Accounting Grade 11 Relab Activities - Learner's Guide
Accounting Grade 11 Relab Activities - Learner's Guide
(RELAB)
ACCOUNTING
GRADE: 11
TERM 1- 4
LEARNER’S GUIDE
1
A. TABLE OF CONTENTS
2
B. INTRODUCTION AND PURPOSE OF THE RELAB
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.
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.
To ensure that all entries relating to cash transactions are accurately recorded.
Fraudulent transactions can be detected.
Errors or omissions can be detected
4
COMPARISON BETWEEN THE BANK STATEMENT AND THE RECORDS OF THE BUSINESS
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
Unfavourable
5
Favourable balance •is an asset to the business
•is a liabilty to the bank
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
Assume that the above records are completed at the end of February 2021
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
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
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
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
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.
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
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.
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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.
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.
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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)
3.4 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:
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.
C. The following information on the June 2020 Bank Statement from XXZ Bank did not appear
in the June 2020 Cash Journals:
Debit orders:
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.
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)
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
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
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.
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 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
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:
17
BASELINE ACTIVITY
REQUIRED
Use the following information extracted from the records of Zizi Traders to:
INFORMATION
ADDITIONAL INFORMATION
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.
18
SOLUTION
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
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:
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 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.
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
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.
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
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).
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.
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
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
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
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
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
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
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.
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
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”
31
DEPRECIATION METHODS
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
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
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##
Vehicles
Cost 120 000
MOVEMENTS
Additions at Cost
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
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
DEPRECIATION
2020 30 Accumulated 19 600
Jun depreciation on
vehicles
36
ACTIVITY 3
INFORMATION
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
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
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
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.
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
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 ? ? ?
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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.
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
DISPOSAL OF ASSETS
In the beginning
At the end of the year During the year
of the year
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
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
INFORMATION
On 1 March 2020 (the beginning of the accounting period) the following balances appeared in the books of
Gauteng Traders:
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.
REQUIRED
Show how the transaction will be recorded in the :
General Journal
General Ledger
Depreciation 51 240
STEP
Accumulated Depreciation on vehicles 51 240
TWO
Depreciation is calculated at 20% -diminishing
balance
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
Depreciation
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
Closing transfer
45
STEPS INVOLVED WHEN SELLING ASSETS
Steps Type of record Account debited Account credited
INFORMATION
The financial year of Zizzy Traders ends on 28 February 2021.
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
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
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
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
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
INFORMATION
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
48
SOLUTION - Assets bought and sold during the year
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: 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
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
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.
52
Management of Tangible Assets
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.
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
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.
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.
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]
EXPECTED SOLUTION
57
GENERAL JOURNAL OF KWA-MANINGI STORES: FEBRUARY 2021
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
Interest on Capital
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
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
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
61
EXPECTED ANSWER
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
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
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.
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.
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
STATEMENT CONCEPT
A. Interest on overdraft is shown as a separate amount in
the Income Statement.
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.
The net profit for the year, before the transactions below have been taken into account, amounted to
R208 000.
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
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
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 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
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
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.
Grade 10 Grade 11
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
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.
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
xxxx
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
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
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.
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NOTES TO THE FINANCIAL STATEMENTS
1 Interest income
Interest on fixed deposit [3 800 + 300] 4 100
Interest on current account 700
4 800
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
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
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
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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
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 :
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:
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
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.)
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
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:
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)
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.
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.
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.
New
Liquidity Stock holding period
Average debtors collection period
Average creditors payment period
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
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
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:
93
INFORMATION
The following information relates to the financial records of Bigfoot Traders with partners
B Big and F Foot.
94
ADDITIONAL INFORMATION
2019
Trading stock 360 000
Trade and other receivables 169 400
Trade and other payables 230 400
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
SUGGESTED SOLUTION
Percentage gross profit on sales
2021 2020
Gross profit x 100 Gross profit x 100
sales 1 sales 1
95
Percentage operating profit on sales
2021 2020
Operating profit x 100 Operating profit x 100
Turnover 1 Turnover 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)
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.
½(R156 600 + R159 660) x 365 ½(R156 600 + R169 400) x 365
R1 828 000 1 R1 650 000 1
½(R229 600 + R129 600) X 365 ½(R230 400 + R229 600) X 365
R1 040 000 1 R860 000 1
97
Rate of stock turnover
2021 2020
Cost of sales . Cost of sales .
Average inventories Average inventories
½(R398 600 + R420 000) . x 365 ½(R398 600 + R360 000) . x 365
R 1 040 000 1 R860 000 1
98
Partners’ earnings
2021 2020
B Big B Big
=12,8% = 12,1%
F Foot F Foot
= 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.
(Trade and other receivables + Cash and cash equivalents) : Current 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:
1.3 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:
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:
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.
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
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
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.
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.
104
EXPECTED ANSWER
× 30 % (Sept) 27 000
× 18 % (Oct ) 16 200
× 18 % (Nov) 172 80
× 30 % (Nov ) 30 000
× 18 % (Dec )
× 30% (Dec)
× 18% (Jan)
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
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
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
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
Operating expenses
Salaries 23 000 23 000 28 000
Depreciation 7 000 7 000 7 000
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
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
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
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
109
EXPECTED ANSWER
Workings
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
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.
111
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
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.
112
EXPECTED ANSWER
113
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
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.
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
114
ACTIVITY 3
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
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)
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.
7. Fixed deposit of R 45 000 with an interest of R 4 000 is due to mature on the 15 of May 2021.
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.
ACTUAL PROJECTED
June 98 000
July 95 200
August 89 600
September 112 000
October 82 880
116
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
117
ACTIVITY 5 : BUDGETS,ETHICS AND FINANCIAL INDICATORS
(52 marks; 42 minutes)
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:
B.Total Sales
Actual
September R360 000
October R374 400
Budgeted
November R403 200
December R468 000
118
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
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
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.
123
ACCOUNTS AFFECTED BY PERPETUAL AND PERIODIC INVENTORY 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.
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
126
CALCULATION FOR COST OF SALES
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
127
EXAMPLE 2
Use the following information to calculate the purchases for the year ended 28 February 2021.
EXPECTED ANSWER
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
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:
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
INVOICE
30 treadmills 35 300
Less 10% trade discount 3 530
31 770
Add transport costs 1 800
33 570
130
ACTIVITY 4: PERIODIC INVENTORY AND ANALYSIS AND INTERPRETATION OF FINANCIAL
STATEMENTS
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:
(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:
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:
132
ACTIVITY 6
The transactions below was taken from the books of Thebuss Stores.
REQUIRED:
TRANSACTIONS:
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:
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.
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.
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
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)
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
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:
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 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 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
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.
INFORMATION:
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
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
= 36 000 – 17 000
1 800
= 19 000
1 800
= R10,56
Break-even point
= 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.
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
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:
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
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:
Damaged raw material worth R15 700 was sent back to creditors.
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:
B. 2 550 dolls were made and sold during the financial year.
[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
C Additional information:
(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)
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
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)
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
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.
[45]
148
10. VALUE ADDED TAX
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.
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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 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
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
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VAT Exclusive
100 x 1 035
115 1
VAT inclusive is known (place at bottom / denominator)
= R900
ALTERNATIVE METHOD
VAT Exclusive
100 x 135
15 1
VAT is known (place at bottom / denominator)
= R900
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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
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ACTIVITY 1
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
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
VAT ethics is willingness of businesses and individuals to pay their taxes and comply with tax laws.
‘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
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.
Mdunge Traders is registered for VAT. The VAT rate of 15% applies.
REQUIRED:
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.
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
NOTE: The UK METHOD (unknown/known) is important for most of your calculations in this section .
ACTIVITY 4
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:
10 B. Brown a debtor cannot be traced. His debt of R230 must be written off.
(inclusive)
159
EXPECTED ANSWER
160
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
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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