Book Title
BookBook
Title
Student’s
Student’s
Book
FET FIRST
Level 3
FET FIRST
NATED Series
Author
Level
3
Financial
Author
Accounting N4
Student’s Book
R. Eyssen
FET FIRST NATED Series Financial Accounting
Student’s Book
© R. Eyssen, 2012
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Contents
Syllabus Grid: Financial Accounting N4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
Module 1Introduction (revision of components of previous syllabi) . . . . . . . . . . . . 1
Part 1: Accounting theory, principles and concepts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Unit 1.1:
Unit 1.2:
Unit 1.3:
Unit 1.4:
Accounting theory, principles and concepts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Types of commercial organisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Activities of organisations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The accounting transactions of service and trading activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
3
5
6
Part 2: Recording transactions from source documents according to the
continuous (perpetual) stock system. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Unit 1.5:
Unit 1.6:
Unit 1.7:
Unit 1.8:
Unit 1.9:
Accounting cycle. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Source documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Books of original entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Posting to the general and subsidiary ledgers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Drawing up a Trial Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14
15
16
21
28
Part 3: Bank reconciliations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Unit 1.10: Aims of a bank reconciliation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unit 1.11: Aims and uses of a bank statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unit 1.12: Comparing the bank statement with the Cash Journals.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unit 1.13: Reconciling a bank statement with the previous month’s reconciliation statement. . . . . . . . . . . .
Unit 1.14: Steps to reconcile the bank statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unit 1.15: Dealing with “stop payment” cheques. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unit 1.16: How to record postdated cheques . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30
30
31
34
36
41
42
Part 4: Control accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Unit 1.17:
Unit 1.18:
Unit 1.19:
Unit 1.20:
Aim of control accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Adjustment of books of original entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50
Debtors and creditors control accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Reconciliation of the balance of the control accounts and the totals of the lists of debtors
and creditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Unit 1.21: Transfers between debtors and creditors ledgers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Part 5: Results of sole traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Unit 1.22:
Unit 1.23:
Unit 1.24:
Unit 1.25:
Unit 1.26:
Unit 1.27:
Unit 1.28:
Additional transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Accounting adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Post-adjustment Trial Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Closing transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
Final accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Module 2Accounting entries for a trading organisation according to the
periodic stock system. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
Unit 2.1: Recording transactions for stock movements using the periodic stock system. . . . . . . . . . . . . . 130
Unit 2.2: Adjusting books of first entry to accommodate the periodic stock system . . . . . . . . . . . . . . . . . 137
Unit 2.3: Unit 2.4:
Unit 2.5: Unit 2.6: Calculating the cost of sales value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The end-of-year adjustment for trading stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year-end closing transfers for stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dealing with stock in the Income Statement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
140
142
143
144
Module 3 Departmental accounts according to the periodic stock system. . . . . 150
Unit 3.1:
Unit 3.2:
Unit 3.3:
Unit 3.4: Unit 3.5: Unit 3.6: Aim of departmental accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
Adaptation of source documents for departmental purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
Adaptation of books of original entry for departmental purposes . . . . . . . . . . . . . . . . . . . . . . . . 151
Adaptation of General Ledger accounts for departmental purposes . . . . . . . . . . . . . . . . . . . . . . 152
Drawing up a Departmental Trading Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
Drawing up a Departmental Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .157
MODULE 4 Non-trading organisations (organiSations without a profit motive)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
Unit 4.1:
Unit 4.2:
Unit 4.3:
Unit 4.4:
Unit 4.5:
Unit 4.6:
Unit 4.7:
Unit 4.8: The aim of a non-trading organisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special items (ledger accounts). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounting concepts for non-profit organisations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Analysis Cash Book . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating (Trading) account per activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statement of Income and Expenditure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance Sheet for an NPO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
164
165
168
170
172
173
175
184
MODULE 5 The Cash Flow Statement for a sole trader . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
Unit 5.1:
Unit 5.2:
Unit 5.3:
Unit 5.4:
Unit 5.5:
Unit 5.6: The aim of a Cash Flow Statement (CFS). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Users of a Cash Flow Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Explanations and concepts of a Cash Flow Statement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dealing with non-cash items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Procedure for drawing up a Cash Flow Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dealing with special items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
191
192
192
197
197
212
Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218
Abbreviations/acronyms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221
SYLLABUS GRID: Financial accounting
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Learning Content
Learning Objectives
On completion of this module the student must be
able to:
MODULE 1: INTRODUCTION (REVISION COMPONENTS OF PREVIOUS SYLLABI)
1–13
1.1
1.1.1
1.1.2
1.1.3
1.1.4
ACCOUNTING THEORY, PRINCIPLES AND
CONCEPTS
Revision components i.r.o. accounting
principles of the sole trader (service and
trading enterprise)
Accounting theory, principles and concepts
Types of organisations
–– Sole trader
–– Partnership
–– Close Corporation
–– Company with limited liability
–– Public company
–– Organisations with no profit motive
Activities of organisations
–– Service activities
–– Trading activities
–– Manufacturing activities
–– Activities with no profit motive
The accounting transactions of service and
trading activities with relation to the usage
of source documents, the double entry
principle and influence of the double entry
transactions on the accounting equation
1.1.1 briefly describe the basic accounting
concepts, principles and policy
1.1.2 identify the different forms of organisations
by explaining the similarities and differences
between each
1.1.3 identify the business activities of the
organisations mentioned in par 1.1.2 and
to indicate the difference between each in
respect of generating profit
1.1.4 identify the source document and the
accounts involved with each transaction,
and to determine which account must be
debited or credited, as well as explaining the
influence of the relevant transaction on the
accounting equation
DIDACTIC DIRECTIVES
With reference to learning objectives 1.1.1 to 1.1.3:
1. Topics in this section must be discussed briefly to serve as revision of students’ background knowledge.
Illustrate with good examples. Additional literature, such as published annual statements of listed companies,
as well as accounting statements can be consulted.
With reference to learning objective 1.1.4:
2. Students should be able to handle each transaction on the basis of the following structure:
–– source document for the transaction
–– ledger account debited and ledger account credited
–– the influence of the double entry on the accounting equation.
3. Topics dealt with in this module, must be emphasised continuously in all other modules. Use practical
examples to illustrate the accounting practice visually.
EVALUATION
With reference to learning objectives 1.1.1 to 1.1.3:
1. Theory questions can be asked in class tests. In examination papers the emphasis should rather be on
practical than on theoretical questions as students should already have mastered the theory concepts.
With reference to learning objectives 1.1.1 to 1.1.4:
2. Students must be evaluated on a daily basis to determine whether the student has grasped the double entry
principle, including all other elements involved (also refer in this regard to the evaluation guidelines (par 4) at
the beginning of the syllabus).
MODULE 1: (Cont.)
14–29
1.2
THE RECORDING OF TRANSACTIONS FROM
SOURCE DOCUMENTS ACCORDING TO THE
CONTINUOUS (PERPETUAL) STOCK SYSTEM
1.2.1 The accounting cycle
v
1.2.1 identify and describe briefly the steps in the
accounting cycle
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Learning Content
Learning Objectives
On completion of this module the student must be
able to:
1.2.2 Source documents
1.2.2 define a source document, describe the
necessity of it as a source of information
and to distinguish between the original and
duplicate as well as source and supporting
documents and also external and internal
documents
1.2.3 do the recording of transactions in the
subsidiary books of organisations from
source documents
1.2.3 Books of original entry:
–– Cash receipts journal
–– Cash payments journal
–– Debtors journal
–– Creditors journal
–– Debtors allowances journal
–– Creditors allowances journal
–– Petty cash journal
–– General journal
–– Wages journal
–– Salaries journal
–– Cash book with analysis columns
1.2.4 Posting to the general and subsidiary
ledgers
1.2.4 do the posting of all the transactions in
columns from the books of original entry to
the general and subsidiary ledgers, as well
as the grouping of ledger accounts, T-form
and three column accounts
1.2.5 test the correctness of the double entries
with the aid of the trial balance, and to trace
the errors if it does not balance
1.2.5 Drafting of a trial balance
DIDACTIC DIRECTIVES
With reference to the learning objectives 1.2.1 and 1.2.2:
1. Topics can only be discussed briefly to serve as revision for background knowledge of the students.
With reference to the learning objectives 1.2.2 to 1.2.4:
2. Students should at all times be able to do exercises directly from sets of source documents.
3. Students should be able to do all cash and credit transactions of a service and trading organisation which are
usually recorded in the journals mentioned and which have been dealt with in the N3/NSC and std 10 HG/SG
syllabi.
With reference to learning objective 1.2.3:
4. Both methods of dealing with employer’s contribution must be dealt with.
5. Students must be informed that different names for the same subsidiary journals are in use, e.g. debtors
journal/sales journal/sales book.
6. Columns and the position of columns can also vary in the subsidiary journals of the different enterprises.
With reference to learning objective 1.2.5:
7. It must be emphasised that the trial balance only indicates that for every debit entry a corresponding credit
entry was made.
EVALUATION
With reference to learning objective 1.2.1 to 1.2.5:
1. Theory questions can be asked in class tests. In examination papers the emphasis should rather be on
practical than on theoretical questions as students should already have mastered the theory concepts.
With reference to learning objectives 1.2.2 to 1.2.5:
2. Examination questions will be set from actual source documents with the exception of the salaries and wages
journals.
3. Students should reach a high competency level in regard to these topics.
4. To increase the competency level of the students, short assignments and exercises must be evaluated on a
regular basis.
5. Students can be evaluated on all transactions that are recorded in the subsidiary journals mentioned and
which were dealt with in the N3/NSC and std 10 HG/SG syllabi.
vi
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Learning Content
Learning Objectives
On completion of this module the student must be
able to:
MODULE 1: (Cont.)
30–49 1.3 BANK RECONCILIATION
1.3.1 Aim of bank reconciliation
1.3.2 Bank statement: aim and uses
1.3.3 Reasons for the differences between the
balances as in the bank statement and the
bank account
1.3.3.1Items in the cash journals/cash book, but
not on the bank statement
–– Outstanding deposits
–– Outstanding cheques
1.3.3.2Items on the bank statement, but not in the
journals/cash book
–– Bank charges
–– Interest on overdraft
–– Stop and debit orders
–– Dishonoured (R/D) cheques
–– Deposits by debtors
–– Interest on current account (favourable
balance)
1.3.3.3Errors in the cash journals/cash book
1.3.3.4Errors on the bank statement
–– Deposits credited in error on the bank
statement
–– Cheques debited in error on the bank
statement
1.3.4 Steps to reconcile the bank statement and
the cash journals/cash books
1.3.4.1Recording of outstanding transactions in
the cash journals/cash book
1.3.4.2Drafting of the bank reconciliation
statement
–– where the bank account has a favourable
balance
–– where the bank account has an
overdrawn balance
1.3.5 Reconciliation of the bank statement with a
bank reconciliation statement of a previous
month
1.3.6 Payment stopped due to
–– lost cheque
–– stale cheques
–– disputes
1.3.7 Postdated cheques
–– received
–– issued
1.3.1 describe the aim of bank reconciliation
1.3.2 name the aim and functions of the bank
statement
1.3.3 compare the bank statement with the cash
journals/cash book and identify and record
the differences
1.3.4 record the supplementary entries in the
cash journals/cash book
1.3.4.2draw up a bank reconciliation statement
and to compare the balance in the bank
statement with the balance in the bank
account/cash book
1.3.5 compare the bank statement with the cash
journals/cash book of the current month
and the reconciliation statement of the
previous month and to do the necessary
entries
1.3.6 briefly describe the procedure to stop the
payment of a cheque, recording of the
cancellation in the applicable cash journal/
cash book, and the issuing of a new cheque
1.3.7 the correct procedure and entries with
regard to postdated cheques
DIDACTIC DIRECTIVES
With reference to learning objective 1.3.4:
1. Students should be able to do bank reconciliation from a given bank statement and actual source documents.
vii
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Learning Content
Learning Objectives
On completion of this module the student must be
able to:
EVALUATION
With reference to learning objectives 1.3.1 to 1.3.7:
1. Theory questions can be asked in class tests. In examination papers the emphasis should rather be on
practical than on theoretical questions as students should already have mastered the theory concepts.
2. Students should reach a high competency level in regard to this topic.
MODULE 1: (Cont.)
50–62 1.4 CONTROL ACCOUNTS
1.4.1 Aim of control accounts
1.4.2 Adjustment of books of original entry
1.4.3 Debtors and creditors ledger
1.4.4 Debtors control account
1.4.5 Creditors control account
1.4.6 Transfers between debtors and creditors
ledgers
63–
128
1.4.1 briefly describe the aim of control accounts
1.4.2 provide additional columns required in the
books of original entry
1.4.3 post from the books of original entry to the
subsidiary ledgers
1.4.4 post from the books of original entry to
the debtors control account in the general
ledger
draft a list of debtors at a given stage and
reconcile it with the debtors control account
1.4.5 post from the books of original entry to the
creditors control account in the general
ledger
draft a list of creditors at a given stage
and reconcile it with the creditors control
account
1.4.6 make transfers between the debtors and
creditors by means of journal entries and
post to the general and subsidiary ledgers
1.5
RESULTS OF SOLE TRADERS: ACTIVITIES
AND FINANCIAL STATUS
1.5.1 Additional transactions
1.5.1.1 Carriage on purchases
1.5.1.2Bad debts recovered
1.5.1.3Sale of fixed assets
viii
1.5.1.1 do the following in connection with
transactions in par. 1.5.1.1 and 1.5.1.2 of the
contents column:
–– record the entries in the correct
subsidiary journal
–– post the entries to the correct accounts
in the general ledger
–– indicate the influence on the accounting
equation
1.5.1.3do the following in connection with
transactions in par 1.5.1.3 of the contents
column:
–– complete or adjust the asset register
–– do the recording procedure for the sale
of fixed assets during and at the end of
the financial period, namely
–– journalise the applicable transactions
and record the cash transactions in
the cash journals
–– post the entries to the relevant ledger
accounts
–– indicate the influence on the
accounting equation
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Learning Content
Learning Objectives
On completion of this module the student must be
able to:
1.5.2Adjustments
1.5.2.1 Additional bad debts
1.5.2.2 Provision for bad debts
1.5.2.3 Provision for depreciation on fixed assets:
1.5.2.4 Provision for discount allowed
1.5.2.5 Provision for unforeseen expenses
1.5.2.6 Expenses payable/accrued expenses
1.5.2.7 Income receivable/accrued income
1.5.2.8 Prepaid expenses
1.5.2.9 Income received in advance
1.5.2.10 Consumable stores on hand
1.5.2.11 Trading stores on hand
1.5.2.12 Correction of errors and omissions
1.5.2 do the following in connection with
transactions in par 1.5.2.1 to 1.5.2.12 in the
contents column:
–– briefly explain the aim of adjustments
–– journalise the necessary adjustments
–– post the adjustments to the correct
ledger accounts
–– indicate the influence on the accounting
equation
–– indicate how the relevant ledger
accounts will be shown in the financial
statements
–– identify and journalise the amounts that
must be written back at the beginning of
the next financial period, and adjust the
relevant ledger accounts
1.5.3 Post-adjustment trial balance
1.5.3 draft a post-adjustment trial balance after
all adjustments have been journalised and
transferred to the relevant accounts
1.5.4 Closing transfers
1.5.4 journalise the closing transfers and post to
the relevant accounts
1.5.5 Final accounts
1.5.5 draft a trading account and profit and
loss account as well as a post-closing trial
balance
1.5.6 Income statement
1.5.6 draft an income statement in vertical form
1.5.7 Balance sheet
1.5.7 draft a balance sheet in vertical form with
the necessary notes
DIDACTIC DIRECTIVES
With reference to learning objectives 1.5.1 to 1.5.7:
1. After the completion of module 1 the students should be able to draft a complete set of books for a sole
trader (service and trading enterprise) from the subsidiary books up to the balance sheet.
With reference to learning objective 1.5.2.3:
2. Refer to the requirements of the Receiver of Revenue i.r.o. the time-limit for writing off an asset.
EVALUATION
With reference to all learning objectives in module 1:
1. This module will be examined in full.
2. Questions should be in the form of practical applications where students will be asked to do entries directly
from source documents.
MODULE 1: (Cont.)
120
1.6
DOCUMENT PROJECT (ACCORDING TO THE
CONTINUOUS/PERPETUAL STOCK SYSTEM)
1.6.1 Complete document assignment on a
combined service and trading organisation
1.6.1 complete a comprehensive assignment from
source documents within a specified time
DIDACTIC DIRECTIVES
With reference to learning objective 1.6:
1. The lecturer can draw up a comprehensive assignment where students must use a set of source documents to
complete the books of account for a combined service and trading organisation within a specified time.
2. This set of documents must be compiled in such a manner that it simulates the practice of accounting as
faithfully as possible.
3. The following aspects must be dealt with in the assignment:
3.1 Grouping of documents in bundles.
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Learning Content
Learning Objectives
On completion of this module the student must be
able to:
3.2 Arranging in date order.
3.3 Drafting of all subsidiary journals revised in module 1:
–– Cash receipts journal
–– Cash payments journal
–– Debtors journal
–– Creditors journal
–– Debtors allowance journal
–– Creditors allowance journal
–– Petty cash journal
–– General journal
–– Wages journal/salaries journal
3.4 Posting to the debtors and creditors ledger.
3.5 Posting to the general ledger.
3.6 Drafting of a bank reconciliation statement.
3.7 Drafting of a debtors list and reconciliation with the debtors control account.
3.8 Drafting of a creditors list and reconciliation with the creditors control account.
3.9 Drafting of a pre-adjustment trial balance.
3.10 All the additional transactions and adjustments dealt with.
3.11 Drafting of a post-adjustment trial balance.
3.12 Drafting of the annual financial statements.
EVALUATION
1. The assignment can be evaluated as part of the semester work.
2. The following methods of evaluation can be followed:
2.1 Students can complete the assignment in the prescribed time under test conditions after which the
complete assignment is handed in to be marked.
2.2 Students can complete sections of the assignment in their own time while other sections are done under
test conditions. Marks are then allocated for those sections completed under test conditions.
MODULE 2: ACCOUNTING ENTRIES FOR A TRADING ORGANISATION ACCORDING TO THE PERIODIC STOCK
SYSTEM
129–
149
2.1
Recording of the following transactions in
the ledger accounts:
Purchasing of stock
Sales of stock
Returns of stock bought by the organisation
Returns of stock bought by clients
Withdrawal of stock by the owner
Carriage on purchases (carriage in)
Other purchasing costs that increase the
purchase price
Carriage on sales (carriage out)
2.1
enter the transactions mentioned in general
ledger accounts
2.2
Adjusting of books of first entry to
accommodate the periodic stock system
2.2
adjust the columns of the respective books
of first entry, properly closing off and
posting them to the general ledger
2.3
Calculation of cost of sales
2.3
identify the accounts involved in the
calculation of the cost of sales and to do the
calculation
2.4
Trading stock as year-end adjustment
2.4
record the adjustment of the trading stock
amount in the general journal and post it to
the general ledger
2.5
Closing transfers
2.5
do the closing transfers to the trading
account, profit and loss account and capital
account
2.1.1
2.1.2
2.1.3
2.1.4
2.1.5
2.1.6
2.1.7
2.1.8
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Learning Content
Learning Objectives
On completion of this module the student must be
able to:
2.6
2.6
Financial statement
do the trading section (calculation of the
gross profit) in the income statement
DIDACTIC DIRECTIVES
With reference to learning objective 2.1 to 2.6:
1. After completion of this module the students should be able to compile the books of an organisation
according to the continuous (perpetual) as well as the periodic stock system.
EVALUATION
1. During evaluation there should only be concentrated on the learning objectives as set out above. It should
therefore not be necessary to evaluate a complete set of books according to the periodic stock system.
MODULE 3: DEPARTMENTAL ACCOUNTS ACCORDING TO THE PERIODIC STOCK SYSTEM
150–
163
3.1
Aim of departmental accounts
3.1
explain the aim of departmental
accounts and explain how to control the
departmental profits by making use of
departmental accounts
3.2
Adaptation of source documents
3.2
interpret source documents or
departmental codes on source documents
and enter them in the books of original
entry
3.3
Adaptation of books of original entry
–– Columnar creditors journal
–– Columnar creditors allowances journal
–– Columnar debtors journal
–– Columnar debtors allowances journal
–– Cash journals/cash book
–– Columnar inter-departmental transfers
journal
–– General journal
3.3
adapt the books of original entry mentioned
in the contents column by providing
additional columns, recording the
transactions, and closing them off
3.4
Adaptation of relevant accounts in the
general ledger
–– Departmental purchases account
–– Departmental sales account
3.4
adapt the accounts mentioned in the
contents column by providing additional
columns, recording the relevant journal
totals in them, and closing them off
3.5
Departmental trading statement
3.5
draw up the departmental trading
statement at the end of the accounting
period
3.6
Departmental income statement
3.6
draw up the departmental income
statement at the end of the accounting
period.
DIDACTIC DIRECTIVES
With reference to learning objective 3.1 to 3.6:
1. Departmental sets of accounts with two departments will be sufficient.
2. Practical contact with departmental organisations is of the utmost importance for students to gain knowledge
of departmental stock recording and especially stock control.
3. Students must complete some exercises from source documents that are based on departmental stock codes.
EVALUATION
1. Evaluation must be based on practical orientated exercises and questions.
2. Theory questions can be asked in class tests.
MODULE 4: ORGANISATIONS WITHOUT A PROFIT MOTIVE (NON-TRADING ORGANISATIONS)
164–
190
4.1 Aim of non-trading organisations
4.1.1Terminology
4.1.2Administration
4.1.3Characteristics
4.1
xi
explain the difference between
organisations with and without a profit
motive, as well as give a brief explanation of
the general and accounting administration
of a non-trading organisation
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Learning Content
Learning Objectives
On completion of this module the student must be
able to:
4.2 Special items (ledger accounts)
4.2.1 Entrance fees
4.2.2Subscriptions
4.2.3 Affiliation fees
4.2.4Honorarium
4.2.5 Legacies and donations
4.2
explain the aim of the different ledger
accounts typical to a non-trading
organisation, interpret and record the
entries allocated to them
4.3 Special funds
4.3.1 Creation and expansion of funds and fund
investments
4.3.2 Interest on funds
4.3.3 Capitalisation of interest to funds
4.3.4 Interest to cover current expenses
4.3.5 Allocation of prizes from interest
4.3
explain the aim of special funds and record
the entries i.r.o. the creation of the fund as
well as the employment of the income from
the special fund
4.4
4.4
4.4.1
4.4.2
4.4.3
4.4.4
Concepts i.r.o. incomes and expenses as well
as receipts and payments
Receipts and incomes
Payments and expenses
Capital expenses and current expenses
Capital receipts and current receipts
define the concepts in the contents column
and explain the difference between the
respective concepts
4.5
Analysis cash book
4.5
draw up an analysis cash book with relevant
entries and post to the correct ledger
accounts
4.6
Trading account per activity
4.6
draw up a trading account for the different
activities of a non-trading organisation
4.7
Statement of incomes and expenses
(income and expenditure statement)
4.7
indicate the surplus or deficit by means of
an income statement
4.8
Adjustments of the set of accounts to
provide for a profit section
4.8
do the necessary adjustments to
accommodate a section with a profit
motive within the books of a non-trading
organisation
4.9
Balance sheet
4.9
draw up the balance sheet of the nontrading organisation in vertical form
DIDACTIC DIRECTIVES
With reference to learning objective 4.3:
1. The operation of only one special fund is sufficient.
With reference to learning objective 4.9:
2. For the placement of the special fund in the balance sheet of the non-trading organisation see annexure 2.
EVALUATION
1. Evaluation must be based on practical orientated exercises and questions.
2. Theory question can be asked during class tests.
3. Questions should include all types of non-trading organisations and not only clubs.
MODULE 5: CASH FLOW STATEMENT OF A SOLE TRADER
191–
217
5.1
The aim of a cash flow statement
5.1
explain the aim of a cash flow statement
5.2
Users of the cash flow statement
–– Entrepreneur/owner
–– Credit providers
–– Cash flow planning
5.2
name the users of the cash flow statement
of an organisation and indicate why they are
interested in the cash flow statement
5.3
Explanations and concepts
5.3
define the different cash flow items and
explain the important principles i.r.o. the
setting out of the cash flow statement
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Learning Content
Learning Objectives
On completion of this module the student must be
able to:
5.4
5.4
name and explain the different non-cash
flow items
5.5
Procedure for the drafting of a cash flow
statement
5.5.1 Cash retained from operating activities
5.5.2 Cash utilised in investment activities
5.5.3 Cash goods from financing activities
5.5
follow the correct procedure for the drafting
of the cash flow statement
5.6 Special items
5.6.1Depreciation
5.6.2 Profit/loss on sale/scrapping of fixed assets
5.6
explain special items i.r.o. the cash flow and
record these in the cash flow statement
Non-cash flow items
DIDACTIC DIRECTIVES
With reference to learning objectives 5.1 to 5.6:
See annexure 1 for the form of the cash flow statement.
EVALUATION
Students can be requested to draft a complete cash flow statement from given cash flow information applicable
to a sole trader.
xiii
Module 1
Introduction
(revision of components
of previous syllabi)
Part 1: Accounting theory, principles and concepts
Overview
When you have completed Part 1 of this module, you should be able to:
• Briefly describe the basic accounting concepts, principles and policy.
• Identify the different forms of organisations by explaining the similarities and
differences between each.
• Identify the business activities of the organisations mentioned above and indicate
the difference between each in respect of generating profit.
• Identify the source document and the accounts involved with each transaction
and determine which account must be debited and credited, as well as explaining
the influence of the relevant transaction on the accounting equation.
Unit 1.1:Accounting theory, principles and concepts
Accounting is the process of transaction recording in order to have a permanent record
of those transactions. From these records an enterprise can determine whether a profit
was made or a loss was suffered for a financial period. This profit or loss will have an effect
on the owner’s equity or the wealth of the owner. It is also important for an enterprise to
report on its assets and liabilities, indicating whether there was an increase or decrease in
these accounts.
The main objective of all enterprises is to make a profit at the end of a financial period.
A profit is recorded when the income exceeds the expenses of that enterprise, while a
loss is suffered when the expenditure exceeds the income of the
enterprise.
assets: Are the
The accounting equation defines the relationship between assets,
owner’s equity and liabilities. This relationship defines assets as
being equal to the owner’s equity and liabilities, or A = O + L.
Assets
Assets can be defined as the possessions owned by an enterprise,
like a vehicle. All assets can be divided into two groups (types):
• Non-current (fixed) assets
These assets are bought to be used (not for resale) in the
enterprise. Therefore these assets have a long life span and
1
possessions owned
by an enterprise, for
example a vehicle. All
assets can be divided
into two groups
(types): non-current
(fixed) assets and
current assets. All asset
accounts increase on
the debit side of the
account and decrease
on the credit side of the
account.
will be used for periods longer than 12 months. However, these assets can be resold
close to the end of their life span and be replaced with new assets for the same purpose
or to expand current operations.
Examples of fixed assets are land and buildings, vehicles and equipment.
• Current assets
These assets include the cash in the enterprise’s current bank account or any other asset
that can be converted into cash within a year.
Examples of current assets are the cash in the current account
or any other forms of cash, like petty cash or cash float,
trading stock and debtors.
All asset accounts increase on the debit side of the account and
decrease on the credit side of the account.
Owner’s equity
Owner’s equity refers to the wealth of the business owner or the
interest the owner has in his or her enterprise.
There are two owner-related accounts that have an effect on the
owner’s equity. These accounts are capital and drawings. Any
contribution that an owner makes towards his or her business
is called his or her capital contribution and will increase the
owner’s equity. If the owner withdraws cash or trading stock
from his or her business this is referred to as drawings and will
decrease the owner’s equity.
All income and expenditure accounts will also have an effect on
the owner’s equity. Income will increase the owner’s equity, while
expenditure will decrease the owner’s equity. The capital and all
income accounts increase on the credit side of the account and
decrease on the debit side of the account. The drawings and all
expenditure accounts increase on the debit side of the account
and decrease on the credit side of the account.
current assets:
Include the cash in the
enterprise’s current
bank account or any
other asset that can be
converted into cash
within a year. Examples
of current assets are
the cash in the current
account, trading stock
and debtors.
liability: Any amount
owed by an enterprise
to entities or enterprises
is called a liability. These
entities or enterprises
are referred to as
creditors. Liabilities can
also be divided into two
groups: non-current
and current liabilities.
Liability accounts
increase on the credit
side of the account and
decrease on the debit
side of the account.
current liabilities: Are
short-term liabilities
like an overdrawn bank
account and creditors.
non-current liabilities:
Include long-term loans,
and are also known
as interest-bearing
liabilities.
Liabilities
Any amount owed by an enterprise to entities or enterprises is
called a liability. These entities or enterprises are referred to as creditors.
Liabilities can also be divided into two groups. These groups are non-current and current
liabilities. Non-current liabilities, for example, long-term loans are also known as
interest-bearing liabilities. Current liabilities are short-term liabilities like an overdrawn
bank account and creditors.
Liability accounts increase on the credit side of the account and decrease on the debit side
of the account.
2
To summarise:
DRASSETS, DRAWINGS OR EXPENSESCR
INCREASE
DECREASE
DRLIABILITIES, CAPITAL OR INCOMECR
INCREASE
DECREASE
So far, we have talked about businesses and organisations. From an accounting point
of view they have to keep similar records and the accounting process is the same for all
entities. In the next unit, we are going to focus on the different types of business.
Unit 1.2:Types of commercial organisation
When you look around, you will easily identify many different organisations. These
organisations all differ in size but each of these entities is also a different type of commercial
organisation, because of the number of people who own all or part of the business.
The different ways in which a business is set up depend on two basic elements, namely:
• The number of people who invest in or own the business.
• The level of risk that investors are willing to take.
Therefore, business owners have to decide how to protect themselves and their businesses.
One of the ways of doing this is through their choice of business structure. Table 1.1 shows
how many investors can own a business and the advantages and disadvantages that need
to be taken into account:
Table 1.1 The advantages and disadvantages of the different types of business structure
Business
format
Maximum
no. of
investors
(owners)
Advantages
Disadvantages
Sole trader
1
• Legal business registration not
required.
• Business can start to operate without
registration delays.
• A sole proprietor receives all business
profits.
• Business accounts do not have to be
professionally prepared or audited.
• The owner is self-reliant.
• A sole proprietor is personally liable
for all business debts.
• The owner’s personal assets can be
sold to pay business debts.
• The business ceases on the death of
the owner.
• The business name is not registered
and protected.
Partnership
2–20
• Legal business registration not
required.
• Business can start to operate without
registration delays.
• Two or more owners share business
responsibilities.
• Partners are personally liable for all
business debts.
• Partners’ personal assets can be sold
to pay business debts.
• The business name is not registered
and protected.
3
Business
format
Maximum
no. of
investors
(owners)
Advantages
Disadvantages
• Partners share profits between them.
• Business accounts do not have to be
professionally prepared or audited.
Close
corporation
(CC)
1–10
• Registration was easier than for a
private limited company.
• Members’ liability is limited to the
amounts invested in the business.
• Ownership can be easily transferred
by selling a member’s interest.
• A CC continues after the death of a
member.
• In terms of the Companies Act, 2008,
no new CCs may be established.
However, existing CCs may continue
or convert to other business formats.
• Ownership of a CC is limited to ten
people.
• Dividends can only be paid if the
business is solvent.
• Accounts have to be formally audited
and presented to members.
• Limited liability results in creditors
demanding more financial
information.
Limited
liability
company
Max 50
• Shareholders’ liability for business
debts is limited to the amounts paid
for shares.
• Shareholders can employ managers
to run the company.
• Companies tend to be perceived as
being more stable.
• Companies generally have easier
access to loan capital.
• Companies must be formally
registered.
• Business accounts must be
professionally prepared and audited.
• Business information must be
circulated to shareholders at
specified times.
• A private limited company can have a
maximum of 50 shareholders.
• Shares in a private limited company
cannot generally be sold to the
public.
Public
company
Min 7
• Shares can be bought and sold easily
on the Johannesburg Stock Exchange
(JSE).
• There is no limit to the number of
shareholders.
• Shareholders’ liability for business
debts is limited to the amounts paid
for shares.
• Shareholders employ managers to
run the company.
• Companies are usually large and
therefore perceived as being stable.
• Public companies generally have
access to loan capital.
• Public companies can issue more
shares in order to raise more capital.
• Companies must be formally
registered with the JSE.
• Business accounts must be
professionally prepared and audited.
• Formal business reports and
information must be circulated to
shareholders every year.
• Public companies must hold a public
annual general meeting to report to
shareholders.
Non-profit
organisation
(NPO)
Various
• There are different forms of
non-profit organisations that are
governed by different rules.
• Small NPOs generally have to meet
the same rules as private limited
companies (see above).
• Large NPOs generally have to meet
the same rules as public limited
companies (see above).
4
Exercise
In the following table, choose the term in Column A that matches the description in
Column B:
Column A
Column B
a)
Non-profit organisations
i)
disallows new close corporations
b)
Close corporations
ii)
occurs when two friends start a new
business without formal registration
c)
A sole trader
iii)
is the Johannesburg Stock Exchange
d)
Limited liability
iv)
may not have more than ten members
e)
A public company
v)
requires business assets to be worth more
than liabilities
f)
JSE
vi)
generally have to comply with the rules for
limited companies
g)
The 2011 Companies Act
vii)
allows people to start a business with
minimum risk
h)
A partnership
viii)
is a one-person business with high personal
risk
i)
Solvency
ix)
can trade its shares on the JSE
j)
A limited liability company
x)
means that the investor can only lose the
value of his or her investment
Having identified the different formats for organisations, we will now look at the activities
of these organisations in more detail.
Unit 1.3:Activities of organisations
The activities of the different organisations listed in Unit 1.2 can be classified under the
following headings:
• Service activities.
• Trading activities.
• Manufacturing activities.
• Activities with no profit motive.
Service activities
A service enterprise is a business that sells a service to the public to generate income,
where this activity is its main source of income.
Examples of service enterprises:
• Doctors.
• Garden services.
• Attorneys.
Trading activities
A trading enterprise is a business that buys and sells goods to generate income, where this
activity is its main source of income.
5
Examples of trading enterprises:
• General dealers.
• Wholesalers.
Manufacturing activities
A manufacturing enterprise is a business that buys raw material
and turns it into a product.
Examples of manufacturing enterprises are factories that
produce products through a manufacturing process, like a
clothing factory.
manufacturing
enterprises: Are
businesses that buy raw
material and turn it into
a product. Examples
of manufacturing
enterprises are
factories that produce
products through a
manufacturing process,
like a clothing factory.
Activities with no profit motive
In some cases an enterprise is incorporated not to make a profit, but rather to provide a
service to a group of people with a common interest. These enterprises are called nonprofit enterprises and an example is a tennis club where people get together to play tennis.
In Module 2, you will learn how to create and maintain accounting records, but we first
need to find out where accounting information comes from and the type of systems used
in the accounting process.
Unit 1.4:The accounting transactions of service and
trading activities
In this unit we will look at the accounting transactions in relation to the use of source
documents, the double-entry principle and the influence of double-entry transactions on
the accounting equation.
Accounting processes begin when you write out a piece of paper that shows details of
a transaction relating to a product or service you are selling, or that specifies goods or
services you have received from another business. These are called source documents.
A source document is proof that a transaction has taken place and can be classified as an
internal or external source document. Internal source documents are documents used
internally, like petty cash vouchers, while external source documents are documents
received from outside the enterprise, such as an invoice from a supplier.
The most important source documents are the following:
• Receipts
This source document will be issued for money received from the owner or debtor.
• Cash register roll
This source document will be issued for money received from cash sales.
• Cheque counterfoil
6
This source document is left behind in the cheque book and
will be applicable when payment is made by cheque.
• Invoice
This source document will be issued to clients (debtor) for
credit sales or will be issued by the supplier (creditor) for
credit purchases.
• Petty cash voucher
This source document will be issued when money is
withdrawn from petty cash.
• Debit note
This source document will be issued for returns on a credit
purchase.
• Credit note
This source document will be issued for returns on a credit
sale.
• Journal voucher
This source document will be issued for any entry in the
General Journal.
General Journal (GJ):
This journal is used to
capture all transactions
for which no specific
journal is opened.
The source document
applicable to this
journal is the journal
voucher (internal office
memo). The first line
of every journal entry
is the debit entry,
which will be posted
to the debit side of the
relevant account. The
second line of every
journal entry is the
credit entry, which will
be posted to the credit
side of the relevant
account. The control
columns will be debited
or credited to the
relevant control account
as journal debits or
journal credits.
For all transactions, at least two accounts are always applicable.
Example:
Purchase a vehicle per cheque, R150 000, from TSP Traders.
For this example, we buy a vehicle and pay by cheque. The two accounts are vehicles and
bank. One of these accounts will be debited and the other account will be credited. Or,
for every account debited, there will be an account that will be credited. This principle
is known as the double-entry principle.
The vehicle account is an asset. When a vehicle is bought, this account will increase.
Asset accounts increase on the debit side of the account and decrease on the credit side
of the account.
Therefore, the vehicle account will increase on the debit side of the account. So, the
vehicle account is debited.
The bank account is also an asset, given the fact that the bank is not in overdraft. When
a cheque is issued, the cash in your bank account decreases.
Therefore, the bank account will decrease on the credit side of the account. So, the
bank account is credited.
All transactions can be analysed on the basis of the accounting equation.
7
The accounting equation is:
ASSETS = OWNER’S EQUITY + LIABILITIES
Or
A=O+L
In the previous example we indicated that:
• The vehicle account will increase on the debit side of the account by R150 000.
• The bank account will decrease on the credit side of the account by R150 000.
Let’s analyse this transaction on the basis of the accounting equation:
For the vehicle account, the entry will be under ASSETS, because the vehicle account is
classified as an asset account. If the vehicle account increases, the assets of the enterprise
will also increase.
ACCOUNTING EQUATION
A
O
L
+ 150 000
This is only one entry and the bank account entry must also be indicated on this equation.
For the bank account, the entry will be under ASSETS, because the bank account is
classified as an asset account. If the cash in the bank account decreases, the assets of the
enterprise will also decrease.
ACCOUNTING EQUATION
A
O
L
+ 150 000
– 150 000
No entries are made under O and L, because the applicable accounts are all assets. The net
result under assets is zero, but it is worth noting that the accounting equation is balanced.
The left of the equation, assets, is equal to the right of the equation, owner’s equity plus
liabilities.
Let’s consider the following transactions:
Transaction 1
The owner, T Smit, increases his capital contribution by R50 000. Issue receipt 5.
For this transaction, the enterprise receives money from T Smit, the owner. The enterprise
will issue a receipt to T Smit as proof of the money received. The receipt is the source
document and proof that a transaction took place.
8
All receipts will be recorded in the Cash Receipts Journal (CRJ).
This journal will provide a summary of all monies received for
a particular month.
The two accounts for this transaction are Capital and Bank.
Capital is an Owner’s Equity account. Capital will increase on
the credit side of this account with a bank entry of R50 000.
Cash Receipts Journal
(CRJ): In this journal,
all cash receipts of the
enterprise are captured.
The source documents
applicable to this
journal are cash register
roll slips (for cash sales)
and receipts (for all
other receipts).
DRCapitalCR
Bank
50 000 00
This is the credit entry. Bank is the contra account in this case.
Bank is an asset account. The cash in the bank will increase on the debit side of this
account with a capital entry of R50 000.
DRBankCR
Capital
50 000
00
This is the debit entry. Capital is the contra account in this case.
On the accounting equation:
For Capital account: Capital is an Owner’s Equity account; therefore the entry under O.
If capital increases, the owner’s equity will also increase; therefore
the +.
ACCOUNTING EQUATION
A
O
L
+ 50 000
For Bank account: Bank is an asset account; therefore the entry under A. If Bank
increases, the assets will also increase; therefore the +.
ACCOUNTING EQUATION
A
+ 50 000
O
L
+ 50 000
9
Transaction 2
Buy trading stock on credit from TRS Dealers, R10 000, and receive invoice 45.
For this transaction, the enterprise receives trading stock from
TRS Dealers. This is a credit purchase. TRS Dealers will issue
an invoice to the enterprise as proof of the credit purchase. The
invoice is the source document and the proof that a transaction
took place.
Creditors Journal
(CJ): In this journal, all
credit purchases of the
enterprise are captured.
The source document
applicable to this
journal is the credit
invoice. The creditor
control column will be
credited to the Creditors
Control account and all
other columns or entries
(like equipment and
trading stock) will be
debited to the relevant
ledger account.
All invoices received will be recorded in the Creditors Journal
(CJ). This journal will provide a summary of all credit purchases
for a particular month.
The two accounts for this transaction are Trading Stock and
Creditors Control.
Trading Stock is an asset account. Trading Stock will increase
on the debit side of this account with a creditor control entry of
R10 000.
DRTrading StockCR
Creditors control
10 000
00
This is the debit entry. Creditors Control is the contra account in this case.
Creditors Control is a liability account. The Creditors Control account will increase on
the credit side of this account with a trading stock entry of R10 000.
DRCreditors ControlCR
Trading Stock
10 000
00
This is the credit entry. Trading Stock is the contra account in this case.
On the accounting equation:
For Trading Stock account: Trading Stock is an asset account; therefore the entry
under A. If trading stock increases, the assets will also
increase; therefore the +.
ACCOUNTING EQUATION
A
O
+ 10 000
10
L
For Creditor Control account: Creditors Control is a liability account; therefore the
entry under L. If creditors control increases, the liabilities
will also increase; therefore the +.
ACCOUNTING EQUATION
A
O
L
+ 10 000
+ 10 000
Transaction 3
Pay the salary of K Nel per cheque, R8 500. Issue a cheque.
For this transaction, the enterprise pays the salary of K Nel. This
is a normal payment. The enterprise will issue a cheque to K Nel
as proof of the payment. The cheque counterfoil is the source
document and the proof that a transaction took place.
All cheque counterfoils will be recorded in the Cash Payments
Journal (CPJ). This journal will provide a summary of all cheque
payments for a particular month.
The two accounts for this transaction are Bank and Salary.
Bank is an asset account. The cash in the bank will decrease on
the credit side of this account with a salary entry of R8 500.
Cash Payments
Journal (CPJ): In
this journal, all cash
payments of the
enterprise are captured.
The source document
applicable to this
journal is the cheque
counterfoil. Therefore,
this journal will be
posted to the credit side
of the bank account
in the General Ledger.
Accounts like Trading
Stock and Creditors
Control will be debited
in the General Ledger.
DRBankCR
Salary
8 500
00
This is the credit entry. Salary is the contra account in this case.
Salary is an expense and an Owner’s Equity account. The Salary account will increase on
the debit side of this account with a bank entry of R8 500.
DRSalaryCR
Bank
8 500
00
This is the debit entry. Bank is the contra account in this case.
On the accounting equation:
For Bank account: Bank is an asset account; therefore the entry under A. If Bank
decreases, the assets will also decrease; therefore the –.
11
ACCOUNTING EQUATION
A
O
L
– 8 500
For Salary account: Salary is an expense and an Owner’s Equity account; therefore the
entry under O. If Salary increases, the owner’s equity will decrease;
therefore the –.
ACCOUNTING EQUATION
A
O
– 8 500
L
– 8 500
Transaction 4
Receive a payment from G Smith on his account, R2 500. Issue receipt 7.
For this transaction, the enterprise receives money from G Smith, a debtor. The enterprise
will issue a receipt to G Smith as proof of the money received. The receipt is the source
document and the proof that a transaction took place.
All receipts will be recorded in the Cash Receipts Journal (CRJ). This journal will provide
a summary of all monies received for a particular month.
The two accounts for this transaction are Bank and Debtors Control.
Bank is an asset account. The cash in the bank will increase on the debit side of this
account with a debtors control entry of R2 500.
DRBankCR
Debtors control
2 500
00
This is the debit entry. Debtors Control is the contra account in this case.
Debtors Control is an asset account. Debtors Control will decrease on the credit side of
this account with a bank entry of R2 500.
DRDebtors ControlCR
Bank
This is the credit entry. Bank is the contra account in this case.
12
2 500
00
On the accounting equation:
For Bank account: Bank is an asset account; therefore the entry under A. If
Bank increases, the assets will also increase; therefore the
+.
ACCOUNTING EQUATION
A
O
L
+ 2 500
For Debtors Control account: Debtors Control is an asset account; therefore the entry
under A. If Debtors Control decreases, the assets will also
decrease; therefore the –.
ACCOUNTING EQUATION
A
O
L
+ 2 500
– 2 500
Exercise
Analyse the following transactions according to the columns of the table and example
provided.
Example:
The owner, T Smit, increases his capital contribution by R50 000. Issue receipt 5.
No.
Source document
Account debited
Account credited
A
O
e.g.
Receipt
Bank
Capital
+ 50 000
+ 50 000
Transactions
1. Issued a cheque for R990 to Macro Traders in settlement of our account.
2. Buy trading stock from TRS Suppliers, R15 350 and pay per cheque.
3. The owner took trading stock at a cost price of R350 for personal use.
4. Buy stationery on credit from Write Nice and receive an invoice.
5. Credit sales, R1 200 (cost price, R1 000)
13
L
Part 2: Recording transactions from source documents
according to the continuous (perpetual) stock
system
Overview
When you have completed Part 2 of this module, you should be able to:
• Identify and briefly describe the steps in the accounting cycle.
• Define source documents and the information they contain.
• Record basic transactions in accounting records of original entry.
• Post transactions from books of original entry into general and subsidiary
ledgers.
• Test the accuracy of accounts with the aid of a Trial Balance.
Unit 1.5:Accounting cycle
The accounting cycle represents the movement of a transaction
through the organisation to reach the end of a financial period.
Step 1: Transaction (daily)
➩
Step 2: Source documents (daily)
➩
Step 3: Journals (daily)
➩
Step 4: Ledger accounts (monthly)
➩
Step 5: Trial Balance (monthly)
➩
Step 6: Income statement (annually)
➩
Step 7: Balance Sheet (annually)
Trial Balance: Is
usually implemented
at the end of a given
financial period and
is used to make sure
that accounting entries
have been carried out
accurately. The Trial
Balance often leads
to the preparation of
financial statements
called the Income
Statement and Balance
Sheet.
accounting cycle:
Represents the
movement of a
transaction through the
organisation to reach
the end of a financial
period.
Income Statement:
This statement indicates
whether a profit was
made or a loss suffered
for the past financial
year. Therefore, the
Income Statement
provides the financial
results for a particular
financial year.
Transactions occur daily in the books of the enterprise. At this point a source document is
issued as proof of the transaction. These source documents are captured or recorded in the
relevant subsidiary journal. At the end of each month, all subsidiary journals are posted to
the relevant ledger accounts and a Trial Balance is drawn up from these ledger accounts.
Therefore, the purpose of the Trial Balance is to provide a summary of ledger account
balances, as well as to check that the double-entry principle has been applied throughout.
14
Annually, the financial year-end statements are drawn up.
The Income Statement will indicate if a profit was made or a
loss suffered for the past financial year. Therefore the Income
Statement provides the financial results for a particular financial
year. The Balance Sheet will check if the total assets are equal to
the owner’s equity plus liabilities, or if the accounting equation
throughout is balanced. Therefore the Balance Sheet provides
the financial position of the enterprise’s assets, owner’s equity
and liabilities on a given date.
Unit 1.6:Source documents
Every financial transaction in a business should have a source
document. Source documents therefore record a specific business
transaction and provide details of a particular transaction.
The most important source documents are the following:
Balance Sheet: T his
statement checks if the
total assets are equal
to the owner’s equity
plus liabilities, or if the
accounting equation
throughout is balanced.
Therefore, the Balance
Sheet provides the
financial position of
the enterprise’s assets,
owner’s equity and
liabilities on a given
date.
accounting equation:
Defines the relationship
between assets, owner’s
equity and liabilities.
This relationship defines
assets as being equal to
the owner’s equity and
liabilities, or A = O + L.
• Receipts
This source document will be issued for money received from the owner or debtor.
• Cash register roll
This source document will be issued for money received from cash sales.
• Cheque counterfoil
This source document is left behind in the cheque book and will be applicable when
payment is made by cheque.
• Invoice
This source document will be issued to the client (debtor) for credit sales or will be
issued by the supplier (creditor) for credit purchases.
• Petty cash voucher
This source document will be issued to withdraw money from the petty cash.
• Debit note
This source document will be issued for returns on a credit purchase.
• Credit note
This source document will be issued for returns on a credit sale.
• Journal voucher (internal office memo)
This source document will be issued for any entry in the General Journal.
Original and duplicate source documents
When you have to provide an original document for another business or individual, such
as a receipt, credit invoice, credit note or cash register roll slip, you need to also keep a
copy of that document for your own records. To achieve this, you raise documents in
duplicate.
15
Table 1.2 shows how original and duplicate documents are dealt with.
Table 1.2 Original and duplicate source documents
Document
Original
Duplicate
Receipt
Receipt given to customer
Receipt retained by business for
entry into own records
Cash register roll slip
Slip given to customer
Slip retained by business for entry
into own records
Cheque counterfoil
Cheque given to supplier or
individual as payment
No cheque duplicate. The cheque
counterfoil stays in the cheque
book for entry into own records
Invoice to a debtor
Issue to customer
Retained by business for entry into
own records
Invoice from a creditor
Received from supplier and used to
enter into own records
Retained by suppliers for their
records
Petty cash voucher
Retained by business for entry into
own records
No duplicate required
Credit note
Credit note issued to customer
Retained for entry into own records
Debit note
Received from supplier and used to
enter into own records
Retained by suppliers for their
records
Journal voucher (internal office
memo)
Retained by business for entry into
own records
No duplicate required
Internal and external source documents
Source documents can also be defined as internal or external to the organisation according
to where the document is raised. This is shown in Table 1.3.
Table 1.3 Internal and external source documents
Document
Internal/External
Receipt
Internal (raised by your business)
Cash register roll slip
Internal (raised by your business)
Cheque counterfoil
Internal (raised by your business)
Invoice to a debtor
Internal (raised by your business)
Invoice from a creditor
External (raised by the supplier)
Petty cash voucher
Internal (raised by your business)
Credit note
Internal (raised by your business)
Debit note
External (raised by the supplier)
Journal voucher (internal office memo)
Internal (raised by your business)
While the internal/external definitions are interesting, the important thing to remember
about source documents is that you should have one to cover every financial transaction.
Unit 1.7: Books of original entry
Traditional bookkeeping practice teaches that financial transactions are first entered into
books of original entry or accounting records called journals. These journals can comprise:
• Cash Receipts Journal (CRJ).
16
•
•
•
•
•
•
•
•
Cash Payments Journal (CPJ).
Debtors Journal (DJ).
Creditors Journal (CJ).
Debtors Allowance Journal (DAJ).
Creditors Allowance Journal (CAJ).
Petty Cash Journal (PCJ).
General Journal (GJ).
Wages Journal (WJ).
Debtors Journal (DJ): In this
journal, all credit sales of the
enterprise are captured. The
source document applicable to
this journal is the credit invoice.
The sales column will be debited
to the Debtors Control account
and credited to the Sales account.
However, the cost of sales column
will be debited to the Cost of
Sales account and credited to the
Trading Stock account.
Creditors Allowance Journal
(CAJ): In this journal, all credit
returns to creditors of the
enterprise are captured. The
source document applicable to
this journal is the debit note. The
creditor control column will be
debited to the Creditors Control
account and all other columns or
entries (like stationery and trading
stock) will be credited to the
relevant ledger account.
Debtors Allowance Journal (DAJ):
In this journal, all credit returns
from debtors of the enterprise are
captured. The source document
applicable to this journal is the
credit note. The debtors allowance
column will be debited to the
Debtors Allowance account and
credited to the Debtors Control
account. However, the cost of sales
column will be credited to the Cost
of Sales account and debited to the
Trading Stock account.
Petty Cash Journal (PCJ): In this
journal, all cash payments (small
amounts) of the enterprise are
captured. The source document
applicable to this journal is the
petty cash voucher. The petty cash
column will be credited to the
Petty Cash account and all other
columns or entries (like stationery
and refreshments) will be debited
to the relevant ledger account.
General Journal (GJ): This journal
is used to capture all transactions
for which no specific journal is
opened. The source document
applicable to this journal is the
journal voucher (internal office
memo). The first line of every
journal entry is the debit entry,
which will be posted to the debit
side of the relevant account.
The second line of every journal
entry is the credit entry, which
will be posted to the credit side
of the relevant account. The
control columns will be debited
or credited to the relevant control
account as journal debits or
journal credits.
Wages Journal (WJ) and Salaries
Journal (SJ): In this journal, all
wage and salary payments to
employees of the enterprise are
captured. The source document
applicable to this journal is the
cheque counterfoil.
• Salaries Journal (SJ).
Transactions are entered on a daily basis, from where the transactions are posted to the
General Ledger on a monthly basis.
• Cash Receipts Journal (CRJ)
In this journal all cash receipts of the enterprise are captured.
The source documents applicable to this journal are cash register roll slips (for cash
sales) and receipts (for all other receipts).
CASH RECEIPTS JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
Details
Details
of sundry
accounts
15
1
TH Smit
Capital
CRR
Sundry
accounts
20 000
Sales
Analysis of
receipts
00
Sales
20 000
Cost of
Sales
00
17
150
00
100
00
150
00
100
00
Bank
20 000
00
20 000
00
150
00
150
00
20 150
00
Therefore this journal will be posted to the debit side of the Bank account in the General
Ledger. Accounts like capital and sales will be credited in the General Ledger.
• Cash Payments Journal (CPJ)
In this journal all cash payments of the enterprise are captured.
The source document applicable to this journal is the cheque counterfoil
CASH PAYMENTS JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
Details
345
10
Trutect
346
Details
of sundry
accounts
Sundry
accounts
Trading
Stock
500
Creditors
control
Bank
00
TP Suppliers
500
Salaries
00
500
00
5 500
00
5 500
00
5 500
00
6 000
00
Therefore this journal will be posted to the credit side of the bank account in the
General Ledger.
Accounts like Trading Stock and Creditors Control will be debited in the General
Ledger.
• Debtors Journal (DJ)
In this journal all credit sales of the enterprise are captured.
The source document applicable to this journal is the credit invoice.
DEBTORS JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
Debtors
65
1
TH Smit
66
17
K Nel
Sales
Cost of Sales
1 500
00
1 200
00
350
00
150
00
1 850
00
1 350
00
The sales column will be debited to the Debtors Control account and credited to the
Sales account. However, the cost of sales column will be debited to the Cost of Sales
account and credited to the Trading Stock account.
• Creditors Journal (CJ)
In this journal all credit purchases of the enterprise are captured.
The source document applicable to this journal is the credit invoice.
CREDITORS JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
Creditors
345
10
Trutect
346
13
TP Suppliers
Creditors
control
Trading
Stock
Stationery
Amount
1 500
00
5 500
00
5 500
00
1 000
00
5 500
00
18
Sundry accounts
Details
1 500
00 Equipment
1 500
00
The creditors control column will be credited to the Creditors Control account and
all other columns or entries (like equipment and trading stock) will be debited to the
relevant ledger account.
• Debtors Allowance Journal (DAJ)
In this journal all credit returns from debtors of the enterprise are captured.
The source document applicable to this journal is the credit note.
DEBTORS ALLOWANCE JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
Debtors
Debtors
allowance
Cost of Sales
4
8
K Nel
200
00
175
00
5
23
R Roux
500
00
400
00
700
00
575
00
The debtors allowance column will be debited to the Debtors Allowance account and
credited to the Debtors Control account. However, the cost of sales column will be
credited to the Cost of Sales account and debited to the Trading Stock account.
• Creditors Allowance Journal (CAJ)
In this journal all credit returns to creditors of the enterprise are captured.
The source document applicable to this journal is the debit note.
CREDITORS ALLOWANCE JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
Creditors
51
11
Trutect
52
26
TP Suppliers
Creditors
control
1 400 00
Trading
Stock
Stationery
Amount
1 400
00
1 400
00
200 00
1 600 00
Sundry accounts
200
00
200
00
Details
The creditors control column will be debited to the Creditors Control account and
all other columns or entries (like stationery and trading stock) will be credited to the
relevant ledger account.
• Petty Cash Journal (PCJ)
In this journal all cash payments (small amounts) of the enterprise are captured.
The source document applicable to this journal is the petty cash voucher.
PETTY CASH JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
Details
112
18
Trutect
113
23
TP Suppliers
Details
of sundry
accounts
Sundry
accounts
Stationery
50
50
19
Refreshments
Postage
00
00
Petty cash
50
00
125
00
125
00
125
00
175
00
The petty cash column will be credited to the Petty Cash account and all other columns
or entries (like stationery and refreshments) will be debited to the relevant ledger
account.
• General Journal (GJ)
This journal is used to capture all transactions for which no specific journal is opened.
The source document applicable to this journal is the journal voucher (internal office
memo).
GENERAL JOURNAL OF TH DEALERS – MAY 2010
DR
CR
DEBTORS CONTROL
CREDITORS CONTROL
DR
DR
30
Trading Stock
3 400
TS Dealers
3 400
3 400
CR
CR
The first line of every journal entry is the debit entry which will be posted to the debit
side of the relevant account. The second line of every journal entry is the credit entry
which will be posted to the credit side of the relevant account.
The control columns will be debited or credited to the
relevant control account as journal debits or journal credits.
For example, the R3 400 in the credit column of the Creditors
Control account, will be posted to the credit side of that
account as journal credits of R3 400.
• Wages Journal (WJ) and Salaries Journal (SJ)
In this journal all wage and salary payments to employees of
the enterprise are captured.
The source document applicable to this journal is the cheque
counterfoil.
control account: Is a
ledger account in the
General Ledger that
contains all the postings
for a particular function
such as debtors and
creditors. The total
value of all transactions
for a specific function
(debtor or creditor) is
shown in the control
account.
Wages are normally paid weekly, while a salary is paid once a month.
The first section of these journals focuses on calculating the total remuneration (normal
and overtime) for each employee, referred to as the gross wage or salary before any
deductions.
The second section of these journals focuses on calculating the total deductions applicable
to each employee. The difference between the gross wage (salary) and the total deductions
per employee will result in the net wage (salary). This amount is payable to the employee.
The third section of these journals focuses on any employer contribution. The employer
can decide to make an additional contribution to each employee for pension and medical.
These additional contributions can form part of the fringe benefits that these employees
may have.
20
21
17
31
C Maasdorp
Employer
contribution
22
P Smit
00
00
00
38
40
40
00
00
2 756
00
00
1 240
680
836
46
33
00
00
Rate
Amount
Rate
Hours
Overtime
Normal time
K Nel
Details
18
5
Hours
993
828
165
00
00
00
Amount
3 749
3 749
2 068
680
1 001
Gross
wages
00
00
00
00
00
798
532
266
143
53
70
00
00
00
00
00
00
Pension
fund
Deductions
250
125
125
65
25
35
00
00
00
00
00
00
Medical
fund
904
904
514
140
250
PAYE
WAGES JOURNAL OF TH DEALERS FOR WEEK ENDED 30 MAY 2010
00
00
00
00
00
15
15
8
3
4
UIF
00
00
00
00
00
1 310
1 310
730
221
359
Total deduction
00
00
00
00
00
2 439
2 439
1 338
459
642
00
00
00
00
00
Net wages
Unit 1.8: Posting to the general and subsidiary ledgers
Ledger accounts are where all entries need to end up – they are the accounts that show the
situation in a business at any moment in time. Postings are done from all journals to all
ledger accounts in the General Ledger.
Ledger accounts are formatted in T-accounts, meaning that they have two sides (Debit
and Credit) that are separated by a vertical bar in the middle and a top bar over which the
name of the account appears.
Let’s have a look at the following example illustrating how ledger accounts are drawn up
from the journals provided.
Example:
E Collier, the owner of TB Traders, provided the following totals of the subsidiary
journals:
Balances as on 1 June 2010:
R75 000
Trading Stock
SalesR475 000
Cost of Sales
R315 000
EquipmentR15 000
InsuranceR3 500
COLUMN TOTAL OF JOURNALS AS on 30 June 2010
AMOUNTS
CASH RECEIPTS JOURNAL (CRJ)
Sales
37 500
Cost of Sales
15 750
Debtors control
18 000
Discount allowed
1 125
Sundry accounts
7 500
CASH PAYMENTS JOURNAL (CPJ)
Trading Stock
16 800
Wages
3 750
Debtors control
450
Creditors control
46 500
Discount received
3 000
Sundry accounts (on the 5th – insurance = R1 500)
1 500
DEBTORS JOURNAL (DJ)
Sales
36 000
Cost of Sales
21 000
DEBTORS ALLOWANCE JOURNAL (DAJ)
Debtors allowance
1 688
Cost of Sales
900
22
CREDITORS JOURNAL (CJ)
Total
82 575
Trading Stock
48 750
Equipment
29 700
Sundry accounts
4 125
CREDITORS ALLOWANCE JOURNAL (CAJ)
Total
6 150
Trading Stock
6 000
Equipment
150
GENERAL JOURNAL (GJ)
Debtors control – debit
75
Debtors control – credit
180
Creditors control – debit
45
Creditors control – credit
115
Required:
Open the following accounts with the given balances/totals:
Post the totals of the journals to the following ledger accounts and balance all the
accounts on 30 June 2010.
1. Trading Stock.
2.Sales.
3. Cost of Sales.
4.Equipment.
5.Insurance.
Solution:
The process to follow for drawing up a ledger account is:
• Step 1: Open the relevant ledger account in the General Ledger.
• Step 2: Post the opening balance of this account, if provided.
• Step 3: Post all relevant entries from journals to the applicable account. First the
entries in the sundry account column and thereafter the column totals.
• Step 4: Close off every ledger account if requested.
Steps 1 and 2: Open and balances
Trading Stock
2010
1
Balance
75 000
00
Jun
Sales
2010
Jun
23
1
Balance
475 000
00
Cost of Sales
2010
1
Balance
315 000
1
Balance
15 000
1
Balance
3 500
00
Jun
Equipment
2010
00
Jun
Insurance
2010
00
Jun
Step 3: Posting
On 5 June 2010 in the sundry account column of the CPJ a payment was made for
insurance. This entry must be posted on the given date to the Insurance account,
because entries in the sundry account column are posted individually.
Let’s do it.
Insurance
2010
1
Balance
3 500
00
Jun
5
Bank
1 500
00
Remember, Bank is the contra account for this transaction and the reason why the
bank entry appears in the Insurance account.
The next account:
Scan all journals for any equipment entries. The only journals with equipment
entries are the Creditors Journal and the Creditors Allowance Journal.
All postings will be done on the column totals calculated on the last day of June
2010. Therefore the posting will also be done on the last day of June 2010 in the
Ledger account.
Equipment
2010
1
Balance
Jun
30
Creditors control
CJ
15 000
00 2010
29 700
00 Jun
30
Creditors control
CAJ
6 000
00
The debit entry is from the CJ where the contra account is Creditors Control. The
credit entry is from the CAJ where the contra account is also Creditors Control.
24
• There are insufficient funds in the bank account to cover the
cheque and the bank refuses payment.
The cheque will be cancelled in the CRJ.
postdated cheque:
Is a promise to pay a
particular amount at a
later date.
Unit 1.16: How to record postdated cheques
You may occasionally be in the position where you want to deal with a supplier in good
faith but you are waiting to receive expected payment to you in order to pay the supplier’s
account. Alternatively, you may want to secure a future delivery without risking paying
for it right now. In both cases you can write a postdated cheque.
A bank will not enter an item on the bank statement until the date shown, so you have
to treat postdated items in a different way when entering them into your Cash Journals.
Postdated cheques received
A postdated cheque received is a promise to pay a particular account at a later date. You
need to identify that you have received a postdated cheque so that you do not continue
to chase the customer for payment. You can, of course, do this by making a note in the
customer’s Debtors Ledger account and store the cheque for safekeeping in your safe until
the date arrives.
You can also enter the cheque in the current Cash Receipts Journal and Debtors Ledger
account, writing in the date it can be presented so that you know that it will not appear on
any bank statement received before the cheque date.
Therefore a postdated cheque will be recorded in the Bank Reconciliation Statement by an
entry credit postdated cheque received.
Whichever way you deal with postdated cheques, you must make sure that a cheque you
receive is presented to the bank for payment on the date shown on the cheque so that you
can get payment at the earliest opportunity.
Postdated cheques issued
When you issue a postdated cheque to a supplier, you would normally enter that cheque
counterfoil in the current Cash Payments Journal and ledgers, also making a note of the
date it should be paid, so that you can record this in the Bank Reconciliation Statement as
part of the other outstanding cheques.
Let’s consider the following example. You will note the format of this question is different
from the previous example. In this example all the comparisons were done and indicated.
Example:
Required:
Use the information given below to prepare the following in the accounting records of
MICKOR TRADERS.
42
1. Complete the CASH JOURNALS for SEPTEMBER 2009. (Only total the bank
columns.)
2. Post to the BANK ACCOUNT in the GENERAL LEDGER and balance it.
3. Draw up the BANK RECONCILIATION STATEMENT on 30 SEPTEMBER
2009.
NOTE: MICKOR TRADERS operates its current banking account at CAPITEC BANK.
Information:
A.
BANK RECONCILIATION STATEMENT OF MICKOR TRADERS ON 31 AUGUST 2009
Debit
Debit balance as per bank statement
Credit
13 860
Credit outstanding deposit
4 350
Debit outstanding cheques
No. 580
445
No. 1440
245
No. 1490
1 100
Credit balance as per bank account
11 300
15 650
15 650
B. The Cash Journals showed subtotals before the September bank statement was
received:
CASH RECEIPTS JOURNAL OF MICKOR TRADERS – SEPTEMBER 2009
Date
Details
30
Totals
Sundry
accounts
Sales
Debtors
control
7 800
11 533
Discount
allowed
4 561
Bank
561
23 894
CASH PAYMENTS JOURNAL OF MICKOR TRADERS – SEPTEMBER 2009
Date
Details
30
Totals
Sundry
accounts
9 280
Debtors
control
Trading
Stock
–
14 310
Creditors
control
3 810
Discount
received
Bank
–
27 400
C. A comparison of the bank statement (no. 9) for September 2009 and the previous
Bank Reconciliation Statement revealed the following:
–– The outstanding deposit of R4 350 appeared on the bank statement.
–– Cheque no. 1440 appeared on the bank statement, but cheque no. 1490 does not
appear on it.
–– Cheque no. 580 was issued to BOXER TRADERS for merchandise bought on
20 February 2009. This cheque is now stale.
D. A comparison of the bank statement (no. 9) for September 2009 and the Cash
Journals for September 2009 showed the following:
–– The bank statement showed an overdrawn balance of R7 647 on 30 September
2009.
43
–– A deposit of R1 458, which was deposited on 10 September, did not appear on
the bank statement.
–– The following items appeared on the bank statement for September 2009:
R720
Service fees
Cheque book fee
R70
Levy on credit card sales
R49
Interest on current account
R180+
Interest on overdrawn account
R971–
–– A cheque received from J Sono, a debtor, has been dishonoured by the bank
due to insufficient funds, R165.
–– A debit order for R500 appeared only on the bank statement. The payment was
made to Eagle Insurance for the monthly insurance premium.
–– G Smith, a tenant, deposited his rent of R2 700 directly into the current
account of the business.
–– Cheque no. 1501 was incorrectly entered in the Cash Payments Journal as
R1 260, instead of R1 620, which is correct on the bank statement. This cheque
was issued to VW MOTORS for repairs to the vehicle.
–– A deposit on the bank statement of R3 740 was incorrect. The correct amount
appeared in the Cash Receipts Journal as R3 650.
–– The bank had debited the current account of the firm with R600 in error. This
cheque was drawn by GAUTENG TRADERS.
–– A cheque dated 18 November 2009 (received from R Naidoo, a debtor) was
deposited in error. The cheque was held over for re-deposit on 18 November
2009, R680.
–– The following cheques were still outstanding on 30 September 2009:
No. 1511
R3 000
No. 1518
R5 217
Answers:
1.
CASH RECEIPTS JOURNAL OF Mickor Traders – September 2009
Doc
no.
D
30
Details
Details
of sundry
accounts
Totals
Boxer
Traders
G Smith
Sundry
accounts
Sales
4 561
00
561
Bank
7 800
00
23 894
00
445
00
445
00
Interest
on current
account
180
00
180
00
2 700
00
2 700
00
27 219
00
44
00
Discount
allowed
Trading
Stock
Rent
income
11 533
Debtors
control
00
CASH PAYMENTS JOURNAL OF Mickor Traders – September 2009
Doc
no.
D
Name of
payee
30
Totals
Details
of sundry
accounts
Sundry
accounts
Debtors
control
Trading
Stock
–
9 280
00
27 400
00
839
00
839
00
Interest on
overdrawn
account
971
00
971
00
165
00
Eagle
Insurance
Insurance
500
00
500
00
VW Motors
Repairs
360
00
360
00
30 235
00
165
00
3 810
00
Bank
Bank
charges
J Sono
14 310
Creditors
control
00
2.
Bank
2009
30
Sept
Total receipts
27 219
00 2009
1
Balance
11 300
00
Balance
14 316
00 Sept
30
Total payments
30 235
00
41 535
00
1
Balance
14 316
00
41 535 00
Oct
3.
BANK RECONCILIATION STATEMENT OF Mickor Traders on 30 September 2009
Debit
Debit balance as per bank statement
Credit
7 647
00
Credit outstanding deposit
1 458
00
600
00
Debit outstanding cheques
No. 1490
1 100
00
No. 1511
3 000
00
No. 1518
5 217
00
90
00
Debit deposit error on bank statement
Credit cheque incorrectly debited
Credit postdated cheque received
Credit balance as per bank account
17 054
45
00
680
00
14 316
00
17 054
00
Exercise A
The following information was taken from the books of MY WAY TRADERS.
Information:
MY WAY TRADERS
BANK RECONCILIATION STATEMENT ON 31 MARCH 2011
Debit
Credit
Credit balance as per bank statement
31 200
Credit deposit not credited by the bank
14 110
Debit outstanding cheques
No. 714
4 220
No. 716
7 700
No. 717
16 380
Debit balance as per bank account
17 010
45 310
45 310
CASH RECEIPTS JOURNAL OF MY WAY TRADERS – APRIL 2011CRJ8
Doc
no.
D
Details
Analysis of
receipts
Bank
Sales
20 000
20 000
8 200
8 200
W Botha
11 270
11 270
680
4
J Naidoo
CRR1
6
Sales
681
11
CRR2
17
Sales
16 300
16 300
682
29
L Viret
6 500
6 500
Debtors
control
Sundry accounts
Amount
Details
20 000 Capital
8 200
11 270 Rent
income
16 300
6 500
62 270
24 500
6 500
31 270
CASH PAYMENTS JOURNAL OF MY WAY TRADERS – APRIL 2011 CPJ8
Doc
no.
D
725
5
MAKRO
9 750
726
7
TELKOM
1 500
727
11
J Naidoo
728
14
Trade
Centre
729
Name of
payee
Cash
Bank
Creditors
control
Trading
Stock
Wages
Sundry accounts
Amount
Details
9 750
1 500 Telephone
2 100
2 100 Drawings
11 600
11 600
1 000
1 000
730
25
Waltons
7 300
7 300 Stationery
731
30
Cash
2 000
2 000 Cash float
35 250
9 750
11 600
46
1 000
12 900
ABSA BANK
BANK STATEMENT
MY WAY TRADERS
P O Box 9663
CAPE TOWN
8000
Date
Details
01 April
Balance
01 April
Deposit
03 April
03 April
04 April
Deposit
05 April
Cheque no. 725
DATE: 30 April 2011
bank statement no.: 09
Amount
Balance
31 200
14 110+
45 310
Cheque no. 714
4 220-
41 090
Cheque no. 717
16 380-
24 710
20 000+
44 710
9 750-
34 960
06 April
Deposit
8 200+
43 160
11 April
Deposit
11 270+
54 430
14 April
Cheque no. 728
11 800-
42 630
14 April
Cheque no. 729
1 000-
41 630
17 April
Deposit
18 April
Interest on credit balance
19 April
Deposit
20 April
Cheque no. 56
29 April
Stop order
29 April
Service fees
29 April
Cheque book fees
30 April
Cheque no. 731
30 April
Dishonoured cheque
16 300+
57 930
750+
58 680
4 300+
62 980
940-
62 040
1 200-
60 840
140-
60 700
80-
60 620
2 000-
58 620
11 270-
47 350
Additional information:
1. On 19 April 2011 an amount of R4 300 was paid directly into the bank account of
MY WAY TRADERS. The amount was deposited by B Mans as payment on his
account.
2. Cheque no. 56 was drawn by another client, WAY TRADERS. This error will be
rectified on next month’s bank statement.
3. The stop order of R1 200 represented an insurance premium paid to SANTAM.
4. The dishonoured cheque on 30 April 2011 was received from W Botha.
(Refer to 11 April 2011 in the CRJ.)
5. Cheque no. 728 was entered incorrectly as R11 600 in the Cash Payments Journal.
The correct amount should be R11 800. (The bank statement is correct.)
6. Cheque no. 716 was issued on 15 November 2010 to MAKRO for trading
inventory.
Required:
1. Compare the bank statement with the Bank Reconciliation Statement of the
previous month, as well as the Cash Receipts Journal and the Cash Payments
Journal.
47
Make SUPPLEMENTARY ENTRIES in both journals.
Total the bank column in these journals.
2. Post to the BANK ACCOUNT in the General Ledger. Balance the account.
3. Draft the BANK RECONCILIATION STATEMENT on 30 April 2011.
Exercise B
The information given below was extracted from the books of WILLGOOD DEALERS.
Required:
1. Complete the CASH RECEIPTS and CASH PAYMENTS Journals on 31 August
2010. Total the bank column in the journals.
2. Post to the BANK ACCOUNT in the General Ledger and balance the
account.
3. Prepare the BANK RECONCILIATION STATEMENT on 31 August 2010.
NOTE: WILLGOOD DEALERS operates its current banking account at National
Bank.
Information:
WILLGOOD DEALERS
BANK RECONCILIATION STATEMENT ON 31 JULY 2010
Debit
Credit
Credit balance as per bank statement
28 550
Credit deposit not yet credited
8 200
Debit outstanding cheques:
No. 191
9 350
No. 281
5 880
No. 282
2 000
No. 296
18 000
Debit cheque no. 1222 wrongly credited
4 380
Credit balance according to the bank account
2 860
39 610
39 610
CASH RECEIPTS JOURNAL OF WILLGOOD DEALERS – AUGUST 2010
Date
Details
30
Totals
Date
Details
30
Totals
Bank
75 250
Sales
Cost of
Sales
Debtors
control
47 255
20 074
Discount
allowed
Sundry
accounts
561
7 921
CASH PAYMENTS JOURNAL OF WILLGOOD DEALERS – AUGUST 2010
Bank
46 500
Trading
Stock
Debtors
control
21 840
Creditors
control
–
48
18 020
Discount
received
Sundry
accounts
–
6 640
Additional information:
1. The bank statement showed a favourable balance of R98 141 on 31 August 2010.
2. The bank had credited an outstanding deposit, R8 200, on the bank statement for
August.
3. Cheques no. 281 and 282 appeared on the bank statement for August, but cheque
no. 296 does not appear on it.
4. Cheque no. 191 had been given to W Rooney for stationery on 4 January this year.
5. The bank statement for August included the adjustment for the wrong cheque no.
1222, which appeared on the previous month’s Bank Reconciliation Statement.
6. On 10 August 2010 cheque no. 287 for R4 800 was drawn in favour of T Manuel
for equipment. The cheque was dated 30 November 2010.
7. The tenant, Morefresh, had deposited its rent directly into the bank account of the
business, R3 500.
8. The following items appeared on the bank statement for August:
Interest on debit balance
R397
Cash deposit fee
R220
Service fees
R175
Cheque book fees
R157
9. A deposit on the bank statement of R7 340 was incorrect. The correct amount
appeared in the Cash Receipts Journal as R7 430.
10. The bank had placed a cheque no. 390 for R400, drawn by Willgood Stores, on the
bank account of the business in error.
11. The owner, Mr T Willgood, made an additional capital contribution by means of
an electronic transfer directly into the business’s bank account, R50 000.
12. A cheque received from R Nel as payment on account has been returned by the
bank due to insufficient funds, R1 065.
13. The debit order in favour of Propsure is for building insurance, R5 520.
14. Cheque no. 355 for R1 500 appeared only in the Cash Payment Journal.
15. A deposit of R6 375, which was made on 31 August 2010, does not appear on the
bank statement.
16. Cheque no. 460 was erroneously debited twice on the bank statement, R500.
SUMMARY
In this part, we looked at the process of reconciling a bank statement with entries in
the Cash Journals and associated ledgers, first defining the aims of the reconciliation
and the reason why differences occur between the two accounting documents. We
went on to explain the items that can be omitted from a bank statement or Cash
Journals and the differences that result from errors in either record.
We then showed you how to complete a Bank Reconciliation Statement to achieve a
balance between the bank statement and Cash Journals, and how you need to post
items from the Bank Reconciliation Statement to the Cash Journals and associated
ledgers; also how you use a Bank Reconciliation Statement for the following month’s
reconciliation.
Finally, we explained how to deal with “stop payments” and postdated cheques.
49
Part 4: Control accounts
Overview
When you have completed Part 4 of this module, you should be able to:
• Briefly describe the aim of control accounts.
• Provide additional columns in books of original entry.
• Post from books of original entry to subsidiary ledgers.
• Post from books of original entry to the Debtors Control account in the General
Ledger and draw up a List of Debtors at a given stage to reconcile with the
Debtors Control account.
• Post from books of original entry to the Creditors Control account in the General
Ledger and draw up a list of creditors at a given stage to reconcile with the
Creditors Control account.
• Make transfers between debtors and creditors by means of journal entries and
post to the General Ledger and subsidiary ledgers.
Unit 1.17: Aim of control accounts
A control account is a ledger account in the General Ledger that
contains all the posting for a particular function such as debtors
and creditors. Individual transactions related to a particular
debtor or creditor are also recorded in the Subsidiary Ledger,
referred to as the Debtors Ledger or Creditors Ledger. These
accounts in the Subsidiary Ledger are the individual accounts for
a particular debtor or creditor. The balance of a control account
should match the total of all the accounts of a Subsidiary Ledger.
This means that:
• The total value of all transactions of a specific function
(debtor or creditor) are shown in the control account.
• The detailed values (outstanding balances) for individual
accounts are shown in the subsidiary ledgers.
Subsidiary Ledger:
Records individual
transactions related to
a particular debtor or
creditor. These accounts
are the individual
accounts for a particular
debtor or creditor. The
balance of a control
account should match
the total of all the
accounts of a subsidiary
ledger. The detailed
values (outstanding
balances) for individual
accounts are shown in
the subsidiary ledgers.
Unit 1.18: Adjustment of books of original entry
In the following journals, debtor-related transactions are recorded in a debtors control
column or in the sundry accounts column:
• Cash Receipts Journal
Transactions where debtors pay their accounts are recorded in the CRJ.
CASH RECEIPTS JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
Details
Details
of sundry
accounts
15
1
TH Smit
Capital
Sundry
accounts
20 000
Sales
00
Debtors
control
Analysis of
receipts
20 000
50
00
Bank
20 000
00
16
R Nel
50
00
1 000
00
1 000
00
1 000
00
1 000
00
21 000
00
• Cash Payments Journal
Referred to drawer cheques received from debtors are recorded in the CPJ, as they are
returned by the financial institution (bank).
CASH PAYMENTS JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
Details
345
10
Trutect
R/D
Details
of sundry
accounts
Sundry
accounts
Trading
Stock
3 500
Creditors
control
Debtors
control
00
R Nel
3 500
Bank
00
3 500
00
500
00
500
00
500
00
4 000
00
• Debtors Journal
Credit sale transactions are recorded in the DJ.
DEBTORS JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
Debtors
65
1
TH Smit
66
17
K Nel
Sales
Cost of Sales
1 500
00
1 200
00
350
1 850
00
150
00
00
1 350
00
• Debtors Allowance Journal
Return of credit sale transactions are recorded in the DAJ.
DEBTORS ALLOWANCE JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
Debtors
Debtors
allowance
Cost of Sales
4
8
R Nel
200
00
175
00
5
23
R Roux
500
00
400
00
700
00
575
00
• Petty Cash Journal
Transactions where carriage on purchase is paid on behalf of a debtor from petty cash.
PETTY CASH JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
Details
112
18
Trutect
113
23
R Nel
Details of sundry
accounts
Sundry
accounts
Stationery
50
Debtors control
(carriage on
purchase)
125
00
125
00
51
50
Refreshments
00
00
Petty cash
50
00
125
00
175
00
• General Journal
Debtor-related transactions not covered in the aforementioned journals are recorded
in the General Journal.
GENERAL JOURNAL OF TH DEALERS – MAY 2010
DR
CR
DEBTORS CONTROL
CREDITORS CONTROL
DR
DR
CR
CR
30
R Nel
43
43 Interest
received
43
In the following journals, creditor-related transactions are recorded in a creditors control
column:
• Cash Payments Journal
Transactions where payments made to creditors are recorded in the CPJ.
CASH PAYMENTS JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
Details
345
10
Trutect
356
17
TS Dealers
Details
of sundry
accounts
Sundry
accounts
Trading
Stock
Creditors
control
3 500
500
00
500
00
3 500
Bank
Debtors
control
00
00
3 500
00
500
00
4 000
00
• Creditors Journal
Credit purchase transactions are recorded in the CJ.
CREDITORS JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
Creditor
Creditors
control
345
10
Trutect
346
13
TP Suppliers
Trading
Stock
Stationery
Sundry accounts
Amount
1 500
00
5 500
00
5 500
00
7 000
00
5 500
00
Details
1 500
00 Equipment
1 500
00
• Creditors Allowance Journal
Return of credit purchase transactions are recorded in the CAJ.
CREDITORS ALLOWANCE JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
Creditor
51
11
Trutect
52
26
TP Suppliers
Creditors
control
Trading
Stock
1 400
00
200
00
1 600
00
1 400
1 400
52
Stationery
Sundry accounts
Amount
00
00
200
00
200
00
Details
• General Journal
Creditor-related transactions not covered in the aforementioned journals are recorded
in the General Journal.
GENERAL JOURNAL OF TH DEALERS – MAY 2010
DR
CR
DEBTORS CONTROL
CREDITORS CONTROL
DR
DR
CR
CR
30
Interest paid
154
Trutect
154
154
Postings are done from all these journals to the relevant control account to determine the
total amount of debt owed by debtors and debt owed to creditors.
Unit 1.19: Debtors and creditors control accounts
Let’s have a look at the following example to see how we do the posting to the relevant
control accounts.
Example:
E Smit, the owner of CTB Traders, provided the following totals of the subsidiary
journals:
Balances as on 1 June 2010:
Debtors Control
R32 350
Creditors Control
R11 700
COLUMN TOTAL OF JOURNALS as on 30 June 2010
AMOUNTS
CASH RECEIPTS JOURNAL (CRJ)
Sales
37 500
Cost of Sales
15 750
Debtors control
18 000
Discount allowed
1 125
Sundry accounts
7 500
CASH PAYMENTS JOURNAL (CPJ)
Trading Stock
16 800
Wages
3 750
Debtors control
450
Creditors control
46 500
Discount received
3 000
Sundry accounts (on the 5th – insurance = R1 500)
1 500
DEBTORS JOURNAL (DJ)
Sales
36 000
Cost of Sales
21 000
53
DEBTORS ALLOWANCE JOURNAL (DAJ)
Debtors allowance
1 688
Cost of Sales
900
CREDITORS JOURNAL (CJ)
Total
82 575
Trading Stock
48 750
Equipment
29 700
Sundry accounts
4 125
CREDITORS ALLOWANCE JOURNAL (CAJ)
Total
6 150
Trading Stock
6 000
Equipment
150
PETTY CASH JOURNAL (PCJ)
800
Petty cash
Stationery
350
Sundry accounts (on the 10th, carriage on purchase was
paid on behalf of a debtor = R450)
450
GENERAL JOURNAL (GJ)
Debtors control – debit
75
Debtors control – credit
180
Creditors control – debit
45
Creditors control – credit
115
Required:
Open the following accounts with the given balances/totals:
Post the totals of the journals to the following ledger accounts and balance all the
accounts on 30 June 2010.
1. Debtors Control.
2. Creditors Control.
Solution:
The process to follow for drawing up a ledger account is:
• Step 1: Open the relevant ledger account in the General Ledger.
• Step 2: Post the opening balance of this account, if provided.
• Step 3: Post all relevant entries from journals to the applicable account; first the
entries in the sundry account column and thereafter the column totals.
• Step 4: Close off the ledger account if requested.
Steps 1 and 2: Open with balances
Debtors Control
2010
1
Balance
32 350
00
Jun
54
Creditors Control
2010
1
Balance
11 700
00
Jun
Steps 3 and 4: Posting and closing off
• The posting to Debtors Control account:
Scan all journals for any debtors control entries. Remember any entry made in a
sundry column will be posted first on the given date and then posting of the column
totals will follow.
PCJ: Sundry account column: On the 10th for carriage on purchases – R450.
CRJ: Column total: R18 000. Bank and Discount Allowed are the contra account.
CPJ: Column total: R450. Bank is the contra account.
DJ: Column total: R36 000. Sales is the contra account.
DAJ: Column total: R1 688. Debtors Allowance is the contra account.
GJ: Column total: R75 (debit) as journal debits and R180 (credit) as journal credits.
Debtors Control
2010
1
Balance
Jun
10
Petty cash
PCJ
450
30
Bank
CPJ
Sales
Journal debits
Jul
1
Balance
32 350
00 2010
Bank and
discount allowed
CRJ
18 000
00
00 Jun
Debtors
allowances
DAJ
1 688
00
450
00
Journal credits
GJ
180
00
DJ
36 000
00
Balance
49 457
00
GJ
75
00
69 325
00
69 325
00
49 457
00
30
On 1 July the total outstanding debt owed by debtors is R49 457.
• The posting to the Creditors Control account:
Scan all journals for any creditors control entries. Remember any entry made in a
sundry column will be posted first on the given date and then posting of the column
totals will follow.
CPJ: Column total: R46 500. Bank and Discount Received are for contra account.
CJ: Column total: R82 575. Different accounts are applicable and therefore Sundry
Purchases or Sundry Accounts are the contra account.
CAJ: Column total: R6 150. Different accounts are applicable and therefore Sundry
Returns or Sundry Accounts are the contra account.
GJ: Column total: R45 (debit) as journal debits and R115 (credit) as journal credits.
55
Creditors Control
2010
30
Jun
Bank and
discount received
CPJ
46 500
Sundry returns
CAJ
6 150
Journal debits
GJ
Balance
00 2010
1
Balance
00 Jun
30
Sundry purchases
Journal credits
45
00
41 695
00
94 390
00
Jul
1
Balance
11 700
00
CJ
82 575
00
GJ
115
00
94 390
00
41 695
00
On 1 July the total outstanding debt owed to creditors is R41 695.
Exercise
At the end of May 2010 the owner of P&S Traders provided you with the following
column totals of the subsidiary journals.
Required:
Open the following accounts with the given balances and post the totals of the journals
to the following ledger accounts and balance all the accounts on 31 May 2010.
1. Debtors Control.
2. Creditors Control.
3. Trading Stock.
4.Sales.
5. Cost of Sales.
6.Stationery.
7. Discount Received.
LEDGER ACCOUNTS
BALANCE (1 May 2010)
Debtors control
72 000
Creditors control
63 000
Trading Stock
150 000
Cost of Sales
630 000
Sales
950 000
COLUMN TOTAL OF JOURNALS as on 31 May 2010
CASH RECEIPTS JOURNAL (CRJ)
Debtors
Discount allowed
CASH PAYMENTS JOURNAL (CPJ)
2 250
Cost of Sales
31 500
Sales
75 000
Sundry accounts
15 000
Debtors
Creditors
900
93 000
Discount received
6 000
Stationery
3 600
Wages
Trading Stock
56
36 000
7 500
30 000
DEBTORS JOURNAL (DJ)
DEBTORS ALLOWANCE JOURNAL (DAJ)
CREDITORS JOURNAL (CJ)
Sales
72 000
Cost of Sales
42 000
Debtors allowance
3 375
Cost of Sales
1 800
Total
165 150
Trading Stock
97 500
Equipment
52 500
Stationery
6 900
Sundry accounts
CREDITORS ALLOWANCE JOURNAL (CAJ)
8 250
Total
12 300
Trading Stock
12 000
Stationery
GENERAL JOURNAL (GJ)
300
Debtors control – credit
150
Creditors control – debit
360
Debtors control – debit
90
Creditors control – credit
115
This exercise required you to draft the control accounts from the information given in the
journals.
However, if a control account is given, you must be able to answer related questions.
Let’s have a look at the following example:
Example:
WESTMIN TRADERS is a retail business which uses a mark-up of 60% on cost at all
times. The business uses the continuous inventory system.
Study the DEBTORS CONTROL ACCOUNT below and answer the questions that
follow:
GENERAL LEDGER OF WESTMIN TRADERS
Debtors Control
2010
1
Balance
Jan
31
???
Feb
1
DJ
48 600
00 2010
74 816
31
Bank and
discount allowed
CRJ
44 160
00
00 Jan
???
DAJ
2 912
00
GJ
5 360
00
???
00
126 384
00
Bank
???
832
00
Journal credits
Petty cash
PCJ
224
00
Balance
Journal debits
GJ
Balance
1 912
00
126 384
00
???
00
57
Required:
1. Describe ONE transaction that could give rise to the entry of R224 on the debit
side of the account.
2. Describe ONE transaction that could give rise to the entry of R5 360 on the credit
side of the account.
3. Which GENERAL LEDGER ACCOUNT (contra account) will be debited as a
result of the credit entry of R2 912?
4. What is the source document for the credit entry of R2 912?
5. Calculate the balance on 1 February 2010.
6. Name the contra account for the amount of R74 816 on the debit side of the
account.
7. Calculate the COST OF SALES in the Debtors Journal for January 2010.
8. What is the folio reference for the entry ‘Bank – R832’ on the debit side of the
account?
9. What was the outstanding balance on debtors debt on 31 December 2009?
10. Determine the cost of returned goods by debtors for January 2010.
Answers:
Let’s first deal with mark-up rate: 60% on cost.
CP.100
​
 
 
 ​
________
___
______
60
Profit
= 60% = ​    ​ => ​ P60  ​ 
60% on cost => ​ 
  ​ 
100
cost price
SP 160
1. Pay carriage on purchase, R224, on behalf of a debtor from the petty cash.
2. Write off the debt of R Nel, R5 360, as irrecoverable.
3. Debtors allowance.
4. Credit note.
5. R126 384 – R44 160 – R2 912 – R5 360 = R73 952.
6.Sales.
CP
​ 100 ​ × 74 816 = R46 760.
7. Cost of sales = ___
​  ​ × 74 816 = ___
160
SP
8.CPJ.
9.R48 600.
​ 100 ​ × 2 912 = R1 820.
10. Cost of goods returned = ___
​CP ​ × 2 912 = ___
160
SP
Let’s see how you will do in the next exercise.
Exercise
UMPA TRADERS is a retail business which uses a mark-up of 25% on cost at all times.
The business uses the continuous inventory system.
Required:
Study the Debtors Control account below and answer the questions that follow:
58
GENERAL LEDGER OF UMPA TRADERS
Debtors Control
2010
1
Balance
May
31
Sales
93 432
00 2010
???
44 800
31
Bank and
discount allowed
CRJ
55 660
00
00 May
???
DAJ
22 912
00
GJ
960
00
Bank
CPJ
855
00
Journal credits
???
PCJ
924
00
Balance
Journal debits
GJ
5 992
00
???
Questions:
1. State the total amount owed by the debtors to UMPA Traders at the end of April
2010.
2. What is the folio reference for the entry “Sales – R44 800” on the debit side of the
account?
3. Name the contra account for the amount of R924 on the debit side of the account.
4. Calculate the balance b/d on 1 June 2010.
5. State whether the balance b/d is a debit or a credit balance.
6. Describe ONE transaction that could possibly give rise to the entry of R855 on
the debit side of the account.
7. Calculate the COST OF SALES in the Debtors Journal for May 2010.
8. What is the source document for the credit entry of R55 660?
9. Which General Ledger account (contra account) will be debited as a result of the
credit entry of R22 912?
10. Describe ONE transaction that could give rise to the entry of R960 on the credit
side of the account.
Unit 1.20:Reconciliation of the balance of the control
accounts and the totals of the listS of debtors
and creditors
The balance of the control accounts should reconcile with the total of the List of Debtors
or Creditors.
If the balance of the control account and total of the list do not reconcile, a reconciliation
statement should be drawn up to correct any mistakes and omissions.
Example:
The following balances and total of the List of Debtors as well as the total of the List of
Creditors appeared in the books of THI Dealers on 28 February 2010.
Debtors Control
List of Debtors Creditors Control
List of Creditors
R9 840
R8 760
R4 520
R4 221
59
The following mistakes and omissions were found:
1. The List of Debtors was overcast by R120.
2. The total of the debtors control column, R300, in the Cash Receipts Journal was
incorrectly posted to the debit side of the Debtors Control account.
3. The total of the sales column in the Debtors Journal was undercast by R200.
4. A debit note of R51 in the Creditors Allowance Journal was erroneously not
posted to the creditor’s account.
5. The total of the debtors allowance column in the Debtors Allowance Journal was
wrongly posted to the debit side of the Debtors Control account, R350.
6. The account of a debtor was balanced incorrectly. The balance had to be R650
instead of R550.
7. The creditors control column in the Creditors Journal was incorrectly added as
R170 instead of R160 and posted as such.
8. A debit note of R450 was incorrectly entered as R495 in the Creditors Allowance
Journal and posted as such.
9. An invoice for R236 was not entered in the Creditors Journal.
10. The balance of a creditor’s account was by mistake omitted from the List of
Creditors, R340.
Required:
Indicate how the mistakes and omissions should be corrected to reconcile the various
totals with the control accounts.
Solution:
DEBTORS CONTROL
LIST OF DEBTORS
DR
DR
CR
CR
1
CREDITORS CONTROL
LIST OF CREDITORS
DR
DR
CR
CR
120
2
600
3
200
4
51
5
700
6
100
7
10
8
45
45
9
236
236
10
340
Totals
200
Wrong
balance
Plus
1 300
9 840 Wrong
total
200 Plus
10 040
Less
1 300 Less
8 740
100
120
8 760 Wrong
balance
100 Plus
8 860
120 Less
8 740
60
10
281
4 520 Wrong
total
281 Plus
4 801
10 Less
4 791
51
621
4 221
621
4 842
51
4 791
Exercise
The following balances and total of the List of Debtors as well as the total of the List of
Creditors appeared in the books of ST Traders on 30 May 2010.
R5 175
R2 745
R5 670
R5 581
Debtors Control
List of Debtors Creditors Control
List of Creditors
The following mistakes and omissions were found:
1. The balance of a creditor’s account was by mistake omitted from the List of
Creditors, R450.
2. The account of a debtor was balanced incorrectly. The balance had to be R250
instead of R520.
3. A debit note of R351 in the Creditors Allowances Journal was erroneously not
posted to the creditor’s account.
4. The total of the debtors control column, R500, in the Cash Receipts Journal was
incorrectly posted to the debit side of the Debtors Control account.
5. A debit note of R495 was incorrectly entered as R435 in the Creditors Allowance
Journal and posted as such.
6. The List of Debtors was undercast by R200.
7. An invoice for R360 was not entered in the Creditors Journal.
8. The total of the sales column in the Debtors Journal was overcast by R1 200.
9. The creditor control column in the Creditors Journal was incorrectly added as
R270 instead of R280 and posted as such.
10. The total of the debtors allowance column in the Debtors Allowance Journal was
wrongly posted to the debit side of the Debtors Control account, R150.
Required:
Indicate how the mistakes and omissions should be corrected to reconcile the various
totals with the control accounts.
Unit 1.21: Transfers between debtors and creditors ledgers
It is possible to have customers who are also suppliers. In this case, you have a Debtors
Ledger account and a Creditors Ledger account for the same person or business.
In theory, you should receive the total amount owed by this customer for products supplied
by you, and you should pay the customer’s account in full for products you have bought.
This process would result in bank charges for both businesses and it makes sense to agree a
net payment system rather than both parties sending payments to each other. The process
is called set-off – you set off one balance against another to identify the net amount payable.
For example, if you owe R500 to T Smith, a supplier, who also owes you R400, it makes
sense for you to offset the amounts and accept R100 in full settlement of both debts. You
would therefore raise a journal voucher to create a source document for the transaction
and enter the transaction in the General Journal as follows:
61
On 31 May 2010:
T Smith as a creditor T Smith as a debtor
R500
R400
Offset the R400 against the R500 owed.
GENERAL JOURNAL OF TH DEALERS – MAY 2010
31
T Smith
400
400
T Smith
DR
CR
DEBTORS CONTROL
CREDITORS CONTROL
DR
DR
CR
400 CR
400 Summary
In this part, we looked at how we can use control accounts to provide clearer
information in relation to an accounting function where there are a number of entries
every month. We explained that the main use of the control account is for debtors and
creditors.
We also reconcile the control accounts with the particular list by addressing any errors
and/or omissions. We explained the process of set-off when you supply products to a
business from which you also buy.
62
Part 5: Results of sole traders
Overview
When you have completed Part 5 of this module, you should be able to:
• Record accounting entries for carriage on purchases, bad debts recovered, sales of
fixed assets (including adjustments to the asset register), and show the influence
on the accounting equation.
• Briefly explain the purpose of accounting adjustments and record account
entries for adjustments in relation to additional bad debts, provision for bad
debts, depreciation of fixed assets, provision for discount allowed, provision
for unforeseen expenses, accrued expenses, accrued income, prepaid expenses,
income received in advance, consumable stores on hand, trading stock deficit and
correction of errors and omissions.
• Draw up a post-adjustment Trial Balance after all adjustments have been
journalised and transferred to relevant accounts.
• Journalise the closing transfers and post to the relevant accounts.
• Draw up Trading and Profit and Loss accounts as well as a post-closing Trial
Balance.
• Draw up an Income Statement in vertical format.
• Draw up a Balance Sheet in vertical format with relevant notes.
Unit 1.22: Additional transactions
During the course of a financial year, you may have to deal with “unusual” accounting
items, some of which we cover below.
Carriage on purchases
When you buy materials from a supplier, you may have to pay carriage for delivering
the goods to your business premises. Many businesses treat this as part of the cost of the
stock, entering the total invoice amount into the Trading Stock account, for a continuous
stock system.
The Trading Stock account includes the cost price of stock bought and any indirect costs
like carriage.
Example:
Paid R2 500 per cheque to TBM Transport for delivery of stock ordered.
This transaction will be recorded in the Cash Payments Journal.
TRADING STOCK
Bank
2 500
00
63
BANK
Trading stock
2 500
00
On the accounting equation:
ACCOUNTING EQUATION
A
O
L
+ 2 500
–2 500
Bad debts recovered
At some point, you may find that a bad debt you wrote off some months before is suddenly
paid, in full or in part. This is called a bad debt recovered and is classified as an income
account.
Example:
Received R500 from Mrs K Walton, a debtor, whose debt had previously been written
off as irrecoverable.
This transaction will be recorded in the Cash Receipts Journal.
BANK
Bad debt
recovered
500
00
64
BAD DEBT RECOVERED
Bank
500
00
On the accounting equation:
ACCOUNTING EQUATION
A
O
+ 500
L
+ 500
Loans (long-term)
An enterprise may have a need for additional funding, but due to its current situation
does not have enough money of its own. One way of getting additional funding will be to
request the owner to make an additional capital contribution, but sometimes an enterprise
will apply to a financial institution to borrow money. The money borrowed from it is a
long-term loan and forms part of the long-term liabilities of this enterprise.
Two actions will follow:
• Repayment of the loan – to decrease the initial liability.
• Interest payable – cost related to having a loan.
The following example will focus on the three aspects of a long-term loan:
• Receiving money from the financial institution as a loan.
• Repayment of the loan.
• Interest payment.
Example:
1. Received an amount of R100 000 from BNT Bank for signing a loan agreement.
This transaction will be recorded in the Cash Receipts Journal.
65
BANK
Loan: BNT Bank
100 000
00
LOAN: BNT BANK
Bank
100 000
00
Loan: BNT Bank
10 000
00
Bank
100 000
00
This loan is a long-term liability for this enterprise.
On the accounting equation:
ACCOUNTING EQUATION
A
O
L
+ 100 000
+ 100 000
2. Paid R10 000 per cheque to BNT Bank as an instalment on the loan.
This transaction will be recorded in the Cash Payments Journal.
BANK
Loan: BNT Bank
100 000
00
LOAN: BNT BANK
Bank
10 000
00
This payment decreases this liability and will have a direct result on future
calculations.
On the accounting equation:
ACCOUNTING EQUATION
A
–10 000
O
L
–10 000
66
3. Paid R2 500 per cheque to BNT Bank as interest on loan.
This transaction will be recorded in the Cash Payments Journal. This interest is a
cost of having a loan and is therefore an Expense account.
BANK
Loan: BNT Bank
100 000
00
Loan: BNT Bank
Interest on loan
10 000
00
2 500
00
100 000
00
LOAN: BNT BANK
Bank
10 000
00
Bank
INTEREST ON LOAN
Bank
2 500
00
On the accounting equation:
ACCOUNTING EQUATION
A
O
–2 500
L
–2 500
Fixed deposit
A fixed deposit is the opposite of taking up a loan. An enterprise
may have additional funds on its current account that can be
invested to earn a better interest than is offered on the current
account.
Money in the enterprise’s current account is a current asset and
if this money is invested at a financial institution in the form of
a fixed deposit this will be classified as a long term (non-current)
asset. Fixed deposits are classified as financial assets.
fixed deposit: I s the
opposite of taking up a
loan. An enterprise may
have additional funds
on its current account
that can be invested to
earn a better interest
than is offered on the
current account. Money
in the enterprise’s
current account is a
current asset, and, if this
money is invested with
a financial institution
in the form of a fixed
deposit, this will be
classified as a long-term
(non-current) asset.
Fixed deposits are
classified as financial
assets.
Two actions will follow:
• Repayment of the fixed deposit by the financial institution at
the end of the agreed term.
• Interest receivable – income related to having a fixed deposit.
The following example will focus on the three aspects of a fixed deposit:
• Paying money to the financial institution as a fixed deposit.
67
• Interest receivable.
• Repayment of the fixed deposit by the financial institution at the end of the agreed
term.
Example:
1. Pay an amount of R150 000 over to Z Bank as a fixed deposit.
This transaction will be recorded in the Cash Payments Journal.
BANK
Fixed deposit:
Z Bank
150 000
00
FIXED DEPOSIT: Z BANK
Bank
150 000
00
This fixed deposit is a long-term (non-current) financial asset for this enterprise.
On the accounting equation:
ACCOUNTING EQUATION
A
O
L
–150 000
+ 150 000
2. Received a cheque for R1 250 from Z Bank as interest on fixed deposit.
This transaction will be recorded in the Cash Receipts Journal. This interest is a
receipt for having a fixed deposit and is therefore an Income account.
BANK
Interest on
fixed deposit
1 250
00
FIXED DEPOSIT: Z BANK
Bank
150 000
00
68
Fixed deposit:
Z Bank
150 000
00
INTEREST ON FIXED DEPOSIT
Bank
1 250
00
On the accounting equation:
ACCOUNTING EQUATION
A
O
+ 1 250
L
+ 1 250
3. Received a cheque of R150 000 from Z Bank as repayment of the fixed deposit at
the end of the period.
This transaction will be recorded in the Cash Receipts Journal.
BANK
Interest on
fixed deposit
Fixed deposit:
Z Bank
1 250
00
Fixed deposit:
Z Bank
150 000
00
Bank
150 000 00
150 000 00
FIXED DEPOSIT: Z BANK
Bank
150 000
00
INTEREST ON FIXED DEPOSIT
Bank
This receipt decreases this financial asset.
On the accounting equation:
ACCOUNTING EQUATION
A
O
L
–150 000
+ 150 000
69
1 250
00
Example:
The following information was given to you as the accountant on 31 December 2010,
the end of the financial year:
R110 000
R420 000
R44 100
Fixed deposit: ABSA (9% p.a.)
Loan: FNB (21% p.a.)
Interest on loan
Required:
1. If the fixed deposit was increased by R60 000 on 1 October 2010, calculate the
interest receivable for the financial year ended 31 December 2010.
2. The loan at FNB was obtained on 1 April 2010. Calculate the interest STILL
PAYABLE for the financial year ended 31 December 2010.
Answers:
1.
FINANCIAL YEAR 2010
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
Nov
50 000
Calculation: 1 Jan 2010 to 30 Sept 2010:
1 Oct 2010 to 31 Dec 2010:
2.
Dec
Jan
110 000
9
50 000 × 12 × 9%= 3 375
3
110 000 × 12 × 9% = 2 475
Total = 5 850
FINANCIAL YEAR 2010
Jan
Feb
Mar
Apr
May
Jun
Jul
0
Aug
Sept
Oct
Nov
Dec
Jan
420 000
9
Calculation: 1 Apr 2010 to 31 Dec 2010: 420 000 × 12 × 21%= 66 150
Already paid= 44 100
Still payable= 22 050
Asset disposal
Purchase of fixed assets is deemed to be part of investing
activities for use in the enterprise. These assets are usually
depreciated over the life span of these assets. Selling these assets
is not normally a trading activity within the enterprise, but
merely a way of replacing existing assets with new technology.
Selling assets is referred to as asset disposal.
70
asset disposal: T he
selling of assets. There
are three ways of
disposing of an asset:
1. Selling an asset
for cash.
2. Selling an asset
on credit.
3. Trade-in on a
new asset.
There are three ways of disposing of an asset:
• Selling an asset for cash.
• Selling an asset on credit.
• Trade-in on a new asset.
Information needed to dispose of an asset on a given date:
• The cost price of the asset.
• Accumulated depreciation of that asset on date on sale.
• Selling price (Proceeds).
• Profit or loss on the sale of an asset.
With this information the following entries will be recorded in the books for the disposal
of an asset:
• Transfer the cost price of the asset from the Asset account to the Asset Disposal
account.
ASSET ACCOUNT
Asset disposal
XXX
ASSET DISPOSAL
Asset account
XXX
• Transfer the accumulated depreciation related to that asset from the Accumulated
Depreciation account to the Asset Disposal account.
ASSET ACCOUNT
Asset disposal
XXX
ACCUMULATED DEPRECIATION
Asset disposal
XXX
ASSET DISPOSAL
Asset account
Accumulated
depreciation
XXX
71
XXX
• Record the sale.
ASSET ACCOUNT
Asset disposal
XXX
ACCUMULATED DEPRECIATION
Asset disposal
XXX
BANK
Asset disposal
XXX
ASSET DISPOSAL
Asset account
XXX
Accumulated
depreciation
XXX
Bank
XXX
• Calculate the result of the sale. If the credit side of the Asset Disposal account is more
than the debit side, a profit will be recorded on the debit side of the Asset Disposal
account, or if the debit side of the Asset Disposal account is more than the credit side,
a loss will be recorded on the credit side of the Asset Disposal account.
ASSET ACCOUNT
Asset disposal
ACCUMULATED DEPRECIATION
Asset disposal
XXX
BANK
Asset disposal
XXX
72
XXX
ASSET DISPOSAL
Asset account
XXX
Accumulated
depreciation
XXX
Profit on sale
of asset
XXX
Bank
XXX
PROFIT ON SALE OF ASSET
Asset disposal
XXX
Example:
On 31 August 2011 a vehicle with a cost
price of R225 000 and accumulated
depreciation, until date of sale of
R120 000, was sold for R130 000 on credit
to C Maasdorp.
The book value of this vehicle is the
difference between the cost price of that
vehicle and the accumulated depreciation
of the vehicle. Thus, the book value (real
value or net carrying amount) of the
vehicle is (225 000 – 120 000) = R105 000.
• If the proceeds are MORE than the
book value, a profit will be recorded.
• If the proceeds are LESS than the
book value, a loss will be recorded.
From this information it is known that:
• Cost price of asset sold = R225 000.
• Accumulated depreciation of asset up to
date of sale = R120 000.
• Proceeds from the sale = R130 000.
• The book value is R105 000 and the proceeds from the sale are R130 000. Thus the
proceeds are more than the book value and therefore a profit will be recorded.
Profit on sale of asset = R25 000
Asset Disposal account:
73
ASSET DISPOSAL
2010
Aug
2010
31
Vehicle
Profit on sale
of asset
225 000
25 000
00 Aug
31
Accumulated
depreciation on
vehicle
120 000
00
Debtors control
130 000
00
250 000
00
00
250 000 00
Example:
The following information appeared in the books of Big Jack Traders on 31 March
2010, the end of the financial year:
Vehicles
R105 000
Accumulated depreciation on vehicles R18 000
R98 000
Debtors control
Transaction:
On 31 March 2010 sell Vehicle A for R70 000 on credit to P Nel.
The cost price of this vehicle is R80 000 and the accumulated depreciation on the date
of sale is R16 000.
Required:
1. Calculate the book value of Vehicle A on date of sale.
2. Open the following ledger accounts and post the transaction to the relevant
accounts.
Vehicles.
Accumulated Depreciation on Vehicles.
Debtors Control.
Asset Disposal.
Solution
1. Book value = cost price – accumulated depreciation = 80 000 – 16 000 = 64 000.
2.
Vehicles
2010
Mar
2010
31
Balance
105 000
00 Mar
74
31
Asset disposal
80 000
00
Accumulated Depreciation on Vehicles
2010
Mar
2010
31
Asset disposal
16 000
00 Mar
31
Balance
18 000
00
Accumulated
depreciation on
vehicle
16 000
00
Debtors control
70 000
00
86 000
00
Debtors Control
2010
Mar
31
Balance
98 000
00
Asset disposal
70 000
00
Asset Disposal
2010
Mar
2010
31
Vehicle
Profit on sale of
asset
80 000
6 000
00 Mar
31
00
86 000 00
On date of sale the accumulated depreciation of the asset for sale must be updated, if
applicable, with additional depreciation. This action is needed to ensure that the real
value (book value) of the asset for sale can be calculated.
Exercise
The following information appeared in the books of Big Jack Traders on 28 February
2010, the end of the financial year:
Vehicles
R105 000
EquipmentR68 000
Accumulated Depreciation on Vehicles
R18 000
Accumulated Depreciation on Equipment R15 000
BankR98 000
Transaction:
On 31 August 2010 Vehicle B with cost price of R55 000 was sold for R30 000 cash. The
net carrying value of this vehicle on 28 February 2011 was R40 000. Depreciation on
vehicles is calculated at 20% p.a. on cost price.
Required:
1. Calculate the total accumulated depreciation for Vehicle B on date of sale.
2. What is the book value of Vehicle B on date of sale?
3. Draw up the Asset Disposal account on 31 August 2010 in the General Ledger.
4. Calculate the closing balance of the following accounts on 1 September 2010:
75
Vehicles.
Equipment.
Accumulated Depreciation on Vehicles.
Accumulated Depreciation on Equipment.
Bank.
Profit or Loss on Sale of Asset.
Unit 1.23: Accounting adjustments
It is a legal requirement for all businesses to produce accounts at the end of each financial
year to show the trading results and position for the year. However, on the last day of
the trading year you may not have received source documents such as supplier invoices
and bank statements. There are also annual calculations and adjustments that you have
to calculate in order to have all the information you need for the end-of-year accounts.
Therefore you may have additional calculations and adjustments for such transactions,
examples of which are given below.
All adjustments are recorded in the General Journal before posting to the relevant ledger
accounts.
Depreciation of non-current (fixed) assets
An asset is recorded at cost on the day of purchase. Over the years these assets (excluding
land and buildings) depreciated in value and it was necessary to adjust their cost price
accordingly to reflect the total value of assets realistically.
Providing for depreciation at the end of the financial year results in an expense called
depreciation, but this depreciation accumulates year on year in an account called
Accumulated Depreciation.
The difference between the cost price (gross carrying amount) and the accumulated
depreciation (total depreciation written off to date) is the book value (net carrying
amount) of that asset.
Providing for depreciation will have the following double entry in the books of the
enterprise.
Dr Depreciation
Cr Accumulated depreciation on assets (vehicles or equipment)
There are two methods to write off depreciation:
• Cost price method (straight-line method)
The cost price of the asset will be used in the calculation.
Example:
VehiclesR60 000
Accumulated depreciation on vehicles R15 000
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Provide for depreciation at 20% p.a. on the cost price method.
Calculation:
12
Depreciation = Cost price × period × % = 60 000 × 12 × 20% = R12 000
Vehicles
Balance
60 000
00
Accumulated Depreciation on Vehicles
Balance
15 000
00
Depreciation
12 000
00
Depreciation
Accumulated
depreciation on
vehicles
12 000
00
Depreciation is an Expense account and is reported on in the Income Statement.
Balances AFTER the adjustment:
VehiclesR60 000
Accumulated depreciation on vehicles R15 000 + R12 000 = R27 000
R60 000 – R27 000 = R33 000
Book value of vehicles
DepreciationR12 000
Therefore:
Gross carrying amount (cost price) of vehicles = R60 000
Net carrying amount of vehicles = Gross carrying amount less Accumulated
depreciation = R60 000 – R27 000 = R33 000
• Diminishing value method (book value method)
The book value (cost price less accumulated depreciation) of the asset will be used in
the calculation.
Example:
Equipment
R60 000
Accumulated depreciation on equipment R15 000
Provide for depreciation at 20% p.a. on the diminishing value method.
Calculation:
Depreciation = (Cost price – Accumulated depreciation) × period × %
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12
= (60 000 – 15 000) × 12 × 20%
= R9 000
Equipment
Balance
60 000
00
Accumulated Depreciation on Equipment
Balance
15 000
00
9 000
00
Depreciation
Depreciation
Accumulated
depreciation on
equipment
9 000
00
Depreciation is an Expense account and is reported on in the Income Statement.
Balances AFTER the adjustment:
Equipment R60 000
Accumulated depreciation on equipment R15 000 + R9 000 = R24 000
Book value of equipment
R60 000 – R24 000 = R36 000
DepreciationR9 000
Therefore:
Gross carrying amount (cost price) of equipment = R60 000
Net carrying amount of equipment
= Gross carrying amount less Accumulated depreciation
= R60 000 – R24 000 = R36 000
Exercise
1.Vehicles
R190 000
Equipment
R80 000
Accumulated depreciation on vehicles
R35 000
Accumulated depreciation on equipment R15 000
Provide for depreciation as follows:
1.1 on vehicles: 15% p.a. on cost price.
1.2 on equipment: 20% p.a. on the diminishing value method.
Thus, after the adjustment, provide the closing balances of the following:
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Vehicles
Equipment
Accumulated depreciation on vehicles
Accumulated depreciation on equipment
Depreciation
2. For the financial year ended 30 June 2011:
Vehicles
Equipment
Accumulated depreciation on vehicles
Accumulated depreciation on equipment
R100 000
R108 000
R58 000
R45 000
Note that new vehicles to the value of R90 000 were bought on 1 April 2011.
Provide for depreciation as follows:
2.1 On vehicle: 20% p.a. on cost price.
2.2 On equipment: 25% p.a. on the diminishing value method.
Thus, after the adjustment, provide the closing balances of the following:
Vehicles
Equipment
Accumulated depreciation on vehicles
Accumulated depreciation on equipment
Depreciation
Additional bad debts
If the debt of a debtor becomes irrecoverable, it is written off as a bad debt. Sometimes on
the last day of the financial year additional bad debts need to be written off.
Bad Debt will be debited and Debtors Control will be credited with the applicable amount.
Example:
Write off the debt of Mrs K Walton, a debtor, as irrecoverable, R750.
DEBTORS CONTROL
Bad debt
BAD DEBT
Debtors control
750
00
On the accounting equation:
79
750 00
ACCOUNTING EQUATION
A
O
–750
L
–750
Provision for bad debt
You may have reason to believe that one or more of your debtors may not be able to pay
their accounts in the future. In this case you can make a provision for bad debt.
Debtors are reflected in the Balance Sheet. It is important that this amount should be a
realistic value. Therefore provision for bad debt is needed. It is possible to calculate the
percentage of the debt written off to the total outstanding debtors. This percentage is given
for bad debt for the future financial year and will be used to make provision for bad debt.
Provision for bad debt will be discussed under the following headings:
• Creation of a provision for bad debt.
• Increase of a provision for bad debt.
• Decrease of a provision for bad debt.
Creation of a provision for bad debt
This provision is calculated on the outstanding debtors at a given date. Remember to
account first for any additional bad debt BEFORE the provision is calculated.
Example:
Debtors Control
R50 000
Create a provision for bad debts at 5% of the debtors.
Let’s calculate the provision = 5% × 50 000 = 2 500.
Provision for Bad Debt will be credited and Provision for Bad Debt Adjustment will be
debited with R2 500.
Provision for Bad Debt
Provision for
bad debt
adjustment
Provision for Bad Debt Adjustment
Provision for
bad debts
2 500
00
80
2 500
00
On the accounting equation:
ACCOUNTING EQUATION
A
O
–2 500
L
–2 500
Increase of a provision for bad debts
Example:
Debtors Control
R60 000
Provision for Bad Debt R2 500
Create a provision for bad debts at 5% of the debtors.
Let’s calculate the NEW provision = 5% × 60 000 = 3 000. Thus the provision will
increase from R2 500 to R3 000. The adjustment in the provision is R500.
Provision for Bad Debts will be credited and provision for Bad Debt Adjustment will
be debited with R500.
Provision for Bad Debts
Balance
Provision for
bad debt
adjustment
2 500
500 00
3 000
Provision for Bad Debt Adjustment
Provision for
bad debts
500 00
Provision for Bad Debt Adjustment is in this example an Expense account of R500.
On the accounting equation:
ACCOUNTING EQUATION
A
O
–500
L
–500
81
00
00
Decrease of a provision for bad debt
Example:
Debtors Control
R55 000
Provision for Bad Debt R3 000
Create a provision for bad debts at 5% of the debtors.
Let’s calculate the NEW provision = 5% × 55 000 = 2 750. Thus the provision will
decrease from R3 000 to R2 750. The adjustment in the provision is R250.
Provision for Bad Debts will be debited and Provision for Bad Debt Adjustment will be
credited with R250.
Provision for Bad Debts
Provision for
bad debt
adjustment
250 00
Balance
2 750
Balance
3 000
00
3 000
00
00
3 000 00
Provision for Bad Debt Adjustment
Provision for
bad debt
250 00
Provision for Bad Debt Adjustment is in this example an Income account of R250.
On the accounting equation:
ACCOUNTING EQUATION
A
O
+ 250
L
+ 250
Provision for discount allowed
At the end of a financial year you may have debtor accounts that will become due after
the end of the year and on which you will allow a discount for prompt payment. For your
year-end accounts you need to make provision for discount allowed and for all known
items related to the current year.
This provision should be calculated on the net estimated amount receivable from debtors.
The net estimated receivable amount for debtors will be the debtors control less additional
bad debt and less provision for bad debt. The reason why you should exclude the provision
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for bad debt is that you don’t allow discount on bad debt and it therefore needs to be
excluded from the provision for discount allowed calculation.
Provision for discount allowed will be discussed under the following headings:
• Creation of a provision for discount allowed.
• Increase of a provision for discount allowed.
• Decrease of a provision for discount allowed.
Creation of a provision for discount allowed
This provision is calculated on the net estimated amount receivable from debtors at a
given date. This net estimated amount receivable from debtors is debtors control less
provision for bad debt.
Example:
Debtors Control
R50 000
Provision for Bad Debt R2 500
Create a provision for discount allowed at 3% of the debtors.
This provision is calculated on the net estimated receivable amount that would be
equal to R50 000 less R2 500 = R47 500.
Let’s calculate the provision for discount allowed = 3% × 47 500 = 1 425.
Provision for Discount Allowed will be credited and Provision for Discount Allowed
Adjustment will be debited with R1 425.
Provision for Discount Allowed
Provision for
discount allowed
adjustment
Provision for Discount Allowed Debt Adjustment
Provision for
discount allowed
1 425
00
On the accounting equation:
ACCOUNTING EQUATION
A
– 1 425
O
L
– 1 425
83
1 425
00
Increase of a provision for discount allowed
Example:
Debtors Control
Provision for Bad Debt
Provision for Discount Allowed
R60 000
R2 500
R1 425
Create a provision for discount allowed at 3% of the debtors.
Remember the provision is calculated on the net estimated receivable amount. In this
example, this amount is equal to R57 500 (R60 000 less R2 500).
Let’s calculate the NEW provision = 3% × 57 500 = 1 725. Thus the provision will
increase from R1 425 to R1 725. The adjustment in the provision is R300.
Provision for Discount Allowed will be credited and Provision for Discount Allowed
Adjustment will be debited with R300.
Provision for Discount Allowed
Balance
Provision
for discount
allowed
adjustment
1 425
00
300 00
1 725
00
Provision for Discount Allowed Adjustment
Provision
for discount
allowed
300 00
Provision for Discount Allowed Adjustment is in this example an Expense account of
R 300.
On the accounting equation:
ACCOUNTING EQUATION
A
O
– 300
L
– 300
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Decrease of a provision for discount allowed
Example:
Debtors Control
Provision for Bad Debt
Provision for Discount Allowed
R55 000
R2 500
R1 725
Create a provision for discount allowed at 3% of the debtors.
Let’s calculate the NEW provision = 3% × 52 500 (net estimated receivable amount) =
1 575. Thus the provision will decrease from R1 725 to R1 575. The adjustment in the
provision is R150.
Provision for Discount Allowed will be debited and Provision for Discount Allowed
Adjustment will be credited with R150.
Provision for Discount Allowed
Provision
for discount
allowed
adjustment
150 00
Balance
1 575
Balance
1 725
00
1 725
00
00
1 725 00
Provision for Discount Allowed Adjustment
Provision
for discount
allowed
adjustment
150 00
Provision for Discount Allowed Adjustment is in this example an Income account of
R150.
On the accounting equation:
ACCOUNTING EQUATION
A
O
+ 150
L
+ 150
Provision for unforeseen expense
At the end of the financial year, if the enterprise is aware of a big expense which it is going
to incur during the next financial year, a provision must be made for this expense.
An example of such a provision would be if there is a looming legal case pending.
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Creation of a provision for unforeseen expense
Example:
In the following financial year the enterprise is going to be involved in a court case.
Create a provision of R150 000 for legal fees payable in the following financial year.
Provision for Legal Fees will be credited and Provision for Legal Fees Adjustment will
be debited with R150 000.
Provision for Legal Fees
Provision for legal
fees adjustment
150 000
00
Provision for Legal Fees Adjustment
Provision for legal
fees allowed
150 000
00
Provision for legal fees adjustment is, in this example, an expense account of R150 000.
On the accounting equation:
ACCOUNTING EQUATION
A
– 150 000
O
L
– 150 000
Accrued expenses (expenses still payable)
Enterprises must account for all expenses during the financial year. It can easily happen
that an expense incurred during the financial year is not paid before the end of the
financial year. In this case no transaction will be recorded in this Expense account and
therefore it will not reflect the real expense for this financial year.
This requires an adjustment to that Expense account to ensure the amount forwarded to
the Income Statement with regard to this expense is a true reflection of the real expense
for that financial year.
Accrued expense is expense related to the current financial year but which you expect to
pay after the end of the financial year.
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Example:
The manager of an enterprise is earning a monthly salary of R10 000. At the end of the
financial year the salary account indicates a total expense of R110 000; one month’s
salary is still payable. Therefore the amount of R110 000 (only 11 month’s expenses) is
not a true reflection of what the real expense is with regard to salaries for the particular
financial year, given the fact that the manager worked for a period of 12 months. The
Salary account must be adjusted with the last month’s expense of R10 000, so that the
Salary account can reflect expenses for 12 months as it should be in this case. This
additional R10 000 is an expense still payable and is referred to as accrued expense.
The double entry should be: Salary account debited with R10 000 and Accrued Expense
credited with R10 000. The Accrued Expense account is a liability for the reason that
this amount is still payable.
Salary
Balance
110 000
Accrued expense
00
10 000 00
120 000
00
Accrued Expense
Salary
10 000 00
The total salary expense is R120 000 after the adjustment.
On the accounting equation:
ACCOUNTING EQUATION
A
O
– 10 000
L
+ 10 000
The above adjustment is done at the end of the financial year and the Expense account is
closed off to the Profit and Loss account (or Income Statement) and the account Accrued
Expense is recorded in the Balance Sheet as part of Trade and Other Creditors.
However, at the beginning of the following financial year this Accrued Expense account
must be written back to the Expense account. This is to ensure that the first payment for
salary in the new financial year is to cover the amount still payable with regard to the
previous financial year.
87
Let’s do the reversal of this accrued expense:
Accrued Expense
Salary
10 000 00
Salary
10 000
00
Salary
Accrued expense
10 000 00
The writing back of accrued expense results in the closing off of the Accrued Expense
account. The first payment of R10 000 on the debit side of the Salary account will cover
the amount outstanding from the previous financial year.
Accrued income (income receivable)
Enterprises must account for all income during the financial year. It can easily happen
that an income is incurred during the financial year, but is not received before the end of
the financial year. In this case, no transaction will be recorded in this Income account and
therefore the real income for this financial year will not be reflected.
This requires an adjustment to this Income account to ensure that the amount forwarded
to the Income Statement with regard to this income is a true reflection of the real income
for that financial year.
Accrued income is income related to the current financial year but which you expect to
receive after the end of the financial year.
Example:
The enterprise lets a building to another enterprise for R5 000 per month. At the end
of the financial year the Rent Income account indicates a total income of R55 000;
one month’s rent income is still receivable. Therefore the amount of R55 000 (only 11
month’s income) is not a true reflection of what the real income is with regard to rent
income for the particular financial year, given the fact that the building was leased for a
period of 12 months. The Rent Income account must be adjusted with the last month’s
income of R5 000 so that the Rent Income account can reflect an income for 12 months
as it should be in this case. This additional R5 000 is an income still receivable and is
referred to as accrued income.
The double entry should be: Rent Income account credited with R5 000 and Accrued
Income debited with R5 000. The Accrued Income account is an asset for the reason
that this amount is still receivable.
88
Rent Income
Balance
Accrued income
55 000
00
5 000 00
60 000
00
Accrued Income
Rent income
5 000
00
The total rent income is R60 000 after the adjustment.
On the accounting equation:
ACCOUNTING EQUATION
A
O
+ 5 000
L
+ 5 000
The above adjustment is done at the end of the financial year and the income is closed off
to the Profit and Loss account (or Income Statement) and the account Accrued Income is
recorded in the Balance Sheet as part of Trade and Other Debtors.
However, at the beginning of the following financial year this Accrued Income account
must be written back to the Income account. This is to ensure that the first receipt for rent
income in the new financial year is to cover the amount still receivable with regard to the
previous financial year.
Let’s do the reversal of this accrued income:
Accrued Income
Rent income
5 000 00
Rent income
5 000 00
Rent Income
Accrued income
5 000
00
The writing back of accrued income results in the closing off of the Accrued Income
account. The first receipt of R5 000 on the credit side of the Rent Income account will
cover the amount outstanding from the previous financial year.
89
Prepaid expenses (expenses paid in advance)
It can easily happen that an expense paid during the financial year runs into the next
financial year. In this case, the Expense account is overstated with an amount related to
the next financial year. Reporting on expenses should only relate to the current financial
year.
This requires an adjustment to this Expense account to ensure that the amount forwarded
to the Income Statement with regard to this expense is a true reflection of the real expense
for that financial year.
Prepaid expense is an expense related to the next financial year, but which you have already
paid in this financial year.
Example:
Given that the enterprise’s financial year ends on 30 June, assume a payment of R24 000
is made on 1 October of that financial year to its insurance company as an annual
insurance premium. This payment will cover the insurance for the enterprise till 30
September in the next financial year. At the end of the financial year the Insurance
account indicates a total expense of R24 000 of which three months is related to the
next financial year. Therefore the amount of R24 000 (including the payment of three
months that is related to the next financial year) is not a true reflection of the real
expense for insurance for the particular financial year. The Insurance account must
______
  ​ 
 = R2 000 per month) so
be adjusted with the thee months’ expense of R6 000 (​R24 000
12
that the Insurance account can reflect an expense that is only related to this financial
year. This amount of R6 000 is an expense paid in advance and is referred to as prepaid
expense.
The double entry should be: Insurance account credited with R6 000 and Prepaid
Expense debited with R6 000. The Prepaid Expense account is an asset.
Insurance
Balance
24 000
00
Prepaid expense
Prepaid Expense
Insurance
6 000 00
The total insurance expense is R18 000 after the adjustment.
90
6 000 00
On the accounting equation:
ACCOUNTING EQUATION
A
O
+ 6 000
L
+ 6 000
The above adjustment is done at the end of the financial year and the Expense account is
closed off to the Profit and Loss account (or Income Statement) and the account Prepaid
Expense is recorded in the Balance Sheet as part of Trade and Other Debtors.
However, at the beginning of the following financial year this Prepaid Expense account
must be written back to the Expense account.
Let’s do the reversal of this prepaid expense:
Prepaid Expense
Insurance
6 000
00
Insurance
6 000 00
Insurance
Prepaid expense
6 000 00
The writing back of prepaid expense results in the closing off of the Prepaid Expense
account. The payment of R6 000 on the debit side of the Insurance account is a relocation
of the three months’ payment that was made in the previous financial year related to this
financial year.
Income received in advance
It can easily happen that an income is received during the financial year running into the
next financial year. In this case the Income account is overstated with an amount related
to the next financial year. Reporting on income should only relate to the current financial
year.
This requires an adjustment to this Income account to ensure that the amount forwarded
to the Income Statement with regard to this income is a true reflection of the real income
for that financial year.
Income received in advance is income related to the next financial year but which you have
already received in this financial year.
91
Example:
The enterprise lets a building to another enterprise for R5 000 per month. At the end
of the financial year the Rent Income account indicates a total income of R65 000;
one month’s rent income is received in advance. Therefore the amount of R65 000 (13
months of income) is not a true reflection of what the real income is regarding the rent
income for the particular financial year, given the fact that the building was leased for
a period of 12 months in this financial year. The Rent Income account includes one
month of rent income received that is related to the next financial year, and therefore
must be adjusted by R5 000 so that the Rent Income account can only reflect an income
for 12 months as it should be in this case. This R5 000 is an income received for the
next financial year and should be accounted for in that financial year and referred to as
income received in advance.
The double entry should be: Rent Income account debited with R5 000 and Income
Received in Advance credited with R5 000. Income received in advance is a liability.
Rent Income
Income
received in
advance
5 000
00
Balance
65 000
00
Income Received in Advance
Rent income
5 000 00
The total rent income is R60 000 after the adjustment.
On the accounting equation:
ACCOUNTING EQUATION
A
O
L
– 5 000
+ 5 000
The above adjustment is done at the end of the financial year and the Income account is
closed off to the Profit and Loss account (or Income Statement) and the account Income
Received in Advance is recorded in the Balance Sheet as part of Trade and Other Creditors.
However at the beginning of the following financial year, this Income Received in Advance
account must be written back to the Income account.
Let’s do the reversal of this income received in advance:
92
Income Received in Advance
Rent income
5 000 00
Rent income
5 000
00
Income
received in
advance
5 000 00
Rent Income
The writing back of income received in advance results in the closing off of the Income
Received in Advance account. The receipt of R5 000 on the credit side of the Rent Income
account is a relocation of the one month’s receipt that was received in the previous
financial year related to this financial year.
Trading Stock deficit
Most businesses determine the value of stock at the end of the financial year by carrying
out a physical count of the items sitting in the stores on the last day of the year and
checking that count against the stores record cards. The two amounts may not agree,
perhaps because of errors in the system or because stock has been stolen during the year.
Example:
Trading Stock (as reflected in the books
on the last day of the financial year) R50 000
On the last day of the financial year, the stock on hand after the physical stock take, is
R49 600.
Reporting on trading stock will be done in the Balance Sheet as part of current assets.
Therefore reporting it to be R50 000 is not a true reflection of the trading stock in this
enterprise. An adjustment to the trading stock is needed.
The R400 difference is most likely due to theft and would be recorded as a loss in the
books of the enterprise as a trading stock deficit.
The double entry should be: Trading Stock credited with R400 and Trading Stock
Deficit debited with R400. Trading Stock deficit is a loss in stock and is classified as an
expense.
Trading Stock
Balance
50 000
00
93
Trading Stock
deficit
400 00
Trading Stock Deficit
Trading Stock
400 00
The total trading stock is R49 600 after the adjustment.
On the accounting equation:
ACCOUNTING EQUATION
A
O
– 400
L
– 400
Consumable goods on hand
Consumable goods on hand are any consumable items like stationery, packing materials,
et cetera, on hand at the end of the financial year.
Any purchase of consumable goods is classified as an expense. These amounts will only
be recorded in total as an expense if no goods are on hand at the end of the financial year.
In the case of these goods being on hand, that is if they are unused and will only be used
in the next financial year, that part of the payment will therefore follow the expense to the
next financial year and be recorded in that financial year.
Example:
Stationery
R5 000
On the last day of the financial year, the stationery on hand after the physical stock
take is R1 000.
The total used stationery in this financial year is R4 000 and this amount will be
recorded in the Income Statement as an expense. The unused stationery of R1 000 will
be recorded as an expense in the next financial year if used. An adjustment to the
Stationery account is needed.
The stationery on hand of R1 000 is referred to as consumable goods on hand.
The double entry should be: Stationery credited with R1 000 and Consumable Goods
on Hand debited with R1 000. The Consumable Goods on Hand account is an asset.
Stationery
Balance
5 000
00
94
Consumable
goods on hand
1 000 00
Consumable Goods on Hand
Stationery
1 000 00
The total stationery is R4 000 after the adjustment.
On the accounting equation:
ACCOUNTING EQUATION
A
O
+ 1 000
L
+ 1 000
Correction of errors and omissions
Errors and omissions in accounts should be investigated and corrected in the accounts in
which they occur.
Example:
The following balance appeared in the books at the end of the financial year:
Stationery
Bank Charges
R3 200
R600
During the year stationery to the value of R100 was bought, but the Bank Charges
account was incorrectly debited. Rectify the error.
A mistake was made by the accountant and therefore the correction must follow. The
entry was supposed to be an entry in the Stationery account, but instead it was entered
in the Bank Charges account.
The double entry should be: Bank Charges credited with R100 and Stationery debited
with R100.
Stationery
Balance
Bank charges
3 200
00
100 00
Bank Charges
Balance
600
00
95
Stationery
100 00
After the adjustment the Stationery account is R3 300 and the Bank Charges account
is R500.
On the accounting equation:
ACCOUNTING EQUATION
A
O
L
+ 100
– 100
Unit 1.24: Post-adjustment Trial Balance
For an accounting function, the end of the financial year is an extremely busy time because
the ledger accounts used during the year have to be balanced and closed off, checked for
accuracy, and adjustments journalised and transferred to relevant accounts.
The last month’s Trial Balance drawn up before any end-of-year adjustments is called the
pre-adjustment Trial Balance. All adjustments will be considered and applied to the preadjustment Trial Balance. The adjusted balances in a newly drawn up Trial Balance are
referred to as the post-adjustment Trial Balance.
Example A
You are provided with the PRE-ADJUSTMENT TRIAL BALANCE of BIG TIME
STORES on 30 June 2011.
Required:
1. Open all the accounts listed in the pre-adjustment Trial Balance in the General
Ledger of Big Time Stores.
2. Journalise the adjustments and post from the General Journal to the ledger
accounts.
3. Draw up a post-adjustment Trial Balance of Big Time Stores on 30 June 2011.
Adjustments:
1. A credit invoice from TS Dealers, R3 400, for stock purchased was omitted from
the financial records. Record this transaction.
2. According to a physical stock count on 30 June 2011, the following stock was on
hand:
Trading Stock
R68 500
Stationery
R480
3. A debtor, B Mans, has disappeared and his account of R2 000 must be written off
as irrecoverable.
4. Adjust the provision for bad debt to 5% of outstanding debtors.
5. The fixed deposit was increased by R50 000 on 1 April 2011. Provide for the
outstanding interest.
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6. The interest on the loan is still due. On 30 September 2010 the interest rate was
decreased from 25% p.a. to 20% p.a.
7. Rent is still receivable for three months. There has been no increase in the
monthly rent for this financial year.
8. Insurance includes an annual premium of R2 400 on a new policy which
commenced on 1 November 2010.
9. An amount of R300 was collected from M Botman whose account had previously
been written off.
10. Depreciation must be provided for as follow:
On equipment at 15% p.a. according to the diminishing balance method.
On vehicles at 20% p.a. on cost price.
Take into account that a vehicle with a gross carrying value of R20 500 was
bought on 1 October 2010.
11. In June 2011 the manager’s salary of R5 000, was paid, but the Wages account was
incorrectly debited. Rectify this error.
BIG TIME STORES
PRE-ADJUSTMENT TRIAL BALANCE ON 30 JUNE 2011
DR
CR
BALANCE SHEET ACCOUNTS SECTION
Capital
746 000
Drawings
9 000
Land and buildings
869 000
Equipment
180 000
Accumulated depreciation on equipment
32 000
Vehicles
120 500
Accumulated depreciation on vehicles
49 000
Fixed deposit: ABSA Bank (8% p.a.)
200 000
Trading Stock
66 600
Debtors control
40 000
Bank
1 200
Loan: NEDBANK (20% p.a.)
400 000
Petty cash
200
Creditors control
64 200
Provision for bad debt
2 000
NOMINAL ACCOUNTS SECTION
Sales
483 000
Cost of Sales
220 000
Debtors allowances
3 000
Rent income
18 000
Interest on fixed deposit
16 000
Discount received
2 000
Wages
5 000
97
Salaries
32 110
Interest on loan
45 000
Bad debts
6 110
Insurance
12 000
Stationery
2 480
1 812 200
1 812 200
Solution
As part of the solution a short explanation will follow on each of the adjustments to
help you understand them better.
Adjustments
Throughout it is important to identify the accounts applicable in these adjustments
and how these accounts will be affected.
1. A credit invoice from TS Dealers, R3 400, for stock purchased was omitted from
the financial records. Record this transaction.
The journal entry:
GENERAL JOURNAL OF BIG TIME STORES – JUNE 2011
DR
CR
DEBTORS CONTROL
DR
CREDITORS CONTROL
30
Trading Stock
3 400
CR
DR
CR
TS Dealers
3 400
3 400
Adjusted balances:
Trading Stock = R66 600 + 3 400 = R70 000
Creditors control = R64 200 + 3 400 = R67 600
2. According to a physical stock count on 30 June 2011, the following stock was on
hand:
Trading Stock R68 500
Stationery
R480
Remember that after adjustment the balance of trading stock is R70 000; therefore
the deficit is R1 500 (R70 000 – R68 500).
98
The journal entry:
DR
30
CR
CREDITORS CONTROL
DR
CR
CR
1 500
Trading Stock
deficit
Trading Stock
1 500
Consumable
goods on hands
480
Stationery
DEBTORS CONTROL
DR
480
Adjusted balances:
Trading Stock = R70 000 – 1 500 = R68 500
Trading Stock deficit
= R1 500
Stationery
= R2 480 – 480
= R2 000
Consumable goods on hand = R480
3. A debtor, B Mans, has disappeared and his account of R2 000 must be written off
as irrecoverable.
The journal entry:
DR
30
Bad debts
CR
DEBTORS CONTROL
CREDITORS CONTROL
DR
DR
CR
CR
2 000
2 000
2 000
Adjusted balances:
Debtors control = R40 000 – 2 000 = R38 000
Bad debts
= R6 110 + 2 000 = R8 110
4. Adjust the provision for bad debt to 5% of debtors.
Remember that the provision must be calculated on the net debtors after
adjustment 3; therefore on the balance of R38 000.
Provision for bad debt = 38 000 × 5% = R1 900. The old provision is R2 000
according to the Trial Balance. Therefore the adjustment is a decrease of R100.
The journal entry:
DR
30
Provision for
bad debts
Provision for
bad debts
adjustment
CR
100
100
99
DEBTORS CONTROL
CREDITORS CONTROL
DR
DR
CR
CR
Adjusted balances:
Provision for bad debts = R2 000 – 100= R1 900
Provision for bad debts adjustment = R100
5. The fixed deposit was increased by R50 000 on 1 April 2011. Provide for the
outstanding interest.
A timeline is always useful to ensure that you do the calculation correctly.
FINANCIAL YEAR 2010/2011
Jul
Aug
Sept
Oct
Nov
Dec
Jan-11
Feb
Mar
Apr
May
150 000
Jun
Jul
200 000
9
12
Calculation: 150 000 × 12 × 8% = R9 000 OR 150 000 × 12 × 8% = 12 000
3
3
200 000 × 12 × 8% = R4 000 50 000 × 12 × 8% = 1 000
Total (real income) = R13 000 Total = 13 000
OR What amount is recorded in the Trial Balance? = R16 000
Thus R3 000 (16 000 – 13 000) is received in advance.
Income received in advance = R3 000.
The journal entry:
DR
30
Interest on
fixed deposit
CR
CREDITORS CONTROL
DR
DR
CR
CR
3 000
Income
received in
advance
6.
DEBTORS CONTROL
3 000
Adjusted balances:
Interest on fixed deposit = R16 000 – 3 000= R13 000
Income received in advance = R3 000
The interest on the loan is still due. On 30 September 2010 the interest rate was decreased from 25% p.a. to 20% p.a.
FINANCIAL YEAR 2010/2011
Jul
Aug
Sept
Oct
Nov
Dec
Jan-11
25%
Calculation:
Feb
Mar
20%
3
400 000 × 12 × 25% = R25 000
9
400 000 × 12 × 20% = R60 000
Total (real income) = R85 000
100
Apr
May
Jun
Jul
What amount is recorded in the Trial Balance? = R45 000
Thus R40 000 is still payable. Accrued expenses = R40 000.
The journal entry:
DR
30
Interest on
loan
CR
CREDITORS CONTROL
DR
DR
CR
CR
40 000
Accrued
expense
DEBTORS CONTROL
40 000
Adjusted balances:
Interest on loan = R45 000 + 40 000 = R85 000
Accrued expense = R40 000
7. Rent is still receivable for three months. There has been no increase in the
monthly rent for this financial year.
Three months is still receivable = rent for only nine months was received.
Nine months = R18 000 and therefore the monthly rent is R2 000 per month.
R6 000 (three months) is still receivable. Accrued income = R6 000.
The journal entry:
DR
30
CR
CREDITORS CONTROL
DR
CR
CR
6 000
Accrued
income
Rent income
DEBTORS CONTROL
DR
6 000
Adjusted balances:
Rent income
= R18 000 + 6 000 = R24 000
Accrued income = R6 000
8. Insurance includes an annual premium of R2 400 on a new policy which
commenced on 1 November 2010.
FINANCIAL YEAR 2010/2011
Jul
Aug
Sept
Oct
Nov
Dec
Jan-11
Feb
Mar
Apr
May
Jun
Jul
In this financial year = 8 months
Annual premium of R2 400 = R200 per month
Of this year, eight months are within this financial year; however the last four are
in the next financial year. The insurance for these four months is paid in advance.
Prepaid expense = R800 (four months × R200)
101
The journal entry:
DR
30
CR
DEBTORS CONTROL
CREDITORS CONTROL
DR
DR
CR
CR
800
Prepaid
expense
Insurance
800
9.
Adjusted balances:
Insurance = R12 000 – 800 = R11 200
Prepaid expense
= R800
An amount of R300 was collected from M Botman whose account had previously
been written off.
Bad debt recovered.
The journal entry: (This transaction will normally be recorded in the CRJ.)
DR
30
Bank
CR
CREDITORS CONTROL
DR
DR
CR
CR
300
Bad debt
recovered
DEBTORS CONTROL
300
Adjusted balances:
Bank
= R1 200 + 300 = R1 500
Bad debt recovered = R300
10. Depreciation must be provided for as follows:
On equipment at 15% p.a. according to the diminishing balance method.
On vehicles at 20% p.a. on cost price. Take into account that a vehicle with a gross carrying value of R20 500 was
bought on 1 October 2010.
Calculations:
12
Depreciation (equipment) = (180 000 – 32 000) × 15% × 12 = 22 200
Depreciation (vehicles)
FINANCIAL YEAR 2010/2011
Jul
Aug
Sept
Oct
Nov
Dec
Jan-11
100 000
Feb
Mar
120 500
3
Depreciation (vehicles) = 100 000 × 20% × 12 = 5 000
102
Apr
May
Jun
Jul
9
+ 120 500 × 20% × 12 = 18 075
Total = 23 075
The journal entry:
DR
30
Depreciation
(23 075 + 22 200)
CR
DEBTORS CONTROL
CREDITORS
CONTROL
DR
DR
CR
CR
45 275
Accumulated
depreciation
on equipment
22 200
Accumulated
depreciation
on vehicles
23 075
Adjusted balances:
Accumulated depreciation on equipment
Accumulated depreciation on vehicles
Depreciation = R45 275
R32 000 + 22 200 = R54 200
R49 000 + 23 075 = R72 075
11. In June 2011 the manager’s salary of R5 000 was paid, but the Wages account was
incorrectly debited. Rectify this error.
The mistake was made in the Wages account; this account must be credited.
DR
30
Salaries
CR
CREDITORS CONTROL
DR
CR
CR
5 000
Wages
DEBTORS CONTROL
DR
5 000
Adjusted balances:
Salaries = R32 110 + 5 000 = R37 110
Wages = R5 000 – 5 000 = R0
Now let’s get to the information required:
1. Open all the accounts listed in the pre-adjustment Trial Balance in the General
Ledger of Big Time Stores.
GENERAL LEDGER OF BIG TIME STORES
Balance Sheet Accounts Section
CapitalB1
2011
Jun
103
30
Balance
746 000
00
DrawingsB2
2011
30
Balance
9 000
00
Jun
Land and Buildings
2011
30
Balance
869 000
B3
00
Jun
EquipmentB4
2011
30
Balance
180 000
00
Jun
Accumulated Depreciation on Equipment
2011
30
Jun
Balance
Depreciation
B5
32 000
00
22 200
00
54 200
00
VehiclesB6
2011
30
Balance
120 500
00
Jun
Accumulated Depreciation on Vehicles
2011
30
Jun
B7
Balance
49 000
00
Depreciation
23 075
00
72 075
00
Fixed Deposit: ABSA Bank (8% p.a.)
2011
30
Balance
200 000
B8
00
Jun
Trading Stock
2011
30
Jun
Balance
Creditors control
66 600
00 2011
3 400
00 Jun
30
B9
Trading Stock
deficit
Balance
70 000 00
1 500
00
68 500
00
70 000
00
Debtors Control
2011
30
Balance
40 000
00 2011
Jun
Jun
40 000 00
104
30
B10
Bad debts
(Journal credits)
Balance
2 000
00
38 000
00
40 000
00
2011
30
Jun
Balance
Bad debt
recovered
BankB11
1 200
00
300
00
1 500 00
Loan: NEDBANK (20% p.a.)
2011
30
Balance
B12
400 000
00
Jun
2011
Petty Cash
30
Balance
200
B13
00
Jun
Creditors Control
2011
30
Jun
2011
B14
Balance
Trading Stock
64 200
00
3 400
00
67 600
00
Provision for Bad Debt
30
Provision for
bad debt
adjustment
100
00 2011
Jun
30
B15
Balance
2 000
00
2 000
00
Jun
Balance
1 900
00
2 000 00
Consumable Goods on Hand
2011
30
Stationery
480
B16
00
Jun
Income Received in Advance
2011
30
Interest on fixed
deposit
B17
3 000
00
Jun
Accrued Expenses
2011
Jun
105
30
B18
Interest on loan
40 000
00
Accrued Income
2011
30
Rent income
6 000
B19
00
Jun
2011
Prepaid Expenses
30
Insurance
800
B20
00
Jun
Nominal Accounts Section
SalesN1
2011
30
Balance
483 000
00
Jun
Cost of SalesN2
2011
30
Balance
220 000
00
Jun
Debtors AllowancesN3
2011
30
Balance
3 000
00
Jun
Rent IncomeN4
2011
30
Jun
Balance
Accrued income
18 000
00
6 000
00
24 000
00
Interest on Fixed DepositN5
2011
30
Income
received in
advance
3 000
Jun
00 2011
30
Balance
16 000
00
Jun
Discount ReceivedN6
2011
30
Balance
2 000
00
Jun
WagesN7
2011
30
Balance
5 000
00 2011
Jun
106
30
Salaries
5 000
00
SalariesN8
2011
30
Jun
Balance
Wages
32 110
00
5 000
00
37 110 00
Interest on LoanN9
2011
30
Jun
Balance
45 000
00
Accrued expenses
40 000
00
85 000 00
2011
Bad DebtsN10
30
Jun
Balance
6 110
00
Debtors control
2 000
00
8 110 00
InsuranceN11
2011
30
Balance
12 000
00 2011
Jun
30
Prepaid expense
800
00
Jun
StationeryN12
2011
30
Balance
2 480
00 2011
Jun
30
Consumable
goods on hand
480
00
Jun
Trading Stock DeficitN13
2011
30
Trading Stock
1 500
00
Jun
Provision for Bad Debt AdjustmentN14
2011
30
Provision for
bad debt
100
00
Jun
DepreciationN16
2011
30
Accumulated
depreciation on
equipment
22 200
00
Accumulated
depreciation on
equipment
23 075
00
45 275
00
Jun
107
2. Journalise the adjustments and post from the General Journal to the ledger
accounts.
This question was addressed partly in the explanation of the adjustments. The
posting is done to the same General Ledger drawn up in 1.
3. Draw up a post-adjustment Trial Balance of Big Time Stores on 30 June 2011.
BIG TIME STORES
POST-ADJUSTMENT TRIAL BALANCE ON 30 JUNE 2011
DR
CR
BALANCE SHEET ACCOUNTS SECTION
Capital
746 000
Drawings
9 000
Land and buildings
869 000
Equipment
180 000
Accumulated depreciation on equipment
54 200
Vehicles
120 500
Accumulated depreciation on vehicles
72 075
Fixed deposit: ABSA Bank (8% p.a.)
200 000
Trading Stock
68 500
Debtors control
38 000
Bank
1 500
Loan: NEDBANK (20% p.a.)
400 000
Petty cash
200
Creditors control
67 600
Provision for bad debt
1 900
Consumable goods on hand
480
Income received in advance
3 000
Accrued expenses
40 000
Accrued income
6 000
Prepaid expenses
800
NOMINAL ACCOUNTS SECTION
Sales
483 000
Cost of Sales
220 000
Debtors allowances
3 000
Rent income
24 000
Interest on fixed deposit
13 000
Discount received
2 000
Wages
–
Salaries
37 110
Interest on loan
85 000
Bad debts
8 110
Insurance
11 200
108
Stationery
2 000
Trading Stock deficit
1 500
Provision for bad debt adjustment
100
Bad debt recovered
300
Depreciation
45 275
1 907 175
1 907 175
Unit 1.25: Closing transfers
At the end of the financial year, after all adjustments, the nominal accounts section of the
post-adjustment Trial Balance is closed off. These accounts are closed off to the Trading
account and Profit and Loss Account. The closing off of these accounts is the closing
transfers and is done in the General Journal.
The eight closing transfers are:
• Closing off of the Debtors Allowance account to the Sales account, to determine the
net sales for the financial year.
• Closing off the net sales as per Sales account is now closed off to the TRADING
account.
• Closing off of the Cost of Sales account to the TRADING account.
• The balance of the TRADING account, now the gross profit, is transferred to the
PROFIT AND LOSS account.
• Closing off ALL income accounts to the credit side of the PROFIT AND LOSS account.
• Closing off ALL expenditure accounts to the debit side of the PROFIT AND LOSS
account.
• The balance of the PROFIT AND LOSS account, now the net profit/loss, is transferred
to the Capital account.
• Closing off the Drawings account to the Capital account.
After recording these closing transfers in the General Journal and posting it to the General
Ledger, the post-closing Trial Balance can be drawn up. This Trial Balance will only have
a balance sheet accounts section for the reason that all nominal accounts have been closed
off.
Unit 1.26: Final accounts
There are two final accounts. These accounts are the TRADING account and PROFIT
AND LOSS account, as referred to in the previous section.
• Trading account
In this account the gross profit is calculated by closing off the net sales and cost of sales
accounts at year end. The gross profit is then transferred to the Profit and Loss account.
• Profit and Loss account
In this account the net profit/loss is calculated by transferring the gross profit from the
Trading account, and closing off all income and expenditure accounts at year-end. The
109
net profit/loss is then transferred to the Capital account as it forms part of the owner’s
equity.
Example B (follow-up on Example A)
The following post-adjustment Trial Balance appeared in the books of Big Time Stores
on 30 June 2011:
Required:
1. Journalise the closing transfers.
2. Open all accounts as well as the Trading and Profit and Loss accounts in the
General Ledger of Big Time Stores.
3. Post the closing transfers to the General Ledger.
4. Draw up the post-closing Trial Balance.
BIG TIME STORES
POST-ADJUSTMENT TRIAL BALANCE ON 30 JUNE 2011
DR
CR
BALANCE SHEET ACCOUNTS SECTION
Capital
746 000
Drawings
9 000
Land and buildings
869 000
Equipment
180 000
Accumulated depreciation on equipment
54 200
Vehicles
120 500
Accumulated depreciation on vehicles
72 075
Fixed deposit: ABSA Bank (8% p.a.)
200 000
Trading Stock
68 500
Debtors control
38 000
Bank
1 500
Loan: NEDBANK (20% p.a.)
400 000
Petty cash
200
Creditors control
67 600
Provision for bad debt
1 900
Consumable goods on hand
480
Income received in advance
3 000
Accrued expenses
40 000
Accrued income
6 000
Prepaid expenses
800
NOMINAL ACCOUNTS SECTION
Sales
483 000
Cost of Sales
220 000
Debtors allowances
3 000
Rent income
24 000
Interest on fixed deposit
13 000
110
Discount received
2 000
Wages
–
Salaries
37 110
Interest on loan
85 000
Bad debts
8 110
Insurance
11 200
Stationery
2 000
Trading Stock deficit
1 500
Provision for bad debt adjustment
100
Bad debt recovered
300
Depreciation
45 275
1 907 175
1.
1 907 175
GENERAL JOURNAL OF BIG TIME STORES – JUNE 2011
DR
30
Sales
CR
3 000
Debtors allowance
3 000
Sales
480 000
Trading account
480 000
Trading account
220 000
Cost of Sales
220 000
Trading account
260 000
Profit and loss account
260 000
Rent income
24 000
Interest on fixed deposit
13 000
Discount received
2 000
Provision for bad debt adjustment
100
Bad debt recovered
300
Profit and loss account
39 400
Profit and loss account
190 195
Salaries
37 110
Interest on loan
85 000
Bad debt
8 110
Insurance
11 200
Stationery
2 000
Trading Stock deficit
1 500
Depreciation
45 275
Profit and loss account
109 205
Capital
109 205
Capital
9 000
Drawings
9 000
111
2. Open all accounts as well as the Trading and Profit and Loss accounts in the
General Ledger of Big Time Stores.
3. Post the closing transfers to the General Ledger.
GENERAL LEDGER OF BIG TIME STORES
Balance Sheet Accounts Section
Capital 2011
30
Jun
Drawings
Balance
9 000
00 2011
846 205
00 Jun
855 205
00
Jul
B1
30
1
Balance
746 000
00
Profit and
loss account
109 205
00
855 205
00
846 205
00
Balance
DrawingsB2
2011
30
Balance
9 000
00 2011
Jun
30
Capital
9 000
Land and Buildings
2011
00
Jun
30
Balance
869 000
B3
00
Jun
EquipmentB4
2011
30
Balance
180 000
00
Jun
Accumulated Depreciation on Equipment
2011
30
Jun
B5
Balance
32 000
00
Depreciation
22 200
00
54 200
00
VehiclesB6
2011
30
Balance
120 500
00
Jun
Accumulated Depreciation on Vehicles
2011
Jun
30
49 000
00
Depreciation
23 075
00
72 075
00
Fixed Deposit: ABSA Bank (8% p.a.)
2011
30
Balance
200 000
00
Jun
112
B7
Balance
B8
Trading Stock
2011
30
Jun
Jul
Balance
Creditors control
1
Balance
66 600
00 2011
3 400
00 Jun
70 000
00
68 500
00
30
B9
Trading Stock
deficit
Balance
1 500
00
68 500
00
70 000
00
Debtors Control
2011
30
Balance
40 000
00 2011
40 000
00
38 000
00
Jun
Jul
Jun
1
Balance
2011
30
30
Jun
Balance
Bad debt
recovered
B10
Bad debts
Balance
2 000
00
38 000
00
40 000
00
BankB11
1 200
00
300
00
1 500 00
Loan: NEDBANK (20% p.a.)
2011
30
Balance
B12
400 000
00
Jun
2011
Petty Cash
30
Balance
200
B13
00
Jun
Creditors Control
2011
30
Jun
2011
B14
Balance
Trading Stock
00
3 400
00
67 600
00
Provision for Bad Debt
30
Provision for bad
debt adjustment
100
00 2011
Jun
B15
30
Balance
1
Balance
2 000
00
Jun
Balance
1 900
00
2 000 00
Jul
Consumable Goods on Hand
2011
64 200
30
Stationery
480
00
Jun
113
2 000
00
1 900
00
B16
Income Received in Advance
2011
30
Interest on fixed
deposit
B17
3 000
00
Jun
Accrued Expenses
2011
30
B18
Interest on loan
40 000
00
Jun
Accrued Income
2011
30
Rent income
6 000
B19
00
Jun
2011
Prepaid Expenses
30
Insurance
800
B20
00
Jun
Nominal Accounts Section
SalesN1
2011
30
Jun
Debtors
allowance
Trading account
3 000
480 000
00 2011
30
Balance
483 000
00
483 000
00
00 Jun
483 000 00
Cost of SalesN2
2011
30
Balance
220 000 00
Jun
2011
30
Trading account
220 000
00
Jun
Debtors AllowancesN3
2011
30
Balance
3 000 00
Jun
2011
30
Sales
3 000
00
Jun
Rent IncomeN4
2011
30
Profit and
loss account
24 000
00 2011
Jun
Jun
24 000 00
114
30
Balance
Accrued income
18 000
00
6 000
00
24 000
00
Interest on Fixed DepositN5
2011
30
Income received
in advance
3 000
00 2011
Jun
30
Balance
16 000
00
16 000
00
Jun
Profit and
loss account
13 000
00
16 000 00
Discount ReceivedN6
2011
30
Profit and
loss account
2 000 00
Jun
2011
30
Balance
2 000
00
Jun
WagesN7
2011
30
Balance
5 000 00
Jun
2011
30
Salaries
5 000
00
Jun
SalariesN8
2011
30
Jun
Balance
Wages
32 110
00 2011
5 000
00 Jun
30
Profit and
loss account
37 110 00
37 110
00
37 110
00
Interest on LoanN9
2011
30
Jun
Balance
45 000
00 2011
Accrued expenses
40 000
00 Jun
30
Profit and
loss account
85 000 00
2011
85 000
00
85 000
00
Bad DebtsN10
30
Jun
Balance
6 110
00 2011
Debtors control
2 000
00 Jun
30
Profit and
loss account
8 110 00
8 110
00
8 110
00
InsuranceN11
2011
30
Balance
12 000
00 2011
Jun
Jun
12 000 00
115
30
Prepaid expense
Profit and
loss account
800
00
11 200
00
12 000
00
StationeryN12
2011
30
Balance
2 480
00 2011
Jun
30
Consumable
goods on hand
480
00
2 000
00
2 480
00
Jun
Profit and
loss account
2 480 00
Trading Stock DeficitN13
2011
30
Trading Stock
1 500 00
Jun
Profit and
loss account
1 500
00
Provision for Bad Debt AdjustmentN14
30
Profit and
loss account
100 00
Jun
2011
30
Provision for
bad debt
100 00
Jun
2011
30
Jun
2011
2011
Bad Debt RecoveredN15
30
Profit and
loss account
300 00
Jun
2011
30
Bank
300
00
Jun
DepreciationN16
2011
30
Accumulated
depreciation on
equipment
22 200
00 2011
Accumulated
depreciation on
equipment
23 075
00
Jun
30
Profit and
loss account
45 275
00
45 275
00
Jun
45 275 00
Trading AccountN17
2011
Jun
30
Cost of Sales
220 000
00 2011
Profit and
loss account
260 000
00 Jun
480 000 00
116
30
Sales
480 000
00
480 000
00
2011
Profit and Loss accountN18
30
Jun
Salaries
37 110
00 2011
Interest on loan
85 000
30
Trading account
260 000
00
00
00 Jun
Rent income
24 000
Bad debts
8 110
00
Interest on
fixed deposit
13 000
Insurance
11 200
00
Discount received
Stationery
2 000
00
Trading Stock
deficit
1 500
00
Depreciation
45 275
00
109 205
00
Capital
00
Provision for
bad debt
adjustment
100
00
Bad debt
recovered
300
00
299 400
00
299 400 00
4. Draw up the post-closing Trial Balance.
BIG TIME STORES
POST-CLOSING TRIAL BALANCE ON 30 JUNE 2011
DR
CR
BALANCE SHEET ACCOUNTS SECTION
Capital
846 205
Land and buildings
869 000
Equipment
180 000
Accumulated depreciation on equipment
54 200
Vehicles
120 500
Accumulated depreciation on vehicles
72 075
Fixed deposit: ABSA Bank (8% p.a.)
200 000
Trading Stock
68 500
Debtors control
38 000
Bank
1 500
Loan: NEDBANK (20% p.a.)
400 000
Petty cash
200
Creditors control
67 600
Provision for bad debt
1 900
Consumable goods on hand
480
Income received in advance
3 000
Accrued expenses
40 000
Accrued income
6 000
Prepaid expenses
800
1 484 980
117
00
2 000
1 484 980
Exercise
The following information appeared in the books of AMBO TRADERS for the year
ended 28 February 2011.
AMBO TRADERS
PRE-ADJUSTMENT TRIAL BALANCE ON 28 FEBRUARY 2011
DR
CR
BALANCE SHEET ACCOUNTS SECTION
Capital
268 000
Drawings
134 600
Land and buildings
250 000
Equipment at cost
160 000
Accumulated depreciation on equipment
60 000
Fixed deposit: BNF Bank (10% p.a.)
36 000
Creditors control
81 800
Debtors control
107 200
Trading Stock
191 680
Bank
8 380
Petty cash
1 000
Provision for bad debt
2 010
NOMINAL ACCOUNTS SECTION
Sales
1 438 000
Cost of Sales
844 000
Debtors allowances
6 400
Interest on fixed deposit
1 080
Salaries
67 250
Bad debts
5 600
Insurance
11 000
Bad debts recovered
800
Stationery
1 880
Packing material
2 460
Wages
46 400
Rent income
5 400
1 865 470
1 865 470
Adjustments:
1. A physical stock take on 28 February 2011 shows:
Trading Stock R178 000
Stationery
R180
2. Packing material used during the financial year amounted to R1 950.
3. The owner took merchandise for personal use at cost price, R4 000. (No entry has
been made for this transaction.)
118
4. Rent income was received for ten months. On 1 January 2011 the monthly rent
was increased by 15%.
5. Write off R280 as bad debts.
6. Adjust the provision for bad debt to 5% of debtors. (Take adjustment 5 into
account.)
7. Create a provision for discount allowed of 4%. (Round off to the nearest rand.)
8. Depreciation on equipment is to be written off at 20% per annum on the straightline method. Equipment costing R15 000 was bought on 1 November 2010.
9. Interest on fixed deposit is still outstanding.
10. Included in the insurance is a premium of R3 600 paid on 1 November 2010 for a
contract, which will expire on 3 April 2011.
11. The salary of the manager has only been paid until 31 December 2010.
Required:
1. Open all the accounts from the pre-adjustment Trial Balance in the General
Ledger of Ambo Traders.
2. Journalise the adjustments in the General Journal and post to the General Ledger
accounts.
3. Draw up the post-adjustment Trial Balance.
4. Journalise the closing transfers in the General Journal.
5. Post the closing transfers to the ledger accounts in the General Ledger.
6. Draw up the post-closing Trial Balance.
Unit 1.27: Income Statement
In the books of an enterprise, the results of a particular financial year are reflected in the
Income Statement.
The Income Statement is a combination of the Final accounts, Trading and Profit and Loss
accounts, but presented in a formal statement that indicates the result for that financial
year as a net profit/loss.
Let’s have a look at the format of an Income Statement:
Enterprise’s name
INCOME STATEMENT FOR THE YEAR ENDING (date)
A
B
Sales (less debtors allowances)
XXX
Less: Cost of Sales
XXX
Gross profit
XXX
Plus other income
XXX
List all income
XXX
List all income
XXX
List all income
XXX
Gross income
XXX
Less expenditure
XXX
List all expenses
XXX
119
List all expenses
XXX
List all expenses
XXX
List all expenses
XXX
Net profit/loss for the year
XXX
Sections A and B represent the Trading account and Profit and Loss accounts respectively.
Unit 1.28: Balance Sheet
In the books of an enterprise, the position of a particular financial year is reflected in the
Balance Sheet on a given date. The purpose of the Balance Sheet is to indicate that the
total assets are equal to the total equity and liabilities together. Therefore, the Balance
Sheet consists of two sections, an Assets section and an Equity and Liabilities section.
Let’s have a look at the format of a Balance Sheet:
Enterprise’s name
BALANCE SHEET ON (date)
ASSETS
Notes
Non-current assets
Land and buildings, vehicles and equipment
XXX
*
XXX
Other financial assets (fixed deposits)
XXX
Current assets
XXX
Stock
*
XXX
Trade and other debtors
*
XXX
Cash and cash equavalents
*
XXX
TOTAL ASSETS
XXX
EQUITY AND LIABILITIES
Capital
*
XXX
Non-current liabilities
XXX
Interest-bearing liabilities (loans)
XXX
Current liabilities
Trade and other creditors
XXX
*
XXX
Bank overdraft (if applicable)
XXX
XXX
As part of the Balance Sheet, notes are included for some of the line items (indicated by a
* on the template) to indicate how the total amount was calculated. This will be illustrated
in the example following.
120
Example C (follow-up on Example A)
The following post-adjustment Trial Balance appeared in the books of Big Time Stores
on 30 June 2011:
Required:
1. Prepare the INCOME STATEMENT for the year ended 30 June 2011.
2. Prepare the BALANCE SHEET as on 30 June 2011.
NOTE: Show the relevant notes/annexures to the Balance Sheet.
BIG TIME STORES
POST-ADJUSTMENT TRIAL BALANCE ON 30 JUNE 2011
BALANCE SHEET ACCOUNTS SECTION
Capital
746 000
Drawings
9 000
Land and buildings
869 000
Equipment
180 000
Accumulated depreciation on equipment
54 200
Vehicles
120 500
Accumulated depreciation on vehicles
72 075
Fixed deposit: ABSA Bank (8% p.a.)
200 000
Trading Stock
68 500
Debtors control
38 000
Bank
1 500
Loan: NEDBANK (20% p.a.)
400 000
Petty cash
200
Creditors control
67 600
Provision for bad debt
1 900
Consumable goods on hand
480
Income received in advance
3 000
Accrued expenses
40 000
Accrued income
6 000
Prepaid expenses
800
NOMINAL ACCOUNTS SECTION
Sales
483 000
Cost of Sales
220 000
Debtors allowances
3 000
Rent income
24 000
Interest on fixed deposit
13 000
Discount received
2 000
Wages
–
Salaries
37 110
121
Interest on loan
85 000
Bad debts
8 110
Insurance
11 200
Stationery
2 000
Trading Stock deficit
1 500
Provision for bad debt adjustment
100
Bad debt recovered
300
Depreciation
45 275
1 907 175
1 907 175
Solution:
1. Prepare the INCOME STATEMENT for the year ended 30 June 2011.
BIG TIME STORES
INCOME STATEMENT FOR THE YEAR ENDING 30 JUNE 2011
Sales (483 000 – 3 000)
480 000
Cost of Sales
220 000
Gross profit
260 000
Plus other income
39 400
Rent income
24 000
Interest on fixed deposit
13 000
Discount received
2 000
Provision for bad debt adjustment
100
Bad debt recovered
300
Gross income
299 400
Less expenditure
190 195
Salaries
37 110
Interest on loan
85 000
Bad debts
8 110
Insurance
11 200
Stationery
2 000
Trading Stock deficit
1 500
Depreciation
45 275
Net profit for the year
109 205
2. Prepare the BALANCE SHEET as on 30 June 2011.
NOTE: Show the relevant notes/annexures to the Balance Sheet.
122
BIG TIME STORES
BALANCE SHEET ON 30 JUNE 2011
ASSETS
Notes
Non-current assets
1 243 225
Land and buildings, vehicles and equipment
1
1 043 225
Other financial assets
200 000
Current assets
113 580
Stock
2
68 980
Trade and other debtors
3
42 900
Cash and cash equivalents
4
1 700
TOTAL ASSETS
1 356,805
EQUITY AND LIABILITIES
Capital
5
846 205
Non-current liabilities
400 000
Interest-bearing liabilities
400 000
Current liabilities
110 600
Trade and other creditors
6
110 600
Bank overdraft (if applicable)
–
1 356 805
NOTES TO THE BALANCE SHEET
1. Land and buildings, small vehicles and equipment
Gross carrying
amount
Land and buildings
869 000
Vehicles
120 500
Equipment
Accumulated
depreciation
Net carrying
amount
869 000
72 075
48 425
180 000
54 200
125 800
1 169 500
126 275
1 043 225
Reconciliation of the net carrying amount
Land and
buildings
Balance at the beginning of the year
Vehicles
869 000
+ Additions
Equipment
51 000
148 000
20 500
- Disposal
- Depreciation
Balance at the end of the year
869 000
123
(23 075)
(22 200)
48 425
125 800
Given in the adjustment related to depreciation: Take into account that a vehicle with
a gross carrying value of R20 500 was bought on 1 October 2010.
The total of the net carrying amount (R1 043 225) is entered on the Balance Sheet.
2. Stock
Trading Stock
68 500
Consumable goods on hand
480
68 980
3. Trade and other debtors
Debtors control (40 000 – 2 000)
38 000
Less: Provision for bad debt
1 900
36 100
Accrued income: Rent income
6 000
Prepaid expense: Insurance
800
42 900
4. Cash and cash equivalent
Bank (1 200 + 300)
1 500
Petty cash
200
1 700
5. Capital
Balance as on 30 June 2011
746 000
Plus: Net profit for the year
109 205
855 205
Less: Drawings
9 000
846 205
6. Trade and other creditors
Creditors control (64 200 + 3 400)
67 600
Accrued expense: Interest on loan
40 000
Income received in advance: Interest on fixed
deposit
3 000
110 600
124
Summary
In this part, we dealt with the different additional transactions that can occur at the
end of a financial year and how you should record those transactions so that they
appear correctly in the financial year. We explained, in detail, how to deal with endof-the-financial-year adjustments and how they affect the ledger accounts in the
General Ledger.
We then showed you how to calculate the totals for these account and how to transfer
these totals to a Trial Balance and how the information from a Trial Balance is used to
present end-of-year accounts in the General Ledger as well as in the form of an Income
Statement and Balance Sheet.
Exercises
Exercise 1
You are provided with the PRE-ADJUSTMENT TRIAL BALANCE of RAMIC TRADERS
on 28 February 2010.
Required:
1. Prepare the INCOME STATEMENT for the year ended 28 February 2010.
2. Prepare the BALANCE SHEET as on 28 February 2010.
NOTE: Show the relevant notes/annexures to the Balance Sheet.
Adjustments:
1. According to a physical stock count, the following stock was on hand on 28
February 2010:
Trading Stock
R56 000
Stationery
R180
2. K Meltz, a tenant, has occupied part of the building since 1 May 2009 at a rental of
R2 000 per month. Her rental was increased by 5% on 1 October 2009. Adjust the
rent accordingly.
3. A debtor, B Mouton, has disappeared and his account of R720 must be written off as
irrecoverable.
4. Adjust the provision for bad debt to 5% of debtors.
5. Salaries for February 2010 are still outstanding.
6. Depreciation must be provided for as follows:
On equipment at 10% p.a. according to the diminishing balance method.
On vehicles at 20% p.a. on cost price. NOTE:A new vehicle was bought for R95 000 on 1 September 2009.
7. Interest on fixed deposit is still outstanding.
8. Insurance includes an annual premium of R3 600 on a new policy which
commenced on 1 November 2009.
9. An amount of R280 was collected from a debtor, M Slickt, whose account had
previously been written off.
125
RAMIC TRADERS
PRE-ADJUSTMENT TRIAL BALANCE ON 28 FEBRUARY 2010
DR
CR
BALANCE SHEET ACCOUNTS SECTION
Capital
899 760
Drawings
73 360
Land and buildings
800 000
Equipment
170 000
Accumulated depreciation on equipment
94 500
Vehicles
190 000
Accumulated depreciation on vehicles
79 000
Fixed deposit: ABSA Bank (12% p.a.)
78 000
Trading Stock
56 200
Debtors control
34 000
Bank
40 900
Cash float
2 000
Petty cash
500
Creditors control
22 000
Provision for bad debt
1 750
NOMINAL ACCOUNTS SECTION
Sales
694 000
Cost of Sales
311 000
Debtors allowances
7 400
Rent income
22 600
Interest on fixed deposit
3 990
Discount received
400
Salaries
22 550
Wages
11 000
Bad debts
4 000
Insurance
4 500
Stationery
2 480
Telephone
7 900
Bank charges
2 210
1 818 000
1 818 000
Exercise 2
You are provided with the PRE-ADJUSTMENT TRIAL BALANCE of TIME IT! STORES
on 30 June 2011.
Required:
1. Prepare the INCOME STATEMENT for the year ended 30 June 2011.
2. Prepare the BALANCE SHEET as on 30 June 2011. NOTE: Show the relevant notes/annexures to the Balance Sheet.
126
Adjustments:
1. Discount received, R1 200, applicable to invoice 712, was omitted from the financial
records. This must still be recorded in the Discount Received and Creditors Control
accounts.
2. According to a physical stock count on 30 June 2011, the following stock was on
hand:
Trading Stock
R66 000
Stationery
R980
3. A debtor, M Bam, has disappeared and his account of R3 500 must be written off as
irrecoverable.
4. Adjust the provision for bad debt to 5% of debtors (after taking adjustment 3 into
account).
5. The loan was decreased by R35 000 on 1 January 2011. Provide for interest.
6. Provide for interest on fixed deposit, if this investment of R200 000 was made on
1 October 2010.
7. Rent is receivable for 12 months in this financial year. However, only six months’
rent was received. There was a 10% increase in the monthly rent on 1 January 2011.
8. Insurance includes an annual premium of R2 400 on a new policy. R800 of this
contract is applicable to the financial year starting on 1 July 2011.
9. An amount of R300 was transferred from the Bank account to the Petty Cash
account, but no entry was made. Record this transfer. 10. Depreciation must be provided for as follows:
On vehicles at 20% p.a. according to the diminishing balance method.
On equipment at 15% p.a. on cost price.
Take into account that new equipment with a gross carrying value of R20 000 was
bought on 1 October 2010.
TIME IT! STORES
PRE-ADJUSTMENT TRIAL BALANCE ON 30 JUNE 2011
DR
CR
BALANCE SHEET ACCOUNTS SECTION
Capital
646 000
Drawings
9 000
Land and buildings
869 000
Equipment
180 000
Accumulated depreciation on equipment
32 000
Vehicles
120 500
Accumulated depreciation on vehicles
49 000
Fixed deposit: ABSA Bank (8% p.a.)
200 000
Trading Stock
66 600
Debtors control
40 000
Bank
1 200
Loan: NEDBANK (20% p.a.)
400 000
Petty cash
200
Creditors control
64 200
Provision for bad debt
2 000
127
NOMINAL ACCOUNTS SECTION
Sales
583 000
Cost of Sales
220 000
Debtors allowances
3 000
Rent income
18 000
Interest on fixed deposit
16 000
Discount received
2 000
Salaries
37 110
Interest on loan
45 000
Bad debts
6 110
Insurance
12 000
Stationery
2 480
1 812 200
128
1 812 200
Module 2
Accounting entries for a trading
organisation according to the
periodic stock system
Overview
When you have completed this module, you should be able to:
• Enter transactions related to the movement of stock.
• Adjust the columns of the respective books of first entry, properly closing off and
posting to the General Ledger.
• Identify the accounts involved in the calculation of cost of sales and do the
calculation.
• Record the year-end adjustment for trading stock in the General Journal and post
it to the General Ledger.
• Implement closing transfers to final accounts.
• Calculate net profit in the Income and Expenditure Statement.
Introduction
The stock you keep in your business and the accounting transactions related to stock can
be recorded in two ways according to the stock system used:
• Continuous (perpetual) stock system, through which daily movements of stock are
recorded and monitored through a ledger account called Trading Stock. This system
is often used in a small retail business which requires that the movement of each
product is monitored and controlled as sales and purchases occur. It means that the
value of the stock is known at any stage, without counting the stock.
• Periodic stock system, which only values stock at the end of the trading year and
which does not require different bookkeeping accounts or entries during the year.
This system is more appropriate for big retail and service businesses with different
departments. These enterprises which sell great volumes of goods need to do a
physical stock take at the end of the financial year to determine the actual value of the
stock.
Since the periodic system does not require any different accounting entries, we will use
the continuous (perpetual) system to explain the differences between these systems if in
use.
The following are unique to the periodic stock system:
• Purchase account to deal with normal activities in stock. The Trading Stock account
will only reflect stock takes at the end of a financial year.
• Creditors Allowance account to deal with purchase returns.
129
• All indirect costs (like carriage on purchase, etc.) with regard to stock purchases will
be accounted for in separate accounts.
• Calculate cost of sales.
Unit 2.1:Recording transactions for stock movements using
the periodic stock system
If the owner wants only to know the total value of stock at any point, a straightforward
Ledger Trading Stock account is all that is needed. However, if the owner wants to
know the value of stock for each product in a periodic stock system, the business needs to
undertake a stock take at the end of the financial year.
➊ Purchase of trading stock for cash
When a periodic stock system is used, purchases are posted to the Purchase account
instead of posting them to the Trading Stock account in the case of a continuous stock
system.
The double entry is as follows for each stock system:
CONTINUOUS STOCK SYSTEM
PERIODIC STOCK SYSTEM
DR
Trading stock
DR
Purchases
CR
Bank
CR
Bank
Transaction:
Buy trading stock, R1 000, from Big Ben and pay by cheque.
On the accounting equation:
130
CONTINUOUS STOCK SYSTEM
A
O
PERIODIC STOCK SYSTEM
L
+ 1 000
A
O
L
– 1 000
– 1 000
– 1 000
For periodic stock systems, the Trading Stock account is replaced by a Purchase account.
Day-to-day stock entries are made in the Purchase account and stock takes are recorded
in the Trading Stock account. This account reflects the opening and closing stock for a
financial year.
➋ Cash sales of stock
The double entry is as follows for each stock system:
CONTINUOUS STOCK SYSTEM
PERIODIC STOCK SYSTEM
DR
Bank
DR
Bank
CR
Sales
CR
Sales
DR
Cost of sales
CR
Trading stock
For periodic stock systems, no cost of sales entries are made for a given sales transaction,
because it is difficult to calculate the cost of the sales of each transaction due to the great
volume of goods sold. However, cost of sales can be calculated at the end of the financial
year.
Transaction:
Cash sales, R500, according to the cash register roll.
Assume the cost price of this stock is R450 in the case of a continuous stock system.
On the accounting equation:
CONTINUOUS STOCK SYSTEM
A
O
+ 500
PERIODIC STOCK SYSTEM
L
A
+ 50
O
+ 500
– 450
➌ Purchase of trading stock for credit
The double entry is as follows for each stock system:
131
L
+ 500
CONTINUOUS STOCK SYSTEM
PERIODIC STOCK SYSTEM
DR
Trading stock
DR
Purchases
CR
Creditors control
CR
Creditors control
Note that the Trading Stock account is replaced by the Purchase account in the case of a
periodic stock system.
Transaction:
Buy trading stock, R750, from Big Ben on credit.
On the accounting equation:
CONTINUOUS STOCK SYSTEM
A
O
PERIODIC STOCK SYSTEM
L
+ 1 000
A
+ 1 000
O
L
– 1 000
+ 1 000
➍ Credit sales of stock
The double entry is as follows for each stock system:
CONTINUOUS STOCK SYSTEM
PERIODIC STOCK SYSTEM
DR
Debtors control
DR
Debtors control
CR
Sales
CR
Sales
DR
Cost of sales
CR
Trading stock
Note that no cost of sales entry is recorded in the case of a periodic stock system.
Transaction:
Credit sales according to the cash register roll, R1 500.
Assume the cost price of this stock is R1 250 in the case of a continuous stock system.
On the accounting equation:
CONTINUOUS STOCK SYSTEM
A
+ 1 500
O
PERIODIC STOCK SYSTEM
L
+ 250
A
O
+ 1 500
+ 1 500
– 1 250
132
L
➎ Returns of stock purchased on credit from a creditor
The double entry is as follows for each stock system:
CONTINUOUS STOCK SYSTEM
PERIODIC STOCK SYSTEM
DR
Creditors control
DR
Creditors control
CR
Trading stock
CR
Creditors allowances
For large enterprises, the management may have an interest in stock returned to creditors
and therefore a separate account, Creditors Allowance, is opened for this purpose.
Transaction:
Return damaged goods purchased before on credit from Manic Traders, R750.
On the accounting equation:
CONTINUOUS STOCK SYSTEM
A
O
– 750
PERIODIC STOCK SYSTEM
L
A
O
– 750
L
+ 750
– 750
➏ Withdrawal of stock by owner
An owner might decide to withdraw some stock for his or her own use. In theory, the
owner should pay for such withdrawals to provide the second part of the double-entry
system, in which case it can be treated as a normal sales transaction. However, when an
owner does not pay it becomes necessary to raise a Ledger account for owner’s personal
drawings.
The double entry is as follows for each stock system:
CONTINUOUS STOCK SYSTEM
PERIODIC STOCK SYSTEM
DR
Drawings
DR
Drawings
CR
Trading stock
CR
Purchases
Note that the Trading Stock account is replaced by the Purchase account in the case of a
periodic stock system.
Transaction:
The owner took stock of R750 for his own use.
On the accounting equation:
133
CONTINUOUS STOCK SYSTEM
A
O
– 750
PERIODIC STOCK SYSTEM
L
A
O
– 750
L
– 750
+ 750
➐ Stock returns, sold on credit, to a debtor
The double entry is as follows for each stock system:
CONTINUOUS STOCK SYSTEM
PERIODIC STOCK SYSTEM
DR
Debtors allowance
DR
Debtors allowance
CR
Debtors control
CR
Debtors control
DR
Trading stock
CR
Cost of sales
Note that no cost of sales entry is recorded in the case of a periodic stock system.
Transaction:
A debtor returned unwanted stock, R800.
Assume the cost price of this stock is R700 in the case of a continuous stock system.
On the accounting equation:
CONTINUOUS STOCK SYSTEM
A
O
– 800
PERIODIC STOCK SYSTEM
L
A
– 100
O
– 800
L
– 800
+ 700
➑ Payment of carriage on purchases and other expenses which increase the cost
of purchases (indirect cost)
For a continuous stock system, all indirect costs will be posted to the Trading Stock
account in the General Ledger. However, individual accounts are opened independently
of the Purchase account for a periodic stock system.
The double entry is as follows for each stock system:
CONTINUOUS STOCK SYSTEM
PERIODIC STOCK SYSTEM
DR
Trading stock
DR
Carriage on purchase
CR
Bank
CR
Bank
134
Note that all indirect costs are posted to separate accounts in the case of a periodic stock
system.
Transaction:
Pay carriage on purchase, R250, per cheque to TM transporters.
On the accounting equation:
CONTINUOUS STOCK SYSTEM
A
O
PERIODIC STOCK SYSTEM
L
A
– 250
O
– 250
L
– 250
+ 250
For large enterprises, the management may have an interest in all indirect costs related to
stock and therefore separate accounts are opened for this purpose.
Examples of these indirect accounts are:
• Carriage on purchases.
• Import duties.
• Customs tax.
• Shipping freight.
➒ Carriage on sales
If the delivery cost on a sale to a client is for the business account,
it is referred to as carriage on sales.
This, however, does not have an effect on the total cost for
purchases.
Carriage on sales is normally an operating expense with other
expenses like Salaries, Telephone, etc.
135
carriage on sales: Is the
delivery cost on a sale to
a client for the businesst
account. Carriage on
sales is normally an
operating expense,
together with other
expenses like salaries,
telephone, et cetera.
The double entry is as follows for each stock system:
CONTINUOUS STOCK SYSTEM
PERIODIC STOCK SYSTEM
DR
Carriage on sales
DR
Carriage on sales
CR
Bank
CR
Bank
Transaction:
Pay carriage on sales, R300, per cheque to TM transporters.
On the accounting equation:
CONTINUOUS STOCK SYSTEM
A
O
– 300
PERIODIC STOCK SYSTEM
L
A
– 300
O
– 300
L
– 300
Exercise
The following information was taken from the books of MANIC TRADERS.
Required:
Indicate which LEDGER ACCOUNTS (account debited and account credited) will be
influenced by the following transactions if MANIC TRADERS makes use of a periodic
stock system. Complete the columns.
1.1
1.2
1.3
1.4
Issue a cheque to Makro for trading stock purchase, R5 000.
Credit sales, R3 500 (Cost price = R3 000).
Owner takes trading stock for own use, R50.
Pay Makro per cheque, R750, as delivery fee for trading stock delivered.
Required:
Indicate how the ACCOUNTING EQUATION will be influenced by the following
transactions. Use (+) to indicate an increase, a (–) to reflect a decrease and a (0) if there
has been no change. Include the applicable amount(s).
1.5 Pay salaries cash, R15 000.
1.6 Buy stationery on credit from Waltons, R3 500.
1.7 Receive R250 from P du Toit, a debtor, in settlement of his account of R280.
1.8 Cash sales, R1 500 (Cost price = R1 200)
1.9 Pay Makro, a creditor, R400 on account.
1.10 Receive rent from Aida properties, R500.
1.11 Purchase a delivery vehicle, R125 000, from VW Barons for cash.
136
Unit 2.2: Adjusting books of first entry to accommodate the
periodic stock system
Some of the journals will differ from an organisation working according to the periodic
stock system and others according to the continuous stock system.
The following journals will differ based on the stock system in use:
• Cash Payments Journal.
• Cash Receipts Journal.
• Debtors Journal.
• Debtors Allowance Journal.
• Creditors Journal.
• Creditors Allowance Journal.
➊ Cash Payments Journal and Cash Receipts Journal
The only difference between the Cash Receipts Journal for both stock systems is that no
cost of sales column is opened in this journal for a periodic stock system.
The only difference between the Cash Payments Journal for both stock systems is that
the trading stock column is replaced by a purchases column in this journal for a periodic
stock system.
• Cash Receipts Journal
For a continuous stock system:
CASH RECEIPTS JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
15
1
Details
Details
of sundry
accounts
TH Smit
Capital
Sundry
accounts
20 000
Sales
Analysis of
receipts
00
Sales
20 000
Cost of
sales
00
137
150
00
100
00
150
00
100
00
Bank
20 000
00
20 000
00
150
00
150
00
20 150
00
For a periodic stock system:
CASH RECEIPTS JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
15
1
Details
Details
of sundry
accounts
TH Smit
Capital
Sundry
accounts
20 000
Sales
Cost of
sales
Analysis of
receipts
00
Sales
20 000
00
150
00
150
00
Bank
20 000
00
20 000
00
150
00
150
00
20 150
00
• Cash Payments Journal
For a continuous stock system:
CASH PAYMENTS JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
Details
345
10
Trutect
346
Details
of sundry
accounts
Sundry
accounts
Trading
stock
500
Creditors
control
00
TP
Suppliers
500
Salaries
00
Bank
500
00
5 500
00
5 500
00
5 500
00
6 000
00
For a periodic stock system:
CASH PAYMENTS JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
Details
345
10
Trutect
346
Details
of sundry
accounts
Sundry
accounts
Purchases
500
Creditors
control
00
TP
Suppliers
500
Salaries
00
Bank
500
00
5 500
00
5 500
00
5 500
00
6 000
00
➋ Debtors Journal and Debtors Allowance Journal
The only difference between both these journals for both stock systems is that no cost of
sales column is opened in these journals for a periodic stock system.
• Debtors Journal
For a continuous stock system:
DEBTORS JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
Debtors
65
1
TH Smit
66
17
K Nel
Sales
Cost of sales
1 500
00
1 200
00
350
00
150
00
1 850
00
1 350
00
138
For a periodic stock system:
DEBTORS JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
Debtors
65
1
TH Smit
66
17
K Nel
Sales
Cost of sales
1 500
00
350
00
1 850
00
• Debtors Allowance Journal
For a continuous stock system:
DEBTORS ALLOWANCE JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
Debtors
Debtors
allowance
Cost of sales
4
8
K Nel
200
00
175
00
5
23
R Roux
500
00
400
00
700
00
575
00
For a periodic stock system:
DEBTORS ALLOWANCE JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
Debtors
Debtors
allowance
Cost of sales
4
8
K Nel
200
00
5
23
R Roux
500
00
700
00
➌ Creditors Journal and Creditors Allowance Journal
The only difference between the Creditors Journal for both stock systems is that the
trading stock column is replaced by a purchases column in this journal for a periodic
stock system.
The only difference between the Creditors Allowance Journal for both stock systems is
that the trading stock column is replaced by a creditors allowance column in this journal
for a periodic stock system.
139
• Creditors Journal
For a continuous stock system:
CREDITORS JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
Creditor
Creditors
control
345
10
Trutect
346
13
TP Suppliers
Trading
stock
Stationery
Sundry accounts
Amount
1 500
00
5 500
00
5 500
00
7 000
00
5 500
00
Details
1 500
00 Equipment
1 500
00
For a periodic stock system:
CREDITORS JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
Creditor
Creditors
control
345
10
Trutect
346
13
TP Suppliers
Purchases
Stationery
Sundry accounts
Amount
1 500
00
5 500
00
5 500
00
7 000
00
5 500
00
Details
1 500
00 Equipment
1 500
00
• Creditors Allowance Journal
For a continuous stock system:
CREDITORS ALLOWANCE JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
Creditor
Creditors
control
51
11
Trutect
52
26
TP Suppliers
1 400 00
Trading
stock
1 400
Stationery
Amount
1 400
Details
00
200 00
1 600 00
Sundry accounts
00
200
00
200
00
For a periodic stock system:
CREDITORS ALLOWANCE JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
Creditor
51
11
Trutect
52
26
TP Suppliers
Creditors
control
1 400 00
Creditor
allowance
1 400
Stationery
Amount
1 400
Details
00
200 00
1 600 00
Sundry accounts
00
200
00
200
00
Unit 2.3: Calculating the Cost of Sales value
When a periodic stock system is in place, the owner needs to know the exact value of
materials used during the year. This is not the total of purchases, because some of the
purchases may still remain unused and in stock at year-end. Similarly, the owner must
also take into account that the business had some stock unused at the beginning of the
year.
140
The cost of sale value for each sale transaction is not known for the reason that it is difficult
for an enterprise using a periodic stock system to calculate it based on the great volume
of goods that has been sold.
Therefore, at the end of each financial year a calculation must be done to determine cost
of sales for the financial year. This calculation is important for any enterprise to be able to
determine its gross profit for the financial year.
The calculation is as follows:
Calculation of cost of sales
Opening stock *
+ Net purchases ^
+ Carriage on purchases
+ Import duties
+ Customs tax
+ Shipping freight
– Closing stock **
Note
*Opening stock is the balance of the Trading Stock account at the beginning of the
financial year.
^Net purchases is equal to the balance of the Purchase account less returns on purchases
(creditor allowances).
**Closing stock is the balance of the Trading Stock account at the end of the financial
year.
Example:
The following information appeared in the books of TH Dealers:
Trading stock on 1 January 2011
Sales
Purchases Debtors allowances
Creditors allowance
Import duties
Trading stock on 31 December 2011
Carriage on purchases
R24 500
R121 500
R100 600
R11 500
R9 600
R1 400
R10 350
R6 750
Note: An invoice of R1 500 for carriage was still outstanding.
Required:
1. Calculate the net sales amount as reported on at the end of the financial year.
2. Calculate the cost of sales as reported on at the end of the financial year.
141
Solution
1. Net sales = Sales less debtors allowance = 121 500 – 11 500 = 110 000
24 500
2. Opening stock + Purchases (100 600 – 9 600)
91 000
+ Carriage on purchases (6 750 + 1 500) 8 250
+ Import duties
1 400
– Closing stock
10 350
Cost of sales =
114 800
Unit 2.4:The end-of-year adjustment for trading stock
An enterprise working according to the periodic stock system makes entries only once
during the financial year in the Trading Stock account. This is done at the end of the
financial year after a stock take.
The balance of the trading stock before the stock take is referred to as the opening stock
and is closed off to the Trading account. After the stock take, the value of the stock is
referred to as the closing stock and is entered as an adjustment in the General Journal and
posted to the Trading Stock account.
Example:
The following balance appeared in the books of BK Traders on 31 December 2010, the
end of the financial year:
Trading stock (1 January 2010) R50 000
Adjustment:
According to a stock take on 31 December 2010, the stock on hand is R65 000.
Solution
Note: The balance of trading stock on 1 January 2010 is referred to as the opening stock
and the stock as counted on 31 December 2010 is the closing stock.
TRADING STOCK
2010
Jan
1
Balance
50 000
00
Transfer opening stock to the Trading account:
Dr
Trading account
Cr
Trading Stock
Recording the adjustment:
Dr
Trading Stock
R65 000
Cr
Trading account R65 000
142
TRADING STOCK
2010
2010
Jan
1
Balance
50 000
00 Dec
Dec
31
Trading account
65 000
00
31
Trading account
50 000 00
Trading stock
65 000
TRADING ACCOUNT
2010
Dec
2010
31
Trading stock
50 000
00 Dec
31
00
Unit 2.5: Year-end closing transfers for stock
The closing transfers to the Trading account for the two stock systems are different. In the
Trading account the gross profit is calculated for the financial year.
In this unit the focus will be on the closing transfers for stock based on a periodic stock
system.
Example:
The following balances appeared in the books of TH Dealers on 31 December 2010, the
last day of the financial year:
Trading stock (1 January 2010)
R25 000
Sales
R201 000
PurchasesR89 000
Debtors allowance
R2 500
Carriage on purchases
R3 750
Import duties
R1 000
Creditors allowance
R1 200
On 31 December 2010 after a stock take the trading stock on hand is R35 000.
Required:
Journalise the closing transfers in the General Journal.
GENERAL JOURNAL OF TH DEALERS – DECEMBER2010
D
31
Debit
Sales
Credit
2 500
00
1 200
00
25 000
00
Debtors allowance
Creditor allowance
Purchases
Trading account
Trading stock
143
2 500
00
1 200
00
25 000
00
Trading account
92 550
00
Purchases
87 800
00
Carriage on purchases
3 750
00
Import duties
1 000
00
35 000
00
198 500
00
115 950
00
Trading stock
35 000
00
198 500
00
115 950
00
Trading account
Sales
Trading account
Trading account
Profit and loss account
The amount (R115 950) in the last journal entry is the total gross profit for the financial
year. This amount is transferred to the Profit and Loss account. In this account the net
profit for the year is calculated.
Exercise
The following balances appeared in the books of BIG Dealers on 31 July 2010, the last
day of the financial year:
Trading stock (1 August 2009)
Sales
Purchases
Customs duties
Debtors allowance
Carriage on purchases
Import duties
Creditors allowance
R40 000
R171 000
R99 000
R500
R5 500
R8 750
R4 000
R7 200
On 31 July 2010 after a stock take the trading stock on hand is R42 000.
Required:
Journalise the closing transfers in the General Journal.
Unit 2.6: Dealing with stock in the Income Statement
We have talked about the way in which opening and closing stock values are used in the
final accounts and how they are transferred to and from ledgers at the beginning and end
of financial years.
In fact, an Income Statement is made up of three distinct sections, the first one being a
trading section, followed by the income section and then the expense section. The calculation
of stock used during the year applies to the trading section and is used to determine cost
of sales and gross profit.
144
Let us see what these look like, using the example we used earlier:
Example:
The following balances appeared in the books of TH Dealers on 31 December 2010, the
last day of the financial year:
Trading stock (1 January 2010)
Sales
Purchases
Debtors allowance
Carriage on purchases
Import duties
Creditors allowance
R25 000
R201 000
R89 000
R2 500
R3 750
R1 000
R1 200
On 31 December 2010 after a stock take the trading stock on hand is R35 000.
Required:
Draw up the Income Statement of TH Dealers for the year ending 31 December 2010.
Solution
INCOME STATEMENT OF TH DEALERS FOR THE YEAR ENDING 31 DECEMBER2010
Sales (201 000 – 2 500)
Less cost of sales
Trading section
Opening stock
25 000
00
Purchases (89 000 – 1 200)
87 800
00
3 750
00
Carriage on purchases
Import duties
Closing stock
Gross profit
Plus other
Less expenditure
Net profit for the year
145
1 000
00
117 550
00
35 000
00
198 500
00
82 550
00
115 950
00
Exercise
The following balances appeared in the books of BIG Dealers on 31 July 2010, the last
day of the financial year:
Trading stock (1 August 2009)
Sales
Purchases
Customs duties Debtors allowance
Carriage on purchases
Import duties
Creditors allowance
R40 000
R171 000
R99 000
R500
R5 500
R8 750
R4 000
R7 200
On 31 July 2010 after a stock take the trading stock on hand is R42 000.
Required:
Draw up the Income Statement of TH Dealers for the year ending 31 July 2010.
Summary
In this module we have looked at the accounting entries related to the receipt and
management of stock, which is usually called ‘inventory’ in the accounts. We followed
the entries for recording stock movement using the continuous (perpetual) stock
control system and also dealt with the entries using the more usual periodic stock
control system.
At the end of the trading year, a business has to calculate the value of stock used (cost
of sales) during the year and start a new year by opening the Trading (Inventory)
account with the stock remaining at the end of the previous trading year. We dealt
with all the accounting entries related to this calculation.
The next two exercises deal with year-end financial statements of an enterprise using
a periodic stock system.
More exercises
The following information was taken from the books of ETC DEALERS on 30 June 2005.
ETC DEALERS
PRE-ADJUSTMENT TRIAL BALANCE ON 30 JUNE 2005
DR
CR
BALANCE SHEET ACCOUNTS SECTION
Capital
542 176
Drawings
31 200
Land and buildings
283 240
Equipment at cost
104 000
146
Vehicles at cost
183 200
Accumulated Depreciation on Equipment
26 400
Accumulated depreciation on vehicles
35 360
Loan: People’s Bank (18% p.a.)
72 000
Trading stock (1 July 2004)
237 760
Debtors
71 728
Bank
30 600
Petty cash
600
Creditors
93 800
Provision for bad debs
6 560
NOMINAL ACCOUNTS SECTION
Sales
826 960
Purchases
403 040
Sales returns
2 960
Purchase returns
2 640
Bad debts
6 720
Bad debts recovered
2 080
Stationery
3 920
Discount received
1 952
Carriage on purchases
3 400
Salaries and wages
228 800
Discount allowed
2 760
Rates and taxes
23 920
Rent received
20 800
Interest on loan
9 600
Import duty
3 280
1 630 728
1 630 728
Adjustments:
1. According to a physical stock count, the following were still on hand on 30 June 2005:
Trading stock
R98 000
Stationery
R960
2. Write an amount of R728 off from the debtors as irrecoverable.
3. Adjust the provision for bad debt to 5% of debtors (take adjustment 2 into account)
and create a provision for discount allowed of 2%. (Round off to the nearest rand.)
4. Provide for depreciation as follows:
Vehicles:
20% p.a. according to the reducing balance method.
Equipment: 15% p.a. according to the straight-line method. Take into account that
equipment to the value of R8 000 was bought on 1 April 2005.
5. Interest on loan is still outstanding.
6. The rent was paid for 13 months.
7. The owner took trading stock at cost price of R960 for personal use. (No entry has
been made in the books.)
147
8. Rates and taxes include an annual payment of R10 600, which was paid in respect of
the municipal financial year, which ended on 31 December 2005.
Required:
1.1 Prepare the INCOME STATEMENT for the year ended 30 June 2005.
1.2 Prepare the BALANCE SHEET as at 30 June 2005.
NOTE: Show the relevant notes/annexures to the Balance Sheet.
More exercises
The following information relates to DTM TRADERS on 30 April 2003, the last day of the
financial year of the enterprise.
DTM TRADERS
PRE-ADJUSTMENT TRIAL BALANCE ON 30 APRIL 2003
DR
CR
BALANCE SHEET ACCOUNTS SECTION
Capital
773 060
Drawings
22 000
Land and buildings
500 000
Equipment
160 000
Vehicles
112 000
Accumulated depreciation on vehicles
49 200
Accumulated Depreciation on Equipment
26 400
Debtors control
35 600
Creditors control
30 000
Bank
36 000
Petty cash
200
Fixed deposit: KLM Bank (15% p.a.)
200 000
Stock (1 May 2002)
66 600
Provision for bad debs
3 000
Long-term loan: AA Bank (15% p.a.)
40 000
NOMINAL ACCOUNTS SECTION
Sales
391 400
Purchases
95 400
Creditors allowance
16 800
Wages and salaries
59 200
Insurance
20 800
Bad debts
1 600
Water and electricity
11 900
Telephone
4 500
Carriage on purchases
4 000
148
Import tariffs
6 000
Interest on loan
7 200
Packing materials
8 000
Interest on fixed deposit
23 800
Discount allowed
8 100
Discount received
7 440
Stationery
7 000
Rent received
5 000
1 366 100
1 366 100
Adjustments:
1. According to a physical stock count, the following were still on hand on 30 April
2003:
Trading stock R30 000
Stationery
R1 720
2. Write off J Smith’s account as irrecoverable, R400.
3. Adjust the provision for bad debts to 10% of trade debtors and create a provision for
discount allowed of 5%.
4. Provide for depreciation on vehicles at 15% p.a. on cost, and on equipment at 20%
p.a. according to the diminishing balance method. Take into account that vehicles
with a gross carrying value of R35 000 were bought on 1 January 2003.
5. Interest on the fixed deposit is still outstanding.
6. The long-term loan was negotiated on 1 March 2001 with AA Bank. The first
instalment of R15 000 was paid on 31 October 2002. All interest payments are
settled monthly from the current bank account.
7. The owner took stock at cost price of R650 and selling price of R960 for personal use.
No entry has been made in the books.
8. The insurance has been paid up until 30 June 2003.
9. Rent has been received up until 28 February 2003. There has been an increase of 10%
instituted on 1 March 2003.
Required:
1.1 Complete the INCOME STATEMENT for the year ended 30 April 2003.
1.2 Complete ONLY the ASSETS section of the BALANCE SHEET and make the
following notes:
Property, equipment and vehicles.
Stock, trade and other debtors.
149
Module 3
Departmental accounts according
to the periodic stock system
Overview
When you have completed this module, you should be able to:
• Explain the aim of departmental accounts and how to control departmental
profits.
• Interpret departmental codes on source documents and enter them in books of
original entry.
• Adapt the books of original entry by providing additional columns, recording the
transactions and closing them off.
• Adapt relevant accounts in the General Ledger by providing additional columns,
recording the transactions and closing them off.
• Draw up a Departmental Trading Statement at the end of the financial year.
• Draw up a Departmental Income Statement at the end of the financial year.
Unit 3.1: Aim of departmental accounts
A business can grow, usually by increasing the number of departments within the
business. This will ensure increasing sales and directly increase profitability.
When growth includes more departments, it is possible for the management of the
business to determine the profitability of each department. By doing this, management
can ensure that each department performs optimally, through effective planning
and administration. In cases where one or more departments are not preforming to
management’s expectations, it can easily result in the reorganising of that department or
even the closure thereof.
An enterprise selling shoes can decide to
divide the trading stock (shoes) into two
departments: men’s shoes and ladies’ shoes.
This will help the enterprise to expand on
its merchandise, increasing the sales and
profitability of the entire enterprise. Even
more, management will be able to determine
if both departments are profitable and, if not,
whether to continue with the less profitable
department. This could lead to this enterprise
specialising in ladies’ shoes or men’s shoes if it
decided to discontinue the other department.
150
Separate accounts for each department will be kept to enable management to determine
profit per department. These accounts are usually called departmental accounting. Stock
will be recorded according to the periodic stock system for syllabus purposes.
Therefore, we can say that the aim of departmental accounting is to enable the business to
identify and apply costs to separate departments of the business.
Unit 3.2: Adaptation of source documents for departmental
purposes
As you have probably gathered, departmental accounting usually applies to businesses with
different departments, resulting in these enterprises being classified as large businesses.
This means that the business must have a way of applying each source document to the
correct department. The usual way to address this is to apply a departmental code to
each document to ensure that the document is handled by, and applied to, the correct
department. Below is an example of how an entrepreneur with several shops may code
source documents:
Department
Code
Men’s Shoes
MS
Ladies’ Shoes
LS
In cases where a business has only two departments, management can consider amending
the source documents to include separate columns for each department on the particular
source document.
Unit 3.3: Adaptation of books of original entry for
departmental purposes
Having the appropriate codes or different columns on source documents helps a bookkeeper
to apply those documents to the correct accounts, but the different accounts have to be
adapted to allow departmental documents to be applied to the correct department.
The way to do this is to use journals and ledgers that have enough columns to accommodate
all the entries made in the business.
Let us look at an example:
The following transactions appeared in the
books of TH Dealers.
May 2010:
1. Mr TH Smit increased his capital
contribution by R20 000. Receipt 7 was
issued to him.
10. Purchase stock from Trutect Suppliers
and pay per cheque: Ties, R500 and Hats,
R250.
151
15. Paid the manager T Smit’s salary per cheque, R5 500.
26. Cash sales, Hats, R150 and Ties, R100.
CASH RECEIPTS JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
1
Details
TH Smit
Details
of sundry
accounts
Sundry
accounts
Capital
20 000
Sales
Ties
Hats
00
Sales
20 000
Analysis of
receipts
00
100
00
150
00
100
00
150
00
Bank
20 000
00
20 000
00
250
00
250
00
20 250
00
CASH PAYMENTS JOURNAL OF TH DEALERS – MAY 2010
Doc
no.
D
10
Details
Details
of sundry
accounts
Sundry
accounts
Purchases
Ties
Trutect
500
Salaries
Hats
00
250
00
T Smit
–
500
Bank
00
250
00
750
00
5 500
00
5 500
00
5 500
00
6 250
00
You can also use department columns for other journals such as:
• Creditors Journal.
• Creditors Allowance Journal.
• Debtors Journal.
• Debtors Allowance Journal.
We will not go through the accounting processes for each journal entry, or the closingoff process, since we have already covered these processes earlier in this book and the
processes are the same for all bookkeeping transactions.
Unit 3.4: Adaptation of General Ledger accounts for
departmental purposes
You can also use the column system for ledger accounts.
Example:
Using the information given in Unit 3.3, post from the CRJ and CPJ to the Sales and
Purchase accounts of TH Dealers:
PURCHASE
2010
May
Total
31 Bank CPJ
750 00
Ties
500 00
Hats
Total
Ties
Total
Ties
Hats
250 00
SALES
Total
Ties
Hats 2010
May
152
31 Bank CRJ
250 00 100
Hats
00
150 00
Example:
Smit Dealers has two departments, toys and
sweets.
Use the following information and post to the
Purchase account in the General Ledger of Smit
Dealers. Close off this account on 30 April 2010.
April 2010:
1. Balance of the Purchase account: Toys, R350 and Sweets, R450.
4. Donate the following to a children’s home: Toys, R250 and Sweets, R150.
5. Buy Toys, R100 and Sweets, R50 for cash from Marko.
8. The owner took a toy home for his own child, R80.
13. Buy Sweets, R300, on credit from The Sweet Factory.
24. Transfer stock from the toy department to the sweet department, R50.
PURCHASE
2010
Apr
Total
Toys
Balance
800 00
450 00 350
5
Bank
150 00
50 00 100
13 Creditors
control
300 00
300 00
24 Transfer
50 00
50 00
1 300 00
Apr
Sweet
1
1
Balance
770 00
2010
Total
70
150 00
Toys
4
Donation
400 00
00
8
Drawings
80 00
80 00
24 Transfer
50 00
50 00
30 Balance
770 00
700 00
70 00
1 300 00
850 00
450 00
850 00 450 00
700 00
Sweets
00 Apr
250 00
00
Or as a calculation:
Calculation for Purchase accounts:
Balance
Total
Sweets
800
00
Toys
450
00
350
00
100
00
(250)
00
(80)
00
Cash purchases
150
00
50
00
Credit purchases
300
00
300
00
Donation
(400)
00
(150)
00
Drawings
(80)
00
Transfer
Total
–
770
00
50
00
(50)
00
700
00
70
00
Note that the total of the calculation is the same as the closing balance of the Ledger
account.
In a Periodic Stock account, the account used to record stock movement will be done in
the Purchase account. However, the Trading Stock account will only be used to record
stock take at the end of each financial year.
153
Notice that when a transfer is made between departments, this is not an accounting
entry (the business has not lost or given up the value of inventory) but is just an entry
between departments recorded in the appropriate columns.
Unit 3.5: DRAWING UP a departmental trading statement
The term "trading" refers to the main activity of a trading enterprise – the selling of trading
stock. For all enterprises the nominal accounts are closed off to the Trading account and
Profit and Loss account. In the case of enterprises without any departments, Sales and Cost
of Sales accounts are closed off to the Trading account, to determine the gross profit for the
financial year. The result of the Trading account and all other nominal accounts are closed
off to the Profit and Loss account to determine the net profit for the financial year.
Therefore, a trading statement is the first section (Sales and Cost of Sales) of an Income
Statement. The cost of sales will be known if a continuous stock system is followed. For
a periodic stock system a calculation must be done to determine the cost of sales for the
financial year.
Example:
The following Trial Balance appeared in the books of TH Dealers on 28 February 2010.
TH DEALERS
POST-ADJUSTMENT TRIAL BALANCE ON 28 FEBRUARY 2010
DR
CR
BALANCE SHEET ACCOUNTS SECTION
Trading stock: Ties (1 March 2009)
70 000
Trading stock: Hats (1 March 2009)
18 500
NOMINAL ACCOUNTS SECTION
Sales: Ties
231 500
Sales: Hats
155 725
Purchases: Hats
35 000
Purchases: Ties
20 500
Carriage on purchases: Ties
850
Carriage on purchases: Hats
1 600
Discount allowed
800
Motor vehicle expenses
6 000
Insurance
7 440
Wages
18 000
Debtors allowances: Hats
3 325
Debtors allowances: Ties
7 325
Creditors allowances: Ties
14 200
Creditors allowances: Hats
3 075
Sundry expenses
3 000
158 800
154
158 800
Adjustment:
1. According to a physical stock take on 28 February 2010, the following stock was
on hand:
Ties R15 500
Hats R10 000
2. The owner took a hat, R150 and tie, R50 for his personal use.
3. Stock invoice for tie, R500, was posted to the hat department. Rectify this error.
4. The owner donated hats, R350, to the local old-age home.
5. A carriage on purchase invoice for hats, R200, is still outstanding and due for
payment.
Required:
Draw up a departmental trading statement for TH Dealers for the year ending 28
February 2010.
(Show calculations for the Purchase accounts.)
Solution
Departmental Trading Statement of TH Dealers for the year ending 28 February 2010:
Total
Ties
Sales *
376 575
00
Cost of sales
103 325
88 500
00
00
62 100
00
70 000
37 675
00
2 650
00
128 825
00
25 500
273 250
Opening stock
+ Purchases
+ Carriage on purchases
– Closing stock
Gross profit
Calculation for Purchase accounts:
Balance
Drawings
Error
Donation
Creditors allowances
Hats
224 175
152 400
00
00
41 225
00
00
18 500
00
6 750
00
30 925
00
850
00
1 800
00
77 600
00
51 225
00
00
15 500
00
10 000
00
00
162 075
00
111 175
00
Total
Ties
Hats
55 500
00
20 500
00
35 000
00
(200)
00
(50)
00
(150)
00
500
00
(500)
00
(350)
00
–
(350)
00
(17 275)
00
(14 200)
00
(3 075)
00
37 675
00
6 750
00
30 925
00
Important to note:
Always show all calculations in brackets as far as possible, but for calculating the
purchase amount per department, show the calculation separately.
* Refers to the net sales of each department. Net sale is sale less debtors allowance.
155
Exercise
The following information appeared in the books of Craft Traders which consists of
two departments, Art Accessories and Art Equipment.
Balances on 30 June 2010:
Art Accessories
Sales
Carriage on purchases
Purchase returns
Purchases
Sales returns
Trading inventory (1 July 2009)
Art Equipment
Total
56 120
45 680
101 800
990
510
1 500
360
170
530
43 800
38 300
82 100
495
300
795
14 300
12 600
26 900
Additional information:
1. The owner took art equipment, cost price R250 and selling price R375, for his own
use. No entry has been made in the books.
2. Trading inventory on 30 June 2010:
Art accessories
R9 900
R7 725
Art equipment
3. Art accessories R200 and art equipment R150 were donated to the St Michael’s
Children’s Home.
Required:
1. Draw up the Departmental Purchase account in the General Ledger and close off
the account.
2. Prepare a Departmental Trading Statement for the year ended 30 June 2010.
156
Exercise
The following information appeared in the books of Union Mart Traders on 28
February 2005:
Extract from the PRE-ADJUSTMENT TRIAL BALANCE of Union Mart Traders on
28 February 2005:
Equipment
Trading stock (1 March 2004)
Carriage on sales
Purchases
Purchases returns
Sales
Carriage on purchases
Shoes/Clothes
Total
58 026
33 624
91 650
5 320
2 122
7 442
88 468
119 606
208 074
406
6 468
6 874
400 000
350 000
750 000
16 778
8 588
25 366
Stationery
5 290
Import duty
1 500
1 000
Bad debts
2 500
794
Additional information:
1. A physical stock take on 28 February 2005 revealed the following:
Trading stock: Equipment
R58 400
Shoes/Clothes R78 500
2. The equipment department ordered stock on 31 January 2005; R26 000 was
entered in the books, but the stock has not yet been received. 3. Issued a credit note to S Fagan for equipment returned to the equipment
department for R1 200 on 31 January 2005. No entry has been made in the books.
4. The owner took equipment, R500, and clothes, R850, for personal use at cost
price. No entries have been made in the books.
5. A stock sheet of the shoes/clothes department for R6 000 has been added twice to
purchases.
Required:
Draw up the DEPARTMENTAL TRADING STATEMENT for the year ended 28
February 2005. (Show calculation of purchases.)
Unit 3.6: DRAWING UP a departmental Income Statement
Just as you can produce a Trading Statement, using columns to analyse department
performance, so you can extend that statement to produce an Income Statement.
The result of a Departmental Trading Statement is to determine the gross profit per
department. Therefore, a Departmental Income Statement is an Income Statement per
department determining the net profit per department.
For calculating the net profit per department, it must be clear that all income and
expenditure can be split between departments. Different methods can be followed to do so.
157
The following example will illustrate some of these methods:
Example:
HT Dealers has two departments: Toys and DIY. The following table indicates closing
balances of accounts and additional information as it appeared in the books of HT
Dealers:
Total
Sales
591 500
Sundry expenses
TOYS
DIY
238 000
353 500
27 450
Salaries
125 360
Rent expense
20 900
Depreciation
6 666
Water and electricity
13 560
7 200
Department
No. of workers
Floor space
Toys
3
70m²
DIY
2
30m²
Allocate the following accounts to the departments as follows:
1.
2.
3.
4.
Salaries according to the number of workers.
Rent expenses according to floor space.
Sundry expenses in proportion to turnover. Depreciation according to the ratio 2:1 (Toys:DIY).
Solution
1. Total number of workers is five. Three of the five workers worked in the toy
department; therefore 3 of the total salary expenditure must be allocated to the
5
toy department and 2 to the DIY department.
5
Calculation: Toy = 3 × 125 360 = 75 216
5
DIY = 3 × 125 360 = 50 144
5
Total
Salaries
125 360
TOYS
75 216
DIY
50 144
2. Total floor space is 100m2. 70m2 of the 100m2 floor space is allocated to the toy
department; therefore 70 of the total rent expenditure must be allocated to the
100
30
toy department and
to the DIY department.
100
Calculation: Toy = 70 × 20 900 = 14 630
100
DIY = 30 × 20 900 = 6 270
100
158
Total
Rent expense
TOYS
20 900
DIY
14 630
6 270
3. "In proportion to turnover" means that the sundry expenses must be allocated to
each department based on the sales of that department as a fraction of the total
sales.
Total
Sales
TOYS
591 500
DIY
238 000
353 500
Based on the sales: 238 000 of 591 500 was generated by the toy department and
353 500 of 591 500 was generated by the DIY department.
Calculation: Toy = 238 000 × 27 450 = 11 045 (rounded off to the nearest rand)
591 500
DIY = 353 500 × 27 450 = 16 405 (rounded off to the nearest rand)
591 500
Total
Sundry expenses
TOYS
27 450
DIY
11 045
16 405
4. Toys:DIY = 2:1 (Total of the ratio is 3)
Therefore, 2 of 3 or 2 of the total depreciation must be allocated to the toy
3
department and 1 of 3 or 1 of the total depreciation must be allocated to the DIY
3
department.
Calculation: Toy = 2 × 6 666 = 4 444
3
DIY = 2 × 6 666 = 2 222
3
Total
TOYS
4 444
6 666
Depreciation
DIY
2 222
5. The total and the toy department’s water and electricity amounts are given. The
difference will result in the amount for the DIY department.
Total
Water and electricity
13 560
Example:
The following information was extracted from
the books of Count Down’s Departmental Store,
with departments for Sport and Clothing, for
the year ended 31 December 2010.
159
TOYS
DIY
7 200
6 360
Total
Sport
department
Clothing
department
Inventory (1 January 2010)
216 000
93 000
123 000
Purchases
591 500
238 000
353 500
Purchase returns
27 450
15 300
12 150
1 265 100
586 400
678 700
Sales returns
21 500
9 000
12 500
Carriage on purchases
16 300
7 600
8 700
Wages
48 000
21 000
27 000
Rent paid
72 000
Sundry expenses
63 600
Sales
Depreciation
7 800
Additional information:
1. Inventory on hand at 31 December 2010:
Sport
R120 000
ClothingR112 500
2. The owner took sports equipment to the value of R700 for his personal use. No entry has been made in the books.
3. An invoice of R1 000 for clothing purchases was erroneously posted to the
Purchase account of the sport department.
4. Carriage on purchases to the value of R300 for the sport department was still due.
No entry was made.
5. Clothing worth R550 was stolen on 20 December 2010. The insurance claim has
not yet been settled and no entry was made in respect of the stolen goods.
6. Expenses must be allocated as follows:
Depreciation must be equally divided between the departments.
Sundry expenses according to the ratio 3:5 (Sport:Clothing).
Rental according to the floor space occupied:
Sport : 30m2
Clothing: 20m2
Required:
Draw up the DEPARTMENTAL INCOME STATEMENT for Count Down’s
Departmental Store for the year ended 31 December 2010.
Solution
Total
Sales (586 400 – 9 000) (678 700 – 12 500)
Cost of sales
Opening stock
+ Purchases
+ Carriage on purchases
Sport dept
Clothing dept
1 243 600
00
577 400
00
666 200
00
562 900
00
201 900
00
361 000
00
216 000
00
93 000
00
123 000
00
562 800
00
221 000
00
341 800
00
16 600
00
7 900
00
8 700
00
795 400
00
321 900
00
473 500
00
160
– Closing stock
232 500
00
120 000
00
112 500
00
Gross profit
680 700
00
375 500
00
305 200
00
Less expenditure
191 400
00
91 950
00
99 450
00
Wages
48 000
00
21 000
00
27 000
00
Rent paid
72 000
00
43 200
00
28 800
00
Sundry expenses
63 600
00
23 850
00
39 750
00
7 800
00
3 900
00
3 900
00
489 300
00
283 550
00
205 750
00
Depreciation
Net profit per department
Calc: Purchase accounts:
Total
Sport dept
Clothing dept
Balance
591 500
00
238 000
00
353 500
00
Creditors allowances
(27 450)
00
(15 300)
00
(12 150)
00
(700)
00
(700)
00
(1 000)
00
1 000
00
(550)
00
341 800
00
Drawings
Error
–
Stolen goods
(550)
00
562 800
00
221 000
00
Exercise
The following information was obtained from ZENEX GARAGE on 30 June 2009.
They are using TWO departments, namely SPARES and REPAIRS AND SERVICES.
Total
Sales
Spares
Repairs and
Services
1 217 400
688 400
529 000
Purchases
906 100
509 440
396 660
Stock (1 July 2008)
131 520
73 680
57 840
5 400
2 400
3 000
87 842
73 100
Returns on sales
Rent paid
20 700
Salaries and wages
18 258
General expenses
160 942
Depreciation on
equipment
8 000
Returns on purchases
9 520
3 400
6 120
Import duty
9 400
4 150
5 250
Interest on loan
4 800
Floor space:
The floor space occupied by the SPARES and REPAIRS AND SERVICES departments
is 10 000m2 and 30 000m2 respectively.
Additional information:
1. A physical stock taking on 30 June 2009 revealed the following stock:
Spares
R72 600
Repairs and services
R56 200
161
2. Stock, cost price R1 520, was transferred on 1 June 2009 from the Spares
Department to the Repairs and Services Department to be used in the workshop.
No entry was made for the transfer.
3. Sixty people are employed by ZENEX Garage. Ten workers are employed in
the Spares Department and the rest of the workers in the Repairs and Services
Department. Salaries and wages are allocated according to the number of people
employed in each department.
4. Rent is allocated according to the floor space used.
5. Interest on the loan is divided equally among the departments.
6. Depreciation on equipment must be allocated in the ratio 3:2 to Spares and
Repairs and Services respectively.
7. On 29 June 2009 an invoice for carriage, R12 600, was received from JETSET
Transport. R9 350 must be allocated to the Spares Department and the rest to the
Repairs and Services Department. No entry was made for this invoice.
Required:
Draw up the DEPARTMENTAL INCOME STATEMENT for the year ended 30 June
2009 and calculate the net profit for each department.
Exercise
MADIBA HARDWARE STORE trades as
a retail business using TWO departments,
namely: Paints and Hardware.
Required:
As the accountant for the above business
organisation, you were requested:
1.1 To show your calculations for the closing balance of the PURCHASE account for
each department.
1.2 To draw up the DEPARTMENTAL INCOME STATEMENT to advise the
departmental managers on the profitability of their respective departments.
1.3 To indicate your recommendations to the departmental managers.
NOTE: Round off ALL amounts to the nearest rand. The business uses a periodic stock system.
Information:
The following is an extract from the books on 30 June 2010:
Paints
Hardware
Stock (1 July 2009)
28 500
15 000
Purchases
11 900
9 500
Customs duties
2 000
1 500
Carriage on sales
1 300
700
56 250
93 750
1 200
–
550
410
Sales
Creditors allowance
Discount received
162
Other expenses
Salaries
50 000
Sundry expenses
9 000
Rent expenses
12 000
Adjustments and additional information:
1. Trading stock at 30 June 2010:
Paints
R13 700
Hardware R4 900
2. Customs duties for Hardware still outstanding, R220.
3. Paint valued at R900 was donated to Charities Ltd.
4. Hardware was taken by the owner for private use, R180.
5. B Habana, a debtor, returned hardware valued at R320. No entry has yet been
made.
6. Goods to the value of R800 were transferred from the Paint to the Hardware
Department.
7. Costs are allocated as follows:
Salaries according to the number of workers.
Rent expenses according to floor space.
Sundry expenses in proportion to turnover. Department
No. of workers
Floor space
Paint
6
70m²
Hardware
4
30m²
Summary
In this module we considered how to deal with accounts for organisations that want
to analyse accounting entries according to departments, and explained the aim of this
system and how source documents can be coded to ensure that they are posted to the
correct departments.
We then looked at how journals and ledgers are adapted to facilitate departmental
accounts before explaining how the Departmental Trading and Income Statements
are generated for these types of accounts.
163
Module 4
Non-trading organisations
(organisations without a profit
motive)
Overview
When you have completed this module, you should be able to:
• Explain the difference between organisations with and without a profit motive,
and the general and accounting administration of a non-trading organisation.
• Explain the aim of different ledger accounts typical of a non-trading organisation
and interpret and record entries.
• Explain the aim of special funds and record entries for fund creation and
employment of income from the special fund.
• Define accounting concepts relating to non-profit organisations.
• Draw up an Analysis Cash Book with relevant entries and post to the correct
ledger accounts.
• Draw up a Trading account for the different activities of a non-trading
organisation.
• Indicate the surplus or deficit by means of a Statement of Income and
Expenditure.
• Draw up a Balance Sheet in vertical form for a non-trading organisation.
Unit 4.1:The aim of a non-trading organisation
A non-profit organisation (NPO) is an entity whose main purpose does not include
profit as an outcome or objective. However, the terms are misleading because such
organisations may involve themselves in trading activities from which they seek profits,
though these activities are not the main aim of the organisations. For example, NPOs
include the following:
Table 4.1 Non-profit organisations
NPO
Main purpose
Trading activities
Profit opportunities
Schools
Provide education
Tuck shops
Tuck shops
Clubs
Club activities, e.g.
• Sports
• Social
Purchase and sale of
associated items such as
clothing and equipment
Tuck shops
Purchase and sale of
associated items such as
clothing and equipment
Tuck shops
As you can see, NPOs include a wide range of activities which may, or may not, include
activities that generate a profit. Where a profit is obtained, it is invariably used to support
the main non-profit aim of the organisation.
164
The term “surplus” is used instead of profit and likewise the term “deficit” instead of loss.
For all clubs, there is no capital account. Surpluses are accumulated in an accumulated
fund account and form the members’ equity for the club.
An example of a non-profit organisation is one that
promotes literacy and reading.
non-profit
organisation (NPO):
Is an entity whose
main purpose does
not include profit as an
outcome or objective.
However, the term is
misleading because
such organisations may
involve themselves in
trading activities from
which they seek profits,
though these activities
are not the main aim of
the organisations.
NPO administration
With the incorporation of an NPO, the constitution predicts the main objectives of this
NPO, the composition of management and control thereof.
At the annual general meeting a committee is elected by members to administer the dayto-day activities of the NPO. Normally, this committee consists of:
• Chairperson.
• Vice-chairperson.
• Secretary.
• Treasurer.
• Additional members.
Each of these members has a specific role to fulfil. The treasurer is responsible for the
financial record-keeping and for drawing up the annual financial statements.
Unit 4.2:Special items (ledger accounts)
An NPO may have similar expenses to trading organisations, such as rent, telephones,
stationery, postage, advertising, wages and salaries, insurance, et cetera, but NPOs may
also need to deal with special items. If we take a sports club as an example, the accounting
records of this NPO may have to include items such as the following:
• Entrance fees paid by new members to join the club for the first time.
These fees are an income for the club and are recorded as such. However, the club’s
constitution may indicate that these fees must be capitalised. Therefore these fees will
not be recorded as an income, but directed to the Accumulated Fund account.
So, how do we record these fees as an income?
165
Example:
On 1 July 2011, Mr T Smith joined the DC Tennis Club for the
first time.
He paid his entrance fee of R250 by cheque.
Dr BankCr
2011
July 1
Entrance fees
250
DrEntrance FeesCr
2011
July 1
Bank
250
Example:
On 1 January 2010, 15 new members joined the AJ Soccer Club.
The entrance fee is R500 per person. The constitution determines
that 60% of all entrance fees must be capitalised.
1. Record the total entrance fees
Dr BankCr
2010
Jan 1
Entrance fees
7 500
DrEntrance FeesCr
2010
Jan 1
Bank
7 500
2. Capitalise 60% of the entrance fees (60% of R7 500 = R4 500)
DrEntrance FeesCr
2010
Jan 1
2010
Accumulated fund
4 500 Jan 1
Bank
7 500
DrAccumulated FundCr
2010
Jan 1
Entrance fees
4 500
• Membership fees, which are fees paid by all members, normally annually or monthly.
This fee is payable as long as a member stays a member of this NPO.
This is also the main income of a non-profit enterprise (NPO). This Ledger account will
be explained in more detail later in this module.
166
Example:
On 1 July 2010 Mr T Smith paid his membership of R200 by cheque.
Dr BankCr
2010
July 1
Membership fees
200
DrMembership FeesCr
2010
July 1
Bank
200
• Affiliation fees, which are paid in order to be associated with another organisation; for
example, a tennis club may pay an affiliation fee to be part of a national sports group:
This is an expense to the NPO.
Example:
On 1 January 2010 MC Tennis Club paid the annual affiliation fees of R5 000 to SA
Tennis Union by cheque.
Dr BankCr
2010
Jan 1
Affiliation fees
5 000
DrAffiliation FeesCr
2010
Jan 1
Bank
5 000
• Honorarium, which is a fee paid to someone providing a service to the NPO but not
employed by the NPO.
This is an expense to the NPO.
Example:
On 1 January 2010 MC Tennis Club paid the secretary an honorarium by cheque for
administrative services rendered, in the amount of R1 500.
Dr BankCr
2010
Jan 1
Honorarium
1 500
DrHonorariumCr
2010
Jan 1
Bank
1 500
• Legacies and donations are amounts of money that are given to a club or other NPO.
Donations are normally considered to be current income and are recorded in the
Statement of Income and Expenditure, or the Income Statement for an NPO.
167
Legacies are money received from a member’s estate. The person making this special
donation may stipulate that this money must be used for a specific purpose.
Example:
Received on 1 July 2010 a donation of R10 000 from T Smit, a member of MC Tennis Club.
Dr BankCr
2010
Jul 1
Donation
10 000
DrDonationsCr
2010
Jul 1
Bank
10 000
Unit 4.3:Special funds
Internally, an NPO must manage the funds at its disposal and the money it receives and
uses. However, income is not derived from sales of products or services, but from:
• Income like entrance and membership fees.
• Donations and legacies as defined above.
• Interest on existing funds.
As indicated above, a special donation such as legacies can be received by an NPO with
special conditions, like the creation of a special fund.
Let’s look at the following to understand the creation of a special fund.
Example:
On 31 July 2010 MC Tennis Club received a special donation, R150 000, from the estate
of Mr Moolman. His estate stipulated that a special fund should be created.
Dr BankCr
2010
July
31
Moolman Fund
150 000
DrMoolman FundCr
2010
July
31
168
Bank
150 000
Investing funds for future use
When an NPO receives more money than it needs for the next few months of operation,
it can invest the excess in order to attract interest. It may place the money in an interestpaying investment account or as a special instruction issued by the donor of a legacy.
Example:
On 31 July 2010 MC Tennis Club received a special donation, R150 000, from the estate
of Mr Moolman. His estate stipulated that a special fund should be created and invested.
Creation of the special fund
Dr BankCr
2010
July
31
Moolman Fund
150 000
DrMoolman FundCr
2010
July
31
Bank
150 000
Investment
Dr BankCr
2010
July
31
2010
Moolman Fund
150 000 July
31
Moolman Fund investment
150 000
DrMoolman FundCr
2010
July
31
Bank
150 000
DrMoolman Fund InvestmentCr
2010
July
31
Bank
150 000
The R150 000 invested has now been taken out of the NPO’s bank account and placed
in a special investment Ledger account, Fixed Deposit: Moolman Fund.
Using interest received for normal operations or capitalisation
When money is invested to provide a regular income, such as interest on a bank account,
that interest can be used for normal day-to-day operations to cover current expenses:
169
Example:
On 31 August 2010 received an amount of R7 500 for interest on the Moolman Fund
investment at ABC Bank.
Dr BankCr
2010
Aug
31
Interest on fixed deposit
7 500
DrInterest on Fixed DepositCr
2010
Aug
31
Bank
7 500
Alternatively, it can be retained as a capital item by adding it to the amount invested:
Example:
On 31 August 2010 received an amount of R7 500 for interest on the Moolman Fund
investment at ABC Bank. This amount must be capitalised.
Dr BankCr
2010
Aug
31
Interest on fixed deposit
7 500
DrInterest on Fixed DepositCr
2010
Aug
31
2010
Accumulated fund
7 500 Aug
31
Bank
7 500
DrAccumulated FundCr
2010
Aug
31
Interest on fixed deposit
7 500
Unit 4.4:Accounting concepts for non-profit organisations
In accounting, different phrases or terms can be used to describe the same or similar
aspects, and commercial accounts tend to refer to income as sales or revenue, and
expenditure as costs.
170
• Receipts and income
Receipts are money deposited into the bank account of an NPO. Capital receipts are the
money received from selling an asset, like equipment.
Income is the total amount receivable during a financial year. Current income is used
when income is received, like membership fees, et cetera.
Example:
In the Trial Balance: (extract)
DR
CR
NOMINAL ACCOUNTS SECTION
Interest on fixed deposit
16 000
Adjustment:
At the end of the financial year R4 000 is still outstanding as interest on the fixed
deposit.
It is important to note that:
Receipts = R16 000
Income = R20 000
• Payments and expenditure
Payments are any amount paid by cash or cheque.
Expenditure is all expenses the NPO is liable for in a specific financial period.
When as asset is purchased it is referred to as capital expenditure, but normal day-today expenses like salaries and stationery are current expenses.
Example:
In the Trial Balance: (extract)
DR
CR
NOMINAL ACCOUNTS SECTION
Salaries
55 000
Adjustment:
At the end of the financial year a salary of R5 000 is prepaid.
It is important to note that:
Payment = R55 000
Expenditure = R50 000
171
172
30
46
47
2
45
T Smith
D Dali
Donation
10 500
10 000
500
P Nel
1
44
S John- Entrance
son
fee
Details Details
Sundry
of sundry accounts
accounts
Doc D
no.
00
00
00
3 000
1 000
1 000
1 000
Membership fees
00
00
00
00
1 000
10 000
1 500
1 000
00
00
00
00
Analysis of
receipts
13 500 00
11 000 00 170
30
169 21
1 500 00 168 13
4
Doc D
no.
1 000 00 167
Bank
SA
Tennis
Pick n
Pay
Easy
Equip
K van
Zyl
Affiliation
fee
Honorarium
Details Details of
sundry
accounts
ANALYSIS CASH BOOK OF MC TENNIS CLUB – APRIL 2010
2 500
1 750
750
Sundry
accounts
00
00
00
3 250
3 250
00
00
450
450
Equipment Refreshments
00
00
6 200
1 750
450
3 250
750
Bank
00
00
00
00
00
Due to the nature and simplicity of transactions in the books of an NPO, a Cash Book is used to record all payments and receipts. An
Analysis Cash Book is a journal, where the left side of the journal accommodates all receipts and the right side of the journal all payments.
Unit 4.5:Analysis Cash Book
From the Cash Book, you would then post to the appropriate ledger accounts as follows:
DrEntrance FeesCr
2010
Apr 2
Bank
500
DrMembership FeesCr
2010
Apr
30
Bank
3 000
DrDonationCr
2010
Apr
30
Bank
10 000
DrHonorariumCr
2010
Apr 4
Bank
750
DrAffiliation FeesCr
2010
Apr
30
Bank
1 750
DrEquipmentCr
2010
Apr
30
Bank
3 250
DrRefreshmentsCr
2010
Apr
30
Bank
450
In small organisations with not many accounting entries each month, the bookkeeper
may decide not to take time creating ledger accounts but use the analysis columns of the
Cash Book as the record of entries for each category. By using a different page for the debit
and credit side of the Cash Book, it is possible to provide a number of columns (in the
form of a spreadsheet) for this purpose.
Unit 4.6:Operating (Trading) account per activity
NPOs have no profit motive and rather focus on creating facilities for members with a
mutual interest, like a tennis club. Their main activities are not trading activities and a
Trading account is not applicable in this case.
173
However, having a tuck shop or bar on site will result in a Trading account for each of
these activities. During a financial year all income and expenditure will be recorded. At
the end of a financial year, all income and expenditure related to a particular activity,
like tuck shop sales and tuck shop purchases, will be closed off to a Trading account
to calculate the result, being a surplus or deficit, and this result will be recorded in the
financial statements.
Let’s look at the following example:
The following information was extracted from the accounting records of Amac Soccer
Club for the year ended 30 June 2010:
Balances from the Trial Balance on 1 July 2009:
Accumulated funds
35 670
Tuck shop stock
3 540
Accrued income: Membership fees
360
Income received in advance: Membership fees
960
Statement of receipts and payments for the year ended 30 June 2010:
RECEIPTS
PAYMENTS
Membership fees
2004
2005
2006
Tuck shop sales
Membership fees refund
240 Tuck shop: Purchases
5 640 Electricity
600
13 500
Additional information:
1. Tuck shop stock on hand 30 June 2010 amounted to R2 760.
Required:
Prepare the following ledger accounts and balance/close off the accounts:
1. Tuck shop Trading account.
174
120
8 340
500
Solution:
DrTuck Shop Trading AccountCr
2009
Jul 1
2010
Opening stock
3 540 Jun
30
Purchases
8 340
Surplus: Tuck shop
4 380
Sales
13 500
Closing stock
2 760
2010
Jun
30
16 260
16 260
Unit 4.7:Statement of income and expenditure
The Statement of Income and Expenditure is the Income Statement of an NPO. In this
statement we will only account for income and expenditure. NPOs are non-trading
enterprises and this is the reason for not having trading activities as part of this statement.
One of the elements under the Income Section within the Statement of Income and
Expenditure is membership fees, the main income source for NPOs. Let’s focus on more
complex examples calculating the membership fee amount that will be forwarded to this
statement.
Example:
The following information was taken from the Blue Bells Cricket Club on 30 June 2010:
Balance on 1 July 2009:
Accrued income: Membership fees
1 400
Income received in advance: Membership fees
80
RECEIPTS
PAYMENTS
Bank
925 Water and electricity
Interest on fixed deposits
900 Refreshments purchases
Membership fees
2009
2010
2011
Entrance fees
Refreshment sales
Donations received
Gate takings
Stationery
950 Cricket tour
1 920 Bank
120 Membership fee refund
60
4 130
980
2 905
175
210
3 080
55
1 705
1 235
40
Additional information:
1. On 30 June 2010 membership fees amounting to R280 were due.
2. The membership fees still outstanding for 2009 must be written off as
irrecoverable.
Required:
Prepare the MEMBERSHIP FEES account for 2010.
Solution
Note: In the beginning of the financial year, the accrued income and income received
in advance must first be closed off to the Membership Fees account.
These accounts at the beginning of the financial year:
DrAccrued IncomeCr
2009
Jul 1
Membership fees
1 400
DrIncome Received in AdvanceCr
2009
Jul 1
Membership fees
80
Let’s close these accounts off to the Membership Fees account. The reason for this is
that both of these accounts were opened due to adjustments made at the end of the
previous financial year, and therefore at the beginning of the new financial year these
Balance Sheet Section Accounts must be closed off to the applicable account, for this
example, the Membership Fees account.
DrAccrued IncomeCr
2009
Jul 1
2009
Membership fees
1 400 Jul 1
Membership fees
1 400
DrIncome Received in AdvanceCr
2009
Jul 1
2009
Membership fees
80 Jul 1
Membership fees
80
These entries are done on the first day of the new financial year.
MEMBERSHIP FEES
2009 1
Jul
Accrued income
1 400
00 2009 1
Income received
in advance
Jul
There are four stages in drawing up a Membership Fees account:
• Close off the previous financial year’s accrued income and income received in
advance to the Membership Fees account.
176
80
00
• Post the transactions recorded during the financial year with respect to membership
fees.
Membership fees received.
Membership fees refunded.
Membership fees written off.
• Record accrued income and income received in advance for the end of the financial
year.
• Close off the Membership Fees account to the Income and Expenditure account.
Next step:
MEMBERSHIP FEES
2009
1
Accrued income
1 400
00 2009
Jul
2010
1
Income received
in advance
80
00
Jul
30
Bank
40 00 2010
Jun
30
Jun
Bank (2009)
950 00
Bank (2010)
1920 00
Bank (2011)
120 00
Membership fees
written off
450 00
(1 400 – 950)
Remember that the Membership Fees account is an Income account. This account will
increase on the credit side and decrease on the debit side.
The bank entry on the debit side is the refund of the membership fee. The three bank
entries on the credit side are for membership fees received for three different financial
years.
Membership fees written off are calculated as follows:
In the beginning of this financial year membership fees of R1 400 were still outstanding
(accrue income) for the previous financial year. On the credit side an amount of R950 was
received for outstanding membership fees for the previous year. Thus, R950 of the R1 400
was collected. The amount of R450 is still outstanding and therefore will be written off.
Membership fees written off are a loss for the NPO and will be recorded as such in the
Statement of Income and Expenditure (so-called Income Statement).
Next step: (third step)
Given as ADDITIONAL INFORMATION:
1. On 30 June 2010 membership fees amounting to R280 were due.
These are membership fees still to be received for the 2010 financial year. Thus
accrued income = R280.
177
MEMBERSHIP FEES
2009
1
Accrued income
30
Bank
1 400
00 2009
40
00 2010
Jul
2010
1
Income received
in advance
80
00
30
Bank (2009)
950
00
Bank (2010)
1920
00
Jul
Income received
in advance
Jun
120 00 Jun
Bank (2011)
120
00
Membership fees
written off
450
00
(1 400 – 950)
Accrued income
280 00
Income received in advance is derived from the bank entry on the credit side for 2011.
This amount of R120 is thus received for membership for the next financial year. Thus it
is income received in advance.
The last (fourth) step is to close off this account to the Income and Expenditure account.
MEMBERSHIP FEES
2009
1
Accrued income
1 400
00 2009
Jul
2010
1
Income received
in advance
80
00
30
Bank (2009)
950
00
Bank (2010)
1920
00
Bank (2011)
120
00
Membership fees
written off
450
00
280
00
3 800
00
Jul
30
Jun
Bank
Income received
in advance
Income and
expenditure
40
00 2010
120
00 Jun
2 240 00
(1 400 – 950)
Accrued income
3 800 00
The amount of R2 240 is the membership fee income that will be reported on in the
Statement of Income and Expenditure.
Exercise
On 1 January 2010 the following information appeared in the books of Active Tennis
Club.
Each member pays an annual membership fee of R250. At the end of the club’s financial
year on 31 December 2009, the membership fees for 12 members were still outstanding
for 2009.
On the other hand, there were four members who had already paid their membership
fees for 2010 in advance.
178
A total of R15 400 was received during 2010 in respect of membership fees. At the end
of 2010, 13 members were still in arrears with their membership fees for 2010. A total
of six members paid their membership fees for 2011 during 2010.
Only five of the members whose fees were in arrears on 31 December 2009 paid their
membership fees during 2010. It is the policy of the club to expel members if they are
one year in arrears with their subscriptions.
On 1 February 2010 two members resigned from the club and their full membership
fees for 2010 were refunded.
Required:
Prepare the MEMBERSHIP FEE account of Active Tennis Club for the year ending 31
December 2010.
Exercise
The information given below was taken from the books of Bafana Sports Club on 28
February 2010.
Required:
1. Complete the Tuck Shop Trading Account for the year ended 28 February 2010.
2. Prepare the MEMBERSHIP FEES account in the General Ledger.
Information:
A.Balances on 1 March 2009
Accumulated funds
Clubhouse property at cost
81 200
500 000
Equipment
55 000
Accumulated Depreciation on Equipment
19 900
Fixed deposit: World Bank (16% p.a.)
50 000
Creditors control
13 550
Accrued income: Membership fees
1 500
Income received in advance: Membership fees
500
Tuck shop stock (1 March 2009)
3 200
B.Summary of RECEIPTS and PAYMENTS for the year ended 28 February 2010
Receipts:
• Entrance fees
R5 800
• Membership fees
–– 2009R500
–– 2010R9 500
–– 2011R2 500
• Tuck shop sales
R19 850
• Gate takings
R5 220
179
Payments:
• Tuck shop purchases
R8 950
• InsuranceR2 150
• Membership fees refunded
R500
Additional information:
1. Tuck shop stock on 28 February 2010 amounted to R4 550.
2. Depreciation on equipment is calculated at 20% p.a. on cost.
3. Membership fee is R500 per member per annum.
4. The membership fees still outstanding for 2009 must be written off as
irrecoverable.
5. At the end of the year membership fees of four members were still outstanding.
Let’s look at the format of a Statement of Income and Expenditure and of an Income and
Expenditure account:
The first section is to report on all income for a financial year. A few examples of income
are included in the template.
The second section is to report on all expenditure for a financial year. A few examples of
expenses are included in the template.
The difference between the first section, Income, and the second section, Expenditure,
results in either a surplus or deficit for a financial year.
STATEMENT OF INCOME AND EXPENDITURE for the year ended 31 December 2010
INCOME
xxx
Membership fees
xxx
Gate takings
xxx
Interest on fixed deposit
xxx
Entrance fees
xxx
LESS EXPENDITURE
xxx
Membership fees written off
xxx
Stationery
xxx
Insurance
xxx
Interest on loan
xxx
Water and electricity
xxx
Sundry expenses
xxx
Depreciation
xxx
Net surplus for the year
xxx
Alternatively, the reporting on income and expenditure can also be done in a ledger
account.
All income will be recorded on the credit side of this account and all expenditure on the
debit side.
180
INCOME AND EXPENDITURE ACCOUNT
2010
Dec
Membership fees
written off
xxx
Stationery
xxx
Insurance
xxx
Interest on loan
xxx
Water and electricity
xxx
Sundry expenses
xxx
Depreciation
xxx
Accumulated fund
xxx
2010
31
Dec
Membership fees
31
xxx
Gate takings
xxx
Interest on fixed
deposit
xxx
Entrance fees
xxx
xxx
xxx
Take note that the balance of this account is forwarded to the accumulated fund account.
Let’s look at the following example:
The Dance and Drama Club has been operating for
a number of years.
Members pay an annual membership fee of R150 p.a.
On 1 July 2009 the club’s assets and liabilities were
as follows:
Bank
Membership fees in arrears
Income received in advance: Membership fees Stock on hand: The bar
Savings account (10% p.a.)
Amount owed for insurance R9 480
R600
R750
R1 240
R3 000
R400
The club’s treasurer was able to present the following information on 30 June 2010:
RECEIPTS
PAYMENTS
Membership fees
2009
2010
2011
Donation from members
Interest on savings account
Bar sales
Bar purchases
450 Administrative expenses
15 000 Rent
300 Refreshments
2 000 Refund: Membership
200 Insurance
24 740
181
17 000
2 400
4 000
3 600
450
2 690
Additional information:
1. On 30 June 2010 the club committee decided to write off any arrears of
membership fees for the year ended 30 June 2009 and to pay an honorarium of
R400 to the treasurer.
2. Four members must still pay their membership fees for 2010.
3. An amount of R200 must still be paid for insurance.
4. Interest on the saving account is still due and must be calculated on the balance as
on 1 July 2009.
5. The club committee has decided that 50% of the donations from members should
be capitalised.
6. Stock on hand for the bar as on 30 June 2010, R2 560.
Required:
1. Complete the following ledger accounts:
Membership Fees. Bar Trading Account.
Income and Expenditure account for the year ended 30 June 2010.
Solution
MEMBERSHIP FEES
2009
1
Accrued income
600
00 2009
Jul
2010
Jun
1
Income received
in advance
750
00
Jul
30
Bank (refund)
450
00 2010
Bank (2009)
450
00
Income received
in advance
300
00 Jun
Bank (2010)
15 000
00
00
Bank (2011)
300
00
Membership fees
written off
150
00
600
00
17 250
00
Income and
expenditure
15 900
30
(600 – 450)
Accrued income
(4 x 150)
17 250 00
DrTuck Shop Trading AccountCr
2009
Jul 1
2010
Opening stock
1 240 Jun
30
Sales
Closing stock
24 740
2 560
2010
Jun
30
Purchases
Surplus: Bar
17 000
9 060
27 300
182
27 300
INCOME AND EXPENDITURE ACCOUNT
2010
Jun
30
Administrative
expenses
2 400
00 2010
Rent
4 000
00 Jun
Refreshments
3 600
00
Interest on
savings account*
Surplus: Bar
Honorarium
400
00
Membership fees
written off
150
00
Insurance***
2 490
00
Accumulated
fund
13 220
00
Membership fees
30
Donation**
26 260 00
15 900
00
1 000
00
300
00
9 060
00
26 260
00
Calculations:
*10% × 12 × 3 000 = 300
12
**50% × 2 000 = 1 000
*** 2 690 – 400 + 200 = 2 490
Although it is not part of the question, it is important to see how the entries in the
Income and Expenditure account will be reflected in the Statement of Income and
Expenditure.
STATEMENT OF INCOME AND EXPENDITURE for the year ended 30 June 2010
INCOME
Membership fees
Donation
Interest on savings account
Surplus: Bar
15 900
00
1 000
00
300
00
9 060
00
150
00
LESS EXPENDITURE
Membership fees written off
Administrative expenses
2 400
00
Rent
4 000
00
Refreshments
3 600
00
Honorarium
2 490
00
Net surplus for the year
26 260
00
13 040
00
13 220
00
Exercise
The information given below was extracted from the books of Manic Sports Club on
31 December 2010.
183
Required:
1. Draw up the MEMBERSHIP FEES account in the General Ledger. Balance/close off this account.
2. Prepare the STATEMENT OF INCOME AND EXPENDITURE or INCOME
AND EXPENDITURE account for the year ended 31 December 2010.
Information:
A.The following balances/totals, amongst others, appeared in the books on 1 January
2010:
Accumulated funds
95 000
Fixed deposit: Nedbank (12% p.a.)
55 000
Equipment (cost)
102 000
Accumulated Depreciation on Equipment
23 000
Bank
11 560
Income received in advance: Membership fees
1 600
Accrued income: Membership fees
1 000
Prepaid expense: Insurance
300
Loan: Nedbank (16% p.a.)
120 000
B.STATEMENT OF RECEIPTS AND PAYMENTS – 31 DECEMBER 2010
RECEIPTS
Gate takings
PAYMENTS
38 560 Stationery
Membership fees
2009
2010
2011
Equipment (1 July 2010)
200 Insurance
24 000 Interest on loan
600 Water and electricity
Interest on fixed deposit
6 000 Sundry expenses
Entrance fees
9 800
440
15 000
1 240
19 200
1 960
520
Additional information:
1. 50% of the entrance fees must be capitalised.
2. Membership fees outstanding for 2009 must be written off.
3. Four members must still pay their membership fees for 2010. Fees are R100 per member per year.
4. Interest on fixed deposit is still due.
5. Depreciate equipment at 20% p.a. at cost.
6. Stationery on hand at 31 December 2010, R180.
Unit 4.8: Balance sheet for aN NPO
The Balance Sheet for a non-profit organisation is similar to the one for a sole trader.
However there is some difference which will be highlighted in the example.
184
Example:
The following information appeared in the books
of Manic Soccer Club on 31 December 2010, the
last day of the financial year.
MANIC SOCCER CLUB
PRE-ADJUSTMENT TRIAL BALANCE ON 31 DECEMBER 2010
DR
CR
BALANCE SHEET ACCOUNTS SECTION
Accumulated fund
43 000
Mlanda Development Fund
25 000
Equipment at cost
75 600
Accumulated Depreciation on Equipment
5 600
Investment: Mlanda Development Fund
25 000
Fixed deposit: BNF Bank (13% p.a.)
40 000
Bank
3 890
Petty cash
250
Stock: Tuck shop (as on 1 Jan 2010)
1 780
Accrued income: Membership fees (1 Jan 2010)
450
Income received in advance: Membership fees (1 Jan 2010)
7 500
NOMINAL ACCOUNTS SECTION
16 570
Tuck shop sales
Tuck shop purchases
9 800
Gate takings
3 580
Interest on fixed deposit
3 600
Affiliation fees
1 500
Membership fees
27 050
Bank charges
1 000
Honorarium
1 500
Entrance fees
3 500
Legacy: T Smit
35 000
Water and electricity
2 880
163 650
163 650
Adjustments:
1. Stock take on 31 December 2010: Tuck shop, R2 130.
2. On 1 January 2010, R750 for membership fees was paid in advance and R450
was still outstanding from the previous financial year. Of the membership
fees outstanding for the previous financial year, R300 was recovered during
2010. The balance of the membership fees for that period has to be written off
as irrecoverable. At the end of the 2010 financial year membership fees paid in
advance for 2011 amounted to R900, while the membership fees in arrears for
2010 amounted to R1 500.
185
3. Make provision for interest on fixed deposit. This money was invested on 1 April
2010.
4. The water and electricity account for December 2010 has not yet been paid, R450.
5. Provide for depreciation on equipment at 15% p.a. on the cost price.
6. One-quarter of the legacy has to be capitalised. The balance may be used as
current income.
7. Interest on the fund investment was allocated according to the prescriptions of
Mr Mlanda’s estate.
8. 60% of the entrance fees have to be capitalised. The rest may be used as current
income.
9. The honorarium for the treasurer is still outstanding, R750.
Required:
1. Draw up the following ledger accounts:
Membership Fees.
Tuck Shop Trading Account.
2. Draw up the Statement of Income and Expenditure.
3. Draw up the Balance Sheet and relevant notes.
Solution
1.
MEMBERSHIP FEES
2010
1
Accrued income
450
00 2010
31
Income received
in advance
900
00 Dec
Jan
Dec
1
Income received
in advance
31
Bank
750
00
27 050
00
150
00
1 500
00
29 450
00
Jan
Income and
expenditure
28 100
00
Membership fees
written off
(450 – 300)
Accrued income
29 450 00
TUCK SHOP TRADING ACCOUNT
2010
1
Opening stock
1 780
00 2010
Jan
Dec
Dec
31
Purchases
9 800
00
Surplus: Tuck shop
7 120
00
18 700 00
186
31
Sales
Closing stock
16 570
00
2 130
00
18 700
00
2.
STATEMENT OF INCOME AND EXPENDITURE for the year ended 31 December 2010
INCOME
Membership fees
28 100
00
Surplus: Tuck shop
7 120
00
Gate takings
3 580
00
9
  ​  )
Interest on fixed deposit (40 000 × 13% × ​ __
12
3 900
00
Entrance fees (40% × 3 500)
Legacy: T Smit ( ​ _3 ​× 35 000)
1 400
00
26 250
00
150
00
4
LESS EXPENDITURE
Membership fees written off
Affiliation fees
1 500
00
Honorarium (1 500 + 750)
2 250
00
Water and electricity (2 880 + 450)
3 330
00
1 000
00
11 340
00
Bank charges
Depreciation (15% × 75 600)
Net surplus for the year
70 350
00
19 570
00
50 780
00
123 660
00
8 070
00
131 730
00
Balance Sheet of Manic Soccer Club on 31 December 2010
ASSETS
NON-CURRENT ASSETS
Equipment
1
58 660
00
Other financial assets
2
65 000
00
CURRENT ASSETS
Stock
2 130
00
Trade and other debtors
3
1 800
00
Cash and cash equivalents
4
4 140
00
TOTAL ASSETS
EQUITY AND LIABILITIES
Accumulated fund
5
104 630
00
Funds
6
25 000
00
NON-CURRENT LIABILITIES
–
CURRENT LIABILITIES
Trade and other creditors
7
TOTAL LIABILITIES
187
2 100
2 100
00
131 730
00
00
NOTES TO THE BALANCE SHEET
1
2
3
Equipment
Gross carrying
amount
Accumulated
depreciation
Net carrying
amount
Equipment
75 600
16 940
58 660
00
65 000
00
1 800
00
4 140
00
104 630
00
25 000
00
2 100
00
00
Other financial assets
Fixed deposit: BNF Bank
40 000
00
Investment: Mlanda Dev Fund
25 000
00
Trade and other debtors
Accrued income
1 800
Interest on fixed deposit
Membership fees
4
300
00
1 500
00
Petty cash
00
250
00
Balance
43 000
00
Surplus for the year
50 780
00
2 100
00
8 750
00
4
Funds
Mlanda Development Fund
7
3 890
Accumulated fund
Entrance fee (60% × 35 200)
Legacy (​ _1 ​× 35 000)
6
00
Cash and cash equivalents
Bank
5
00
25 000
00
1 200
00
900
00
Trade and other creditors
Accrued expenses
Water and electricity
450
00
Honorarium
750
00
Income received in advance
Exercise
The following information appeared in the books of TN Tennis Club on 30 June 2010,
the last day of the financial year:
TN TENNIS CLUB
PRE-ADJUSTMENT TRIAL BALANCE ON 30 JUNE 2010
DR
CR
BALANCE SHEET ACCOUNTS SECTION
Accumulated fund
68 230
Burger Fund
40 000
188
Equipment at cost
153 450
Accumulated Depreciation on Equipment
21 230
Investment: Burger Fund
40 000
Fixed deposit: ABSA Bank (15% p.a.)
50 000
Bank
2 140
Petty cash
150
Stock: Tuck shop (as on 1 Jul 2009)
3 120
Income received in advance: Membership fees (1 Jul 2009)
Accrued income: Membership fees (1 Jul 2009)
1 375
2 200
NOMINAL ACCOUNTS SECTION
Tuck shop sales
32 620
Tuck shop purchases
19 544
Gate takings
5 640
Interest on fixed deposit
8 125
Affiliation fees
5 210
Membership fees
43 769
Bank charges
3 000
Honorarium
2 250
Entrance fees
2 000
Legacy: T Nel
60 000
Water and electricity
1 925
282 989
282 989
Adjustments:
1. Stock take on 30 June 2010: Tuck shop, R1 030.
2. On 1 July 2009, R1 375 for membership fees was paid in advance and R2 200
was still outstanding from the previous financial year. Of the membership fees
outstanding for the previous financial year, R1 650 was recovered during 2010.
The balance of the membership fees for that period has to be written off as
irrecoverable. At the end of the 2009/2010 financial year membership fees paid
in advance for 2011 amounted to R825, while the membership fees in arrears for
2009/2010 amounted to R3 025.
3. Make provision for interest on fixed deposit. 4. Three-quarters of the legacy has to be capitalised. The balance may be used as
current income.
5. Interest on the fund investment was allocated according to the prescriptions of
Mr Nel’s estate.
6. 40% of the entrance fees have to be capitalised. The rest may be used as current
income.
7. Write off depreciation on equipment at 12% p.a. on the cost price.
8. The water and electricity account for December 2010 has not yet been paid, R625.
9. The honorarium for the treasurer is still outstanding, R1 750.
189
Required:
1. Draw up the following ledger accounts:
Membership Fees.
Tuck Shop Trading Account.
2. Draw up the Statement of Income and Expenditure.
3. Draw up the Balance Sheet and relevant notes.
Summary
In this module we looked at the financial records for a non-profit organisation (NPO)
and discovered that NPOs can exist in a wide range of entities that can be funded
by government or privately. We considered special items such as entrance fees,
membership fees, affiliation fees, honorariums, legacies and donations and examined
how these are dealt with in the accounts of an NPO.
We then went on to consider special funds and how interest on special funds can be
used for operational purposes or can be capitalised for some future specific use. We
also considered the differences between capital and current expenditure.
We followed up by showing how departmentalised accounts can be used to separate
different NPO activities and how those activities can be displayed in a Trading
Statement and in the Income and Expenditure Statement for the organisation. We also
explained the difference between a commercial Balance Sheet and that for an NPO.
190
Module 5
The Cash Flow Statement for a sole
trader
Overview
When you have completed this module, you should be able to:
• Explain the aim of a Cash Flow Statement.
• Name the users of a Cash Flow Statement in an organisation and indicate why
they are interested in this statement.
• Define the different items in a Cash Flow Statement and explain the important
principles in setting up the statement.
• Name and explain the different non-cash items.
• Follow the correct procedure for drawing up a Cash Flow Statement.
• Explain special items and record them in a Cash Flow Statement.
Unit 5.1:The aim of a Cash Flow Statement (CFS)
Cash flow is the lifeblood of any business, for it enables the business to buy materials, labour
and services as it needs them in order to operate efficiently. This applies to businesses of
all sizes, but it is particularly vital to a small business such as a sole trader.
A business operation can be well managed to produce the goods or service to meet high
sales and customer demand, but that business can fail if it does not have cash available
to meet its commitments. In fact, there is a relationship between business operation and
cash flow, and between an Income Statement and cash flow, but there are also differences
between these processes in that:
• An Income Statement displays the performance of a business during a past period of
time (financial year).
• An Income Statement shows the total value of sales, total value of income earned and
the total value of expenditure committed, but does not show when cash is received or
when supplier accounts are paid.
191
• A Cash Flow Statement predicts the movements of cash into the business and cash
out from the business from one financial year to the next financial year.
This is why it is important to consider cash flow for a business
so as to reduce the possibility of the business having to face cash
problems in the future.
Therefore, this is the aim of a Cash Flow Statement: to monitor
and manage the cash flowing through the business to ensure
that the business is operated at its optimum level at all times.
Cash Flow Statement:
Predicts the movements
of cash into the business
and cash out from the
business from one
financial year to the
next financial year. This
movement is either an
inflow or outflow of
cash. optimum: best
under the circumstances
Unit 5.2: Users of a Cash Flow Statement
Since cash flow has an impact on the efficiency of a business, it is of particular interest to
the following individuals:
• The owner and/or management who want to know that their business is running at its
optimum efficiency.
• Credit providers who want to know that the credit they have provided or are about to
provide is not at risk because of a shortfall in cash resources.
• Cash flow planners, usually in large organisations, whose job is to predict the cash
flowing through a business and to identify times when a shortfall might occur.
Unit 5.3:Explanations and concepts of a Cash Flow
Statement
A Cash Flow Statement predicts the movements of cash into the business and cash out
from the business from one financial year to the next financial year. This movement is
either an inflow or outflow of cash.
A Cash Flow Statement can be divided into three sections:
• Cash flow from OPERATING (TRADING) activities
Operating activities are cash received from clients and cash paid to suppliers and
employees.
Income is earned by an enterprise from the sale of goods and services. For this enterprise
to earn this income various expenses are incurred, like salaries and electricity. These
activities are referred to as trading activities and the result of this is a net profit or net
loss for a particular financial year.
All income will result in an inflow of cash. However, accrued income and income
received in advance are non-cash-related. Also for all expenditure, it will result in an
outflow of cash. However, accrued expenses and prepaid expenses are non-cash-related.
These non-cash-related amounts included in these accounts (income and expenses) are
also included in the working capital. Working capital is the current assets (like debtors
and stock) and current liabilities (like creditors) of the enterprise. By focusing on the
movement between two consecutive financial years for working capital, the non-cash
amounts included in income and expenditure are cancelled.
192
Cash generated from these activities will result in an increase or decrease in cash flow.
If there is a decrease in cash flow an investigation should follow to determine the reason
for this.
• Cash flow from INVESTING activities
Investing activities are defined as the addition and/or proceeds
from disposal of non-current assets and the movement in
other financial assets like fixed deposits. For disposal of
non-current assets, the proceeds from that transaction are
included as an inflow of cash into the enterprise.
non-current assets:
These assets are
bought to be used
(not for resale) in the
enterprise. Therefore,
these assets have a long
life span and will be
used for periods longer
than twelve months.
However, these assets
can be resold close to
the end of their life span
and be replaced by
new assets for the same
purpose or to expand
current operations.
Examples of fixed assets
are land and buildings,
vehicles and equipment.
• Cash flow from FINANCING activities
Financing activities include any additional capital
contribution from the owner and movement in long-term,
interest-bearing liabilities.
Cash generated from operating activities or financing
activities can be utilised for investing activities for possible
expanding operations within the enterprise.
Concepts: Inflow or outflow of cash
• Working capital (part of cash flow from operating activities)
For working capital, the movement from one financial year to the next financial year
will result in cash flow.
• DEBTORS
ASSETS
2009
2010
CURRENT ASSETS
Trade and other debtors
45 000
60 000
The line item, trade and other debtors, has increased from R45 000 (in 2009) to R60 000
(in 2010).
Thus an INCREASE in trade and other debtors of R15 000. This must now be translated
into an inflow or outflow of cash.
If debtors are DECREASED it is due to the debtors paying their accounts, resulting
in the enterprise receiving money. Thus this is an inflow of cash.
In short, if debtors are DECREASED, it will result in a CASH INFLOW.
Therefore, if debtors are INCREASED, it will result in a CASH OUTFLOW.
For this example, trade and other debtors have INCREASED by R15 000.
For cash flow purposes, this results in a CASH OUTFLOW of R15 000.
In the Cash Flow Statement this will be recorded as follows:
Increase in debtors (15 000)
193
Note: Negative amounts indicate an outflow of cash.
• CREDITORS
EQUITY AND LIABILITIES
2009
2010
CURRENT LIABILITIES
Trade and other creditors
45 000
40 000
The line item, trade and other creditors, has decreased from R45 000 (in 2009) to
R40 000 (in 2010).
Thus a DECREASE in trade and other creditors of R5 000. This must now be translated
into an inflow or outflow of cash.
If creditors are DECREASED it is due to the enterprise paying its creditors’ accounts.
Thus an outflow of cash.
In short, if creditors are DECREASED, it will result in a CASH OUTFLOW.
Therefore, if creditors are INCREASED, it will result in a CASH INFLOW.
For this example, trade and other creditors have DECREASED by R5 000.
For cash flow purposes, this results in a CASH OUTFLOW of R5 000.
In the Cash Flow Statement this will be recorded as follows:
Decrease in creditors (5 000)
Note: Negative amounts indicate an outflow of cash.
• STOCK
ASSETS
2009
2010
CURRENT ASSETS
Stock
22 000
16 000
The line item, stock, has decreased from R22 000 (in 2009) to R16 000 (in 2010).
Thus a DECREASE in stock of R6 000. This must now be translated into an inflow or
outflow of cash.
If stock is INCREASED it is due to additional purchases of stock by the enterprise,
resulting in the enterprise paying money for this stock. Thus this is an outflow of
cash.
In short, if stock is INCREASED, it will result in a CASH OUTFLOW.
Therefore, if stock is DECREASED, it will result in a CASH INFLOW.
For this example, stock has DECREASED by R6 000.
For cash flow purposes, this results in a CASH INFLOW of R6 000.
194
In the Cash Flow Statement this will be recorded as follows:
Increase in stock 6 000
Note: Positive amounts indicate an inflow of cash.
• Other items
Movements in other financial assets like fixed deposits are included in the section, cash
flow from investing activities.
• FIXED DEPOSIT
ASSETS
2009
2010
NON-CURRENT
Other financial assets
50 000
60 000
The line item, other financial assets (fixed deposits) has increased from R50 000 (in
2009) to R60 000 (in 2010).
Thus an INCREASE in fixed deposits of R10 000. This must now be translated into an
inflow or outflow of cash.
If other financial assets are INCREASED it is due to an increase (additional
investment) in the value of fixed deposits. Money will be transferred from the current
account of the enterprise to the Fixed Deposit account to increase the investment.
Thus an outflow of cash.
In short, if other financial assets are INCREASED, it will result in a CASH
OUTFLOW.
Therefore, if other financial assets are DECREASED, it will result in a CASH
INFLOW.
For this example, other financial assets have INCREASED by R10 000.
For cash flow purposes, this results in a CASH OUTFLOW of R10 000.
In the Cash Flow Statement this will be recorded as follows:
Increase in fixed deposit (10 000)
Note: Negative amounts indicate an outflow of cash.
Movements in interest-bearing liabilities (loans) and capital contribution are included
in the section, cash flow from financing activities.
• LOANS
EQUITY AND LIABILITIES
2009
2010
NON-CURRENT LIABILITIES
Interest-bearing liabilities
43 000
58 000
The line item, interest-bearing liabilities (loans), has increased from R43 000 (in 2009)
to R58 000 (in 2010).
195
Thus an INCREASE in loans of R15 000. This must now be translated into an inflow or
outflow of cash.
If interest-bearing liabilities are INCREASED it is due to an increase (additional
loan) in the value of the loan. Money will be transferred from the loan account of
the enterprise to the current account to increase the loan. Thus an inflow of cash.
In short, if interest-bearing liabilities are INCREASED, it will result in a CASH
INFLOW.
Therefore, if interest-bearing liabilities are DECREASED, it will result in a CASH
OUTFLOW.
For this example, interest-bearing liabilities have INCREASED by R15 000.
For cash flow purposes, this results in a CASH INFLOW of R15 000.
In the Cash Flow Statement this will be recorded as follows:
Increase in loans 15 000
Note: Positive amounts indicate an inflow of cash.
• CAPITAL
EQUITY AND LIABILITIES
2009
Capital
2010
150 000
180 000
The line item, capital, has increased from R150 000 (in 2009) to R180 000 (in 2010).
Thus an INCREASE in capital of R30 000. This must now be translated into an inflow
or outflow of cash.
The owner of an enterprise can only increase his/her capital. Drawings result in a
decrease in the owner’s equity.
If capital is INCREASED it is due to the owner making an additional capital
contribution by depositing money into the current account of the enterprise. Thus
an inflow of cash.
In short, if capital is INCREASED, it will result in a CASH INFLOW.
For this example, capital has INCREASED by R30 000.
For cash flow purposes, this results in a CASH INFLOW of R30 000.
In the Cash Flow Statement this will be recorded as follows:
Increase in capital 30 000
Note: Positive amounts indicate an inflow of cash.
196
Unit 5.4:Dealing with non-cash items
There are some line items that appear in an Income Statement that are accounting expenses
or income for the business, but which do not result in an inflow or outflow of cash from
the business. Such items include the following:
• Depreciation, which is an internal calculation relating to the periodic write-off of
an asset that has been bought in the past. No cash changes hands in respect of this
calculation.
• Profit or loss on the sale of a fixed (non-current) asset, which is an accounting
calculation but does not, in its own right, result from cash flowing to or from the
business.
In other words, when we produce a Cash Flow Statement, we are only interested in:
• The actual cash coming (cash inflow) into a business.
• The actual cash leaving (cash outflow) the business.
Unit 5.5:Procedure for DRAWING UP a Cash Flow Statement
So, how do we produce a Cash Flow Statement?
We have already stated that a Cash Flow Statement represents the cash movements
between two consecutive financial periods.
ASSETS
2009
2010
CURRENT ASSETS
Cash and other cash equivalents
4 575
9 755
Given the situation that the cash position of this enterprise has increased from R4 575 (in
2009) to R9 755 (in 2010): The Cash Flow Statement for this financial period will provide
a detailed indication if the increase in the cash position for this enterprise was due to the
operating, investing and/or financing activities in this period.
The following are needed to draw up a Cash Flow Statement:
• The Income Statement for the current financial year.
• The Balance Sheet for two consecutive financial years, the current and previous
financial year.
• Additional information on non-current assets:
–– Amount spent on non-current asset addition (new non-current assets).
–– Amount received from the sale of non-current assets.
–– Profit/loss on the sale of fixed assets (included in the Income Statement).
–– Depreciation written off during the financial period (non-cash item).
This information can easily be calculated by drawing up the ledger accounts of the
assets, accumulated depreciation, depreciation and asset disposal accounts.
• Other relevant information not provided via the financial statements.
The format of the Cash Flow Statement and relevant notes:
The Cash Flow Statement can be divided into THREE sections (as mentioned previously
in this module):
197
• Cash flow from operating activities.
• Cash flow from investing activities.
• Cash flow from financing activities.
The result of these three sections will either be a net increase or decrease in cash for the
financial period.
Given the situation, from the previous example, that the cash position of this enterprise
has increased from R4 575 (in 2009) to R9 755 (in 2010): The net increase is R5 180 (9 755 –
4 575 and these three sections of the Cash Flow Statement will indicate how this increase
was obtained.
The format of the Cash Flow Statement:
It is very important that an outflow of cash is shown as an amount in brackets and an
inflow without brackets.
CASH FLOW STATEMENT OF BLUES DEALERS for the year ended 30 June 2010
CASH FLOW FROM OPERATING ACTIVITIES
XXX
Cash received from clients
1
XXX
Cash paid to suppliers and employees
2
(XXX)
Cash generated for the year*
XXX
Interest received
XXX
Interest paid
(XXX)
Drawings
(XXX)
CASH FLOW FROM INVESTING ACTIVITIES
XXX
Addition to land and buildings
(XXX)
Addition to vehicles
(XXX)
Addition to equipment
(XXX)
Proceeds from sale of an asset
XXX
Increase in fixed deposit OR
(XXX)
Decrease in fixed deposit
XXX
CASH FLOW FROM FINANCING ACTIVITIES
XXX
Increase in capital
XXX
Increase in loan OR
XXX
Decrease in loan
(XXX)
Net increase/decrease in cash**
XXX
Cash at the beginning of the year
XXX
Cash at the end of the year
XXX
Note:
*The total of cash received from clients and cash paid to suppliers and employees.
**If the total of the three sections of the Cash Flow Statement is positive, it will result in
a net increase in cash. If negative, then it will be a net decrease in cash.
198
Notes to the Cash Flow Statement:
Important information to remember for each
activity:
1. Cash flow from operating activities
This section includes the following:
• Cash received from clients (Note 1
above)
In this note the calculation includes
sales (turnover) from the Income
Statement and movement on debtors from the Balance Sheet.
This calculation should result in a positive answer for the reason cash received is
an inflow of cash into the enterprise.
• Cash paid to suppliers and employees (Note 2 above)
In this note the calculation includes FOUR steps:
1. The calculation of net expenses for the year
Net expenses for the year are sales less profit or sales plus loss for the financial
year.
2. Excluding non-cash items
Included in 1 are the non-cash items and therefore these items must be
excluded from this note. These items are depreciation and profit/loss on sale
of assets.
3. Excluding line items to be shown separately on the face of the Cash Flow
Statement that are included in the Income Statement.
These line items are the items indicated under the section, cash flow from
operating activities that is included in 1. To be able to show these items
separately, these items must be excluded (reversed) from 1. These items are all
interest paid and received.
4. Movement in stock and creditors
Indicate whether there is an increase or decrease in stock and an increase or
decrease in creditors.
• Line items like drawings (indicated in the capital note to the Balance Sheet),
interest paid (all interest paid in the Income Statement) and interest received (all
interest received in the Income Statement) are to be shown on the face of the Cash
Flow Statement.
These items are included on the face of the Cash Flow Statement.
2. Cash flow from investing activities
This section includes the following:
• Addition of new assets
It is necessary to draw up the asset accounts by entering the opening and closing
balances and the cost price of any asset disposed of. The balancing amount will be
the addition of assets during the financial period.
• Proceeds from the sale of assets
This information is normally given but, if not, draw up an Asset Disposal account
to determine the proceeds from the sale of assets.
199
• Movement on the fixed deposit account(s)
The movement will be the difference between the two consecutive years for the
item, other financial assets, in the Balance Sheet.
3. Cash flow from financing activities
This section includes the following:
• Additional capital contribution from the owner
This amount is the difference between the closing balance of capital for the
previous year and the opening balance of capital for the current year.
• Movement on the loan account(s)
The movement will be the difference between the two consecutive years for the
item, interest-bearing liabilities, in the Balance Sheet.
The following example will explain some of the notes and calculations to the cash flow
from operating activities in the Cash Flow Statement.
Example:
INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2010
Sales
1 350 000
Less cost of sales
1 000 000
Gross profit
350 000
Plus other income
38 750
Interest on fixed deposit
2 250
Rent income
24 000
Profit on sale of fixed asset
12 500
Gross income
388 750
Less expenditure
250 450
Salaries
70 000
Telephone
1 480
Interest on loan
47 700
Stationery
3 000
Depreciation
124 500
Interest on overdraft
270
Bank charges
500
Insurance
3 000
Net profit for the year
138 300
200
BALANCE STATEMENT ON 31 DECEMBER 2010
ASSETS
2009
NON-CURRENT ASSETS
Property, equipment and vehicles
1
Other financial assets
CURRENT ASSETS
Stock
Trade and other debtors
Cash and cash equivalents
2
TOTAL ASSETS
2010
354 000
364 000
340 000
356 000
14 000
8 000
116 400
104 000
74 600
62 000
36 800
42 000
5 000
–
470 400
468 000
412 400
405 000
12 000
9 000
EQUITY AND LIABILITIES
Capital
3
NON-CURRENT LIABILITIES
Interest-bearing liabilities
12 000
9 000
CURRENT LIABILITIES
46 000
54 000
Trade and other creditors
46 000
52 000
–
2 000
470 400
468 000
Bank overdraft
TOTAL EQUITY AND LIABILITIES
Consider the following questions:
1. What is the cash position of this enterprise at the BEGINNING of 2010?
This will be the balance of cash and other cash equivalents for 2009.
R5 000
2. What is the cash position of this enterprise at the END of 2010?
This will be the balance of cash and other cash equivalents for 2010, but the bank
overdraft under current liabilities should also be considered.
R(2 000)
It is important to note that there was a decrease in cash between 2009 and 2010 to
the value of R7 000 (from R5000 to R(2 000)).
3. Complete the cash received from clients note:
NOTES
1. Cash received from clients
Sales
Increase/Decrease in debtors
Sales are provided in the Income Statement as R1 350 000.
It is also important to remember when calculating the movement in a line item that,
for this example, you will work from left (2009) to right (2010) on the Balance Sheet.
For debtors, there was an increase from R36 800 to R42 000. The increase is
R5 200.
201
NOTES
1. Cash received from clients
Sales
Increase in debtors
1 350 000
00
(5 200)
00
1 344 800
00
Why is the increase in debtors an outflow of cash? The reason is that a decrease in
debtors is an inflow of cash.
4. Complete the cash paid to suppliers and employees note:
NOTES
2. Cash paid to suppliers and employees
Sales
Net profit for the year/Net loss for the year
Expenses for the year
Profit/Loss on sale of fixed asset
Depreciation
Interest paid
Interest received
Increase/Decrease in creditors
Increase/Decrease in stock
Step 1: The calculation of net expenses for the year
Sales and net profit are provided in the Income Statement.
Sales = R1 350 000
Net profit = R138 300
NOTES
2. Cash paid to suppliers and employees
Sales
Net profit for the year*
Expenses for the year**
1 350 000
00
(138 300)
00
(1 211 700)
00
* Remember that the net profit is deducted from the sales.
** Remember that R1 211 700 represents the net expenses for the year and this is
an outflow of cash; the reason why this amount is reflected negatively.
Step 2: Excluding non-cash items
The non-cash items are:
202
Under income: Profit on sale of fixed asset = R12 500 ➩ R(12 500)
This amount is added in the Income Statement. Therefore
to exclude this item from the Income Statement, because it
is a non-cash item, this amount must be deducted from the
answer in Step 1 to cancel this item in the Income Statement.
Under expenditure:Depreciation = R(124 500) ➪ R124 500
This amount is deducted in the Income Statement. Therefore
to exclude this item from the Income Statement, because it is
a non-cash item, this amount must be added to the answer in
Step 1 to cancel this item in the Income Statement.
NOTES
2. Cash paid to suppliers and employees
Sales
1 350 000
00
Net profit for the year
(138 300)
00
Expenses for the year
(1 211 700)
00
Profit on sale of fixed asset
(12 500)
00
Depreciation
124 500
00
Step 3: Excluding line items to be shown separately on the face of the Cash Flow Statement
that are included in the Income Statement.
These items are all interest paid and received.
Interest received = Interest on fixed deposit = R2 250 ➪ R(2 250)
This amount is added into the Income Statement. Therefore to exclude this item
from the Income Statement, this amount must be deducted from the answer in
Step 1 to cancel this item in the Income Statement.
Interest paid = Interest on loan + Interest on overdraft = R(47 700) + R(270)
= R(47 970) ➪ R47 970
This amount is deducted in the Income Statement. Therefore to exclude this item
from the Income Statement, this amount must be added to the answer in Step 1
to cancel this item in the Income Statement.
NOTES
2. Cash paid to suppliers and employees
Sales
1 350 000
00
Net profit for the year
(138 300)
00
Expenses for the year
(1 211 700)
00
Profit on sale of fixed asset
(12 500)
00
Depreciation
124 500
00
203
Interest received
(2 250)
00
Interest paid
47 970
00
Step 4: Movement in stock and creditors
Stock: R74 600 ➪ R62 000
Stock has decreased by R12 600. Results in a cash inflow. Thus R12 600.
Creditors: R46 000 ➪ R52 000
Creditors have increased by R6 000. Results in a cash inflow. Thus R6 000.
NOTES
2. Cash paid to suppliers and employees
Sales
1 350 000
00
Net profit for the year
(138 300)
00
Expenses for the year
(1 211 700)
00
Profit on sale of fixed asset
(12 500)
00
Depreciation
124 500
00
Interest received
(2 250)
00
Interest paid
47 970
00
Decrease in stock
Increase in creditors
5.
12 600
00
6 000
00
(1 035 380)
00
Show the reconciliation of profit with cash obtained from operations
This reconciliation is a combination of note 1 (Cash received from clients) and
note 2 (Cash paid to suppliers and employees).
In the Cash Flow Statement these two notes result in the cash generated from
operations.
CASH FLOW STATEMENT for the year ended 30 June 2010
CASH FLOW FROM OPERATING ACTIVITIES
Cash received from clients
1
1 344 800
00
Cash paid to suppliers and employees
2
(1 035 380)
00
309 420
00
Cash generated for the year
This reconciliation explains the amount of R309 420 in the Cash Flow Statement.
Reconciliation of profit with cash obtained from operations
Net profit for the year
138 300
Adjusted by:
204
00
Increase in debtors
(5 200)
00
Profit on sale of fixed asset
(12 500)
00
Depreciation
124 500
00
Interest received
(2 250)
00
Interest paid
47 970
00
Decrease in stock
12 600
00
6 000
00
309 420
00
Increase in creditors
Note that the total of the reconciliation is the same as the amount for cash
generated from operations in the Cash Flow Statement.
The following example will explain some of the calculations to the cash flow from investing
activities in the Cash Flow Statement. This section focuses mainly on additions in assets
and proceeds on the sale of fixed assets.
Example
NOTE 1
Property, equipment and vehicles
2009
Gross carrying
amount
Accumulated
depreciation
Net carrying
amount
Land and buildings
660 600
Equipment
288 000
108 000
660 600
180 000
Vehicles
960 000
780 000
180 000
1 908 600
888 000
1 020 600
2010
Gross carrying
amount
Land and buildings
821 550
Equipment
Vehicles
Accumulated
depreciation
Net carrying
amount
821 550
297 000
117 000
180 000
1 200 000
900 000
300 000
2 318 550
1 017 000
1 301 550
Note: During the financial year equipment with a cost price of R12 500 was sold for
R8 000. The net carrying amount of this equipment on date of sale was R10 000.
205
Use the information given and complete the following table:
Land and Buildings
Vehicles
Equipment
Additions
Disposals
Depreciation
Loss/Profit on sale
Proceeds from sale
Solution
Drawing up the following T-accounts will assist to complete this table. Remember that
the closing balances given in 2009 are opening balances for 2010.
1. Let’s enter the opening balances (OB) of these accounts.
Land and Buildings
OB 660 600
Vehicles
Equipment
OB 960 000
Asset Disposal
OB 288 000
Accumulated Depreciation on
Vehicles
Accumulated Depreciation on
Equipment
OB 780 000
OB 108 000
2. Let’s enter the closing balances (CB) of these accounts.
Land and Buildings
OB 660 600
CB 821 550
Asset Disposal
Vehicles
OB 960 000
Accumulated Depreciation on
Vehicles
CB 900 000
3.
Equipment
CB 1 200 000
OB 780 000
OB 288 000
Accumulated Depreciation on
Equipment
CB 117 000
Let’s record the asset disposal transaction.
Cost price (CP)
= R12 500
Accumulated depreciation (AD) = R2 500
Net carrying amount
= R10 000 (12 500 – 2 500)
Proceeds (P)
= R8 000
Loss on sale (L)
= R2 000
206
CB 297 000
OB 108 000
Land and Buildings
OB 660 600
Vehicles
CB 821 550
OB 960 000
Equipment
CB 1 200 000
OB 288 000
CB 297 000
AD 12 500
Asset Disposal (AD)
CP 12 500
Accumulated Depreciation on
Vehicles
AD 2 500
CB 900 000
Accumulated Depreciation on
Equipment
OB 780 000
CB 117 000
OB 108 000
AD 2 500
P 8000
L 2000
4. Let’s balance all the accounts.
The balances on the asset accounts are new additions (A) and on the accumulated
depreciation accounts are depreciations (D) written off during the financial year.
Land and Buildings
OB 660 600
Vehicles
CB 821 550
OB 960 000
A 160 950
CB 1 200 000
OB 288 000
CB 297 000
A 21 500
AD 12 500
A 240 000
Asset Disposal (AD)
E 12 500
Equipment (E)
Accumulated Depreciation on
Vehicles
AD 2 500
CB 900 000
P 8000
Accumulated Depreciation on
Equipment
OB 780 000
CB 117 000
OB 108 000
D 120 000
AD 2 500
D 11 500
L 2000
5. Let’s complete the table from the T-accounts.
Land and Buildings
Vehicles
Additions
160 950
Disposals
Depreciation
Equipment
240 000
21 500
-
-
12 500
-
120 000
11 500
Loss on sale
-
-
2 000
Proceeds from sale
-
-
8 000
So how is this information going to be recorded in the Cash Flow Statement?
CASH FLOW STATEMENT OF BLUES DEALERS for the year ended 30 June 2010
CASH FLOW FROM INVESTING ACTIVITIES
XXX
Addition to land and buildings
(160 950)
Addition to vehicles
(240 000)
00
(21 500)
00
Proceeds from sale of equipment
8 000
00
Increase in fixed deposit OR
(XXX)
Addition to equipment
Decrease in fixed deposit
XXX
207
00
Remember that all additions are an outflow of cash, but the proceeds from the sale are an
inflow of cash.
The following example will explain some of the calculations to the cash flow from financing
activities in the Cash Flow Statement. This section focuses mainly on movements on the
capital and loan accounts.
Example:
2010
2009
NON-CURRENT LIABILITIES
Loan: ABSA (21% p.a.)
102 000
152 000
227 600
212 900
20 800
22 100
(36 000)
(30 000)
212 400
205 000
CAPITAL
Balance at the beginning of the year
Plus Net profit/Less Net loss
Less Drawings
Answer the following questions:
1. Was there an increase or decrease in the loan at ABSA?
Remember the movement is from right (2009) to left (2010). Therefore, the loan
has decreased.
2. This increase/decrease in the loan amounted to …
R50 000 (152 000 – 102 000)
3. In which section of the Cash Flow Statement will you report on this and in which
way?
Cash flow from financing activities
Decrease in loan
R(50 000)
Remember if the Loan account decreased, it is due to a payment (cash outflow) on
the Loan account.
4. Was there any additional capital contribution made by the owner? Yes
A comparison must be done between the closing balance of 2009 and the opening
balance of 2010.
5. This increase in the capital amounted to … R227 600 – R205 000 = R22 600.
Inflow
6. Is this increase in capital an inflow or outflow in cash?
So how is this information going to be recorded in the Cash Flow Statement?
CASH FLOW STATEMENT OF BLUES DEALERS for the year ended 30 June 2010
CASH FLOW FROM FINANCING ACTIVITIES
(27 400)
Increase in capital
22 600
00
Decrease in loan
(50 000)
00
208
00
We have looked at every aspect of drawing up a Cash Flow Statement. The next example
will combine everything into one.
Example:
The owner of Manic Dealers gave the following Balance Sheet to you. You, as the
bookkeeper, have to discuss the cash position with the owner.
Additional information:
1. The sales figures for the year were as follows:
2009R760 000
2010R600 000
2. The following information was extracted from the Income Statement for the year
ending 30 June 2010:
Interest on loan R2 000
Interest on bank overdraft
R200
Interest on fixed deposit
R1 800
Interest on current account R100
3. The owner contributed additional capital during the year, which ended on
30 June 2010.
4. During the financial year, equipment, with a cost price of R7 500, was sold for
R3 000. (The net carrying amount of this equipment on the date of sale was
R5 000.)
BALANCE SHEET OF MANIC DEALERS ON 30 JUNE 2010
ASSETS
2009
NON-CURRENT ASSETS
Property, equipment and vehicles
1
Other financial assets
CURRENT ASSETS
Stock
Trade and other debtors
Cash and cash equivalents
2
TOTAL ASSETS
2010
354 000
364 000
340 000
356 000
14 000
8 000
116 400
104 000
74 600
62 000
36 800
42 000
5 000
–
470 400
468 000
412 400
405 000
427 600
412 900
EQUITY AND LIABILITIES
Capital
3
Balance
+ Net profit/– Net loss
– Drawings
20 800
22 100
(36 000)
(30 000)
NON-CURRENT LIABILITIES
12 000
9 000
Interest-bearing liabilities
12 000
9 000
CURRENT LIABILITIES
46 000
54 000
Trade and other creditors
46 000
52 000
Bank overdraft
TOTAL EQUITY AND LIABILITIES
209
–
2 000
470 400
468 000
NOTES TO THE BALANCE SHEET
NOTE 1
2009
Property, equipment and vehicles
Gross carrying
amount
Land and buildings
Accumulated
depreciation
Net carrying
amount
245 000
Equipment
Vehicles
245 000
75 000
42 000
33 000
124 000
62 000
62 000
444 000
104 000
340 000
2010
Gross carrying
amount
Land and buildings
Accumulated
depreciation
Net carrying
amount
245 000
Equipment
70 000
Vehicles
245 000
44 000
26 000
160 000
75 000
85 000
475 000
119 000
356 000
NOTE 2
2009
Fixed deposit: ABC Bank (15% p.a.)
2010
14 000
8 000
5 000
(2 000)
NOTE 3
Bank
Required:
1. Show the calculation of the cash received from customers and cash paid to
suppliers.
2. Show the reconciliation of profit with cash obtained from operations.
3. Draw up a Cash Flow Statement for the financial year ended 30 June 2010.
Solution
As part of your calculations, you should draw up these T-accounts to have access to
information needed to complete the notes and Cash Flow Statement required.
Land and Buildings
OB 245 000
CB 245 000
Vehicles
OB 124 000
A 36 000
210
Equipment
CB 160 000
OB 75 000
CB 70 000
A 2 500
AD 7 500
Asset Disposal (AD)
E 12 500
Accumulated Depreciation on
Vehicles
AD 2 500
CB 75 000
P 3 000
Accumulated Depreciation on
Equipment
OB 62 000
CB 44 000
OB 42 000
D 13 000
AD 2 500
D 4 500
L 2 000
1.
NOTES
1. Cash received from clients
Sales
Increase in debtors
760 000
00
(5 200)
00
754 800
00
760 000
00
Net profit for the year
(22 100)
00
Expenses for the year
(737 900)
00
NOTES
2. Cash paid to suppliers and employees
Sales
Loss on sale of fixed asset
2 000
00
Depreciation (13 000 + 4 500)
17 500
00
Interest received (1 800 + 100)
(1 900)
00
2 200
00
12 600
00
6 000
00
(699 500)
00
22 100
00
(5 200)
00
Interest paid (400 + 1 800) (2 000 + 200)
Decrease in stock
Increase in creditors
2.
Reconciliation of profit with cash obtained from operations
Net profit for the year
Adjusted by:
Increase in debtors
Loss on sale of fixed asset
2 000
00
Depreciation
17 500
00
Interest received
(1 900)
00
2 200
00
12 600
00
6 000
00
55 300
00
Interest paid
Decrease in stock
Increase in creditors
211
3.
CASH FLOW STATEMENT OF MANIC DEALERS for the year ended 30 June 2010
CASH FLOW FROM OPERATING ACTIVITIES
Cash received from clients
1
754 800
00
Cash paid to suppliers and employees
2
(699 500)
00
Cash generated for the year
Interest received
Interest paid
Drawings
55 300
00
1 900
00
(2 200)
00
(30 000)
00
CASH FLOW FROM INVESTING ACTIVITIES
Addition to land and buildings
25 000
00
(29 500)
00
(2 500)
00
(7 000)
00
5 000
00
(2 000)
00
–
Addition to vehicles
(36 000)
Addition to equipment
00
(2 500)
00
Proceeds from sale of equipment
3 000
00
Decrease in fixed deposit
6 000
00
500
00
(3 000)
00
CASH FLOW FROM FINANCING ACTIVITIES
Increase in capital
Decrease in loan
Net decrease in cash
Cash at the beginning of the year
Cash at the end of the year
Remember the following:
1. An outflow of cash is indicated as a negative amount and an inflow as a positive
amount.
2. Cash in the beginning of the financial year is R5 000 and at the end of the financial
year, R(2 000). Therefore there was a net decrease of R7 000 in cash during
the financial year. The three sections in the Cash Flow Statement indicate the
contribution of each activity.
3. The main reasons for this net decrease is due to additional investment in noncurrent assets and the redemption of the loan.
Unit 5.6: Dealing with special items
Most small businesses use a shorter Cash Flow Statement which covers only the normal
operating processes to the point where “Net cash from business” is calculated. In this case,
the business makes special and separate arrangements for exceptional items such as asset
disposal.
There are certain “special” items that appear in a business’s accounting records that we
have not shown in the Cash Flow Statement above and that we also need to deal with now.
212
Depreciation
In many ways, depreciation is a “false” accounting item in that it does not arise as part of
normal trading activities. In fact, it is an accounting adjustment to allow a business to
spread a large asset purchase over the lifetime of the asset rather than try to embrace it in
one trading year.
For example, you may buy an expensive
machine that will continue to operate for
many years to come, the cost of which
would totally destroy your profits in one
year. So, you decide to write the original
cost off, or depreciate it, over the next five
or ten years. That is a perfectly reasonable
decision and one that gets the approval of
the South African Revenue Service (SARS).
However, you will probably have included
the original cost in the Cash Flow Statement
at the time of purchase. After that, you are
not required to make any future adjustment
to cash flow for depreciation.
Profit/loss on asset disposal
When you dispose of an asset that you no longer require, you have to make the accounting
adjustments that we demonstrated in Part 5 of Module 1, including closing off the relevant
page in the Fixed Asset Register.
You will, of course, record the payment you receive for the sale in your Cash Flow
Statement for that period. However, making a profit or loss on the sale compared with the
value in the Fixed Asset Register does not produce any additional cash (over the payment
received) and does therefore not have to appear in the Cash Flow Statement.
Summary
In this module we explored the concept of the Cash Flow Statement, its aim, users
and what it is used for. We considered the question of non-cash items in a business’s
accounts and identified the items that need to be included in a Cash Flow Statement.
We also looked at the impact of investments and special items before providing
guidance on how to produce an effective Cash Flow Statement.
213
MORE EXERCISES
Question
You are the bookkeeper of Big Time Traders. The owner, Mrs S Nel, could not understand
how her bank account shows an overdraft of R31 200 after a net profit of R276 600 was
calculated.
The following amounts appeared in the Balance Sheets of Big Time Traders on 30 June
2009 and 2010.
Additional information:
1. The turnover for the financial year ending 30 June 2010 was R2 700 000.
2. The owner made an additional capital contribution during the year.
3. During the year the business paid R540 interest on bank overdraft.
4. On 31 December 2009 R9 000 of the fixed deposit at NET Bank was received but the
amount was not reinvested.
5. On 31 August 2009 a vehicle with a cost price of R225 000 and accumulated
depreciation, until date of sale, of R120 000 was sold at a profit of R15 000.
6. Part of the mortgage loan was paid back on 31 March 2010.
BALANCE SHEET OF BIG TIME TRADERS ON 30 JUNE 2010
ASSETS
NON-CURRENT ASSETS
Property, equipment and vehicles
1
Other financial assets
2009
2010
1 050 600
1 322 550
1 020 600
1 301 550
30 000
21 000
CURRENT ASSETS
237 000
256 050
Stock
138 000
116 100
90 000
139 500
9 000
450
1 287 600
1 578 600
606 000
912 600
Balance
708 600
666 000
+ Net profit/– Net loss
(12 600)
276 600
– Drawings
(90 000)
(30 000)
NON-CURRENT LIABILITIES
540 000
480 000
Interest-bearing liabilities (10% p.a.)
540 000
480 000
CURRENT LIABILITIES
141 600
186 000
Trade and other creditors
141 600
154 800
–
31 200
1 287 600
1 578 600
Trade and other debtors
Cash and cash equivalents
2
TOTAL ASSETS
EQUITY AND LIABILITIES
Capital
3
Bank overdraft
TOTAL EQUITY AND LIABILITIES
214
NOTES TO THE BALANCE SHEET
NOTE 1
Property, equipment and vehicles
2009
Gross carrying
amount
Land and buildings
660 600
Equipment
288 000
Vehicles
Accumulated
depreciation
Net carrying
amount
660 600
108 000
180 000
960 000
780 000
180 000
1 908 600
888 000
1 020 600
2010
Gross carrying
amount
Land and buildings
821 550
Equipment
297 000
Vehicles
Accumulated
depreciation
Net carrying
amount
821 550
117 000
180 000
1 200 000
900 000
300 000
2 318 550
1 017 000
1 301 550
NOTE 2
2009
Fixed deposit: ABC Bank (15% p.a.)
2010
30 000
21 000
–
450
9 000
–
NOTE 3
Petty cash
Bank
Required:
Draw up a Cash Flow Statement for the financial year ended 30 June 2010 to enable you to
discuss the cash flow situation with the owner.
(Show only the notes on cash received from customers and cash paid to suppliers and
employees.)
Question
The owner of Hectic Dealers gives the following financial statements to you. He cannot
understand how it is possible that there is an overdraft of R15 600 at the bank, whereas the
Income Statement reflected a profit of R138 300 for the year.
INCOME STATEMENT OF HECTIC DEALERS ON 30 JUNE 2010
Sales
1 350 000
Less cost of sales
1 000 000
Gross profit
350 000
Plus other income
38 750
Interest on fixed deposit
2 250
Rent income
24 000
215
Profit on sale of fixed asset
12 500
Gross income
388 750
Less expenditure
250 450
Salaries
70 000
Telephone
1 480
Interest on loan
47 700
Stationery
3 000
Depreciation
124 500
Interest on overdraft
270
Bank charges
500
Insurance
3 000
Net profit for the year
138 300
BALANCE SHEET OF HECTIC DEALERS ON 30 JUNE 2010
ASSETS
2010
NON-CURRENT ASSETS
Property, equipment and vehicles
1
Other financial assets
2
2009
661 275
525 300
650 775
510 300
10 500
15 000
128 025
118 500
Stock
58 050
69 000
Trade and other debtors
69 750
45 000
CURRENT ASSETS
Cash and cash equivalents
3
TOTAL ASSETS
225
4 500
789 300
643 800
EQUITY AND LIABILITIES
Capital
4
NON-CURRENT LIABILITIES
Interest-bearing liabilities
5
456 300
303 000
240 000
270 000
240 000
270 000
CURRENT LIABILITIES
93 000
70 800
Trade and other creditors
77 400
70 800
Bank overdraft
15 600
–
789 300
643 800
TOTAL EQUITY AND LIABILITIES
NOTES TO THE BALANCE SHEET
NOTE 1
Property, equipment and vehicles
2009
Gross carrying
amount
Accumulated
depreciation
Net carrying
amount
Land and buildings
330 300
Equipment
144 000
Vehicles
480 000
390 000
90 000
954 300
444 000
510 300
216
330 300
54 000
90 000
2010
Gross carrying
amount
Accumulated
depreciation
Net carrying
amount
Land and buildings
410 775
Equipment
148 500
58 500
90 000
600 000
450 000
150 000
1 159 275
508 500
650 775
Vehicles
NOTE 2
410 775
2010
Fixed deposit: FAB Bank (15% p.a.)
2009
10 500
15 000
225
300
–
4 200
Capital
456 300
303 000
Balance at the beginning of the year
333 000
354 300
Plus Net profit/Less Net loss
138 300
(6 300)
Less Drawings
(15 000)
(45 000)
240 000
270 000
NOTE 3
Petty cash
Bank
NOTE 4
NOTE 5
Mortgage loan: KYC Bank (18% p.a.)
Additional information:
1. On 30 June 2009 an old vehicle, net carrying amount of R52 500, was traded in on a
new vehicle, cost price R232 500.
Required:
1. Draw up the CASH FLOW STATEMENT of HECTIC DEALERS for the year ended
30 June 2010.
2. Show the following notes/calculations:
• Cash received from customers/clients.
• Cash paid to suppliers and employees.
3. Show the reconciliation of profit with cash obtained from operations.
217
Glossary
Accounting: Is the process of transaction
recording in order to have a permanent
record of those transactions. From these
records, an enterprise can determine whether
a profit was made or a loss was suffered for a
financial period. – 1
you can check all the debits and credits to the
bank account in your ledgers. – 30
Carriage on sales: Is the delivery cost on a sale
to a client for the business account. Carriage
on sales is normally an operating expense,
together with other expenses like salaries,
telephone, et cetera. – 135
Accounting cycle: Represents the movement
of a transaction through the organisation to
reach the end of a financial period. – 14
Cash Flow Statement: Predicts the movements
of cash into the business and cash out from
the business from one financial year to the
next financial year. This movement is either
an inflow or outflow of cash. – 192
Accounting equation: Defines the relationship
between assets, owner’s equity and liabilities.
This relationship defines assets as being equal
to the owner’s equity and liabilities, or A = O
+ L. – 15
Cash Payments Journal (CPJ): In this journal, all
cash payments of the enterprise are captured.
The source document applicable to this
journal is the cheque counterfoil. Therefore,
this journal will be posted to the credit side
of the bank account in the General Ledger.
Accounts like Trading Stock and Creditors
Control will be debited in the General Ledger.
– 11
Asset disposal: T he selling of assets. There are
three ways of disposing of an asset:
1. Selling an asset for cash.
2. Selling an asset on credit.
3. Trade-in on a new asset. – 70
Assets: Are the possessions owned by an
enterprise, for example a vehicle. All assets
can be divided into two groups (types): noncurrent (fixed) assets and current assets. All
asset accounts increase on the debit side of
the account and decrease on the credit side
of the account. – 1
Cash Receipts Journal (CRJ): In this journal, all
cash receipts of the enterprise are captured.
The source documents applicable to this
journal are cash register roll slips (for cash
sales) and receipts (for all other receipts). – 9
Continuous (perpetual) stock system: Records
and monitors the daily movements of stock
through a ledger account called Trading
Stock. This system is often used in a small
retail business which requires that the
movement of each product be monitored
and controlled as sales and purchases occur.
It means that the value of the stock is known
at any stage, without counting the stock.
– 129
Balance Sheet: This statement checks if the
total assets are equal to the owner’s equity
plus liabilities, or if the accounting equation
throughout is balanced. Therefore, the
Balance Sheet provides the financial position
of the enterprise’s assets, owner’s equity and
liabilities on a given date. – 15
Bank charges: Are costs charged by a financial
institution for rendering a service to its clients
and such costs are debited directly to the
bank account of the enterprise at the financial
institution. Examples of bank charges are
service fees, cheque book fees and credit
card levies. – 32
Control account: Is a ledger account in the
General Ledger that contains all the postings
for a particular function such as debtors and
creditors. The total value of all transactions
for a specific function (debtor or creditor) is
shown in the control account.– 20
Bank statement: Is a record of all the
transactions that go through your bank
account. These transactions are printed out
on a bank statement that should be provided
on demand, or sent to you monthly, so that
Creditors Allowance Journal (CAJ): In this
journal, all credit returns to creditors of
the enterprise are captured. The source
218
earn a better interest than is offered on the
current account. Money in the enterprise’s
current account is a current asset, and, if this
money is invested with a financial institution
in the form of a fixed deposit, this will be
classified as a long-term (non-current) asset.
Fixed deposits are classified as financial
assets. – 67
document applicable to this journal is the
debit note. The creditor control column
will be debited to the Creditors Control
account and all other columns or entries (like
stationery and trading stock) will be credited
to the relevant ledger account. – 17
Creditors Journal (CJ): I n this journal, all credit
purchases of the enterprise are captured.
The source document applicable to this
journal is the credit invoice. The creditor
control column will be credited to the
Creditors Control account and all other
columns or entries (like equipment and
trading stock) will be debited to the relevant
ledger account. – 10
General Journal (GJ): T his journal is used to
capture all transactions for which no specific
journal is opened. The source document
applicable to this journal is the journal
voucher (internal office memo). The first
line of every journal entry is the debit entry,
which will be posted to the debit side of the
relevant account. The second line of every
journal entry is the credit entry, which will
be posted to the credit side of the relevant
account. The control columns will be debited
or credited to the relevant control account as
journal debits or journal credits. – 7
Current assets: Include the cash in the
enterprise’s current bank account or any
other asset that can be converted into cash
within a year. Examples of current assets are
the cash in the current account, trading stock
and debtors. – 2
Income Statement: This statement indicates
whether a profit was made or a loss suffered
for the past financial year. Therefore, the
Income Statement provides the financial
results for a particular financial year. – 15
Current liabilities: Are short-term liabilities like
an overdrawn bank account and creditors. – 2
Debit orders and stop orders: Are instructions
to a financial institution to make specific
payments to different beneficiaries. Examples
of these orders are insurance premiums,
municipal accounts and loan instalments.
– 33
Liability: Any amount owed by an enterprise
to entities or enterprises is called a liability.
These entities or enterprises are referred to
as creditors. Liabilities can also be divided
on-current and current
into two groups: n
liabilities. Liability accounts increase on the
credit side of the account and decrease on
the debit side of the account. – 2
Debtors Allowance Journal (DAJ): In this
journal, all credit returns from debtors of
the enterprise are captured. The source
document applicable to this journal is the
credit note. The debtors allowance column
will be debited to the Debtors Allowance
account and credited to the Debtors Control
account. However, the cost of sales column
will be credited to the Cost of Sales account
and debited to the Trading Stock account.
– 17
Loans (long-term): An enterprise may have a
need for additional funding but, owing to
its current situation, does not have enough
money of its own. One way of getting
additional funding will be to request
the owner to make an additional capital
contribution but, sometimes, an enterprise
will apply to a financial institution to borrow
money. The money borrowed from it is a
long-term loan and forms part of the longterm liabilities of this enterprise. – 65
Debtors Journal (DJ): In this journal, all credit
sales of the enterprise are captured. The
source document applicable to this journal
is the credit invoice. The sales column will
be debited to the Debtors Control account
and credited to the Sales account. However,
the cost of sales column will be debited to
the Cost of Sales account and credited to the
Trading Stock account. – 17
Manufacturing enterprises: Are businesses that
buy raw material and turn it into a product.
Examples of manufacturing enterprises are
factories that produce products through
a manufacturing process, like a clothing
factory. – 6
Fixed deposit: Is the opposite of taking up a
loan. An enterprise may have additional funds
on its current account that can be invested to
219
Postdated cheque: I s a promise to pay a
particular amount at a later date. – 42
Non-current assets: These assets are bought
to be used (not for resale) in the enterprise.
Therefore, these assets have a long life span
and will be used for periods longer than
twelve months. However, these assets can
be resold close to the end of their life span
and be replaced by new assets for the same
purpose or to expand current operations.
Examples of fixed assets are land and
buildings, vehicles and equipment. – 193
Subsidiary Ledger: Records individual
transactions related to a particular debtor or
creditor. These accounts are the individual
accounts for a particular debtor or creditor.
The balance of a control account should
match the total of all the accounts of a
subsidiary ledger. The detailed values
(outstanding balances) for individual
accounts are shown in the subsidiary ledgers.
– 50
Non-current liabilities: Include long-term
loans, and are also known as interest-bearing
liabilities. – 2
Trial Balance: Is usually implemented at the
end of a given financial period and is used
to make sure that accounting entries have
been carried out accurately. The Trial Balance
often leads to the preparation of financial
statements called the Income Statement and
Balance Sheet.
The Trial Balance has two sections:
• Balance Sheet Section
All asset, liability and owner’s equity
(excluding the Income and Expenditure
account) accounts are included in this
section. This section will be used to draw
up the Balance Sheet at the end of a
financial period.
•Nominal Accounts Section
All Income and Expenditure accounts are
included in this section. This section will
be used to draw up the Income Statement
at the end of a financial period. – 14
Non-profit organisation (NPO): Is an entity
whose main purpose does not include
profit as an outcome or objective. However,
the term is misleading because such
organisations may involve themselves in
trading activities from which they seek
profits, though these activities are not the
main aim of the organisations. – 164
Periodic stock system: Only values stock at
the end of the trading year and does not
require different bookkeeping accounts
or entries during the year. This system is
more appropriate for big retail and service
businesses with different departments.
These enterprises, which sell great volumes
of goods, need to do a physical stock take at
the end of the financial year to determine the
actual value of the stock. – 129
Petty Cash Journal (PCJ): In this journal, all cash
payments (small amounts) of the enterprise
are captured. The source document
applicable to this journal is the petty cash
voucher. The petty cash column will be
credited to the Petty Cash account and all
other columns or entries (like stationery and
refreshments) will be debited to the relevant
ledger account. – 17
Wages Journal (WJ) and Salaries Journal (SJ):
In this journal, all wage and salary payments
to employees of the enterprise are captured.
The source document applicable to this
journal is the cheque counterfoil. – 17
220
Abbreviations/acronyms
A:
new additions
AD:
accumulated depreciation/asset disposal
brought down
b/d:
bank reconciliation
BR:
CAJ:
Creditors Allowance Journal
closing balance
CB:
CJ:
Creditors Journal
CP:
cost price
CPJ:
Cash Payments Journal
Cr: Credit
CRJ:
Cash Receipts Journal
depreciation
D:
DAJ:
Debtors Allowance Journal
DJ:
Debtors Journal
Dr:
Debit
E:
equipment
General Journal
GJ:
JSE:
Johannesburg Stock Exchange
L:
loss on sale
NPO:
non-profit organisation
number
No./no.:
OB:
opening balance
proceeds
P:
p.a.:
per annum
PCJ:
Petty Cash Journal
R/D:
refer to drawer
SARS:
South African Revenue Service
SJ:
Salaries Journal
TB:
Trial Balance
WJ:
Wages Journal
221
Notes
222
Notes
223
Notes
224
Notes
225
Notes
226