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Accounting Grade 11 Relab Activities - Learner's Guide

Grade 11 Accounting

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100% found this document useful (1 vote)
23K views161 pages

Accounting Grade 11 Relab Activities - Learner's Guide

Grade 11 Accounting

Uploaded by

thatoramoupi54
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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REMOTE LEARNING ACTIVITY BOOK

(RELAB)
ACCOUNTING
GRADE: 11
TERM 1- 4
LEARNER’S GUIDE

1
A. TABLE OF CONTENTS

Term Week Topic Paper Page

1-2 Bank Reconciliation P2 4- 14

One 3 Creditors Reconciliation P2 15- 29

4-6 Tangible Assets P1/P2 30- 53

7 -10 Partnership : Ledger Accounts P1 54- 73

11-15 Partnership : Financial Statements P1 74- 91

16-19 Partnership : Analysis and Interpretation of P1 92- 102


Two
Financial Statements
21- 24 Budgeting P2 103- 122

Three 25- 26 Inventory P1/P2 123- 133

27- 28 Cost Accounting P2 134- 148

Four 31- 33 Value Added Tax P2 149- 161

2
B. INTRODUCTION AND PURPOSE OF THE RELAB

The pandemic has forced schools to resort to the implementation of rotational


timetables-where learners who are at home during normal schooling must continue
learning. Hence RELAB as a strategy towards the deployment of remote learning.
The RELAB is underpinned by the following Legislative demands:
a) Responding to GDE Strategic goal 2 promoting quality education across all
classrooms and schools
b) DBE Circular S13 of 2020 the requires the GDE to support the implementation of
the Recovery Annual Teaching Plan (RATP)
c) GDE Circular 11 of 2020 requiring districts to issue Learning Activity Packs to
support schools for lockdown learning. Understanding learning constraints at home
as majority of learners do not have access to devices or data to use for online
learning. Many households are depending on schools to provide them with learning
resources packs

RELAB is designed in a study guide format, where the content is briefly explained with
related concepts as revision, in the form of e.g. notes, mind-maps, concept
progression from the previous grade/s followed by exemplar exercises then practice
exercises/problems. The exercises are pitched at different cognitive levels to expose
learners at Grade 10 & 11 to these different cognitive levels of questioning. The NSC
diagnostic reports in different subjects have revealed that learners fail to analyse
questions and as a result fail to respond accordingly.

The RELAB is intended to ensure that learners work on exercises as per topics taught
while at school. These exercises must be completed at home, fully and learners will
receive feedback as groups or individually at school. It is therefore of paramount
importance that teachers mark the work with learners in class, as a way of providing
feedback. Educators must diagnose learner responses, remediate where necessary
and plan further intervention.

Educators are encouraged to create WhatsApp groups to remind learners on what is


expected of them in a particular week/ day(s). There shouldn’t be a backlog on
curriculum coverage as content will be covered simultaneously. Feedback from
learners at home will confirm usage of the RELAB material.

RELAB further prepares learners for formal assessment.

3
1. BANK RECONCILIATION

BASIC EXPLANATION

 Bank reconciliation is the process by which the bank account balance in an entity’s books is
reconciled to the balance in the most recent bank statement. Any difference between the two figures
needs to be examined and, if appropriate, be rectified to bring the two records into agreement.

Reasons for preparing the Bank Reconciliation

 To ensure that all entries relating to cash transactions are accurately recorded.
 Fraudulent transactions can be detected.
 Errors or omissions can be detected

It also enables the business or individual to keep track of the following:

 Outstanding Electronic Funds transfers  Electronic transfers made by the business


(EFT) or person
 Outstanding deposits  Electronic transfers /direct deposits in
favour of the business
 Bank charges/ service fees  Interest on overdrafts
 Interest earned on the credit balance

CONCEPTS UNIQUE TO BANK RECONCILIATION


Current Bank account An account from which money can be drawn immediately without notice,
payments can be made by cheque, electronic transfers or debit card.
Bank charges Amounts deducted by the bank as payment for the services it provides.
This is reflected on the statement.
Bank overdraft The business has withdrawn more money than was deposited in the bank
account.
Interest on overdraft Represents a payment (expense) to the bank for an overdraft bank
balance.
Interest on current account A receipt (income) from the bank for reflecting a favourable bank balance.
Credit card This is used to buy goods or services from suppliers, and the amounts
used is paid back to the bank at a later date.
Debit card This is used to buy goods/services and the amount is immediately
deducted from your bank account balance.
Deposit slip This form is used to record the total cash and cheques received for the
day and is proof of the amount deposited in the current account.
Electronic funds transfer Electronic transfer of money from one bank account to another, without
(EFT) direct interaction of the bank staff.

4
COMPARISON BETWEEN THE BANK STATEMENT AND THE RECORDS OF THE BUSINESS

Records of the business Records of the bank

 Cash transactions recorded in the CRJ  A statement sent by bank to the business
and CPJ and ultimately posted to the reflects all the transactions affecting the
Bank Account. balance of the business.
 Cash received and deposited is reflected  The Bank will CREDIT all deposits made
on the DEBIT side of the Bank Account. by the business.
 Payments made by the business are  Payments, withdrawals, debit orders
reflected on the CREDIT side of the made by the business are recorded on the
bank account. DEBIT side of the bank statement.

FAVOURABLE AND UNFAVOURABLE BANK BALANCE

Favourable

Business Records Bank Records


A favourable balance is reflected on the A favourable bank balance is reflected on
DEBIT side of the Bank account the CREDIT side of the Bank statement.

Unfavourable

Business records Bank Records


An unfavourable bank balance (bank An unfavourable bank balance is
overdraft ) is reflected on the CREDIT reflected on the DEBIT side of the
side of the Bank account. Bank statement. ``````

5
Favourable balance •is an asset to the business
•is a liabilty to the bank

Unfavourable balance •is a liability to the business


•is an asset to the Bank

STEPS TO FOLLOW WHEN COMPLETING THE BANK RECONCILIATION:

Steps Action and Reconciliation

Step 1: Compare the CRJ with the Credits Tick off (√) all the entries that agree in the Journals
(+) entries on the bank statement. and the Bank statement and, circle entries that
Compare the CPJ with the Debits only appear in a journal or that only appear on the
(-) entries on the bank statement. bank statement.

The above action will be classified as step one only when the entity has just opened
the current bank account or just started to operate as a business.

Step 2.1 The entries circled in the Bank Record those entries in CRJ OR CPJ
statement (except errors made by the bank)
2.2 Entries circled in the CRJ and CPJ Record entries in Bank Reconciliation
(except errors made by the business)
2.3 Total the CRJ and CPJ

Step 3: Draw up the Bank account and balance it.

Step 4: Draw up the Bank Reconciliation Statement

Assume that the above records are completed at the end of February 2021

NOTE THE FOLLOWING:

 Errors made by the business will be corrected in the Cash Journals


 Errors made by the Bank will be corrected in the Bank Reconciliation
statement

6
Steps Action and Reconciliation for the end of March 2021

Step 1: Compare Bank Reconciliation If the entries appear in the Bank Statement, only
Statement for February 2021 with tick it off.
Bank statement of March 2021. If the entry does not appear on the bank statement,
circle and record the entry again in the current
month’s BRS.
Step 2.1 Entries circled in the Bank Record those entries again in Bank Reconciliation –
reconciliation statement for March 2021
February 2021. Entries could involve the outstanding deposit if it
the business has not taken the decision to write the
amount off.
These steps will be followed by the steps that were followed In February, check the
information above.

7
EXAMPLE : BANK RECONCILIATION

The bookkeeper of Majozi Stores received the Bank Statement from the First Rand Bank on 31
January 2021.

REQUIRED:

1. Compare the Bank Statement with the CRJ and the CPJ.

2. Supplement (add the relevant extra entries to Cash Journals and total the Bank
columns only)

3. Post the bank totals in the CRJ and CPJ to the bank account in the general ledger

4. Draw up the Bank Reconciliation Statement on 31 January 2021

5. Explain one reason why it is important for a business to prepare a monthly Bank
Reconciliation Statement

INFORMATION:

A. Majozi Stores
Cash Receipt Journal for January 2021
Doc Day Details Bank Sales Cost of Sundry Accounts
sales
Amount Details
CRT 10 S. Marray 2 500 2 500 Debtors control
28 17 DF Malan 2 800 2 800 Debtors control
CRT 30 Sales 7 500 7 500 5 000
12 800 7 500 5 000 5 300

B. Cash Payment Journal for January 2021


Doc Day Details Bank Sundry Accounts
Amount Details
EFT9 19 Mino Stores 3 750 3 750 Equipment
1
EFT9 20 CNA 350 350 Stationery
2
EFT9 26 Faff Traders 1 200 1 200 Creditors control
3
EFT9 30 Karl Motors 2 300 2 300 Repairs
4
7 600 7 600

8
C. Bank Statement received from First Rand Bank
Date Transaction details Debit Credit Balance
1 Jan Opening balance 9 200
10 Jan Deposit: S Marray 2 500 11 700
15 Jan Debit order: OBE Insurers 1 400 10 300
17 Jan DF Malan 2 800 13 100
19 Jan EFT (Mino Stores) 3 750 9 350
20 Jan EFT (CNA) 350 9 000
21 Jan Deposit (EFT by tenant: S Omar) 1 500 10 500
25 Jan Debit order: Multi choice 1 000 9 500
26 Jan EFT (Faff Traders) 1 200 8 300
29 Jan Cash deposit fee 95 8 205
31 Jan Service fee 70 8 135
31 Jan Interest income 240 8 375

ADDITIONAL INFORMATION:

1. The bank account in the General ledger has a favourable balance of R9 200 on 1 January 2021
2. The Bank Statement is received on the 28th of each month.

EXPECTED ANSWER
Majozi Stores
1. Cash Receipt Journal for January 2021
Doc Day Details Fol Bank Sundry Accounts
Amount Details
1 Totals 12 800
B/S 31 S Omar 1 500 1 500 Rent Income
B/S 31 First Rand bank 240 240 Interest Income
14 540

2. Cash Payment Journal for January 2021


Doc Day Details Fol Bank Sundry Accounts
Amount Details
1 Totals 7 600
B/S 31 OBE Insurers 1 400 1 400 Insurance
B/S Multi Choice 1 000 1 000 DSTV fees
B/S First Rand Bank 165 165 Bank charges
10 165

3. Bank account
Jan 1 Balance b/d 9 200 Jan 31 Total CPJ 10 165
payments
31 Total CRJ 14 540 Balance c/d 13 575
Receipts
23 740 23 740
Feb 1 Balance b/d 13 575

9
4. Bank Reconciliation Statement on 31 January 2021
Debit Credit
Cr Balance as per bank statement 8 375
Cr Outstanding deposit 7 500
Dr Outstanding EFT’s
EFT 94 2 300
Dr Balance as per bank account 13 575
15 875 15 875

5. Explain ONE reason why it is important for a business to prepare a monthly


Bank Reconciliation Statement.

 To confirm the accuracy of the bank balance in the business books with external
source, the bank statement.
 To identify errors and timeously do corrections
 To follow up on outstanding deposits and EFT’s
 To update the bank balance with the amounts that were directly deducted or
deposited to your account. e.g. bank charges, interest, debit orders etc.

ACTIVITY 1
Use the following Cash Journals of Chloe Traders and the Bank Statement received from
AJ Bank to complete the following:

REQUIRED:

1.1 Complete the Cash Journals for January 2021. Enter the provisional totals first.

1.2 Post to the Bank account in the General ledger.

1.3 Prepare the Bank Reconciliation Statement on 31 January 2021

INFORMATION:

Chloe Traders
Cash Receipt Journal for January 2021
Doc Day Details Fol Bank Sundry Accounts
Amount Details
CRT 2 Sales 1 900
23 8 H Lene 4 800
CRT 11 Sales 2 500
9 200

10
Cash Payment Journal for January 2021
Doc Day Details Fol Bank Sundry Accounts
Amount Details
EFT11 5 Icon Traders 2 200
5
EFT11 7 City Treasurer 1 900 1 900 Water &
6 Electricity
EFT11 11 S Sly 1 680
7
EFT11 20 V Batim 6 400
8
10 280 1 900

Bank Statement (Extract)


Date Transaction details Debit Credit Balance
1 Jan Balance b/f 13 890
2 Jan Deposit 1 900 15 790
5 Jan Electronic transfer (Icon Traders) 2 200 13 590
11 Jan Deposit 2 500 16 090
Electronic transfer (S Sly) 1 680 14 410
14 Jan Cash deposit fee 29 14 381
20 Jan Electronic transfer (V Batim) 6 400 8 981
28 Jan Service fee 56 8 925
Electronic transfer(tenant: S Mart) 2 400 11 325

ADDITIONAL INFORMATION:

1. The bank account in the General ledger has a favourable balance of R13 890 on 1 January
2021

2. EFT payment 118 on the 20 January 2021 appeared on the January bank statement with
the correct amount of R5 400. Payment was made to a creditor in settlement of our
account.

3. The Bank Statement is received on the 25th of each month.

11
ACTIVITY 2
2.1 Indicate whether the following statements are TRUE or FALSE: (3)
2.1.1 A payment made by EFT, must be recorded in the Cash payment journal when it
reflects on the bank statement.

2.1.2 A business must record cash losses immediately when suspected according to the
materiality concept of GAAP.

2.1.3 A debit balance on the bank statement indicates a bank overdraft.


2.2 Bank Reconciliation

Lucky Jimmy, the cashier of Franco’s Deli, is in charge of collecting, receipting and
banking all cash receipts as well as all payments done via EFT. He feels that there is
no need to prepare a bank reconciliation statement because the bank keeps accurate
records of all transactions as reflected on the bank statement.

REQUIRED:

2.2.1 Calculate the correct bank account balance in the General Ledger on 31 July 2020. (9)
2.2.2 Prepare a Bank Reconciliation Statement on 31 July 2020. (7)
2.2.3 Provide ONE reason why the internal auditor expressed concern about Lucky’s job (2)
description.
2.2.4 Explain to Lucky why it was necessary to prepare a bank reconciliation statement (4)
each month. Provide TWO points

INFORMATION:

A  Favourable balance as per bank account on 31 July 2020 was R11 743 before
receipt of the bank statement from Money Bank.
 Balance as per bank statement on 31 July 2020. R?
B Items on the July bank statement but not shown in the Cash Journals:

RAND
Service fees 45
Cash deposit fees 132
Interest income 23
Debit order payment for insurance to Xi Insurers. This 800
amount appeared twice on the statement in error
Commission income from LUVLI Pastries 522
Direct deposit by debtor, Y Knot 189

C EFT payments made on 31 July 2016, were not on the bank statement:
EFT 1 for R675 and
EFT 2 for R2 010

D Deposit on 31 July 2016 for R3 935 was not on the bank statement.

12
ACTIVITY 3
The information was extracted from the records of Hilton Traders for June 2020.

REQUIRED:

3.1 Complete the Cash Journals for June 2020. (Note: The information from the Bank Statement
was not taken into account) (31)

3.2 Prepare the Bank Account on 30 June 2020. (6)

3.3 Prepare the Bank Reconciliation Statement on 30 June 2020. (9)

3.4 Provide TWO suggestions that the business can use to prevent a situation like the one
experience on 26 May 2020 in the future. (4)

3.5 Identify the problem that is revealed by the previous reconciliation, and list TWO internal
control measures to solve this problem. (5)

3.6 Refer to the debit order for R2 244. Provide a possible explanation how this may have
occured, and provide advise on how this can be rectified. (4)

INFORMATION:

A. Extract from the Bank Reconciliation statement on 31 May 2020:

Outstanding deposits: 17 May 2020 R32 100


26 May 2020 7 300
Outstanding EFT: No. 123 17 600
Unfavourable balance as per bank account 3 456

NOTE:
 The outstanding deposit of R32 100 appeared on the June 2020 bank statement.
 The outstanding deposit on the 26 May 2020 was reflected as R5 700 on the April
statement. Upon enquiry, the bank confirmed that it was because of counterfeit notes
included in the total deposit. This was cash received for repair services rendered. It
was decided to write-off this difference.
 EFT 123 appeared on the Bank Statement for June 2020.

B. Provisional totals from the Cash Journals on 30 June 2020:


 Cash Receipt Journal, R56 200
 Cash Payment Journal, R67 400

C. The following information on the June 2020 Bank Statement from XXZ Bank did not appear
in the June 2020 Cash Journals:
 Debit orders:

Pro Insurers R5 890 Monthly insurance premium


Matjhabeng R6 000 R4 500 is for the business’ rates and
Metro taxes and the balance is for the owner’s
private property.
Yen Bank R5 300 Monthly repayment of loan

13
 EFT Fees, R189
 Cash handling fee, R112
 Service Fees, R292
 Interest on bank overdraft, R317
 A deposit from P. Nel, R11 600 for his monthly rent.
 A debit order for R2 244 appeared on the business bank statement, on 29 April 2020.
This was not an account of the business and fortunately, the owner was able to instruct
the bank to cancel this entry. This reversal will be reflected on the next statement.
 A direct deposit of R16 300 was wrongly reflected on the business Bank Statement. The
bank will rectify the error.
 A deposit from N. Botha for R3 400 in settlement of his account of R3 500.

E. The following information in the June 2020 Cash Journals did not appear on the Bank
Statement for June 2020:
 Outstanding deposit, R17 800
 EFT 654 for R5 555 to BP Suppliers for sanitizing supplies purchased.

14
2. CREDITORS RECONCILIATION

Creditors’ reconciliation is an internal control measure that highlights the differences between a Creditor’s
balance in the creditors’ ledger of a business and the monthly statement received from a creditor. This
process ensures that the creditors’ accounts are properly maintained and controlled.

Credit Purchases of goods


 Credit purchase happens when the business purchase goods or services and make the payments later.
 When goods are purchased on credit the supplier (creditor) will send us an original invoice and he
keeps the copy of the invoice.
 The invoice will indicate the items that have been bought, the total amount owing and the trade discount
if any.
 The transaction is now entered into the Creditors’ Journal and posted to the creditor’s personal account
in the Creditors’ Ledger

Return of goods to the supplier

 When goods are returned to the supplier the debit note is completed by the business, the original copy is
sent to the creditor and the business keep the copy or duplicate.
 The debit note will also be sent to the supplier if the business has been overcharged or if the trading
discount has been omitted.
 If the supplier approve the returns they will send to us the original credit note and they will keep the
duplicate.
 This transaction will be recorded in the Creditors Allowances Journal ,the Creditors Ledger will be
debited (reduced)

Goods Purchased Goods returned


o Source document is original invoice. o Source document is duplicate debit note
o Source document of supplier is duplicate o Original credit note from supplier is a
invoice supporting document

BASELINE ACTIVITY
Match the Column A with Column B
COLUMN A COLUMN B
1 Creditor Book of first or original entry for credit purchases
2 Original Invoice Discount allowed to traders

3 Creditors Ledger List of amounts owed to creditors

4 Trade discount An entity or a person who supplies goods or services


and receive payment at a later date.
5 Creditors list Items bought are not paid for in full at the time of
purchase
6 Credit purchases Source document used to record credit purchases

7 Creditors Control account A creditors’ account that records all the credit
purchases, payments and discounts.
8 Creditors Journal A summary of all transactions with creditors.

15
SOLUTION

COLUMN A COLUMN B

1 Creditor An entity or a person who supplies goods or services


and receive payment at a later date.
2 Original Invoice Source document used to record credit purchases

3 Creditors Ledger A creditors’ account that records all the credit


purchases, payments and discounts.
4 Trade discount Discount allowed to traders

5 Creditors list List of amounts owed to creditors

6 Credit purchases Items bought are not paid for in full at the time of
purchase
7 Creditors Control account A summary of all transactions with creditors.

8 Creditors Journal Book of first or original entry for credit purchases

16
PROCEDURE FOLLOWED WHEN GOODS ARE PURCHASED ON CREDIT

Step 1 An order form will be submitted to the supplier, indicating exactly which goods are
required.(It must be authorised by the senior personnel)

Step 2 The supplier will make up the order and send it to the business together with a delivery
note/invoice.
Step 3 The goods delivered will be checked against the delivery note to make sure that the order
is complete.

Step 4 If the invoice is correct it will be stamped and sent to the accounts department.

Step 5 The invoice will be checked against the order form to make sure that the order has been
correctly completed. If it has not, then a follow-up must be made with creditors.

Step 6 Record the invoice in the Creditor’s journal.

Step 7 The Creditor’s journal will be posted to the:


 General ledger
 Creditor’s ledger

Step 8 At the end of the month a statement will be received from the supplier (creditor)
indicating how much money is owed by the business.

Step 9 o The statement will be checked against the records of the Creditor’s account.
o If they are the same, an amount will be transferred /paid to the creditor.
o If they are differences between the statement and the Creditors Ledger that are
resulting from errors ,omissions etc,they will be corrected or reconciled

Reconciliation of Creditors Control account and the Creditors List

 Creditors Control Account – is the General Ledger account that contains all related totals from the
relevant Subsidiary Journals.
 The account balance verifies the accuracy of Creditors lists total.

Possible reasons for differences in the control account balance and the list of creditors are:

 Errors made on source documents


 Incorrect additions in the journal (casting errors )
 Posting incorrect amounts to the ledgers
 Posting to the incorrect side in the ledgers
 Incorrect balancing of accounts in the ledgers

17
BASELINE ACTIVITY

REQUIRED

Use the following information extracted from the records of Zizi Traders to:

 Prepare the Creditors’ Control account on 31 March 2021


 Reconcile the Creditors’ List of balances with the balance of the Creditors’ Control
account.

INFORMATION

A. Balances on 1 March 2021:


Creditors’ control 28 700

B. Totals on 31 March 2021


List of creditors 28 860

C. Totals from Journals on 31 March 2021


Creditors’ Journal 121 800
Creditors’ Allowance Journal 2 128
Journal debits - Creditors 896
Journal credits - Creditors 462
Cash Payment Journal
Creditors’ control 117 236
Discount received 504

ADDITIONAL INFORMATION

1. The Creditors’ Journal was overcast by R800.

2. An amount of R1 200 in the Creditors’ Allowance Journal was posted to the account of
Wall Wholesalers as R2 200.

3. An amount of R42 was included by mistake in the Creditors column of the Journal credits.
This was in respect of interest that was cancelled on a debtor’s account, B Baloyi. It has
not been posted to his personal account.

Analysis of errors from above transactions:

Type of error Procedure to follow


Overcast /overstated o The Creditors Journal has been closed off ,the amount
will be corrected in the General Journal
o The List of creditors is not affected by this transaction
Error in posting o Calculate the difference and correct only the account of
the creditor.
Incorrect entry o Correct only the area affected by the error.

18
SOLUTION

GENERAL LEDGER OF ZIZI TRADERS

CREDITORS CONTROL
2021 2021
Mar 31 Total returns / CAJ Mar 1 Balance b/d 28 700
Creditors 2 128
allowances
Journal debits GJ 31 Sundry / Total CJ
896 purchases 121 000
(121 800- 800)
Bank and CPJ Journal credits GJ 420
discount 117 236 (462 – 42***)
Balance c/d 29 860
## 150 120 150 120
Sep 1 Balance b/d ## 29 860

***42 is only deducted in this account ,it will not be


deducted from the list of creditors, it affects the list
of debtors and Creditors Journal not the individual
accounts

NOTE :Our closing balance for Control account is the same as the closing total for our Creditors list
after reconciling the two

Creditors’ list
Total 28 860
Wall Wholesalers 1 000 (2 200 -1 200)
Total ## 29 860 The error of posting was made
to the account of Wall

The Creditors control and the creditors list are generated by the business.

19
Reconciliation of Creditors’ statement and the Creditors’ Ledger Account

 The supplier keeps record of all the transactions done with the business in his books.
 The supplier sends the monthly statement to the business showing the record of transactions.
 Each month the supplier’s statement is compared to the books of the business.
 When the statement is compared against the Creditors’ Ledger account the differences in entries is
normally due to the following:

o Outstanding invoices o Outstanding payments o Discounts not recorded


o Outstanding credit notes o Errors o Omissions

BOOKS OF THE BUSINESS

CREDITORS LEDGER OF LANGA TRADERS

WW WHOLESALERS CI
Date Details Fol Debit Credit Balance
Mar 1 Account rendered 6 500
15 Invoice 363 2 000 8 500
27 Receipt 642 5 700 800
Discount received 800 0

Payments: Debit account of the creditor Purchases: Credit the account of the
creditor

STATEMENT FROM THE SUPPLIER


WW WHOLESALERS
100 Day Road, Rosettenville, 0112

STATEMENT OF ACCOUNT

LANGA TRADERS
PO BOX 5550
JOHANNESBURG
Date Details / Doc no Debit Credit Balance
Feb 25 Account rendered 9 400
28 Invoice 098 1 100 10 500
Mar 2 Invoice 110 2 000 12 500
18 Receipt R642 5 700 6 800
25 Invoice 309 2 250 9 050
90 days 60 days 30 days Current
5 950 3 100
Terms – 5% discount if paid within 14 days

20
 The DEBIT side of the statement is compared with the CREDIT side of the Creditors Ledger
(sales by the supplier compared to purchases made by a business)
 The owner of the business (Langa Traders) is regarded as a DEBTOR by the supplier
(WW Wholesalers )

Steps followed when reconciling the statement of account and the Creditors’ Ledger

STEP
Compare the Creditor’s statement with the items in the Creditor’s Ledger account.
ONE

STEP Tick off all similar items appearing in the Creditor’s Ledger account and the Creditor’s
TWO Statement.

Circle the amounts on the Creditor’s statement that are not appearing in the
STEP
Creditor’s Ledger account.
THREE
Draw a square next to the amounts in the Creditor’s Ledger account that are not appearing
STEP
in the Creditor’s statement.
FOUR
STEP Refer to additional information to record differences
FIVE
STEP
Record the differences in the Creditors Ledger account or Creditors Reconciliation Statement
SIX

Calculate the closing Balance -The Creditors’ ledger and Creditors’ statement will have
STEP
similar balances at the end of month.
SEVEN

NOTE: No changes can be made by a business on the statement to address any transactions that are not
appearing in the creditors’ statement, it can be purchases or discount omitted etc. The business can only
inform the supplier through the Creditors reconciliation statement.

Remember that creditors statement is treated the same way as


the bank statement, these are external documents, and
corrections to the documents can only be effected by the
creditor or the bank. The reconciliation statements are prepared
to direct attention to the bank or creditor to the items that should
be corrected.

21
EXAMPLE
CREDITORS RECONCILIATION
REQUIRED
Reeva Traders has received the statement from Moodley Wholesalers, a creditor.
The balance on their statement does not agree with the balance of their account in the Creditors Ledger.
 Reconcile the statement with the ledger account of Moodley Wholesalers

INFORMATION

MOODLEY WHOLESALERS
300 Blue Road
Klip River
2090

STATEMENT OF ACCOUNT
REEVATRADERS
PO BOX 2540
TSHWANE
Date Details / Doc no Debit Credit Balance
May 1 Account rendered 21 480
5 Receipt 702 12 000 9 480
Discount 600 8 880
7 Invoice 945 3 700 12 580
11 Invoice 1014 8 200 20 780
17 Credit note 419 810 19 970
19 Invoice 1323 7 800 27 770
22 Invoice 1495 4 700 32 470
25 Invoice 1509 5 280 37 750
Terms – 60 days
- 5% discount if paid within 30 days
Credit limit: R25 000

CREDITORS’ LEDGER O FREEVA TRADERS

MOODLEY WHOLESALERS
Date Details Fol Debit Credit Balance
May 1 Balance 9 480
7 Invoice 945 3 700 13 180
11 Invoice 1014 8 200 21 380
15 Debit note 334 900 20 480
22 Invoice 1323 7 800 28 280
23 Debit note 424 780 27 500
27 Invoice 1509 5 280 32 780
Debit note 518 1 280 31 500
30 EFT 222 8 436 23 064
Discount 444 22 620

22
ADDITIONAL INFORMATION

1. Reeva Traders issued debit note 334 on 15 May, the amount was subject to trade discount of
10%, but the trade discount was not deducted. Received credit note 419 from Moodley
Wholesalers.

2. Debit Note 424 was for goods returned to Moodley Wholesalers.

3. Invoice 1495 was erroneously charged to Reeva Traders. These goods were not ordered or received
by Reeva Traders.

4. Invoice 1509 include the amount of goods which were not delivered to Reeva Traders
they amount to R1 280.Issued Debit Note 518 to Moodley Traders.

MOODLEY WHOLESALERS
300 Blue Road
Klip River
2090

REEVA TRADERS
Date Details / Doc no Debit Credit Balance
May 1 Account rendered 21 480
5 Receipt 702 12 000 9 480
Discount 600 8 880
7 Invoice 945 1 3 700 12 580
11 Invoice 1014 2 8 200 20 780
17 Credit note 419 ** 810 19 970
19 Invoice 1323 3 7 800 27 770
22 Invoice 1495 4 700 32 470
25 Invoice 1509 4 5 280 37 750
Terms – 60 days
- 5% discount if paid within 30 days
Credit limit: R25 000
CREDITORS’ LEDGER OF REEVA TRADERS

MOODLEY WHOLESALERS
Date Details Fol Debit Credit Balance
May 1 Balance 9 480
7 Invoice 945 1 3 700 13 180
11 Invoice 1014 2 8 200 21 380
15 Debit note 334 ** 900 20 480
22 Invoice 1323 3 7 800 28 280
23 Debit note 424 780 27 500
27 Invoice 1509 4 5 280 32 780
Debit note 518 1 280 31 500
30 EFT 222 8 436 23 064
Discount 444 22 620

Take note of the following :


o Reconciliation/comparison will consider entries that took place after determining the balance of R9 480.

23
o R12 000 reflected on the Creditors Statement does not have to be reconciled, it must be ignored, it was
posted before the calculation of R9 480 (balance).

CREDITORS’ LEDGER ACCOUNT: REEVA TRADERS


Debit Credit Balance Take the
Balance 22 620 closing
Discount 600 22 020 Balance from
the creditors
Credit Note 419 (adjustment) 90 22 110
ledger
 R600 - discount omitted will reduce our debt
 The debit note of R900 did not take into consideration the 10% trade discount, the creditor
reduced our debt by R810 when he received our debit note, and we exceeded the amount
written in debit note by R90.

Explain why did we credit R90 in our Creditors Ledger??


Incorrect entry in our Creditors Ledger Correction
Debit Credit Debit Credit
Debit note 900 Credit note 90
The R90 recorded on the credit side will reduce our balance of R900 to R810.

CREDITORS RECONCILIATION STATEMENT: MOODLEY WHOLESALERS


Debit Credit Balance Take the
Balance 37 750 closing
Balance
Debit Note 424 780 36 970
from the
Debit Note 518 1 280 35 690 creditors
EFT 222 8 436 27 254 statement
Discount 444 26 810
Invoice 1495 (goods not received) 4 700 22 110
Reeva Traders is regarded as debtor in Moodleys’books, any payments, discounts, returns will
reduce the debt and all this transactions will be CREDITED in Moodleys’ books or creditors’
statement.

OR

All the
CREDITORS RECONCILIATION STATEMENT: MOODLEY WHOLESALERS credit
Balance 37 750 entries are
bracketed ,
Debit note 424 (780)
they
Debit note 518 (1 280) reduce the
Payment not reflected (8 436) amount
Discount not reflected (444) owing by
Invoice 1495 incorrectly debited (4 700) the
Balance as per Creditors Ledger account 22 110 business
(Reeva)

NOTE: This activity is reconciling the Ledger of One Creditor against the statement issued by the supplier
(Creditor).
The baseline activity is reconciling the Creditors Control and the list of our creditors.

24
ACTIVITY 1
REQUIRED
Mogashoa Traders has received the statement from Bogatsu Suppliers, a creditor.
The balance on their statement does not agree with the balance of their account in the Creditors Ledger.

 Reconcile the statement with the ledger account of Bogatsu Suppliers.

INFORMATION

BOGATSU SUPPLIERS
110 New Road
Midrand
2022

STATEMENT OF ACCOUNT
MOGASHOA TRADERS
PO BOX 5550
JOHANNESBURG
Date Details / Doc no Debit Credit Balance
Feb 25 Account rendered 28 140
26 Invoice 061 4 560 32 700
28 Invoice 098 11 100 43 800
Mar 2 Invoice 110 22 200 66 000
8 Invoice 208 6 300 72 300
18 Receipt R880 41 610 30 690
25 Invoice 309 2 250 32 940
90 days 60 days 30 days Current
2 190 27 960
Terms – 5% discount if paid within 14 days

CREDITORS LEDGER OF MOGASHOA TRADERS

BOGATSU SUPPLIERS
Date Details Fol Debit Credit Balance
Mar 1 Balance 43 800
4 Invoice 110 CJ 20 220 64 020
10 EFT CPJ 41 610 22 410
Discount (43 800 x 5%) CPJ 2 190 20 220
11 Invoice 208 CJ 5 670 25 890
27 Invoice 401 CJ 9 000 34 890

25
ADDITIONAL INFORMATION

1. The funds transferred by Mogashoa Traders on 10 March to settle the account was not received by
Bogatsu Suppliers within 14 days and therefore they did not allow the discount.
2. Refer to Invoice 110, the amount was correctly recorded in Mogashoa books.
3. Refer to Invoice 208, Suppliers did not deduct 10% trade discount as per agreement. Mogashoa
Traders send a debit note 405 to request for the discount omitted on the statement of Bogatsu
Suppliers
4. The bookkeeper has not yet entered Invoice 309 in the Creditors Journal of Mogashoa Traders.

26
ACTIVITY 2

2 CREDITORS’ RECONCILIATION

Dibe Stores received a statement of account from creditor, Khumalo Suppliers.

REQUIRED:

2.1 Reconcile the account of Khumalo Suppliers in the Creditors Ledger of Dibe Stores, (16)
with the statement received. Show negative amounts in brackets.
2.2 Invoice 780 on the 12 July 2018, was for goods purchased by the owner for his
(3)
personal use. What advice would you offer him about this transaction? Quote a
relevant GAAP principle in your response.
2.3 The internal auditor wants to improve the internal control of stock and creditors. (4)
Provide TWO control measures that he may consider.

INFORMATION:
A. CREDITORS LEDGER OF DIBE STORES
KHUMALO SUPPLIERS (CL2)
DATE DETAILS FOL DEBIT CREDIT BALANCE
July 1 Account b/d 18 710
rendered/Balance
5 Invoice No. 154 CJ 3 915 22 625
8 Debit Note No. 43 CAJ 260 22 885
12 Invoice No. 780 CJ 1 250 24 135
16 EFT No. 887 CPJ 6 250 17 885
Discount received CPJ 313 17 573
27 Invoice No. 991 CJ 1 780 19 353

B Statement of account received from Khumalo Suppliers

KHUMALO SUPPLIERS No: 1215


To : Dibe Stores
Peddie 25 July 2018
DATE DETAILS AMOUNT BALANCE
July 1 Balance 18 710
5 Invoice No. 154 4 365 23 075
8 Credit Note No. 90 (260) 22 815
16 Receipt No. 6651 (6 250) 16 565
24 Credit Note 112 (188) 16 378
25 Interest on overdue account 124 16 502
E&OE
Statement includes transactions up to 25 July 2018

27
ADDITIONAL INFORMATION:
C.
Invoice No. 154 was recorded incorrectly on the statement.
(i)
The goods returned on the 8th was posted incorrectly in the creditors’ ledger account.
(ii)
(iii) Invoice No. 780 in the creditors’ ledger was for goods purchased from another supplier, Dobe
Stores.

(iv) Khumalo Suppliers did not grant a discount for the payment on the 16th stating that the
payment was too late to qualify for the discount.
(v) Credit Note No. 112 on the statement was an error on the statement. Goods were not
returned by the business.
(vi) Interest on overdue account must still be taken into account

28
ACTIVITY 3

CREDITORS' RECONCILIATION
Amber Traders purchase goods on credit from Mongi Suppliers.
REQUIRED:

3.1 The bookkeeper, Walker, says it is not necessary for her to prepare a Creditors' Reconciliation
Statement because the creditors send monthly statements at the end of each month. What would
you say to her? State TWO points. (4)

3.2 Use the table in the ANSWER BOOK to indicate how the relevant balances will change when
preparing the creditors' reconciliation. Indicate the figure as well as a + for increase and a – for
decrease. (16)

INFORMATION

The following balances are provided:


In the account of Mongi Suppliers in the Creditors' Ledger of R110 170 Credit
Amber Traders on 30 September 2019:
On the statement received from Mongi Suppliers on 25 R111 600 Debit
September 2019:

Errors and Omissions

A. An invoice for goods bought for R18 200 was reflected on the statement from Mongi
Suppliers but was not recorded by Amber Traders.

B. Returns recorded as R280 in the creditors ledger account of Amber Traders was shown
as R820 on the statement received. The amount on the statement was correct.

A payment by Amber Traders of R9 000 was omitted from the Creditors' Ledger and the
C. statement

Amber Traders entered a discount of R370 relating to a payment of R5 000 on


D. 15 September 2019.Mongi Suppliers did not approve this discount stating that the
payment was received late.

The statement reflects interest of R630 on the overdue account. Mongi Suppliers
E. acknowledged that an error had been made and promised to reverse the entry in the
October 2019 statement.

A debit note for R2 130 issued to Mango Distributors was incorrectly recorded in the
F. account of Mongi Suppliers by Amber Traders.

A credit note for R5 250 received from Mongi Suppliers for goods returned was
G. incorrectly recorded as an invoice by Amber Traders

Goods purchased from Mongi Suppliers on 30 September 2019 for R4 600


H. were recorded by Amber Traders. The statement from Mongi Suppliers is
dated 25 September 2019.

29
3. TANGIBLE ASSETS

EXPLANATION
 Tangible or Fixed assets acquired by the business are not intended for resale but to be used for daily
operations of the business in order to generate profit.
 The examples of fixed assets are listed below :
 Land and buildings
 Vehicles
 Equipment
 The value of Tangible assets such as vehicles and equipment depreciate because of wear and tear
resulting from daily use.
 The value of land and buildings appreciates if the property is well maintained.

CONCEPTS UNIQUE TO TANGIBLE ASSETS


Depreciation A reduction in the value of an asset over time due in particular to wear and tear.

Accumulated Is the total amount ‘of depreciation deducted from the fixed asset since its
Depreciation acquisition.
Carrying value / Original cost price less the depreciation that has accumulated over the period in
book value which the asset has been in the business.

Age of Assets Businesses should monitor their assets to identify assets that need to be
replaced. Assets that are old due to wear and tear should be replaced with
efficient assets.
Replacement It refers to how often the business determines a fixed asset will be replaced.
Rate
Replacement When a fixed asset has to be replaced, the business needs to look if it is worth
Value of Assets replacing the old asset and what it will cost them to buy the new asset.

Lifespan of Estimated length of time the asset can reasonably be used to generate income
assets and be of benefit to the business.

ACQUISITION OF ASSETS
Factors to be considered when new equipment is acquired (bought)
 The existing equipment has become old / out of date.
 Running costs of current assets may be too high.
 The business wants to keep up-to-date with new technology.

ASSET REGISTER

Is the list of assets that belong to the entity .The purpose of fixed asset register is to keep track of the book
value of assets and determine the depreciation to be calculated and recorded for management and taxation
purpose .

The business should keep every transaction relating to an asset in the fixed asset register .Each asset owned
by the business should have a detailed entry page in the register.

30
DETAILS OF ASSETS RECORDED IN THE ASSET REGISTER

 Date of purchase  Rate of depreciation


 Cost Price  Book value
 Details of the seller  Life expectancy
 Type and model  Method of depreciation
 Serial number  Depreciation
 Receipt/Invoice  Accumulated depreciation

A FIXED ASSET REGISTER FORMAT

D M TRADERS NO.1
Asset register
General ledger account: Vehicle account (B 6)
Item: Nissan delivery van 2 Date 1 March 2021
litre purchased:
From whom Nissan Monument Cost price:
R180 000
purchased:
Percentage 20 % p.a. at cost price/straight line method
Depreciation:
Details of depreciation
Dates Annual depreciation Accumulated Book value
Calculations depreciation or known as
“Carrying value”

NOTE : only one asset will be recorded in this register

31
DEPRECIATION METHODS

FIXED METHOD DIMINISHING BALANCE


 Takes place over the useful life of the asset at a  Writing off of depreciation on the carrying
fixed rate. (e.g. over 5 years at 20% p.a.) value at a fixed percentage (e.g. 15% p.a.)
 Writing off takes place over a longer period.

BASELINE ACTIVITIES

ILLUSTRATIVE ACTIVITY 1

INFORMATION
The financial year ends on the last day of February each year.
Bought a delivery van for R180 000 on 1 March 2020.

REQUIRED
Calculate depreciation on 28 February 2021 at 20% p.a. on cost price

ANSWER

180 000 x 20% = 36 000

ACTIVITY 1

INFORMATION
The financial year ended on 31 December 2020.
Balance of the Equipment account in the General Ledger on 1 January 2020: R90 000.
Bought a new cash register for R5 000 on 1 July 2020.

REQUIRED
Calculate depreciation on 31 December 2020 at 10% p.a. on cost price.

ANSWER SHEET

32
ILLUSTRATIVE ACTIVITY 2

INFORMATION
The following balances appear on 1 March 2020 as follows:
Equipment R40 000
Accumulated depreciation on equipment R4 000.

REQUIRED
Calculate depreciation on 28 February 2021 at 10% p.a. on the diminishing balance method.

ANSWER

Cost price –Accumulated Depreciation = Carrying Value


40 000 – 4 000 = 36 000
36 000 x 10% =3 600

ACTIVITY 2

INFORMATION
 Balances appear in the books on 1 March 2020 as follows:
o Equipment R40 000
o Accumulated depreciation on equipment R7 600
 Bought new equipment for R96 000 on 1 November 2020.

REQUIRED
Calculate depreciation on 28 February 2021 at 10% p.a. on the diminishing balance method.

ANSWER SHEET

33
AN EXAMPLE OF HOW THE ASSET REGISTER APPEARS IN THE FINANCIAL STATEMENTS:

NOTE: The financial year ends on the last day of February each year.

ASSET REGISTER
Mzansi Traders
Item : Delivery Vehicle STV 565 GP
Date of purchase : 2017 March 01
Cost price : R120 000
Purchased from : Speedy Motors
Rate of depreciation : 20%p.a. on cost
Date Current Accumulated Carrying value
Depreciation Depreciation
2018-02-28 24 000 24 000 96 000$$
2019-02-28 24 000 48 000 72 000
2020-02-29 24 000 72 000 # 48 000
2021-02-28 24 000*** 96 000 24 000##

Cost price –Accumulated depreciation =Carrying Value


120 000 -24 000 = 96 000

NOTE 3: TANGIBLE ASSETS

Vehicles
Cost 120 000

Accumulated depreciation Check Asset (72 000)#


Register
Carrying value (2020-02-29) 48 000

MOVEMENTS

Additions at Cost

Depreciation for the year (24 000)***

Carrying value (2021-02-28) Check Asset 24 000##


Register
Cost 120 000

Accumulated depreciation (96 000)

(24 000)*** Depreciation for the current year

34
EXAMPLE 4

RECORDING DEPRECIATION

INFORMATION
The financial year ends on 30 June each year.
The balances appear in the General Ledger on 1 July 2019 as follows:
Vehicles R98 000
Accumulated depreciation on vehicles R 19 600

REQUIRED
1 Calculate depreciation on 30 June 2020 at 20% p.a. on cost price
2 Show the depreciation section of the asset register
3 Record the information in the following ledger accounts:
Vehicles
Accumulated depreciation
Depreciation
4 Show the Tangible Asset Note to the Financial statements
5 Show how the information will appear in the Balance sheet /Statement of Financial position

1 Calculation of depreciation on 30 June 2020

98 000 x 20 x 12 = R19 600


1 100 12

2 ASSET REGISTER
Accumulated
Date Cost Depreciation depreciation Book value
1 Jul 2018 98 000 98 000
30 Jun 2019 19 600 19 600 78 400
30 Jun 2020 19 600 39 200 58 800

GENERAL LEDGER
VEHICLES
2019 1 Balance b/d 98 000
Jul

35
ACCUMULATED DEPRECIATION ON VEHICLES

2019 1 Balance b/d 19 600


Jul
2020 30 Depreciation 19 600
Jun

DEPRECIATION
2020 30 Accumulated 19 600
Jun depreciation on
vehicles

4 NOTE TO FINANCIAL STATEMENTS

Note 3 – Tangible / Fixed assets


Vehicles
Cost 98 000
Accumulated depreciation (19 600)
Carrying value (01 July 2019) 78 400
Movements
Additions at cost
Disposals at carrying value Acc dep at
Depreciation for the year (19 600) beginning
PLUS
Carrying value end of current year 58 800 depreciation
Cost 98 000 19 600 +19 600
Accumulated depreciation (39 200) = 39 200

STATEMENT OF FINANCIAL POSITION :30 JUNE 2020


ASSETS
CURRENT ASSETS Carrying value at
Fixed assets 58 800 end of current year ,
from note 3

36
ACTIVITY 3

INFORMATION

The financial year ends on 31 December each year.


The following balances appeared in the General Ledger on 1 January 2020 as follows:
 Equipment R90 000
 Accumulated depreciation R 9 000

REQUIRED
1 Calculate depreciation on 31 December 2020 at 10% p.a. on the diminishing balance
method.
2 Show the depreciation section of the asset register
3 Record the information in the following ledger accounts:
 Vehicles
 Accumulated depreciation
 Depreciation
4 Show the Tangible Asset Note to the Financial statements
5 Show how the information will appear in the Balance sheet

FULLY DEPRECIATED ASSETS (ASSETS WITH CARRYING VALUE OF R1)

EXAMPLE 5

REQUIRED
 Calculate the depreciation for the current year
 Indicate how the information provided below will appear in the Financial Statements

INFORMATION
Cost R100 000
Accumulated depreciation at the beginning of the year 95 000

NOTE –depreciation on vehicles is calculated at 10% using the cost price method.

DEPRECIATION

100 000 x 10% = 9 000 This amount cannot be regarded as depreciation it is above the Carrying
value of R5 000 (R100 000 – 95 000)

The correct calculation for depreciation is :Book Value LESS R1 (R5 000 – R1) = R4 999

NOTE –Assets cannot be depreciated at an amount above their cost price

CHECK- the balances provided above ,there’s a small difference between the cost price and the
accumulated depreciation.R100 000 – R95 000 = R5 000

37
Amount that will be recorded in the income statement :

Income Statement at the end of current year Income Statement at the end of following yr.
Operating expenses Operating expenses
Depreciation R4 999 Depreciation None

Amount that will be recorded in the Note on Tangible Assets:

Note on Tangible Assets –Current year Note on Tangible Assets - Following year
Cost 100 000 Cost 100 000
Accumulated Depreciation (95 000) Accumulated Depreciation (99 999)
Carrying Value 5 000 Carrying Value 1
Movements Movements
Depreciation 4 999 Depreciation 0
Carrying Value This amount is 1 Carrying Value This amount is 1
Cost transferred to the 100 000 Cost transferred to 100 000
Balance sheet the Balance
sheet
Accumulated Depreciation (99 999) Accumulated Depreciation (99 999)

NOTE: According to Historical Concept, the actual cost price of an asset will always be reflected in the
note irrespective of the decline in the value.

Balance Sheet –Current year Balance Sheet - Following year


Assets Assets
Non- Current Assets Non- Current Assets
Tangible Assets R1 Tangible Assets R1
Financial Assets Financial Assets

The asset will be reflected at R1 in the Balance sheet until the business decides to sell or dispose the
asset (in the next activities you will be introduced to asset disposal)

NOTE in most activities the business will have more than one vehicle, therefore it is unlikely for a large
business to have a carrying value of R1, this figure will be combined with the carrying value of other
vehicles.

38
ACTIVITY 4

REQUIRED
Complete the following :
1. Calculate the depreciation for the current year (on 31 December 2020)
2. Record the information in the following ledger accounts:
 Vehicles
 Accumulated depreciation
 Depreciation
3. Indicate how the information provided below will appear in the Financial Statements

INFORMATION
 A new vehicle was bought for cash on 1 April 2020 at the cost price of R300 000
 Depreciation on vehicles is calculated at 20% p.a. using the cost price method.

INFORMATION ON VEHICLE A

Cost Depreciation Accumulated


price Date depreciation Carrying value
200 000 31 Dec 2016 40 000 40 000 160 000
31 Dec 2017 40 000 80 000 120 000
31 Dec 2018 40 000 120 000 80 000
31 Dec 2019 40 000 160 000 40 000
31 Dec 2020 ? ? ?

INFORMATION ON VEHICLE B
Cost Depreciation Accumulated
price Date depreciation Carrying value
250 000 31 Dec 2018 50 000 50 000 200 000
31 Dec 2019 50 000 100 000 150 000
31 Dec 2020 ? ? ?

39
Disposal of Tangible Assets

Fixed assets are not purchased for the purpose of resale in the normal course of running a business,
however if the owner no longer requires the asset he may decide to dispose or sell it.

In an event an asset is sold the ,the business will have to derecognise or remove the assets from the
financial assets of the business.

What are the reasons for disposing Tangible Assets?

 The existing asset is too old or has outlived its useful life
 Vehicles may have been involved in accidents
 Damaged assets that cannot be used by a business anymore
 Asset may be obsolete
 The existing asset is too old or has outlived its useful life

Different methods of disposing assets

Methods of disposing Tangible Assets Account affected


 Asset can be sold for cash  Bank account
 Asset can be sold on credit  Debtors Control
 They can be donated  Donation
 Taken for personal use by the owner  Drawings
 They can be traded-in  Creditors Control
 Scrapped  Write off, no payment
 Assets can be written off because of damages  Insurance claim approved/Accrued
income

When are the Tangible Assets disposed?

DISPOSAL OF ASSETS

In the beginning
At the end of the year During the year
of the year

Assets are disposed at a:


 Carrying Value (No profit or loss incurred)
 Profit (Above the carrying value )
 Loss (Below the carrying value )

NOTE : Carrying Value is the difference between the Cost Price and the Accumulated Depreciation

40
FORMAT OF AN ASSET DISPOSAL ACCOUNT AND ASSET ACCOUNT

DR Asset Disposal CR
Mar 1 Equipment / Vehicle xxxx Mar 31 Accumulated xxx
depreciation on
equipment
Bank /Debtors xxx
Control/Creditors Control
/ Donation/Drawings
Loss on sale of asset xx
xxxx xxxx

Profit on sale of
asset is recorded
on the debit side

DR Asset Account CR
Mar 1 Balance b/d @cost xxxx Mar 31 Asset disposal @cost xxx
Bank /Creditors Control Balance c/d @cost xxx
@cost
xxxx xxxx
Balance b/d @cost xxxx xxxx

NOTE: When assets are bought, the transaction will be recorded on the debit side and when the sales will
be recorded on the credit side.

41
FORMAT –NOTE ON TANGIBLE ASSETS

Note 3 - Fixed/Tangible assets


Land & Vehicles/
Buildings Equipment
Carrying value at the beginning of
xxxx xxxx
the financial year
Cost xxxx xxxx
Accumulated depreciation Nil (xxx)
Movements
Additions at cost xxxx xxxx
Disposals at carrying value (xxx) (xxx) Tangible assets are
recorded at a carrying
Depreciation Nil (xxx) value and reduce the
Carrying value at the end of the balance of assets
xxxx xxxx
financial year
Cost xxxx xxxx These balances will
exclude the asset that
Accumulated depreciation Nil (xxx) has been disposed off

STEPS TO BE FOLLOWED WHEN ASSET DISPOSING ASSET

ACCOUNT ACCOUNT
STEPS TRANSACTION DEBITED CREDITED
1 Depreciation Calculate the current Depreciation Accumulated
depreciation depreciation
2 Accumulated depreciation Calculate the total Accumulated Asset disposal
accumulated depreciation at depreciation
date of disposal
Balance at the beginning
of the year PLUS
depreciation up to date of
sale
3 Cost price Transfer the cost price of Asset disposal Asset account
the asset (e.g. Vehicle
account)
4 Disposal of asset Transfer the cost to the
(selling of the asset) asset disposal when an
asset is:
 Sold for cash
Bank Asset disposal

 Sold on credit
Debtors control Asset disposal

 Taken by owner
Drawings Asset disposal

 Donated
Donations Asset disposal
5 Calculate Profit / loss Determine the profit/ loss
 Record the profit
Asset disposal Profit on sale of
asset
Check the figures
illustrated below
 Record the loss
Loss on sale of
asset
Asset disposal

42
ASSET SOLD AT :
Carrying value PROFIT LOSS
Cost 20 000 Cost 20 000 Cost 20 000
Acc dep (15 000) Acc dep (15 000) Acc dep (15 000)
Book value 5 000 Book value 5 000 Book value 5 000
Selling price Sold at R5 000 Selling price 7 000 Selling price 4 000
No profit or loss Profit 2 000 Loss 1 000

NOTE: The Asset Disposal Account is a nominal account that will be opened specifically for disposal of the
asset, after the disposal it will be closed off and profit or loss will be transferred to the income statement.

43
DISPOSAL OF TANGIBLE ASSETS

EXAMPLE 3 – Last day of Accounting period

INFORMATION
On 1 March 2020 (the beginning of the accounting period) the following balances appeared in the books of
Gauteng Traders:

 Vehicles at cost R385 200


 Accumulated depreciation on vehicles R129 000

On 28 February 2021, a delivery vehicle was sold on credit to Manyaka for R53 000. The cost price was
R90 000 and accumulated depreciation on vehicles on 1 March 2020 was
R32 400.

Depreciation is calculated at 20% p.a. on the diminishing balance method.

REQUIRED
Show how the transaction will be recorded in the :
 General Journal
 General Ledger

SOLUTION – ASSET SOLD AT END OF YEAR

GENERAL JOURNAL OF GAUTENG TRADERS- 28 FEBRUARY 2021


Debit Credit
Asset disposal 90 000
STEP
Vehicles 90 000
ONE
Transfer equipment at cost price

Depreciation 51 240
STEP
Accumulated Depreciation on vehicles 51 240
TWO
Depreciation is calculated at 20% -diminishing
balance

STEP Accumulated depreciation on vehicles 43 920


THREE Asset disposal 43 920
Transfer of accumulated depreciation

STEP Debtors control / P.Manyaka 53 000


FOUR Asset disposal 53 000
Asset sold on credit

STEP Asset disposal 6 920


FIVE Profit on sale of asset 6 920
Profit on sale of vehicle

44
GENERAL LEDGER OF GAUTENG TRADERS

Vehicles
2020 2021
GJ
Mar 1 Balance b/d 385 200 Feb 28 Asset disposal 90 000
Balance c/d 295 200
385 200 385 200
2021 Balance b/d 295 200
Mar 1

(90 000 - 32 400) x 20% = 11 520


32 400 +11 520 = 43 920 (385 200 -129 000) x 20%

Accumulated depreciation on vehicles


2021 2020
Feb 28 Asset disposal GJ ***43 920 Mar 1 Balance b/d 129 000
2021
GJ
Balance b/d 136 320 Feb 28 Depreciation 51 240
180 240 180 240
2021
Mar 1 Balance b/d 136 320

Depreciation

2021 Accumulated GJ 2021


Feb 28 depreciation on 51 240 Feb 28 Profit and Loss GJ 51 240
vehicles

Debtors control
2021
GJ
Feb 28 Asset disposal 53 000

Asset disposal
2021 2021 Accumulated
Feb 28 Vehicles GJ 90 000 Feb 28 depreciation on GJ ***43 920
vehicles
Profit on sale of GJ Debtors control GJ 53 000
6 920
asset
96 920 96 920

Profit on sale of assets


2021 2021
Feb 28 Profit and Loss GJ 6 920 Feb 28 Asset disposal GJ 6 920

Closing transfer

45
STEPS INVOLVED WHEN SELLING ASSETS
Steps Type of record Account debited Account credited

One Transfer cost price Asset Disposal Asset Account


Two Calculate Depreciation Depreciation Acc Depreciation
Three Transfer Accumulated Depreciation Acc Depreciation Asset Disposal
Four Record/calculate Selling price Bank/Debtors Asset Disposal
Determine loss Loss on sale Asset Disposal
Five
Determine profit Asset Disposal Profit on sale

EXAMPLE 7 – SALES DURING ACCOUNTING PERIOD

INFORMATION
The financial year of Zizzy Traders ends on 28 February 2021.

The following balances appeared on 1 March 2020:


 Equipment R40 000
 Accumulated depreciation on equipment R 11 200

On 31 August 2020 Zizzy Traders sold an old typewriter on credit to George for R1 050. The original cost
price was R2 200.
The total amount written off for depreciation at the end of the previous financial year was R800.
Depreciation is calculated at 20% per annum at cost price.

REQUIRED
 Show how the transaction will be recorded in the General Ledger
 Prepare note 3 on Tangible assets

SOLUTION – ASSET SOLD DURING THE YEAR

GENERAL LEDGER OF ZIZZY TRADERS

Equipment
2020 2021
GJ
Mar 1 Balance b/d 40 000 Feb 28 Asset disposal 2 200
Balance c/d 37 800
40 000 40 000

2021 Balance b/d 37 800


Mar 1

46
2 200 x 6/12 x 20% = 220 Remaining asset : (40 000 - 2 200) x 20% =7 560
800 + 220 = 1 020 Sold asset : 2 200 x 6/12 x 20% = 220

Accumulated depreciation on Equipment


2020 2020
Aug 31 Asset disposal GJ ***1 020 Mar 1 Balance b/d 11 200
2021 Aug Depreciation
GJ 220
Feb 28 Balance b/d 17 960 31
2021 Depreciation
GJ
Feb 28 7 560
18 980 18 980
2021
Mar 1 Balance b/d 17 960

NOTE: Depreciation is calculated at the end of the accounting period, it will only be
calculated during the year if an asset is sold .Depreciation on remaining assets will be
calculated at the end of year.

Depreciation
2021 Accumulated 2021
Feb 28 depreciation on GJ 7 780 Feb 28 Profit and Loss GJ 7 780
equipment

Debtors control
2020
Aug 31 Asset disposal GJ 1 050

Asset disposal
2020 2020 Accumulated
Aug 31 Equipment GJ 2 200 Aug 31 depreciation on GJ ***1 020
equipment
Debtors control GJ 1 050
Loss on sale of GJ 130
asset
2 200 2 200

Loss on sale of an asset


2020 2020
Profit and Loss GJ 130
Aug 31 Asset disposal GJ 130 Aug 31

47
NOTE 3 ON TANGIBLE ASSETS
Equipment
Carrying value at the beginning of the financial year 28 800
Cost 40 000
Accumulated depreciation (11 200)
Movements
Additions at cost - Cost –Acc Dep –Current
Dep
Disposals at carrying value (1 180) 2 200 -800 -220 =1 180
Depreciation (7 780)
Carrying value at the end of the financial year 19 840
Cost 37 800 40 000 - 2 200
Accumulated depreciation (17 960) 11 200 +7 780 -800-220

EXAMPLE 8 - Assets bought and sold during the year

INFORMATION

The financial year of BBB Traders ends on 28 February 2021.


The following balances appeared on 1 March 2020:
 Vehicles R312 000
 Accumulated depreciation on vehicles R104 000

TRANSACTIONS

 On 31 August 2020 BBB Traders sold an old vehicle to Zee Traders for R47 200 on credit. This vehicle
originally cost R76 000. The total amount of depreciation at the beginning of the year amounted to
R34 200.
 On 1 December 2020 a new delivery vehicle was bought for cash R200 000, the funds were transferred
electronically to the motor dealer.

NOTE: Depreciation is calculated at 20% per annum on the diminishing balance method.

REQUIRED

1.Prepare the following accounts in the General Ledger:


 Equipment Account
 Accumulated depreciation
 Asset Disposal
 Note on Tangible Assets

48
SOLUTION - Assets bought and sold during the year

Calculation for carrying value for new and remaining assets:

Total Assets Sold Asset Remaining


Assets
Cost 312 000 - 76 000 = 236 000
Acc Depreciation (104 000) - (34 200)* = (69 800)
Carrying Value 208 000 - 41 800 = 166 200

Calculate Depreciation for each category of assets :

Sold Old New


41 800 x 20% x 6/12 = 4 180* 166 200 x 20% = 33 240 200 000 x 3/12 x 20%=10 000

Total Depreciation : 4 180 + 33 240 + 10 000 = 47 420

49
GENERAL LEDGER OF BBB TRADERS

VEHICLES
2020 2021
Balance GJ
Mar 1 b/d 236 000 Feb 28 Asset disposal 76 000
2020
Balance c/d 360 000
Dec 1 Bank 200 000
436 000 436 000
2021
Mar 1 Balance b/d 360 000

Note: Each amount is recorded at cost in the Asset Account.

34 200* + 4 180* = 38 380 33 240 + 10 000


Depreciation of asset sold Remaining and new asset Depreciation of an asset
sold

Accumulated depreciation on vehicles


2021 2020
Feb 28 Asset disposal GJ **38 380 Mar 1 Balance b/d 104 000
Depreciation
Aug 31 GJ 4 180
2021
GJ
Balance b/d 113 040 Feb 28 Depreciation 43 240
151 420 151 420
2021
Mar 1 Balance b/d 113 040

NOTE: When you sell an asset you need to remove the cost price of the asset and the accumulated
depreciation from the books of the business.

Asset disposal

2020 2020 Accumulated


Aug 31 Vehicle GJ 76 000 Aug 31 depreciation on GJ *38 380
vehicle
Profit on sale of
an asset GJ 9 580 Debtors control CRJ 47 200
85 580 85 580

50
NOTE 3 ON TANGIBLE ASSETS Calculations
Vehicles
Carrying value at the beginning of the financial year 208 000
Cost 312 000
Accumulated depreciation (104 000)
Movements
Additions at cost 200 000
76 000 - 34 200 - 4 180
Disposals at carrying value (37 620) = 37 620
Depreciation (47 420) 4 180 + 33 240 + 10 000
= 47 420
Carrying value at the end of the financial year 322 960 312 000 -76 000 + 200 000
Cost 436 000 = 436 000
Accumulated depreciation (113 040) 104 000 + 47 420-34 200 – 4 180
=113 040

ACTIVITY 5

ASSETS TRADED- IN

INFORMATION

On 1 March 2020, the following balances appeared in the financial records of Norway Traders:
 Vehicles, R 264 000
 Accumulated depreciation on vehicles , R86 000
.
The following transactions took place on 1 October 2020:
 A new delivery vehicle was purchased on credit for R150 000 from Raboroko Motors.
 An old delivery vehicle was traded in at Raboroko Motors for R51 000. The original cost price of this
vehicle was R84 000, it was bought on 1 January 2018.
Note: Depreciation is calculated at 15% p.a.using the cost price.

REQUIRED
1.Complete the following Accounts in the General Ledger of Norway Traders on 28 February 2021:

o Equipment Account
o Accumulated depreciation
o Asset Disposal

51
ACTIVITY 6

TANGIBLE ASSETS

The following information was extracted from the books of Tumi Traders. Their financial year ends on 29
February 2020.
REQUIRED

6.1.1 Calculate depreciation for Vehicles and Equipment. Show all calculations. (15)
6.1.2 Complete the Asset Disposal account. (6
6.1.3 Prepare the Tangible Asset note to the financial statements on 29 February 2020. (12)
6.1.4 Provide a suitable reason for the equipment being disposed (sold). (2)

INFORMATION

A. Balances on 28 February 2019


Land and Buildings ?
Vehicles 600 000
Accumulated depreciation on vehicles 570 000
Equipment 320 000
Accumulated depreciation on equipment 65 000

B.ADDITIONAL INFORMATION

(i) On 01 July 2019 extensions of R200 000 were completed to the office
building. A further R10 000 was spent to repair a leaking roof in the store
room. An amount of R210 000 has been transferred electronically to Rapid Builders.
The amounts have been debited to the repairs account.

(ii) An extra vehicle costing R180 000 was bought on 30 April 2019.

(iii) On 01 September 2019, equipment which was bought on 30 November 2017,


with an original cost price of R40 000, was traded in at profit of R3 400
against a new equipment bought on credit for R 90 000. The transactions have not
been entered in the accounting records of the business.

(vi) Depreciation on Fixed Assets must be provided for as follows:


 Vehicles: at 15% p.a. on cost.
 Equipment: at 20% p.a. on the diminishing balance method.

52
Management of Tangible Assets

 Purchases of assets should be authorised by management


 An internal auditor must ensure that proper records and documentation relating to fixed assets are in
place.
 All fixed assets should be recorded in a Fixed Asset Register.
 Receipts /invoices should be proof of purchase for insurance and external audit purpose
 Fixed assets purchased must be labelled / bar coded or a serial number given for identification and asset
verification.
 Regular stock taking of assets and comparing against the asset register
 Signing in and out of assets to track where they are and who used them
 The movement of assets must be recorded in a log book, e.g. vehicles
 All fixed assets must be insured against fire, theft, etc.

53
4. PARTNERSHIP: LEDGER ACCOUNTS

FORMS OF OWNERSHIP

Forms of
ownership

Sole Close-
Partnership Company
proprietorship corporation

Public Private

Forms of ownership
It is the simplest form of ownership that is owned by one person. It is suitable for
Sole proprietorship businesses that require little capital and can be managed by one person,
/Trader examples are coffee shop, bakery, printers etc.
Partnership It is a legal agreement between two or more persons not exceeding twenty, in a
commercial or professional environment whereby skills, assets are combined with
the aim of earning and sharing profit or losses.
Public company Is formed by an association of people with a common profit motive, It has a legal
status and it is formed by shareholders not fewer than seven.
Private company Is formed by an association of people with a common profit motive, It has a legal
status and it is formed by one or more shareholders not exceeding fifty.
Close corporation It is a simple and inexpensive form of business that has a legal status .It is
suitable for one or more entrepreneurs but not exceeding ten members.

Reasons for converting Sole proprietorship to Partnership

 The sole proprietorship may become too big for one person to manage or handle.
 More capital can be needed and a new partner may provide such capital.
 Additional skills and expertise may be required.
 The costs of the sole trader will be reduced or shared with the partner.
 Expand the business and maximise profits.

Partnership Agreement

Is the contract between the partners. The partnership agreement can be verbal or in writing. The written
agreement is preferable in order to prevent any future differences of opinion between the partners.

54
The following information is contained in the partnership agreement:
 The name of the business and the names of partners.
 The nature and objective of the business, e.g. a product or service to be provided.
 The amount and type of capital contributed by the business.
 Will stipulate the amount of drawings which can be taken by each partner.
 The ratio or manner in which profits and losses are shared between the partners.
 The right of the partner to a salary, bonus, commission, interest on capital contributed, and the amounts
payable in respect of these expenses.
 Admission of new partners or withdrawal, retirement or death of existing partner.
 Whether the financial statements of the partnership will require an audit.
 Control or authority each partner has (managerial status )
 Internal control measures such as safeguarding of assets.

NOTE : When forming a partnership its preferable to get a lawyer to draw up a contract or
partnership agreement

Legal status of a partnership


Legally a partnership agreement binds the partners, but a partnership is not a legal person. It cannot sue or
be sued, only the partners will be sued.

Advantages and disadvantages of sole trader and partnership

Sole proprietorship
Advantages Disadvantages

 It is easy and inexpensive to set up.  The owner has unlimited liability, he is
 The owner is entitled to all the profits. responsible for all the debts of the business.
 The owner makes decisions concerning the  Their capital and assets is usually limited, they
business. can’t borrow large sums of money from the
 The owner has personal interest in the business. banks or other lenders.
 It lacks continuity, normally when the owner
dies or declared insolvent the business
dissolves.
 It’s difficult to attract competent employees
because prospects for promotion or personal
growth are restricted or limited.

55
Partnership

Advantages Disadvantages

 Easy and inexpensive to establish.  The partners have unlimited liability to their
 Partners may possess specific assets and capital contributions.
expertise that can be used to the benefit the  It lacks continuity, in the event of death,
business. resignation, insolvency of a partner the
 Responsibilities are spread among two or more partnership is dissolved.
partners.  Disagreements may have the effect of
 The business risks are shared, that increases the delaying the decision-making.
security for partners.  The partnership has greater capacity to
expand but the contributions are limited to the
funds that can be raised by each partner.
 All partners are bound by contracts entered
into by one partner, an incapable partner can
cause financial loss to the business.

Salaries to partners

Salaries to partners – one or more partners might be required to work more hours for the business
because of certain skills or expertise they possess. The partnership agreement will make a provision for the
salary allowance to one or more partners rendering services to the business.

Different services provided by partners

Lawyer

A partner who has a legal background can assist with drawing up and interpretation of business of contracts
,the services of lawyer will also be needed to draw up the partnership agreement.The lawyer may not
provide legal services daily ,therefore he will get a service fee.In a law firm type of partnership he will get a
salary.

Accountant

The financial expert will assist the business with financial records, advice the business on internal control
systems. The accountant is expected to provide continuous service, and will qualify for a salary allowance.

Always keep in mind that: Other partners will only contribute their capital towards the business and they
are called anonymous or sleeping partners.

Payments of monthly salaries


The cash withdrawals by partners and their monthly salaries will be debited to the partners drawings
account, and the bank account will be credited. The salary account of the partner is only created at the end
of the accounting period.

56
EXAMPLE 1
KWA- MANINGI STORES
The following information is extracted from the financial records of Kwa-Maningi stores the partners are
K.Kubheka and S.Sibanda, the end of the financial year is 28 February 2021.

REQUIRED
 Open the accounts in the General ledger
 Journalise the year –end adjustments and post to the General ledger
 Journalise the closing entries and post to the General ledger
[No need to balance the Capital account]

Information from General Ledger of Kwa-Maningi Stores on 28 February 2021


Capital: Kubheka 100 000
Capital: Sibanda 50 000
Current account: Kubheka (01 March 2020) Cr 5 500
Current account : Sibanda (01 March 2020) Cr 2 600
Drawings :Kubheka 30 000
Drawings :Sibanda 28 000

The net profit for the year amounts to R120 000.

The partnership agreement stipulates the following:


1. Salary allowance to Kubheka amounts to R42 000.
2. Salary allowance to Sibanda amounts to R21 000.
3. Profits and losses are to be shared between Kubheka and Sibanda in the ratio 2:1

EXPECTED SOLUTION

GENERAL JOURNAL OF KWA-MANINGI STORES: FEBRUARY 2021


Doc Date Details Fol Debit Credit
V1 28 Salary :Kubheka N7 42 000
Current account: Kubheka B5 42 000
Salary due according to partnership agreement
V2 Salary :Sibanda N8 21 000
Current account: Sibanda B6 21 000
Salary due according to partnership agreement
Closing transfers
Appropriation F3 63 000
Salary account :Kubheka N7 42 000
Salary account :Sibanda N8 21 000
Transfer of salaries

57
GENERAL JOURNAL OF KWA-MANINGI STORES: FEBRUARY 2021

Doc Date Details Fol Debit Credit


Appropriation F3 57 000
Current account :Kubheka B5 *38 000
Current account :Sibanda B6 *19 000
Transfer income in profit sharing ratio
Profit and loss account F2 120 000
Appropriation account F3 120 000
Net profit transferred to Appropriation account
Current account: Kubheka B5 30 000
Drawings :Kubheka B3 30 000
Transfer of drawings to current account
Current account: Sibanda B6 28 000
Drawings :Sibanda B4 28 000
Transfer of drawings to current account
*Calculation for remaining profit :
120 000 – 42 000- 21 000 = 57 000
Kubheka :57 000 x 2/3 = 38 000 Sibanda :57 000 x 1/3 = 19 000

GENERAL LEDGER OF KWA-MANINGI STORES


BALANCE ACCOUNTS SECTION

Dr CAPITAL : KUBHEKA B1 Cr
2020 01 Balance b/d 100 000
March

Dr CAPITAL : SIBANDA B2 Cr
2020 01 Balance b/d 50 000
March

NOTE: There were no changes to capital contributed during the accounting period.

58
Dr DRAWINGS ACCOUNT : KUBHEKA B3 Cr
2021 28 Balance b/d 30 000 2021 28 Current a/c : GJ 30 000
Feb Feb Kubheka

Dr DRAWINGS ACCOUNT : SIBANDA B4 Cr


2021 28 Balance b/d 28 000 2021 28 Current a/c : GJ 28 000
Feb Feb Kubheka

Dr CURRENT ACCOUNT : KUBHEKA B5 Cr


2021 Drawings: Kubheka GJ 30 000 2020 01 Balance b/d 5 500
Feb 28 March
Balance c/d 55 500 2021 28 Salary :Kubheka GJ 42 000
Feb
Appropriation GJ 38 000
85 500 85 500
2020 01 Balance c/d 55 500
March

Dr CURRENT ACCOUNT : SIBANDA B6 Cr


2021 28 Drawings: Sibanda GJ 28 000 2020 01 Balance b/d 2 600
Feb March
Balance c/d 14 600 2021 28 Salary :Sibanda GJ 21 000
Feb
Appropriation GJ 19 000
42 600 42 600
2021 01 Balance c/d 14 600
March

Interest on Capital

 It is compensation to partners for capital contributed to the partnership.


 Provision made for the interest on capital should be made according to the partnership agreement.
 The interest on Capital is not classified as an operating expense, it is an appropriation of the profit.
 The provision for interest on capital will be made even if the business can run at a loss.

59
EXAMPLE 2
The financial year of Kwa-Maningi stores ends on 31 December 2020.The rate of interest is 12% p.a.

REQUIRED
 Calculate the interest on capital for partners Joe and Sam and record in the General Journal.

INFORMATION
Capital: Joe (01January 2020) 150 000
Capital: Sam (01January 2020) 100 000

EXPECTED ANSWER

Calculation of interest on capital


Joe Sam
150 000 X12% = 18 000 100 000 x 12% = 12 000

GENERAL JOURNAL OF KWA-MANINGI STORES: 31 DECEMBER 2020


Doc Date Details fol Debit Credit
V1 31 Interest on Capital N9 18 000
Current account: Joe B5 18 000
Current account: Sam B6 12 000
Provision for interest on capital at 12% p.a.
Appropriation F3 30 000
Interest on Capital N9 30 000
Closing transfer

Bonus to partners

Bonus is an extra payment made to the employee by the management usually as:
 Reward for outstanding/good work
 Compensation for something (Dangerous work)
 Share out profits of a good year’s trading
 Improve in the skills by employees – improve service delivery.
 The business can give a bonus to the employee who rendered the service that will save money to the
business.

 Partners can receive a bonus for good services rendered to the partnership in addition to their share of
the profit.
 Bonuses are not regarded as operating expenses, but they are distribution from the profits.
 Bonuses to partners should be stipulated in the partnership agreement.

60
Calculation of Bonuses

The following methods are applied when the bonus is calculated :


 Expressed as a percentage of the net profit.
 A fixed amount.
 A percentage of salaries of partners.

EXAMPLE 3

The following information is extracted from the financial records of ABC Traders with partners A.Sekele and
N.Mbatha on 29 February 2020, the end of the financial year.
REQUIRED
1. Draw up the following accounts in the general ledger, balance and close them off properly:
 Current Account: A.Sekele
 Current Account: N.Mbatha
 Appropriation Account
2. Prepare note 7 and note 8

Information from General Ledger of ABC Traders on 29 February 2020


Capital: A. Sekele 300 000
Capital: N.Mbatha 200 000
Current account: A. Sekele (01 March 2019) Dr 9 500
Current account: N. Mbatha (01 March 2019) Cr 12 000
Drawings: A. Sekele 60 000
Drawings: N. Mbatha 70 000

The net profit for the year amounts to 190 500.

The partnership agreement stipulates the following:


4. Salary allowance to A.Sekele amounts to R45 000 p.a.
5. Salary allowance to N.Mbatha amounts to R45 000 p.a.
6. Both partners are entitled to a bonus of 90% of their monthly salaries.
7. The interest on capital amounts to 12 % p.a.
8. Profits and losses are to be shared between A.Sekele and N.Mbatha in the ratio 2

61
EXPECTED ANSWER

GENERAL LEDGER OF ABC STORES


BALANCE SHEET SECTION

Dr CURRENT ACCOUNT: SEKELE B6 Cr


2019 01 Balance b/d 9 500 2020 29 Salary: Sekele GJ 45 000
March Feb
2020 29 Drawings a/c: GJ 60 000 Bonus: Sekele GJ 3 375
Feb Sekele [45 000 ÷ 12] x 90%
Balance c/d 37 375 Interest on capital GJ 36 000
Appropriation GJ 22 500
106 875 106 875
2020 01 Balance c/d 37 375
March

Dr CURRENT ACCOUNT: MBATHA B5 Cr


2020 Drawings: Mbatha GJ 70 000 2019 01 Balance b/d 12 000
Feb 29 March
Balance c/d 25 625 2020 29 Salary: Mbatha GJ 45 000
Feb
Interest on capital GJ 24 000
Bonus: Mbatha
[45 000 ÷ 12] x 90% GJ 3 375
Appropriation GJ 11 250
95 625 95 625
2020 01 Balance c/d 25 625
March

FINAL ACCOUNTS SECTION

Dr APPROPRIATION ACCOUNT F3 Cr
2020 2020
Feb 29 Salary: Sekele GJ 45 000 Feb 29 Profit and loss GJ 190 500
GJ
Salary: Mbatha 45 000
Bonus: Sekele GJ 3 375
Bonus: Mbatha GJ 3 375
Interest on capital 60 000
[24 000+ 36 000] GJ
Current a/c: Sekele GJ 22 500
Current a/c: GJ 11 250
Mbatha
190 500 190 500

62
CALCULATIONS
Sharing of profits
190 500 – 45 000 - 45 000 - 3 375- 3 375 -24 000-36 000 = 33 750
Share the remaining profit
Sekele Mbatha
(33 750 x 2) ÷ 3 (33 750 x 1) ÷ 3
= 22 500 11 250

Primary distribution

Salary Interest on capital Bonus

NOTES TO THE BALANCE SHEET ON 29 FEBRUARY 2020


R R R
7.Capital Accounts Sekele Mbatha Total
Balance on 01 March 2019 300 000 200 000 500 000
Contribution of capital during the financial year xxxx xxxx xxxx
Withdrawal of capital during the year (xxxx) (xxxx) (xxxx)
Balance at 29 February 2020 300 000 200 000 500 000

8.Current Accounts Sekele Mbatha Total


Appropriation of net profit
Salaries 45 000 45 000 90 000
Interest on capital 36 000 24 000 60 000
Bonus 3 375 3 375 6 750
Primary division of profits 84 375 72 375 156 750
Final division of profits 22 500 11 250 33 750
Profit per income statement 106 875 83 625 190 500
Drawings during the year (60 000) (70 000) (130 000)
Retained income for the year 46 875 13 625 60 500
Balance on 01 March 2019 (9 500) 12 000 2 500
Balance at 29 February 2020 37 375 25 625 63 000

Final distribution of profit: R33 750

Sekele: R22 500 Mbatha: R11 250

63
ACTIVITY 1
REXEL STORES

The following balances /totals appeared in the books of Rexel Stores on 29 February 2020, the end of the
financial year. The partners are Alex and Rex.

REQUIRED

1. Draw up the following accounts in the general ledger, balance and close them off properly:
 Current Account: Alex
 Current Account: Rex
 Appropriation Account

2. Prepare note 7 and note 8

All the calculations must be converted to the nearest rand.

INFORMATION A:
Information from General Ledger of Rexel Stores on 29 February 2020
Alex Rex
Capital (01 March 2019) 160 000 100 000
Current account: (01 March 2019) Cr 7 000 Cr 6 500
Drawings 250 800 157 500
Profit and loss 427 000

INFORMATION B:
No entries have been made for the following transactions:
 Rex registered his personal Van worth R40 000 in the same partnership on
01 September and requested that this be regarded as an additional contribution. His partner Alex
agreed.
 A salary cheque of R14 000 for February 2020 issued to Rex was erroneously posted into the
Drawings account of Alex.

INFORMATION C:
The partnership agreement stipulates the following:
 The partners are entitled to the monthly salaries, Alex R14 500, and Rex R14 000.The salary of Alex
was increased by R60 000 per annum on 01 December 2019.
 The interest on capital must be provided for at 15% p.a.
 The balance of the profit and loss is to be shared in proportion to capital balances on 29 February
2020

64
ACTIVITY 2

SG TRADERS

You are provided with the information relating to SG Traders. The partners are Grey and Simon.
REQUIRED
1. Calculate the correct Net Profit
2. Prepare the following accounts in the ledger for the financial year ended 28 February 2021.
 Current Account: Grey
 Current Account: Simon
 Appropriation Account

INFORMATION
1. The following balances appeared in the Ledger on 28 February 2021
 Capital : Grey ,R500 000
 Capital : Simon ,R300 000
 Current Account : Grey (on 01 March 2020) R22 000 (favourable)
 Current Account : Simon (on 01 March 2020) R14 000 (unfavourable)
 Drawings :Grey (R110 000)
 Drawings :Simon (R100 000)
 Equipment R150 000
 Accumulated depreciation on equipment (on 01 March 2020),R65 000

2. The bookkeeper calculated the net profit to be R420 000, but the following adjustments had
not been recorded.
 Bank charges per the February 2021 bank statements,R800
 Interest on fixed deposit per February statement,R1 300
 Depreciation of equipment at 10% on the diminishing balance method.
 Trading stock taken by partner Grey on 28 February 2020, the selling price was R2 400 and the cost
price was R1 800.

3. The partnership agreement provides the following:


 Salary to Grey ,R11 000 per month
 Salary to Simon ,R10 000 per month
 Interest on capital at 10% p.a., Simon had increased his capital by R80 000 half way through the
financial year, this has not been recorded.
 The remaining profits are to be shared between Grey and Simon in the ratio 3:2

65
GAAP CONCEPTS
GAAP – Accounting principles that businesses should follow when preparing the financial statements and
financial information. The purpose is to provide accurate information to the users of the Financial
statements.
CONCEPT EXPLANATION

Going Concern The concept is based on the assumption that the business will continue to
operate in the foreseeable future. The financial statements assume no intention
to liquidate or close the business.

Matching or Accrual Income earned during a particular financial period and expenses incurred in
concept generating the income, must be brought into account (matched) during the
specific financial period when they occur not when the cash for the transaction
is paid or received.

Prudence Losses must be provided for as soon as they are


anticipated, but profits are not recognised until they are realised. In simple
words, it is safer to understate than to overstate profits. An accountant must
report in the most pessimistic or conservative manner.

Historic cost The concept covers the valuation of tangible assets that have been purchased or
acquired by the business. The tangible assets are to be valued at historical cost,
i.e. the amount paid on acquisition.

Materiality Financial statements should disclose all items that are material or important
enough to affect evaluation or decisions.

Business entity The financial affairs of a business must be kept separate from the financial
affairs of the affairs of the owners.

66
ACTIVITY 3: GAAP CONCEPTS

Indicate the GAAP concepts applicable to the following statements

STATEMENT CONCEPT
A. Interest on overdraft is shown as a separate amount in
the Income Statement.

B. The lotto ticket of partner Mr.Manzini wins


R100 000.This is not reflected in the Income Statement.

C. The damages payable to a client will be finalised next


year, an estimated amount of R10 000is recorded this
year.

D. The trading stock is shown in the Balance sheet at


R20 000, even though the business will get R17 000 if
the business was to sell the stock at the flea market the
following day.

E. Land and buildings are shown in the Balance sheet as


R300 000 even though the estate agent say they could
be sold for R750 000.

F. Whenever the debtor settles an account the discounts


should be recorded at the same time.

67
ACTIVITY 4

The information given below is extracted from the books of Simunye Traders, a partnership business with
Neo and Rocks as partners. The financial period ends on the last day of February each year.

Balances / totals on 29 February 2020


Capital: Neo R208 000
Capital: Rocks 184 000
Current account: Neo (01 March 2019) (Cr) 2 500
Current account: Rocks (01 March 2019) (Dr)11 200
Drawings: Neo 87 500
Drawings: Rocks 91 000

The net profit for the year, before the transactions below have been taken into account, amounted to
R208 000.

The following entries must still be taken into account:


 Neo made cash contribution on 29 February 2020, the proportion of his capital balance to Rocks is 3:2
after the contribution. No entry was made for this transaction in the books. The capital contribution of
Rocks remains unchanged.
 Rocks returned the merchandise which was unsuitable for his personal use, before the stocktaking was
completed, the cost price is R500.The records were not updated on goods returned.
 The salary of 6 500 paid to Neo for February 2020 was posted to the salaries and wages account by
mistake and treated as a business expense. The error must be corrected.

The partnership agreement provides for the following:


A. Each partner is entitled to the salary of R6 500 per month.
B. Interest on capital balances at the beginning of the financial year amounts to 8% p.a. On
01 December 2019 the partners increased the interest on capital to 12 % p.a.
C. The remaining profits and losses must be shared in proportion to their capital balances at the beginning
of the year.

68
YEAR –END AJUSTMENTS AND FINAL ACCOUNTS

REQUIRED
Use the information extracted from the records of Ngwenya Traders to prepare the following :
 Journal entries of adjustments and post to the General ledger
 Trading Account and Profit and Loss Account

EXTRACT FROM TRIAL BALANCE - 30 JUNE 2021


Balance Sheet Accounts Section Debit Credit
Trading stock 75 000
Creditors control 10 100
South African Revenue Services:(PAYE)
Creditors for salaries
Pension fund
Medical Aid Fund
Nominal Accounts Section
Sales 540 000
Debtors allowances 8 000
Cost of sales 310 000
Salaries 80 000
Wages 35 000
Pension Fund contribution 4 000
Medical Fund contribution 2 700
Packing material 1 000
Insurance 1 600
Bank charges 5 300

GRADE 10 ADJUSTMENTS

1. The claim for the stolen stock of R6 000 has been submitted to PIX Insurance, they have agreed
to pay R4 500.
2. Trading stock according to stock taking, R68 500.
3. An employee was left out of the salaries Journal, his salary amounts to R7 000 and the deductions
are provided below:

Deductions
PAYE deduction (R1 000)
Pension deduction (R450)
Medical aid (R400)

The owner contributed to the medical fund and pension fund Rand for Rand basis.
4. Packing material on hand amounted to R300.

69
SOLUTION

Adjustment General ledger


Insurance claim
General journal Debit Credit Trading Stock B
The claim for the stolen stock is R6 000 , Loss on stock 1 500
Bal b/d 75 000
PIX Insurance, agreed Loss on stock stolen 1 500
to pay R4 500. Trading stock 1 500 Insurance claim 4 500

Insurance claim 4 500


Insurance claim B
Trading stock 4 500
Trading stock 4 500
 Stock loss is an expense
 Stock claimed but not paid by the insurance Loss to stolen stock N
is an asset, the amount will be recorded in Trading stock 1 500 Profit and loss 1 500
the Balance Sheet

Adjustment General ledger


Trading stock deficit:
General journal Debit Credit Trading stock B
Trading stock according to Loss on stock 1 500
Bal b/d 75 000
stock taking, R68 500. Tr. stock deficit 500 Insurance claim 4 500
Trading stock 500 T.stock deficit 500
Bal c/d 68 500
75 00
75 000

Trading stock deficit N


Trading stock 500 Profit and loss 500

70
Adjustment General ledger
Consumable stores on
General journal Debit Credit Consumable stores on hand B
hand:
Packing material, R300 Packing material 300
Cons. stores on hand 300
Packing material 300
Packing material N
Consumable stores on hand 300
Total 1 000
Profit and loss 700
1 000

Salaries 87 000  R7 000 will increase the expenses and will be recorded in
[80 000 + 7 000] the Income statement.
Pension contribution 4 450  R450 contributed by the owner is regarded as an expense
[4 000 +450]  The amount deducted from the employee will be recorded
under trade and other payables as Pension Fund.
Medical contribution 3 100  R400 contributed by the owner is regarded as an expense
[2 700 + 400]  The amount deducted from the employee will be recorded
under trade and other payables as Medical Aid Fund.
NOTE :PAYE (Pay as you earn) will be recorded under trade and other payables note as SARS-PAYE

71
GENERAL LEDGER OF NGWENYA TRADERS: 30 JUNE 2021

Dr TRADING ACCOUNT F1 Cr
2021 30 Cost of sales GJ 310 000 2021 30 Sales GJ 532 000
June June [540 000 – 8 000]
Profit and Loss GJ 222 000
532 000 532 000

Dr PROFIT AND LOSS ACCOUNT F2 Cr


2021 30 Stock stolen GJ 1 500 2021 30 Trading Account GJ 222 000
June [Check ledger a/c] June
Trading stock deficit GJ 500
[Check ledger a/c]
Stock stolen GJ 1 500
[Check ledger a/c]
Salaries GJ 87 000
[80 000 + 7 000]
Pension GJ 4 450
contribution
[4 000 +450]
Medical contribution GJ 3 100
[2 700 + 400]
Packing material GJ 700
[1 000 -300]
Partnership Appropriation a/c GJ xxxx
Sole trader Capital Account
xxxxx xxxxx

Dr APPROPRIATION ACCOUNT F3 Cr
2021 30 Profit and loss GJ xxxx
June

72
CAPITALISED INTEREST ON LOAN
REQUIRED
Use the loan statement provided to calculate the interest on loan in the books of Rexel Traders on 30 June
2021

YARONA BANK
Loan statement on 30 June 2021
Balance on 1 July 2020 R120 000
Interest charged ?
This is a negative
Total payments to Yarona in terms of the loan agreement R40 000 figure
Balance on 30 June 2021 R110 000

EXPECTED SOLUTION

GENERAL LEDGER OF REXEL TRADERS

Balance Sheet Accounts Section

Dr LOAN : YARONA BANK B6 Cr


2021 30 Bank step 2 40 000 2020 01 Balance step 1 b/d 120 000
June CPJ Jul
Balance step 3 c/d 110 000 Interest on loan step 5 GJ 30 000
step 4 150 000 150 000
2021 01 Balance step 3 b/d 110 000
Jul

(110 000 + 40 000) – 120 000 = 30 000 Bottom up calculation

Note: 40 000 for repayments is a negative figure or bracketed, it indicates payment. When you apply
the Bottom up calculations the negative sign for 40 000 will be positive and 120 000 will be a negative
figure.
Nominal Accounts Section

Dr INTEREST ON LOAN N13 Cr


2021 30 Loan:Mzansi bank GJ 30 000 2021 30 Profit and loss GJ 30 000
June June

EFFECT OF INTEREST ON THE ACCOUNTING EQUATION

Account Debited Account credited Assets Owner’s Equity Liabilities

Interest on loan Loan:Yarona Bank 0 - 30 000 + 30 000

73
5. PARTNERSHIP: FINANCIAL STATEMENTS AND NOTES

In Grade 10 you have lready been introduced to the financial statements of the sole trader namely Income
statement (Statement of comprehensive income)and Balance sheet (statement of financial position)

Income statement –It is the financial statement that shows the income and expenditure of the business. It
indicates if the business has made a profit or loss during the financial period.

Balance sheet - The Balance Sheet is a Financial Statement that is usually prepared at the end of an
accounting period (a financial year) to show the financial position of a business in terms of its assets, liabilities
and equity.

The Components of the Balance Sheet are listed below:


 Assets
 Liabilities
 Equity
Preparing of balance sheet of a sole trader and partnership is the same but the difference is the Equity
Section.

Sole trader Partnership

Grade 10 Grade 11

Owner’ Equity 100 000 Partners’ Equity 200 000


Capital 7 100 000 Capital 7 100 000
Current Account 8 100 000

74
FORMATS OF FINANCIAL STATEMENTS
A. INCOME STATEMENT (STATEMENT OF COMPREHENSIVE INCOME) FOR 30 JUNE 2021
Note
Sales xxx
xxx
Cost of sales
Gross Profit xxxx
Other Operating Income xxxx
Rent Income xxx
New adjustment-loss incurred when asset is sold xxx
Profit on sale of an asset ABOVE the carrying value
xxx
Discount received
New adjustment, it can also entered under
Provision for bad debts adjustment expenses. xxx
Gross Operating income xxxx
Operating Expenses (xxxx)
xxx
Trading stock deficit
New adjustment-loss incurred when asset is sold
Loss on sale of an asset BELOW the carrying value
Salaries xxx
Contributions made by the owner will affect expenses, xxx
Pension fund contribution the business can alternatively use one account to record
contributions called “employer’s contribution account”. xxx
Medical aid contribution The employer can also contribute towards UIF**
xxx
Packing material
xxx
Bad debts
xxx
And other expenses

Operating Profit xxxx


Interest Income 1 xxx
Profit Before Interest Expense xxxx
Interest Expense 2 (xxx)

Net Profit for the year 8 xxxx

NOTE: the format of the sole trader and partnership is the same, the only difference is that all the
expenses and income to partners are entered in the appropriation account and their personal
accounts.

UIF** – Unemployment Insurance Fund

75
FORMAT OF BALANCE SHEET

RAVE STORES:PARTNERSHIP
BALANCE SHEET (STATEMENT OF FINANCIAL POSITION) ON 30 JUNE 2021
Note
ASSETS
Non-current assets xxxx
Tangible/Fixed assets 3 xxx
Financial Assets - Fixed Deposit xxx

Current assets xxxx


Inventories 4
xxx
Trade and other receivables 5
xxx
Cash and cash equivalents 6
xxx
Total assets
xxxx
EQUITY AND LIABILITIES

Capital and Reserves /Owners’ Equity


Capital 7 xxxx
Current Accounts 8 xxx
xxx
Non-current liabilities NEW ACCOUNTS
Mortgage loan xxxx
xxx
Current liabilities
Trade and other payables 9
Bank overdraft (if applicable) xxxx
xxx
Total Equity and Liabilities xxx

xxxx

NGWENYA TRADERS :SOLETRADER


EXTRACT OF BALANCE SHEET (STATEMENT OF FINANCIAL POSITION) ON 30 JUNE 2021

EQUITY AND LIABILITIES The difference is equity


Owners’ Equity section only

NOTE: The relationship between BASIC Accounting Equation (A = OE + L) and the Balance Sheet is that
Assets is equal to Equity plus Liabilities.

76
EXAMPLE
SUPA STORES
You are provided with the Pre-Adjustment trial balance of Supa Stores, a partnership with Chauke and Nkosi
as partners.
REQUIRED

Prepare the following :


 Income Statement
 Balance Sheet
 Notes to Financial Statements

INFORMATION

PRE- ADJUSTMENT OF SUPA STORES TRIAL BALANCE ON 28 FEBRUARY 2021


BALANCE SHEET ACCOUNTS SECTION DEBIT CREDIT
Capital : Chauke B1 600 000
Capital : Nkosi B2 300 000
Current A/c : Chauke B3 24 000
Current A/c : Nkosi B4 33 000
Drawings :Chauke B5 91 000
Drawings :Nkosi B6 109 000
Loan from Mzansi Bank B7 240 000
Land and buildings B8 820 000
Equipment (at cost) B9 80 000
Accumulated depreciation on equipment B10 30 000
Fixed Deposit :Mzansi Bank B11 80 800
Savings account B12 13 000
Trading stock B13 209 000
Debtors control B14 20 000
Provision for bad debts B15 1 400
Bank B16 5 600
Cash float B17 1 000
Creditors control B18 25 100
NOMINAL ACCOUNTS SECTION
Sales N1 935 000
Debtors allowances N2 5 000
Cost of sales N3 550 000
Salaries and wages N4 218 000
Fee income (for services rendered) N5 92 000
Advertising N6 15 000
Interest on fixed deposit N7 3 800
Interest on current bank account N8 700
Commission income N9 36 200
Insurance N10 7 000
Bad debts N11 2 400
Interest on loan N12 28 800
Consumable stores N13 4 800
Sundry expenses N14 12 800
2297 200 2297 200
INFORMATION

77
ADJUSTMENTS AND ADDITIONAL INFORMATION

1. The following amounts are owed at year-end: Advertising R200; Sundry expenses R350.
2. Interest on fixed deposit has not been received, R300.
3. Three quarters of the fixed deposit will mature in June 2021.
4. Consumable stores on hand at year-end ,R800
5. The following amounts were prepaid at year –end: Insurance R400, Wages R650.
6. Commission owed to the business at year–end ,R1 400
7. Trading stock counted physically at the end of the year, R205 000.
8. The partners bought the computer on 01 September 2020, for R10 000.The transaction was properly
recorded.
9. Provide for depreciation on equipment at 10% p.a.
10. The provision for bad is adjusted to 5% of debtors.
11. Each partner increased his capital contribution by R10 000 at the end of the year.
(This entry has been recorded)
12. The partnership agreement stipulates the following:
 Salary of R60 000 per year to Chauke and Nkosi
 Bonus of R10 000 to Nkosi
 Interest on capital at 8% p.a.
 Remaining profits to be in the ratio 2:1 between Chauke and Nkosi

78
SUPA STORES
INCOME STATEMENT FOR 28 FEBRUARY 2021
Note
Sales (935 000- 5 000) 930 000
(550 000)
Cost of sales
Gross Profit 380 000
Other Operating Income 130 000
Commission Income (36 200 + 1 400) 37 600
400
Provision for bad debts adjustment *(1 400 -1 000)
92 000
Fee income
Gross Operating income 510 000
Operating Expenses (270 200)
15 200
Advertising (15 00 +200 )
13 150
Sundry expenses (12 800 +350)
4 000
Consumable stores (4 800 -800)
6 600
Insurance (7 000 -400)
217 350
Salaries and wages (218 000 - 650)
4 000
Trading stock deficit (209 000 - 205 000)
7 500
Depreciation (70 000 x10%) + (10 000 x 6/12 x10%) 7 000 + 500
Bad debts 2 400

Operating Profit 239 800


Interest Income (3 800 + 300 +700) 1 4 800
Profit Before Interest Expense 244 600
Interest Expense 2 (28 800)
Net Profit for the year 8 215 800

PROVISION FOR BAD DEBTS


20 000 x5% = 1 000

NOTE : our provision for this year is R1 000 and in the previous year it amounted to R1 400
the difference of R400 will increase our income.
 In the Note for trade and other receivables R1 000 (ACTUAL PROVISION) will reduce debtors control
 When calculating the provision for bad debts always take into account all the year-end adjustments
affecting the Debtors and the approach below is recommended:
o Debtors Control LESS bad debts less returns LESS discount that was omitted etc.
 The net amount will be multiplied by the percentage provided to get provision.

79
NOTES TO THE FINANCIAL STATEMENTS
1 Interest income
Interest on fixed deposit [3 800 + 300] 4 100
Interest on current account 700
4 800

2 Interest Expense /Finance cost


Interest on loan 28 800

NOTE 3
Land and
TANGIBLE ASSETS Buildings Equipment Total
Carrying Value ( beginning of the year) 820 000 40 000 860 000
Cost 820 000 70 000 890 000

Accumulated Depreciation (30 000) (30 000)


Movements - 2 500 2 500
Additions at Cost - 10 000 10 000
Disposal at Carrying Value - - -
Depreciation for the year - (7 500) (7 500)
Carrying Value (end of the year) 820 000 42 500 862 500
Cost 820 000 80 000 900 000
Accumulated Depreciation - (37 500) (37 500)

4 Inventories
Trading stock The stock on hand is recorded in the note. The 205 000
Consumable stores on hand consumable stores used are recorded in the I/S and 800
the stock sold is recorded in the I/S at cost.
205 800

5 Trade and other receivables


Net trade debtors 19 000
Trade debtors 20 000
Provision for bad debts (1 000)
Income receivable or accrued (1 400 + 300) 1 700
Expenses prepaid (400 + 650) 1 050
21 750

6 Cash and cash equivalents


Fixed Deposits (maturing within 12 months) [80 800 x 3 / 4] 60 600
Savings accounts 13 000
Bank 5 600
Cash float 1 000
80 200

80
7.Capital Accounts Chauke Nkosi
Balance at the beginning of the year 590 000 290 000 880 000
Contribution of capital during the financial year 10 000 10 000 20000
Withdrawal of capital during the year - - -
Balance at the end of the year 600 000 300 000 900 000

8.Current Accounts Chauke Nkosi


Appropriation of net profit
Salaries 60 000 60 000 120 000
Interest on capital Opening balances used to 47 200 23 200 70 400
calculate interest.
Bonus - 10 000 10 000
Primary division of profits 107 200 93 200 200 400
Final division of profits 10 267 5 133 15 400
Profit per income statement 117 467 98 333 215 800
Drawings during the year (91 000) (109 000) 200 000
Retained income /loss for the year 26 467 (10 667) 15 800
Balance at the beginning of the year (24 000) 33 000 9 000
Balance at the end of the year 2 467 22 333 24 800

9 Trade and other payables


Trade creditors 25 100
Expenses payable / accrued (200+350) 550
25 650

81
SUPA STORES
BALANCE SHEET ON 28 FEBRUARY 2021
Note
ASSETS
Non-current assets 882 700
Tangible/Fixed assets 3 862 500
Financial Assets - Fixed Deposit :Mzansi bank [80 800 x 1/4] 20 200

Current assets 307 750


Inventories 4
205 800
Trade and other receivables 5
6 21 750
Cash and cash equivalents
80 200
Total assets
1190 450
EQUITY AND LIABILITIES

Capital and Reserves /Owners’ Equity


Capital 7 924 800
Current Accounts 8 900 000
24 800
Non-current liabilities
Loan:Mzansi Bank 240 000
240 000
Current liabilities
Trade and other payables 9
25 650
25 650
Total Equity and Liabilities

1190 450

82
ACTIVITY 1
You are provided with the Pre-Adjustment trial balance of Jozi Tiles, a partnership with Mogashoa and
Mokotedi as partners.

REQUIRED
1. Prepare the Income Statement
2. Notes to the Financial statements (refer to the work sheet)
INFORMATION
JOZI TILES
PRE- ADJUSTMENT TRIAL BALANCE ON 28 FEBRUARY 2021
BALANCE SHEET ACCOUNTS SECTION DEBIT CREDIT
Capital :Mogashoa B1 600 000
Capital : Mokotedi B2 400 000
Current A/c : Mogashoa B3 41 000
Current A/c : Mokotedi B4 50 000
Drawings : Mogashoa B5 185 000
Drawings : Mokotedi B6 175 000
Vehicles B7 666 000
Equipment (at cost) B8 230 000
Accumulated depreciation on vehicles B9 299 700
Accumulated depreciation on equipment B10 95 000
Loan : Bank of Africa B11 205 000
Fixed Deposit : Bank of Africa B12 150 000
Trading stock B13 667 000
Debtors control B14 265 000
Provision for bad debts B15 16 500
Bank B16 66 000
Creditors control B19 281 500
SARS –(PAYE) B20 19 600
Medical Aid Fund B21 6 200
UIF B22 900
NOMINAL ACCOUNTS SECTION
Sales N1 3000 000
Debtors allowances N2 500 000
Cost of sales N3 1810 000
Fee income (for services rendered) N4 1105 000
Rent expense N5 95 400
Salaries and wages N6 765 176
Employer’s contribution to UIF and Medical Aid N7 78 500
Vehicles expenses N8 95 000
Bank charges N9 28 600
Bad debts N10 4 800
Electricity and water N11 17 600
Discount allowed N12 3 500
Telephone N13 19 100
Insurance N14 28 800
Printing and stationery N15 17 200
Consumable stores N16 132 500
Interest income (on current bank account) N17 1 100
Sundry expenses N18 34 824

83
ADJSUTMENTS AND ADDITIONAL INFORMATION
A. The water and electricity account for February has not been paid, R1 300.
B. A cash customer Mzizi paid R2 800 for installation fees in February but the job will be done in
March 2021.
C. The following items were stolen in February :
 Trading stock (tiles ) R56 000
 Consumable stores R2 500
ABI Insurers has agreed to pay out 90% of the loss, but this has not been received.
D. A debtor B.White complained about the defective tiles that were fitted in his house ,Jozi Tiles
issued a credit note for the following ,but this has not been recorded in the books :

JOZI TILES CN 2200


28 February
2021
Mr. White
4544 Parkhurst
2061
Tiles returned ( cost price R 13 000) R 21 500
Unsatisfactory fitting (Fee income) 2 500
24 000

On closer inspection of the stock it was discovered that tiles costing R49 000 were damaged. These
tiles were returned to Imported Tiles Ltd, but no entry has been made.

E. The following appeared in the bank statement of Bank of Africa on 28 February 2021, the
information has not been entered in the books:

Bank charges R2 000


Interest on current account R250
Stop order for insurance for February 2021 R2 500

F. A physical stock count at the end of the year reflects the following on hand at cost price :
 Trading stock, R570 000
 Consumable stores, R18 000

G. Further bad debts of R3 000 are to be written off and the provision for bad debts is to be adjusted
to 5% of trade debtors.

H. New equipment costing R54 000 was bought on 01 January 2021.This has been properly
recorded. Depreciation is to be calculated at 10% p.a. on a diminishing balance method
I. The business owned three identical vehicles which were all purchased on the same date.
Depreciation is calculated at 20% p.a. on cost.
On 30 November 2019 one of the vehicles was taken over by a partner Mokotedi at the market
value of R96 300.No entry has been made to record depreciation or the sale of the vehicle

84
J. The loan statement from the Bank of Africa reflects the following:
Balance at the beginning of the year: 01 March 2020 R 275 000
Interest capitalized ?
Repayments during the year including interest 70 000
Balance at the end of the year: 28 February 2021 230 000

K. The interest of R9 000 has been earned on fixed deposit, but no entry has been made. The
interest is not capitalised.
L. The partnership agreement provides for the following :
 Salary to Mogashoa, R108 000 p.a.
 Salary to Mokotedi, R84 000 p.a.
 Interest on capital at 7% p.a.
 Remaining profits to be in the ratio 3:2 between Mogashoa and Mokotedi.

85
ACTIVITY 2

MAGIX TRADERS
The following information was taken from the books of Magix Traders, owned by Naidoo and Williams. Their
financial year ends on the 28 of February 2021.

REQUIRED

 Prepare the Balance sheet


 Prepare the following notes:
 Tangible assets
 Trade and other receivables
 Cash and cash equivalents
 Trade and other payables
 Capital and Current accounts
INFORMATION

LIST OF BALANCES ON 28 FEBRUARY 2021

Capital :Naidoo (28 February 2021) 150 000


Capital : Williams (28 February 2021) 300 000
Current A/c : Naidoo (01 March 2020) Cr 11 500
Current A/c : Williams (01 March 2020) Dr 17 400
Drawings :Naidoo 170 000
Drawings :Williams 105 000
Vehicles at cost 332 000
Equipment (at cost) 164 000
Accumulated depreciation on vehicles (28 February 2021) 149 400
Accumulated depreciation on equipment (28 February 2021) 39 900
Mortgage bond: Future bank (15% p.a.) 50 000
Fixed Deposit :Future Bank 110 000
Trading stock 75 400
Consumable stores on hand 1 660
Debtors control 35 200
Provision for bad debts 1 770
Creditors control 45 000
Savings account 34 000
Bank overdraft 3 000
Petty cash 1 000
Accrued income 10 450
Income received in advance 900
Accrued expenses 1 590
Prepaid expenses 7 800
Creditors for salaries 12 050
SARS –PAYE 2 800

86
ADJUSTMENTS AND ADDITIONAL INFORMATION
1. A debtor with a credit balance of R 1 200 must be transferred to the creditors ledger.
2. 40% of the fixed deposit with Future Bank will mature on 31 May 2021.
3. A vehicle sold on 28 February 2021, was properly recorded, details were: cost price, R112 000 and
accumulated depreciation to date of sale, R50 400.
4. Depreciation for the year on vehicles ,R66 600 and equipment,R12 540
5. On 1 September 2020 Naidoo increased his capital by R30 000 and Williams reduced his capital by
R20 000.
6. The amount of R12 000 on mortgage bond is payable on 30 June 2021.
7. The net profit of R296 000 was appropriated as follows:
 Salaries: Naidoo is R13 000 per month, and Williams R7 000 per month.
 Interest on capital at 8% p.a.
 Remaining profits to be shared in the ratio of their capital balances at the end of the year.

87
ACTIVITY 3: CONCEPTS AND INCOME STATEMENT (27 Marks)

3.1 CONCEPTS
Describe the difference between the sole trader and partnership in terms of their unique (9)
accounts. (Refer to the answer book.)

3.2 INCOME STATEMENT

EXCLUSIVE CARPETS

Kgatle and Manyaka are in a partnership business that sells, fit and repair carpets. The
name of the business Exclusive Carpets. Their bookkeeper is inexperienced in preparing
financial statements and recording of certain adjustments, they need your assistance in
correcting and recording certain adjustments presented in the information. The financial
period ended on 28 February 2021.

NOTE:
 Installation and repair fees are reflected as fee income
1
 A mark up of 33 is applied on all carpets sold
3

REQUIRED

Calculate the correct Net Profit for the year ended 28 February 2021. (18)

INFORMATION

A. Extract from Pre-Adjustment trial balance on 28 February 2021


Debit Credit
Trading stock 338 500
Debtors Control 127 500
Provision for Bad Debts 8 000

B. The net profit amounted to R852 765, the bookkeeper did not take all the adjustments into
account.

C. ADJUSTMENTS

(i) Received the water and electricity account for February 2021, R1 260 this amount has not
been paid.
(ii) A cash customer paid R2 250 for a carpet and installation, the selling price of the carpet
is R1 500. The payment was recorded but the carpet will only be delivered and installed
in March 2021.

88
(iii) Rent has been paid up to 30 April 2021, rent increased by 10% on 1 January 2021. The
rent expense account currently has a total of R57 600.
(iv) During February 2021 a fire broke out in the storage for expensive carpets, a carpet worth
R40 000 was damaged. The insurance policy states that the excess payable on all claims
made by the business is R5 000, claims are deposited into the business bank account
after payment of the excess. The insurance company approved the claim. The amount will
be transferred during March 2021.
(v) Further bad debts of R3 000 are to be written off and the provision for bad debts is to be
adjusted to 5% of book debts.
(vi) A physical stock take at the end of the year reflects that trading stock on hand amounted
to R302 100.
(vii) The loan statement received from SVB Bank reflected the following:

Balance on 1 March 2020 142 000


Interest capitalised ?
Repayments during the year (including capitalised interest) 37 000
Balance on 28 February 2021 119 700

All repayments have been debited to the loan account, but no entry has been made to
record the interest. According to the loan agreement the capital portion of the loan will be
reduced by R2 250 per month for the next financial year.

89
ACTIVITY 4: BALANCE SHEET, INTERNAL CONTROL AND ETHICS ( 73 Marks)

4.1 BALANCE SHEET AND NOTES

JV Television Shop is owned by Jele and Vuyi. Their bookkeeper fell sick before he could
process all the year-end adjustments, he is currently on sick leave. The owners have
requested you to prepare the Balance sheet, their financial period ends on 28 February 2021.

REQUIRED

4.1.1 Prepare the Balance sheet on 28 February 2021. Where notes are not required, show (38)
working in brackets,
4.1.2 Complete the Note on Current Accounts (22)

INFORMATION
Extract of the Trial Balance on 28 February 2021
Capital: Jele R400 000
Capital: Vuyi 300 000
Drawings: Jele 55 000
Drawings: Vuyi 100 000
Current account: Jele Cr 130 500
Current account: Vuyi Dr 17 500
Cash Float 6 000
Bank overdraft 51 750
Loan from partner: Jele (to be repaid in 2023) 150 000
Fixed Asset @ carrying value (1 March 2020) 779 500
Mortgage loan: Tshwane Bank 180 000
Fixed deposit: Tshwane Bank 55 000
Saving account: Tshwane Bank 35 000
Debtors control 45 500
Creditors control 82 500
Trading stock 362 500
Income receivable (accrued) 11 500
Expense payable (accrued) 3 500
Expense prepaid 7 500
Deferred income (received in advance) 4 500
Consumable stores on hand 7 000

90
ADJUSTMENTS AND ADDITIONAL INFORMATION

A. The following items are reflected in the bank statement for February 2021 but have not yet
been recorded:
 Direct transfer of rent from tenant, R5 500
 Paid R16 500 to Shoba Software by EFT.

B. Interest for February 2021 on the mortgage loan from Tshwane Bank has not been
recorded. The interest is capitalised, the rate of interest is 15% p.a. The mortgage loan is
expected to decrease by R21 000 over the next financial year.

C. Depreciation for the year amounted to R27 500.

D. A debtor’s debit balance of R 7 000 in the Debtors Ledger must still be transferred to his
account in the Creditors Ledger.

E. JV Televisions had 4 outdated television sets worth R12 000, they were all bought by Vuyi
at a reduced price of R6 000, Jele was not consulted and the transaction has been properly
recorded.

F. The correct net profit after processing all adjustments is R242 000.

G. The partnership agreement provides for the following:


 A salary paid to Jele is R10 000 per month. Jele’s salary is 20% above Vuyi’s salary.
 Jele earned a bonus of R40 000 for extra time worked during the year.
 Interest on capital is calculated at 8% p.a. The financial records reflect that Jele increased
his capital contribution by R50 000 on 31 August 2020, while Vuyi decreased his capital
by R100 000 on the first day of the financial year.
 Vuyi’s share of the remaining loss is R25 500. The profit - sharing ratio between Jele and
Vuyi is 5:3.

4.2. INTERNAL CONTROL AND ETHICS (13 Marks)


Read the following statements and respond to the questions provided.

4.2.1 Jele feels that the partners have not been controlling their cash resources well.
Support your explanation by quoting relevant figures from the information provided in
(6)
2.1. Provide TWO points.

4.2.2 Jele feels that he is bearing an unfair financial burden in this business. In TWO
points explain why do you agree with him and provide figures to support your
(4)
answers.
Do you think Vuyi’s decision of buying the television sets at the reduced price was
4.2.3
fair? Explain in ONE POINT how best this transaction could have been handled to
benefit both partners. (3)

91
6. ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS

The purpose of drafting the financial statements is to determine the profitability of the business, liquidity and if
the business is financially sound.

Analysis of the financial statements is important to any business, correct decisions can be taken by the
owners after analysing the statements. The business might also have to adjust or review the policies, but that
that will be in line with GAAP (Accounting Principles).

The table provided below reflects the financial indicators that are covered in grade 10 and 11.

ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS


CLASSIFICATION GRADE 10 GRADE 11
SOLE TRADER PARTNERSHIP
Gross profit on sales Gross profit on sales
Gross profit on cost of sales Gross profit on cost of sales
PROFITABILITY Net profit on sales Net profit on sales
Operating expenses on sales Operating expenses on sales
Operating profit on sales Operating profit on sales

Solvency Solvency ratio Solvency ratio

Current ratio Current ratio


Acid test ratio Acid test ratio
Stock turnover rate

New
Liquidity Stock holding period
Average debtors collection period
Average creditors payment period

Return on equity IS/BS Return on partners’ equity


Return Partners’ earnings New

Financial Risk/ Debt -equity ratio (gearing) New


Gearing

Strategy in answering analysis and interpretation of financial statements


(recommended steps)

 Calculate the financial indicators (if they are not given on the table of indicators).
 Identify the appropriate financial indicators necessary to answer the question.
 Comment on the financial indicators given or calculated
 Quote the figures and show the trend. Do some comparison (increased/decreased)
 Comparisons would include:
 Information of the same business (previous financial year)
 Other businesses in the same industry (competitors)
 Targets set by the business (such as mark-up percentage)
 An alternative action (such as an investment in a fixed deposit)

92
SUMMARY OF INDICATORS COVERED IN GRADE 11

Classification Financial Indicators Formulae Answer Integration


Gross profit on sales Gross profit x 100 %
Sales 1

Income Statement
Profitability Gross profit on cost of Gross profit x 100 %
sales Cost of sales 1
Operating profit on sales Operating profit x 100 %
Sales 1
Operating expenses on Operating expenses x 100 %
sales Sales 1
Net profit on sales Net profit x 100 %
Sales 1

Solvency Solvency ratio Total assets : Total liabilities Ratio B.Sheet


𝑥:1

Current ratio Current assets : Current liabilities Ratio B.Sheet


𝑥:1
Acid test ratio Current assets - inventories : Current Ratio B.Sheet
Liquidity liabilities 𝑥:1
Stock turnover rate Cost of sales Times IS/BS
Average Stock
Stock holding period Average Stock x 365 Days / IS/BS
Cost of sales 1 months
Average debtors collection Average Debtors x 365 Days / IS/BS
period Credit Sales 1 months
Average creditors payment Average Creditors x 365 Days / IS/BS
period Credit Purchases 1 months

Return on Partners Equity Net profit x 100 % IS/BS


Return Average Partners Equity 1
% Return earned by each Partners earnings x 100 % APP/BS
partner Average Partners Equity 1

Financial Debt -equity ratio (gearing) Non-current liabilities : Partners’ equity Ratio BS
risk/Gearing 𝑥:1
B.Sheet/BS =Balance sheet I/S =Income statement APP-Appropriation

Example one

Use the information below to calculate and comment on the following ratios:

 gross profit % on sales  stock turnover rate


 gross profit % on cost of sales  stock holding period
 operating profit % on sales  debtors collection period
 operating expenses % on sales  creditors payment period
 net profit % on sales  solvency ratio
 current ratio  % return on partners’ equity
 acid test ratio

93
INFORMATION
The following information relates to the financial records of Bigfoot Traders with partners
B Big and F Foot.

INCOME STATEMENT OF BIGFOOT TRADERS- FEBRUARY


2021 2020
Sales 1 828 000 1 650 000
Cost of sales (1 040 000) (860 000)
Gross profit 788 000 790 000
Other operating income 206 560 193 120
Rent income 204 000 190 000
Provision for bad debt adjustment 2 560 3 120
Gross operating profit 994 560 983 120
Operating expenses (530 800) (493 600)
Advertising 25 000 19 600
Insurance 13 700 11 000
Bad debts 5 800 7 000
Water and electricity 24 000 22 800
Salaries and wages 360 000 328 000
Stationery 2 000 1 600
Sundry expenses 84 300 89 600
Trading stock deficit 2 000 0
Depreciation 14 000 14 000
Operating profit 463 760 489 520
Interest income 7 300 5 000
Profit before interest expense 471 060 494 520
Interest expense (34 000) (30 000)
Net profit for the year 437 060 464 520

BALANCE SHEET ON 28 FEBRUARY


2021 2020
ASSETS
NON-CURRENT ASSETS 2 062 000 1 996 000
Tangible Assets 1 986 000 1 922 000
Financial Assets
Fixed Deposit 76 000 74 000
CURRENT ASSETS 732 660 665 600
Inventory 420 800 398 600
Trade and other receivables 159 660 156 600
Cash and cash equivalents 152 200 110 400
TOTAL ASSETS 2 776 660 2 661 600

EQUITY AND LIABILITIES


EQUITY 2 247 060 2 008 000
Capital 2 200 000 2 000 000
Current accounts 47 060 8 000
NON-CURRENT LIABILITIES 400 000 424 000
Mortgage loan 400 000 424 000
CURRENT LIABILITIES 129 600 229 600
Trade and other payables 129 600 229 600
TOTAL EQUITY AND LIABILITIES 2 776 660 2 661 600

94
ADDITIONAL INFORMATION

1 The following were totals for 2019:

2019
Trading stock 360 000
Trade and other receivables 169 400
Trade and other payables 230 400

2. The following were balances for 2021 and 2020

2021 2020
Total earnings: B Big 243 036 206 040
Total earnings: F Foot 194 024 258 480
Average equity: B Big 1 897 518 1 708 000
Average equity: F Foot 830 012 760 000

3. All purchases and sales are on credit.


4. The mark-up used by the business is 100% on cost price.
5. The business sells bedroom furniture.
6. Interest on alternative investment is 8%

SUGGESTED SOLUTION
Percentage gross profit on sales
2021 2020
Gross profit x 100 Gross profit x 100
sales 1 sales 1

R788 000 x 100 = 43,1% R790 000 x 100 = 47,2%


R1 828 000 1 R1 650 000 1

 There is a decline from 47, 2% to 43,1%.


 It can be due to sales prices incorrectly marked.
 Too much trade discount or goods sold for less than mark-up (no adherence to policy).

Percentage gross profit on cost of sales (mark-up %)


2021 2020
Gross profit x 100 Gross profit x 100
Cost of sales 1 Cost of sales 1

R788 000 x 100 = 75,8% R790 000 x 100 = 91,9%


R1 040 000 1 R860 000 1

 The mark-up has decreased from 91, 9% to 75, and 8%.


 The business does not meet their mark-up of 100% on cost price
 Too much trade discount or goods sold for less than mark-up (no adherence to policy).
 Could be resulting from stock losses or theft.

95
Percentage operating profit on sales
2021 2020
Operating profit x 100 Operating profit x 100
Turnover 1 Turnover 1

R463 760 x 100 = 25,4% R489 520 x 100 = 29,7%


R1 828 000 1 R1 650 000 1

 There is a decline from 29,7% to 25,4%. Sales have increased yet operating profit has decreased.
 A large amount of the income is used to pay for expenses, expenses are not well managed.
The business should increase the control over expenses ( Recommendation)

Percentage operating expenses on sales


2021 2020
Operating exp x 100 Operating exp x 100
Turnover 1 Turnover 1

R530 800 x 100 = 29% R493 600 x 100 = 29,9%


R1 828 000 1 R1 650 000 1

 It decreased from 29,9% to 29%.


 Costs have slightly increased, they should be controlled.

Percentage net profit on sales


2021 2020
Net profit x 100 Net profit x 100
Turnover 1 Turnover 1

R437 060 x 100 = 23,9% R464 520 x 100 = 28,2%


R1 828 000 1 R1 650 000 1

 The indicator has declined from 28,2% to 23,9%.


 Increase or poor control in expenses.

Solvency ratio
2021 2020
Total assets : Total liabilities Total assets : Total liabilities
R2 776 660 : R529 600 R2 661 600 : R653 600
= 5,2 : 1 = 4,1 : 1
 Ratio improved from 4, 1:1 to 5, 2:1.
 For every R1 liabilities there are R5, 20 assets to pay for it, the business is solvent.

96
Current ratio
2021 2020
Current assets : Current liabilities Current assets : Current liabilities
R732 660 : R129 600 R665 600 : R229 600
= 5,7 : 1 = 2,9 : 1
 Ratio increased from 2, 9:1 to 5,7:1, for every R1 owing the business has R5,70 to pay for it.
 The high ratio is likely to indicate high stock levels and that means cash is tied up in stock.

Acid-test ratio
2021 2020
Current assets - inventories : Current liabilities Current assets - inventories : Current liabilities
(R732 600 – R420 800) : R129 600 (R665 600 – R398 600) : R229 600
= R311 800 : R129 600 = R267 000 : R229 600
= 2,4 : 1 = 1,2 : 1
 Ratio increased from 1,2:1 to 2,4:1.
 This means that the business can pay its short term debts without having to sell stock.

Average debtors collection period


2021 2020
Average Debtors x 365 Average Debtors x 365
Credit Sales 1 Credit Sales 1

½(R156 600 + R159 660) x 365 ½(R156 600 + R169 400) x 365
R1 828 000 1 R1 650 000 1

= 31,6 days = 36,1 days


 The period decreased from 36,1 days to 31,6 days which is an improvement.
 Debtors are paying their accounts quicker.
 Encourage debtors by offering discount for early payments and charge interest on debtors who take
more than 30 days to settle their accounts.

Average creditors payment period


2021 2020
Average Creditors X 365 Average Creditors X 365
Credit Purchases 1 Credit Purchases 1

½(R229 600 + R129 600) X 365 ½(R230 400 + R229 600) X 365
R1 040 000 1 R860 000 1

= 63 days = 97,6 days


 The period decreased from 97,6 days to 63 days.
 Business is paying their creditors quicker.
 The business receives payments from debtors before they pay the creditors which is good for
the cash flow of the business.
 Paying within the credit term result to creditworthiness and they will not be charged interest for
overdue accounts.

97
Rate of stock turnover
2021 2020
Cost of sales . Cost of sales .
Average inventories Average inventories

R1 040 000 . R860 000 .


½(R398 600 + R420 800) ½(R398 600 + 3R60 000)

= 2,5 times per year = 2,3 times per year


 There is an improvement of 2,3 to 2,5 times per year.
 This is satisfactory as the business sells furniture, their stock is moving faster.

Stock holding period


2021 2020
Average inventories . x 365 Average inventories . x 365
Cost of sales 1 Cost of sales 1

½(R398 600 + R420 000) . x 365 ½(R398 600 + R360 000) . x 365
R 1 040 000 1 R860 000 1

= 143,6 days =161 days


 The period has improved from 161 to 143,6 days.
 143 is a long period for a business to keep stock, they should review their purchasing policy and
the market strategies.

Debt / Equity ratio (gearing ratio)


2021 2020
Non-current liabilities : Owners’ equity Non-current liabilities : Owners’ equity
= R400 000 : R2 274 060 = R424 000: R2 008 000
= 0,18 : 1 = 0,21 : 1
 The ratio improved from 0,21:1 to 0,18:1.
 The business is at low risk / lowly geared.
 The business is creditworthy, the business can obtain an additional loan in future.

98
Partners’ earnings
2021 2020
B Big B Big

Partner’s earnings . x 100 Partner’s earnings . x 100


Average partner’s equity 1 Average partner’s equity 1

R243 036 . x 100 R206 040 . x 100


R1 897 518 1 R1 708 000 1

=12,8% = 12,1%
F Foot F Foot

Partner’s earnings . x 100 Partner’s earnings . x 100


Average partner’s equity 1 Average partner’s equity 1

R194 024. x 100 R258 400 . x 100


R830 012 1 R760 000 1

= 23,4% =34%
 The percentage earnings of Big increased from 12,1% to 12,8%.
 The percentage earnings of Foot decreased from 34% to 23,4%.
 Partners’ earnings are higher than the interest rate (8%) on other investments, the partners
can be satisfied with the returns.

EXAMPLE OF FORMULA SHEET ATTACHED TO THE EXAM PAPER

Gross profit x 100 Gross profit x 100 Net profit x 100


Sales 1 Cost of sales 1 Sales 1

Operating expenses x 100 Operating profit x 100


Sales 1 Sales 1

Total earnings by partner x 100 Net profit x 100


Partner’s average equity 1 Average owners ‘equity 1

Current assets : Current liabilities

(Current assets – Inventories) : Current liabilities

(Trade and other receivables + Cash and cash equivalents) : Current liabilities

Average debtors x 365 Average creditors x 365


Credit sales 1 Credit purchases 1
Average inventories x 365 Cost of sales
Cost of sales 1 Average inventories

Non-current liabilities: Owners’ equity Total assets: Total liabilities

NOTE: The name of indicators are not provided, sufficient practice activities is recommended to improve
the understanding of the analysis and interpretation of financial information

99
ACTIVITY 1
Golden Traders is a partnership business owned by partners David and Moses.
The financial year ended on 29 February 2020.

REQUIRED:

1.1 Calculate the following:

1.1.1 The total current liabilities


1.1.2 Percentage return earned by David
1.1.3 Debt equity ratio
1.1.4 Acid-test ratio

1.2 Comment on the liquidity of the business.


Quote TWO financial indicators (with figures) in your answer.

1.3 Do you think that David is satisfied with his return on investment? Explain. Quote TWO
relevant financial indicators (with figures) to support your answer

1.4 The partners want to expand the existing business and are considering increasing the
loan. What advice would you offer them? Support your answer by making reference to
TWO financial indicators (with figures).

INFORMATION:

A. GENERAL LEDGER OF GOLDEN TRADERS


APPROPRIATION ACCOUNT
2020 2020
Feb 29 Salary: David 165 000 Feb 29 Profit and loss 491 040
Salary: Moses 200 640
Interest on capital: David 46 200
Interest on capital: Moses 30 800
Bonus: Moses 13 200
Current account: David 21 120
Current account: Moses 14 080

B. BALANCES AND OTHER INFORMATION:


29 Feb 2020 28 Feb 2019
Capital: David 577 500 440 000
Capital: Moses 385 000 440 000
Current account: David 10 010 (Dr) 16 940
Current account: Moses 11 660 13 420
Loan: Mia Bank (11% p.a.) 440 000 440 000
Trade debtors 300 520 156 200
Cash and cash equivalents 40 480 40 260
Trading stock 194 700 55 000
Current liabilities ? 139 700
Current ratio 2.5:1 1.8:1
Acid test ratio ? 1.2:1
Debt equity ratio ? 0.5:1
Return earned by David ? 48%
Return earned by Moses 61% 57%

100
ACTIVITY 2 :ANALYSIS AND INTEPRETATION OF FINANCIAL STATEMENTS
(MARKS : 30)
DESIGNER TRADERS

Fiona and Themba are partners in a business called Designer Traders. The following information
was taken from the financial statements for the year ended 29 February 2020.

Debtors are given 30 days to pay their accounts and creditors are paid in 60 days.

REQUIRED:

Use the information given below to answer the following questions.


(Round off to1 decimal place)
2.1 Calculate the Acid Test Ratio for February 2020. (4)

2.2 Calculate the Debtors collection period for the year ended 29 February 2020. (6)

2.3 Calculate the Debt-Equity ratio for the year ended 29 February 2020. (4)

2.4 Comment on the liquidity position of the business. Quote at least TWO financial indicators (6)
and figures in your answer.

2.5 Based on your calculations in 3.2, should the business be happy with payments received from (6)
debtors?
 Provide TWO points to support your answer
 Advice the partners on how to resolve this problem or how to maintain the financial results
in ONE point.
2.6 The partners are considering to take an additional loan of R300 000 in the next financial year (4)
at the same interest rate .Do you think this is a wise decision? Explain and quote ONE
financial indicator to support your answer.

INFORMATION

The following figures have been taken from the books of Designer Traders for the financial year ended on
29 February 2020.

A. INFORMATION EXTRACTED FROM INCOME STATEMENT


29 February 2020
Total Sales (70% credit) 434 000
Cost of sales 135 000

101
B. INFORMATION EXTRACTED FROM BALANCE SHEET
29 February 2020 28 February 2019
Capital :Fiona 550 000 500 000
Capital :Themba 700 000 600 000
Current Account :Fiona 145 000 CR 120 000 CR
Current Account :Themba 175 000 CR 135 000 CR
Long term loan 250 000 320 000
Current assets 95 200 71 000
Current liabilities 48 000 49 000
Inventories (all trading stock) 38 000 40 000
Debtors Control 75 000 45 000

C. THE FOLLOWING FINANCIAL INDICATORS WERE CALCULATED:

29 February 2020 28 February 2019


Debtors collection period ? 68 days
Creditors payment period 58 days 62 days
Stock turnover rate 9 times 7 times
Return on Partners Equity 57% 39%
Current Ratio 1.9:1 1.4:1
Acid test Ratio ? 0.63 :1
Debt Equity ratio ? 03.1
Interest on loan 12% 12.5%
Interest on fixed Deposit 9.5% 10%

102
7. BUDGETS

INTRODUCTION
In grade 10 you have been introduced to different types of budgets and basic calculations. The types of
budgets discussed in the previous grade are:

Budgets

Capital Zero-based Long term Medium


Cash Budget
Budget budget budget term budget

This module will introduce you to the following :

 Projected Debtors Collection Schedule


 Projected Creditors Payment Schedule
 Cash Budget
 Projected Income Statement

The business can achieve maximum profits through effective planning and by placing effective controls. The
following actions among others should be considered by a business if they want to plan effectively :
o Reliable records of past transactions
o Consider external factors such as economic conditions, inflation, etc.
o Investment in fixed assets
o Purchasing of stock
o Financing methods and sources of funding
o Collection from debtors and payments to creditors

Importance of a Budget
o The cash budget is an essential tool used to plan and monitor the liquidity of the business enterprise .The
management can ascertain whether the enterprise will have enough cash:

 To meet the short term commitments such as paying creditors and repaying loans
 To purchase stock
 Purchase additional fixed assets
 Budgets will assist the enterprise to predict shortfalls and arrangements can be made with the
banks, and other sources of funding in advance.
 Many potential funders will require you to provide a budget in addition to a business plan, particularly if
you are new in business.

Points to consider when drawing the Budget


o The budget must be conservative i.e. it must be achievable and realistic
o Budgeted expenditure should not exceed budgeted income
o After the budget period the budgeted income and expenditure must be compared with the actual figures.

103
Debtors’ collection schedule

Reflects the amounts expected to be owed by debtors and as well as receipts from debtors. The following
information is used to prepare the debtors schedule:
o Expected credit sales to debtors
o Actual credit sales
o Credit policy that determines period for collecting debtors accounts, the trader must clearly
indicate the credit terms to be allowed e.g.30 days, 60 days, 90 days etc.
o The cash discount, the customer can be entitled to when he pays before the stipulated date.

EXAMPLE 1
Naidoo Store’s credit sales were as follows:

REQUIRED
Calculate the expected collections from debtors during the budgeted months of September, October and
November.

Month Actual Budgeted


July 80 000
August 90 000
September 96 000
October 100 000
November 110 000

Debtors usually settle their accounts as follows


 50% during the month of sales (transaction month)
 30% during the month following the month of sales (one month after sales / 30 days)
 18% during the second month after sales (two months after sale / 60 days)
 2% irrecoverable debts (bad debts/ 90 days)

104
EXPECTED ANSWER

Debtors collection schedule


Collection period
Month Credit sales Terms September October November
July 80 000 × 50 % (July) same month 50% and 30% are
not collected within
× 30 % (Aug) 30 days the budget period
× 18 % (Sept) 60 days 14 400

Aug 90 000 × 50 % (Aug)

× 30 % (Sept) 27 000

× 18 % (Oct ) 16 200

Sept 96 000 × 50 % (Sept ) 48 000

× 30% (Oct ) 28 800

× 18 % (Nov) 172 80

Oct 100 000 × 50 % (Oct) 50 000

× 30 % (Nov ) 30 000

× 18 % (Dec )

Nov 110 000 × 50% (Nov) 55 000

× 30% (Dec)

× 18% (Jan)

Receipts from debtors 89 400 95 000 102 280

Show only the amounts to be collected


from debtors
Total receipts is recorded in the Cash
Always start with the Actual Budget
sales when preparing the
debtors collection schedule
R80 000 and R90 000

105
ACTIVITY 1 : DEBTORS COLLECTION SCHEDULE
REQUIRED
Make use of the information provided below to draw up the Debtors collection period for the three month
period 01January 2021 to 31 March 2021.

INFORMATION
Month Actual Budgeted
November 60 000
December 80 000
January 50 000
February 52 000
March 60 000

Debtors usually settle their accounts as follows:

 60 % of debtors pay one month after the date of sale


 20 % of debtors pay two months after the date of sale
 15 % of debtors pay three months after the date of sale
 5 % irrecoverable debts (bad debts)

Note: Cash sales is 40% of total sales

106
EXAMPLE 2 : DEBTORS COLLECTION SCHEDULE
REQUIRED
Use the information provided below to prepare the Debtors collection schedule of Zizzy Stores for October,
November, and December 2021.

INFORMATION
1. Actual sales and expenses
Month July August September
Cash Sales 40 000 41 000 43 000
Credit sales 38 000 38 000 41 000
Salaries 23 000 23 000 23 000
Depreciation 7 000 7 000 7 000

2. Budgeted sales and expenses


Month October November December
Cash sales 43 000 45 000 52 000
Credit sales 40 000 42 000 50 000
Salaries 23 000 23 000 28 000
Depreciation 7 000 7 000 7 000

3. The enterprise encourages the debtors to pay early by allowing a 5% discount for accounts settled
within 30 days.
4. Debtors are expected to pay as follows:
 50% in the same month as transactions (receive 5 % discount)
 30% in the following month
 15% after two months
 5% is written off as irrecoverable

EXPECTED ANSWER

Debtors Collection Schedule of Zizzy Stores


Collection period
Month Credit Sales October November December
August (38 000× 15 % ) 38 000 5 700
September (41 000 × 30 %) 41 000 12 300
(41 000 × 15 %) 6 150
October Check calculations 40 000 19 000
(40 000× 30%) 12 000
(40 000× 15 %) 6 000
November Check calculations 42 000 19 950
12 600
December Check calculations 50 000 23 750
Receipts from debtors 37 000 38 100 42 350

107
Extract from the Cash Budget of Zizzy Stores
October November December
Cash Receipts
Cash Sales 43 000 45 000 52 000
Receipts from debtor (From debtors collection) 37 000 38 100 42 350
Total Cash Receipts 80 000 83 100 94 350
Cash Payments
Salaries 23 000 23 000 28 000

Extract from Projected Income Statement of Zizzy Stores


October November December
Sales (Budgeted cash sales and credit sales) 83 000 87 000 102 000

Operating expenses
Salaries 23 000 23 000 28 000
Depreciation 7 000 7 000 7 000

Credit sales + Cash sales


40 000 + 43 000

NOTE: Depreciation does not affect our Cash Budget because there’s no outflow of cash only
recorded in our Projected Income Statement.

Calculations
October November December

40 000 × 50 % = 20 000 42 000 × 50 % = 21 000 50 000 × 50% = 25 000


20 000 × (100 % – 5 %) 21 000 × (100 % - 5 %) 25 000 × (100 % - 5 %)
20 000 × 95 % 21 000 × 95 % 25 000 × 95 %
= 19 000 =19 950 = 23 750

Creditors Payment Schedule

 A business usually negotiates with its creditors how much time it is allowed to pay back the amount
owed to the creditors
 When preparing the Cash Budget the enterprise must calculate cash expected to be paid to the creditors.
 These payments are set out in the Creditors payment schedule.

108
EXAMPLE 3

REQUIRED

Use the information provided below to draw the creditors payment schedule of Nozzy Traders for April and
May 2021.
INFORMATION

Actual Purchases Budgeted Purchases


January 50 000 April 65 000
February 52 000 May 70 000
March 60 000

ADDITIONAL INFORMATION
 60% of the purchases are done on credit
 Creditors are paid after 60 days (i.e. two months after the purchases are made)

EXPECTED ANSWER

Creditors payment schedule of Nozzy Traders for April and May 2021
Credit purchases April May
February (52 000 × 60%) 31 200
March (60 000 × 60%) 36 000
Payments to creditors 31 200 36 000

Extract from the Cash Budget Nozzy Traders for 2021


Cash Payments April May
Cash purchases [65 000 × 40%] [70 000 × 40% ] 26 000 28 000
Payments to creditors 31 200 36 000

EXAMPLE 4
Use the information in respect of Mandisa Traders to prepare the creditors payment schedule
for the first quarter of 2021.

INFORMATION
Balance at 31 December 2020 Budgeted Purchases for 2021
Creditors R53 000 January R80 000
Trading stock R45 000 February R70 000
March R84 000

 Cash purchases of trading stock amount to 50% of all purchases.


 Credit purchases are paid in the month following the month of sales to obtain a
discount of 5%.
 Stock replenishment takes place on monthly basis and the opening balance will be
maintained as the base stock

109
EXPECTED ANSWER

Creditors payment schedule of Mandisa Traders for 2021


Credit purchases January February March
December 53 000
January 38 000
February 33 250

Extract of the Cash Budget –Mandisa Traders for 2021


January February March
Cash Payments
Cash purchases 40 000 35 000 42 000
Payments to creditors 53 000 38 000 33 250

Workings

Credit purchases Cash purchases:


January January
80 000 × 50% = 40 000 80 000 × 50% = 40 000
40 000 × (100% - 5%) February
40 000 × 95% 70 000 × 50% = 35 000
= 38 000 March
February 84 000 × 50% = 42 000
70 000 × 50% = 35 000
35 000 × (100% - 5%)
35 000 × 95%
= 33 250

Trading stock
1Jan Balance b/d 45 000 31 Jan Cost of sales 80 000
2021 2021
Creditors Control 40 000 Balance c/d 45 000
Bank 40 000
125 000 125 000

80 000 x 50% = ( cash sales/credit sales )

45 000 will be the opening and closing balance (Base stock)


All the stock bought in January is sold in the same month.
Therefore the cost of sales is equal to purchases.

110
CASH BUDGET

 A cash budget shows estimates of future cash receipts and payments .Budgets are drawn up to help
management identify potential shortages or surpluses of cash resources that could occur.
 A cash budget deals only with transactions involving movement of cash, non –cash expenses are not
included.

Items that are not included in the cash budget :


 Bad debts  Loss on sale of an asset
 Discount received  Profit on sale of an asset
 Discount allowed  Drawings of trading stock
 Depreciation

Expected cash receipts (inflow) Expected cash payments (outflow)


 Cash sales  Cash purchases of trading stock & fixed assets
 Receipts from debtors  Payments to creditors
 Rent income  Cash withdrawals by the owner
 Interest received (on investments)  Cash invested
 Investments matured  Loans repaid
 Sale of fixed assets  Cash payments of operating expenses e.g.
 Loans receivable rent, salaries, telephone etc.

Components of the Budget


Cash Receipts Prediction of cash receipts (Inflow) for the budget period.
Cash Payments Prediction of cash payments (Outflow ) for the budget period
Cash Surplus /shortfall Total cash receipts less total cash payments
Bank opening balance The bank balance at the beginning of the budget period
Bank closing balance The expected bank balance at the end of the budget period.

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EXAMPLE 5

BEAUTY TRADERS

The following information was extracted from the records of Beauty Traders. Use the information provided
to draw up the:

 Debtors Collection schedule for the three months ending 30 September 2021
 Cash budget for the three month period ending 30 September 2021

INFORMATION
Actual Amounts Budgeted Amounts

May June July August September


Cash sales 20 000 26 000 34 000 37 000 40 000

Credit sales 24 000 29 000 28 000 30 000 24 000

Wages 10 000 10 000 10 000 11 000 11 000

Rent income 5 000 5000 5 000 5 500 5 500


Cash purchases 17 000 16 000 11 000 10 000 14 000
Credit purchases 20 000 26 000 25 000 28 000 26 000
Other expenses 17 000 17 000 17 000 19 000 19 000

ADDITIONAL INFORMATION

(a) New computer will be bought on 1 August 2021, R6 000 will be transferred electronically.
(b) Beauty Traders had a favourable balance of R28 000 on 01 July 2021
(c) Debtors normally pay their accounts as follows :
 60 % one month after the date of sale
 40% two months after the date of sale
(d) Creditors are paid in full one month after the purchase of goods.
(e) Other expenses are paid in the month they occur.

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EXPECTED ANSWER

DEBTORS’ COLLECTION SCHEDULE – BEAUTY TRADERS


Debtors collection
Month Credit sales July August September
May 24 000 × 40% 9 600

June 29 000 × 60% 17 400


× 40% 11 600
July 28 000 × 60% 16 800
× 40% 11 200
Aug 30 000 × 60% 18 000
Expected receipts 27 000 28 400 29 200

CASH BUDGET OF BEAUTY TRADERS – 01JULY 2021 - 30 SEPTEMBER 2021


RECEIPTS July August September

Cash sales 34 000 37 000 40 000


Receipts from debtors 27 000 28 400 29 200
Rent income 5 000 5 500 5 500
66 000 70 900 74 700
PAYMENTS
Cash purchases 11 000 10 000 14 000
Creditors 26 000 25 000 28 000
Wages 10 000 11 000 11 000
Expenses 17 000 19 000 19 000
Equipment 6 000
64 000 71 000 72 000
Cash surplus /Deficit 2 000 (100) 2 700
Bank opening balance 28 000 30 000 29 900
Bank closing balance 30 000 29 900 32 600

Receipts less Payments = Surplus /Deficit


66 000 – 64 000 = 2 000

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ACTIVITY 2
PHAKISO TRADERS
You are provided with the information from Phakiso Traders. You are required to complete the following for
January and February 2021:
 Debtors Collection schedule
 Cash budget for January and February

INFORMATION

A. EXTRACT FROM THE LIST OF BALANCES ON 01 DECEMBER 2020


Fixed Deposit (8 % p.a.) 24 000
Loan: Future Bank (14 % p.a.) 36 000

B. ACTUAL AND BUDGETED FIGURES


Actual Budgeted
November December January February
Credit sales 45 000 48 000 60 000 54 000
Cash sales 50 000 55 000 40 000 36 000
Credit purchases 22 000 23 000 30 000 25 000

ADDITIONAL INFORMATION
1. It is expected that the amounts owed by debtors will be collected as follows:
 30 % in the same month in which the transaction took place
 50% in the month after the sales take place
 15% in the second month after the sales took place
 5% is to be written off in the third month after the sales take place
2. The Fixed deposit matures on the 31 January 2021. Interest on Fixed Deposit is received at the
end of each month.
3. The business will sell the old equipment on 31 January 2021 for R3 000 cash. New equipment
will be purchased on credit for R34 000 in February .The supplier will require a deposit of R4 000
and the balance will be paid over six months commencing in March 2021.

4. Depreciation will increase from R6 700 to R7 000 from January 2021.


5. Credit purchases are paid in full in the month following the purchases transaction month.
A discount of 5% is received for this payment.
6. The loan from Mayibuye Bank was made on 01 November .Half of the loan will be repaid on 31
January 2021 .Interest on loan must be paid monthly.
7. The business employs three shop assistants at a salary of R4 000 each per month. On 31
January one of the assistants will leave the business. The other two assistants will receive the
increase R1 000 each per month with effect from 01 February.

8. Part of building is let at R2 500 per month .The rent received will increase by 15% on 01 February.
9. Phakiso Traders has an unfavourable bank balance of R6 200.

Note: The interest on Fixed deposit and Loan Account is not capitalised

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ACTIVITY 3

The information provided is extracted from the books of Baloyi Traders.

REQUIRED
 Complete the Debtors’ collection schedule of Baloyi Traders for April 2021 and May 2021.
 Prepare the Cash Budget of Baloyi Traders for April 2021 and May 2021.

INFORMATON
1. Cash in the Bank on 31 March 2021, R 18 400
2. Summary of transactions:

ACTUAL BUDGETED
January February March April May
Cash sales R 27 500 R 24 500 R 21 500 R 27 500 R 36 000

Credit sales R 28 400 R 29 500 R 32 500 R 28 500 R 34 500

Cash purchases of R 12 000 R 15 800 R 16 100 R 12 400 R 14 700


stock
Credit purchases R 16 850 R 16 250 R 15 450 R 14 800 R 17 900
of stock
Operating R 6 600 R 7 000 R 7 600 ?? ??
expenses

3. Credit sales are to be collected as follows:

 20% in the month of sale (5% settlement discount is allowed for prompt settlement)
 60% after 30 days (first month after sale)
 18% after 60 days (second month after sale)
 2% is to be written off after 90 days (third month after sales)

4. Creditors are paid one month after purchases.

5. Operating expenses are paid in cash one month after the expense occurred. It is expected that the
operating expenses would increase by 5% per month over the budget period.

6. The following withdrawals are made monthly by the owner:

 Cash to pay for owners’ personal telephone R 300


 Trading stock R 700

7. Fixed deposit of R 45 000 with an interest of R 4 000 is due to mature on the 15 of May 2021.

8. Depreciation is calculated at R 3 500 per month.

9. A new vehicle costing R 53 000 will be purchased and paid in April 2021.

115
ACTIVITY 4 : BUDGETS (55 marks; 33 minutes)

4.1 From the list below, choose the words that best suit the description given. Only write
the words next to the questions (4.1.1 – 4.1.5) in the ANSWER BOOK.

Cash budget; Debtors collection schedule;


Creditors payment schedule; Projected income statement;
Proceeds from sale of asset; Discount allowed

4.1.1 Estimated future receipts from customers are calculated.


4.1.2 An item that appears in the projected income statement but not in the cash
budget.
4.1.3 Indication of whether there will be sufficient inflow of cash to be able to support
expected payments.
4.1.4 Indication of future revenue and expenditure.
4.1.5 Expected future payments to suppliers. (5)
4.2 THUMAMINA TRADERS
The information relates to the budget period: 1 September - 31 October 2021.
REQUIRED:
4.2.1 Prepare the Debtors collection schedule. (14)
4.2.2 Complete the Cash budget. (26)
4.2.3 Name TWO items from the cash budget in question 4.2.2 that will not appear
in the projected income statement. (2)
4.2.4 Give TWO reasons why it is important to compare actual figures with budgeted
figures. (4)
4.2.5 You have noticed that the actual motor vehicle expense for August 2021 was
R5 000 more than the budgeted amount. Suggest TWO possible explanations
for this overspending. (4)
INFORMATION:
A Sales

ACTUAL PROJECTED
June 98 000
July 95 200
August 89 600
September 112 000
October 82 880

 25% of total sales is cash sales


 Although debtors are expected to pay within 30 days, payment trends show
that:

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o 30% pay in the month of sales
o 55% pay in the following month
o 12% pay two months after the sale
o The balance is written off as bad debt after two months

B Trading stock
 The business uses a constant profit mark-up of 40% on cost.
 A fixed base of stock is maintained.
 50% of all stock is paid cash.
 Creditors allow credit of 60 days, but allow a 5% discount if outstanding
balances are settled after 30 days. The business always take advantage of
this discount.
C Sundry expenses amount to R8 600 per month and are expected to increase
by 5% from 1 October 2021.
D Salaries and wages total R384 000 per annum. Employees are entitled to a
6% increase commencing in October 2021.
E Motor vehicle expenses are allocated R12 500 per month. This includes
depreciation which amount to R2 500 per month.
F The business has a loan of R240 000 at VW Bank at an interest rate of 12%
p.a. The monthly interest is paid on the 25th of every month. Take into account
that R40 000 of the loan is due to be paid on 1 October 2021.
G An investment is due to mature on 1 September 2021. The business is
expected to receive this amount together with interest at 15% p.a. for the last
two months, in September.
H The bank had a credit balance of R4 288 on 31 August 2021.
55

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ACTIVITY 5 : BUDGETS,ETHICS AND FINANCIAL INDICATORS
(52 marks; 42 minutes)

5.1 CASH BUDGET


You are provided with information relating to Greyston Stores. The business is
owned by Jerry Williams. The business uses a mark-up of 80% on cost. The budget
period ends on 31 December 2020.

REQUIRED:
3.1.1 Prepare the debtors’ collection schedule for November and December 2020. (7)
3.1.2 Complete the cash budget for two months ending 31 December 2020. (29)

3.1.3 Refer to transaction J, and explain why the employees should not be satisfied with (2)
the increase of 4% in their salaries.

INFORMATION:

A.Balances on 31 October 2020


Bank (favourable) R138 400
Loan: Terrie Bank (10% p.a.) R360 000
Fixed deposit at 6,5% p.a. R80 000

B.Total Sales

Actual
September R360 000
October R374 400

Budgeted
November R403 200
December R468 000

C. Credit sales comprise 40% of total sales.


A. The average collection from debtors over the past six months is provided
below and this trend is expected to continue over the budget period.
25% pay in the month of sale
60% pay one month after the month of sale
10% pay two months after the month of sale
The balance is written off in the third month after the month of sale.
E. The business replaces stock on monthly basis to maintain a fixed stock level
of R200 000.

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F. The business buys 70% of its trading stock on credit. Creditors are paid in the
month following the month of purchase to obtain a 5% cash discount.
G. A loan repayment of R24 000 is scheduled for 1 December 2020. The interest
on loan is paid monthly.
H. Interest on the fixed deposit is received quarterly. The interest for the last
quarter of 2018 is due on 31 December 2020
I. Salaries:
 The store manager earns R20 000 per month. However, from 1 December
2020 his salary will increase by 20%. He will also receive a bonus in
December equivalent to his December salary.
 The business employs ten sales assistants, each earning R6 000 per
month. They will receive a salary increase of 4% effective from 1
December. They do not get bonuses.
J. The owner’s monthly drawings are as follows:
 Goods: R5 000
 Cash: R30 000
The owner intends increasing his cash drawings to R50 000 in December as
he is taking his family on a holiday
K. Equipment costing R20 000 will be purchased for cash at the beginning of
December.
L. Operating expenses are expected to increase monthly in line with the current
inflation rate of 5,7%.
M Part of the buildings are rented out at a monthly rental of R5 000.

119
EXAMPLE 6
Makhubo Traders

Use the Income Statement for the year ended 30 June to prepare the Projected Income Statement of
Makhubo Traders for July, August and September 2021

Income statement of Makhubo Traders - 30 June 2021 .

Sales 960 000


Cost of sales (480 000)
Gross profit 480 000
Other operating income 38400
Rent income 38400
Gross operating income 518 400
Operating expenses (330 600)
Advertising 30 000
Bank charges 21 600
Depreciation 12 600
Insurance 21 000
Rates 7 200
Repairs 12 000
Salaries 105 600
Stationery 10 800
Wages 67 800
Water and electricity 42 000
Operating profit 187 800
Interest income [on Fixed deposit] 3 840
Profit before interest Expense 191 640
Interest expense (7 500)
Net profit for the year 184 140

ADDITIONAL INFORMATION
A. Average monthly sales are expected to remain constant in July and August, and will increase by 10% in
September.
B. A fixed mark-up is maintained throughout the year.
C. A monthly rental charged to the tenant will increase by 10% in August.
D. Interest on fixed deposit will remain unchanged
E. The firm has mortgage of R50 000 with Zakheni bank, the rate of interest on this mortgage is 15% p.a .
R10 000 of this mortgage is repayable on 01 August
F. Depreciation will remain fixed for July and August on 01 September the firm will purchase equipment
for R48 000 ,it will be depreciated at 10% p.a. on cost

G. Advertising, rates and water and electricity are expected to increase by 10% p.a. in August
H. All other expenses are expected to increase by 20% p.a.in September. All expenses are spread evenly
throughout the year.

120
EXPECTED ANSWER

Projected Income statement for July, August and September 2021

July August September


Sales 80 000 80 000 88 000
Cost of sales (40 000) (40 000) (44 000)
Gross profit 40 000 40 000 44 000
Other operating income 3 200 3 520 3 520
Rent income 3 200 3 520 3 520
Gross operating income 43 200 43 520 47 520
Operating expenses (27 550) (28 210) (32 590)
Advertising 2 500 2 750 2 750
Bank charges 1 800 1 800 2 160
Depreciation 1 050 1 050 1 450
Insurance 1 750 1 750 2 100
Rates 600 660 660
Repairs 1 000 1 000 1 200
Salaries 8 800 8 800 10 560
Stationery 900 900 1 080
Wages 5 650 5 650 6 780
Water and electricity 3 500 3 850 3 850
Operating profit 15 650 15 310 14 930
Interest income [3 840 ÷12] 320 320 320
Profit before interest Expense 15 970 15 630 15 250
Interest expense (625) (500) (500)
Net profit for the year 15 345 15 130 14 750

WORKINGS
Sales:
960 000 ÷ 12 = 80 000 Rent income
September 38 400 ÷ 12 = 3 200
80 000 x (100% + 10%) August
80 000 x 110% or (80 000 x 110) ÷ 100 3200 ×110% =3 520
880 000
Cost of sales Interest on mortgage
480 000÷12 = 40 000 50 000 × 15% ÷ 12 = 625
September August
88 000 × 50% = 44 000 50 000 – 10 000=40 000
40 000 × 15% ÷ 12 = 500
Depreciation Advertising
12 600 ÷ 12 = 1 050 30 000 ÷ 12 = 2 500
August 2 500 ×110% =2 750
48 000 × 10% =4 800 Rates
4 800 ÷ 12 = 400 7 200 ÷ 12 = 600
600 × 110% =660
For water and lights perform the same calculation
Wages and all other expenses
67 800 ÷ 12 = 5 650
5 650 × 120% =6 780

121
ACTIVITY 6
THUTHUKA TRADERS

Use the information given to prepare the Projected Income Statement for July and August 2021.

Income statement of Thuthuka Traders for the six months 01 January to 30 June 2021
Sales 900 000
Cost of sales (450 000)
Gross profit 450 000
Other operating income 24 000
Rent income 24 000
Gross operating income 474 000
Operating expenses (126 000)
Bad debts 1 500
Bank charges 2 100
Depreciation 12 600
Consumables 6 000
Insurance 3 600
Telephone 7 800
Salaries and wages 90 000
Stationery 2 400
Profit before interest Expense 348 000
Interest expense (15 000)
Net profit for the year 333 000

Additional information
A. Sales will increase by R10 000 in July and remain constant in August.
B. A fixed mark-up will be maintained.
C. A fixed deposit of R50 000 will be made at 9 % p.a. on 01 August
D. Salaries and wages will be increased by 10% in July.
E. Telephone charges are expected to increase by 10% in July and 5% in August.
F. The insurance monthly premium will increase by R200 in August
G. The rent income will increase by 15 % in August
H. Stationery and consumable stores are expected to increase by 5% in August
I. The advertising expenses for July to December are expected to be R9 000
J. Other expenses will remain constant

122
8. INVENTORY

INTRODUCTION
In grade 10 you were introduced to perpetual inventory systems, grade 11 will focus at perpetual inventory
system and periodic inventory system.

Definition of inventory systems


 The periodic and perpetual inventory systems are different methods used to track the quantity of
goods on hand.

Perpetual inventory Periodic inventory


 Perpetual system keeps continual track of  The periodic system relies upon a physical
inventory balances and the cost of sales count of the inventory to determine the
number of units on hand and the cost of
goods sold.

The difference between the two systems are as follows:


Perpetual inventory system Periodic Inventory System

 The movement of stock is recorded on an  There is no continuous recording of the


ongoing or continuous basis. The exact movement of trading stock. The value of the
quantities and types of stock items on hand trading stock on hand cannot be worked out
are shown by the system at any point in time. during the financial year.
 Businesses that are selling one type of  It is used by businesses that sell large
commodity, like furniture, cars, or computers quantities of trading stock with low value e.g.
will make use of the perpetual stock method. supermarkets.
 The physical stocktaking is conducted to  The value of the stock on hand at the financial
verify the stock on hand. year-end is calculated by conducting a physical
stocktaking.

Accounts used to record periodic and perpetual inventory :

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ACCOUNTS AFFECTED BY PERPETUAL AND PERIODIC INVENTORY SYSTEM

PERIODIC SYSTEM PERPETUAL SYSTEM

 Stock purchases are recorded in the Dr Purchases  Stock purchases are recorded in the Trading Dr Trading
Purchases account – expense account stock account – asset account Stock

 Carriage on purchases/ custom duties are Carriage debited –  Carriage on purchases/ custom duties are Dr Trading
recorded directly in the Carriage on increase expenses recorded in the trading stock account stock ,value of
purchases / Custom duties account stock increased

 Returns on stock purchases are credited  Returns on stock purchases are credited in the
in the Purchases account trading stock account
 Donations of stock are credited in the  Donations of stock are credited in the trading Cr Trading
Purchases account Credit Purchases - stock- reduced
stock account
 Drawings of stock are credited in the  Drawings of stock are credited in the trading
purchases account stock account

124
Advantages of Periodic Inventory Disadvantages of Periodic Inventory

o It is cost effective as there is expensive equipment like bar o Control over stock is not very effective
codes and scanning equipment
o It is not necessary to calculate cost of sales on a continuous o Theft is not quickly detected – a stock-take is necessary to
basis determine leakages or theft
o This system is suitable for businesses where it is difficult to o Trading stock deficit account is not completed, the business will
determine the cost price of individual items forfeit the reduction of taxable income.

Advantages of Perpetual Inventory Disadvantages of Perpetual Inventory

o The business can verify physical stock at any time o The system is complicated, it requires more accounting entries.
o The business can prepare interim accounts
o Discrepancies, errors, shrinkage in stock are discovered and o It is very expensive to run this system
action can be taken.
o Regular updates in stock help in avoiding deterioration (decline
in quality) in stock and obsolescence (outdated).
o Stock can be replenished or replaced timeously.

125
COMPARISON OF THE PERPETUAL INVENTORY SYSTEM WITH THE PERIODIC INVENTORY SYSTEM

PERPETUAL STOCK SYSTEM PERIODIC STOCK SYSTEM


No. Transaction A/c Debit A/c Credit Journal A O L A/c Debit A/c Credit Journal A O L
1. Bought merchandise Trading stock Bank CPJ 0 0 Purchases Bank CPJ _ _ 0
for cash
±
2. Bought merchandise Trading stock Creditors CJ + 0 + Purchases Creditors control CJ 0 _ +
on credit control
3. Return merchandise Creditors Trading stock CAJ _ 0 _ Creditors Creditors CAJ 0 + _
to suppliers control control Allowances or
Purchases
4 Carriage on Trading stock Bank CPJ 0 0 Carriage on Bank CPJ _ _ 0
purchases [Cash]
± purchases
5. Carriage on Trading stock Creditors CJ + 0 + Carriage on Creditors control CJ 0 _ +
purchases [Credit ] control purchases
0
6 Merchandise taken for Drawings Trading Stock GJ _ _ 0 Drawings Purchases GJ ± 0
own use
0
7. Merchandise donated Donation Trading Stock GJ _ _ 0 Donation Purchases GJ ± 0

8. Merchandise sold for Bank Sales CRJ + + 0 Bank Sales CRJ + + 0


cash

Cost of sales Trading stock CRJ _ _ 0


9. Merchandise sold on Debtors Sales DJ + + 0 Debtors Sales DJ + + 0
credit Control Control
Cost of sales Trading stock DJ _ _ 0
10. Merchandise returned Debtors Debtors DAJ _ _ 0 Debtors Debtors Control DAJ _ _ 0
by debtors Allowances Control Allowances
Trading stock Cost of sales DAJ + + 0
11 Closing Stock Trading Stock Closing stock GJ + + 0

126
CALCULATION FOR COST OF SALES

 Perpetual Inventory system – cost of sales calculated at POINT OF SALE


 Periodic inventory – cost of sales is calculated at the end of financial period as indicated below :

Calculation for the cost of sales – Perpetual Inventory


Assume your sales = R500 000
Mark up is 60%
Cost of sales is : 500 000 x 100 = 312 500
160

Calculation for the cost of sales – Periodic Inventory


Opening Stock xxxx Always remember to
Add Purchases xxxx deduct purchases
Add Carriage on purchases xxxx returned
Carriage on sales will
Add import duties xxxx
affect the profit and loss
Less closing stock (xxxx) account or operating
Cost of sales xxxx expenses in the income
statement

CALCULATION FOR GROSS PROFIT

Sales – Cost of sales = Gross Profit

EXAMPLE 1

INSTRUCTION

Use the following information to calculate the cost of sales for the year ended 28 February 2021.

INFORMATION ANSWER
Stock – 1 March 2020 R60 000 R
Purchases for the year R450 000 Opening stock 60 000
Carriage on purchases R20 000 Plus Purchases 450 000
Custom duty R5 000 Plus on purchases 20 000
Stock 28 February 2021 R35 000 Plus Custom duty 5 000
525 000
Less Closing stock (35 000)
Cost of sales 490 000

NOTE: Creditors Allowances will be deducted from the


Purchases and the difference is “Net Purchases”.

127
EXAMPLE 2
Use the following information to calculate the purchases for the year ended 28 February 2021.

Credit sales R90 000


Carriage on sales R8 000
Allowances to debtors R5 500
Opening stock - 1 March 2020 R20 000
Closing stock - 28 February 2021 R40 000
Cost of sales R67 000

EXPECTED ANSWER

Opening stock 20 000 Bottom up : NOTE


Purchases 87 000 67 000 + 40 000- The sign for the
107 000 20 000 = 87 000 cost of sales will
Closing Stock (40 000) Change signs not change
Cost of sales 67 000

ACTIVITY 1
INFORMATION
The following information was taken from the accounting records of three separate businesses.
Calculate the unknown amounts and percentages on 28 February 2021

BALANCES AND TOTALS - 29 FEBRUARY 2021:


Business A Business B Business C

Opening Stock 60 000 56 000 48 000


Purchases A 120 000 115 000

Carriage on purchases 8 000 7 500 H

Cost of goods available for sales 198 000 D 169 000

Less Closing stock 55 000 E I

Cost of sales B 135 500 130 000


Gross profit 71 500 54 200 J

Sales 214 500 F 208 000

Gross profit on cost of sales C 40% K

Gross profit on turnover 33,33% G L

128
ACTIVITY 2

Manyaka Traders
The following information for June 2021 relates to Manyaka Traders. The periodic inventory
is in use and the mark- up on cost is 25%.

REQUIRED:

 Calculate the cost of sales


 Calculate the gross profit

1. TRANSACTIONS FOR JUNE 2021

02 Purchased merchandise from Bronkhorst Ltd, R35 000 was transferred to their current account.
07 Purchased merchandise on credit from Mogashoa Wholesalers for R105 000. Attached to the
invoice is the delivery charges of R1 000.
10 Sold goods on credit to N.Naidoo for R90 000.
14 Returned merchandise to Mogashoa Wholesalers, cost price R4 000.
23 Sold goods for cash, the cost price is R30 000.
28 N.Naidoo returned the goods for R1 200, refer to the 10th of June.

2. INFORMATION
Stock on hand :
01 June 2021 R105 000
30 June 2021 R140 000

ACTIVITY 3
MANDISA STORES
Mandisa Stores sells sport clothes. They apply a 50% mark-up on all products.

REQUIRED

1. Calculate the cost of sales for the period ending 30 June 2021
2. Calculate the gross profit for the year
3. Calculate the actual mark-up percentage achieved.
4. Supply two reasons why the business did not achieve the intended mark-up.
5. The owner is concerned about the high transport costs on purchases. Is there a way to solve this
problem? Explain.
6. The business regularly donates cash and trading stock to several charity organizations. How does the
business benefit from making donations? Explain two ways.
7. The owner is considering changing to the perpetual system the following year.What should he consider
before taking this action?

129
INFORMATION
Extracted from the General Ledger on 30 June 2021 (end of financial year)
Opening stock 320 000
Purchases for cash 710 000
Purchases for credit 240 000
Cash sales 1 024 500
Credit sales 850 000
Debtors allowances 42 000
Carriage on purchases 162 000
Custom duty 56 000

ADDITIONAL INFORMATION

1. The following invoice received has not yet been recorded

INVOICE

To : Mandisa Stores Supplier: Vula Wholesalers

30 treadmills 35 300
Less 10% trade discount 3 530
31 770
Add transport costs 1 800
33 570

2. Donated a soccer kit to the local school, cost price R2 900


3. A debtor returned goods which he had bought for R3 000 (cost price R1 500)
4. According to the stock-taking done on 30 June 2012 there was stock on hand costing
R210 000 (after taking 1, 2 and 3 above into account)
5. After the stock-taking has been done, stock costing R3 400 were returned to the supplier.
A debit note had been issued.
6. The owner remembered after the stock-taking has been done that she had taken stock of
R1 400 for own use.

130
ACTIVITY 4: PERIODIC INVENTORY AND ANALYSIS AND INTERPRETATION OF FINANCIAL
STATEMENTS

4.1 PERIODIC INVENTORY

High Flying T-shirts imports one design of T-shirts from “The T-Shirt Co” in Egypt. They use the
periodic inventory system.

REQUIRED:

Calculate the cost of sales for the year ended 31 December 2020. (10)

INFORMATION:

A. The following balances appear in the books on 31 December 2020:

Trading stock – 1 January 2020 (3 000 T-shirts) R75 000


Purchases (35 000 T-shirts) R875 000
Carriage on purchases R90 250
Carriage on sales R12 500
Custom duties R87 500

B. Adjustments and additional information.

(i) An additional 10 000 T-shirts were ordered from “The T-Shirt Co.” in December. The order
was received on 20 December 2020 and the account of R250 000 is still outstanding.

(ii) Custom duties equal to 10% of this purchase was paid immediately.

(iii) Carriage on purchase amounting to R16 000 was paid to Fast Freight for transporting the
T- shirts form Egypt to South Africa.

(iv) T-shirts costing R20 000 were returned to “The T-shirt Co.” on 30 December.

(v) No entry has been made of 200 T-shirts with a cost price of R5 000 which were donated to
the organizers of the local yacht race on 29 December.

(vi) According to a stock count on 31 December 2020 there were 3 750 T-shirts on hand
valued at R93 750.

131
ACTIVITY 5

Nalini Stores uses the periodic inventory system. They apply 80% mark-up on their products.

REQUIRED:
Calculate the following for the period ending 29 February 2020:

5.1 Cost of sales


5.2 Gross profit
5.3 Actual mark-up % achieved
INFORMATION:
Totals extracted from the records on 29 February 2020, the end of the financial year.

R
Opening stock 56 000
Purchases (cash and credit) 342 000
Carriage on purchases 12 700
Customs duty 5 500
Cash sales 280 000
Credit sales 425 000
Debtors allowances 21 000

Additional information:

The following have not yet been taken into account:


(a) Goods returned to creditors, R900.
(b) Carriage on purchases not recorded, R150.
(c) A physical stock count after taking all of the above into account, revealed trading stock on
hand, R48 000.

132
ACTIVITY 6

The transactions below was taken from the books of Thebuss Stores.

REQUIRED:

6.1 Analyse the transactions according to the columns provided in the


answer book.

TRANSACTIONS:

(i) Bought trading stock and transferred funds electronically.

(ii) Returned trading stock to a creditor.

(iii) Sold goods on account.

(iv) Received an invoice for carriage on purchases. (11)

6.2 The following information was taken from the books of Tembisa Traders
on 31 October 2020. Tembisa Traders use the periodic inventory system.

REQUIRED:

 Calculate cost of sales (7)

INFORMATION:

R
Opening stock 48 000
Purchases 224 000
Sales 350 000
Returns to creditors 12 000
Returns from debtors 43 000
Carriage on purchases 18 000
Carriage on Sales 15 300
Closing stock 55 500

133
9. COST ACCOUNTING

INTRODUCTION
Cost Accounting concepts and basic calculations were introduced in grade 10.In grade 11 the focus will be
calculation of costs within the manufacturing environment, ledger accounts, ethics and internal control in
relation to manufacturing.

CONCEPTS UNIQUE TO COST ACCOUNTING:


CONCEPT EXPLANATION

Manufacturing  A manufacturing enterprise is an enterprise that manufactures products


business (completed products) from raw materials.
 It transforms raw materials into finished or completed products.
Costing It is the calculation of the costs involved in producing a product.

Unit The word used to describe a single product produced in the factory.

Direct material costs The raw material needed to produce the product – also called Direct raw
material cost.

Indirect material costs These are materials that are indirectly involved in the process of
manufacturing the product e.g. cleaning material costs, packing materials.
Direct labour costs This is the payment to workers who are directly involved in manufacturing of
the product.

Indirect labour costs This is the amount paid to workers in the factory who are not directly involved
with the production process e.g. the cleaning staff)
Factory overheads  These are the expenses incurred to run the factory, but none of them are
directly involved with the production process. e.g. factory rent
 Indirect labour and indirect materials are classified as factory overheads.
Primary production Direct material cost plus direct labour cost
cost
Total production cost It is the total cost to produce the products.
or manufacturing costs Prime cost plus factory overhead cost
(Direct material cost + Direct labour cost + Factory overhead cost)
Cost per unit or unit This is the cost of producing one product/unit
cost (Total production cost ÷ total units produced)

Fixed costs These costs do not change irrespective of the number of items produced, the
cost for rent is the same whether the quantity produced by the factory is
increased or reduced.

Variable costs These costs increase when the factory produce more products and decrease
when the factory produce less products (e.g. electricity)
Total costs Fixed costs + Variable costs
Unit costs This is the cost to produce one unit.
Marginal income The difference between the selling price per unit and the variable cost per unit.
(contribution) (SP/unit – VC/unit) It is used to work out the break-even point.

134
CONCEPT EXPLANATION
Break-even point  It is the number of units that need to be sold to cover all costs, but no profit is
made. It is when total receipts are equal to total costs.
 It is the point where there is no profit or loss incurred.
NOTE :The break-even point can be calculated in units as well as rand value

Work-in-progress Products that have not yet been completely turned into finished goods and are still
stock in the manufacturing process.
Finished goods Completed goods are ready for consumption, these units are ready to be sold.
(Completed
products)
Selling and These are costs incurred in the selling of the finished goods, e.g. advertising and
distribution cost sales commission. These are variable costs.
Administration cost These are costs incurred to run the business but are not tied to the manufacturing
or sales costs. These costs will include office rent, salaries of office employees,
depreciation of office equipment etc.

The following methods are used to allocate costs and expenses :

Ratios
Rent amounting to R200 000 was paid during the year. This amount must be divided in the ratio 3:1:1
between the factory, the office and the sales department.
Factory Office Sales department 200 000
3 1 1 5
3 x 200 000 1 x 200 000 1 x 200 000 200 000
5 5 5
=120 000 = 40 000 = 40 000

Percentages
Sundry expenses amounted to R25 000. Factory accounts for 80%, Office 5% and Sales department
15%
Factory Offices Sales department
80% 5% 15% 100%
80 x 25 000 5 x 25 000 15 x 25 000 R25 000
100 100 100
=R20 000 = R1 250 = 3 750

Square Meters
Rent is allocated on proportion to floor area. R72 000 Floor space: Factory 1 000 square meters,
Office 500 square meters, Sales department 500 square meters.
Factory Offices Sales department Total
1 000 500 500 2 000
1 000 x 72 000 500 x 72 000 500 x 72 000
2 000 2 000 2 000
= 36 000 = 18 000 = 18 000

135
SUMMARY OF LEDGER ACCOUNTS

RAW MATERIALS STOCK (direct materials in the store room)


Balance (not used last year) b/d Direct mat cost (materials sent to factory) 4
Creditors control (raw materials bought) Balance (amount left in storeroom year-end) c/d
Bank (raw materials bought)

DIRECT LABOUR COST (labour costs)


Factory wages Work-in Process (direct labour) 3

INDIRECT MATERIALS
Consumable stores stock (reversal ) 9 Factory overhead cost (Indirect materials used) 2
Creditors control (bought) Consumable stores stock (left over year-end) 8
Bank (bought)

DIRECT MATERIAL COST


Raw material stock 4 Work-In –Process stock 10

CONSUMABLE STORES STOCK


Indirect materials stock (left over year-end) 8 Indirect materials (reversal of adjustment) 9

FACTORY OVERHEAD COST (total indirect costs)


Salaries, wages (indirect labour) 1 Work-in Process 5
Electricity, etc
Depreciation (on machinery)
Indirect materials 2

WORK-IN-PROCESS
Balance (unfinished tables end of last year) b/d Finished goods stock 6
(goods ready for sales)
Direct material cost 10 Balance (unfinished goods) c/d
Direct labour cost 3
Factory overhead cost 5

All direct and indirect expenses to make the goods


FINISHED GOODS
Balance (goods not sold last year) b/d Cost of sales (goods sold this year) 7
Work-in-Process (ready to be sold) 6 Balance (goods not sold this year) c/d

COST OF SALES
Finished goods (finished goods sold this year) 7 Trading account 8

TRADING ACCOUNT
Cost of sales 8 Sales
Profit and loss account (gross profit)
xx xx

136
MANUFACTURING ACCOUNTS –EXAMPLE 1

The following information was extracted from the accounting records of Chantel Manufacturers,
manufacturers of ladies handbags.

REQUIRED:

Draw up the following accounts in the General Ledger, properly closed/balance on 31 July 2020:
1. Raw Material stock
2. Work-in–Process
3. Finished Goods Stock
4. Factory overheads
5. Indirect Material

INFORMATION:

Balances on 1 August 2019


Raw Material 67 224
Consumables on hand (indirect material) 1 590
Work-In-Process 11 335
Finished Goods 39 784

Summary of transactions and other information for the year ending 31 July 2020
Raw material purchased in cash R 389 200
Raw material purchased on credit 79 332
Raw material issued for production 496 200
Wages paid: Direct labour 338 780
Indirect labour 105 600
Consumables purchased for production 70 890
Factory rent paid 48 000
Factory insurance paid 16 000
Factory maintenance paid 32 500
Depreciation on factory equipment 28 600
Cost of sales of finished goods 1 143 220
Sale of finished goods 1 829 152
Cost price of finished goods 1 136 079
Consumables on hand (indirect material) 31 July 2020 1 056

137
EXPECTED ANSWER

Dr Raw Material stock B6 Cr


2019 1 Balance b/d 67 224 2020 31 Raw Material GJ 496 200
Aug Jul issued
2020 31 Bank CPJ 389 200 Balance c/d 39 556
Jul
Creditors control CJ 79 332
535 756 535 756
2020 1 Balance b/d 39 556
Aug

Dr Work-in-Process Stock B7 Cr
2019 1 Balance b/ 11 335 2020 31 Finished goods GJ 1 136 079
Aug d Jul inventory
2020 31 Direct material GJ 496 200 Balance c/d 12 360
Jul costs
Direct labour costs GJ 338 780
Factory overheads GJ 302 124
1 148 439 1 148 439
2020 1 Balance 12 360
Aug

Dr Finished Goods Stock B8 Cr


2019 1 Balance b/d 39 784 2020 31 Cost of Sales GJ 1 143 220
Aug Jul
2020 31 Work-in-progress GJ 1 136 079 Balance c/d 32 643
Jul
1 175 863 1 175 863
2020 1 Balance 32 643
Aug

Dr Factory Overheads C2 Cr
2020 31 Wages GJ 105 600 2020 31 Work-in- GJ 302 124
Jul Jul Progress
Rent expense GJ 48 000
Insurance GJ 16 000
Maintenance GJ 32 500
Depreciation GJ 28 600
Indirect Material GJ 71 424

Indirect Material cost


Consumables on hand 1 590
Bank 70 890
Consumables on hand (1 0560)
Factory overheads 71 424

138
ACTIVITY 1 : MANUFACTURING ACCOUNTS

The following information was extracted from the accounting records of Jele Manufacturers,
manufactures of plastic clothes pegs

REQUIRED:

Use the information given below to draw up the ledger accounts shown below.

1. Raw material stock account


2. Factory overheads
3. Work in process
4. Indirect material account
5. Finished goods stock
6. Trading account

INFORMATION:

28 February 2021 28 February 2020


Raw material 20 400 16 800
Consumable on hand (indirect material) 9 800 6 700
Work in process 9 400 5 900
Finished goods ? 25 100

Summary of transactions and other information for the year ending 28 February 2021
Raw material purchased in cash R 55 000
Raw material purchased on credit 25 000
Carriage on purchases paid in cash 2 500
Wages paid: Direct labour including UIF and Pension fund 39 800
Indirect labour including benefits 17 000
Consumables purchased for production (cash) 14 500
Factory insurance paid 2 900
Delivery expense 9 900
Factory rent paid 16 000
Deprecation on factory equipment 8 600
Sundry factory expense 11 200
Sales of finished goods 325 000
Cost of sales of finished goods 175 500

139
CONTRIBUTION PER UNIT AND BREAK-EVEN POINT

Contribution per unit


 Is the difference between the selling price per unit and the variable cost per unit.
(SP per unit – VC per unit)

Note: Contribution per unit is one of the figures used to calculate the break-even point.

EXAMPLE 2

INFORMATION
 Mr Baloyi produced 1 800 cakes and sold them for R20 each.
 Variable cost amounted to R17 000
 Fixed cost amounted to R10 000

SUGGESTED ANSWER

Selling price = 1 800 x R20 = R36 000

Contribution per unit = Sales – Variable cost


Units produced

= 36 000 – 17 000
1 800

= 19 000
1 800

= R10,56

Break- even point


 It is the point where there is no profit or loss incurred.
Formula used to calculate :

Break-even point

Total fixed cost


Contribution per unit

= Total fixed cost


Selling price per unit – Variable cost per unit

= x units

Note : The break-even point can be calculated in units as well as rand value

140
EXAMPLE 3
INFORMATION
Use the information extracted from the records of Bonolo Manufacturers to calculate the break-even point ,
the business manufactures the hand cream.

Total fixed cost R14 400


Total variable costs R10 800
Fixed costs per unit R24
Variable cost per unit R18
Total costs R25 200
Total cost per unit R42
Number of units produced R600
Selling price per unit R50

ANSWER
Calculate the break-even point in units Calculate the break-even point in sales value
Total fixed costs Break-even point in units x selling price per unit
Contribution per unit
= 450 units x R50
= Total fixed cost
Selling price per unit – Variable cost per unit = R22 500

= 14 400
50 – 18

= 14 400
32 = 450 units

SELLING AND DISTRIBUTION COSTS

 These accounts have nothing to do with the manufacturing process and are closed off to the Profit and
loss account
Selling and Distribution Costs
Advertising xxx Profit and loss xxxx
Delivery expenses xxx
Bad debts xxx
Commission on sales xxx These costs are classified as
Refer to textbook for more examples variable costs

Administration Costs
Salaries xxx Profit and loss xxxx
Depreciation xxx
Insurance xxx
Sundry administration costs xxx These costs are classified as
Rent expense xxx fixed cost

141
Variable and fixed costs:

Variable cost = Direct Material cost +


Direct Labour Cost +
Selling and Distribution Cost
Fixed cost = Factory Overheads Cost +
Selling and Distribution Cost

ACTIVITY 2

INFORMATION:
Sun Factory produced leather soccer balls during the year. The soccer balls are sold at R70 each.
All 10 000 soccer balls produced were sold.

REQUIRED:
Calculate the following :
 Total Fixed cost
 Variable cost per unit
 Contribution per unit
 Break-even point

A list of monthly costs:


Direct material costs – leather (R10 per unit) R100 000
Direct labour costs 150 000
Factory overhead costs 200 000
Selling and Distribution costs 50 000
Administration costs 70 000

142
ACTIVITY 3: MANUFACTURING ACCOUNTS AND BREAK EVEN POINT
3.1 JELE MANUFACTURERS
Jele Manufacturers produces rugby balls which are supplied to local schools and retailers
in the Despatch area. The financial year ends on 28/29 February each year.
REQUIRED:
3.1.1 Calculate the following for the financial year:
 Direct material cost (7)
 Direct labour cost (5)
3.1.2 Record the following transactions in the General Ledger:
 Work-in-progress stock (10)
 Finished goods stock (6)
3.1.3 The owner is concerned about the control of workers in production. Provide TWO
points that justify his concern. Quote relevant figures. (6)

INFORMATION:
A. Stock balance:

1 March 2020 28 February 2021


R R
Raw material 23 400 38 700
Work-in-progress 45 300 60 000
Finished goods 27 000 22 000

B. Transactions for the year

 Raw material for R342 600 was purchased on credit.

 Damaged raw material worth R15 700 was sent back to creditors.

 Cash purchase of raw material amounted to R155 000.

 Delivery cost on cash purchases of raw material, R19 400.

 Total factory overheads for the year amounted to R273 340.

C. Details of workers in production:

Number of workers 4
Normal hours worked (basic) 1 440 hours per worker
Normal time as per contract 40 hours per week, 45 weeks per year
Normal time rate R35 per hour
Total overtime hours worked 640 hours
Overtime paid R33 600

The business contributes 1% to the UIF and 9% to the pension fund on behalf of
all employees.

143
3.2 LUVUNO AND SESHOHLI DOLLS

The partnership manufacturers dolls. The financial year ended 30 April 2021. The mark-
up percentage on cost is 50%.

REQUIRED:

3.2.1 Calculate the break-even point and comment on your findings. (10)

3.2.2 Did the business achieve the targeted gross profit on sale? Provide a calculation (6)
to support your opinion,

INFORMATION:

A. Details of the cost accounts:

UNIT COST TOTAL AMOUNT


Direct material Variable cost ? R71 400
Direct labour Variable cost R23 R?
Administration Fixed cost R12 R30 600
Selling and Variable cost R14 R35 700
distribution
Factory Fixed cost R18 R45 900
overheads

B. 2 550 dolls were made and sold during the financial year.

C. Total sales amounted to R242 250.

[50]

144
ACTIVITY 4: MANUFACTURING (40 marks; 35 minutes)
4.1 C & A CLOTHING
You are supplied with information regarding C & A Clothing for the financial year ending on 30 June 2020.
The business manufactures sports clothes for their local school.
REQUIRED:
4.1 Calculate the following for the year ended on 30 June 2020:
4.1.1 Direct material costs (5)
4.1.2 Direct labour costs (6)
4.2 Complete the following ledger accounts in the General Ledger:
4.2.1 Factory overheads (12)
4.2.2 Work-in-progress stock (6)
INFORMATION:
A. Inventory balances:
30 June 2020 30 June 2019
Raw material stock R85 050 R62 100
Work in progress R45 000 R63 900
Finished goods stock R68 700 R81 300

B. Transactions during the year:


R
Raw materials purchased during the year 1 914 450
Transport and carriage on raw materials purchased 39 300
Returns of raw materials to suppliers 49 050
Water and electricity paid 219 000
Rent expense 418 000
Insurance paid 45 000
Maintenance of factory equipment 29 106
Depreciation on factory equipment 48 585
Advertisements 38 250
Wages ?

C Additional information:

(i) Indirect material issued to the factory, R53 595.

(ii) Water and electricity must be divided between the factory and the selling
department in the ratio 3:1.

(iii) Repairs to the factory equipment to the value of R2 925 was completed during
June 2020, but it will only be paid in July 2020.

(iv) Insurance includes an amount of R 9 000 that was paid for the period 1 January
2020 to 31 December 2020. 60% of the insurance is related to the factory.

(v) Rent was outstanding for the last month. The rent was divided according to the
floor space. Two thirds of the floor area is covered by the factory.

145
(vi) Wages
 There are 10 factory workers.
o Basic wages per month, R6 000
o Overtime for the year, R382 800
o Deductions and contributions:
o Pension fund deduction: 8% of basic salary
o Pension fund contribution: 10% of basic salary
o UIF contribution: 1% of basic salary
The factory foremen’s’ salary amounts to R 156 000 for the year.
 There is one cleaner:
o Received R1 125 per week for 52 weeks
o Spends two thirds of her time in the factory and the rest in the sales
department
 There is one administrative clerk:
o Salary per month, R 7 500. He worked for 12 months.
4.3 YASMIN’S CANDLE MANUFACTURERS

You are supplied with information relating to Yasmin’s Candle manufacturers at the
end of the second years’ business, 30 June 2020. No stock was on hand at the
beginning or the end of the financial year.

4.3.1 Calculate the following for the financial year ended 30 June 2020:
 Variable cost per unit (2)

 Break-even point (4)


4.3.2 Comment on the break-even point. Quote figures.
4.3.3 The owner decided to increase the selling price for 2020.
 Calculate the percentage increase in the selling price.

INFORMATION:
2020 2019
Number of units produced 13 500 units 16 000 units
Break-even point in units ? 2 330 units
Price per unit Total Price per unit Total
Sales R88,00 R1 188 000 R80,00 R1 280 000
Total fixed costs R126 896 R120 000
Administration cost R3,40 R45 900 R2,50 R40 000
Factory overheads cost R6,00 R80 996 R5,00 R80 000
Total variable costs R492 750 R456 000
Direct material costs R18,00 R243 000 R14,00 R224 000
Direct labour costs R12,00 R162 000 R10,00 R160 000
Selling and distribution R6,50 R87 750 R4,50 R72 000
cost

40

146
ACTIVITY 5

MANUFACTURING ACCOUNTS AND BREAK-EVEN POINT

5.1 Mongezi Manufacturers manufacture and sell soccer and netball balls. The financial year
ended on 30 June 2021.

REQUIRED:
5.1.1 Calculate the raw materials used for production. (4)

5.1.2 Complete the following accounts in the General ledger:


Factory overheads cost (14)
Work-in-process stock (10)
Finished goods stock (7)

INFORMATION:

A. Balances
30 June 2021 1 July 2020
Raw material stock 73 600 138 800
Work-in-process stock ? 31 200
Finished goods stock ? 93 200
Indirect material on hand 16 800 23 600

B. TRANSACTIONS FOR THE YEAR ENDED 30 JUNE 2021:


Raw materials purchased for cash 382 000
Carriage on purchases of raw materials (cash) 11 600
Raw materials issued for production ?
Indirect materials purchased for cash 69 200
Direct wages 368 000
Wages of a cleaner – Admin 7 600
Salaries – sales staff 74 400
Advertising 12 400
Rent expense 46 400
Factory maintenance 26 000
Water and electricity 50 000
Depreciation on factory machinery 26 400
Commission on sales (3% of sales) 41 400

C. ADDITIONAL INFORMATION:

 Rent must be allocated in proportion to the floor space occupied. The factory area use
600 square meters and the office area uses 400 square meters.
 The cleaner spends 20% of his time cleaning the Administration Block and the rest in the
factory. Cost must be allocated according to the time spend in each department.
 The factory uses 75% of the water and electricity.
 14 300 units were produced at the cost of R140 per unit.
 Cost of sales is equal to 70% of sales.

147
5.2 BREAK EVEN POINT
Katlego Mahlangu started his own business. He sells and makes personalised
key rings.
REQUIRED:
5.2.1 Explain to Katlego why it is necessary to calculate the Break-even point. (2)
5.2.2 Calculate the Break-even point achieved by Katlego (6)
5.2.3 Comment on the level of production achieved by Katlego. (2)
INFORMATION:
Production and sales figures at the end of 2021.

Details Total Per unit


Direct material costs R 9 800 R 10
Direct labour costs R 5 880 R6
Factory overheads R 6 860
Selling and distribution costs R 2 940 R3
Administration costs R 700
Sales : 2020 = 1 100 units R30 800 R28
2021 = 900 units
Breakeven point: 2021 870 units

[45]

148
10. VALUE ADDED TAX

Value Added Tax


An indirect tax that is charged whenever goods are sold or when services are rendered by a registered VAT
vendor. In South Africa the Standard rate of VAT is 15%.

VAT Concepts Explanation


VAT Vendor A business that is registered for VAT, there are two categories of
registration:
 Compulsory registration: any business whose annual income
exceeds R1 Million is required to register as a VAT vendor.
 Voluntary registration: Any business whose annual income is less
than R1 Million may voluntarily register as a VAT vendor, provided that
the business has an annual income in excess of R50 000.

Output VAT It is the VAT that is charged by the vendor when he sells goods or renders a
service. The output tax is included in the price that the customer is charged
for the goods or services.

Input VAT VAT paid by a registered vendor on purchases from another registered
vendor as well as VAT paid on other business expenses (e.g. rent) are known
as input tax.

Standard rate The standard rate is the normal rate at which VAT is charged when goods
are sold or services are rendered by a registered VAT vendor. The standard
rate is currently at 15% .The rate is adjusted by the minister of finance.

Zero rated Zero-rated supplies are supplies of goods and services on which output VAT
is levied at a rate of 0%.
Tax Exempt An exempt supply is the supply of goods or services upon which neither
VAT at the standard rate or zero-rate is chargeable.

VAT 201 form Is a declaration, which you need to make at the end of every tax period if you
are a vendor, which reflects the VAT that you have charged on supplies
(output tax), and the amounts that you believe you are entitled to deduct as
input tax.

SARS The South African Revenue Service (SARS) is the nation’s tax collecting
authority they are responsible for administering the South African tax system
and customs service.

149
EXAMPLES OF ZERO-RATED GOODS
 Goods export from SA  Mealie rice  Fruit and vegetables
 Brown Bread  Dried lentils  Pilchards in cans
 Brown wheaten meal  Mealies  Sardines in cans
 Maize meal  Rice  Milk
 Samp  Beans  Cultured milk
 Cooking oil  Eggs  Milk powder
 Edible legumes, pulses  Leguminous  Dairy powder blends
plants
 Petrol and diesel  International
transport
Other examples will include :
 Services supplied outside SA (Exports)
 Certain supplies made from farming
 Agricultural or pastoral purposes (provided certain requirements are met)
 Certain gold coins issued by SARB (including the Kruger Rand)
 State subsidies and donations to welfare organisations
 Transfer payments made by public authorities to vendors

The zero rate will not apply when zero-rated foodstuffs are prepared for immediate consumption, for
example:
 A glass of milk served in a restaurant
 A prepacked salad with salad dressing purchased at a supermarket
 Sandwiches and other take-away foods.
 A punnet of vegetables seasoned with herbs and including a stick of butter
 A pack of rice or beans containing a sachet of flavouring
 A gift hamper consisting of a basket of fruit with chocolates and nuts
 Peri-peri-flavoured cooking oil.

VAT-EXEMPT SUPPLIES
The following goods and services are exempted from VAT:
 Passenger transport by road and rail
 The rental of residential accommodation
 Educational services in crèches, nursery schools, primary and secondary schools, after school
centres, universities and technikons.
 Insurance ,pension and life insurance benefits
 Medical services and medicines supplied by state and provincial hospitals and local authority
clinics
 The supply of goods and services by an employee organisation to its members to the extent
that the consideration consists of membership contributions.

150
STANDARD - RATED SUPPLIES

With the exception of the items listed above, all items are subject to the standard VAT of 15%. In April 2018
the rate was increased from 14% – 15%.

VAT CALCULATIONS OF USING INCLUSIVE AND VAT EXCLUSIVE AMOUNTS

VAT Exclusive
 The amount does not include VAT.
 Assume that an exclusive amount of R200 does not include the VAT.
VAT Inclusive
 The amount that includes VAT
 To determine the inclusive price : VAT Exclusive Plus VAT = VAT Inclusive
R200 + (15% of R200) = R230

Amount
(VAT exclusive) 100% R200
R200 x 15% = R30
VAT 15%
Amount
(VAT inclusive) 100% + 15% =115% R200 +R30 = R230

EXAMPLE 1 - Calculate the unknown amount

INFORMATION
Bought stationery and paid R1 035, the amount include VAT.

REQUIRED
 Calculate the VAT amount
 Calculate the price exclusive of VAT
SUGGESTED ANSWER
R1 035 Include VAT and it is equal to = 115% (100% + 15%)
VAT amount
VAT exclusive Amount VAT (15%) VAT inclusive Amount
100% 115%
Unknown Unknown R1 035
Known
VAT is unknown (place on top/numerator)

VAT amount:
15 x 1 035
115 1
VAT inclusive is known (place at bottom /denominator)
= R135

151
VAT Exclusive

VAT exclusive Amount VAT (15%) VAT inclusive Amount


100% 115%
Unknown R135 R1 035
Known Known

VAT Exclusive is unknown (place on


top/numerator)
VAT Exclusive :

100 x 1 035
115 1
VAT inclusive is known (place at bottom / denominator)
= R900

ALTERNATIVE METHOD

VAT Exclusive

VAT exclusive Amount VAT (15%) VAT inclusive Amount


100% 115%
Unknown R135 R1 035
Known Known

VAT Exclusive is unknown (place on top/numerator)


VAT Exclusive :

100 x 135
15 1
VAT is known (place at bottom / denominator)
= R900

152
EXAMPLE 2 : BASIC VAT CALCULATIONS

Amount Amount
(VAT exclusive) VAT (VAT inclusive)
110% 15% 115%

36 A
240
225 C
B
D E 690

3 200 F G

EXPECTED ANSWER

Amount Amount Calculations


(VAT exclusive) VAT (VAT inclusive)
240+ 36 =276
OR
36 276
240 240 x 115/100
36 x 115/15
225 x 100 /15=1 500
1 500 225 1 725 225 x 115/15 =1 725
690 x 100/115= 600
600 90 690 690 x15/115 = 90
3 200 x 15/100 =480
3 200 480 3 680 3 200 x 115/100 3 680
NOTE: The UK METHOD (unknown/known) is important for most of your calculations in this
section .
240 x 115/100
(unknown/known)
 115 is a numerator because it is unknown
 100 is a denominator because it is known ( equals to 240)

153
ACTIVITY 1

Complete the table provided below:

No Exclusive selling price VAT @ 15% Inclusive selling price


1 400 60 460
2 700 A B
4 C D 966
5 E F 1 265
9 G 225 H

Effect of VAT Input and VAT Output on different types of supplies/transactions


Transactions/Supplies Output VAT Input VAT
Standard-rated The car dealer charges 15% The car dealer pays 15% VAT when he
Example the sale of a VAT when it sells the car to a buys the vehicle from the factory. The
motor vehicle. customer. This amount has to dealer claims this amount back from
be paid over to SARS. SARS.
Zero-rated The bakery does not charge The bakery does not pay VAT on the
Example - the sale of a VAT when he sells the loaf of brown-bread flour, but is pays 15% VAT
loaf of brown bread. bread to a customer. No output on ingredients such as salt, yeast and
VAT has to be paid to SARS. butter. The bakery claims back the 15%
VAT it paid on the salt, yeast and butter.
Exempt supplies The taxi owner is not allowed to Even though the taxi owner pays 15%
Example - a taxi charge VAT on the fare that VAT when she/he buys new tires for the
transporting passengers. passengers pay. taxi, he/she cannot claim back from SARS.

Illustration of VAT Input and VAT Output


Transaction VAT Input VAT
Output
1. Bought stationery for R345 (including R45 VAT). R45
2. Sold golf balls for R115 (including R15 VAT). R15
3. Bought trading stock (golf shirts) for R2 300 (including R300 VAT). R300
4. Sold a set of golf clubs for R8 625 (including R1 125 VAT). R1 125
5. Paid the business telephone account, R1 150 (including R150 VAT). R150
R495 R1 140

VAT collected from customers

Amount payable to SARS is: R1 140 – R495 = R645

Note: The Input VAT of R495 is claimed back from SARS and that will reduce the amount payable to R645.

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ACTIVITY 2

Complete the following table by calculating the amounts indicated by A – G.

No VAT exclusive VAT VAT inclusive


1 R3 000 (A) R3 450
2 R22 500 R3 375 (B)
3 (C) R3 750 R28 750
4 (D) R1 260 (E)
5 R10 000 (F) (G)

Payment of VAT to SARS

Every vendor needs to decide which method of calculating will be used when VAT is paid over to SARS or
when VAT is claimed.
The two methods are called invoice basis or receipt basis.
Invoice basis
 Pay VAT or claim VAT as soon as invoice is issued
 All vendors are registered on the invoice basis, unless they specifically ask to be registered on the
payment basis

Payment / receipt basis


 Pay VAT or claim VAT once payment is received or made
 This payment basis was implemented to assist smaller businesses with a turnover of less than
R2,5 million per year

ETHICS RELATING TO VAT


Definition of ethics

VAT ethics is willingness of businesses and individuals to pay their taxes and comply with tax laws.

Some illegal or unethical practices in relation to VAT are the following:


 A vendor collects VAT from customers, but does not pay it over to SARS.
 A vendor claims a VAT refund, but is not registered as a VAT vendor.
 A vendor claims a VAT refund from fictitious invoices.
 A vendor does not record cash sales on a VAT invoice, and does not charge VAT.
NOTE: VAT fraud and VAT evasion are serious offences that should be reported to SARS and the vat vendor
can be fined or receive a prison sentence.

Difference between Tax Avoidance and Tax Evasion

‘Tax evasion’ is taking illegal steps to avoid paying tax, e.g. not declaring income to SARS or falsely reduce
income and inflate expenditure and recording of fictitious transactions.
Tax avoidance is generally the legal way of attempting to reduce the amount of tax that is payable by means
that are within the law, e.g. If you reduce your purchases that will reduce VAT as possible.

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Internal control relating to VAT

The following procedures should be in place to prevent fraud and VAT evasion:
 Invoices received from suppliers must be checked to see which are standard-rated, zero-rated and
exempt items, and should be charged accordingly.
 A vendor must complete VAT 201 forms accurately and submit it to SARS on time.
 VAT must be correctly recorded in the books of the business.
 Vendors must only issue valid tax invoices.
 Ensure that payments are done correctly.
 Internal auditor or owner should conduct random VAT Input and Output calculations.
 Ensure that VAT is paid on the due date to avoid penalties imposed by SARS vat returns are returned.

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ACTIVITY 3 : VAT ETHICS

3.1 Rakgetsi Traders

Rakgetsi Traders is registered for VAT. The VAT rate of 15% applies. His customers are
complaining about being charged vat on zero-rated items and also that government is raising
prices unnecessarily by charging VAT on goods.
3.1.1 Is it ethical for Rakgetsi Traders to charge VAT on zero-rated items? Explain the (3)
consequences/results of his action in ONE point.
3.1.2 Give ONE reason why you would agree that “the government is raising prices by charging (4)
VAT”, and ONE reason why you would not agree with the statement.

3.2 MDUNGE TRADERS

Mdunge Traders is registered for VAT. The VAT rate of 15% applies.

REQUIRED:

3.2.1 Refer to the Information A:


Calculate the VAT that the business must either pay or receive. (2)

3.2.2 You discovered that the VAT amount was not being submitted on due dates.
On enquiry, it was discovered that the manager was using the VAT money to
pay for business expenses. Give ONE point of advice to the manager and
explain why you offer this advice. (4)

3.2.3 Mpumi, the owner, suggested to the bookkeeper that they charge VAT on all
goods sold (including the zero rated goods) but keep a separate journal for
the VAT payable to SARS.

 Comment on this suggestion. Provide ONE point. (2)

INFORMATION:

A.
VAT from sales of goods R5 280
VAT on municipal services (electricity and water) R 279
VAT paid on purchases of trading stock R3 870

15

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VAT CALCULATIONS
 When a business sells goods at a mark-up, the mark-up percentage is ADDED to the cost price to
determine the selling price. ( COST PRICE + MARK-UP = SELLING PRICE )
 VAT is then calculated on the selling price to determine the price inclusive of VAT.

VAT Inclusive:
Selling Price +
EXAMPLE 3 Selling price: VAT
Complete the following Cost Price+ Mark-Up 100+15 =115
100 +15 = 115

Cost price Selling price Selling price


% mark-up (VAT exclusive) (VAT inclusive)

R500 20% Mark-up = 500 X 20/100 VAT = R600 x 15/100 = R90


= R100
Selling price
Selling price = R500 +R100 R600 + R90 = R690
= R600
OR
OR
Selling price = R500 X 120/100 R600 x115/100 =R690
= R600
The selling price include VAT , price
The selling price exclude VAT charged to the customer

NOTE: The UK METHOD (unknown/known) is important for most of your calculations in this section .

ACTIVITY 4

Complete the following calculations :

Cost price % mark-up Selling price Selling price


(VAT exclusive) (VAT inclusive)
Example
R460 15% R460 x 115/100 = R529 R529 x 115/100 = R608,35

R1 800 20% ? ?

R1 250 40% ? ?

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ACTIVITY 5
Cost price Selling MARKED
( VAT) mark-up Price VAT PRICE
Number (VAT excl) (VAT incl)

R % R R R
1 120 50%

2 40% 402.50

3 280 364

4 25% 200

EXAMPLE 4

Longhill Traders
The information relates to Longhill Traders for the VAT period ended 30 April 2021. The VAT rate
of 15% applies to all goods and services.
REQUIRED:

Enter the following transactions in the relevant subsidiary books of Longhill Traders.

INFORMATION:

Transactions for April:

5 Issued credit invoice to customer R. Reddy for merchandise sold R3 910,


(cost of sales R1 900)

10 B. Brown a debtor cannot be traced. His debt of R230 must be written off.
(inclusive)

13 R. Reddy returned unsatisfactory merchandise R552, (cost of sales 345)

18 Bought office equipment R3 000 for cash from SS Suppliers. (exclusive)

21 Credit purchases of stock from Goodwill stores, R8 700 (exclusive)

25 Cash sales as per register roll R4 554, (cost of sales R2 200)

28 Unsatisfactory goods were returned to Goodwill stores. A credit note of was


received for R805 (inclusive)

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EXPECTED ANSWER

CASH RECEIPTS JOURNAL OF LONGHILL TRADERSFOR 30 APRIL 2021


Analysis Output Cost Debtors Discount Sundry Accounts
Day Details Of Bank VAT Sales of Control Allowed Amount Details
Receipts Sales
25 Sales 4 554 4 554 594 4 554 2 200

CASH PAYMENTS JOURNAL OF LONGHILL TRADERS FOR 30 APRIL 2021


Trading Input Creditors Discount Sundry Accounts
Day DETAILS Bank Stock VAT Control Received Amount Details

18 SS Suppliers 3 450 450 3 000 Equipment

DEBTORS JOURNAL OF LONGHILL TRADERSFOR 30 APRIL 2021


Doc Sales Output Cost of Sales
No. Day Details F VAT
101 5 R. Reddy 3 910 510 1 900

DEBTORS ALLOWANCES JOURNAL LONGHILL TRADERSFOR 30 APRIL 2021


Doc Debtors Output Cost Of Sales
No. Day Details F Allowances VAT
156 13 R. Reddy 552 72 345

CREDITORS JOURNAL OF LONGHILL TRADERSFOR 30 APRIL 2021


Doc Creditors Trading Input VAT Equipment Sundry Accounts
No. Day Details F Control Stock Amount F Details
111 21 Goodwill 1 005 8700 1 305
stores

CREDITORS ALLOWANCES JOURNAL OF LONGHILL TRADERSFOR 30 APRIL 2021


Doc Creditors Trading Input Equipment Sundry Accounts
No. Day Details F Control Stock VAT Amount F Details
221 28 Goodwill 805 700 105
stores

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GENERAL JOURNAL OF LONGHILL TRADERSFOR 30 APRIL 2021
Doc General Ledger Debtors Control Creditors Control
No. Day Details F Debit Credit Debit Credit Debit Credit
Bad debts 200
Debtors control 200 200
Output Vat 30
Debtors control 30 30

SUMMARY OF TRANSACTIONS (EXAMPLE 4 )


Date Subsidiary book Vat Amount Input Vat Ouput Vat
5 Debtors Journal 510 
10 General Journal 30 
13 Debtors Allowances Journal 72 
18 Cash Payment Journal 450 
21 Creditors Journal 105 
25 Cash Receipts Journal 594 
27 Creditors Allowances Journal 105 

ACTIVITY 6
Pro Party Shop
You are provided with information relating to Pro Party Shop for the VAT period ended 28
February 2021. The standard VAT rate of 15% is applicable.
REQUIRED:
Analyse transactions given below and complete the table provided

INFORMATION:
Transactions for February:
8 Bought stationery on credit for R3 220 (VAT R420).
15 Trading stock sold for cash, R30 800 (excluding VAT).
16 Settled the amount owing, R25 300, to Dolphin Traders, less 5% discount.
20 Bought 92 costumes @ R500 each (VAT inclusive) from Funny Clothes Ltd received
Invoice 1702.
23 Returned 10 faulty costumes together with Debit Note 87 to Funny Clothes Ltd. The
VAT on this return amounted to R560.
25 Sold goods on credit to M Malinga for R9 625 (including R1 000 of zero rated items)
27 C. Jones debt of R575 must be written off as irrecoverable (VAT inclusive)

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