 February 2013
R
ASSETS
NON-CURRENT ASSETS 2 440 988
Other investments (financial assets) 100 000

Inventories 4 72 820
Bank Cash and cash 132 382
Cash float }
equivalents 120
668 458
426
EQUITY AND LIABILITIES R
Share capital: Ordinary 500 000

TOTAL EQUITY 5 5 33 514
NON-CURRENT LIABILITIES 6 60 000
Trade and other payables (19 712 + 206 + 2 300 29 363
+ 1 200 + 8 000 – 2 050)
SARS 3 576
668 458
12.8.3
Statement of changes in equity
Share Retained Total
capital earnings
Opening balance 500 000 36 904 536 904
Ordinary dividend (92 000) (92 000)
Profit for the year 500 000 88 610 88 610
Calculations:
Administration and distribution costs R
Insurance 994
Telephone & postage 1 464
Salaries 34 800
Credit losses (858 + 156 – 112) 902
Rates 2 026
Bank charges (586 + 38) 624
Directors’ remuneration (51 700 + 2 300) 54 000
Auditors’ remuneration 1 590
Depreciation (3 700 + 1 642) 5 342
Trading inventory deficit 1 500
105 538
427
Accounting for All
Questions
Question 12.1
Beaver Limited commenced business on 1 March 2011 with an authorised and
issued share capital of 100 000 ordinary shares of R3 each. On 28 February 2012
the company’s net income after tax for the year amounted to R40 000. However,
no dividends were declared in the first year.
On 31 August 2012, after six months of trading in the second financial year, the
company’s accountant calculated that the company was liable for R16 000 in
respect of provisional income tax to SARS.
On 10 September 2012 cheque no 821 for R16 000 was issued to the SARS.
On 30 September 2012 the directors of the company declared an interim dividend

of 8 cents per share.
On 12 October 2012 cheque no 870 was issued to pay the interim dividend due to
the shareholders.
On 28 February 2013, the last day of the second financial year:

 The total net profit before taxation for the year ended 28 February 2013
amounted to R116 000.
 The total amount due for income tax for the whole financial year was 28% of
the total net profit for the year.
 The directors declared a final dividend of 12 cents per share.
Required:
From the information supplied below in respect of Beaver Limited you are
required to prepare the following
12.1.1 Ledger accounts in the general ledger of Beaver Limited for the period 1
March 2012 to 28 February 2013. Balance the accounts on 28 February
2013, the end of the financial year.
SARS – income tax (B12).
Shareholders for dividends (B13).
Income tax (N21).
Ordinary dividends (N22).
Appropriation account (F3).
12.1.2 Extract of the statement of financial position reflecting shareholders’
equity as at 28 February 2013. The final total is not required.
428
Question 12.2
Data:
You have been assigned to assist in the preparation of the financial statements of
Spiraes Ltd for the year ended 30 November 2013. The company is a trading
company operating from freehold premises in a large industrial city. You have
been provided with the extended trial balance of Spiraes Ltd on 30 November
2013, which is set out below.
Trial balance of Spiraes Ltd for the year ended 30 November 2013
Debit Credit
R R
Accruals
Cash at bank 375
Interest charges 189
– Buildings 810
– Office equipment 319
– Fixtures & fittings 820
Revenue 18 742
Fixed asset investment 866
9% debentures 4 200
Prepayments
Cost
– Land 3 570
– Buildings 2 933
– Office equipment 882
– Fixtures & fittings 2 071
Purchases 10 776
Administrative expenses 1 805
Inventory 1/12/2013 925
Returns inwards 595
Returns outwards 314
Distribution cost 2 497
34 696 34 696
429
Accounting for All
1. Profit after tax is R6 192.
2. Inventory on 30/11/2013 = R3 871.
Required:
Draft the financial statements for the year ended 30 November 2013.
Question 12.3
Bad Boys Blue Ltd was incorporated on 1 January 2013 with an authorised capital
of 200 000 ordinary shares of R2 each and 200 000 10% redeemable preference
shares of R1 each. The trial balance of the company at 31 December 2013 was as
follows:
Trial balance of Bad Boys Blue Ltd at 31 December 2013
Debit Credit
R R
10% redeemable preference shares 40 000
6% debentures secured by a bond over
land & buildings 60 000
General reserve 20 000
Retained income (1 January 2013) 30 000
Capital redemption reserve fund 10 000
Machinery 130 000
Vehicles 40 000
Accumulated depreciation (1 January 2013):
Machinery 41 800
Vehicles 18 400
Reserve for revaluation of fixed assets 34 000
Investments 76 900
Inventory (31 December 2013):
Merchandise 55 000
Consumables 5 000
Bank 20 000
SARS
– provisional tax payments 12 000
Net profit after taxation 92 575
Ordinary dividend paid 8 500
(Ordinary shares)
Preference dividends paid 7 600
558 000 558 000
430
Required:
12.3.1 Prepare the statement of financial position of Bad Boys Blue Ltd for the
year ended 31 December 2013.
12.3.2 Show the following note only:
Statement of changes in equity.
Question 12.4
Grand West Ltd had the following trial balance in its books at 30 June 2013:
List of balances of Grand West Ltd at 30 June 2013
R
20 000 10% debentures of R10 each 200 000
1 600 000 ordinary shares 800 000
300 000 5% preference shares of R1 each 300 000
Furniture & office equipment @ cost 56 000
Goodwill @ cost 230 000
General expenses 38 600
Office rent 16 000
Advertising 2 500
Cash on hand 150
Cash at bank 161 600
Retained earnings 1 July 2013 70 700
Listed investments (90 000 R1 shares in Tex Ltd) 90 000
Unlisted investments (20 000 R3 shares in Brand (Pty) Ltd) 60 000
Debenture interest 15 000
Director’s fees 5 000
Returns inward 18 600
Salaries 139 000
Revenue 1 132 000
Provisional tax payments 85 000
Inventory 1 July 2013 60 000
Purchases 885 500
Preference dividend 15 000
Accumulated depreciation: Furniture & office equipment 7 200
Vehicles 16 850
431
Accounting for All
Adjustments and further information:

1. Included in the item general expenses is the audit fee of R3 150 and also
audit expenses of R430.
2. Debenture interest is paid on 31 March and 30 September each year.
3. The land and buildings consist of stand 503, situated in Mark Township,
Kylstroom and were purchased on 4 June 2008.
4. Inventory on hand at 30 June 2013 – R249 000 (inventory has been valued at
the lower of cost or net realisable value on a basis consistent with that of last
year).
5. Office rent for July 2013 amounting to R1 200 was paid on 30 June 2013.
6. An amount of R800 must be written off as irrecoverable.
7. An allowance for credit losses of 5% must be maintained on outstanding
trade receivables.
8. The item ‛salaries’ includes an amount of R35 000 paid to the managing
director.
9. Provide for depreciation as follows:
Vehicles at 10% pa on cost (one vehicle, cost price R30 000, was purchased
on 31 March 2013).
Land and buildings at 2% pa on cost.
Furniture and office equipment at 10% pa on carrying value.
10. A dividend of 12,5c per share was declared by Tex Ltd on 20 June 2013 (the
listed investment) but was only received by Grand West Ltd on 17 July 2013.
11. The authorised share capital of the company is made up of 300 000 5%
preference shares of R1 each and 2 400 000 ordinary shares of R0.50 each.
12. Provide R94 000 for SA normal tax for the year ended 30 June 2013.
13. Transfer R30 000 to general reserve.
14. Provide for a dividend of 5c per ordinary share.
15. The 10% debentures are redeemable in five equal annual instalments of
R40 000 each starting 30 June 2013, and are secured by a mortgage on land
and buildings.
Required:
12.4.1 Prepare a statement of profit or loss and other comprehensive income for
the year ended 30 June 2013.
12.4.2 Prepare a statement of financial position at 30 June 2013.
432
CHAPTER 13
STATEMENT OF CASH FLOW
13.1 Introduction
In the previous chapters on companies we have said that the statement of cash
flow is part of their financial statements.
The statement of cash flow identifies the inflows and outflows of cash during a
specific period. The statement of cash flow presents the users of financial
statements with useful and relevant information, for example, answers to the
following questions:
 Was sufficient cash generated from operations to pay the interest charges,
dividends and taxation?
 How was the expansion financed, etc?
Before we discuss the format of the statement of cash flow we are first going to
discuss the meaning of certain concepts that are used in the statement of cash
flow.
 To define and explain the following concepts:
– Cash
– Funds
– Investment activities
– Financing activities
– Operating activities
– Cash flows from operating activities
– Cash flows from investment activities
– Cash flows from financing activities
 To calculate the following:
– Cash retained from operating activities
– Cash utilised in investment activities
– Cash effects of financing activities
 To prepare a statement of cash flow which fulfills the requirements of
statement IAS 7
13.2 Concepts
13.2.1 Cash
Cash, for the purpose of this statement, is cash at bank and on hand and any other
highly liquid investments that are readily convertible to known amounts of cash.
Accounting for All
13.2.2 Funds
Funds can be defined as the financial resources possessed by a company and
which flow from transactions concluded with third parties. This means that there
can only be a flow of funds if a transaction occurs between the business and a
person outside the business. Your main task will be to determine whether there
was an inflow or outflow of funds during the past financial year. One can say that
the concepts cash and funds go hand in hand.
Example 13.1
The following comparative figures in the financial statement of Zippa Ltd are
given to you:
2013 2012
R R
1. Land & buildings 150 000 100 000
2. Vehicles 80 000 90 000
3. Inventory 90 000 110 000
4. Debtors 40 000 60 000
5. Creditors 50 000 45 000
6. Ordinary share capital 200 000 180 000
Required:
Indicate for each item whether it is an inflow or outflow of funds.
Solution:
1. Land and buildings
To determine whether it was an inflow or outflow of funds one must
compare the figures for this year with the figures of the previous year.
Because there was an increase of R50 000 one can say that more buildings
were bought. Therefore the increase of R50 000 in land and buildings will be
an outflow of funds.
2. Vehicles
The decrease of R10 000 in vehicles means that vehicles were sold during
the past financial year. This means an inflow of funds.
3. Inventory
The decrease of R20 000 in inventory means that more inventory was sold
during the past financial year. This means an inflow of funds.
4. Debtors
The decrease of R20 000 in debtors means that more debtors paid their debts
during the past financial year. This means an inflow of funds.
434
Chapter 13 Statement of cash flow
5. Creditors
The increase of R5 000 in creditors, means that more credit facilities were
received from creditors (more credit purchases). This means an inflow of
funds although your liabilities increased.
6. Ordinary share capital
The increase of R20 000 in the share capital means that more shares were
issued during the past financial year which indicates that the company
received cash. This means an inflow of funds.
13.2.3 Investment activities
Investment activities are those activities relating to the acquisition and disposal of
fixed assets and investments. You are referred to the increase of R50 000 in land
and buildings and the decrease of R10 000 in vehicles in the previous example.
What will an increase or decrease in investments be?
Example 13.2
2014 2013
R R
Investments 20 000 10 000
The increase of R10 000 in investments means that more money was invested in a
business outside our business. This means an outflow of funds. The opposite,
namely a decrease in investments, will be an inflow of funds.
13.2.4 Financing activities
Financing activities are those activities which result in changes in the size and
composition of the debt and capital funding of the business. In other words the
financing activities indicate where the funds were obtained from to finance the
investment activities and the daily operating activities. The increase of R20 000 in
the ordinary share capital is a good example of a financing activity (example to
explain the concept funds).
Will an increase in long-term liabilities be an inflow or outflow of funds?
Yes it will be an inflow of funds because more money is borrowed from outside
the business.
13.2.5 Operating activities
Operating activities include all transactions and other events that are not investing
and financing activities. Cash flows from operating activities are generally the
cash effects of transactions and other events that enter into the determination of
income. Examples of these types of activities are:
 Dividends paid for the year
 Taxation paid for the year and
 Interest paid (finance cost) for the year
435
Accounting for All
In our discussion later you will see that the information for operating activities is
found in the statement of profit or loss and other comprehensive income.
13.2.6 Cash flows from operating activities
The cash flows from operating activities represent the first section of the
statement of cash flow. In this section all those items which have an effect on the
determination of income will be taken into account. The following items are
involved:
 Investment income, for example dividends received
 Finance charges, for example interest paid
 Taxation paid
 Dividends paid
 Changes in working capital which consist of:
– increase/decrease in inventory
– increase/decrease in debtors
– increase/decrease in creditors
 Profit before taxation adjusted with all the non-cash flow items.
What is the meaning of the concept non-cash flow items?
Non-cash flow items are all those items that have an influence on the profit but
that are not a flow of funds because no third party is involved.
The following are examples of non-cash flow items:
 Profit or loss on disposal of a fixed asset
 Depreciation
 Increase or decrease in the allowance for credit losses
 Transfer to reserves
Did you recognise that the majority of the information for this section can be
found in the statement of profit or loss and other comprehensive income? It is
only the changes in working capital that are found in the statement of financial
position. Although these changes did not influence the profits directly, it must be
taken into account in this section because the changes are part of the operating
activities of the business.
13.2.7 Cash flows from investment activities
The cash flows from investment activities represent the second section of the
statement of cash flow.
In this section all those items which have an effect on the acquisition and disposal
of fixed assets and investments will be taken into account. In other words this
section indicates how the funds were utilised to maintain or to expand operations.
436
The following items are involved:

 Replacement of fixed assets
 Proceeds on the disposal of fixed assets
 Additions to fixed assets
 Investments purchased
 Investments sold
Did you recognise that the information for this section can be found in the notes
for plant, machinery and equipment (fixed assets) and investments? The
comparative figures of the previous year must be taken into account to determine
the inflow or outflow of funds (see our discussion later).
13.2.8 Cash flows from financing activities
The cash flows from financing activities represent the third section of the
statement of cash flow. In this section all those items which have an effect on the
debt and capital funding of the business, will be taken into account. In other
words this section indicates where the funds were obtained from to finance the
investment activities and the daily operating activities.
The following items are involved:
 Increase or decrease in long-term borrowings
 Proceeds from issue of share capital
 Increase in share premium
Did you recognise that the information for this section can be found in the equity
and liabilities section of the statement of financial position? You must determine
whether the increase or decrease from the previous years’ figures is an inflow or
outflow of funds.
13.3 Calculation of certain concepts

Before we discuss the format of the statement of cash flow according to IAS 7, we
are first going to discuss how to calculate the following concepts:
 Cash flows from operating activities
 Cash flows from investment activities
 Cash flows from financing activities
To explain the calculations of these concepts only one example will be used.
437
Accounting for All
Example 13.3
The following information was obtained from the financial statements of SAMA
(Ltd) at 31 March 2013:
Statement of profit or loss and other comprehensive income of Sama Ltd

for the year ended 31 March 2013
R
Turnover 96 000
Gross profit 33 600
Other operating income: profit on disposal of asset 1 300
Investment income: 389
Operating costs (20 089)
Depreciation 12 295
Auditor’s remuneration 2 000
Profit on ordinary activities before interest 15 200
Interest paid (3 200)
Taxation (5 400)
Profit on ordinary activities after taxation 6 600
Preference dividend (400)
Profit attributable to ordinary shareholders 6 200
Ordinary dividend (1 000)
Transfer to general reserve (2 800)
Retained profit for the year 2 400
Retained earnings – beginning of the year 3 180
Retained earnings – end of the year 5 580
438
Statement of financial position of Sama Ltd at 31 March 2013

ASSETS 2013 2012
R R
NON-CURRENT ASSETS 126 800 116 000
FIXED ASSETS (see note) 121 800 114 500
Investments in shares at cost 5 000 1 500
CURRENT ASSETS 44 680 46 400
Inventory 19 300 21 850
Debtors 25 380 22 750
Bank – 1 800
171 480 162 400

Capital and reserves 97 380 81 180
Ordinary share capital 33 000 26 000
Preference share capital 6 000 4 000
Share premium 20 000 18 000
Non-distributable reserves 10 000 10 000
Distributable reserves 28 380 23 180
– General reserve 22 800 20 000
– Retained income 5 580 3 180
NON-CURRENT LIABILITIES 41 280 47 120
LONG-TERM LOAN 21 000 29 000
Debentures 20 280 18 120
CURRENT LIABILITIES 32 820 34 100
Creditors 25 870 27 500
SARS 5 400 6 000
Bank overdraft 1 250 –
171 480 162 400
439
Accounting for All
1. Fixed assets/tangible assets
2013
Land and Plant Equipment Total
building
Gross carrying value 17 100 118 500 4 330 139 930

Acc depreciation 1 100 16 700 330 18 130
Opening balance 420 5 270 145 5 835
Depreciation 680 11 430 185 12 295
Net carrying value 16 000 101 800 4 000 121 800
2012
building

Acc depreciation 420 6 770 145 5 835
Depreciation 280 3 770 100 4 150
2. Plant with a cost price of R2 080 and a net carrying value of R580 was sold
for R1 880. Plant purchased was in replacement of the plant sold.
Required:
Calculate the following
13.3.1 Cash flows from operating activities.
13.3.2 Cash flows from investment activities.
13.3.3 Cash flows from financing activities.
Solution:
13.3.1 Cash flows from operating activities
R
Profit before taxation 12 000
Adjusted for:
Depreciation 12 295
Interest paid 3 200
Profit on disposal of plant (1 300)
Investment income (389)
25 806
440
Operating profit before changes in working capital

R
Changes in working capital: (1 710)
Decrease in inventory (21 850 – 19 300) 2 550
Increase in debtors (25 380 – 22 750) (2 630)
Decrease in creditors (27 500 – 25 870) (1 630)
Cash generated by operations 24 096
Taxation paid (6 000 + 5 400 – 5 400) (6 000)
Dividends paid (600 + 1 400 – 300) (1 700)
13 585
Explanation:
 Depreciation is added back because it is not a flow of funds and because it
originally decreased the profit.
 Profit on disposal of equipment is another item that is not a flow of funds.
Therefore it must be subtracted because it originally increased the profit.
 The only reasons to subtract the investment income and to add the interest
paid are because they both influenced the profit before taxation and both have
their own heading in the calculation of the cash flows from operating
activities.
 The taxation paid and dividends paid can also be calculated as follows:
– Taxation
Unpaid amounts at beginning of year 6 000

Amount in statement of profit or loss and other 5 400
Unpaid amounts at the end of the year (5 400)
6 000
– Dividends
Unpaid amounts at beginning of year 600

Amount in statement of profit or loss and other 1 400
(Ordinary + preference)
Unpaid amounts at the end of the year (300)
1 700
 The amounts in brackets indicate an outflow of funds except for the

adjustments to the profit before taxation.
441
Accounting for All
13.3.2 Cash flows from investment activities

R
Investments to maintain operating capacity (14 930)
Replacement of plant (16 810)
Proceeds on disposal of plant 1 880
Investments to expand operating capacity (6 865)
Additions to land and buildings (2 680)
Additions to equipment (685)
Investments purchased (3 500)
(21 795)
Explanation:
 The replacement of the plant can be calculated using the following ‛T’
account.
Dr Plant Cr
Balance 103 770 Asset disposal 2 080
* Purchase 16 810 Balance 118 500
120 580 120 580
– The purchases are the balancing figure on the plant account

 Because there was no land and buildings and equipment sold the difference in
their cost prices from the previous year indicates the additions to these assets.
 Remember an increase in investments indicates that more money was
invested outside the business (outflow of funds).
13.3.3 Cash flows from financing activities
R
Decrease in long-term loans (8 000)
Proceeds from ordinary shares issued (7 000 + 2 000) 9 000
Proceeds from preference shares issued 2 000
Proceeds from debentures 2 160
5 160
Explanation:
 A decrease in long-term loans indicates an outflow of funds. Money was paid
to a third party outside the business.
 The increase in the share premium (R2 000) must be included in the proceeds
from the ordinary shares issued. The R2 000 is part of the cash received when
the shares were issued.
13.4 Format statement of cash flow (IAS 7)
The statement of cash flow of a company must be prepared according to the
requirements of International Accounting Standard 7 (IAS 7). As we have
indicated before there are two methods namely the indirect and direct method. In
this chapter we are going to concentrate on the direct method only as this is the
suggested format to use in practice.
442
Example 13.4
The following information was obtained from the financial statements of Mamoek
Limited at 31 March 2013.
Statement of profit or loss and other comprehensive income of Mamoek

Ltd for the year ended 31 March 2013
R
Gross turnover 96 000
Gross profit 33 600
Other operating income 1 300
Profit on disposal of plant 1 300
Investment income: 389
Depreciation 12 295
Auditor’s remuneration 800
Director’s remuneration 1 200
Profit on ordinary activities before interest 15 200

Taxation (5 400)
Profit on ordinary activities after taxation 6 600
Statement of financial position of Mamoek Ltd at 31 March 2013

2013 2012
R R
ASSETS
Property, plant & equipment 121 800 114 500
Investments in shares @ cost 5 000 1 500
Inventory 19 300 21 850
Debtors 25 380 22 750
Bank – 1 800
171 480 162 400
443
Accounting for All

Capital & reserves 97 380 81 810
Share premium 20 000 18 000
Non-distributable reserves 10 000 10 000
Distributable reserves 28 380 23 180
– Retained income 5 580 3 180
Debentures 20 280 18 120
Creditors 25 870 27 500
Receiver of Revenue 5 400 6 000
Bank overdraft 1 250 –
171 480 162 400
1. Property, plant & equipment
2013
building
Acc depreciation 1 100 16 700 330 18 130
Depreciation 680 11 430 185 12 295
2012
building
Acc depreciation 420 6 770 145 5 835
Depreciation 280 3 770 100 4 150
444
2. Plant with a cost price of R2 080 and a net carrying value of R580 was sold
for R1 880. Plant purchased was in replacement of the plant sold.
Required:
Prepare the statement of cash flow of Mamoek Ltd for the year ended 31 March
2013 using both the methods (indirect and direct).
Solution:
Did you notice that the information given in Mamoek (Ltd) is exactly the same as
the information given in SAMA (Ltd)? This means that we have already
calculated the cash flows from operating activities, from investment activities and
from financing activities. All that remains now is to put them together in the
correct format according to the requirements of IAS 7.
Statement of cash flow of Mamoek Ltd for the year

ended 31 March 2013
Note R
Cash flows from operating activities 13 585
Cash receipts from customers 93 370
Cash paid to suppliers and employees (69 274)
Cash generated from operations 1 24 096
Taxation paid (6 000 + 5 400 – 5 400) (6 000)
Dividends paid (600 + 1 400 – 300) (1 700)
Cash flows from investment activities (21 795)
Purchase of fixed assets/tangible assets (20 175)
– Replacements 2 (16 810)
– Additions 3 (3 365)
Proceeds on disposal of fixed assets/tangible assets 4 1 880
Investments purchased (3 500)
Cash flows from financing activities 5 160
Decrease in long-term loans (8 000)
Proceeds from shares issued 5 11 000
Proceeds from debentures issued 2 160
Net decrease in cash and cash equivalents (3 050)
Cash and cash equivalents at beginning of period 1 800
Cash and cash equivalents at end of period (1 250)
445
Accounting for All
Notes to the statement of cash flow:

1. Reconciliation of net profit before taxation to cash generated from
operations
Adjusted for:
Depreciation 12 295
Interest paid 3 200
Profit on disposal of plant (1 300)
Investment income (389)
Operating profit before changes in working capital 25 806
Changes in working capital (1 710)
Decrease in inventory 2 550
Increase in debtors (2 630)
Decrease in creditors (1 630)
24 096
2. Replacement of fixed assets/tangible assets
Plant purchased 16 810
3. Additions to fixed assets/tangible assets

Land and Buildings purchased 2 680
Equipment purchased 685
3 365
4. Proceeds on disposal of fixed assets/tangible assets

Carrying value of asset sold 580
Profit on disposal 1 300
Total proceeds 1 880
5. Proceeds from shares issued

Ordinary shares 7 000
Share premium on ordinary shares 2 000
Preference shares 2 000
11 000
Explanation:
1. You are referred to the explanations of the calculations for SAICA Ltd.
2. The cash received from customers and cash payments to suppliers and
employees are calculated as follows:
446
 Cash received from customers
Dr Debtors Cr
Balance 22 750 * Bank 93 370
Sales 96 000 Balance 25 380
118 750 118 750
All the sales are taken into account as credit sales and the bank is the balancing
figure.
 Cash payments to suppliers and employees
Dr Creditors Cr
* Bank 61 480 Balance 27 500
Balance 25 870 Purchases 59 850
87 350 87 350
 Purchases are determined as follows:

Cost of sales R62 400
– decrease in inventory (2 550)
59 850
 The bank is the balancing figure, but this is only the payments to suppliers.
What about the other payments to employees? Therefore the payments to
suppliers and employees are calculated as follows:
R
Payments to suppliers 61 480
Payments to employees:
– Auditors’ remuneration 800
– Directors’ remuneration 1 200
– Admin expenses 5 794
69 274
447
Accounting for All
Example 13.5
The following information was obtained from the records of Wasim Limited:
Statement of financial position of Wasim Ltd at 28 February 2013
2013 2012
R R
ASSETS
– @ cost 3 880 1 910
– Accumulated depreciation (1 450) (1 060)
INVESTMENTS 2 500 2 500
Inventory 1 400 2 450
Debtors 2 100 1 500
Cash 230 160
8 660 7 460

Distributable reserves:
Retained income 3 380 1 380
LONG-TERM LIABILITIES
Loan: Wesp Bank 1 700 1 040
CURRENT LIABILITIES (1 180) (3 390)
Creditors 550 2 290
Interest payable 230 100
SARS 400 1 000
8 660 7 460
448
Statement of profit or loss and other comprehensive income of Wasim Ltd

for the year ended 28 February 2013
R
Revenue 30 650
Gross profit 4 650
Depreciation 450
Administrative expenses 910
Auditor’s fees 40
Profit from ordinary activities before interest 3 750
Interest paid (250)
Profit from ordinary activities before taxation 3 500
Taxation (300)
Profit from ordinary activities after taxation 3 200
1. During the year, the company sold plant costing R80 with accumulated
depreciation thereon of R60, for R20.
Required:
Prepare the statement of cash flow for the year ended 28 February 2013.
Solution:
Statement of cash flow of Wasim Ltd for the year ended 28 February 2013
R
Cash flows from operating activities 690
Cash receipts from customers 30 050
Cash paid to suppliers and employees (27 640)
Cash generated from operations 2 410
– Interest received 200
– Dividends received 300
Interest paid (100 + 250 – 230) (120)
Taxation paid (1 000 + 300 – 400) (900)
Dividends paid (1 200)
449
Accounting for All
Cash flows from investment activities (2 030)

Investments to maintain operating activities (2 030)
Replacement of plant (2 050)
Proceeds on disposal of fixed assets 20
Investments to expand activities –
Cash flows from financing activities 1 410
Ordinary shares issued 750
Increase in long-term loan 660
Net increase in cash 70
Cash at beginning of year 160
Cash at the end of the year 230
Explanation:
1. The cash received from customers was calculated as follows:
Dr Debtors Cr
Balance 1 500 * Bank 30 050
Sales 30 650 Balance 2 100
32 150 32 150
The balancing figure ‛bank’ will be the amount received from customers.
2. The cash paid to suppliers and employees was calculated as follows:
Dr Creditors Cr
Bank 26 690 Balance 2 290
Balance 550 Purchases 24 950
27 240 27 240
Purchases = cost of sales – decrease in inventory

= 26 000 – 1 050
= R24 950
The balancing figure ‘bank’ will be the payment to suppliers. The payment to
suppliers and employees will be calculated as follows:
Payments to suppliers 26 690

Payments to employees:
– Admin expenses 910
– Auditors’ fees 40
27 640
450
3. Because plant was sold during the year one can assume that all the plant
purchased was a replacement. The plant purchased was calculated as follows:
Dr Plant Cr
Balance 1 910 Asset disposal 80
Purchased 2 050 Balance 3 880
3 960 3 960
Asset disposal
Plant 80 Acc depreciation 60
Bank 20
80 80
Did you notice that there was no profit or loss on the disposal of the plant?
There were no additions to fixed assets.
451
Accounting for All
Questions
Question 13.1
The following are the financial statements of Cleancor Limited for the year ended
28 February 2013
Statement of financial position of Cleancor Ltd at 28 February 2013
2013 2012
ASSETS R R
NON-CURRENT ASSETS

Inventory 7 370 4 550
Debtors 6 490 4 450
Cash 730 2 970
31 410 28 470

Share capital & reserves 23 640 17 200
Retained earnings 8 640 7 200
LONG-TERM LOANS 2 500 5 000
Creditors 3 420 4 420
SARS 850 1 550
Shareholders for dividends 1 000 300
31 410 28 470
Statement of profit or loss and other comprehensive income of Cleancor

Ltd for the year ended 28 February 2013
R
Revenue 32 100
Cost of sales 3 680
Gross profit 28 420
Profit on sale of fixed asset 150
Administration costs (23 980)
Profit before interest 4 590
Finance cost (300)
Taxation (1 850)
452
1. Property, plant and equipment
2013
Land & Plant & Motor Total

buildings equipment vehicles

Acc depreciation – (4 380) (3 200) (7 580)
2012
Land & Plant & Motor Total

buildings equipment vehicles

Acc depreciation – (4 400) (2 300) (6 700)
Plant costing R2 100 was purchased for cash during the year.
Plant which originally cost R900 and with a book value of R100 was sold for
R250.
2. Administrative costs included the following:

R
Depreciation of fixed assets 1 680
23 980
3. Assume that all sales and purchases were on credit.

Required:
Prepare the statement of cash flow according to IAS 7.
453
Accounting for All
Question 13.2
The following set of financial statements of Ponty Pride Limited is made
available to you:
Statement of financial position of Ponty Pride Ltd at 30 June 2013
2013 2012
ASSETS R R
NON-CURRENT ASSETS
Current assets 80 906 76 924
Inventory 38 320 36 325
Debtors 26 710 28 995
Cash at bank 15 876 11 604
256 906 185 924
– Retained earnings 15 000 5 775
NON-CURRENT LIABILITIES
Creditors 12 314 15 273
Shareholders for dividends 7 500 6 000
SARS 2 092 1 376
256 906 185 924
Statement of profit or loss and other comprehensive income of Ponty
Pride Ltd for the year ended 30 June 2013
R
Revenue 300 500
Gross profit 93 641
Profit on sale of fixed asset 5 000
Administration costs (41 800)
Loss on disposal of fixed assets 2 000
Directors’ remuneration 28 000
Depreciation 10 000
Profit before interest 56 841
Finance cost (8 250)
Taxation (21 866)
454
Property, plant and equipment
2013
Land and Vehicles Machinery Total

buildings

Acc depreciation – 18 000 12 000 30 000
2012
Land and Vehicles Machinery Total

buildings

Acc depreciation – 21 000 15 000 36 000
1. A vehicle with a net carrying value of R15 000 was sold for R20 000 during
the year and replaced with a newer model. Depreciation on vehicles during
the year amounted to R7 000.
2. Machinery with a cost price of R14 000 was sold during the year for R6 000,
because it became obsolete.
3. No depreciation must be written off in respect of land and buildings.
4. The authorised share capital of the company consists of 200 000 ordinary
shares of R1 each.
Required:
Prepare the statement of cash flow for the year ended 30 June 2013 according to
IAS 7.
455
Accounting for All
Question 13.3
The following information was extracted from the financial statements of Moremi
Limited on 28 February 2013, the end of the financial year.
Statement of profit or loss and other comprehensive income of Moremi

Ltd for the year ended 28 February 2013
R
Revenue 800 000
Other income 20 500
Gross income 620 500
Administration & distribution costs (115 200)
Net income before interest 505 300
Finance costs (8 300)
Net income before taxation 497 000
Taxation (173 950)
Additional information to statement of profit or loss and other

comprehensive income:
1. Other income included the following: R
Profit on disposal of equipment 2 000
Dividends received 8 500
2. Administration and distribution costs included the following:

Directors’ remuneration 18 000
Depreciation ?
3. Preference dividends declared and paid 10 000
4. Ordinary dividends declared and paid 25 000
456
Statement of financial position of Moremi Ltd at 28 February 2013

EQUITY AND LIABILITIES 2013 2012
R R
General reserve 20 000 15 000
Revaluation of fixed assets 50 000 20 000
770 050 393 000
Creditors 18 000 22 000
Bank overdraft – 12 000
Receiver of Revenue 11 000 2 500
949 050 599 500
ASSETS
Investment 30 000 20 000
Inventory 40 000 54 000

Debtors 65 000 40 000
Bank 11 000 –
949 050 599 500
Additional information to statement of financial position:

1. The authorised share capital of the company consists of:
500 000 ordinary shares of R1 each.
60 000 10% preference shares of R1 each.
2. Property, plant and equipment consists of:
457
Accounting for All
Gross carrying Accumulated Net carrying

value depreciation value
2013 2012 2013 2012 2013 2012
R R R R R R
Land & buildings 320 000 290 000 – – 320 000 290 000
Equipment 344 100 190 000 72 050 90 000 272 050 100 000
Vehicles 280 000 150 000 80 000 66 500 200 000 83 500
944 100 630 000 152 050 156 500 792 050 473 500
Goodwill 11 000 12 000
803 050 485 500
3. Land and buildings were revalued during the year by R30 000.
4. During the year equipment with a cost price of R90 000 was sold cash for
R65 000.
5. No vehicles were sold.
Required:
13.3.1 Prepare the statement of cash flow of Moremi Limited for the year ended
28 February 2013 according to statement AC 118.
13.3.2 Show only the note for:
Reconciliation of the net profit before taxation with the cash generated
from operating activities.
Question 13.4
The statement of profit or loss and other comprehensive income and statement of
financial position of Zero Ltd for the year ended 28 February 2013 together with
comparative figures for the previous year is supplied. Zero Ltd sells car tyres to
the general public at a mark-up of 50% on cost price.
Statement of profit or loss and other comprehensive income of Zero Ltd for
the year ended 28 February 2013
R
Revenue 806 400
Administration costs 175 200
Net profit before interest and taxation 103 200
Finance costs 39 600
Net profit before taxation 63 600
Taxation 31 800
458
1. The following expenses are included in administration costs:
R
Auditors’ fees 4 900
Directors’ fees 30 000
Depreciation 40 300
2. Ordinary dividends declared and paid, R5 600.

Statement of financial position of Zero Ltd at 28 February 2013
2013 2012
EQUITY AND LIABILITIES R R

Ordinary shareholders’ interest 264 400 163 200
Capital and reserves 294 400 183 200
NON-CURRENT LIABILITIES
Loan from XB Bank 150 000 80 000
Creditors 57 200 64 950

SARS – 9 500
508 100 344 200
ASSETS
2013 2012
Property, plant & equipment 1. 270 600 245 400
Inventory 25 400 27 200

Debtors 139 200 67 000
Receiver of Revenue 4 600 –
Cash 68 300 4 600
508 100 344 200
459
Accounting for All
Notes:
1. Property, plant and equipment
Cost price Acc Carrying

dep value
2013

Equipment 220 300 51 800 168 500
Vehicles 134 300 92 200 42 100
414 600 144 000 270 600
2012

Equipment 202 800 32 400 170 400
Vehicles 139 600 74 600 65 000
352 400 107 000 245 400
1. Vehicles with a cost price of R15 000 were sold at carrying value during the
year.
2. No equipment was sold during the year.
3. No depreciation must be written off in respect of land and buildings.
Required:
Prepare the statement of cash flow of Zero Ltd for the year ended 28 February
2013.
460
CHAPTER 14
INTERPRETATION OF FINANCIAL
STATEMENTS
14.1 Introduction
The interpretation of financial statements is where the information disclosed in
the financial statements is interpreted by the calculations of certain ratios.
Ratio analysis is a method available for analysing information and in the process
adding new information for the benefit of decision makers.
 Calculate various ratios
 Compare the results of the calculations
 Draw a conclusion based on the meaning of the results
14.2 Data and information flow in an accounting cycle
Collecting Sorting
Reporting Summarising
The last stage of the accounting cycle, reporting, is where the net financial results
and the financial position of the organisation are put into a form to be presented to
all interested parties, both internal and external. On their own, without any further
analysis or evaluation, the financial reports have limited value. Their real value is
in what they can disclose, using the right techniques.
It is the responsibility of the user of the report, to analyse, interpret and evaluate
the information in the reports.
Financial reports are very important sources of information when it comes to
management decision making, both for planning and control purposes.
 Planning – shows the financial achievements that the organisation is capable
of and which could be repeated in the future.
 Control – reflects actual financial achievements which, when compared
against budgeted or estimated achievement, will give an indication of where
what action is required.
The ratio analysis in this chapter is limited to those ratios that will evaluate the
following:
 Profitability – the rate of return, in other words how much of sales income
remains in the business after the business has covered its expenditure.
Accounting for All
 Liquidity – the ability of the business to cover its current debts.

 Solvency – the degree to which the total assets of the business cover the total
liabilities.
Before continuing with ratio analysis, note the following:
 The statement of financial position shows the financial position of a business
at a specific point in time. Where a ratio calculates the relation between two
statement of financial position items, the values of the statement of financial
position items should be as on the accounting date, ie, the closing values as at
year end.
 The statement of profit or loss and other comprehensive income reflects the
result of the business’s operations over a period of time. Where a ratio
calculates the relation between two statement of profit or loss and other
comprehensive income items, use the values of the items as they appear on
the statement of profit or loss and other comprehensive income.
 Where a ratio calculates the relation between a statement of profit or loss and
other comprehensive income item and a statement of financial position item,
use the statement of profit or loss and other comprehensive income item as it
appears for the current year and the average value of the statement of
financial position item. The average value of the statement of financial
position item is the average between the opening value and the closing value
of the item.
14.3 Purpose of the analysis of financial statements

The purpose of the analysis of financial statements depends on the needs of the
users, for example:
 Did the entity achieve their main objective which is the maximisation of profit?
 Will the entity be able to repay their interest or capital on long-term
liabilities?
 Will the entity be able to redeem their short-term debts from liquid funds?
 Did the investor receive a reasonable return on his investment?
 What is the future potential of the entity?
The results of accounting ratios for the current year will be compared to the
results of the previous year or industry averages to assist the users of the financial
statements to make proper economic decisions.
14.4 Users of financial statements

The users of financial statements can be divided into two categories:
 Internal users
 External users
462
Chapter 14 Interpretation of financial statements
Internal users
The internal users are normally employed by the entity, for example:
management, shareholders, etc. They want to know what the internal weaknesses
of the entity are as well as what action must be taken to improve it for the future.
External users
External users are any persons with a financial interest or potential financial
interest in the entity, for example: potential investors, creditors, clients, SARS etc.
The following are examples of the users of financial statements with an indication
of their needs:
 managers of the company, who need to make financial decisions affecting the
future development of the company;
 banks, who are being asked to lend money to finance the company;
 suppliers, who wish to assess the likelihood of receiving payment;
 customers, who wish to be assured of continuity of supplies in the future;
 shareholders, who wish to be assured that their investment is sound;
 prospective investors, who wish to compare relative strengths and
weaknesses;
 employees and trade unions, who wish to check on financial prospects of the
company;
 government and government agencies, eg SARS and Customs, who wish to
check they are receiving the amounts due to them.
14.5 Accounting ratios

To master accounting ratios you must be able to do the following:
 Know the elements of the ratio
 Understand the meaning of the ratios
 Identify whether it has improved or deteriorated compared with the previous
year
 Identify the possible reason for the improvement or deterioration
In this chapter we will only concentrate on the following ratios:
14.5.1 Profitability ratios
Profitability ratios examine the relationship between profit and revenue, assets,
equity and capital employed. We will only discuss the following key profitability
ratios:
Gross profit 100
 Gross profit percentage = Revenue x 1
463
Accounting for All
This expresses, as a percentage, the gross profit in relation to revenue. For

example a gross profit percentage of 30% means that for every R1 of sales
(revenue) a gross profit of 30c will be made.
Net profit before finance cost and taxation* 100
 Net profit percentage = Revenue x 1
* Profit from operations
This expresses, as a percentage, the net profit before finance costs and taxation, in
relation to revenue. For example a net profit percentage of 20% means that for
every R1 of revenue (sales) a net profit of 20c will be made.
Profit from operations 100

 Return on total assets = Total assets x 1
This expresses, as a percentage, the net profit before finance costs and taxation, in
relation to the total assets. It indicates how well the entity is using its assets.
 Return on capital Profit from operations 100

employed (ROCE) = Total equity + non-current liabilities x
1
This ratio is also known as the primary ratio. The return on capital employed
expresses profit in relation to the capital employed and is therefore a direct
measure of the efficiency of an entity in using the capital available to it, in order
to generate profits.
Profit after tax 100
 Return on owner's = Total equity x 1
equity
This expresses the profit after tax, as a percentage, in relation to the total equity. It
focuses on the return on investment for the ordinary shareholders.
14.5.2 Liquidity ratios

Liquidity ratios examine the stability of an entity on a short-term basis. It focuses
on the relationship between assets and liabilities as well as the ability to cover
current debts.
We will only discuss the following key liquidity ratios:

 Current ratio = Current assets : Current liabilities
= x : 1
The current ratio is the standard test used to determine the liquidity of an entity. It
indicates whether the entity has sufficient current assets to cover the current
liabilities. The ideal ratio is 2:1.
464
 Acid-test ratio = Current assets – inventory : Current liabilities

(Quick ratio) = x : 1
This acid-test ratio or quick ratio measures exactly the same as the current ratio
with the exception that inventory is excluded from the equation. Inventory is
excluded as it is perceived to be the least liquid of all the current assets. The ideal
ratio is 1 : 1.
Cost of sales
 Inventory turnover = Inventory
= x times
The inventory turnover rate indicates how many times the inventory was
turned over (sold) during the past financial year.
Inventory 365
 Inventory holding period (days) = =Cost of sales x
1
= x days
The inventory holding period indicates the average number of days it took to
sell the inventory during the past financial year.
 Trade receivables collection period Trade receivables 365

(Debtors collections period) = Credit sales x 1
= x days
This calculation indicates how many days, on average, trade receivables take
to pay for goods sold to them by the entity.
 Trade payables’ payment period Trade payables 365

(Creditors payment period) = Cost of sales or credit x 1
purchases
= x days
This calculation indicates how many days, on average, it will take an entity to
pay the trade payables.
465
Accounting for All
14.5.3 Solvency ratios

Solvency ratios examine the strength and long-term financing of an entity. It
indicates whether the entity will be able to meet its long-term obligations.
We will only discuss the following ratios:
 Gearing ratio = Non-current liabilities x 100

Total equity + non-current liabilities 1
The gearing ratio is concerned with the long-term financial stability of an entity. It
measures how much of the entity is financed by non-current liabilities (for
example long-term loans) against the capital employed (total equity + non-current
liabilities). The higher the gearing percentage, the less secure the financing of the
entity.
 Interest cover = Profit from operations

Finance costs
= x times
The interest cover indicates how many times the finance costs of the entity will be
covered by the net profit before finance costs and taxation (profit from
operations).
 Degree of solvency = Total assets

(Debt ratio) Total liabilities
The following example will explain how to apply all these ratios:
Example 14.1
Statement of profit or loss and other comprehensive income of
Mamathemba Trading Company Ltd for 2013 and 2014
2014 2013
R R
Revenue 350 300
Cost of sales (100) (90)
Administration costs (90) (40)
Profit from operations 160 170
Finance costs (10) (20)
Taxation (35) (30)
Total comprehensive income/profit for the year 115 120
466
Statement of financial position

2014 2013
R R
ASSETS
NON-CURRENT ASSETS AT CARRYING 465 325
VALUE

Inventories 110 70
Cash and cash equivalents 15 30
TOTAL ASSETS 685 485

EQUITY 420 290
Ordinary shares of R1 each 300 200
CURRENT LIABILITES 215 135
Trade payables 180 105
SARS 35 30
TOTAL EQUITY AND LIABILITES 685 485
Required:
Calculate all the profitability, solvency ratios and the following liquidity ratios for
both years:
– Current ratio; acid-test ratio; inventory turnover; trade receivables collection
period.
Solution:
Profitability ratios
Gross profit 100
 Gross profit percentage = x 1
Revenue
2014 2013
250 x 100 210 x 100
350 1 300 1
= 71% = 70%
467
Accounting for All
Profit from operations 100

 Net profit percentage = x
Revenue 1
2014 2013
160 x 100 170 x 100
350 1 300 1
= 45,7% = 56,6%
100
 Return on total assets = Profit from operations x
Total assets 1
2014 2013
160 100 170 100
x x
685 1 485 1
= 23,4% = 35,1%
 Return on capital employed = Profit from operations s x 100

2014 2013
160 0 100 170 100
x x
420 + 50 1 290 + 60 1
= 34% = 48,6%
 Return on equity = Profit after tax x 100

Total equity 1
2014 2013
115 100 120 x 100
420 x 1 290 1
= 27,4% = 41,4%
468
Solvency ratios
 Gearing ratio = Non-current liabilities s x 100

2014 2013
50 0
x 100 60 0 x 100
420 + 50 1 290 + 60 1
= 10,6% = 17,1%
 Interest cover = Profit from operations

Finance costs
2014 2013
160 170
10 20
= 16 times = 8,5 times
 Degree of solvency = Total assets s

Total liabilities
2014 2013
685 485
265 195
= 2,58 : 1 = 2,48 : 1
Liquidity ratios
 Current ratio = current assets : current liabilities
2014 2013
220 : 215 160 : 135
= 1,02 : 1 = 1,2 : 1
 Acid-test ratio = current asset – inventory : current liabilities
2014 2013
220 – 110 : 215 160 – 70 : 135
= 0,5 : 1 = 0,7 : 1
469
Accounting for All
Cost of sales
Inventory turnover
Inventory
2014 2013
100 90
110 70
= 0,9 times = 1,3 times
 Trade receivables collection period = Profit after tax x 365

Total equity 1
2014 2013
95
x 365 60 x 365
350 1 300 1
= 98 days = 73 days
14.6 Limitations of ratios

There are certain limitations to using ratio analysis that any user of financial
information should be aware of:
 Financial statements reflect values that are the result of subjective judgment.
Different organisations may have different methods and techniques for
drawing up final accounts. An item like inventory, for example, will be
valued according to a method decided as most appropriate by the particular
organisation. Therefore, remember that financial statements do not reflect
absolute values and facts – accounting is not a science.
 Assets are not necessarily disclosed at their current replacement value. How
assets are disclosed, be it at true value or at cost less depreciation, will vary
from company to company.
 Ratios are numeric values but this does not necessarily mean that they are
accurate. The accuracy of the ratio will depend on the accuracy of the data
used.
 The ratios must be relevant to the type and nature of the business.
 Ratios are calculated on information supplied in financial statements.
However, since financial statements are drawn up at the end of an accounting
period, in-between fluctuations will be hidden from the ratios.
470
 To be useful, ratios have to be compared to other measures, for example,

predetermined standards, corresponding ratios for previous period or
corresponding ratios for the industry. On their own they do not provide
information that could aid management in decision making for planning and
control purposes.
Irrespective of the limitations, ratios can still provide some useful information to
management if heed is taken of the limitations as mentioned above. One of the
benefits of ratios is that they can be used to identify trends which again will aid
management in decision making. It is important that companies remain consistent
in their method of calculating ratios so as to keep the results obtained,
comparable.
 Ratio analysis enables management to compare actual results, be it against a

budget, previous years’ figures or the results of competitors.
 ROI is often perceived as the most important accounting ratio.
 Statement of profit or loss and other comprehensive income ratios include:
profit margin ratio; contribution/sales ratio; gross profit margin ratio.
 Statement of financial position ratios are divided into asset turnover, liquidity
and efficiency ratios.
 Added value is the difference between the sales price of the end product and
the value of the direct materials.
Example 14.2
Below is an extract from the statement of financial position for DD Distributors:
Statement of financial position of DD Distributors as at 30 June

2013 2012
R R
Owner’s equity 30 000 20 000
Capital 20 000 10 000
+ net profit 19 000 15 000
39 000 25 000
– drawings 9 000 5 000
Long-term loans 50 000 60 000

Plant, machinery & equipment 5 000 10 000
Investments 15 000 10 000
Inventory 50 000 70 000
Trade receivables 20 000 20 000
Bank (favourable balance) 30 000 20 000
Trade and other payables 30 000 50 000
SARS 10 000 (Cr) –
471
Accounting for All
1. All sales are on credit. Credit sales for:
2013 R60 000

2012 R50 000
2. Cost of sales: 2013 R300 000

2012 R200 000
Required:
Calculate the following ratios for 2013 and 2012
14.2.1 The current ratio.
14.2.2 The acid-test ratio.
14.2.3 The inventory turnover ratio (use closing inventory).
14.2.4 The trade receivables collection period (use closing trade receivables).
14.2.5 The return on owner’s equity.
14.2.6 Comment on the liquidity position of DD Distributors.
Solution:
Current assets s
14.2.1 Current ratio =
Current liabilities
2013 2012
= 50 000 + 20 000 + 30 000 = 70 000 + 20 000 + 20 000
30 000 + 10 000 50 000 + 0
= 2,5 : 1 = 2,2 : 1
Current assets – stock

14.2.2 Acid test ratio =
Current liabilities
2013 2012
= 20 000 + 30 000 = 20 000 + 20 000
30 000 + 10 000 50 000 + 0
= 1,25 : 1 = 0,8 : 1
472
Cost of sales s
14.2.3 Inventory turnover =
Closing inventory
2013 2012
= 300 000 = 200 000

50 000 70 000
= 6 times = 2,86 times
Closing debtors
14.2.4 Debtors collection = x 365
Credit sales
2013 2012
= 20 000 x 365 = 20 000 x 365

60 000 50 000
= 122 days = 146 days
Net profit t
14.2.5 Return on owner’s equity =
Owner’s equity
2013 2012
19 000 15 000
= =
30 000 20 000
= 63,33% = 75%
14.2.6 The current ratio is at an acceptable level. The ratio did improve however,
due to an increase in cash even though inventory levels decreased.
Creditors also decreased, however the liability to SARS increased.
The acid test ratio has improved to an acceptable level. This is due to an
increase in the bank balance and a decrease in creditors.
The inventory turnover has improved drastically. This could be due to an
elimination of obsolete inventory by management, or the carrying of lines
that sell better.
Debtors’ collection period has improved possibly due to a better credit
policy being introduced and better sales or the improvement in collections
from debtors.
In conclusion, there seems to be an upswing in all liquidity ratios. This
could be due to a better management team as well as the improved
inventory turnover.
473
Accounting for All
Questions
Question 14.1
The following information was obtained from the financial statements of Sedge
Ltd for the past two years:
2013 2012
R R
Inventory 80 000 120 000
Trade receivables 22 000 55 000
Cash 8 000 10 000
Current liabilities 90 000 130 000
Credit sales 300 000 450 000
Cost of sales 180 000 225 000
The inventory at the end of 2011 was R50 000 and the trade receivables R90 000.
Required:
Calculate the following for both years
14.1.1 Net working capital.
14.1.2 Acid-test ratio (quick ratio).
14.1.3 Debtors collection period (answer in months).
14.1.4 Inventory turnover rate.
Question 14.2
The following information was taken from Guess Who Stores for the past two
years:
2013 2012
R R
Cost of sales A B
Sales (revenue) 500 000 800 000
Inventory 180 000 166 000
Debtors (accounts receivable) 45 000 65 000
Creditors (accounts and other 160 000 200 000
payables)
Total liabilities 160 000 200 000
Total assets 650 000 700 000
474
1. Credit sales are 70% of total sales figure.

2. Cost of sales is 60% of revenue.
Required:
Calculate the following for both years
14.2.2 Acid-test ratio.
14.2.3 Current ratio.
14.2.5 Debtors collection period (months).
14.2.6 Comment on the liquidity of Guess Who Stores.
Question 14.3
The following financial statements relate to Zick Zick Ltd. We need to evaluate
their statements for their application of a 30-day payment period for their
purchases.
December 2013 December 2012

R R
Non-current assets 240 000 365 000
Long-term liabilities 100 000 100 000
Inventory (opening) 85 000 40 000
Inventory (closing) 70 000 85 000
Sales (revenue) 300 000 450 000
Cost of sales 180 000 80 000
Accounts receivable (debtors) 140 000 90 000
Credit sales 250 000 200 000
Accounts receivable for 2011 was R180 000.
475
Accounting for All
Required:
Calculate the following ratios
14.3.3 Debtors collection period in days.
14.3.5 Degree of solvency.
14.3.6 Comment on the liquidity of Zick Zick Ltd.
Question 14.4
An extract from the statement of financial position of Pritt Enterprises for the year
ending 31 December 2013.
ASSETS R R
NON-CURRENT ASSETS C
Inventory 160 000
Bank 70 000
Debtors A
Petty cash 25 000
605 000
EQUITY AND LIABILITIES D
Capital B
+ Profit 220 000
– Drawings 80 000
Creditors 90 000
605 000
Required:
14.4.1 A, B, C, D.
14.4.2 ROE (return on owner’s equity).
14.4.3 The degree of solvency.
14.4.4 Current asset ratio.
14.4.7 Comment on the degree of solvency.
476
Question 14.5
Statement of profit or loss and other comprehensive income for the year
ended 30 June 2013
R
Revenue (sales) 200 000
– Cost of sales 90 000
Other income: 7 000
Rent received 6 000
117 000
– Expenses 83 000
Salaries 25 500
Bank charges 800
Telephone 7 200
Rent paid 26 000
Credit losses 1 000
Depreciation 11 000
Stationery 11 500
Net profit for the year 34 000
Statement of financial position for the year ending 30 June 2013
ASSETS R
Non-current assets
FIXED ASSETS Cost price Acc depreciation Carrying value
Vehicles 5 000 1 000 A
20 000 1 000 19 000
INVESTMENTS 2 000
Fixed deposits 2 000
Inventory 14 000
Trade receivables B
Bank 9 000
54 000
477
Accounting for All

OWNER’S EQUITY 38 000
Capital C
+ Net profit 34 000
– Drawings 6 000
NON-CURRENT 4 000
LIABILITIES
Loan: Wesbank 4 000
54 000
Required:
14.5.1 A, B and C.
14.5.2 Gross profit percentage.
14.5.3 Net profit percentage.
Question 14.6
Mary Cullen is the Managing Director of Reeva Ltd. She has just returned from a
meeting with one of the company’s major shareholders. The shareholder was
concerned about the current ratio, quick ratio, inventory turnover and debtors’
turnover. Mary did not understand the shareholder’s concern and has asked you to
help her. She has given you the summarised financial statements of Reeva Ltd.
Summary statement of profit or loss and other comprehensive income of
Reeva Ltd for the year ended 30 September 2013
R
Revenue 14 994
Gross profit 6 278
Distribution costs (2 037)
Administrative expenses (1 541)
Operating profit 2 700
Finance cost (274)
Tax on profit on ordinary activities (631)
Profit for the financial year (1 795)
478
 Note: All sales are on credit

Statement of financial position of Reeva Ltd as at 30 September 2013
R
ASSETS
NON-CURRENT ASSETS
Property, plant & equipment 11 432

Inventory 4 200
Cash and cash equivalents 145
17 872
EQUITY & LIABILITIES
EQUITY 10 572
Capital 5 000
+ profit 5 572


Dividends payable 500
Tax liability 631
17 872
Required:
Calculate the following ratios
14.6.2 Quick ratio (acid-test).
14.6.3 Inventory turnover (inventory turnover period based on cost of sales).
14.6.4 Trade receivables collection period.
14.6.5 Give an explanation of what the ratios tell you about the company.
479
Accounting for All
Question 14.7
The following information was obtained from the financial statements of
Industrious Ltd:
Statement of profit or loss and other comprehensive income of Industrious
Ltd for the year ended 30 September 2013
2013 2012
R R
Revenue 1 583 1 260

Cost of sales 1 351 1 007
Purchases 1 393 987
1 477 1 165
– Closing inventory 200 158
Other income 3 4
Administration costs (207) (195)
Profit from operations 28 62
Finance costs – 9
Taxation (11) (23)
Profit for the year 17 30
Statement of financial position of Industrious Ltd at 30 September 2013

2013 2012
ASSETS R R
NON-CURRENT ASSETS
Property, plant & equipment 273 252
INVESTMENT
Shares @ cost 32 32

Inventory on hand 200 158
Cash and cash equivalents 5 21
TOTAL ASSETS 614 533
480

EQUITY
Ordinary shares 289 242
Retained income 36 26
Ordinary shareholder’s equity 325 268
8% preference shares of R1 each 75 50
TOTAL EQUITY 400 318
NON-CURRENT LIABILITES
Mortgage bond 30 105
SARS 5 16
Dividends payable 7 14
TOTAL EQUITY AND LIABILITIES 614 533
Required:
Calculate the following ratios for both years
14.7.1 Gross profit percentage.
14.7.2 Net profit percentage.
14.7.4 Trade receivables collection period.
14.7.5 Trade payables payment period.
14.7.6 Gearing ratio.
Comment on each ratio calculated in terms of
14.7.7 Did it improve or deteriorate?
14.7.8 What are the possible reasons for the improvement or deterioration?
481
Accounting for All
Question 14.8
The following information was obtained from the statement of financial position
of Amacus Ltd as at 31 December 2013:
Statement of financial position of Amacus Ltd as at 31 December 2013

ASSETS R
NON-CURRENT ASSETS at net carrying value 500
CURRENT ASSETS 250
Inventories 150
Trade receivables 95
Cash and cash equivalent 5
TOTAL ASSETS 750

EQUITY
Capital 300
+ profit 180
– drawings (30)
TOTAL EQUITY 450
NON-CURRENT LIABILITIES 100

Bank loan 100
CURRENT LIABILITIES 200

Trade payables 175
Bank overdraft 25
TOTAL EQUITY AND LIABILITIES 750
1. The profit from operations was R200 000.
2. Finance costs, R60 000.
Required:
14.8.2 Gearing ratio.
14.8.3 Interest cover.
482
CHAPTER 15
BASIC COST ACCOUNTING
15.1 Introduction
The task of management, which is to accomplish organisational goals by
planning, controlling and decision making, is based on accounting and operational
information. This information is normally needed on a periodic basis.
The planning and control activities of resources are a part of the duties that
managers are involved in. To perform these duties, managers need information.
From a management accounting point of view, this information relates to the cost
of the organisation. The term ‛cost’, in management accounting, has many
definitions depending on the purpose it must serve. There are many types of costs,
and these costs are classified in different ways according to the immediate
requirements of management. Managers may for example, require cost
information to control costs, to prepare budgets or for long-term and short-term
decision-making purposes like buying or renting of equipment.
 Identify the three elements of manufacturing cost
 Calculate primary cost
 Calculate commercial cost
 Distinguish between manufacturing cost and commercial cost
 Distinguish between expired and unexpired cost
 Distinguish between period cost and product cost
 Distinguish between direct cost and indirect cost
 Calculate and define opportunity cost
 Understand the term, sunk cost
15.2 The concept: cost

The term ‛cost’ has different meanings for different people. It may be perceived
as the estimated amounts necessary to produce a product or to render a service,
known as product or service costs. These costs are necessary to determine profits
and to evaluate stock.
Costs are also needed for planning purposes and are the estimated amounts used
to compile a budget and to determine standard costs. It will serve as the
benchmark against which to measure expenses (planning and controlling
functions).
Costs are also useful for decision-making purposes; for example, should the
organisation buy or rent a photocopy machine, or should a certain production line
continue to manufacture products or should it be closed down.
Cost in general may be defined as all costs incurred that are necessary to produce
a product or to render a service to generate current or future profits. Wasted
sacrifices (costs) should not be included in the product or service but it should be
Accounting for All
written off as a loss against the statement of profit or loss and other
comprehensive income. Organisations are more efficient when they reduce cost to
achieve some benefit. To achieve a competitive advantage, organisations should
make an effort to provide equal or better customer value (products and services)
at lower costs than their competitors.
Cost may be defined as the sacrifices necessary to generate current or future
profits. The different objectives pursued by different organisations normally result
in different ways of cost classification. To understand management accounting as
a subject it is necessary to understand the basic terminology and cost
classification. Therefore, certain basic concepts and classifications will be
touched on in the next section. The manufacturing environment will be used as an
example to discuss cost classification.
15.3 Cost classification

The costs of a manufacturing company can be classified into two broad
categories:
 Manufacturing costs
 Commercial costs (non-manufacturing costs)
15.3.1 Manufacturing costs
Manufacturing costs can be classified in three categories, namely:
 Direct material
 Direct labour
 Manufacturing overheads
Material
Material can be subdivided into:
 Direct material
 Indirect material
– Direct material
Direct material is an independent cost element that consists of those materials
that become the main ingredients of the finished product. They are visible in
the finished product and their cost can easily be traced to the product. Direct
materials or parts (ingredients) are usually absorbed in predetermined
standard quantities. For example, a picture tube will be one of the materials
included in a TV set. Wood will be the main material in furniture, and steel in
security gates.
– Indirect material
Indirect material included in the product may be glue, nails or paint used on a
production line and it is not worthwhile tracing the cost as this is viewed as an
overhead cost. Indirect materials are sometimes, but not always, visible in the
finished product but it is a secondary type of material used in the production
process and the quantity used is not always directly related to the volume of
production.
484
Chapter 15 Basic cost accounting
Labour
Labour can be subdivided into:
 Direct labour
 Indirect labour
– Direct labour
The term direct labour refers to the labour cost that is relatively easy to be
traced to the product. For example, the labour cost of workers on a production
line in the manufacturing process would be classified as direct labour. If
direct labour is not part of the manufacturing process, the production process
will not be able to function. In some machine-intensive organisations direct
labour has become an insignificant small part of total production cost and has
become part of overheads.
– Indirect labour
Indirect labour is labour costs that cannot be conveniently traced directly to a
particular cost object and forms, with indirect materials, part of the
manufacturing overheads. Depending on the traceability to the product, the
costs can be classified. Thus, traceability is the ability to allocate a cost to a
product by means of a causal relationship. Indirect labour includes the labour
of cleaners, supervisors, material handlers, machine maintenance personnel,
etc.
Manufacturing overheads
Manufacturing overheads refer to all manufacturing costs excluding direct
material and direct labour cost. Examples of manufacturing overheads are indirect
material, indirect labour, depreciation of the factory assets, insurance of the
factory, etc. Although manufacturing overheads are incurred during the
production process it cannot be allocated directly to a particular product. Various
methods of allocation of overheads are used by different organisations depending
on the organisational and costing structures.
Primary and conversion costs
The definition of primary and conversion costs is explained further.
 Primary costs
Primary costs are the sum of direct material and direct labour. In other words
all costs incurred in the factory except manufacturing overheads. Direct
labour and direct material are easily traced to products and are regarded as
product costs while overheads are treated as period costs.
Thus: Primary cost = direct material + direct labour.
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Accounting for All
 Conversion costs
Conversion costs are the sum of direct labour and manufacturing overheads,
in other words all costs incurred in the factory except direct materials. The
concept conversion cost refers to those costs that must be employed to
convert material into a finished product.
Thus: Conversion costs = direct labour + manufacturing overheads.
15.3.2 Commercial costs (non-manufacturing costs)

Commercial costs can be defined as the sum of marketing and administrative
costs; in other words all other costs incurred outside of the manufacturing process.
Marketing costs
Marketing costs include all costs necessary to obtain customer orders and the
delivery of products or services to the customer. Examples of marketing costs
include advertising, dispatching, sales travel, sales commissions, sales salaries,
etc.
Administrative costs
Administrative costs relate to executive, organisational and clerical costs of an
organisation, which exclude the costs related to the manufacturing and marketing
functions. Administrative costs may include the costs for executive compensation,
accounting, secretarial personnel, etc involved in the general administration of the
company.
15.4 Expired and unexpired costs

Besides the two broad categories of cost classification:
 Manufacturing costs
 Commercial costs
Any cost can also be classified as an expired or unexpired cost. An outlay is made
to receive a benefit. If the benefit has already been received, we will classify the
cost as an expired cost. If the benefit will only be received in the future, the cost
outlay will be classified as an unexpired cost.
15.4.1 Expired costs
The statement of profit or loss and other comprehensive income reflects costs
when the benefit in revenue has already been earned. These costs are all expired
costs. The actual outlay becomes an expired cost (cost of sales, depreciation, rent
etc). Expired costs earn revenue or if no benefit has occurred or will occur in
future from the cost outlay, then this waste also becomes an expired cost and is
written off as a loss in the statement of profit or loss and other comprehensive
income.
486
15.4.2 Unexpired costs

Incurring costs precedes the generation of current or future revenues. As long as
no benefit has been received from the cost outlay made, the cost will be classified
as unexpired cost. For example, prepaid insurance, materials inventory and the net
carrying value of machinery or equipment are all unexpired costs. All unexpired
cost outlays are shown as assets in the statement of financial position. Thus, assets
can be defined as unexpired benefits of the organisation.
The diagram below is a summary of the broad classification of costs.
Cost
Manufacturing cost Non-manufacturing cost

(commercial cost)
Expired Unexpired Expired Unexpired

cost cost cost cost
Example 15.1
Zoë Enterprise provides you with the following figures:
R
Direct material 35 000
Manufacturing overheads 30 000
Direct labour 20 000
Required:
15.1.1 Primary cost.
15.1.2 Conversion cost.
15.1.3 Manufacturing cost.
487
Accounting for All
Solution:
15.1.1 Primary cost = Direct material + direct labour
= R35 000 + R20 000
= R55 000
15.1.2 Conversion cost = Direct labour + overheads
= R20 000 + R30 000
= R50 000
15.1.3 Manufacturing cost = Direct material + direct labour +
overheads
= R35 000 + R20 000 + R30 000
= R85 000
Example 15.2
You are provided with the following list of costs.
Required:
Classify each type of cost as
 Manufacturing cost or commercial cost.
 Expired or unexpired cost.
 Identify all the overheads.
Solution:
Direct material Expired Manufac
Indirect material Expired Manufac OH
Direct labour Expired Manufac
Indirect labour Expired Manufac OH
W & E – factory Expired Manufac OH
W & E – admin Expired Commercial
Advertising Expired Commercial
Insurance – factory Expired Manufac OH
Insurance – admin Expired Commercial
Machinery Unexpired Asset
Furniture Unexpired Asset
Closing inventory on hand Unexpired Asset
488
15.5 Product and period costs

Manufacturing and commercial costs can be classified as either product costs or
period costs.
15.5.1 Product costs
Product costs are all costs incurred to manufacture products. The manufacturing
of a product includes direct material, direct labour and manufacturing overheads.
Product costs are seen as part of the product and become absorbed in the
inventory, waiting to be sold. So the product costs (costs of goods) are allocated
to an inventory account on the statement of financial position. As the products are
sold, the costs of goods are released from inventory and matched against sales.
Because product costs are allocated to inventories, they are also known as
inventory costs. All manufacturing costs will be classified as product costs.
15.5.2 Period costs
Period costs are the costs not included in the manufacturing process. These costs
are written off against the statement of profit or loss and other comprehensive
income for a specific period. Marketing and admin costs are normally costs
incurred to generate revenue in a specific period. It is not directly associated with
the product itself. The volume of products produced will not affect the amount of
marketing or admin costs. Commercial costs, (marketing and admin costs) will be
classified as period costs.
The diagram on page 490 illustrates the classification of costs in detail.
489
Accounting for All
Cost
Manufacturing cost
Non–manufacturing cost
(Commercial cost)
Expired Unexpired
cost cost
Expired Unexpired
cost cost
Dir mat Dir lab Overheads Administrative

Marketing costs
costs
Primary costs Conversion costs
Period costs
Product costs
490
Example 15.3
Indicate whether the following costs will be classified as:
 period costs
 product costs
Solution:
Period cost Product cost
Advertising x
Direct material x
W & E – factory x
W & E – admin x
Depreciation – factory x
Depreciation – admin x
Salary of supervisor in factory x
Salary of accountant x
Telephone x
Rent – factory x
Rent – admin x
15.6 Allocating cost to cost objects

Cost allocated to cost objects happens for a variety of reasons including cost
pricing, decision making, and budget control. A cost object is any item such as
products, product lines, customers, jobs, departments and divisions for which cost
information is required. These costs are classified as either direct or indirect when
allocating the costs to the cost objects.
15.6.1 Direct costs
Direct costs are costs that can easily, accurately and economically be traced to a
particular cost object. Direct cost is more than just direct materials and direct
labour. For example, the salary of a production manager in a factory would be a
direct cost of that office but an indirect cost to a specific production line. The
salary of a corporate sales director will be a direct cost to that office but an
indirect cost to a specific sales office in a sales area.
For our purposes however, in determining the manufacturing cost of a product,
direct material and direct labour are classified as direct costs.
15.6.2 Indirect costs
Indirect costs are costs that cannot easily and economically be traced to a specific
cost object. A certain factory may manufacture hundreds of products but the
salary of the factory manager has no effect on any of the products since he is there
to manage the factory. The factory manager’s salary is the common cost
491
Accounting for All
of producing the different products of the factory. Common costs are the costs of
resources that relate to more than one cost object and are incurred because of
general activities. Although the factory manager’s salary is an indirect cost as far
as the relationship to the products is concerned, it is a direct cost of the
manufacturing division. Likewise, factory rent is an indirect cost to the various
products manufactured in that factory but a direct cost to the factory.
For our purposes however, in determining the manufacturing cost of a product, all
indirect costs = manufacturing overheads.
15.7 Other cost terms, in decision making

Other cost terms used in decision making are:
 Opportunity cost
 Sunk cost
15.7.1 Opportunity cost
Opportunity cost is the total revenue that is lost by choosing one alternative over
another. In other words, the cost itself (opportunity cost) is the benefit of revenue
given up by choosing one alternative over another. All other extra costs of each
alternative have no effect on the determination of opportunity cost.
Opportunity cost is the potential benefit sacrificed or foregone when one
alternative is selected over another. For example, John Smith earns a salary of
R80 000 per annum. He considers the option of going into business with his father
as a partner. Leaving the organisation to go into business means that he would
sacrifice his salary of R80 000 and that would be an opportunity cost for going
into business with his father. There exist no records of opportunity cost in the
accounting system. As most alternatives have opportunity cost attached to it, it
must be taken into account for decision-making purposes.
Another example, the college has a spare lecture room. The cost of the room per
month is R4 000 (insurance, interest on bond and electricity and water). A
university wants to rent the room for R9 000 per month. If the college decides not
to rent the room to the university, then the opportunity cost is R9 000. The college
loses this income by deciding not to rent it out for R9 000. The R4 000 for
insurance, interest and electricity and water is not applicable in calculating
opportunity cost.
Example 15.4
BBX Manufacturers have the following two alternative options of a machine:
Alternative 1
They can use the machine themselves. This machine will produce 3 000 units per
month, which can be sold for R25 per unit. The manufacturing cost of the 3 000
units amounts to R45 000 in total.
492
Alternative 2
They can rent out the machine to another company at R60 000 per month. The
contract will stipulate however that BBX is responsible for servicing and
maintenance of the machine. Servicing and maintenance is estimated at R20 000
per month.
Required:
15.4.1 Calculate the opportunity cost if the machine is used by BBX.
15.4.2 Calculate the opportunity cost if BBX rents out the machine.
15.4.3 Which alternative should be accepted?
Solution:
15.4.1 Opportunity cost for alternative 1 = R60 000
15.4.2 Opportunity cost for alternative 2 = R75 000
Alternative 1 Alternative 2
Opportunity cost R60 000 R75 000
Manufacturing cost R45 000
Maintenance R20 000
Total cost R105 000 R95 000
15.4.3 Accept alternative 2; cost is less than alternative 1.

15.7.2 Sunk costs
A sunk cost is a cost that has already been incurred and that cannot be affected by
a decision at present or in future. Since sunk cost cannot be changed at present or
in the future it is not a differential cost or relevant for decision-making purposes.
Assume that a farmer bought one tractor too many for which he paid R160 000
two years ago. He never managed to utilise the excessive capacity to the full.
Although the farmer should not have bought the additional tractor there is nothing
he can do to undo that transaction. This R160 000 was incurred in the past and as
a sunk cost cannot be used in any decision-making process.
15.8 Summary
Material, labour and overheads are used to produce products. These three
elements are called manufacturing costs. Costs can be classified as manufacturing
costs or non-manufacturing costs. Non-manufacturing costs are not part of the
manufacturing process and are also called commercial costs. Costs can also be
classified as unexpired or expired costs. Manufacturing costs are product costs.
Non-manufacturing costs are period costs.
 Commercial costs can be defined as the sum of marketing and administrative
costs.
 Conversion costs are manufacturing overhead costs added to direct labour
costs.
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Accounting for All
 Costs may be defined as the sacrifices necessary to bring current or future

profits to the organisation.
 Direct costs are costs that can accurately be traced to a cost object.
 Direct labour refers to the labour cost that is relatively easy to trace to the
product.
 Direct material is an independent cost element that consists of those
materials that become an integral part of the product and which costs can
easily be traced to the product.
 Expired costs are costs used up in earning revenues and are also known as
expenses.
 Indirect costs are costs that cannot easily be traced to a cost object.
 Indirect material consists of secondary materials such as glue, nails or polish
and are part of the manufacturing overheads and do not form part of the end
product.
 Manufacturing costs can be classified in three categories; namely, direct
materials, direct labour and manufacturing overheads.
 Manufacturing overheads are all manufacturing costs excluding direct
material and direct labour cost.
 Marketing costs include all costs necessary to secure customer orders and
deliver the product or service into the hands of the customer.
 Opportunity cost is the potential benefit sacrificed or foregone when one
alternative is selected over another.
 Period costs are the costs not included in the manufacturing process, in other
words, the costs that are not part of the cost of the product.
 Primary costs are the sum of direct material and direct labour.
 Product costs are all costs incurred to manufacture a product.
 Sunk costs are costs that have already been incurred and that cannot be
affected by a decision at present or in the future. Since sunk costs cannot be
changed at present and in future, it is not a differential cost and therefore not
relevant for decision-making purposes.
 Unexpired costs are an offer made to incur a future benefit that will be useful
in the future. Until the benefit is received this type of outlay is carried as a
deferred or unexpired cost and reflected as an asset in the statement of
financial position.
 Variable cost is a cost that varies in direct proportion to the change in
activity level.
494
Questions
Question 15.1
Indicate whether the following costs are direct costs or indirect costs:
15.1.2 Indirect labour
15.1.3 Salary of typist
15.1.4 Accounting fees
15.1.5 Import tax paid on direct material
15.1.6 Depreciation of factory machinery
15.1.7 Rent of factory
15.1.8 Other overheads
15.1.9 Direct labour
15.1.10 Maintenance machinery
Question 15.2
Indicate whether the following costs are fixed or variable costs:
15.2.2 Water and electricity
15.2.3 Supervision
15.2.4 Wages paid per hour
15.2.6 Rent of admin building
15.2.9 Insurance
15.2.10 Advertising
Question 15.3
From the figures available below, calculate the following, for 2013:
15.3.1 Primary cost
15.3.2 Conversion cost
15.3.3 Manufacturing cost
495
Accounting for All
Actual figures for 2013

R
Indirect labour 14 000
Indirect material 16 000
Other overheads 80 000
Question 15.4
The following list of balances was taken from the books of Nelson (Pty) Ltd, for
the year ending 28 February 2013.
R
Direct material opening inventory 10 000
Direct material closing inventory 4 000
Indirect material opening inventory 4 000
Indirect material closing inventory 2 000
Salary typist 80 000
Salary accountant 200 000
Salary supervisor in factory 90 000
Depreciation of office furniture 14 000
Depreciation of factory equipment 25 000
Rent – joint cost 60 000
Water and electricity – joint cost 28 000
Insurance – joint cost 40 000
Direct material purchased 100 000
Indirect material purchased 35 000
Railage paid on direct material purchased 7 000
60% of all joint costs were spent in the factory
Required:
Calculate the following, for the year ending 28 February 2013
496
Question 15.5
The following balances were obtained from Ruby Duby (Pty) Ltd for the year
ending 30 June 2013.
Inventory 1/7/2013 30/6/2012

R R
Direct material 40 000 45 000
Indirect material 15 000 12 000
R
Purchases – direct material 100 000
Purchases – indirect material 22 000
Returns – direct material 5 000

Returns – indirect material 1 000

Overheads (joint cost)

Insurance 60 000
Depreciation 50 000
Telephone 22 000
65% of all joint costs were for the factory
Railage paid on:

Sales 14 000
Required:
Calculate
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Accounting for All
Question 15.6
The following calculations were made by the cost accountant for Ntini
Manufacturers:
R
Manufacturing cost 400 500
Conversion cost 300 000
Required:
Calculate
15.6.1 Direct material cost.
Question 15.7
The following calculations were obtained from DS (Pty) Ltd:
R
Primary cost 120 000
Conversion cost 160 000
Required:
Calculate
15.7.1 Direct labour.
15.7.2 Direct material.
15.7.3 Overheads.
Question 15.8
In a factory where cream is produced the following information was revealed:
Direct material is 60% of primary cost
R
Required:
Calculate
15.8.1 Direct material cost.
15.8.2 Direct labour cost.
15.8.3 Overheads.
498
Question 15.9
Indicate which of the following costs will be classified as manufacturing costs or
commercial costs:
15.9.2 Indirect labour.
15.9.3 Depreciation – factory.
15.9.4 Depreciation – admin.
15.9.5 Rent – factory.
15.9.6 Rent – admin.
15.9.7 Advertising.
15.9.8 Transport of finished products.
15.9.9 Railage on direct material.
15.9.10 Direct material purchased.
Question 15.10
15.10.1 Define sunk cost and give an example.
15.10.2 Define expired cost and give an example.
15.10.3 Define unexpired cost and give an example.
Question 15.11
Micky bought a vehicle on 1 March 2013. He has two alternative options to use
the vehicle to earn income.
Alternative 1
Mickey can rent the vehicle to Minnie for R4 000 per month. Mickey will be
responsible for the maintenance of the vehicle. Maintenance cost is estimated at
R3 000 per year.
Alternative 2
Mickey can use the vehicle himself and get a contract to do deliveries for a
company. This will insure an income for Mickey of R60 000 per year. If Mickey
does the deliveries for the company, the maintenance is estimated at R800 per
month. He also has to pay the fuel himself, and this is estimated at R1 000 per
month.
Required:
15.11.1 Determine the opportunity cost if alternative 1 is accepted.
15.11.2 Determine the opportunity cost if alternative 2 is accepted.
499
Accounting for All
Question 15.12
Honiball Constructions can choose between two contracts.
Alternative 1
Plastering of three houses in a security complex. Labour and transport costs will
amount to R50 000. Contract tender price amounts to R205 000. Cement and
other contract costs are estimated at R30 000.
Alternative 2
Building of an office for a company in Midrand. Total contract cost is estimated
at R75 000. Tender price of the office amounts to R250 000.
Required:
15.12.1 Calculate the opportunity cost for each alternative.
15.12.2 Which contract should be accepted?
Question 15.13
The following figures were taken from Brent (Pty) Ltd:
Manufacturing Expired
R or or
commercial unexpired
Depreciation – office 400
Depreciation – factory 600
Indirect material 800
W & E – admin 1 000
W & E – factory 700
Advertising 900
Salaries – admin 3 000
Closing inventory – direct material 4 000
Prepaid rent – factory 2 000
Required:
Identify
15.13.2 Commercial cost.
15.13.3 Expired cost.
15.13.4 Unexpired cost.
500
Question 15.14
Can you classify the following as:
15.14.1 Product cost
15.14.2 Period cost
Period cost Product cost

Direct labour
Indirect labour
Direct material
Indirect material
Stationery
Fuel used for delivery vehicle
Maintenance – machinery in factory
Maintenance – computer
Depreciation – furniture
501
CHAPTER 16
MANUFACTURING CONCERN
16.1 Introduction
A manufacturing concern differs from a retail business. A retail business
purchases finished products, and sells the finished products at a profit.
A manufacturing company manufactures products and then sells them at a profit.
The calculation of the cost of the finished products is more difficult to calculate
than with a retail business where finished goods are purchased. All the costs
which are needed to manufacture or produce the product are part of the cost price
of the product and have to be calculated.
This includes:
 Direct material
 Direct labour
 Indirect labour
 Water and electricity used in the factory
 Insurance of goods in the factory
 Rent of the factory
 Depreciation of assets used in the factory, etc
This chapter will explain the flow of costs in a manufacturing environment and
illustrate the preparation schedules of cost of goods manufactured and cost of
sales. The statement of profit or loss and other comprehensive income
transactions will be prepared and the under- or over-applied overheads will be
calculated.
When the cost of goods manufactured is calculated it must be observed that the
product is a finished product and is transferred to the finished goods store. By this
time the material costs, labour costs and manufacturing overheads, have been
allocated to the output.
Work in process is also a factor in the calculation of cost of units completed.
In a manufacturing enterprise, products are manufactured. Raw material is
purchased; labour and overheads are added, plus work in process. All of these
costs are used to calculate the cost of units produced or completed, during a
specific period.
Chapter 16 Manufacturing concern

 Understand cost and activity flows in a manufacturing enterprise
 Prepare journal entries to record the flow of materials, labour and overheads
 Prepare the general ledger for the recording of materials, labour and
overheads
 Prepare the manufacturing statement of a manufacturing organisation
 Prepare the statement of profit or loss and other comprehensive income of a
manufacturing organisation
 Understand the different inventory accounts in a manufacturing enterprise
16.2 Terminology
Before the calculation of cost of goods can be explained it is necessary to look at
a few definitions. This will help you understand the flow of activities in a
manufacturing concern. Some of the terms have already been explained in
previous chapters.
Direct material is the main ingredient the product is made of. Normally it is
visible in the finished product.
Indirect material is part of overheads. It is not the main ingredient that the product
is made of. It can be visible in the finished product.
Direct labour is the cost spent on direct labourers, working in the manufacturing
process, ie the labourers working on the production process.
Indirect labour is part of overheads. These labourers also work in the factory but
are not directly involved in the manufacturing process.
16.2.5 Overheads
Overheads are all costs which occur in the factory, except direct material and
direct labour eg:
 Rent of the factory
 Insurance of the factory
 Water and electricity of the factory
 Depreciation of the factory
 Indirect labour
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16.2.6 Primary cost

Primary cost = direct material + direct labour.
16.2.7 Manufacturing cost
Manufacturing cost = direct material + direct labour + overheads.
16.2.8 Work in process
Work in process is the same as uncompleted goods or incomplete goods. Because
units are manufactured and the cost of goods completed has to be calculated for a
specific period, there will always be units which have been started with, but
which are not yet finished.
Work in process units can be in any stage of completion eg 1% – 99% stage of
completion.
16.2.9 Finished products
Finished products (also referred to as completed units) are units which are 100%
completed. These units are all ready to be sold.
16.2.10 Cost of sales
Cost of sales is the cost of the units completed, but only regarding the number of
units sold.
16.3 Activities typical of any manufacturing enterprise

These activities are:
 Procurement of material
 Labour
 Overheads
 Production
 Storage
 Sales
16.3.1 Procurement of material
Direct material and indirect material need to be purchased. The purchase function
always involves:
 Ordering
 Receiving
 Storage
16.3.2 Labour cost
Direct labour and indirect labour are always part of a manufacturing enterprise.
16.3.3 Overheads
In any manufacturing process, overheads are spent and are part of the
manufacturing process.
504
16.3.4 Production
Raw material is transferred from the storage room to the production process,
where labour and overheads are added to produce a product.
16.3.5 Storage
As soon as units are completed, they are transferred from the production area to
the storage area of finished products.
16.3.6 Sales
Units are produced with the main objective being to sell and to make a profit.
16.4 Product cost flows

Cost flows are the accounting paths followed by product costs, from the time they
are incurred to the time they become an expense in the statement of profit or loss
and other comprehensive income (product cost absorbed in inventory, in the
statement of financial position, until sold). You need to understand and know how
costs enter and flow through a manufacturing costing system, and eventually end
up as cost of sales in the statement of profit or loss and other comprehensive
income.
16.5 Inventory accounts in a manufacturing enterprise

The cost flow diagram below shows that manufacturing organisations have more
than one type of inventory account, namely:
 Direct material account
 Indirect material account
 Work in process account
 Finished goods account
These accounts are assets recorded in the statement of financial position at cost. In
commercial enterprises only the trading inventory account features.
Direct material
Direct labour
Allocated overheads
Work in process
Finished products
Cost of sales
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16.6 Accounting procedures in a manufacturing enterprise

Costs of particular activities are recorded in the appropriate account and then
transferred to the next section.
The diagram below illustrates the detailed flow of costs through a manufacturing
costing system.
Raw materials
Work in process
Opening balance Work in process
Opening balance Creditors Manf overheads
Direct materials Cost of goods
Direct labour manufactured
Manf overheads
Salaries and wages
Finished products
Bank Work in process
Manf overheads
Opening balance Cost of sales
Work in process
Cost of sales Manufacturing overheads
Finished goods Actual Work in

overheads process
16.7 Steps to follow in doing the general ledger entries of a

manufacturing enterprise
Step 1 – Opening of accounts
Open all the applicable accounts. These accounts will normally be the following:
 Material control account
 Labour control account
 Overheads control account
 Finished products account
 Cost of sales account
506
Step 2 – Opening balances

Enter the opening balances of the inventory accounts, namely:
The opening balances are all entered onto the debit side.
Step 3 – Manufacturing cost
Do all the entries of the manufacturing cost elements eg:
 Material purchased – debit side of material control account
 Material returned – credit side of material control account
 Material purchased and returned are for direct materials as well as indirect
materials
 Wages paid/payable – debit side of labour control account
(This will include all labour, direct labour and indirect labour)
 All overheads paid/payable – debit side of the specific overhead accounts
All the above entries for the three manufacturing cost elements were debited onto
the applicable account. The credit entry for all these debit entries will be either the
bank account or creditors account.
Step 4 – Direct material used
The total of direct material used has to be taken out of the material control
account:
 Material control account – credit
 Work in process account – debit
Step 5 – Indirect material used
The total of indirect material used has to be taken out of the material control
account:
 Material control account – credit
 Overhead control account – debit
Step 6 – Direct labour payable
The total of direct labour payable has to be taken out of the labour control
account:
 Labour control account – credit
 Work in process account – debit
Step 7 – Indirect labour payable
The total of indirect labour payable has to be taken out of the labour control
account:
 Labour control account – credit
 Overheads control account – debit
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Step 8 – Actual overheads

All other overheads paid or payable besides indirect labour and indirect material
must be entered:
 Specific overhead account eg rent – debit
 Bank/creditors – credit
Step 9 – Posting of actual overheads
All actual overhead accounts must be closed off against the overheads control
account:
 Overheads control account – debit
 Specific overhead account, eg rent – credit
Step 10 – Posting overheads to work in process
The overheads control account has to be balanced off against the work in process
account:
 Work in process – debit
 Overheads control account – credit
Step 11 – Units completed during the period
The value of units completed during the period is taken out of the work in process
account and entered onto the finished goods account:
 Finished goods – debit
 Work in process – credit
Step 12 – Cost of sales
The cost of sales value for the period is taken out of the finished products account
and entered into the cost of sales account:
 Cost of sales – debit
 Finished goods – credit
Step 13 – Closing balances
The closing balances of all the inventory accounts have to be calculated eg:
508
Example 16.1
Pooh Manufacturers provides you with the following information:
R
Sales 60 000
Direct material purchases on credit 30 000
Direct labour paid cash 15 000
Cost of goods completed 44 000
Materials transferred to work in process 12 000
Factory rent paid 7 000
Indirect labour paid 6 000
Water & electricity of factory paid 5 000
Advertising paid 4 000
Rent – admin building 3 000
Admin salaries 6 000
There were no opening balances for any accounts.

Required:
How will the journal entries and ledger accounts be disclosed?
Solution:
Pooh Manufacturers
 Recording material transactions
The material purchases are recorded as follows:
Debit Credit
R R
Materials 30 000
Creditors 30 000
The materials inventory account is the control account for all materials. The
material cost flows into the materials account by means of a debit entry when
materials are purchased. When the manufacturing department needs material,
the cost of the material flows from the materials account to the work in
process account.
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The entry would be as follows:
Debit Credit
R R
Work in process 12 000
Materials 12 000
The work in process account is also a control account and these cost flows are
recorded and summarised in it.
 Recording direct labour transactions
Debit Credit
R R
Labour control 15 000
Bank 15 000
Remember that the labour cost flows show only direct labour costs. Indirect
cost is allocated as a part of overheads. Direct labour is balanced off against
the work in process account.
Debit Credit
R R
 Recording actual overhead transactions

Pooh Manufacturers incurred the following overheads for the period:
The actual overheads are recorded as follows:
Debit Credit
R R
Overheads incurred:
Rent 7 000
Labour control (indirect labour) 6 000
Bank 18 000
510
These overhead costs that were incurred are recorded in the individual
overhead accounts. All the individual overhead accounts then have to be
balanced off against the work in process account.
These entries will be as follows:
Debit Credit
R R
Overhead control account 18 000
Rent 7 000
Labour control (indirect labour) 6 000
The overheads control account has to be balanced off against the work in
process account.
This entry will look as follows:
Debit Credit
R R
Overheads control account 18 000
 Recording finished goods transactions

The costs of products and jobs are determined by adding together direct
materials, direct labour and overhead costs. When the products in work in
process are completed and transferred to finished goods stores, the cost of
completed goods is transferred from the work in process account to the
finished goods account.
The cost of units completed during the period is recorded as follows:
Debit Credit
R R
Finished goods 44 000
511
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A summary of the cost flows occurs when a batch of products is finished. The
cost of the completed product batch must be transferred from work in process
to finished goods and eventually when the products are sold, added to cost of
sales in the statement of profit or loss and other comprehensive income. To
ensure the accuracy in calculating these costs, a cost of goods manufactured
statement is prepared. This schedule will be illustrated later in this chapter.
 Recording cost of sales and sales transactions
When the goods manufactured are sold, the cost of goods manufactured
becomes the cost of sales.
The cost of sales for the period is recorded as follows:
Debit Credit
R R
Debit Credit
R R
Debtors 60 000
Sales 60 000
 Recording of non-manufacturing costs

Administrative and selling expenses are period costs, which should never be
classified as part of manufacturing expenses and should consequently never
be allocated to production. Therefore, these costs are not part of the
manufacturing cost flows but are treated as a separate category. The journal
entry will be as follows:
The non-manufacturing costs are recorded as follows:
Debit Credit
R R
Rent 3 000
Advertising 4 000
Salaries 6 000
Bank 13 000
512
At the end of the period the selling and administration expenses will be
balanced off against the profit and loss accounts and these costs flow to the
period’s statement of profit or loss and other comprehensive income.
The ledger account entries of Pooh Manufacturers
Solution:
Ledger accounts
Dr Material control account Cr
Creditors 30 000 Work in process 12 000
Balance 18 000
30 000 30 000
Balance 18 000
Labour control account

Bank 15 000 Overheads control 6 000
Bank 6 000 Work in process 15 000
21 000 21 000
Overheads control account

Rent 7 000 Work in process 18 000
18 000 18 000
Work in process
Material control 12 000 Finished products 44 000
Labour control 15 000 Balance 1 000
Overheads 18 000
45 000 45 000
Balance 1 000
Finished products
Work in process 44 000 Cost of sales 42 000
Balance 2 000
44 000 44 000
Balance 2 000
Rent
513
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Dr Water and electricity Cr

Cost of sales
Finished products 42 000
Sales
Debtors 60 000
16.8 The manufacturing statement

Before a statement of profit or loss and other comprehensive income can be
compiled in a manufacturing enterprise, the manufacturing statement has to
be compiled.
The cost of units completed during a specific period is calculated on the
manufacturing statement.
A standard format is used in compiling the manufacturing statement.
Example 16.2
The manufacturing statement consists of all items – costs spent in the production
process. This will include:
 Direct material
 Direct labour
 Overheads
 Work in process
514
The following is the format for the manufacturing statement:

Manufacturing statement
R R R
Direct material used xxx
Opening balance: direct material xx
+ purchases xx
+ freight paid on direct material xx
Direct material available for use xx
– closing balance: direct material (xx)
Direct labour xxx
Primary cost xxx
Manufacturing overheads: xxx
Depreciation on factory equipment xx
Rent: factory xx
Water & electricity: factory xx
Indirect wages xx
Indirect material xx
Opening balance indirect materials xx
+ purchases indirect material xx
+ freight paid on indirect materials xx
Total indirect materials available xx
– closing balance indirect materials (xx)
Manufacturing cost xxx
+ opening inventory work in process xxx
Cost of goods put into process xxx
– closing inventory work in process (xxx)
Cost of goods manufactured * xxx
16.9 The statement of profit or loss and other comprehensive

income
In a manufacturing organisation material and other resources are converted into
finished goods, whereas in a trading enterprise purchases are completed goods for
resale. Therefore, the financial statements of the manufacturing enterprise must
contain all records of the manufacturing costs and the inventory accounts.
After compiling the manufacturing statement, the statement of profit or loss and
other comprehensive income can be compiled. The cost of units produced, as
calculated on the manufacturing statement is carried forward to the statement of
profit or loss and other comprehensive income.
The cost of units produced is then added to the opening balance of finished
products. The closing balance of finished products is then deducted to get to the
cost of sales amount. From here the statement of profit or loss and other
515
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comprehensive income of a manufacturing company is exactly the same as the

statement of profit or loss and other comprehensive income of a trading company.
The statement of profit or loss and other comprehensive income must be compiled
in the format prescribed by IFRS.
Example 16.3
The following is the format for the statement of profit or loss and other
comprehensive income in a manufacturing enterprise.
Statement of profit or loss and other comprehensive income of a
manufacturing company
R R
Sales xxx
– cost of sales (xxx)
Opening balance: finished goods xx
* + cost of goods manufactured xx
Cost of goods available to sell xx
– closing balance, finished goods (xx)
Gross profit xxx
+ other income xxx
Rent received xx
Interest received xx
xxx
– other expenses (xxx)
Marketing and selling expenses xxx
Net profit xxx
* Taken from the manufacturing statement.
Example 16.4
Nadia Manufacturers provides you with the following information for October
2013:
R
Direct materials purchases 60 000
Import tax paid on direct material 4 000
Factory rent 14 000
Depreciation: factory 7 000
Depreciation: offices 5 000
Salaries: offices 25 000
Water & electricity: factory 41 000
Water & electricity: offices 13 000
516
Indirect materials purchases 8 000

Sales 230 000
Opening Closing
balance balance
R R
Finished goods 14 000 12 000
Work in process 8 000 10 000
Required:
16.4.1 Compile the manufacturing statement.
16.4.2 Compile the statement of profit or loss and other comprehensive income.
Solution:
16.4.1 Manufacturing statement of Nadia Manufacturers for October 2013
R R R
Direct material used 72 000
Opening balance: direct material 24 000
+ purchases 60 000
+ import tax 4 000
Direct material available for use 88 000
– closing balance: direct material (16 000)
Primary cost 89 500
Actual manufacturing overheads: 73 000
Factory rent 14 000
Depreciation on factory equipment 7 000
Water & electricity: factory 41 000
Opening balance: indirect materials 3 000
+ purchases 8 000
Indirect materials available 11 000
– closing balance: indirect materials (6 000)
+ opening balance: work in process 8 000
Cost of goods put into process 170 500
– closing balance: work in process (10 000)
Cost of goods manufactured 160 500
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16.4.2 Statement of profit or loss and other comprehensive income of

Nadia Manufacturers for October 2013
R R
Sales 230 000
– cost of sales 162 500
Opening balance: finished goods 14 000
+ cost of goods manufactured 160 500
Cost of goods available to sell 174 500
– closing balance: finished goods (12 000)
Gross profit 67 500
+ other income 3 500
71 000
– other expenses (43 000)
Depreciation 5 000
Salaries 25 000
Net profit 28 000
16.10 Cost flows in a trading environment

The costs flows of organisations in a manufacturing environment and
organisations in a trading environment are very similar. The only difference is
with regard to having different inventory accounts. Manufacturing companies
normally operate material, work in process and finished goods inventories, while
trading companies only have a trading inventory to look after.
The difference in calculating the cost of sales for both trading and manufacturing
organisations can be explained through the following formulas:
16.10.1 Cost of sales in a manufacturing organisation
Cost of Opening balance Cost of goods Closing balance
= + –
sales finished goods manufactured finished goods
16.10.2 Cost of sales in a trading organisation

Cost of Opening balance Purchases of Closing balance
= + –
sales trading goods trading goods trading goods
518
Questions
Question 16.1
The following list of balances is provided to you by Mikka Manufacturers:
1/01/2013 31/12/2013
R R
Raw material (direct) – inventory 15 000 12 000
Raw material (indirect) – inventory 7 000 4 000
Raw material (direct) purchased 40 000
Raw material (indirect) purchased 6 000
Freight on direct material purchased 3 000
Freight on indirect material purchased 1 000
Finished products 14 000 4 000
Direct labour in arrears 3 000 5 000
Required:
Compile the following ledger accounts
16.1.1 Direct material account.
16.1.2 Indirect material account.
16.1.3 Labour account.
Question 16.2
The following information was taken from Danny (Pty) Ltd:
1/03/2012 28/02/2013
R R
Direct material inventory 7 000 8 000
Indirect material inventory 4 000 6 000
Insurance – factory 20 000
– admin 15 000
Rent – factory 30 000
– admin 15 000
Water and electricity – factory 22 000
– admin 17 000
Freight on indirect material purchased 1 000
Depreciation – factory 15 000
– admin 8 000
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Required:
The following ledger accounts
16.2.1 Direct material account.
16.2.2 Manufacturing account.
16.2.3 Trading account.
16.2.4 Indirect material account.
Question 16.3
The following list of balances was taken from Sammy & Sons at 31 December
2013:
R
Indirect material used 10 000
Factory rent 30 000
Factory insurance 25 000
Supervisor salary 40 000
Water & electricity – factory 12 000
Inventory balances
1/01/2013 31/12/2013
R R
Required:
Compile the manufacturing statement for the year ending 31 December 2013.
520
Question 16.4
Era produces steel cabinets. They want to know what the cost was to produce one
cabinet during the year ending 31 December 2013. Figures for the year are as
follows:
R
Direct material returns 8 000
Sales 580 000
Rent 35 000
Freight on direct material 6 000
Telephone 7 500
Packing of finished products 6 500
Advertising 19 900
Insurance 44 000
INVENTORY 01/01/2013 31/12/2013

R R
75% of insurance, telephone and rent was for the factory.

Number of units produced: 10 000 units.
Required:
16.4.1 Compile a manufacturing statement for the year ending 31 Dec 2013.
16.4.2 Compile a statement of profit or loss and other comprehensive income for
the year ending 31 Dec 2013.
16.4.3 Calculate the manufacturing cost per unit.
521
Accounting for All
Question 16.5
The following was taken from Jumbo Wholesalers:
01/03/2012 28/02/2013
R R R
Direct material returns 2 000
Sales 250 000
Sales returns 5 000
Freight on direct material 1 000
Actual overheads
Electricity & water – factory 9 000
Insurance – factory 7 000
Other expenses and income

Rent received 7 000
Freight paid on sales 3 000
Bank charges 4 500
Accounting fees 16 000
Salaries admin 24 000
Rent admin 7 000
Required:
16.5.1 Compile a manufacturing statement on 28 Feb 2013.
16.5.2 Compile the statement of profit or loss and other comprehensive income
on 28 Feb 2013.
522
Question 16.6
The following was taken from Sandra’s Manufacturers for the year ending 31
December 2013:
R
Work in process, opening inventory 29 000
Actual overheads 37 000
Finished products, opening inventory 22 000
Finished products, closing inventory 8 000
Direct material, opening inventory 6 000
Direct material, closing inventory 16 000
Import tax on direct material 3 500
Required:
Calculate the following by compiling a manufacturing statement
16.6.1 Direct material purchases.
16.6.2 Cost of goods manufactured.
16.6.4 Work in process, closing inventory.
Question 16.7
The following opening balances were taken from Fishy Price (Pty) Ltd on
1 January 2013:
R R
Material control 14 000
Debtors 80 000
Prepaid rent 2 000
Creditors 60 000
Insurance in arrears 1 000
Capital 40 000
Bank 10 000
Retained income 10 000
523
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The following transactions occurred during 2013:

R
Direct material issued 42 000
Indirect material issued 5 000
Overheads: (all paid)
Rent 17 000
Insurance 7 000
Depreciation 15 000
Direct labour paid 86 000
Sales – cash 200 000
Work in process, closing inventory 6 000
Insurance in arrears on 31 December 2013 2 000
Overheads are allocated at 100% of direct labour cost.

Overheads over/under applied must be recovered against cost of sales.
Required:
Compile the following general ledger accounts
16.7.1 Material control account.
16.7.2 Overheads account.
16.7.3 Work in process account.
16.7.4 Finished goods account.
16.7.5 Cost of sales account.
Question 16.8
The following is available for Lindiwe Manufacturers for the year ending
28 February 2013:
Balances 01/03/2012 28/02/2013
R R
Water & electricity in arrears 700
524
Transactions occurred during the year – all cash, all for factory.
R
Indirect wages 10 000
Material purchased 60 000
Depreciation 8 000
Cost of goods completed 206 000
Other overheads paid 12 000
Insurance 14 000
Rent 28 000
Sales 400 000
Overheads are allocated at 200% of direct material cost.

Rent in arrears at the end of 2013 was R800.
Water and electricity in arrears at year end was R600.
Overheads over/under applied are recovered against cost of sales.
Required:
Compile the following
16.8.1 Manufacturing statement for the year ending 28 Feb 2013.
16.8.2 Statement of profit or loss and other comprehensive income for the year
ending 28 Feb 2013.
Question 16.9
Lynn Manufacturers manufactures furniture. The following information is
available for the year ending 31 December 2013:
R
Sales 550 000
Opening inventory – finished goods 40 000
Closing inventory – finished goods 45 000
Other income 5 000
Administration expenses 65 000
Marketing expenses 55 000
525
Accounting for All
Direct material returned 7 500

Opening inventory – work in process 30 000
Closing inventory – work in process 20 000
Manufacturing overheads 55 000
Required:
16.9.1 Compile a manufacturing statement for the year ending 31 December
2013.
16.9.2 Compile a statement of profit or loss and other comprehensive income for
the year ending 31 December 2013.
Question 16.10
Tough Tin manufactures steel goods. The following information is available for
the year ending 28 February 2013:
R
Direct material returned 25 000
Sales 300 000
Other income 2 000
Administration expenses 9 000
Marketing expenses 6 000
Work in process opening inventory 22 000
Work in process closing inventory 15 000
Completed products opening inventory 50 000
Overheads are allocated at 50% of direct material used.

Actual overheads amounted to R55 000.
Required:
16.10.1 Compile a manufacturing statement at 28 February 2013.
16.10.2 Compile a statement of profit or loss and other comprehensive income
for the year ending 28 February 2013.
526
CHAPTER 17
COST BEHAVIOUR
17.1 Introduction
It is necessary to be aware of how costs will behave when activity levels change.
Cost behaviour is the way that cost changes in relationship to changes in the
levels of activity usage. In other words what will the effect on costs be if
production or service levels change? For example, a manager may want to
determine the impact on the cost of a long-distance trip of delivery vehicles due to
an increase of 15% in direct labour. As a particular activity level changes, some
costs related to this activity may change in direct relationship to the change while
others remain relatively constant. A manager should be aware of the behaviour of
these costs, which will come in handy when compiling the annual budget.
Students should not get confused with the term cost behaviour and assets. Cost
behaviour has nothing to do with assets. Although assets can be classified as
either fixed assets or current assets, it has nothing to do with cost behaviour. For
the definition of fixed assets and current assets, refer to chapter 9.
 Understand the term ‛cost behaviour’
 Classify any given cost as:
– Fixed cost
– Semi-fixed cost
– Variable cost
– Semi-variable cost
 Give the definition of all the different ways in which a cost can behave
 Draw a graph and give examples of all the different ways in which a cost can
behave
17.2 Cost behaviour

Cost behaviour is the way in which any cost changes to a change in production
volume. In other words, what will the effect on the cost be if there is a change in
the production volume? For example, what will the effect on rent and direct
material costs be if production volume increases from 2 000 units to 3 000 units?
All costs can be divided firstly into:
 Fixed cost
 Variable cost
Fixed costs can be subdivided into:
 Fixed cost
 Semi-fixed cost
Accounting for All
Variable costs can be subdivided into:

 Variable – direct proportional
 Variable – progressive change
 Variable – degressive change
 Semi-variable
If we put all types of cost behaviour into a diagram it will look like this:
Cost behaviour
Fixed costs Variable costs
Fixed Semi-fixed Variable costs Semi-variable

costs
Direct proportional Degressive Progressive

change change change
17.3 Fixed costs

As discussed previously fixed costs can be subdivided as follows:
Fixed costs
Fixed Semi-fixed
17.3.1 Fixed manufacturing costs

Fixed manufacturing costs are costs that remain constant in total for a specific
period regardless of the level of activity or output during that period, unless
influenced by some external factors such as price changes. In other words the cost
stays the same, regardless of any change in volume.
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Chapter 17 Cost behaviour
Factory rent is a good example of a fixed manufacturing cost because it remains

the same regardless of the number of units manufactured during the year.
Although manufacturing fixed costs behave fixed in total; the manufacturing fixed
cost per unit decreases as the number of units increases, and increases as the
number of units decreases.
Example 17.1
You are provided with the following figures by Johanna Ltd:
Production units 0 6 000 12 000 18 000 24 000

Factory rent per month R12 000 R12 000 R12 000 R12 000 R12 000
Cost per unit N/A R2 R1 R 0.67 R 0.50
Required:
Draw a graph.
Solution:
Total fixed costs.
Total factory rent
Total R16 000

Cost R12 000
(R) R 8 000 fixed costs
R 4 000
0 6 000 12 000 18 000 24 000
Production units
Notice that the total cost of renting remains at R12 000 per annum within the 0 to
24 000-unit range. The total does not vary but the cost per unit decreases as the
production volume increases.
The fixed-cost relationship is only valid for a certain capacity level and time
period. The capacity level is bound between minimum and maximum production
levels, termed the relevant range. Fixed costs will remain the same within a
specific time period, within the relevant range.
Should the manufacturing capacity increase beyond the outer limit of the relevant
range, the total fixed overheads will increase.
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Accounting for All
17.3.2 Semi-fixed manufacturing costs

Semi-fixed manufacturing costs (step-fixed costs) are costs that respond to
increases above or decreases below the present capacity level (relevant range).
Semi-fixed costs stay the same, regardless of any change in production volume,
but only between certain intervals. Fixed overhead costs cannot expect to be the
same all the time as predicted over some range of activity.
Example 17.2
Gemsbok (Pty) Ltd rents one machine at R20 000 per month to produce 1 000
products per month. If the company gets a contract to supply 2 000 units a month,
it will need to rent an additional machine. Gemsbok’s monthly rent will thus
increase from R20 000 per month to R40 000 per month.
Required:
Draw a graph.
Solution:
Semi-fixed manufacturing costs.
Renting a machine
Total 40 000 Semi-fixed costs

Cost of additional
Cost
capacity
20 000
(R)
Cost of capacity
0 500 1 000 1 500 2 000

Production units
As seen on the graph, the cost stays fixed (R20 000) for 0 – 1 000 units. Then the
cost stays fixed, R40 000 for 1 001 – 2 000 units.
17.4 Variable costs

Variable costs can be subdivided as follows:
Variable costs
Variable Semi-variable
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17.4.1 Variable manufacturing costs

Variable manufacturing costs change with a change in production volume. If the
direct material cost for one unit is R40, the direct material cost for two units will
be R80, for three units R120 and for 500 units, R20 000. This illustrates that the
cost changes as production changes.
If production increases, costs will increase
If production decreases, costs will decrease
Variable costs, can at a certain level, or because of a certain factor change again
into three different types of change.
Variable costs
Direct proportional Degressive Progressive

change change change
Direct proportional change

Variable manufacturing costs behaving in a direct proportional manner are costs
that vary in total, in direct proportion to the activity level. The cost changes in a
directly proportional way to a change in production volume. The activities in a
manufacturing environment are normally expressed as production units. Variable
manufacturing costs have a direct relationship to the number of units produced,
because the unit cost remains constant.
Example 17.3
Rebecca Manufacturers provides you with the following direct material
information:

Variable cost per unit R5 R5 R5 R5 R5
Total cost (R) N/A 30 000 60 000 90 000 120 000
Required:
Draw a graph.
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Accounting for All
Solution:
Variable costs behaving directly proportional (total variable costs)
Total direct material
Total R120 000

Cost R 90 000
(R) R 60 000
R 30 000
Variable costs
0 6 000 12 000 18 000 24 000
Production units
Solution:
Variable costs per unit
Direct material per unit
6 Fixed cost
Cost 4
R/U 2
0 6 000 12 000 18 000 24 000

Production units
The total variable overheads change in direct proportion to units manufactured,
but the variable cost per unit stays fixed.
Variable manufacturing costs that behave progressively
The manufacturing overheads behave in direct proportion to production volume
up to a point where variable cost per unit increases due to certain factors, eg
material wastage because of machines that are being extended beyond their
production capacity.
The change of the cost to production volume is ‛supposed’ to be directly
proportional, and will be, until a certain factor has the effect that the change in the
cost is a little bit more than the change in production volume.
532
Example 17.4
Rebecca Manufacturers provides you with the following information, regarding
direct material:

Variable cost per unit R5 R5 R5 R5 R5.20
Total cost (R) N/A 30 000 60 000 90 000 124 800
Required:
Draw a graph.
Solution:
Variable costs that behave progressively
Total direct material with wastage
Total R120 000

Cost R 90 000
(R) R 60 000
R 30 000
Variable costs
0 6 000 12 000 18 000 24 000
Production units
Another example of progressive change is labour inefficiency.

You can see from the graph that the cost for 24 000 was supposed to change in a
directly proportional way and be R120 000. Instead, because of material wastage,
the cost increases a little bit more than the increase in production volume and the
total cost for 24 000 units is R124 800.
Variable manufacturing costs that behave degressively
The manufacturing cost behaves in direct proportion to production volume up to a
point where variable cost per unit decreases due to certain factors, eg there may
be a saving in set-up costs if two consecutive production runs produce the same
product.
The change of the cost to production volume is ‛supposed’ to be directly
proportional, and will be, until a certain factor has the effect that the cost changes
a little bit less than the change in production volume, eg material savings, increase
in productivity.
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Accounting for All
Example 17.5
Rebecca Manufacturers provides you with the following information, regarding
direct material:

Variable cost per unit R5 R5 R5 R5 R4.60
Total cost (R) N/A 30 000 60 000 90 000 110 400
Required:
Draw a graph.
Solution:
Variable costs that behave degressively
Total direct material with material savings
R120 000
Total R 90 000
Cost R 60 000
(R) R 30 000
Variable costs
0 6 000 12 000 18 000 24 000
Production units
You can see on the graph that the total cost for 24 000 units, is not R120 000 as it
should have been in a direct proportional change. The cost changes a little bit less
than the change in production volume and the total cost for 24 000 units is
R110 400.
17.4.2 Semi-variable manufacturing costs
Semi-variable manufacturing costs, also known as mixed overhead costs, contain
both, variable and fixed cost elements.
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Example 17.6
For example, a photocopy machine is rented at R2 000 per month plus R0.15 per
photocopy produced. The following table shows the cost for different levels of
activity:
Activity levels Fixed costs Variable cost Total variable Total cost
per unit costs
1 2 3 4 5
Units R R R R
(1 x 3) (2 + 4)
1 000 2 000 0.15 150 2 150
2 000 2 000 0.15 300 2 300
3 000 2 000 0.15 450 2 450
4 000 2 000 0.15 600 2 600
5 000 2 000 0.15 750 2 750
Required:
Draw a graph.
Solution:
Semi-variable costs
Renting a photocopy machine
Total overheads
2 750
Total 2 600
Costs 2 450 Variable
(R) 2 300 costs
2 150
2 000 Fixed
0 1 000 2 000 3 000 4 000 costs
Production units
The fixed part is the R2 000 rent that has to be paid. The variable part is R0.15 per
unit.
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Accounting for All
Questions
Question 17.1
Calculate the total cost for 9 000 units if:
Fixed cost = R15 000
Variable cost = R7/u
Question 17.2
The following was taken from A&J Enterprises:
Total production cost = R60 000
Units produced = 4 000 units
Required:
17.2.1 How much is the variable cost per unit, and in total?
17.2.2 Calculate the total production cost for 6 000 units.
Question 17.3
Indicate which of the following will be regarded as fixed, or variable costs:
17.3.1 Direct material used
17.3.2 Rent of the factory
17.3.3 Direct labour used
17.3.4 Direct overheads
Question 17.4
Indicate if the following costs are:
– fixed cost
– variable cost
– semi-fixed cost
– semi-variable cost
17.4.1 Direct material used
17.4.2 Telephone
17.4.3 Renting of a vehicle
17.4.5 Rent of storage room
17.4.6 Indirect material used
17.4.7 Supervisor salary
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17.4.9 Advertising
17.4.10 Water and electricity
Question 17.5
Explain what you understand with the following terms; where applicable give a
graph and an example:
17.5.1 Cost behaviour
17.5.2 Fixed costs
17.5.3 Variable costs; direct proportional change
17.5.4 Progressive variable costs
17.5.5 Degressive variable costs
17.5.6 Semi-fixed costs
17.5.7 Semi-variable costs
Question 17.6
Zoko Manufacturers provides you with the following figures for electricity use:
Fixed rent = R800 per month

Cost per KW hour use = R2/KwH
Can you draw the graph, and complete the total electricity for:
17.6.1 1 000 units produced
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CHAPTER 18
BUDGETS
18.1 Introduction
Most organisations prepare a financial plan that shows them the way to allocate
resources to cost objects over a specific period of time. These organisations
disclose in quantitative terms how to distribute financial resources to each
organisational sub-unit based on its activities and short-run objectives. Thus, a
budget is a plan of action expressed in monetary terms to determine whether the
financial plan will meet organisational goals. The goal of many organisations is
profit maximisation, while non-profit organisations operate on a break-even basis.
Thorough planning and effective cost control is necessary to achieve this goal.
Budgets also act as a communication medium to supply information about the
organisation’s short-term goals to the management team. It will indicate an over-
or under-allocation of resources to certain activities, which will be valuable
information when the budget is in a process of being finalised.
Budgets are an expensive process and managers can spend a significant part of
their time on budgets. Budgets provide relevant information for managerial
decisions.
 Understand the functions of budgeting
 Understand the aims of budget control
 Describe the advantages and disadvantages of budgets
 Describe the master budget
 Describe the important aspects to remember in preparing the budget
 Compile the following budgets:
– Sales budget
– Production budget
– Materials purchasing budget
– Labour budget
– Overheads budget
– Cost of sales budget
– Expenses budget
– Cash budget
18.2 Budgeting and budget control

The concepts of budgeting and budget control are necessary to take the different
steps that are necessary to prepare the budget.
Chapter 18 Budgets
18.2.1 Budgets
A budget is a plan of action expressed in monetary terms to determine whether the
financial plan will meet organisational goals.
Budgeting is the process of preparing budgets.
18.2.2 Budget control
Budget control is the process whereby organisations take steps to ensure that the
objectives set down during the planning stage are staying on track by using the
budget as a benchmark by which performance is measured. Attaining targets
becomes the cause for motivation. When objectives are reached managers usually
get financial incentives. If the targets are beyond reach it becomes demoralising.
The difference between the budgeted target and the actual performance is called a
variance. An under-spending is known as a favourable variance and an over-
spending as an unfavourable variance. Large variances are normally investigated
to determine the cause of the problem and to take corrective action.
Organisations with a continuous improvement approach, normally prepare
budgets for brief periods eg three months, to incorporate achievements into their
plan and to set new targets.
18.3 The functions of budgets and budget control

Budgeting is a basis for making planning decisions and to measure actual outputs
against set targets. Budgets produce information to improve co-ordination
between departments. The control benefits of budgets include the entrusting of
decision rights to managers regarding scarce resources and to establish
performance measures to reward those managers.
The functions of budgets are:
 Planning
 Co-ordination
 Control
18.3.1 Planning
Top management must make important long-term decisions. Much of the
information needed for decision making lies at the bottom of the organisational
hierarchy. For this information to move up to the top, a bottom-up approach
should also be adopted.
Lower level managers also require information for decision making, therefore
they should also utilise information from top management. Top managers must
use a top-down approach to communicate information down to the lower level
managers for decision-making purposes.
18.3.2 Co-ordination
Budgeting involves each facet of the enterprise. All the underlying aspects are
pieced together by the master budget.
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Co-ordination is the piecing together of the production budget, sales budget,

material budget, labour budget etc. Co-ordination is also the incorporation of all
the activities of the enterprise as a whole.
18.3.3 Control
Budgets also play an important role in control. The budget is often used to
allocate resources and to delegate decision-making privileges to different
managers. A measure of freedom on how to spend the resources must also be
given to the responsible manager. New and inexperienced managers must be
guided on how the allocated amount must be spent. The more restrictions on the
budget, the less decision-making privileges are given to the manager.
Budgeted figures are also used as targets to motivate the managers. Budgeted
figures become standards for the managers of the organisation.
Once the budget is finalised, it becomes the target by which performance is
appraised and rewarded. When finalising the budget, some accountants argue that
the budget should be stiff but attainable. If budgets are easily attained, it smothers
extra effort and creativity. If budgets are unattainable, managers become
demoralised. The motivation to achieve the budget is through reward. If the
budget is attained, the manager is rewarded through bonuses or other privileges.
The difference between a budgeted standard and actual performance is called a
variance. An unfavourable variance occurs when the actual costs are more than
the budgeted costs, or the actual revenues are lower than the budgeted revenues.
A favourable variance occurs when the actual costs are less than budgeted costs or
actual revenues are more than budgeted revenues. Variances are calculated in the
reports for the period, normally a month, to ascertain whether an organisation
accomplished its goals. Large favourable or unfavourable variances are normally
investigated to determine the reason for the variance and to correct any problem
that may exist. Lesser variances may also be scrutinised.
Organisations that are transforming fast in the global environment may prepare
new budgets more often by constantly revising budgets, so that the organisation
can achieve its strategic objectives of continuous improvement.
18.4 Aims of budget control

The broad aims of budgets and budget control are:
 To gather various ideas at all levels of management in the preparation of
budgets.
 To centralise controls for decentralised activities.
 To co-ordinate all the activities of the enterprise as a whole.
 To lay a basis for the future.
 To plan costs and income to achieve maximum profits.
 To use capital expenditure in the most profitable way.
 To use production facilities and factors in the most economical way.
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Chapter 18 Budgets
 To serve as a benchmark or standard against which actual results can be

measured.
 To establish causes for variances between budgeted and actual results.
18.5 Advantages of budgeting

The advantages of budgets and budget control can be explained as follows:
 It is a way to convey the organisation’s plans to all levels of employees in the
organisation.
 Managers are under pressure to budget, because without it they would spend a
significant part of their time handling crises.
 The budgeting process helps to allocate resources to those operations where
the highest possible rate of return can be earned. Non-value activities must be
eliminated as far as possible.
 Budgets may unveil potential constraints before they occur.
 Budgets synchronise the processes of the whole organisation by incorporating
the plans of the different organisational segments. Budgets help to make sure
that each manager in the organisation is working towards the same goal.
 Benchmarks can be determined by using budgets, which can serve as future
standards to measure performance.
18.6 Disadvantages of budgeting

The disadvantages of budgeting can be summarised as follows:
 The uncertainty of forecasts adversely affects the system.
 Processes can overlap or activities can be duplicated if responsibilities cannot
be defined.
 Decisions are based on budgeted information and other estimated information
that distorts the results as forecasting is inevitably not always correct.
 Managers may not act in the interest of the organisation but in their own
interest.
 Budget systems are expensive to install and to maintain (including the
budgeting process and control with its administration). The price of budgeting
and budget control may be expensive, but worthwhile.
18.7 Important aspects in the preparation of budgets

The most important aspects in the preparation of budgets are:
 The human factor
 The budget period
 The budget committee
 Resource constraints
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18.7.1 Human factor

Top management should be enthusiastic about the budget system to convey the
same level of enthusiasm to the other levels of management. Budgeting requires a
lot of effort, and if top management sees it as just another job to be done, the
same attitude will filter through to the rest of the organisation.
When certain problems arise, the budget should not be used to make the
responsible employee a scapegoat. This negative approach will demotivate
employees and affect their co-operation and productivity adversely. Problems
should be investigated thoroughly and then resolved. Regrettably, pressure is
often placed on managers to achieve the budget under all circumstances.
The budget is normally used to assist in creating new goals, to assess actual
performance, and to detect troublesome areas. Awareness must be cultivated
amongst the employees that the primary objective of the budget is to assist in
achieving both individual and organisational goals.
Because budgeted information is non-flexible, it is most critical for employees
whose performance assessment is based on budgeting results. The intention of the
budget is to lift the morale of the employees and to harmonise efforts. To be
obsessed about rands and cents or being uncompromising in budget preparation or
control, may lead to the suboptimal utilisation of the budget.
18.7.2 Budget period
A budget period is the time period covered by a budget. The key to understanding
the budget period is in knowing the relationship between long-term planning and
the budget. The budget mainly accentuates the inputs that are essential to attain
the required output, while the strategic plan recognises the required output.
Operating budgets usually cover a 12-month period, which should correspond
with the organisation’s tax year but this is seldom the case. The budget period is
broken up into quarterly and monthly budgets for control purposes.
Rolling budgets are used by a significant number of companies. A rolling budget
is a yearly budget that rolls forward one month as the current month comes to an
end. The advantage of this approach is that the budget is reappraised throughout
the year and it keeps managers focused at least one year ahead. The danger of this
approach is that managers are mainly focused on short-term results.
18.7.3 Budget committee
The budget committee usually consists of key managers who are responsible for
the overall policy matters relating to the budget programme and for the co-
ordination of the preparation of the budget. These key managers are normally the
chief executive officer, the board of directors and the management accountant.
The budget committee normally solves budget-related differences and problems
between organisational segments (divisions, departments, sections, etc). Finally,
the budget committee approves the budget.
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Chapter 18 Budgets
18.7.4 Resource constraints

A resource constraint is an influence that expresses a resource limitation. Certain
constraining factors determine the limits of most activities. These factors include
production capacity, shipping, factory site and means of transport. For example, if
a certain operating skill is not available for a specific production process, the
manufacturing process may come to a halt, resulting in a loss of customer orders
and goodwill. Another example may be where the level of operating capital will
be determined by the cash flow level or credit limits.
18.8 Preparation of the master budget

The master budget consists of a set of interdependent budgets that cover all the
phases of an organisation’s operations for the budget period. The diagram below
provides an overview of the various parts of the master budget and how they are
related.
Master budget interrelationships
Sales budget
Ending Selling and

inventory Production
admin expenses
budget budget
Direct Direct labour Prod

materials budget overheads
budget budget
Cash budget
Budgeted
statement of
profit or loss and Budgeted
other statement of
comprehensive financial
income position
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The master budget starts with the sales budget, but if it is done poorly it will
affect the rest of the budget. The purpose of the sales budget is to indicate the
number of units that must be sold, in order to help in the calculation of how many
units should be manufactured. In the production budget, the number of units is
determined and from this the amount of material, labour and overheads that are
needed to fulfil the production requirement can be calculated.
The following budgets are the framework for the cash budget, budgeted statement
of profit or loss and other comprehensive income and budgeted statement of
financial position. They are:
 Sales budget
 Production budget
 Materials purchasing budget
 Labour budget
 Overheads budget
 Selling and admin expenses budget
Example 18.1 will be used to demonstrate the preparation of the five budgets in a
manufacturing concern.
Example 18.1
Jumbo (Pty) Ltd provides you with the following budgeted information for the
year ending 31 December 2013:
Jumbo (Pty) Ltd manufactures glass plates.
Sales 9 000 units

Selling price R13 per unit
Direct material R7 per kg
One plate uses ½ kg of glass in the production process. It takes 45 minutes to
manufacture two plates.
Labour rate per hour R17/hour
Overheads:
R
Rent 12 000
Insurance 14 000
Depreciation 8 000
Inventory balances 1 January 2013 31 December 2013

Glass 1 600 kg 2 600 kg
Plates 2 000 units 3 400 units
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Chapter 18 Budgets
Required:
Compile the following budgets
18.1.1 Sales budget.
18.1.2 Production budget.
18.1.3 Materials purchasing budget.
18.1.4 Labour budget.
18.1.5 Overheads budget.
18.9 Sales budget

The sales budget is a detailed forecast of sales volume and sales revenue. A
budget that is split up in months or quarters can also provide information of sales
collections. Sales cause most activities in a profit organisation and developing a
sales budget is the beginning of the preparation of the master budget. The various
budgets are all somehow dependent on the sales budget. Managers use sound
available information to estimate probable market conditions. When these
forecasts are based on information related to products available, promotion and
advertising plans, and expected pricing policies, it should lead to a reasonably
accurate estimate of the sales budget.
Solution:
18.1.1 Sales budget for Jumbo (Pty) Ltd
Budgeted units Unit price Total sales
9 000 R13/u R117 000
The sales budget total is prepared by multiplying the budgeted sales units by the
selling price per unit.
The sales budget indicates the budgeted sales units, unit price and total budgeted
sales value.
The sales budget is prepared first because the number of units to be produced is
based on the sales units.
18.10 Production budget

The production budget shows the number of units that must be produced to meet
the needs of the sales budget and to satisfy ending inventory requirements. Should
there be no opening or closing inventory balances, the production units to be
manufactured would be equal to the estimated sales units.
Normally, the production budget must consider opening and closing inventory
balances because traditional manufacturing organisations use inventory as a
buffer against possible stock-outs.
To determine the units to be produced, both beginning and desired closing
balances of inventory are needed.
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Production = Expected sales + closing – opening

units units inventory inventory
The formula is the basis for the production budget.

Solution:
18.1.2 Production budget for Jumbo (Pty) Ltd
Plates
Closing balance 3 400
+ Needed for sales 9 000
Total requirement 12 400
– Opening balance (2 000)
Plates to be produced 10 400
The desired ending inventory influenced the quarterly production requirements.
Inventories should be carefully planned. Excessive inventory ties up funds which
could have been used on other projects, while insufficient inventory may lead to
stock-outs resulting in a loss of customer orders and goodwill.
The production budget indicates the number of units to be produced. The material
purchasing budget, labour budget and overheads budget, are all based on the
production budget. The number of units to be produced will indicate how much
material, labour and overheads are needed.
18.11 Materials purchasing budget

After completing the production budget, the direct materials budget, direct labour,
and manufacturing overheads budget can be prepared. A materials purchasing
budget is a budget that indicates the quantity of materials and total cost price of
materials to be purchased during the budget period. The quantity of direct
materials is used as a source to obtain this information. A bill of materials is the
type and quantity of each item of material needed to complete a product.
Preparing a direct materials budget is part of an organisation’s material
requirements planning. Material-requirements planning (MRP) is an operations
management tool that uses a computer to assist managers in scheduling
production in each stage of a complex manufacturing process and assists in the
management of materials and inventories. The main goal of MRP is to ensure that
the correct materials in accurate quantities at the right time support the production
budget.
The materials purchasing budget must indicate the:
 Number of material units (eg kg, litre, metre) to be purchased.
 Rand – value of the material to be purchased.
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Chapter 18 Budgets
Solution:
18.1.3 Materials purchasing budget for Jumbo (Pty) Ltd
Glass (kg)
Closing balance 2 600
+ Needed for production 5 200 (10 400 x 0,5 kg)
Total requirement 7 800
– Opening balance (1 600)
Glass to be purchased 6 200
Material purchases in rand value = R7 per kg x 6 200 kg = R43 400
18.12 Direct labour budget

The direct labour budget is an estimate of wages to be earned by production
employees for the budgeted period. The preparation of this budget is also based
on the production budget. The direct labour needs must be determined to know
whether there is sufficient labour to meet the production requirements.
Organisations that do not prepare budgets run the risk of not having certain levels
of skill throughout the year.
As with direct materials, the budgeted direct labour hours are determined by the
relationship between labour and output. Many levels of labour will be involved,
depending on the rate per hour of the employee. When the various labour types
are determined to meet the production requirements, the rates must be calculated.
Finally, the budgeted number of production units multiplied by the standard hours
to produce one product, equals the direct labour budget requirements for the
period.
The labour budget must indicate the total hours needed for production, as well as
the total labour cost.
Direct labour rate = Total direct labour cost ÷ total direct labour hours
Companies normally calculate a direct labour rate for each wage rate category.
Solution:
18.1.4 Labour budget for Jumbo (Pty) Ltd
Hours Total (R)
* R0.75/plate x
2 plates 10 400 plates = 3 900 = R66 300 (3 900 hrs x
R17 per hour)
45
* 45 minutes = = 0,75 hours
60
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18.13 Manufacturing overheads budget

The manufacturing overheads budget consists of an estimate of manufacturing
costs other than direct materials and direct labour to be incurred over the budgeted
period. These overheads are therefore all indirect manufacturing costs. To assist
in the preparation of the manufacturing overheads budget, all the costs must be
classified as either fixed or variable. In contrast with direct materials there are no
specific input/output relationships for overhead cost items but these are a series of
activities with related drivers. Specific items that will fluctuate are identified: for
example water and lights, supplies, etc and the amount for each item will be
separated into fixed and variable components.
Solution:
18.1.5 Manufacturing overheads budget for Jumbo (Pty) Ltd
R
Rent 12 000
Insurance 14 000
Depreciation 8 000
Total manufacturing overheads 52 000
Because the sales budget is used in preparing the production budget, and the
production budget is used to prepare the material, labour and overheads budgets,
the budgets should be prepared in the following order:
 Sales budget
 Production budget
 Materials budget
 Labour budget
 Manufacturing overheads budget
After these five budgets are compiled in this order, all other budgets can be
prepared eg ending inventory budget, selling and administrative expense budget,
etc.
The sales budget, production, materials, labour and manufacturing overheads
budgets were explained by a very simple example.
However, the basic principles of these five budgets remain the same regardless of
the level of difficulty.
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Chapter 18 Budgets
Example 18.2
Bobo Gobani Manufacturers has the following forecasted figures for the year
ending 31 December 2013:
Selling price per unit R300

Total sales R120 000
Direct material cost R7/kg
Direct labour cost R12/hour
Bobo Gobani produces wrought iron chairs. One chair uses 2,5 kg of steel and
takes five and a half hours to be produced.
Budgeted other costs:

R
Salaries – admin 20 000
Telephone 7 000
Advertising 4 000
Water and electricity –factory 12 000
Water and electricity –admin 8 000
Opening Inventory Closing Inventory

Chairs 900 1 500
Steel 3 000kg 6 000kg
Required:
Solution:
18.2.1 Sales budget
Units R/U Total
400 R300/u R120 000
549
Accounting for All
18.2.2 Production budget of Bobo Gobani

Units
Needed for sales 400
+ Needed for closing inventory 1 500
Total needed 1 900
– Opening inventory (900)
Production 1 000
18.2.3 Materials purchasing budget of Bobo Gobani
Kg
Needed for production 2 500
+ Needed for closing inventory 6 000
Total needed 8 500
– Opening inventory (3 000)
Material purchases 5 500
Material purchases in Rand = R38 500

18.2.4 Labour budget of Bobo Gobani
R/H Hours Total
Labour hours R12/h 5 500 R66 000
18.2.5 Overheads budget of Bobo Gobani
R
Depreciation 2 000
Total overheads 31 000
18.14 Cost of sales budget

Cost of sales budget requires a very detailed explanation: the cost of sales budget
is influenced by whether it is a manufacturing company or a retail business.
If it is a manufacturing company, the cost of sales budget will include:
 Direct material costs
 Direct labour costs
 Overheads costs
If it is a retail company, the cost of sales budget is simpler and the mark-up on
purchases is used in the calculation of cost of sales.
For our purposes, we will do the cost of sales budget for a retail company.
550
Chapter 18 Budgets
Example 18.3
Discovery (Pty) Ltd has the following expected sales figures:
Sales Product A Product B

January 2 000 units 800 units
February 3 000 units 800 units
March 3 500 units 900 units
Selling price R25/u R30/u

Opening inventory R20 000 R18 000
The mark-up is 25% on cost price. Closing inventory is 40% of the cost of sales
of the following month.
Required:
18.3.1 Compile the sales budget for January and February.
18.3.2 Compile the cost of sales budget for January and February.
Solution:
18.3.1 Sales budget
January February
R/U Units Total R/U Units Total
R R
Product A R25/u 2 000 50 000 R25/u 3 000 75 000
Product B R30/u 800 24 000 R30/u 800 24 000
18.3.2 Cost of sales budget
January February
R R
Product A
Opening inventory 20 000 24 000
+ Purchases 44 000 64 000
64 000 88 000
– Closing inventory (24 000) (28 000)
The table to use in calculation of cost of sales:

Cost price = 100
Profit = 25
Selling price = 125
551
Accounting for All
Cost of sales for January = 50 000 x 100 = R40 000

125
Cost of sales for February = 75 000 x 100 = R60 000

125
Cost of sales for March = 87 500 x 100 = R70 000

125
Closing inventory for January = 40% x R60 000

= R24 000
Closing inventory for February = 40% x R70 000

= R28 000
Purchases are calculated as follows:
Cost of sales
+ Closing inventory
– Opening inventory
January February
R R
Product B
+ Purchases 8 880 20 160
26 880 27 840
– Closing inventory (7 680) (8 640)
Cost of sales for January = 24 000 x 100 = R19 200

125
24 000
Cost of sales for February = 125 x 100 = R19 200
27 000
Cost of sales for March = x 100 = R21 600
125
The cost of sales figure is known and can be calculated.

If cost of sales is known, we work ‛backwards’ to get the purchases amount.
552
Chapter 18 Budgets
18.15 Cash budget

The cash budget is a summary of cash receipts and disbursements expected to
occur during the budget period. Cash flow is the lifeblood of an organisation and
therefore the cash budget is one of the most important budgets in the main budget.
Cash deficiencies are often the cause why businesses fail. A business may be
successful in producing and selling a product, but fails because of timing
problems associated with cash inflows and outflows. If a manager knows when
cash deficiencies will occur; he will know when to plan to borrow, when a surplus
will occur, and when to invest the money. The cash budget provides an estimate
of all receipts and payments, and the manner and period in which they will be
received or employed. The cash budget consists of four phases:
 Cash receipts
 Cash payments
 Cash deficiency or surplus
 Financing
The cash budget must include all cash transactions:

 Cash inflow
 Cash outflow
Cash inflow will be for example the sales, when money is received.
Cash outflow will be all payments and purchases, when they are actually paid.
Depreciation for example, has no cash flow effect; therefore has no influence on
the cash budget.
Example 18.4
Phaff Manufacturers provides you with the following information for the four
quarters of the year ending 31 December 2013:
Sales forecast:
First Second Third Fourth
quarter quarter quarter quarter
Units 2 000 3 000 2 600 4 000
The selling price is R20 per unit.

Cash sales are 80% of all sales and the rest is on credit. Credit sales are collected
in the quarter after they were sold.
The sales for the last quarter of 2013 were 3 600 units.
553
Accounting for All
Material used in production is plastic. Plastic costs R7 per kg. Estimated material
purchases are:

Kg 1 000 2 000 1 600 3 000
Sixty per cent of material purchases are on credit. The credit purchases are paid in
the quarter after the purchase. The rest of purchases are cash.
Material purchases for the last quarter of 2013 were 2 000 kg in total.
Other expected expenses, overheads and costs, were paid cash.

Direct labour R10 000 R12 000 R14 000 R16 000
Depreciation R 7 000 R 7 000 R 7 000 R 9 000
Insurance R 3 000 R 3 000 R 3 000 R 3 000
Rent R 8 000 R 8 000 R 8 000 R 8 000
Advertising – – R 5 000 –
Admin salaries R10 000 R10 000 R10 000 R12 000
Machine – – – R30 000
The bank balance on 31 Dec 2012 was R18 000 (debit).
Required:
Compile the cash budget for each quarter of the year ending 31 December 2013.
Solution:
Cash budget of Phaff Manufacturers for the year ending 31 December 2013
Cash receipts
Sales R R R R
2012 – 72 000 14 400
First quarter – 40 000 32 000 8 000
Second quarter – 60 000 48 000 12 000
Third quarter – 52 000 41 600 10 400
Fourth quarter – 80 000 64 000
Total cash inflow 46 400 56 000 53 600 74 400
554
Chapter 18 Budgets
Cash payments
Purchases R R R R
2012 – 14 000 8 400
First quarter – 7 000 2 800 4 200
Second quarter – 14 000 5 600 8 400
Third quarter – 11 200 4 480 6 720
Fourth quarter – 21 000 8 400
Direct labour 10 000 12 000 14 000 16 000
Insurance 3 000 3 000 3 000 3 000
Rent 8 000 8 000 8 000 8 000
Advertising 5 000
Admin salary 10 000 10 000 10 000 12 000
Machine 30 000
Total outflow 42 200 42 800 52 880 84 120
Balance 4 200 13 200 720 (9 720)
Balance in beginning 18 000 22 200 35 400 36 120
Closing balance 22 200 35 400 36 120 26 400
555
Accounting for All
Questions
Question 18.1
Grey (Pty) Ltd provides you with the following forecast for 2013:
Expected sales Units Price/unit

Pens 5 000 R6/u
Pencils 12 000 R3/u
Required:
Compile a sales budget for 2013.
Question 18.2
The sales manager of Bibo Manufacturers estimates the following sales for the
products they are producing:
Sales: handbags 12 000 units at R420 each

Sales: purses 8 000 units at R180 each
Opening Closing
inventory inventory
Units Units
Handbags 2 000 3 000
Purses 5 000 4 000
Required:
18.2.1 Compile the sales budget.
18.2.2 Compile the production budget.
Question 18.3
BBA Manufacturers provides you with the following budgeted information for
2013:
Sales 5 000 units at R110 per unit.

Each unit uses 3 kg of material. Material cost R7/u.
Each unit takes three hours, 15 minutes to be produced. Labour rate is R16/hour.
Inventory Material Finished products

Opening inventory 5 000 kg 1 000 units
Closing inventory 4 400 kg 3 000 units
556
Chapter 18 Budgets
Required:
18.3.1 Sales.
18.3.2 Production.
18.3.3 Materials purchasing.
18.3.4 Labour.
Question 18.4
The sales manager of Acgra Gadabra estimates that sales of product toothbrushes
for adults will amount to 20 000 units and 40 000 for children. These toothbrushes
will be sold for R15 and R9 respectively.
The inventories are estimated as follows:
Opening Closing
inventory inventory
Toothbrushes – adults 5 000 7 000
Toothbrushes – children 4 000 3 000
Toothbrush for adults uses 20 g plastic and 10 g bristles.

Toothbrush for children uses 15 g plastic and 8 g bristles.
Opening inventory – plastic 40 000 g

Closing inventory – plastic 33 000 g
Opening inventory – bristles 77 000 g
Closing inventory – bristles 15 000 g
20 g bristles costs R20

1 g plastic costs R2
Required:
557
Accounting for All
Question 18.5
Toys for Boys Enterprise provides you with the following information:
Forecast for 2014
Sales units 12 000 units

Sales price per unit R400/u
Material required for production of one unit 4 kg
Cost of material R20/kg
Labour rate per hour R30/hour
Production labour time three hours per
unit
Inventory balances are as follows:

Opening Closing
inventory inventory
Sales units 4 000 u 2 500 u
Material 3 300 kg 2 700 kg
Required:
Question 18.6
Goodies for Girls Enterprise estimated the following for 2014:
Material needed for production of one unit: 3,5 kg; 2 kg material costs R12.
Labour hours needed for production of one unit, three hours. Labourers are paid
R45 per hour.
Variable overheads are estimated at R60 000.

Fixed overheads are estimated at R40 000.
Sales are estimated at 2 000 units, and total turnover is estimated at R400 000.
Inventory balances:
Sales Kg –
units material
Closing inventory 6 600 4 400
558
Chapter 18 Budgets
Required:
Compile the following budgets for the year 2014
Question 18.7
DG Enterprises manufactures hangers from plastic. The following information
was taken from their books:
Sales R 200 000

Selling price per unit R50/u
It takes four hours to produce two hangers. The labour rate is R13 per hour.
One hanger uses 2,5 g of plastic; 10 g of plastic costs R50.
Rent – factory R 12 000

Depreciation office furniture R 3 000
Indirect material used R 3 800
Indirect labour R 14 000
Insurance R 8 000
Water and electricity R 6 000
Inventory: Opening Closing

inventory inventory
Direct material 2 000 g 1 600 g

Insurance and water and electricity are divided 50/50 between commercial and
manufacturing costs.
Required:
Compile all manufacturing budgets.
559
Accounting for All
Question 18.8
Fisherman’s Paradise produces two types of fishing rod from line and graphite.
The following was taken from their books for the year ending 31 December 2013:
Fishing rod AA Fishing rod BB

Sales in units 5 000 7 000
Turnover R25 000 R70 000
Inventory 1/1/2013 Inventory 31/12/2013
(units) (units)
Fishing rod AA 2 000 3 000
Fishing rod BB 3 000 4 000
Line 10 000 m 15 000 m
Graphite 8 000 kg 3 000 kg
One fishing rod AA uses 20 kg graphite and 100 m line.

Three fishing rods BB use 75 kg graphite and 270 m line.
It takes three hours, 15 minutes to produce one fishing rod AA and four hours, 45
minutes to produce two fishing rods BB.
Other costs:
R
Rent factory 20 000
Salary, accountant 14 000
Insurance 26 000
Graphite, for 10 000 kg 350 000
Line, for 20 000 metres 40 000
Labour cost per hour R20 per hour
All joint costs of the factory and the offices are allocated at a ratio of 3 : 2.
Factory : office
It is estimated that sales and closing inventory will increase by 15% in 2014.
Overheads will increase by 20%; all other prices will remain the same in 2014.
560
Chapter 18 Budgets
Required:
Compile the following budgets for the year ending 2014
Question 18.9
Boypatong Manufacturers budgeted that their sales for four quarters in 2014 will
be as follows:
R Selling price/u
Quarter 1 R100 000 R20
Opening inventory: Material Finished products

3 000 m 1 300 units
Closing inventory:
Finished products: 15% of the next quarter’s sales requirements.
Material: 12% of the next quarter’s production requirements.
Overheads:
Fixed R35 000 for each quarter.
Variable R2.25 per unit.
One unit finished product uses 2,75 m of raw material. Material is bought in 10 m
lengths; 10 m costs R50.
It takes three hours, 45 minutes to produce one product. Labour rate is R18 per
hour.
Required:
Compile the following budgets for the first and second quarter of 2014
561
Accounting for All
Question 18.10
Joost (Pty) Ltd provides you with the following budgeted figures:
Sales
January 4 000 units
February 3 500 units
March 3 700 units
Selling price R20/u
Opening inventory R10 000
The profit is 30% on cost price. Closing inventory is 60% of the cost of sales of
the following month.
Required:
18.10.1 Compile the sales budget for January and February.
18.10.2 Compile the cost of sales for January and February.
Question 18.11
Bettie Manufacturers has the following forecast for sales for 2013:
Quarter 1 2 3 4
Sales 6 000 units 8 000 units 4 000 units 5 000 units
Selling price R20/unit R20/unit R22/unit R25/unit
Sixty per cent of sales are on credit. Thirty per cent of credit sales are collected in
the quarter after the sale and the remainder of credit sales in the following quarter.
Closing inventory is always 20% of the next quarter’s sales.
Required:
The cash inflow from sales for the third quarter.
Question 18.12
The following was taken from the books of Kitty Enterprise:
Sales forecast:
First quarter R240 000

Second quarter R720 000
Third quarter R960 000
Fourth quarter R600 000
The unit selling price is R15 per unit.

The debtor’s balance at the beginning of the period was R144 000. Cash sales are
70% and the remainder on credit. Credit sales are collected in the quarter after the
sales.
562
Chapter 18 Budgets
Required:
18.12.1 The sales budget for each quarter of the year for Kitty Enterprise.
18.12.2 Cash receipts for each period for the year.
Question 18.13
The sales manager of Cry for Me Retailers presents the following information:
 Three types of products are sold: toiletries, medicine, cleaning material.
 The financial year is from 1 March 2012 to 28 February 2013.
 Cash sales figures for March 2012 were estimated as follows:
Toiletries – R 60 000
Medicine – R150 000
Cleaning material – R 30 000
 Sales are expected to increase by 10% per month for the first six months after
March, thereafter it is estimated that sales will increase by 15% per month
until the end of the financial year.
 For budgetary purposes the financial year is divided into three four-month
periods.
Required:
The cash budget for receipts for the financial year, ending 28 February 2013.
Question 18.14
The following sales figures for 2014 were gathered from the various sales
managers at various branches. Bogom (Pty) Ltd sells three types of second-hand
cars and has three branches.
Units sold
Branch 2014
Gauteng
Ford 300
Mazda 400
Colt 100
Mpumalanga
Ford 100
Mazda 300
Colt 70
North-West Province
Ford 60
Mazda 150
Colt 110
563
Accounting for All
Selling price of the motor vehicles is the same in all the provinces, except Colt
which sells for 10% more in Gauteng.
Selling price of vehicles in Mpumalanga during 2014:

Ford – R33 000
Mazda – R24 000
Colt – R40 000
It is expected that selling prices will increase by 5% in 2015.
The vehicles are all purchased in Gauteng and transported by truck to the various
other provinces. In 2014 the transport cost per vehicle was as follows:
Ford Mazda Colt

North-West province R300 R200 R500
Mpumalanga R400 R300 R600
It is estimated that transport costs will increase by 10% in 2015.
The number of units to be sold in 2015 is estimated to increase as follows in the

various provinces:
Colt Ford Mazda

Gauteng 5% 3% 6%
North-West province 10% 10% 2%
Mpumalanga 10% 5% 5%
Required:
Compile the sales budget for 2015.
Question 18.15
The following information was taken from the books of Moses Retailers:
Actual sales 2013

R
October 200 000
November 300 000
December 260 000
Seventy per cent of sales are for cash and 30% of sales are on credit, and 80% are
collected in the month after the sale and 20% in the second month after the sale.
The gross profit percentage is 20% on selling price. Sales turnover is expected to
increase by 15% every month, after December’s sales in 2013. Sixty per cent of
cost of sales is paid cash in the month of the sales and the balance is paid in the
following month.
564
Chapter 18 Budgets
Other expected expenses:

January February March
2014 2014 2014
R R R
Depreciation 7 000 7 000 10 000
Salaries 60 000 60 000 60 000
Water and electricity 12 000 12 000 14 000
Rent 10 000 10 000 10 000
A dividend of R8 000 will be paid in March.

Capital expenditure is estimated at R60 000 for the whole year and can be
regarded as spread evenly throughout the year.
The bank balance on 31 Dec 2013 was R400 000.
Required:
Cash budgets for January, February and March 2014.
Question 18.16
The following forecasts were made for BBBC Enterprises for 2014.
Sales forecast:
January R100 000

February R330 000
March R300 000
April R400 000
May R450 000
Cash sales are 65% and the rest is on credit. Credit sales are collected as follows:
90% in the month following the sale
10% in the second month following the sale
Cost of sales is paid as follows:

40% is paid in the month after the expense
The balance of cost of sales is all paid cash
Cost of sales forecast:
January R 40 000
February R132 000
March R120 000
April R160 000
May R180 000
565
Accounting for All
The company wants to buy a new computer in April 2014. The estimated amount
for this computer amounts to R11 000.
R R R R R
Other expenses Jan Feb March April May
Depreciation 2 000 2 000 2 000 2 000 2 000
Interest paid 500 500 500 500 –
Insurance 5 000 5 000 5 000 1 000 –
Salaries 65 000 65 000 65 000 70 000 70 000
A loan at FF Bank will be paid back in April 2014. The amount of the loan is
R12 000.
On 31 January 2013, the bank overdraft amounted to R200 000.
Required:
Compile the cash budgets for February, March, April and May for the year 2014.
Question 18.17
Freelander (Pty) Ltd has the following forecasted figures for the first three months
of 2014:
Nov Dec Jan Feb March

2013 2013 2014 2014 2014
Sales units 200 u 400 u 600 u 500 u 300 u
Purchases (units) 100 kg 200 kg 400 kg 300 kg 100 kg
Insurance R 7 000 R 7 000 R 7 000
Depreciation R 4 000 R14 000 R14 000
Rent R10 000 R10 000 R10 000
Salaries R15 000 R15 000 R15 000
Advertising R 5 500 – –
Water & electricity R 7 000 R 6 000 R 5 000
Telephone R 1 000 R 1 000 R10 000
Equipment – R45 000 –
Bank balance R25 000
Selling price per unit is R80. Seventy per cent of sales are on credit; 40% of sales
are collected in the month after the sale, and 60% are collected two months after
the sale.
Purchases are paid as follows:
40% – cash
20% – in month after the purchase
80% – in second month after the purchase
566
Chapter 18 Budgets
Material cost is R40 per kg.

All other expenses and costs are paid in the month they occur.
Required:
Compile the cash budgets for January, February and March 2014.
Question 18.18
The following was estimated for the production of puzzle sets, for 2014 and 2015:
Sales:
First six months 2014 R250 000 at R50/set
Second six months 2014 R460 000 at R46/set
First six months 2015 R300 000 at R50/set
Second six months 2015 R300 000 at R50/set
All sales are cash sales.

Material information
Material cost:
1 litre of ink = R5.00
100 sheets of cardboard = R100.00
One puzzle set uses 1¼ sheets of cardboard and ½ litre of ink.

Closing inventory on 31 December 2013 was as follows:
Finished products Ink Cardboard

3 000 sets 1 600 litres 2 000 sheets
It is the policy of the company that closing inventory for direct material must be
45% of the next period’s production requirements.
It is the policy of the company that closing inventory for finished products must
be 35% of the next period’s sales.
Material purchases are paid as follows:

75% cash and 25% in the next period.
Material purchases in last semester of 2013 amounted to R14 000.
Labour and overheads: information
It takes two hours 30 minutes to produce one puzzle set. Labour rate is R9/hour
for the whole of 2014.
2014 2014
First six months Second six months
Fixed cost R10 000 R14 000
Variable cost R4/set R4/set
567
Accounting for All
An additional amount of R2 500 will also be spent on advertising in the second

part of the year.
A new machine must be purchased in October 2014 for R14 000.
An amount of R35 000 was invested in September 2011. It was invested for a
fixed period of four years.
Interest received on this investment is R600 per month. Interest will be received
until the end of August 2014.
Actual sales for the last six months in 2013 were 9 000 sets of puzzles.
Bank balance on 31 December 2013 was R106 000.
Required:
Compile the following budgets for the first and second six months of 2014
18.18.6 Cash budget.
568
CHAPTER 19
COST-VOLUME-PROFIT ANALYSIS
19.1 Introduction
Cost-profit-analysis (CVP) is an effective short-term planning management
instrument which management have at their command. It is a technique used to
examine the relationships between the level of activity in an organisation and total
cost, total revenues, and profits during a time period normally over a month or a
year. Given that CVP supports managers to understand the relationships between
cost, volume and profit; they can make decisions concerning volume of activity
levels on profit, units to be sold to achieve a certain profit, what products to
manufacture and sell, the marketing strategy to employ and product facilities to
acquire, etc.
Before we can advance with CVP analysis we need to understand the marginal
statement of profit or loss and other comprehensive income format. The marginal
statement of profit or loss and other comprehensive income emphasises cost
behaviour and is therefore very helpful to a manager in evaluating the impact of
profits on change in selling, costs or volume. Thus, it is necessary for
management accountants to understand cost behaviour and to distinguish between
fixed and variable costs. Under the marginal income method, only variable costs
are considered to be product costs. This would include direct materials, direct
labour, variable manufacturing overheads and variable selling and administrative
overheads. Fixed overhead costs are treated as period costs and are written off
against the statement of profit or loss and other comprehensive income. This
includes fixed manufacturing costs, as well as fixed non-manufacturing costs.
Thus, product cost per unit in the inventory does not contain any fixed overheads.
 Compile a marginal statement of profit or loss and other comprehensive
income
 Calculate:
– Marginal income (per unit and in total)
– Marginal income rate
– Break-even point (units and Rand value)
– Margin of safety (units and Rand value)
– Margin of safety ratio
 Understand the meaning of all the above
 Show the effect of change in:
– Sales volume
– Sales price
– Variable cost
– Fixed cost
 Calculate the number of units to be sold to make a desired profit
Accounting for All
19.2 The marginal statement of profit or loss and other

The format for the marginal statement of profit or loss and other comprehensive
income will always be:
Number of units sold
R/U Total
Sales xx xxx
– variable cost (xx) (xxx)
Marginal income xx xxx
–fixed cost (xxx)
Net profit xxx
If you understand this, and understand how to calculate the amounts under the
total column, you are halfway there.
Total sales = SP/u x number of units sold

Total variable cost = Variable cost/u x number of
units sold
Marginal income total = MI/u x number of units sold
Total fixed cost = Total fixed cost
19.3 Marginal income

Marginal income is the difference between sales and variable costs. In other
words, the amount available to cover all fixed costs and earn a profit. The
marginal income is used firstly to recover the fixed costs, and then to earn profits.
If the selling price is R150 and marginal income is not adequate to recover the
fixed costs, then there will be a loss for the period as the example below
illustrates:
Marginal income can be calculated as follows:
 Marginal income per unit
 Marginal income in total
19.3.1 Marginal income per unit (MI/unit)
Marginal income per unit = selling price per unit – variable cost per unit.
19.3.2 Marginal income in total
Marginal income in total = sales total – variable cost total.
Marginal income per unit and in total can also be calculated by compiling a
marginal statement of profit or loss and other comprehensive income.
570
Chapter 19 Cost-volume-profit analysis
Example 19.1
Vogue (Pty) Ltd sold 240 units, variable cost is R90 per unit, selling price is R150
per unit and the fixed cost is R12 600.
Required:
What is the marginal income per unit and the marginal income in total, if
19.1.1 240 units are sold.
19.1.2 One unit is sold.
19.1.3 Two units are sold.
Solution:
19.1.1 If 240 units are sold
Marginal statement of profit or loss and other comprehensive income
R/Unit Total
R
Sales (240 units x R150) 150 36 000
– variable costs (240 units x R90) (90) (21 600)
Marginal income 60 14 400
– fixed costs (12 600)
Net income 1 800
Notice that sales, variable costs, and marginal income are expressed on a unit
basis as well as in total. This is normally done when statements of profit or loss
and other comprehensive income are prepared for management’s own use, as it
smoothes the progress of profitability analysis.
19.1.2 If one unit is sold
R/Unit Total
R
Sales (one unit x R150) 150 150
– variable costs (one unit x R90) (90) (90)
Marginal income 60 60
Net income (12 540)
Every unit sold during the period will contribute R60 more to the covering of
fixed costs. For example, selling a second unit will result in the total marginal
income increasing by R60 (to a total of R120) and the loss of the company will
decrease by R60, to R12 480.
571
Accounting for All
19.1.3 If two units are sold

R/Unit Total
R
Sales (two units x R150) 150 300
– variable costs (two units x R90) (90) (180)
Marginal income 60 120
Net income (12 480)
If the company can manage to sell enough marginal income to generate R12 600,
then all fixed costs will be covered and the company will break even for the
period. The break-even point is where the volume of activity of an organisation
generates revenues that are equal to its total costs. To reach this level, the
organisation will have to sell 210 units (R12 600 fixed cost ÷ R60 marginal
income per unit) for the period, because each unit contributes R60 towards the
recovery of fixed costs.

R/Unit Total
R
Sales (210 units x R150) 150 31 500
Net income 0
After the break-even point has been reached, every extra unit will contribute R60
towards profit. If 211 units were sold for the period, then the net profit will be
R60 for the period, because the company sold one unit more than what is needed
to break even.
R/Unit Total
R
Sales (211 units x R150) 150 31 650
Net income 60
572
If two units are sold above the break-even point, then the net profit for the period
will be R120, etc. To determine net profits at different levels of activity it is not
essential to prepare a statement of profit or loss and other comprehensive income
for all levels. The management accountant only needs the number of units to be
sold above the break-even point and multiplies that number with the marginal
income per unit to determine the profit. The outcome will signify the planned
profits for the period. Should there be an anticipation of an increase in sales units
the management accountant need only multiply anticipated increase in units with
the marginal income per unit. This will show the estimated increase in net profits.
For example, if the company is at present selling 210 units for the period and
intends to increase sales to 250 units for the period, the expected increase in net
profit can be calculated as below (remember 210 units was the break-even point).
This means, if the organisation is selling 250 units, it will sell 40 units above the
break-even point which will result in a profit:
Increase in number of units to be sold 40 units

Marginal income per unit R60
Increase in net income (40 units x R60) R2 400
These calculations can be verified as follows:
Verification Sales volume

R/Unit 210 units 250 units Difference
40 units
Total Total
R R R
Sales 150 31 500 37 500 6 000
– variable costs (90) (18 900) (22 500) (3 600)
Marginal income 60 12 600 15 000 2 400
– fixed costs (12 600) (12 600) (0)
Net income 0 2 400 2 400
If there were no sales the loss would have been the same as the fixed cost. If the
income is sufficient to reach the break-even point, each extra unit sold boosts the
profit of the organisation by the marginal income of one unit.
19.4 MIR (marginal income ratio)

Marginal income ratio is the marginal income divided by sales expressed as a
percentage of sales.
MIR MI x 100
=
Sales 1
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Accounting for All
Example 19.2
Use the same information as given in example 19.1 of Vogue (Pty) Ltd.
Required:
Calculate the marginal income ratio.
Solution:
R/Unit Total Percentage
R
Sales (240 units x R150) 150 36 000 100%
– variable costs (240 units x R90) (90) (21 600) (60%)
Marginal income 60 14 400 40%
Net income 1 800
The marginal income ratio is calculated by dividing marginal income by sales. It

is the proportion (40% or 40 cents) of each Rand available to recover fixed costs
and to earn a profit.
Sales unit information may not always be available when analysing CVP
relationships. In this case the marginal income ratio (expressed as a percentage)
may be used to determine the break-even value required to earn a desired profit.
This can be illustrated in the following example:
If 280 units are sold
R/Unit Total Percentage

R
Sales (280 units x R150) 150 42 000 100%
– variable costs (280 units x R90) (90) (25 200) (60%)
MI/MIR 60 16 800 40%
The marginal income ratio can be calculated by using the unit amount or total
amount.
Sales (R/u) – variable cost (R/u) 100
MIR = x
Sales (R/u) 1
OR
Sales (R/u) – variable cost (R/u) 100
MIR = x
Sales (R/u) 1
574
The following example illustrates the calculation of the marginal income ratio:
Verification
Refer to Vogue (Pty) Ltd as given in example 19.1
MIR (per unit) = Marginal income per unit x 100

Sales price per unit 1
= R60 x
x 100
R150 1
= 40%
Verification
Refer to Vogue (Pty) Ltd as given in example 19.1, if 240 units are sold
MIR = Marginal income x 100

Sales 1
= R14 400 x 100
R36 000 1
= 40%
This was the total sales and total marginal income for 240 units. The total sales
and total marginal income for any number of units can be used. The information
of the example of Vogue (Pty) Ltd, if 280 units are sold, will be used to verify this
statement.
Verification
MIR (total) = Marginal income x 100
Sales 1
= R16 800 x 100
R42 000 1
= 40%
19.5 Break-even point

The break-even point can be calculated in units as well as Rand value. The break-
even point is the unit or Rand value where total revenues equal total costs. The
management accountant often determines whether an investment in a business
project will be profitable. Since it is expedient to know how revenues, costs and
profits behave with volume changes, the starting point will be to find the
organisation’s break-even point. Break-even analysis determines the volume at
which the profit from the business project will be sufficient to cover the fixed
costs and to earn the required rate of return on the investment. The traditional
break-even analysis relies on the break-up of costs into fixed and variable
components.
Break-even point can be calculated as:
 Break-even point in units (BEP units)
 Break-even point in Rand (BEP R)
575
Accounting for All
19.5.1 Break-even point in units

Break-even point in units is the lowest quantity of products that must be sold in a
particular period to ensure the recovery of all costs (fixed and variable) to prevent
the organisation making a loss. In other words at the break-even point neither a
profit nor a loss is made.
The break-even quantity is calculated by dividing total fixed cost by the marginal
income per unit.
Total fixed cost
Break-even point in units =
Marginal income per unit
Example 19.3
Figures for Vogue (Pty) Ltd are as follows:

Marginal income per unit = R60/u
Required:
Calculate the break-even point in units.
Solution:
Total fixed cost
Break-even point in units =
= R12 600
R 60/u
= 210 units
This means, as previously said, that if 210 units are sold, all income is equal to all
expenses. In other words:
Sales = variable cost + fixed cost.
This also means that net profit is zero. Neither a profit nor a loss is made.
19.5.2 Break-even point in Rand value
Break-even point in Rand value is the value of the units to be sold to break even.
This can be calculated by two different formulas.
Break-even point Rand value can be calculated in two different ways:
 Using the break-even units
 Using marginal income rate
Calculation of the break-even point Rand value using break-even units
Break-even point in Rand value = Break-even quantity x selling price per unit
576
Example 19.4
The calculation of the break-even point in Rand value can be illustrated as
follows, using the information from example of Vogue (Pty) Ltd:
SP/u = R150/u
Variable cost per unit = R90/u
Required:
Calculate the BEP in Rand value.
Solution:
Break-even point Rand value = Break-even units x selling price per unit
= 210 units x R150
= R31 500
The organisation will break even for the period concerned if enough units are sold
to earn marginal income to the value of R12 600 to cover the fixed costs of
R12 600 putting the company in a position where it earns no profit nor suffers any
loss. The break-even point will be achieved when 210 units are sold for the period
as the marginal income of each unit contributes R60 towards the recovery of fixed
costs: (R60/u x 210 units = R12 600).
Verification
R/unit Total
R R
Sales (210 x R150) 150 31 500
– variable cost (210 x R90) (90) (18 900)
Marginal income* 60 12 600
Net profit 0
*R60 x R210 units = R 12 600
Calculation of the break-even point using the marginal income ratio (MIR)
Secondly, the break-even point can be calculated by using the MIR (profit-volume
ratio). The MIR shows how the marginal income will be affected by a change in
total sales when calculating the break-even point in sales value. The break-even
point in sales value can be determined by dividing the fixed costs by the marginal
income ratio.
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Total fixed cost

Break-even point Rand value =
Marginal income rate
Example 19.5
Calculation of break-even point Rand value can be illustrated as follows, using

MIR:
The same information is used for Vogue (Pty) Ltd in example 19.1.
Required:
Calculate the BEP Rand value.
Solution:
Break-even point Rand value = Total fixed costs
Marginal income ratio
= R12 600
40%
= R12 600
0,4
= R31 500
Remember 40% means (40 ÷ 100), thus you divide fixed costs by 0,4 to determine
total break-even value. If the marginal income percentage was 30% you would
have divided fixed costs by 0,3 (30 ÷ 100).
On both methods,
using BEP (units),
using MIR,
the break-even point Rand value is R31 500.
Marginal income rate was calculated as follows:
Sales – variable cost 100
x 1
Sales
R150/u – R90/u 100
= x 1
R150/u
= 40%
19.6 Break-even point and profit planning

Establishing profit objectives is an important part of planning for money-making
organisations. Profit objectives can be expressed in various ways. For example it
can be expressed as a percentage of the previous period’s profits, percentage of
total assets, percentage of owners’ equity, etc. It is normally expressed as
578
percentage of sales. The anticipated changes in products, costs, and technology

are normally considered when establishing profit objectives.
Before profit plans can be finalised and incorporated into the annual budget, some
preliminary data on the feasibility of those plans must be collected. CVP analysis
is one way of doing it. The sales volume corresponding with a desired profit can
be determined by manipulating cost-volume-profit relationships. The
achievability of the sales volume will then be evaluated.
The equation used to calculate the number of units to be sold to make a certain
profit is:
Desired profit = Sales – variable cost – fixed cost

Thus:
Fixed cost + desired profit
Sales volume =
Example 19.6
The figures for Vogue (Pty) Ltd are as follows:
Selling price = R150/u

Variable cost = R90/u
Required:
19.6.1 If a profit of R5 400 is required, how many units must be sold?
19.6.2 What will the Rand value of these sales be?
Solution:
19.6.1 Sales volume = Fixed costs + desired profit
= R12 600 + R5 400
R60/u
= 300 units
19.6.2 Sales value = 300 units x R150 /u

= R45 000
By compiling a marginal statement of profit or loss and other comprehensive

income for 300 units above, the calculations can be verified.
579
Accounting for All
Verification:
R/Unit Total
R %
Sales (300 units x R150) 150 45 000 100
– variable costs (300 units x R90) (90) (27 000) (60)
Marginal income 60 18 000 40
Net profit 5 400
If 300 units are sold, a profit of R5 400 is made.
19.7 Margin of safety (MS)

The margin of safety can be calculated in:
 Units
 Sales value
 Percentage of sales (margin of safety ratio)
The margin of safety in units is the number of units sold in excess of the break-
even units. The margin of safety sales value is the sales value in excess of the
break-even sales value. In other words it states the number of units or the sales
value whereby sales can decrease before the organisation starts to suffer losses.
The formulae for its calculations are as follows:
MS in sales units = Total sales units – BEP units
MS in sales value = Total sales (R) – BEP (R)
or MS units x selling price per unit

MS units 100
MS as a percentage of sales value = x
Sales units 1
(Margin of safety ratio)
OR
MS sales value 100
Margin of safety ratio = x
Sales value 1
Example 19.7
The same figures from Vogue (Pty) Ltd are used:
Selling price per unit = R 150/u

Variable cost per unit = R 90/u
580
Required:
19.7.1 Calculate margin of safety in units.
19.7.2 Calculate margin of safety in Rand value.
19.7.3 Calculate marginal safety ratio.
Solution:
If 250 units are sold the break-even point as calculated is 210 units
250 210 40
units units units
R R R
Sales (250 units x R150) 37 500 (210 x R150) 31 500 (40 x R150) 6 000
– variable costs
(250 units x R90) (22 500) (210 x R 90) (18 900) (40 x R 90) (3 600)
Marginal income 15 000 12 600 2 400
– fixed costs (12 600) (12 600) (12 600)
Net profit 2 400 0 (10 200)
Verification
19.7.1 MS in units = Total sales units – break-even units

= 250 units – 210 units
= 40 units
19.7.2 MS Rand value = Sales (R) – BEP (R)

= R37 500 – R31 500
= R6 000
19.7.3 MS as a percentage of sales units = MS units X 100

(Margin of safety ratio) Sales units 1
40 units 100
= X
250 units 1
= 16%
OR
MS as a percentage of sales value = R6 000 x 100

(Margin of safety ratio) R37 500 1
= 16%
581
Accounting for All
The margin of safety means that at the current level of sales and with the
organisation’s current prices and cost structure, a reduction of 16% in sales
(R6 000 or 40 units) would result in just breaking even. The margin of safety can
only be expressed in terms of units if the organisation produces only one product,
eg a power station.
19.8 Applying CVP analysis

The cost-volume-profit relationships do have a wide range of applications, but we
have not as yet applied CVP analysis to determine the effect on profit where there
are changes in fixed costs, variable costs per unit, sales price per unit, and sales
volumes. Until now it has been assumed that all the factors such as prices, costs
and volumes have remained constant.
The effect of change in:
 selling price,
 variable cost,
 fixed cost, and
 sales volume
will be illustrated in examples 19.8 – 19.11.
19.8.1 Change in selling price
Changing the sales price per unit will also change marginal income per unit.
Suppose the sales price per unit increases from R150 to R165 this change will
increase the marginal income per unit from R60 to R75.
Example 19.8
Information for examples 19.8 – 19.11:
Sales volume 250 units = 80% of capacity
Sales price per unit R150/u
Variable costs per unit R90/u
Marginal income per unit R60/u
Total fixed costs for the period R12 600
Required:
19.8.1 Calculate the break-even point if the selling price increases by 10%.
19.8.2 Calculate the number of units that must be sold to achieve a profit of
R3 000.
582
Solution:
Current Current MIR Increase Increase MIR
Total unit ratio total unit
R R % R %
Selling price per unit 37 500 150 100 41 250 165 100,00
– Variable costs (22 500) ( 90) ( 60) (22 500) ( 90) ( 54,50)
Marginal income / MIR 15 000 60 60 40 18 750 75 45,45
– Fixed costs (12 600) (12 600)
Net income / (loss) 2 400 6 150

Fixed costs R12 600 R12 600
= Marginal income per unit = R60/u
=
R75/u
R12 600
= R60/u
= 210 units = 168 units
Break-even point Rand value
= Fixed costs = R12 600 = R12 600

MIR 40% 45,45%
= R31 500 = R27 720

OR
Break-even units x unit price = 168 units x R165/u = R27 720
19.8.2 Number of units to achieve profit of R3 000

Fixed costs + desired profit R12 600 + R3 000
= = R12 600 + R3 000 =
Marginal income per unit R60/u R75/u

19.8.2 Change in variable costs
Variable costs per unit can increase as a consequence of inflation or ineffective
utilisation of material in the manufacturing process, which will result in reduced
profits, assuming the selling price remains the same. The opposite can also occur
where variable costs per unit decrease as a result of bulk purchasing for example.
This will result in an increase in profits and marginal income with the assumption
that selling prices remain the same.
583
Accounting for All
Example 19.9
Refer to the original information in example 19.8
Required:
19.9.1 Suppose variable cost increases by 20%, calculate the break-even
point.
19.9.2 How many units must be sold to achieve a profit of R3 000?
Solution:
R/unit total Ratio R/unit total
R R R % %
Selling price per unit 150 37 500 100 150 37 500 100
Variable costs ( 90) (22 500) ( 60) (108) (27 000) ( 72)
Marginal income/MIR 6 0 60 15 000 40 42 10 500 28
Fixed costs (12 600) (12 600)
Net income/(loss) 2 400 (2 100)

Fixed costs
= Marginal income per unit
= R12 600 = R12 600
R60/u R42/u
Break-even point value

Fixed costs
= = R12 600 = R12 600
MIR 40% 28%
= R31 500 = R45 000

OR
Break-even units x unit price = 300 units x R150 = R45 000

Fixed costs + desired profit R12 600 + R3 000 R12 600 + R3 000
= = =
584
19.8.3 Change in fixed costs

What will be the effect on the break-even point be if fixed costs change? The
following example illustrates the effect of a change in fixed costs on the break-
even point and profits:
Example 19.10
Required:
19.10.1 Calculate break-even point if factory rent increases by R2 400.
Solution:
250 units are sold
R/unit total ratio R/unit total
R % R %
Selling price per unit 150 37 500 100 150 37 500 100
– variable costs (90) (22 500) (60) (90) (22 500) (60)
Marginal income/MIR 60 15 000 40 60 15 000 40
– fixed costs (12 600) (15 000)
Net income/(loss) 2 400 00
Fixed costs s
= = R12 600 = R15 000

= Fixed costs = R12 600 = R15 000
MIR 40% 40%
= R31 500 = R37 500

OR
585
Accounting for All

= =
= 260 units
= =
= 280 units
19.8.4 Change in sales volume
What will the effect be on the break-even point if the sales volume changes? The
following example illustrates the effect of a change in sales volume on the break-
even point and profits:
Example 19.11
Required:
Sales volume increases from 250 units to 400 units
19.11.1 Calculate the break-even point.
19.11.2 How many units must be sold to make a profit of R4 200?
Solution:
250 Units 400 Units
total R/unit ratio total R/unit
210 units 400 units
R R % R %
Selling price 37 500 150 100 60 000 150 100
Variable costs (22 500) (90) ( 60) (36 000) ( 90) ( 60)
Marginal income/MIR 15 000 60 60 40 24 000 60 40
Fixed costs (12 600) (12 600)
Net income/ (loss) 2 400 11 400
586

Fixed costs s R12 600
= =
= 210 units
Fixed costs R12 600
= =
MIR 40%

Fixed costs + desired profit
= = R12 600 + R4 200
= 280 units
Formulas
Marginal income (MI/u) = Sales price/u – variable cost/u
Marginal income total = Sales ( R ) – variable cost ( R )

Sales (R ) – variable cost (R) 100
Marginal income ratio (MIR) = x
Sales 1
or
SP/u – Variable cost/u 100
= x
Sales/u (R/u) 1
Fixed cost (R) FC (R) p

Break-even quantity (BEQ) = OR
MI/u (R/u) MI per unit(R/u)
Fixed cost (R )
Break-even Rand value =
MIR
Expected units = Fixed cost (R)+ desired profit (R)

Marginal income per unit (R/u)
Margin of safety units = Sales units – BEP units
Margin of safety Rand value = Sales (R) – BEP (R)

Sales – BEP 100
Margin of safety rate = Sales x
1
587
Accounting for All
= FC(R)
Break-even value (BEV) OR FC (1–VC ) OR R x (1– MSR)
MIR R
Required minimum turnover = FC(R) + PP( R)

in value (RV) MIR
Required minimum turnover

in quantity (RQ) = FC(R)+PP(R) OR FC(R)+PP(R)
MI per unit MI per unit
Abbreviations
P = Net profit
PP = Planned profit
RQ = Sales quantity
BEV = Break-even value
BEQ = Break-even quantity
R = Sales
VC = Variable cost
FC = Fixed cost
MI = Marginal income
MIR = Marginal income rate
MS = Margin of safety
MSR = Margin of safety ratio
19.9 Basic assumptions about cost-volume-profit analysis

To use information in cost-volume-profit calculations, certain assumptions are
made. Most of these assumptions are as follows:
Relevant range:
A primary assumption is that for the cost information used to determine the break-
even point the organisation is operating within a specific relevant range of
activity. In other words, all cost remains unchanged within this range of activity
(total fixed cost, total variable cost and variable cost per unit).
Sales:
Total sales behave directly in relation to units sold. Sales price per unit is assumed
to be constant, and factors such as quantity discounts are ignored. Sales mixes are
also assumed to be constant for various types of products.
Variable costs:
Variable costs are assumed to be directly in relation to the level of activity or
volume. Variable costs per unit remain constant. Variable costs of the production
departments and selling and administration departments are included.
588
Fixed costs:
Fixed costs are assumed to remain constant and therefore fixed cost per unit
decreases when sales volume increases, and increases when sales volume
decreases. Fixed costs of the production departments, and selling and
administration departments are included.
Mixed costs:
The separation of mixed costs in variable components must be affected by
methods, such as the high-low method or regression analysis method. That
validity separates these costs in relation to one or more predictors that are used.
Inventory levels:
It is assumed that inventory levels do not change materially during this period.
These assumptions can only be valid for the short-term. During long-term
planning price and costs changes must be recognised.
Marginal income:
Marginal income is an important factor in break-even analysis. Marginal income
per unit is the selling price per unit minus variable cost per unit. Marginal income
is the revenue after all variable costs have been covered. Marginal income per unit
is constant, since revenue and variable costs per unit are constant. Total marginal
income fluctuates in direct proportion to sales volume.
589
Accounting for All
Questions
Question 19.1
The following was extracted from PPI (Pty) Ltd:
Selling price per unit R80/unit
Variable cost per unit R35/unit
Fixed cost R20 000
Units sold 2 000 units
Required:
Compile a marginal statement of profit or loss and other comprehensive income
and calculate
19.1.1 The net profit.
19.1.2 Marginal income per unit and the total marginal income.
Question 19.2
Bobbie Manufacturers provides you with the following information:
Sales total R250 000
Units sold 25 000 units
Fixed cost R80 000
Required:
19.2.1 Marginal income per unit and total.
19.2.2 Marginal income rate.
19.2.3 Break-even point, units and Rand value.
19.2.4 Margin of safety, units and Rand value.
19.2.5 Margin of safety ratio.
Question 19.3
Joost Enterprises provides you with the following figures:
Turnover for the year R160 000
Variable cost total R 40 000
Units 20 000 units
Fixed cost R 30 000
Required:
Calculate
19.3.2 Marginal income per unit.
19.3.4 Break-even point units.
19.3.5 Break-even point Rand value.
19.3.6 Margin of safety units.
590
Question 19.4
The following figures were taken from Mashaba (Pty) Ltd:
Sales R50/unit
Variable cost total R450 000
Total sales R750 000
Fixed cost R200 000
Required:
19.4.1 Compile the marginal statement of profit or loss and other comprehensive
income.
19.4.2 Compile a marginal statement of profit or loss and other comprehensive
income, if sales volume increased by 10%.
19.4.3 If sales volume increased by 5%, sales price increased by 6% and variable
costs increased by 5%, calculate the net profit (fixed cost remains
unchanged).
* With each question, refer to original information.
Question 19.5
The following information was taken from Elios enterprises:
Selling price per unit R120/unit

Fixed cost R150 000
Sales total R600 000
Required:
Calculate
19.5.1 Marginal income per unit and total.
19.5.2 Break-even point units and Rand value.
19.5.3 Margin of safety units and Rand value.
19.5.5 What will the effect on the net profit be if all costs increase by 15% and
sales volume increases by 10%, and selling price remains unchanged?
19.5.6 How many units must be sold to make a profit of R80 000, if selling price
increases by 5%, fixed costs increase by 5% and variable costs decrease
by 5%?
591
Accounting for All
Question 19.6
Naas Ltd manufactures one type of toy. The following was information gathered
by them:
Direct materials cost per toy R20/unit

Direct labour cost per toy R25/unit
Variable overheads cost per toy R35/unit
Fixed cost R50 000
Toys sold 2 000 units
Selling price per toy R95/unit
Required:
19.6.1 Calculate the net profit by compiling a marginal statement of profit or
loss and other comprehensive income.
19.6.2 Calculate the net profit if material costs decrease by 3%, labour and
overhead costs increase by 5%, sales volume decreases by 10% and fixed
costs increase to R60 000. Selling price increases by 15%.
Question 19.7
Shoes (Pty) Ltd provides you with the following:
Turnover R500 000

Manufacturing, variable cost R110 000
Non-manufacturing, variable cost R 80 000
Manufacturing fixed cost R100 000
Non-manufacturing fixed cost R 60 000
Units sold 25 units
Required:
Calculate
19.7.2 Break-even point in units.
19.7.6 Calculate the net profit if all costs increase by 10% and sales price and
sales volume decrease by 4%.
19.7.7 How many units must be sold to make a profit of R200 000 if all costs
increase by 10% and sales price decreases by 5%?
592
Question 19.8
Bee Bee Manufacturers provides you with the following information:
Turnover R105 000

Sales volume 35 000 units
Variable cost R1.50/unit
Fixed cost R22 000
Required:
Calculate
19.8.1 Net profit.
19.8.3 Marginal income in total.
19.8.4 Break-even point in units.
19.8.5 Break-even point Rand value.
19.8.7 Margin of safety Rand value.
19.8.9 Refer back to original information.
Compile a marginal statement of profit or loss and other comprehensive
income, if sales volume decreases by 5% and sales price increases by
10%. All other cost remains the same.
19.8.10 Refer back to original information.
Compile a marginal statement of profit or loss and other comprehensive
income, if sales volume increases by 10% and all costs increase by 10%.
Selling price per unit increases by 5%.
Question 19.9
WCS sells second-hand golf clubs for children. They provide you with the
following information for the year ended 31 December 2013:
Selling price per unit R70/u

Fixed cost R120 000
Total turnover R700 000
Required:
Calculate
19.9.3 Break-even point (units).
19.9.4 Break-even point (Rand).
593
Accounting for All

19.9.7 If selling price per unit increases by 5%, variable costs decrease by
10%, sales volume decreases by 20% and fixed costs increase by
R20 000, calculate the new net profit.
19.9.8 How many unit must be sold to make a profit of R100 000 if all costs
increase by 20% (use original information)?
594
CHAPTER 20
PAYROLL
20.1 Introduction
It is important to motivate employees to pursue the organisation’s goals in their
daily jobs. Merging the individual’s interests with the managerial objectives is
perhaps the most important element of motivation.
The workforce must be motivated so that they behave themselves in such a way
that it supports the welfare of the organisation. A person’s interest in behaving in
a certain way can be affected by many factors and can affect his/her motivation.
These factors include the employee’s unique characteristics, the culture of the
organisation, and the general management style of the organisation. The
compensation policy of the company also influences the behaviour of employees
notably. Management accountants are important role players in compensation
practice.
The purpose of a compensation policy should be to pay employees a fair amount
for work performance, which benefits the organisation. Organisations that use
conventional compensation practices reward employees based on outcomes such
as profits, budget savings, return on capital, internal rate of return, or high
customer service ratings, etc.
Compensation is often based on inputs rather than outputs because of
uncontrollable factors that may affect measured outcomes. For example, rewards
are normally based on the number of hours employees work.
 Understand the various definitions concerning labour practice
 Know all the factors which have an influence on productivity
 Understand what is meant with personnel administration and employment
records
 Calculate net remuneration
 Calculate labour recovery rate
 Analyse the payroll into direct and indirect costs
 Prepare the necessary journals and ledger accounts
20.2 Productivity
Determination of both efficiency and effectiveness requires a valid measure of
output. When such a measure is available, efficiency and effectiveness require a
valid measure of output:
Accounting for All
Actual result Compared with Planned result

Efficiency = Actual output = Planned output
Actual input Planned input
or
Efficiency = Actual input = Planned input
Actual output Planned output
20.3 Factors that influence labour productivity

20.3.1 Humanitarian factors that influence labour productivity
Intellectual capacity is a significant constraint on organisational strategy.
Intellectual capital includes human and structural capital. Human capital points
towards the knowledge and creativity of the company’s personnel and is the basis
of strategic innovation and renewal. However, certain humanitarian factors in the
working place may increase or inhibit productivity levels of employees.
 The employee may be recruited without the necessary skills for the job.
 The employee may be ‘over-qualified’ for the job, which may result in the
company not developing and utilising the employee’s full potential.
 The employee may not receive proper job-specific training to perform the
work.
 Laziness of certain employees may affect productivity levels.
 Labour standards that are set too high may drain the labour force and
therefore their motivation over the long run.
 Because of a lack of job satisfaction, the employee may not be motivated to
increase his or her productivity level.
20.3.2 External factors that influence labour productivity
It is necessary for a company to create a working environment that helps
employees to perform optimally. Certain external factors in the working place
influence productivity levels. The most important external factors are, amongst
others the following:
 Lighting that is too bright or too dim may cause higher stress and fatigue
levels.
 Temperature is also an important factor since optimal productivity levels are
normally achieved at room temperature.
 Higher productivity levels are normally achieved in slightly moist air.
 Noise is a distracting factor and affects productivity levels adversely.
 After three or four hours on a shift, productivity levels are decreasing.
 Other factors such as family problems, financial problems, health problems,
and so on also influence the productivity levels of an employee.
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20.3.3 Personnel administration

To replace staff that leave can be very expensive. Except for replacement costs
such as advertising, agency fees, etc, there are also other costs which may not
always be easily recognised. For example, the training costs for new staff, the cost
of errors as people are progressing through the learning curve of how to do their
job, the cost of interviews and following up references. There is also the loss of
the investment made in staff members, eg for training, skills imparted, the speed
and efficiency of someone who knows their job and who is acquainted with the
procedures of the company.
20.4 Employment records

20.4.1 Personnel records
Personnel records are normally administered by the personnel department. They
usually open a file for each employee containing the following information.
The CV (curriculum vitae) contains the personal details, previous employment,
qualifications, and experience of the employee.
 Salary of the employee
 Promotions
 Salary increases
 Leave records
 Performance assessments
 Special achievements or disciplinary records, and so on
20.4.2 Clock cards
Clock cards collect information regarding an employee’s attendance time at work,
details of absenteeism, hourly labour rate and details of deductions such as
pension, tax, medical aid, UIF, insurance, etc. Where bonus schemes are
operative, the gross payment will be based on attendance time plus a bonus. The
labour rate is obtained from the clock card and the bonus details from the job
cards. Under some bonus schemes, a set time is allowed for each job and a bonus
is paid based on time that is saved.
20.4.3 Time tickets
Direct labour consists of labour charges that are easily traced directly to a specific
job. Labour charges that are difficult to trace to any job are known as indirect
labour costs and are considered as part of manufacturing overheads. Indirect
labour includes tasks such as maintenance, supervision, and cleaning services.
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Time tickets record the time that workers spend on each job. A completed time
ticket is a summary of the employee’s activities for the day. At the end of the day
the accounting department processes the labour hours and costs on individual job
cost sheets.
Presently, most companies utilise computerised systems and no longer record
labour time manually on time tickets. Every entry appears as a transaction in the
computer system.
20.4.4 Job cards
A job card is the source document used to calculate the actual time spent on a
specific job or task.
While the clock card is more important to the financial accountant in calculating
remuneration and labour costs, the job card is used to allocate direct labour to
different departments, jobs, products or tasks.
The job cards have to be reconciled with the clock cards regularly to determine
idle time.
Although a certain amount of idle time is acceptable because time is lost during
the production process due to rest periods, lunch times etc, idle time has to be
monitored to ensure maximum productivity.
20.4.5 Production reports
A production report is prepared for each department in which work was done on
products. The production report provides numerous functions. It gives a summary
of the number of units moving through a department during a time period, and
moreover it shows a calculation of unit costs. Additionally, it gives you an idea of
the costs that were charged to the department and what the nature of these costs
was.
20.4.6 General expectations
The organisational culture is an important factor as it includes the mindset of
employees, their shared beliefs, values and goals. Organisational culture will
determine whether an employee will fit in easily, not so easily or not at all. This is
an important factor for both the employer and employee as job placement affects
job satisfaction as well as productivity.
Individuals also recognise the need for change and seek to bring it about through
their own efforts. Their expectations are that of proper training and eventually
promotion.
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20.5 Terminology
20.5.1 Salary
When a person is appointed on a salary-based method it means he/she will receive
the same amount every month. It is a fixed amount and performance has nothing
to do with it. Normally it does change every year to provide for an annual increase
to provide for inflation. You can be appointed at a specific amount or percentage
that your salary will increase with annually, or the company will announce a
percentage increase in salaries for all employees.
Basic salary also differs from salary scale. A salary scale indicates the starting
notch, annual increments and new notch as well as the maximum salary that the
employee can earn. An employee can therefore not receive more than what the
salary scale’s maximum salary indicates.
Example 20.1
Mr Hobbs was appointed in 2010 at a salary scale.
Required:
Calculate what his salary will be at the end of 2015.
Salary scale
Starting salary Increment New notch/year
Year 1 120 000 10% R132 000
Year 2 132 000 12% R147 840
Year 3 147 840 12% R165 580
Year 4 165 580 12% R185 450
Solution:
2010 His salary will be R120 000
20.5.2 Wages
Wages can be paid weekly, every second week or even monthly. Wages are not a
fixed amount, it can be based on either hours worked or units produced. You will
be appointed at a specific rate per hour or rate per unit manufactured or for the
number of tasks you have completed. This means the amount you receive will
vary every time.
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Normal time
Hours you are supposed to work per week/day within the normal work hours.
According to labour legislation a normal week has 40 hours, with a maximum of
45 hours per week. All hours worked on a Monday to Friday (45 or less) will be
regarded as normal pay. Everything more than that will be overtime.
Employers employ people at a certain rate/hour.
Overtime
These are hours worked more than normal hours. This will include hours worked
on a Saturday, Sunday as well as public holidays.
20.5.3 Commission
If you are working on commission it means you are paid at a percentage of your
turnover (sales). It can be a fixed percentage on all your sales, eg 10% on
turnover. Alternatively commission is calculated on a sliding scale.
Example 20.2
Mrs Dinky was appointed on the following commission structure:
Sales Turnover bracket %
R10 000 3%
R10 001 – R20 000 6%
R20 001 – R35 000 12%
R35 001 – R60 000 20%
More than R60 000 R2 000 + 35% for
everything more
than R20 000
Mrs Dinky had the following sales for the last four months:
August 2013 R19 900

September 2013 R55 000
October 2013 R70 000
Required:
Calculate Mrs Dinky’s commission for August, September and October 2013.
Solution:
August 2013 R 1 194
September 2013 R11 000
October 2013 (R70 000 – R20 000) x 35% + 2000 R19 500
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20.5.4 Bonus
Most employers have a bonus system to encourage their workers to increase
performance and productivity. It is normally a one-time payment and does not
form part of the basic remuneration of the employee.
Cash bonuses
This can be paid when targets are exceeded, or for example at the end of the year.
Thirteenth cheque
A bonus can be a 13th cheque, which means you get one months’ salary twice in a
specific month (eg your birthday month). This will be stated on your appointment
agreement.
Profit-sharing bonuses
Bonuses can also be based on a profit-sharing scheme. This is a short-term bonus
plan focused on group performance.
Stock options
Bonuses can also include stock options. This is an offer to employees to purchase
organisational shares at a specific price. This bonus system should also be based
on the performance of the individual.
Gain sharing
Usually this is a group incentive scheme that rewards a group of individuals for
performance exceeding their targets.
20.5.5 Fringe benefits
It is a collection of various benefits by an employer. Besides basic salary, an
employee’s remuneration structure can also include other benefits. This means
that the employee receives this in addition to his normal salary, every month.
Most of these fringe benefits are also taxable. Examples are:
 Medical aid contribution by employer on behalf of employee
 Travel allowance
 Entertainment allowance
 Low interest rate loans
 Pension fund contribution by employer
 Education reimbursement
 Cafeteria plans
 Employee discounts
 Use of company vehicle or other assets
20.5.6 Total income = gross income
This includes all your income and will include bonuses, travel allowances, other
allowances, overtime, commission, all other fringe benefits, before any
deductions are made.
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20.5.7 Taxable income

The earnings or income on which tax is calculated. We can deduct certain
amounts from our income so that the amount used for calculation of tax is less.
Allowable deductions are for example pension fund.
20.5.8 Net income
Amount of your total income less all deductions. In other words the amount that is
transferred into your bank account at the end of the month or the amount you
receive in cash at the end of the week.
Gross income – deductions = net income.
20.5.9 Retirement funding
According to SARS, this is the total of taxable earnings. This includes fringe
benefits, overtime and bonuses.
It excludes travel allowances and medical aid fringe benefits.
Example 20.3
Mr Smith received the following income for November 2013:
R
Basic salary 15 000
Commission 3 000
Travel allowance 4 000
Bonus 3 000
Required:
Calculate the retirement funding income and also gross income.
Solution: R
Basic salary 15 000
Commission 3 000
Bonus 3 000
Retirement funding income 21 000
(Note it excludes travel allowance)
Basic salary 15 000
Commission 3 000
Travel allowance 4 000
Bonus 3 000
Total gross income 25 000
20.6 Deductions from gross income

Some deductions have to be made from an employee’s gross remuneration.
These deductions are either:
 Imposed by law or company regulation
 Voluntary deductions
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20.6.1 Deductions imposed by law or company regulation

PAYE
PAYE and SITE taxes are the tax amounts that have to be paid (deducted from the
employee’s wages or salary) every month to SARS (South African Revenue
Services). The Minister of Finance announced in his 2014 budget for 2013/2014
that earnings less than the following earnings per annum will not be taxable.
 Less than R67 111 (below 65)
 Less than R104 611 (between 65 – 75)
 Less than R117 111 (older than 75)
In other words, if an employee is younger than 65 and earns R67 111 or less, no
tax will be deducted.
PAYE is calculated on taxable income.
PAYE is calculated by using income tax rates for that specific year as announced
by the Minister of Finance.
Certain amounts can be deducted from your total income, which reduces the
amount your tax will be calculated on.
Pension fund
The deduction for pension fund contributions and retirement annuity fund
contributions are the contributions made by the employee and not the contribution
made by the employer on behalf of the employee. Pension fund deductions for tax
purposes are limited to the greater of:
 7,5% of retirement fund income
 R1 750
Normal, average pension fund contributions are ± 8% – 11% of total
remuneration (gross income). Refer section 20.5.6.
This means that the employee contributes let’s say 8% and then the employer will
also contribute 8% on behalf of the employee towards a pension fund. But the
amount deductable for tax purposes has a limit.
Unemployment Insurance Fund (UIF)
According to the new Unemployment Insurance Contribution Act, which came
into operation on 1 April 2002, all employees, full-time as well as part-time, must
contribute 1% of their income to UIF.
The Unemployment Insurance Fund has been established in order to provide
short-term relief to workers when they become unemployed.
Note: Maximum contribution per month for an employee is limited to a salary
level of R14 872, and amounts to R148.72.
 The employer will also contribute R148.72 (maximum).
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The amount of the contribution payable:

 1% of remuneration paid by employee
 1% of remuneration paid by employer
Total UIF payable to SARS
1% paid by employee 1% paid by employer
2%
Remuneration is the total amount the employee earns; all fringe benefits and
overtime included.
Note: The only exception is commission earned.
Example 20.4
Mr Edwars receives R5 000 basic salary, R5 000 commission and a bonus of R2 000.
Required:
20.4.1 What will the deductable amount on his payslip be?
20.4.2 How much UIF will be paid over to SARS?
Solution:
20.4.1 Deductable amount
Mr Edwars:
Basic salary R5 000
Bonus R2 000
R7 000
20.4.2 UIF paid to SARS
1% of R7 000 = R70 deducted from his salary
2% of R7 000 = R140 paid to SARS
Note: Commission is not included when UIF is calculated.
20.6.2 Deductions made voluntarily
Retirement annuity fund
Retirement annuity fund contributions are allowed as a deduction with certain
limits. In practice not all employees contribute towards a pension fund, eg
directors of companies or part-time employees. Instead of contributing towards
the company’s pension fund they have a retirement annuity fund. The calculation
of the deduction limit for retirement annuity fund contributions will not be
discussed under this topic. For the purpose of this topic the amount to be used as a
deduction will be provided to you. However, this is one of the deductions allowed
by SARS to proceed to the taxable income.
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Union membership
There are a number of unions in SA. Their aim is to protect the rights of the
employee. All employees have the right to join a union. To be a member of a
union, you have to pay a membership fee per month. You can ask your employer
to deduct this membership fee directly from your salary.
Other deductions
An employee can also decide to have his bond payment deducted from his salary
or insurance, medical aid etc.
20.7 Medical tax credit

As from 1 March 2012 a medical scheme contribution tax credit is available to
taxpayers who are below the age of 65, and contribute towards a medical scheme.
The medical tax credit for the 2013/2014 tax year is R242 per month + R242 for
the first dependant and thereafter R162 per month for each additional dependant.
20.8 Calculation of taxable income

Taxable income is calculated as follows:
Total income xx
– Pension fund contribution (xx)
Taxable income xx
Note: Tax (PAYE) is calculated on taxable income.
Example 20.5
Mr White earns a salary of R16 040. His pension fund contribution is R937.
Medical aid contribution is R2 563. He has three dependants on his medical aid.
PAYE is R1 805.
Required:
20.5.1 Calculate tax payable.
20.5.2 Calculate the net income of Mr White.
Solution:
20.5.1 Tax payable
Salary 16 040
– PF (7,5% x 16 040) (937)
Taxable income 15 103
Tax payable 1 805
– Tax credits
(242 x 2) + (162 x 2) 808
Tax payable R 997
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20.5.2 Net income Mr White
Salary 16 040
– PF 937
– Medical aid 2 563
– Tax 997 (4 497)
Net income R11 543
20.9 Remuneration methods

In a near perfect environment the law of fair exchange should be in operation,
which means fair wages for fair work done. The remuneration package that an
employee receives depends on the level he is appointed at and the work he is
doing. When gross pay for production workers is calculated there are a number of
major remuneration methods that can be used:
 Fixed salary remuneration method
 Time-based remuneration method
 Shift work remuneration method
 Piecework remuneration method
20.9.1 Fixed salary remuneration
With this method the employee is rewarded a fixed salary regardless of his output
or the time it takes to complete a task. This method of remuneration is normally
paid to managers, supervisors and administration staff. The disadvantage of this
method is that the output or hours worked by the employee bears no relation to his
remuneration package.
20.9.2 Time-based remuneration
Using this method of remuneration the employee is paid for the actual hours
present in the work place. The disadvantage of this remuneration method is that it
does not keep track of the employee’s output and unproductivity. The advantage
is that it only pays the employee for the hours present in the workplace.
The formula for calculating time-based wages is:
Number of hours worked x the rate per hour applicable.
So, if an employee works 40 hours per week at a rate of R80 an hour, the gross
pay will be R3 200 for the week (gross pay = 40 hours x R80 per hour = R3 200).
Hours worked
Factory workers (including supervisors) are usually required to use clock cards.
When they start their shift they clock in and when the shift ends they clock out.
This is to keep track of the time spent on the factory premises by each employee.
Every employee receives a clock card and a time recorder which records the time
whenever a card is inserted into it. The time recorder indicates hours worked,
overtime, when the employee is late, and absent from work.
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Clock cards summarise the number of hours at work and the supervisor authorises
it at the end of the week by signing every individual card and investigating any
query that may arise. Then the individual clock cards are sent to the payroll
section where the pay that is due to each employee is calculated.
Time spent at work
The clock card records no details of the activities of the employee during the
period at work but it does provide the hours of attendance. An analysis of the
activities of direct factory employees should be recorded on a time sheet or job
card. On a daily basis the employee should complete the document for the time
spent on each job. The hours recorded on the clock card and that of the time sheet
should agree. This does not always happen because idle time, down time and
maintenance are responsible for these discrepancies. Non-productive times are
normally regarded as overheads. Management needs to know the extent of it, as
this controllable cost should be managed. Lost production time and idle time
means fewer finished goods which results in lost contribution and extra overheads
being incurred. When idle time occurs direct workers are often utilised on
cleaning and maintenance activities. These diverted activities also need to be
recorded separately to make management aware of why such actions take place.
Overtime
Overtime is the extra money paid at a higher rate for time worked above the
normal time and is usually paid at the normal rate plus an extra amount to the rate
per hour. The extra amount paid to the rate per hour is known as the overtime
premium. Different overtime rates are paid depending on the day the overtime is
worked. Overtime paid during the working days of the week, namely Monday to
Friday is normally being paid the basic hourly rate for the extra hours plus an
overtime premium of 50%, while weekends and holidays are paid double time
Example 20.6
Peter, a direct labour employee works a normal week that consists of 40 hours and
the remuneration rate is R80 per hour. Peter worked 48 hours for the week, four
hours overtime on Friday and four hours on Saturday morning. Overtime rates are
paid time and a half during working days and double time over weekends and
holidays. The overtime is due to a time constraint, as a specific job must be
completed at a certain time.
Required:
20.6.1 Calculate the gross wage.
20.6.2 Calculate the overtime premium.
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Solution:
20.6.1 Gross wage
R
Basic remuneration (40 hours x R80) 3 200
Overtime on Friday (4 hours x R80 x 1½) 480
Overtime on Saturday (4 hours x R80 x 2) 640
Gross remuneration for the week 4 320
20.6.2 Overtime premium
R
Total hours worked (48 hours x R80 normal rate per hour) 3 840
Gross remuneration for the week 4 320
Overtime premium (4 hours x ½ x R80) + (4 hours x 1 x R80) 480
The R480 overtime premium is the extra compensation (4 hours x 1½ normal

wage on Friday and an additional four hours double normal wage for working on
Saturday) paid to Peter for working overtime. Overtime premium costs are
recorded as part of overheads unless the customer demands the job to be
completed as a result of a time constraint. In this case the overtime premium
becomes a direct labour cost.
20.9.3 Shift work remuneration
Organisations that operate more than one shift usually pay a shift allowance. This
is a premium for inconvenient times. Factories and institutions with a continuous
production process, e.g. mines and Eskom use a shift-work system. A hospital
that operates their services for 24 hours a day may break the work down into three
shifts. The first shift may be from 6am to 2pm; the second from 2pm to 10pm;
and the third from 10pm to 6am. The time between 10pm and 6am may be
considered inconvenient for the individual and he may be paid an extra amount
per hour. This shift allowance is known as a shift premium and is classified as an
overhead.
20.9.4 Piecework remuneration
With piecework time is not taken into consideration but the employee will be paid
according to the individual’s output of products or services, at the rate per unit,
irrespective of the time it has taken. Nevertheless, management will normally
expect certain production levels to be achieved in a specific period of time as
productivity is viewed an important business factor to them; therefore time targets
are usually set.
The modified piecework system is to set higher target levels of activity and to pay
the employee a higher rate per unit for those units completed in excess of the
target. The quicker the individual achieves targets, the sooner the higher
piecework rate is reached. The system with the higher (different) rate is called
differential piecework. The reason for the introduction of a differential piecework
system is that there is a perception that when an individual’s acceptable level is
reached, productivity decreases which is not a desirable situation for the
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organisation. Therefore, motivating the employee to earn extra money may

benefit both the organisation and employee. The formula for determining the
remuneration is:
Units produced x rate per unit
Example 20.7
Mary is employed at Tembisa Hospital. She is paid R1.00 for washing 10 m2 of
floor space. For washing more than 2 000 m2 floor space per day she receives
R1.50 per 10 m2. On the 25th she washed 2 500 m2.
Required:
20.7.1 Calculate Mary’s earnings for that day.
20.7.2 The differential piecework amount.
Solution:
20.7.1 Total earnings
R
Two thousand square metres (2 000 m2 ÷ 10 m2) x R1 200
Five hundred square metres (500 m2 ÷ 10 m2) x R1.50 75
Total earnings (gross earnings) 275
20.7.2 Differential piecework amount

R
Total square metres (2 500 m2 x normal rate – R10 per m2) 250
Total earnings 275
Differential piece work amount 25
The differential piecework amount is the result of the higher rate per m2 paid for
work done in excess of the target.
20.10 Payroll and payroll analysis

Gross pay and deductions will be calculated and a summarised payroll called a
payroll analysis will be prepared for each employee’s gross pay. The payroll will
be explained by using an example. This is illustrated in the following example:
Example 20.8
SU Hospital submits the following information relating to time tickets of workers
for the week ending 26 November 2013:
Name Job Basic hour Hours worked Overtime
rate normal
S Smit Nurse R60 40 8
R Steenkamp Sister R80 40 4
W Botha Nursing manager R100 40 6
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1. Overtime is remunerated at time and a half of the normal rate.
2. Nursing managers receive only a basic rate for overtime and no overtime
premium.
3. From gross wages the following are deducted:
Income tax 20%
Pension 7,5%
Medical aid R50 per person.
4. Pension fund contribution is allowed as a deduction of income, before tax is
calculated.
5. One percent towards UIF.
Required:
20.8.1 Prepare a payroll with all the detailed information regarding gross wages,
deductions and net wages.
20.8.2 Calculate total amount to be paid towards UIF.
Solution:
Hours worked
Name Normal Overtime Normal Overtime Total
rate/hour rate/hour
S Smit R60 R90 40 8 48
R Steenkamp R80 R120 40 4 44
W Botha R100 R100 40 6 46
20.8.1 Remuneration
S Smit R Steenkamp W Botha Total
R R R R
Normal 2 400 3 200 4 000 9 600
Overtime 720 480 600 1 800
Gross 3 120 3 680 4 600 11 400
Pension fund 234 276 345 855
Taxable income 2 886 3 404 4 255 10 545
–Tax 577.20 680.80 851 2 109
– UIF 31.20 36.80 46 114
– Medical 50 50 50 150
Net wages 2 227.60 2 636.40 3 308 8 172
20.8.2 UIF payable

UIF payable to SARS R62.40 R73.60 R92 R228
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Questions
Question 20.1
Sophie worked the following hours at the following applicable rates during
October 2013:
A normal week has 40 hours.
Hours worked, in total 52.

Four hours worked on Sunday.
Rate per hour R50.
Overtime during the week is paid at 1½.
Overtime on weekends is paid double.
Required:
20.1.1 Calculate Sophie’s gross income.
20.1.2 Calculate the overtime premium.
Question 20.2
Elsie is employed at Bambi Laundromat. She receives R20 for every 6 kg of
washing she washes. If she washes more than 36 kg of washing per day, she
receives R22.80 for every 6 kg of washing, more than 36kg..
On 13 May 2013 she washed 48 kg.
Required:
Elsie’s gross income for 13 May 2013.
Question 20.3
Mr Bloom works at Speedy Carpets. He receives a salary of R15 000 per month.
Pension fund contribution is 7,5% for employee and employer. Mr Bloom pays
R1 800 tax and also wants his house bond to be deducted from his income. This
amounts to R200 per month. UIF contribution in total is 2% per month. He also
pays R22/month towards union membership.
Required:
Calculate the net income for Mr Bloom for April 2013.
Question 20.4
July-Ann is a typist at Temp Type (Pty) Ltd and earns R30 per hour. She is a
temporary worker and not employed full-time. Information on her clock card
indicates the following:
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Time in Time out Time in Time out

Monday 07:59 13:00 13:30 16:00
Tuesday 08:02 13:02 14:00 15:00
Wednesday – –
Thursday 08:45 13:00 15:00 17:00
Friday 09:15 12:00 13:05 17:05
Saturday – –
Deductions: R140 tax

UIF 1%
Medical R80
Required:
Calculate July-Anne’s net wage.
Question 20.5
Miaaw, Miaaw provides you with the following information regarding their two
employees for the month February 2013:
Employee Tax Other deductions Hours Rate/hour
worked
1. Van der Westhuizen R210 Medical R80 60 R35
Insurance R35
2. Van der Merwe R 70 Medical R70 45 R30
Employees’ R30
union
UIF is 2% per month in total, for both, employer and employee. Both employer
and employee contribute toward pension fund equally based on normal wages,
total contribution 15%.
Overtime during the week is paid at time and a half. Weekend overtime is paid
double.
Vd Westhuizen worked five hours on weekends.
Vd Merwe worked three hours on weekends.
Normal week is 40 hours
Required:
Net wages for both employees.
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Question 20.6
May Mahunu worked 48 hours during the week. The first 40 hours are considered
normal hours. She is paid R55 per hour and for overtime during the week she is
paid 1½ times normal rate and on weekends she received double her normal pay.
May worked three hours on Saturday. The other overtime hours were during the
week.
May’s deductions are the following:
PAYE R264
UIF 1% (employer also contributes 1%)
Medical aid R100 per week
Pension fund 7,5% (employer also contributes 7,5%)
Required:
Calculate May’s net income for the week.
Question 20.7
Mrs Leboa had the following income and deductions during March 2013:
Normal wage R5 000
Overtime wage (as calculated per hour) R2 000
PAYE R1 750
UIF 1%
Insurance R200
Pension fund contribution 7,5%
Medical aid fund contribution R300
Union membership R35
Required:
In Mrs Leboa’s contract, it is stated that she cannot receive overtime in excess of
R1 800; if she did work more overtime it must be carried forward to the next
month.
Calculate Mrs Leboa’s net income for March 2013.
Question 20.8
Mr Willemse receives a basic monthly salary of R30 000. He also earns
commission of 10% of total sales, with a maximum amount for commission of
R1 500. His total sales for the month amount to R20 000. His deductions are as
follows:
Pension fund contribution 8%
PAYE R6 000
UIF 1%
Medical aid R1 200
Required:
Calculate Mr Willemse’s net salary for the month of July 2013.
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Question 20.9
Mr Bean was appointed on 1 January 2013 as factory manager. He was appointed
on a salary scale. The salary scale stated that his salary will increase each year by
R20 000, until he reaches a total salary of R300 000. He was appointed on a
salary of R260 000.
Required:
Calculate the salary and increment for each year for Mr Bean until the end of
2018.
Question 20.10
The following information relates to the employees of BMW Motors:
Normal working time is 40 hours a week.
The following information is available for March 2014:
1. C Cilliers, a packer earns R40 per hour. He is paid double his normal rate for
working any overtime. He has the following deductions:
PAYE: R280
Medical Aid: R70
UIF: ?
Union contribution: R40
He worked 60 hours during the week.
2. S Speedy the admin clerk earns R60 per hour. She is paid R70 per hour for
all hours worked overtime. She has the following deductions:
Medical Aid: R100
Loan: R70
PAYE: R105
UIF: ?
She worked 48 hours during the week.
3. All employees contribute 7,5% of their normal income towards pension fund.
The employer contributes the same percentages. The employer also
contributes R2 towards medical aid for every R10 the employee contributes.
Required:
20.10.1 Calculate the net pay for each employee.
20.10.2 Calculate the cost to company for both these employees.
614
Chapter 20 Payroll
Question 20.11
B Bamba’s salary structure indicates the following:
R300 000 x R30 000 – R420 000 x R35 000 – R525 000
Required:
20.11.1 Calculate the monthly salary of Bamba if he is on his fourth notch of his
salary scale.
20.11.2 Calculate the monthly salary of Bamba if he is on his eighth notch of his
salary scale.
615
CHAPTER 21
BUSINESS ETHICS
21.1 Introduction
In this chapter we will only concentrate on the basic principles of business ethics and
how it relates to the business environment.
 Define business ethics
 Understand the characteristics or features of business ethics
 Understand the need or importance of business ethics
 Understand the relationship between business ethics, law and professional ethics
21.2 Definition of business ethics

 According to Andrew Crane:
‘Business ethics is the study of business situations, activities, and decisions
where issues of right or wrong are addressed.’
 According to Raymond C Baumhart:
‘Business ethics is the ethics of responsibility the businessman must promise that
he will not harm knowingly.’
Ethics can be described as moral guidelines which govern good behaviour which
differentiates between right and wrong. To behave ethically means that you are
doing what is morally right.
Ethics in business is to distinguish between good and bad, right and wrong, fair and
unfair, moral and immoral and proper and improper actions. This is why employees
have to sometimes sign a code of conduct when employed by a business. The code
of conduct addresses all the ethical issues.
To behave ethically in business is widely recognised as good business practice. The
well known Henry Ford once said:
‘A business that makes nothing but money is a poor kind of business.’
The following are examples of unethical practices:
 unfair trade practices like misleading advertisements
 cheating in weights and measures
 unfair wages and poor working conditions of employees
 unfair competition and monopolies
 lack of payment of taxes to government
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Chapter 21 Business ethics
21.3 Business ethics and law

To behave ethically does not necessarily mean that the behaviour was lawful.
Remember we have indicated that ethics are about what is right or wrong, law on the
other hand is about what is lawful and unlawful.
A decision can only be ethical if it is both legal and meets the ethical standards of the
business environment.
Professional accountants in South Africa belong to professional bodies: The South
African Institute of Public Accountants (SAIPA) and The South African Institute of
Chartered Accountants (SAICA). Members of SAICA are bound by the SAIPA code
as contained in the SAIPA Handbook. SAICA adopted the revised International
Federation of Accountants (IFAC) Code of Ethics for Professional Accountants and
the code is applicable to all chartered accountants in South Africa.
21.4 Business ethics and corporate social responsibility (CSR)

A business should be socially responsible to apply sound business ethics’ principles.
CSR is about the responsibility to all stakeholders and not just the shareholders of
the business.
Therefore to ensure that directors, managers and employees act ethically, it is more
and more the practice to request employees to sign a code of conduct which covers
areas such as:
 Corporate social responsibility
 Environmental policy and actions
 Dealings with customers and supply chain
 Rules for personal and corporate integrity
21.5 Characteristics or features of business ethics

 Code of conduct
A business must follow a code of conduct which indicates what to do and what not
to do.
 Based on moral and social values
Business ethics must include the moral and social rules of doing business, which
include self-control, consumer protection, service to society, etc.
 Protection to social groups
Different social groups must be protected by business ethics for example employees,
shareholders, creditors etc.
617
Accounting for All
 Basic framework
Business ethics must provide the basic framework for doing business. This includes
the social, cultural, economic, legal and other limits of business.
 Voluntary
Business ethics must be accepted voluntarily by businessmen. It must not be
enforced by law.
 Requires education and guidance
Training on how to introduce and implement business ethics is essential.
 Relative term
Business ethics differs from business to business and country to country.
 New concept
Business ethics is strictly applied in developed countries but not followed properly in
poor and developing countries.
21.6 Need or importance of business ethics

The need for the voluntary implementation of business ethics by entities can be
discussed under the following points:
 Stop business malpractices
This is indulging in unfair trade practices like black marketing, artificial high
pricing, cheating in weights and measures.
 Improve customers’ confidence
Customers will have more trust and confidence in a product if they know the
business follows ethical rules.
 Survival of business
Business ethics are mandatory for the survival of a business.
 Safeguarding consumers’ rights
Business ethics will protect the rights of consumers such as: the right to health and
safety, right to be informed, right to choose, right to be heard, etc.
 Protection of employees and shareholders
Business ethics will protect the interests of all the stakeholders in a business from
exploitation through unfair trade practices.
 Develops good relations
Business ethics will develop good and friendly relations between the business and
society.
 Consumer movement
Today consumers are more aware of their rights. Therefore it is important to
implement proper business ethics as this will enhance the survival of a business in
the market.
618
Chapter 21 Business ethics
 Consumer satisfaction
Today the main objective of a business is consumer satisfaction. Consumers will be
satisfied if the business follows all the business ethics.
 Importance of labour
Employees play a very important role in the success of any business. The
implementation of business ethics will ensure a good relationship between the
employer and employees.
 Healthy competition
Business ethics will enhance healthy competition with competitors. They must avoid
monopolies.
21.7 Rules or principles of business ethics

The rules or principles of business ethics are in fact the code of conduct of any
business. These principles are related to all the stakeholders of a business.
The most important rules or principles are as follows:
 Avoid exploitation of customers, for example artificial price increase
 Avoid profiteering, for example black-marketing or sale and use of harmful
goods
 Integrity
 Encourage healthy competition
 Objectivity
 Ensure accuracy, for example the weighing of products
 Pay taxes regularly
 Get accounts audited
 Fair treatment to employees
 Keep investors informed
 Avoid injustice and discrimination
 No bribery and corruption
 Professional competence and due care
 Discourage secret agreements
 Keep service before profit
 Practise fair business
 Confidentiality
 Avoid monopoly
 Comply with consumers’ expectations
 Respect the rights of consumers
 Accept social responsibilities
 Protect the interest of groups
619
Accounting for All
 The intentions of the business must be to use pure and legal means to do
business
 Professional behaviour
 Technical standards
References
G Akrani. 2011. Kalyan-City.blogspot.com. Available: http://kalyan-city. blogspot.com
\2011\09\what–are-business-ethics-meanings.html. Accessed on 01.10.2013
620
Notes
621
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Help and Support

First published 2015

Juta and Company (Pty) Ltd

PO Box 14373, Lansdowne 7779, Cape Town, South Africa

© 2015 Juta & Company (Pty) Ltd

ISBN 978 1 48510 374 5 (Print)

Project Manager: Debbie Henry

6.1 Introduction 216

7.1 Introduction 244

8.1 Introduction 276

9.1 Introduction 310

10.1 Introduction 330

11.1 Introduction 371

12.1 Introduction 407

13.1 Introduction 433

14.1 Introduction 461

15.1 Introduction 483

16.1 Introduction 502

17.1 Introduction 527

18.1 Introduction 538

19.1 Introduction 569

20.1 Introduction 595

21.1 Introduction 616

The content is written in an interactive way so that it:

 Enables students to master the different topics by means of working

 Enables lecturers to fulfil the role of facilitator because the contents of

Old term New term

Balance sheet Statement of financial position

Debtors Accounts receivable

Creditors Accounts and other payables

Bad debts Credit losses

Bad debts recovered Credit losses recovered

Allowance for bad debts Allowance for credit losses

Cash flow statement Statement of cash flow

Discount allowed Settlement discount granted

Discount received Settlement discount received

1.2 Definition of accounting

1.3 Purpose of accounting

1.4 External users of financial statements

1.5 The term financial position

All assets and liabilities go to the statement of

1.6 The term financial performance

1.7 Types of reports of accounting

1.8 Elements of financial statements

1.9 Underlying assumptions of financial accounting

1.10 Qualitative characteristics of financial accounting

1.11 Dual concepts

1.12 Definition of an account

1.13 What is a transaction?

1.14 Starting a business

1.15 Classifications of accounts

1.15.1 What is an asset?

Owner’s equity = Capital + Profit – Drawings

 Long-term liabilities: These are obligations negotiated by a business which

Total assets = Total liabilities

Total assets (all debit balances)