The Trial balance of Hobbit Traders on the 31 March 2022 is given below

Capital 106 100

Drawings 12 500
Vehicles 55 000
Accumulated Depreciation on Vehicles 5 500
Equipment 30 000
Accumulated Depreciation on Equipment 3 300
Shares: JSE 8 500
Inventory ( 1 April 2021) 20 000
Accounts Receivable 6 365
Accounts Payable 5 900
Bank 12 065
Cash float 380
Sales 126 766
Purchases 90 545
Consumable stores 725
Stationery 1 934
Rent Income 3 170
Wages 11 475
General expenses 947

The investory at 31 March 2022 was R10 000

YOU ARE REQUIRED TO
Prepare the following financial Statements
The Statement of profit or loss and other income for the year ended 31 March 2022
The Statement of financial position at 31 March 2022
ed 31 March 2022
Basic Financial statements with year end adjustments

When a business buys an item such as a vehicle or equipment , the

cost is treated as an asset. These assets are utilised over a period of time
With use , the asset is likely to lose valu through wear and tear. This loss should
allocated to the financial year in which the asset was used to generate income.
For fair presentation , this should recorded as an expense for that year and the
value of the asset should decrease accordingly. This is done to match the income
earned with the expense incurred to earn the income
This allocated expense is called depreciation.
The basics that underlie depreciation are the following:
The asset should be used to generate income in the course of conducting business
The expense should be fairly allocated over the lifetime of the asset
The asset should be fairly presented in the statement of financial position, that
is , at book value /carrying value

Example 1
A business has an equipment which cost R10 000, Provide for Depreciation
of R1 000
Solution
1. Two accounts ( an expense which appears in the Statement of profit or loss and
other income
2. Accumulated depreciation on eauipment ( a negative asset which appears in the
statement of financial position

Depreciation
Accumulated depreciation on equipment

Methods of calculating depreciation

we will cover the following methods

1. Straight line method/ cost method / fixed instalment method
2. Reducing balance method/ Diminishing balance method

Example 2
The following balances were extracted from the books of SS Traders as at 28 Feb 2022

Vehicles at cost
Accummulated depreciation on vehicles
Equipment at cost
Accumulated depreciation on equipment

Adjustments

1. Depeciation on vehicles must be provided for at 15% per annum using the reducing
balance method
2. Depreciation on equipment must be provided for at 10% per annum using the
fixed instalment method

Class exercise
The following balances were extracted from the books of XYZ Traders as at 30 June 2022

Furniture and fittings at cost

Accumulated dedpreciation on furniture and fittings
Vehicles at cost
accumulated depreciation on vehicles

Adjustments

1. Depreciation on vehicles must be provided for at 20% per annum using a

straight line method
2. Depreciation on furniture and fitting must be provided for at 15% per annum
using the reducing balance methos

Required

Prepare the journal entry for depreciation and indicate how the following will be
shown in the statement of profit or loss and other comprehensive income as well
as the statement of financial position
. Accumulated depreciation on furniture and fittings
. Accumulated depreciation on vehicles
. Depreciatiuon
Debit (Dr) Credit (Cr)
R R
1 000
1 000

Solution example 2

R
120 000
33 300
70 000
42 000
 R
42 000
6 300
35 000
18 000
Allowance for credit losses

The accountant must anticipate the percentage of debtors who are in doubt.
How much to provide for doubtful debts is usually based on the past experience and
the economic climate

The following are typical transactions encountered with regard to doubtful debts
1. Writing off credit losses when an allowance for credit losses account does not exist
2. The creation of an allowance for credit losses
3. Increasing the allowance for creadit losses
4. Decreasing the allowance for credit losses
5. Writing off credit losses when an allowance for credit losses account does exist

1. Writing off credit losses when an allowance for credit losses account does not exist
Debit: Credit Losses( expense item) will increase
Credit :Debtors control(Current Asset) will decrease

2. The creation of an allowance for credit losses

Debit: Credit Losses( expense item) will increase
Credit: Allowaces for credit losses ( negative Asset) will increase

3. Increasing the allowance for creadit losses

Debit: Credit Losses( expense item) will increase
Credit: Allowaces for credit losses ( negative Asset) will increase

4. Decreasing the allowance for credit losses

Debit : Allowaces for credit losses ( negative Asset) will decrease
credit : Credit Losses( expense item) will decrease

5. Writing off credit losses when an allowance for credit losses account does exist

Debit : Allowaces for credit losses ( negative Asset) will decrease

Credit :Debtors control(Current Asset) will decrease

Prepaid expenses

Prepaid expenses are payments that were made in the current period even though are
only due in the next accounting period
Therefore the expense should be matched to the income for the current period

Debit : Prepaid expense

Credit : relevant expense account

Accrued expense

Refers to the expense that has been incurred in the current accounting period ,
but has not been paid
The expense has been written off against the income of the current accounting period ,
even though they have not yet been paid
Exercise
The following balance appear among others in the book of ZZ Traders at 28 Feb 2022
the last day of the financial year
Debtors control R58 200
Allowances for credit losses 2 150
Credit losses 9 360

Adjustments
1. I Isaac , who owes the business R640, has been declared insolvent and
his debt must be wrritten off
2. Adjust the allowance for credit losses to 5% of the outstanding debtors

REQUIRED

Prepare the journal entry and indicate how the following accounts will be shown in the
statement of profit or loss and other comprehensive income and
the statement of financial position

> Debtors control

> Allowance for credt losses
> Credit losses
 Hobbit Traders
Statement of profit or loss and other comprehensive income for the year ended 31 March
R R
Sales 126 766
less cost of sales 100 545
Opening stock 20 000
add Purchases 90 545
Goods available for sale 110 545
Less closing stock 10 000
Gross profit for the year 26 221
add: other income 3 170
Rent Imncome 3 170
Gross income for the year 29 391
Less operating expenses 16 081
Consumable stores 725
Stationery 1 934
Wages 11 475
General expenses 947
Net Profit for the year 14 310

statement of changes in equi

Capital
Plus Net profit
less Drawings

Hobbit Traders
Notes to the financial statements for the year ended 31 March 2022
Note 1 Accounting Policies
The financial statement have been prepared in accordance with the accepted guidelines laid down
in the international Financial Reporting Standards (IFRS).
The financial statements have used the accounting policies that are consistent with the previous finan
Note 2 Non-current assets
Cost Accumulated
R R
Vehicles 55 000 5 500
Equipment 30 000 3 000
85 000 8 500
NB
When periodic method is used, there are various items that affect the purchases and sales account
Example
Sales 155 000
Purchases 82 000
Sales return 5 000
Purchases returns 2 000
Carriage on purchases 3 000
Carriage on sales 1 500
Opening Stock 50 000

A physical stocktaking revealed that the stock to the value R45 000 was on hand
the year ended 31 March 2022 Statenent of financial position as at 31 Ma

Assets
Non Current Assets
Vehicles
Equipment
Share JSE

Current assets
Inventory
Debtors
Bank
Cash float
Total asset
Equity and liabilities
Owner's equity
Non -current liabilities

Current liabities
Creditors
Total equity and liabilities

ement of changes in equity of Hobbit Traders for the year ended 31 March 2022
R
106 100
14 310
( 12 500)
107 910

pted guidelines laid down

stent with the previous financial year

Carrying Value
R
49 500
27 000
76 500
rchases and sales account
 Hobbit Traders
ial position as at 31 March 2022

Notes R R
2 85 000
49 500
27 000
8 500

28 810
10 000
6 365
12 065
380
113 810
107 910
107 910
0

5 900
5 900
113 810