ADVANCED
ACCOUNTING
FOR GRADE 11
TEACHERS GUIDE
RHYLVHG15% VAT
Advanced Accounting for Grade 11 Revised 15% VAT
Teachers Guide
Lucem Publishers
P O Box 71672,
The Willows
0041
Cover Design by Marcomedia Pretoria.
Proof-reading by Wian van Schalkwyk
Typeset by
Wian van Schalkwyk
Printed by
Bindworx, Pretoria
Copyright:
Lucem Publishers
Third edition
1st print
ISBN Number: 978-0-9814000-3-7
© All rights reserved. No part of this book may be reproduced or transmitted in
any from or by any means, electronic or mechanical, including photocopying,
recording, or by any information storage and retrieval system, without
permission in writing from the publisher.
INTRODUCTION
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FIRST TERM
YEAR PLANNING
1.
2.
3.
REVISION OF PREVIOUS TOPICS
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FIXED/TANGIBLE ASSETS
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COST ACCOUNTING
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2.1 WHAT IS UNDERSTOOD UNDER “BUSINESS ETHICS”?
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CHAPTER 3: INTERNAL AUDITING
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CHAPTER 4: RECONCILIATIONS
4.1
RECONCILIATION OF BANK STATEMENTS WITH CASH JOURNALS TO PREPARE
BANK RECONCILIATION STATEMENTS:
4.1.1
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Creditors reconciliation statement of Park Stores with XY Traders on 31 March
2018
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4.2.2
Statement of current month and Creditors reconciliation statement of previous month
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4.2.3
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4.2.4
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4.2.5
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4.2.6
Correction of errors and omissions
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EXERCISE 4.14
The creditors control account and creditors list of Park Stores was composed by the inexperienced
bookkeeper on 31 May 2018. Because of the fact that the balance and the total did not concur, you
were asked to assist.
REQUIRED:
Use the information given and calculate the correct balance according to the creditors control account as
well as the correct total of the creditors list. Every change must be shown separately.
INFORMATION:
1.
The creditors control column in the Creditors journal was added with Rl 000 too much.
2.
A Credit balance of R2 100 shown for a debtor in the Debtors ledger must be posted to his
account in the Creditors ledger.
3.
A debit note for R4 900 issued to a supplier regarding stock returned has not been recorded in
any subsidiary journal.
4.
An entry of R1 200 in the Creditors journal was posted to the wrong side of the personal
account of the creditor in the Creditors ledger.
5.
An invoice for R2 850 is shown correctly in the Creditors journal but was never posted to the
creditor's personal account.
6.
An invoice for R4 100 received from Lucem Wholesalers was posted to the account of
Brooklyn Traders by mistake.
The amount of a cheque issued for R4 931 to a creditor was wrongly entered as R4 391 into the
7.
Cash payments journal and posted as such.
8.
A creditor, Lynwood Suppliers charged interest of R180 on the account of Park Stores. The
transaction was recorded correctly in the General journal but was posted to the wrong side of
the account of Lynwood Suppliers.
9.
An adding error was made in the account of a creditor, Kloof Stores. The balance is shown as
R90 less than it should be.
No. Details of transaction
Provisional incorrect balance / total
1.
Creditors control
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67
Creditors list
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Bank reconciliation statement on 30 June 2018
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CHAPTER 5: FIXED/TANGIBLE ASSETS
THE CONCEPT OF A FIXED ASSET REGISTER
5.1
For every vehicle or piece ofequipment that the business owns a separate page is drawn up in
a file, called the asset register. This page contains information regarding the specific asset
such as the date the asset was bought, depreciation rate, where it was bought etc.
It is therefor very easy to determine what the exact value ofany specific asset is on any given
date by looking at the information in the asset register.
EXAMPLEl
Complete the page in the asset register for the following vehicle:
A delivery van with registration number QXV 334 GP was bought from Hatfield Motors on
1 November 2014 at a cost price ofR600 000.
Depreciation on vehicles is calculated at 10% on cost price.
The financial year ends on 28 February ofevery year.
The vehicle was sold to P. Joynt for R340 000 on 1 December 2018.
ASSET REGISTER
.
P. Vl6
Vehicles
Account 1n General ledger: ................................................................................
.
.
x \/
4- Gr-P
Q;
5 �··············-··
Reg1strat10n number:·························
Date bought: ..( .�.�
Ha t:f' i el d t'Vlo tor.S
.�! �.� �.�.. ?.-.�I 'f
Bought from: ..................................................................
.
f<.hOO
ooo
Cost pnce: .................................
! .�. i.�. f.."..�.'...(!.� .. ����ft".'.'�-� ............
Method and rate of depreciation: ....
DETAILS IF SOLD:
tc.,ew,ber
ID
�o t 8
Date sold.. .......................................
g_ -�
Selling price:
.Lf. �. �.� �.............
Information rei ardin2 depreciation:
Current depreciation
Date
28 Feb. 2015
28 Feb. 2016
28 Feb. 2017
28 Feb. 2018
1 Dec. 2018
ibO
100 )(�
, OOOOXJ2_
4_)
�
,.
/0
12...)
.
R.
000
Accumulated depreciation
20
�o
ooo
000
I lf-0 OOD
bcoor,; XµioY. "i'i_
I.
,o '"")
,60 000
60 000
2.00
LI.
/0
4-S-000
2.f./.S OOD
bDo D(X) x/OD x TL
q )
I {,oo 001' )(j"oi-,.. ii.
oo
IS O
Profit/ Loss on disposal: ...........................
20 ooo
/0 ·�) bO
I 60 0000 ><� X ,i.
f. TO'fn't
Sold to: ...............................................
72
ooo
5.2
CALCULATION AND RECORDING OF DEPRECIATION
There exist mainly two methods of calculating depreciation viz.
5.2.1
Depreciation according to the fixed instalment method (Cost price- / Straight line method)
According to this method depreciation is calculated as a percentage of the initial cost price of
the asset. This means that the asset will be used by the business for a pre-determined length of
time. If the asset still has value at the end of this period it is called the residual value. The
depreciation that can be written off on the asset is there for the difference between the cost price
and the residual value. This amount is written off in equal amounts over the useful life of the
asset.
5.2.2
Depreciation according to the diminishing balance method (Carrying- / Book value method)
According to this method depreciation is calculated as a percentage of the carrying- / book value
of the asset. The amount of the depreciation written off will therefor decrease every year. The
asset will be used by the business for an indefinite time.
Carrying value is determined as follows:
Carrying value = Cost price – Total accumulated depreciation of previous years
EXAMPLE 2
REQUIRED:
2.1
Open the ledger accounts with the balances given on 1 March 2017.
2.2
Calculate the depreciation to be written off on vehicles and equipment for the financial year
ending 28 February 2018.
2.3
Show the journal entries for the depreciation and post it to the ledger accounts.
2.4
Calculate both the carrying value of vehicles and the carrying value of equipment on 28 February
2018.
INFORMATION:
1.
On 1 March 2017 the following balances appeared in the records of Lucem Traders:
Vehicles (at cost price)
R800 000
Equipment (at cost price)
380 000
Accumulated depreciation on vehicles
150 000
Accumulated depreciation on equipment
136 800
2.
Adjustments and additional information:
(a)
During the financial year a new vehicle and new equipment were bought and paid for by
cheque. The following information concerns the transactions:
Details
Vehicles
Equipment
(b)
Date purchased
1 August 2017
1 January 2018
Cost price
R360 000
R273 600
Depreciation must be provided for as follows:
x On vehicles at 10% per annum on cost price.
x On equipment at 20% per annum on the diminishing balance-method.
73
5.3.1
Recording of asset disposal at the beginning of, end of or during the financial year
The cost prices of all the vehicles and equipment owned by the business, which are recorded
separately in the asset register, are summarized in the balances of the accounts for Vehicles
and Equipment in the General ledger. In the same way the balances of Accumulated
depreciation on vehicles and Accumulated depreciation on equipment will be a summary of
all the depreciation already written off on all these assets.
When a non-current asset is sold, all information regarding the asset must be taken out of the
financial records of the business. This means the cost price as well as the total accumulated
depreciation up to the exact date on which the vehicle or equipment was sold must be
cancelled.
Remember that depreciation is normally only written off on the last day of every financial
year. If the asset was sold during the financial year, the depreciation must therefore first be
updated by considering the “extra” amount for the part of the current year in which the asset
was still used by the business.
At the end of the year depreciation must only be written off on the assets that was used for the
full year as well as on new assets that might have been bought during the year.
5.3.2
Steps in asset disposal and depreciation of remaining assets
Step
1.
Description
Cancel the cost price of the sold asset
Double entry
Dt. Asset disposal Cr. Vehicles / Equipment
2.
Bring the extra depreciation into account if
the asset was sold during the financial year
Dt. Depreciation
Cr. Accumulated depreciation on vehicles /
Equipment
3.
Cancel the total accumulated depreciation up
to the date of the sales transaction
Dt. Accumulated depreciation on vehicles /
equipment
Cr. Asset disposal
4.
Do the “disposal transaction”
(a) Sold for cash:
(b) Sold on credit:
(c) Traded in in new:
(d) Taken by owner for personal use:
(e) Given away as donation:
5.
Close off the Asset disposal account to:
Profit on disposal of asset
6.
Dt. Bank
Dt. Debtors control
Dt. Creditors control
Dt. Drawings
Dt. Donations
Cr. Asset disposal
Cr. Asset disposal
Cr. Asset disposal
Cr. Asset disposal
Cr. Asset disposal
Dt. Asset disposal
Cr. Profit on disposal of asset
Loss on disposal of asset
Dt. Loss on disposal of asset
Cr. Asset disposal
Write off depreciation on the last day of the
financial year on all the remaining assets as
well as on new assets bought during the year.
Dt. Depreciation
Cr. Accumulated depreciation on vehicles /
equipment
78
EXAMPLE4
The following information was taken from the records ofGroenkloofTraders. The financial year of the
business ends on 28 F ebruary every year.
REQUIRED:
4.1
4.2
4.3
Use the information to open up separate pages for each vehicle in the asset register.
Open the accounts for Vehicles and Accumulated depreciation on vehicles in the General ledger
on 1 March 2017 by deriving the balances for these accounts from the asset register.
Complete the entries for all the transactions in the General ledger as well as in the asset register.
INFORMATION:
1.
GroenkloofTraders owned the following two vehicles on 1 March 2017:
Bought from
Menlyn Motors
Delta Motors
Registration number
DFG344GP
KJH 447 GP
Date bought
1 December 2012
30 July 2015
Cost price
R320 000
R450 000
2.
Depreciation on vehicles must be provided for at 20% per annum on the cost price.
3.
On31 May 2017 a new vehicle with the following details was bought:
Bought from
Hafield Auto
Registration number
XVV312GP
4.
Date bought
31 May 2017
On 1 November 2017 the vehicle with registration number KJH 447 GP was sold to T. Toerien
on credit for R250 000.
Calculation of depreciation:
Vehicle DFG344 GP:
,ot i. - 2.8 Feb .io1� ·. 320
, cec..
2.0
=- 1-h ooo
3.
ooo X ,oo .,._ Ti..
1
-:=:..
-28"/=eb. 2014-: 32...o 000 X. ��o J<. 1�
.x..½_
I rVlar. 2ot+ - 2'8 Feb. 201&: 32.0 ooo 'I.
I f\/lc.\r.2<,13
1rv1ar. 2.01s-2gF,eb.201b:
1 mw-. 2.01 h - 2� �b. 2.l>I 1 :
1Mcu·. 201-, -2sF�h.2.oJ8:
Vehicle KJH 447 GP:
I
Cost price
R540 000
�i
32.0000 x �
-==
=
:::.
X.¥t_
61..f- OOO
b 4- 000
b4-ooo
b "-ooo
3 20 boo x ,� x �
Ont, 4. 7 9G'1 c.co,, be wr-�·tte,,,.,
Qc.tordi""�
4-so O 00
1
i:.othe R1 clatt�e.
52
<.O
SOO
I 2..- X 7
3o:ru.\ .2 0 ,s 2.8 Ftb. ,01 h :
,o
12..
too X °Ti, - Cf o ooo
X
000
4-SD
:
20n
Feb.
zig
I rflc.u·--. 201b boooo
000 )(
x
IIYla..--.io11 - ;Nov, 2011:
-
4-50
Vehicle XVV312GP:
31 (V1o..y
�01,-28Feh·
2--018:
X
/00
¼ ::::
;£
S-4-D
'2.D
t>OD X µw X
79
q
_
T2.. -
o++
5.5
ETHICAL BEHAVIOUR REGARDING FIXED ASSETS
The effectiveness of the use of Non-current assets must be continuously evaluated.
Measures taken to protect the assets must be reviewed, not only in respect of theft, but
also against unnecessary wear and tear that could possibly decrease the service life of
the asset. Efforts must be made to utilise the asset optimally at all times without
unnecessarily ruining and damaging it.
EXERCISE 5.2
The accounts provided appeared in the General ledger of Park Traders for the financial year ending
28 February 2018.
REQUIRED:
Study the accounts and answer the questions that follow:
2017
Mar.
1
Aug.
31
Balance
?
General ledger of Park Traders
Equipment
2017
b/d
368 700 May 31 Asset disposal
2018
CJ
106 450 Feb. 28 Balance
GJ
c/d
475 150
2018
Mar.
2017
May
1
31
Balance
Asset disposal
b/d
31
Equipment
?
Accumulated depreciation on equipment
2017
GJ
11 713 Mar. 1
Balance
GJ
?
475 150
May
2018
Feb.
2017
May
68 900
Asset disposal
2017
May
?
86
b/d
124 800
31
Depreciation
GJ
2 067
28
Depreciation
GJ
?
31
Accumulated deprec.
on equipment
GJ
Debtors control
GJ
?
51 000
CHAPTER 6: PARTNERSHIPS
6.1
PARTNERSHIPS AS A TYPE OF BUSINESS ENTERPRISE
Up now we have only looked at the bookkeeping of sole traders, i.e. one owner who provides all
the capital and who is also entitled to all the profits. There are also are other types of business
enterprises which does their business in exactly the same way but where there is not only one
owner who provides all the capital, takes all the risk and gets all the profit. In this chapter we will
be taking a look at a new type of business enterprise called a partnership.
A partnership can consist of 2 to 20 “owners” called partners. It is important to know that these
partners are jointly as well as separately held responsible for the debt of the partnership. It is
therefore very important to be able to completely trust the person who you enter into a partnership
with.
The biggest differences between the different types of business enterprises lies in the way in
which capital is obtained as well as in the way the profit is distributed. In the case of a sole trader
the owner is responsible to generate all the capital and he also takes all the risk. This is the reason
why he is entitled to all the profit. In the case of a partnership the partners all contribute to the
partnership in one way or another. The contribution made by each partner will determine which
portion of the profit he is entitled to.
A partnership agreement is drawn up to determine exactly how the profit should be divided
amongst the partners based on the contribution made by each of the partners. Some partners might
only contribute to the business by providing capital to the partnership and are in no further way
involved in the day to day activities of the business. The partnership agreement might stipulate
that a portion of the profit is awarded to these partners as interest on capital. Another partner
might be working full time in the business and the partnership agreement might in this case state
that a portion of the profit is awarded as a salary to this partner. Stipulations such as these in the
partnership agreement are called the primary distribution of profit. The remaining profit after the
primary distribution has been deducted will then be further distributed between the partners in a
ratio as stated in the partnership agreement.
The following comparison between sole traders and partnerships details the differences:
Sole Trader
Partnership
One owner.
2 - 20 Owners, who are known as partners.
Provides all the capital.
Each contributes Capital in one form or another.
Owners’ equity
Capital (B1)
Drawings (B2)
Owners’ equity
Capital: Mr A (B1)
Current account: Mr A (B3)
Drawings: Mr A (B5)
Solely responsible for debt.
Jointly and separately responsible for debt.
Takes all the profit.
Share the profits as determined in the
partnership agreement.
Final accounts
Trading account; Profit and Loss account.
Final accounts
Trading account; Profit and Loss Account;
Appropriation Account.
102
6.2
GENERAL LEDGER ACCOUNTS
6.2.1
Capital
For every partner a separate Capital account is created in the General ledger. Only their initial
capital contribution as well as any increase or decrease in capital is recorded in this account. It is
important to know exactly how much capital was contributed by each partner and for which
period the funds were made available to the business because the partnership agreement often
award partners with interest on capital as part of the primary distribution of profit. The final
distribution of the remaining profit is also usually done in proportion to the capital contributions
of the partners.
6.2.2
Drawings
Each partner also has a separate account for Drawings linked to his name. Any amount of money
or even stock etc. which was withdrawn by the partner during the year thus decreasing his interest
in the partnership will be debited against his Drawings-account. It is very important to understand
that it is of no importance which part of the profit awarded to him according to the partnership
agreement, whether it is his salary or interest on capital or a bonus, he withdrew. The Drawingsaccount closes off to the Current-account of the partner at the end of each year in order to
determine whether the partner withdrew more or less than the amount awarded to him by the
partnership agreement.
6.2.3
Current accounts
Each partner has a separate Current account in which the total portion of the profit that has been
awarded to him according to the partnership agreement is recorded. The portion of the profit
awarded to him will increase his interest in the partnership and is therefore credited against his
Current account.
All withdrawals made by a partner during the year means that profit, awarded to him according to
the partnership agreement, was taken out of the business. This will decrease his interest in the
partnership. The Drawings account is closed off at the end of every financial year by debiting it
against the Current account.
A credit balance on the Current account at the end of the year thus represents the amount which
has been awarded to the partner according to the partnership agreement but which he has not
withdrawn during the year. A credit balance on the Current account will increase the interest of
the partner in the business and will be added to the balance of his Capital account in the Balance
sheet in order to calculate his total interest in the partnership.
A debit balance on the Current account however means that the partner withdrew more that was
awarded to him according to the partnership agreement. A debit balance on the Current account
will decrease the interest of the partner in the business and will be deducted from the balance of
his Capital account in the Balance sheet in order to calculate his total interest in the partnership.
103
6.2.4
Interest on capital
Interest can form part of the primary distribution of profit awarded to partners in accordance to
the partnership agreement, and is normally calculated as a percentage of their capital contribution.
The amount awarded as interest on capital will only be brought into consideration as part of the
primary distribution of profit at the end of the financial year by debiting a special expense account
viz. Interest on capital and crediting the Current account of the partner with the amount that has
been awarded.
Because of the fact that Interest on capital is seen as part of the primary distribution of profit, it
will not be closed off to the Profit and Loss account as is done with normal expenses, but it will
be closed off to the Appropriation account.
A partner can at any time during the financial year already withdraw the interest on capital that he
knows he will be awarded. If this is the case the amount will still be shown as ordinary Drawings
which will be closed off to the Current account at the end of the year in order to determine which
portion of the profit that was awarded to him in accordance to the partnership agreement he has in
fact withdrawn during the year.
6.2.5
Partners salaries
A monthly salary can also be awarded to a partner as part of the primary distribution of profit
awarded to partners in accordance to the partnership agreement should a partner be involved
fulltime in the activities of the business.
The total amount awarded as a salary for the year will only be brought into consideration as part
of the primary distribution of profit at the end of the financial year by debiting a special expense
account viz. Partners salaries and crediting the Current account of the partner with the amount that
has been awarded as a salary to the partner for the year.
Because of the fact that Partners salaries form part of the primary distribution of profit, it will not
be closed off to the Profit and Loss account as is done with normal expenses, but it will be closed
off to the Appropriation account.
A partner can off course withdraw the salary that he knows he has been awarded every month. If
this is the case the amount will still be shown as ordinary Drawings which will be closed off to
the Current account at the end of the year in order to determine which portion of the profit that he
was awarded in accordance to the partnership agreement has in fact been withdrawn during the
year.
6.2.6
Partners bonuses
Sometimes the partnership agreement stipulates that partners are entitled to a bonus as part of the
primary distribution of profit should they meet certain requirements.
The amount awarded as bonuses to partners will only be brought into consideration as part of the
primary distribution of profit at the end of the financial year by debiting a special expense account
viz. Partners bonuses and crediting the Current account of the partner with the amount that has
been awarded.
Because of the fact that Partners bonuses is seen as part of the primary distribution of profit, it
will not be closed off to the Profit and Loss account as is done with normal expenses, but it will
be closed off to the Appropriation account.
104
A partner can at any time during the financial year already withdraw the bonus that he knows he
was awarded. If this is the case the amount will still be shown as ordinary Drawings which will be
closed off to the Current account at the end of the year in order to determine which portion of the
profit that was awarded to him in accordance to the partnership agreement he has in fact
withdrawn during the year.
6.2.7
Distribution of remaining profit/loss
With sole traders the net profit, which was calculated from the Profit and loss account, is directly
transferred to the Capital account. With partnerships the net profit for the year is calculated in
exactly the same way in the Profit and loss account but it must then be awarded to the partners in
accordance to the stipulations of the partnership agreement.
A last final account viz. the Appropriation account is used to record the distribution of the profit
according to the stipulations of the partnership agreement.
All the relevant closing transfers to calculate the gross profit in the Trading account and the net
profit in the Profit and loss account remain exactly the same as with a sole trader. The difference
lies in the distribution of the net profit. The net profit is transferred from the Profit and Loss
account to the Appropriation account and then all the amounts awarded to the partners according
to the partnership agreement, e.g. Interest on capital, Partners salaries and Partners bonuses, etc.
are then deducted in order to determine the remaining profit after the primary distribution of the
profit has been done. This remaining profit will then be distributed between the partners as
stipulated in the partnership agreement by debiting the amount in the Appropriation account and
and crediting it in the Current account of each partner.
EXAMPLE 1:
The following information concerns Philroy Traders with partners Phil and Rory.
REQUIRED:
Use the given information to complete the accounts in the General ledger of Philroy Traders on 28
February, the end of the financial year.
INFORMATION:
1.
The following balances and totals appeared in the financial records of Philroy Traders on 28
February 2018:
Capital: Phil
Capital: Rory
Current account: Phil (1 March 2017)
Current account: Rory (1 March 2017)
Drawings: Phil
Drawings: Rory
2.
3.
R900 000
600 000
200 000
48 500 (dr.)
?
?
The net profit for the year according to the Profit and loss account was calculated as R800 000.
Additional information:
(a)
Partner Phil increased his capital with R300 000 on 1 August 2017.
(b)
Partner Rory decreased his capital with R200 000 on 1 December 2017.
(c)
Partner Rory withdrew the monthly salary awarded to him in accordance to the
partnership agreement. He also withdrew his salary for March 2018.
(d)
Partner Phil withdrew R30 000 of the interest on capital he is entitled to according to the
partnership agreement as well as a further amount of R520 000.
105
EXERCISE 6.1
The following information concerns Bryan Traders, a partnership with partners, Bryan and Jean.
REQUIRED:
6.1.1 Use the information provided to prepare the opened accounts in the General ledger of Bryan
Traders for the financial year ending 30 June 2018.
6.1.2 Calculate each of the partners' interest in the partnership on 30 June 2018.
INFORMATION:
The following balances and totals appeared in the records of Bryan Traders on 1 July 2017:
1.
Capital: Bryan
R405 000
Capital: Jean
198 000
Current account: Bryan
140 000
Current account: Jean
120 000 ( dr.)
2.
3.
Die net profit for the year ending 30 June 2018 was calculated correctly as R542 500.
Additional information:
(a)
The partners equalized their capital contributions to R450 000 on 1 December 2017 by
making the necessary contributions.
During the year partner Bryan withdrew his salary as well as half of the interest on capital
( c)
he is entitled to according to the partnership agreement.
Partner Jean withdrew an amount ofR145 000 from the partnership during the year.
(d)
4.
The partnership agreement stipulates the following:
Both partners are entitled to interest on capital of 8% per annum.
(a )
Partner Bryan is entitled to a salary of Rl 5 000 per month. His salary will increase with
(b)
6% on 1 January every year.
A bonus ofR35 000 was awarded to partner Jean during the year.
( c)
The remaining profit after the primary distribution has been brought into consideration is
(d)
to be distributed evenly between the partners.
Calculations:
Interest on capital: Bryan
1 :r-u. (. 2.0, 7 - ,
o ec.. 2.017 �
g
S
4-osooo x 1oo X12-
1 Oec.,/2..0,-, - 30:rt.v'l .2.018: 4-s-(jooox *o 'J<.. (z.
Interest on capital: Jean
1 .:ru\ .
I
2..0 , -, -
"ec_ .
1-J
2...t Ii -
S
, o-e {., . c:.o, -, : I q 8 o oo x /OD x. li.
3D .::Tt.c.vi. z.o I�'. 4-so 0()0 X ,l._ y. 2..
8
.:r-av-i.
Drawings: Bryan
1 �s 4-00 + (_
3
,5(
4- 2-. v
D
c- 00 o X
� I __,
: IS-Cf oo X
-
)
108
/.3S-OO
=: 2..1 000
34-S"OO ...
-
6 bOD
=: :2../ 000
2..., boo ...
1-. - Cjoooo
b ::: C, S I.J_OO
185 l.J...00
(00
Salary: Bryan
I .:T(J,.\. z..o 1-, - I TCV\.. '2.01 i
zo (8 - 30Jt.wt. �18
I
=
1:)
I ;L.
-
2...0 2- bSO
D
.,.
6.3
GAAP-PRINCIPLES
Accounting practice is the general accepted method of reporting on the financial position of
business. It is important that common standards are composed for financial reporting in order that
information involved is trustworthy and statements can be compared with each other. Financial
statements compiled in accordance with international financial reporting standards (IFRS), create
trust and give credibility to the reports.
The following principles must always apply with financial reporting:
6.3.1
Historical cost
According to this principle the business must show all non-current assets in their financial records
at the original price that was paid for the asset on the day it was bought.
6.3.2
Prudence
This very important principle states that assets should be recorded in such a manner that it will
reflect the most realistic picture and value of the asset. Although non-current assets must,
according to the historical cost principle, be shown at the original cost price, provision for
depreciation on non-current assets should also be made. Debtors must also be shown as a realistic
asset by providing for debtors who will perhaps not pay their debt. This is done by creating a
provision for bad debts and adjusting it annually. Financial information must rather be recorded
and reported in a conservative and pessimistic manner.
6.3.3
Materiality
According to the materiality concept a mistake will be left in the books if it has no great influence
on the result for the financial year, e.g. a cheque issued for wages and recorded as a R100 too
much but the total wages for the year amounts to R1 000 000. The correction of the mistake will
be carried over to the following financial year. Financial information relevant to the reader of
financial statements must be separately disclosed.
6.3.4
Business entity rule
The business operates separate from the owner. Financial affairs of the business are kept entirely
separate from the financial affairs of the owners. The owner only has claim to his owner’s equity
in the business.
6.3.5
Going concern
This concept accepts that the business will conduct a trading existence in the foreseeable future.
Decisions should be taken carefully without threatening this principle.
6.3.6
Matching
When calculating the profit at the end of the financial period, the exact income and expenses
received or paid for that specific period, should be taken into account. Income and expenses
should therefore be “matched” with the specific period for which it was earned or made.
112
6.4
PREPARING FINANCIAL STATEMENTS AFTER CONSIDERING YEAR-END
ADJUSTMENTS
All the adjustments and year end procedures that applied in other business enterprises will also
form part of the financial- and bookkeeping process of partnerships. The only aspect that will be
added is the distribution of the profit between the partners according to the stipulations of the
partnership agreement.
6.4.1
Depreciation
Two methods are used to write off depreciation on fixed assets, namely,
 The Cost price method, also known as the Straight line, or Fixed instalment method, and
 The Diminishing balance method, also called the Book value or Carrying value method.
Whenever depreciation is written off, an expense account viz. Depreciation is debited and a
negative asset account, viz., Accumulated depreciation on vehicles/equipment, is credited.
The depreciation written off for a particular financial year must be deducted from the profit in the
Income statement for that specific year as an expense according to the matching principle.
6.4.2
Accrued expenses as opposed to Prepaid expenses
If an expense has been incurred for a specific financial period, but has not yet been fully paid, the
matching principle states that “money is still owed” in respect of the expense for this period. A
temporary liability viz. Accrued expenses, is created in order to increase the expense and thus
reflect the correct amount of the expense for the period.
If an expense in respect of a following financial period has already been paid during the current
period it means that, in accordance with the matching principle, “too much has been paid” in
respect of the expense for the current period. A temporary asset viz. Prepaid expenses, is created
in order to reduce the expense and thus reflect the correct amount of the expense for the period.
6.4.3
Accrued income as opposed to Income received in advance
If an income has been earned for a specific financial period, but has not yet been received in full,
the matching principle states that “money is still owed to us” in respect of the income for this
period. A temporary asset viz. Accrued income, is created in order to increase the income and
thus reflect the correct amount of the income earned for the period.
If an income in respect of a following financial year has already been received during the current
period it means that, in accordance with the matching principle, “too much has been received” in
respect of the income for the current period. A temporary liability viz. Income received in
advance is created in order to reduce the income and thus reflect the correct income amount that
was earned for the current period.
113
6.4.4
Bad debts and Provision for bad debts
If a debtor is unable to pay his debt, his account is written off as a bad debt. An expense account
viz. Bad debts, is debited and an asset account viz. Debtors control, as well as the debtor’s
personal account, is credited with the amount of the debt that is being written off.
The amount owed by debtors must be shown as realistically as possible in the Balance sheet in
accordance to the rule of prudence. Provision must therefore be made for the fact that some
debtors might not pay their debt.
A provision for bad debts is created by debiting an expense account, viz., Provision for bad debt
adjustment, and crediting a negative asset account, viz. Provision for bad debts.
Should the provision for bad debts increase, the expense account, viz. Provision for bad debts
adjustment, is again debited, and the negative asset account, Provision for bad debts, is credited.
However, should the provision for bad debts decrease, an income account viz. Provision for bad
debt adjustment will be credited and the negative asset account, viz. Provision for bad debts will
be debited.
Remember! Net Trade debtors = Trade debtors – Provision for bad debts.
6.4.5
Consumable stores on hand and Trading stock deficit
At the end of the financial year the amount of all unused consumables e.g., stationery, packaging
material, fuel, etc. is determined by a physical stocktaking.
Only that which was consumed during the year must, in accordance with the matching principle,
be deducted as an expense from this year’s profit. The unused inventory is shown in the Balance
sheet as an asset, since it will only be used during the following financial period. An asset account
viz. Consumable stores on hand, is debited, and the applicable expense account is credited with
the amount of unused inventory.
The Balance sheet must reflect the correct amount of trading inventory available on the last day of
the financial year. The balance of the Trading stock account does not necessarily reflect the
physical inventory on hand. A physical stocktaking must be undertaken to determine whether any
inventory was lost or stolen. Should the total amount of the physical stocktaking indicate that an
inventory shortage does, in fact, exist, an expense account viz. Trading stock deficit is debited,
and an asset account, viz. Trade stock, is credited with the amount of the inventory shortage.
Inventory shortage is the difference between the balance of the Trading stock account and the
amount determined by a physical stocktaking.
6.4.6
Profit or loss on asset disposal
Whenever a non-current asset is disposed of, the recording thereof follows a five-step procedure,
namely:
(a)
Extract the cost price of the asset.
(b)
Update the accumulated depreciation.
(c)
Extract the total accumulated depreciation to the date of the disposal.
(d)
Record the disposal transaction.
(e)
Determine the profit or loss on the sale of the asset.
If the asset is sold at a profit it will be shown as an income in the Income Statement.
A loss on the sale of an asset will be shown as an expense in the Income Statement.
114
6.4.7
Final accounts
The following three final accounts are used to determine profits for the year as well as to indicate
the distribution of the profit between the partners in accordance to the stipulations of the
partnership agreement.
(a)
Trading account
The Trading account is used to determine the gross profit for the year by closing off the
net sales and the total cost of sales for the year against it. Remember that Debtors
allowance must first be closed off to Sales in order to determine the net sales.
2018
Feb. 28 Cost of sales
Profit and loss acc.
(b)
GJ
GJ
Trading account
2018
500 000
Feb. 28 Sales
300 000
800 000
F1
GJ
800 000
800 000
Profit and loss account
The Profit and loss account is used to determine the net profit for the year by closing off
all income- and expense accounts against it, after all adjustments have been made.
Remember that income- and expense accounts only occur in the Nominal accounts
section of the General ledger.
2018
Feb. 28 Wages
GJ
Profit and loss account
2018
14 000
Feb. 28 Trading account
F2
GJ
300 000
Salaries
GJ
120 000
Discount received
GJ
2 000
Water and electricity
GJ
80 000
GJ
122 000
Telephone
GJ
60 000
GJ
54 000
Insurance
GJ
50 000
GJ
12 000
Stationary
GJ
23 000
GJ
1 500
Interest on loan
GJ
45 000
Rent income
Interest on fixed
deposit
Bad debts
recovered
Provision for bad
debts adjustment
Profit on disposal
of asset
GJ
8 500
Bad debts
GJ
20 000
Depreciation
GJ
22 500
Trading stock deficit
GJ
5 500
Appropriation account
GJ
60 000
500 000
115
500 000
(c)
Appropriation account
The Appropriation account is used to indicate how the net profit, as was calculated in the
Profit and loss account, is to be distributed between the partners in accordance to the
stipulations of the partnership agreement.
2018
Feb. 28 Interest on capital
Partners’ salaries
Partners’ bonuses
Current acc. Mr. A
Current acc. Mr. B
6.4.8
Appropriation account
2018
GJ
16 000
Feb. 28 Profit and loss
account
GJ
20 000
GJ
4 000
GJ
10 000
GJ
10 000
60 000
F3
GJ
60 000
60 000
Financial statements
At the end of every financial year the financial position of the partnership must be reflected in the
form of financial statements that conform to the standards of generally accepted accounting
practice and principles.
(a)
Income statement
Income statement of Brooklyn Stores for the year ended 28 February 2018
Net sales/Turnover ( Sales – Debtors allowance)
800 000
Cost of sales
(500 000)
300 000
Gross profit
Other operating income
146 000
Discount received
2 000
Rent income
122 000
Bad debts recovered
12 000
Provision for bad debts adjustment
1 500
Profit on disposal of asset
8 500
446 000
Gross operating income
Operating expenses
(395 000)
Wages
14 000
Salaries
120 000
Water and electricity
80 000
Telephone
60 000
Insurance
50 000
Stationary
23 000
Bad debts
20 000
Depreciation
22 500
Trading stock deficit
5 500
51 000
Operating profit
Interest income
1
54 000
105 000
Profit before interest expense
Interest expense
2
(45 000)
60 000
Net profit for the year
116
(b)
Balance sheet
Balance sheet of Brooklyn Stores on 28 February 2018
Assets
Non-current assets
Fixed assets
Financial assets
Fixed deposit: ABSA (250 000 – 50 000)
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
3
1 600 000
1 400 000
4
5
6
200 000
400 000
93 000
174 000
133 000
Total assets
2 000 000
Equity and liabilities
Owners’ equity
Capital
Current accounts
Non-current liabilities
Mortgage loan: ABSA (600 000 – 24 000)
Current liabilities
Trade and other payables
Instalment on loan payable within 12 months
Bank overdraft (minus postdated cheques)
1 133 000
1 100 000
33 000
576 000
576 000
291 000
217 000
24 000
50 000
Total equity and liabilities
7
8
9
2 000 000
Notes to the financial statements:
1. Interest income
Interest on fixed deposit
Interest on savings account
Interest on overdue debtors
Interest on current bank account
2. Interest expenses
Interest on loan
Interest on overdue creditors
Interest on overdraft
117
54 000
54 000
45 000
45 000
3. Fixed assets
Cost at beginning of the year
Accumulated depreciation beginning of year
Carrying value at beginning of the year
Movements
Additions at cost
Disposals at carrying value
Depreciation for the year
Carrying value at end of the year
Cost at end of the year
Accumulated depreciation at end of the year
Land and
buildings
300 000
300 000
200 000
200 000
500 000
Vehicles
Equipment
700 000
(200 000)
500 000
220 000
330 000
(80 000)
(30 000)
720 000
320 000
(90 000)
230 000
(50 000)
(38 000)
(12 000)
180 000
1 320 000
(290 000)
1 030 000
370 000
530 000
(118 000)
(42 000)
1 400 000
500 000
-
850 000
(130 000)
260 000
(80 000)
1 610 000
(210 000)
4. Inventories
Trading stock
Consumable stores on hand
Stationary
Packaging material
Fuel
Total
88 000
5 000
1 500
1 200
2 300
93 000
5. Trade and other receivables
Trade debtors
Provision for bad debts (% of trade debtors)
Net trade debtors
Prepaid expenses
Insurance
Accumulated income
Interest on fixed deposit
Deposit on water and electricity
6. Cash and cash equivalents
Fixed deposit (maturing within 12 months)
Savings account
Bank (plus postdated cheques issued)
Cash float
Petty cash
118
160 000
(8 000)
152 000
9 000
9 000
11 500
11 500
1 500
174 000
50 000
80 000
1 200
1 800
133 000
7. Capital
Balance at the beginning of the year
Contribution of capital during the year
Withdrawal of capital during the year
Balance at the end of the year
8. Current accounts
Net profit per Income statement
Partners’ salaries
Partners’ bonuses
Interest on capital
Primary distribution of profit
Final distribution of profit
Drawings during the year
Retained income for the year
Retained income at the beginning of the year
Retained income at the end of the year
9. Trade and other payables
Trade creditors (plus postdated cheques issued)
Accrued expenses
Interest on loan
Income received in advance
Rent income
Creditors for salaries
Pension fund
Medical aid fund
SARS (PAYE)
Mr. A
400 000
300 000
700 000
Mr. B
500 000
(100 000)
400 000
Total
900 000
300 000
(100 000)
1 100 000
Mr. A
26 000
4 000
12 000
16 000
10 000
(15 000)
11 000
(56 000)
(45 000)
Mr. B
34 000
20 000
4 000
24 000
10 000
(36 000)
(2 000)
80 000
78 000
Total
60 000
20 000
4 000
16 000
40 000
20 000
(51 000)
9 000
24 000
33 000
156 000
15 000
15 000
8 000
8 000
25 000
3 000
4 500
5 500
217 000
EXAMPLE 2
You are provided with the following Post-adjustment trial balance and additional information concerning
Samdiego Traders owned by partners Sam and Diego.
REQUIRED:
2.1
2.2
2.3
Complete the accounts provided in the General ledger on 28 February 2018, the last day of the
financial year.
Complete the Income statement of Samdiego Traders for the year ended 28 February 2018.
Complete the Balance sheet with notes to the financial statements of Samdiego Traders on 28
February 2018. Where notes are not required the calculations must be shown on the face of the
Balance sheet.
119
INFORMATION:
1.
Post-adjustment trial balance on 28 February 2018:
Post-adjustment trial balance of Samdiego Traders on 28 February 2018
Balance sheet accounts section
Fol
Debit
Capital: Sam
B1
Capital: Diego
B2
Current account: Sam (1 March 2017)
B3
53 000
Current account: Diego (1 March 2017)
B4
Drawings: Sam
B5
88 400
Drawings: Diego
B6
120 600
Land and buildings
B7
950 000
Vehicles
B8
620 000
Equipment
B9
470 000
Accumulated depreciation on vehicles
B10
Accumulated depreciation on equipment
B11
Fixed deposit: FNB
B12
180 000
Trading stock
B13
181 000
Debtors control
B14
60 000
Provision for bad debts
B15
Deposit on water and electricity
B16
7 600
Bank
B17
Petty cash
B18
1 800
Cash float
B19
2 200
Mortgage loan: ABSA
B20
Creditors control
B21
Consumable stores on hand
B22
6 000
Accrued expenses
B23
Prepaid expenses
B24
3 815
Accrued income
B25
1 985
Income received in advance
B26
Nominal accounts section
Sales
N1
Debtors allowances
N2
40 000
Cost of sales
N3
587 500
Rent income
N4
Discount received
N5
Bad debts recovered
N6
Interest on fixed deposit
N7
Telephone
N8
65 000
Water and electricity
N9
87 000
Insurance
N10
23 000
Discount allowed
N11
13 500
Salaries
N12
136 100
Stationary
N13
24 000
Bad debts
N14
12 000
Interest on loan
N15
33 600
Profit on disposal of asset
N16
Depreciation
N17
165 000
Provision for bad debts adjustment
N18
Trading stock surplus
N19
3 933 100
120
Credit
900 000
660 000
56 000
264 000
118 000
2 400
51 500
280 000
162 000
18 400
14 100
1 097 500
260 000
17 000
9 000
8 100
12 600
920
1 580
3 933 100
EXERCISE 6.7
The following information was taken from the financial records of Duncson Traders with partners
Duncan and Jason as owners.
REQUIRED:
6.7.1 Use the information provided to complete the following notes to the Balance sheet:
(a)
Trade and other receivables
(b)
Cash and cash equivalents
(c)
Trade and other creditors
6.7.2 Complete the Balance sheet on 28 February 2018. (Where notes are not required calculations
must be shown in brackets)
INFORMATION:
1.
Post-closing trial balance on 28 February 2018, the end of the financial year:
Post-closing trial balance of Duncson Traders on 28 February 2018
Balance sheet accounts section
Debit
Credit
Capital: Duncan
550 000
Capital: Jason
350 000
Current account: Duncan
40 000
Current account: Jason
150 000
Land and buildings
812 000
Vehicles
860 000
Equipment
240 000
Accumulated depreciation on vehicles
360 000
Accumulated depreciation on equipment
140 000
Fixed deposit: ABSA
144 000
Trading stock
212 800
Debtors control
78 000
Provision for bad debts
4 680
Deposit: Water and electricity
4 600
Savings account
47 800
Bank
49 800
Petty cash
3 400
Cash float
1 800
Mortgage loan: Nedbank
780 000
Creditors control
143 800
Creditors for salaries
18 000
SARS (PAYE)
11 890
Pension fund
7 360
Medical aid fund
2 300
Consumable stores on hand
7 200
Accrued income
12 870
Accrued expenses
10 650
Prepaid expenses
24 210
Income received in advance
9 800
2 538 480
2 538 480
2.
Additional information:
(a)
A quarter of the fixed deposit at ABSA will be withdrawn on 25 April 2018.
(b)
The mortgage loan is payable in twelve equal annual instalments from 1 October 2018.
(c)
A cheque for R6 200 was issued to a creditor on 25 February 2018. The cheque was
dated for 25 March 2018.
138
6.5
INTERPRETATION OF FINANCIAL STATEMENTS
Financial statements are very important instruments that supply information to the partners and
other stakeholders on the performance of the business. It is important to analyze and interpret
figures in order to make appropriate decisions concerning the liquidity, profitability and solvency
of the business and consider measures on how to better the performance.
The following indicators can be helpful in this regard:
6.5.1
Gross profit on turnover
Formula
Gross profit
Turnover
Comment
X
100
1
= …….. %
A percentage lower than the actual percentage
shows that the merchandise was sold at reduced
prices.
Note!
Turnover = Sales – Debtors allowances
6.5.2
Gross profit on cost of sales
Formula
Gross profit
Cost of sales
Comment
X
100
1
= …….. %
6.5.3
Net profit on turnover
Formula
Net profit
Turnover
Compare it with the actual percentage profit to
determine whether inventory was perhaps lost or
stolen.
Comment
X
100
1
= …….. %
Show what percentage of every rand received
ends up in the pockets of the owners at the end.
Compare this with results from previous years
and similar businesses.
Note!
Turnover = Sales – Debtors allowances
6.5.4
Operating expenses on turnover
Formula
Operating expenses
Turnover
Comment
X
100
1
= …….. %
Note!
Turnover = Sales – Debtors allowances
141
Show what percentage of every rand received is
used to pay for running costs. Compare this with
results from previous years and similar
businesses.
6.5.5
Operating profit on turnover
Formula
Operating profit
Turnover
Comment
X
100
1
= …….. %
Note!
Turnover = Sales – Debtors allowances
6.5.6
Solvency ratio
Formula
Comment
Total assets : Total liabilities
…… : 1
The acceptable norm is 1:1. Should the business
have more liabilities than assets, it means that
some of the owners’ equity had to be used to
repay liabilities. This implies that the partners
would lose some of their investments.
Note!
Total liabilities = Non-current liabilities +
Current liabilities
6.5.7
Current ratio
Formula
Comment
Current assets : Current liabilities
…… : 1
Remember to always compare the current
year’s ratio with that of the previous year.
6.5.8
Acid-test ratio
Show what percentage of every rand received is
considered as current profit, i.e. before any
interest is taken into account. Compare this with
percentages from previous years and similar
businesses. This can show that financing costs
are too high.
Formula
The acceptable norm is 2:1. If the ratio is 2:1
or more, the liquidity position of the business
is very good. If it is less than 2:1, the liquidity
position is not good at all, and ways and
means must be found to improve the situation
by e.g. encouraging debtors to pay more
quickly or to bargain with creditors for a
longer settlement period or to increase the
stock turnover rate.
Comment
(Current assets – Inventory) : Current
liabilities
…… : 1
Remember to always compare the current
year’s ratio with that of the previous year.
142
The acceptable ratio is 1:1. If the ratio is 1:1
or greater, the liquidity position of the
business is very good. If it is less than 1:1, the
liquidity position is not good at all, and ways
and means must be found to improve the
situation by e.g. encouraging debtors to pay
sooner or to negotiate with creditors for a
longer settlement period or to increase the
stock turnover rate.
6.5.9
Turnover rate of stock
Formula
Comment
Cost of sales
Average stock
= …….. times per year
Note!
Average stock = ½ (Stock at beginning of year
+ Stock at end of year)
6.5.10 Period for which enough stock is on hand
Formula
Average stock
Cost of sales
X
12
1
= ……… months
This represents the number of times the stock
was replaced or sold during the financial year.
The turnover of inventory must be compared
with that of previous years to see whether the
rate has improved or weakened. It is also
important to look at the turnover of similar
products to be able to come to conclusions.
Comment
This represents the total number of months for
which there is enough stock on hand. It also
determines when stock must be replenished
and encourages good internal control of stock.
Note!
Average stock = ½ (Stock at beginning of year
+ Stock at end of year)
6.5.11 Average debtors collection period
Formula
Average debtors
Credit sales
X
Comment
365
1
= ……… days
Note!
Average debtors = ½ (Opening balance +
Closing balance) of Trade debtors
6.5.12 Average creditors payment period
Formula
Average creditors
Credit purchases
X
This is a very important liquidity ratio. An
attempt is made to collect debtor’s obligations
within 30 days. The faster the money comes
in, the better the cash flow situation will be.
Debtors can be encouraged to repay quicker
by offering discounts or imposing interest
charges on accounts in arrears.
Comment
365
1
= ……… days
Note!
Average creditors = ½ (Opening balance +
Closing balance) of Trade creditors
143
This is also a very important liquidity ratio.
An attempt is made to bargain with creditors
to repay what is owed to them only after 90
days. The longer we can delay payment, the
better it is for our cash flow situation. It is
here that bargaining power plays an important
role, e.g. through bulk purchases, good credit
and repayment records, and long-term
relationships.
6.5.13 Debt/Equity ratio (Gearing)
Formula
Comment
Non-current liabilities : Shareholders’ equity
….…. : 1
Take note!
Shareholders equity = Ordinary share capital +
Retained income
The norm for this ratio is between 0.5:1 and
1:1. If the ratio is lower than 0.5:1, financial
institutions will readily lend money to the
business. If the ratio is greater than 1:1
financial institutions will not find it easy to
lend money to the business.
A business is at risk if the ratio of borrowed- against own capital is high or greater than 1:1.
A business is low risk when the ratio of borrowed- to own capital is low or smaller than 1:1.
To determine whether the partners must rather invest additional capital compared with taking
out an additional loan, one has to consider:
 The effect that the interest on the loan will have on the returns generated by the business
 The effect that it will have on the net income of the business
6.5.14 Percentage return earned by each partner
Formula
Amount earned by the partner
Partners’ average equity
X
100
1
= ……… %
Note!
Amount earned by the partner = Salary + Interest
on capital + Bonus + Share in remaining profit.
Partners’ equity = Capital + Current accounts
Comment
This represents the returns earned on shareholders’ equity. It must be compared with the
previous year’s returns, as well as with the
following:
 Interest rates on bank investments
 Similar investments i.e., the rate on the
returns that similar companies offer.
 Debt/shareholders’ equity ratio
 Market conditions
Partners’ average equity = ½ (opening balance
+ closing balance)
6.5.15 Percentage return on owners’ equity
Formula
Net profit
Average owners’ equity
X
Comment
100
1
= ……… %
Note!
Average owners’ equity = ½ (opening balance
+ closing balance)
Owners’ equity = Capital + Current accounts of
all partners
144
This represents the returns on the total
investment in the business. It must be
compared with the previous year’s returns, as
well as with the following:
 Interest rates on bank investments
 Similar investments i.e., the rate on the
returns that similar companies offer.
 Debt/shareholders’ equity ratio
 Market conditions
EXERCISE 6.8
You are provided with information obtained from the financial statements of MM Traders. The business is
owned by two partners, Michael and Mandla.
REQUIRED:
Study the information and do the following:
6.8.1 Calculate the following financial indicators for 2018:
(a)
Percentage net profit on turnover
(b)
Current ratio
(c)
Debt-equity ratio
(d)
Percentage return obtained by Michael on his average equity
6.8.2 Use the acid test ratio to calculate the amount for trading stock on hand on 28 February 2018.
6.8.3 Should the partners be satisfied with the control of operating expenses? Explain quoting ratios,
percentages or figures to support your answer.
6.8.4 Comment on the liquidity situation of the business. Quote ratios, percentages or figures to support
your comment.
6.8.5 Mandla is of the opinion that Michael’s withdrawals are unreasonable. Do you agree with him?
Quote figures to support your opinion.
6.8.6 Comment on the percentage return obtained by the business as well as that of each partner. Quote
ratios, percentages or figures to support your comment.
6.8.7 The business wants to expand their current building at a cost of R240 000. How should they
finance this cost? Give a reason for your answer.
INFORMATION:
1.
The following extract was taken from the Income statements of the previous two years:
2018
2017
Sales
882 000
724 000
Debtors allowances
24 000
17 200
Cost of sales
520 000
456 000
2.
The following is an extract of the distribution statement for the year ended 28 February 2018:
Michael
Mandla
Total
Net profit in Income statement
139 425
75 075
214 500
3.
The following is an extract from the Balance sheets of the last two years:
2018
Fixed assets at carrying value
455 000
Fixed deposit: ABSA (6,5% p.a.)
200 000
Current assets
167 000
Total assets
822 000
Owners’ equity
Capital: Michael
Capital: Mandla
Current account: Michael
Current account: Mandla
Loan: FNB (10,5% p.a.)
Current liabilities
Total equity and liabilities
598 538
300 000
240 000
44 980
13 648
95 000
128 462
822 000
145
2017
420 000
80 000
120 000
620 000
410 000
200 000
130 000
86 700
6 700 (dr.)
135 000
75 000
620 000
EXERCISE 6.10
You are provided with information regarding Brooklyn Fashion, a business owned by two partners, Errol
en Hannon. They started the business on 1 March 2017.
Errol resigned from his previous work in order to manage the partnership on a full time basis. He earned a
salary of R160 000 per annum at his previous employer. Hannon decided not to get involved in the
partnership on a full time basis during the first year. (He is a sleeping partner for the first year). He will
reconsider the situation at a later stage.
REQUIRED 1:
6.10.1 Complete the following accounts in the General ledger of Brooklyn Fashion:
(a)
Current account: Errol
(b)
Appropriation account
6.10.2 The partners are concerned about the financial results after the first year of trading:
(a)
Calculate the net profit as a percentage of the average owners’ equity of the partnership
as a whole.
(b)
Comment on this return. Should the partners be satisfied? Explain your opinion.
6.10.3 Errol is not sure if he made the right decision by resigning from his previous position.
(a)
Calculate the total amount earned by Errol for the year.
(b)
Which percentage of the total net profit was allocated to each partner?
(c)
Should the partners be satisfied with this distribution? Explain.
INFORMATION:
1.
The following figures were taken from the financial records on 28 February 2018:
28 Feb. 2018
Capital: Errol
120 000
Capital: Hannon
180 000
Current account: Errol
83 600
Current account: Hannon
32 400
Loan: ABSA (9% p.a.)
350 000
Net profit according to the Profit and loss account
224 000
2.
The following stipulations appear in the partnership agreement:
(a)
Errol is entitled to an annual salary of R80 000.
(b)
Both partners are entitled to interest on capital at 8% per annum. Both capital
contributions were made on 1 March 2017 when the business was started.
(c)
Remaining profits are shared between the partners in proportion to their capital
contributions.
(d)
Each partner is entitled to withdraw a maximum of R4 500 in cash or merchandise per
month. Both partners utilized this grant to the full extend. These were the only
withdrawals during the year.
150
EXERCISE 6.12
The following Post-closing trial balance was taken from the financial records of Rovak Stores on 28
February 2018, the end of the financial year. The partnership is owned by partners Roger and Novak.
REQUIRED:
6.12.1 Use the information provided to complete the Balance sheet on 28 February 2018.
(Where notes are not required calculations must be shown in brackets)
INFORMATION:
1.
The following Post-closing trial balance was prepared on 28 February 2018:
Post-closing trial balance of Rovak Stores on 28 February 2018
Balance sheet accounts section
Debit
Credit
Capital: Roger
935 000
Capital: Novak
865 000
Current account: Roger
530 000
Current account: Novak
230 000
Land and buildings
1 100 000
Vehicles
620 000
Equipment
289 000
Accumulated depreciation on vehicles
243 000
Accumulated depreciation on equipment
233 000
Fixed deposit: ABSA
560 000
Trading stock
245 000
Debtors control
380 000
Provision for bad debts
30 400
Deposit on telephone: Telkom
12 000
Savings account
181 000
Bank
31 000
Petty cash
2 500
Cash float
1 500
Loan: FNB
900 000
Creditors control
228 000
Creditors for salaries
128 000
SARS (PAYE)
38 000
Pension fund
18 000
Medical aid fund
16 000
Consumable stores on hand
12 000
Accrued income
17 900
Accrued expenses
65 000
Prepaid expenses
30 500
Income received in advance
83 000
4 012 400
4 012 400
2.
The following additional information is available:
(a)
15% of the fixed deposit at ABSA will be withdrawn on 15 December 2018.
(b)
The loan from FNB must be settled in sixty equal monthly instalments payable as from
1 August 2018.
(c)
A cheque for R24 000 was issued to a creditor on 26 February 2018 and recorded in the
Cash payments journal. The cheque is dated 3 March 2018.
156
EXERCISE 6.15
You are provided with information taken from the financial statements of JP Traders. The business is
owned by two partners, Jake en Peter.
REQUIRED:
Study the information and do the following:
6.15.1 Calculate the following financial indicators for 2018:
(a)
Percentage net profit on turnover
(b)
Current ratio
(c)
Debt-equity ratio
(d)
Percentage return obtained by Jake on his average equity
6.15.2 Use the acid test ratio to calculate the amount for trading stock on hand on 28 February 2018.
6.15.3 Should the partners be satisfied with the control of operating expenses? Explain quoting ratios,
percentages or figures to support your comments.
6.15.4 Comment on the liquidity situation of the business on 28 February 2018. Quote ratios,
percentages or figures to support your comment.
6.15.5 Peter is of the opinion that Jake’s withdrawals are unreasonable. Do you agree with him? Quote
figures to support your opinion.
6.15.6 Comment on the percentage return obtained by the business as well as that of each partner. Quote
ratios, percentages or figures to support your comment.
6.15.7 The business wants to buy a new delivery vehicle at a cost price of R300 000. How would you
advise them to finance this cost? Give a reason for your answer.
INFORMATION:
1.
The following extract was taken from the Income statements of the previous two years:
2018
2017
Sales
759 100
640 400
Debtors allowances
13 600
9 600
Cost of sales
426 000
380 000
2.
The following is an extract of the distribution statement for the year ended 28 February 2018:
Jake
Peter
Total
Net profit in Income statement
103 000
49 000
152 000
3.
The following is an extract from the Balance sheets of the last two years:
2018
Fixed assets at carrying value
381 790
Fixed deposit: ABSA (9% p.a.)
140 000
Current assets
113 560
Total assets
635 350
Owners’ equity
Capital: Jake
Capital: Peter
Current account: Jake
Current account: Peter
Loan: FNB (13% p.a.)
Current liabilities
Total equity and liabilities
473 710
275 000
200 000
24 690 (dr.)
23 400
94 840
66 800
635 350
162
2017
337 520
30 000
121 050
488 570
326 150
200 000
125 000
2 350
1 200 (dr.)
114 000
48 420
488 570
CHAPTER 7: NON-PROFITABLE ORGANIZATIONS (CLUBS)
7.1
ACCOUNTING CONCEPTS UNIQUE TO NON-PROFITABLE ORGANIZATIONS
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31 Dec. 2018
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Nominal accounts section
(a)
Sales
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8.2.5
Final accounts section
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(ii)
(d)
(e)
(f)
(g)
(h)
The remainder of the wages is the wage of the cleaner. She spends 60% of her
time cleaning the factory, 25% cleaning the office and the rest cleaning the sales
department.
Salaries consist of the salary of the factory foreman of R8 000 per month and the salary
ofthe secretary ofR6 000 per month. The rest is the salaries ofthe two sales assistants.
Pension fund contributions amounts to 5% of the gross wages and salaries and must be
divided between the different cost accounts as such.
Insurance for February 2018 is still outstanding. The insurance premium was R2 400 per
month but increased by 10% on 1 September 201 7. Insurance for the year must be
divided in the ratio 6:1 :3 between the factory, the office and the sales department
respectively.
The total Rent expense for the building amounts to Rl 8 000 per month. The building
covers a total floor space of 340 square metres. Of this the factory uses 170 square
metres, the administration department uses 34 square metres and the sales department
uses the rest. Rent expense must be allocated to the different cost accounts as per floor
space used.
Depreciation consists ofthe following:
(i)
on factory equipment, R25 296
(ii)
on office equipment, R38 126 and
(iii)
on delivery vehicles, R33 138.
Calculations:
Consumable stores ratio:
Factory overheads cost:
1-gooo + IS
(2. ,oo
+
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Admnustration cost: O
(_ ""2.
700 +18000
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Cleaners wages ratio�
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-:::- 3/ 2.00
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=-
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Pension fund contribution ratio:
Factoryoverheads cost:
==
Administration cost:
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. �
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==
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Administration cost: (tc,(_2.1-1-co'j+ h{?-blµ>
-
Wages of direct workers:
Rent expense ratio:
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uc lc f 400)
12- (R.ISOoO)
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f 70
340
Administration cost:
�
tl.
l iDOO) X 3
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"
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Selling and distribution cost:
Selling and distrib
+
r:,
S
+ 7 2. OD<)) r toO
-=- 4= 2.SO
( J 3 000
Selling and distribution cost:
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CHAPTER 9: BUDGETING
9.1
PREPARING A CASH BUDGET OF A SOLE TRADER
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9.1.2
Projected collections from debtors
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EXAMPLE 1
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INFORMATION:
7RWDOVDOHVIRUWKHSHULRG-DQXDU\WR0D\
January
February
March
April
May
5
5
5
5
5
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GD\V 9.1.3
Projected payments to creditors
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INFORMATION:
7RWDOVDOHVIRUWKHSHULRG-DQXDU\WR0D\
January
February
March
April
May
5
5
5
5
5
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9.2
PREPARING A PROJECTED INCOME STATEMENT
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9.2.1
Projected income and expenses
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Income
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EXERCISE 9.3
7KHILQDQFLDO\HDURI/LPSRSR7UDGHUVHQGVRQ-XQH
REQUIRED:
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INFORMATION:
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January
February
March
CASH RECEIPTS
&DVKVDOHV
5HFHLSWVIURPGHEWRUV
5HQWLQFRPH
CASH PAYMENTS
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9.6.2
Complete the Creditors payments schedule for the period 1 February 2018 to 31 March 2018.
Creditors payment schedule of King Traders for the period 1 February to 31 March 2018
Payments made to creditors during:
Month
Credit purchases
.,
q S- o
Februa
March
l 31 4-23
Total payments made to creditors
9.6.3
Io I Ob I
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Complete the Cash budget for the period 1 February 2018 to 31 March 2018.
Cash budget of King Traders for the period 1 February tot 31 March 2018
February
March
CASH RECEIPTS
(
)
(
)
(..5
Bank balance at the beginning of the period
Bank balance at the end of the perioti
9.6.4 Sundry cash expenses increase at the inflation rate. Calculate the current inflation rate.
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9.6.5 Depreciation is provided at 15% per annum on the cost price of vehicles. Calculate the cost
price of the vehicle that was purchased on 1 February 2018.
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EXERCISE 9.7
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INFORMATION:
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Income statement of Highveld Traders for the year ended 30 June 2018
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Extract from the Post-closing trial balance on 30 June 2018
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CHAPTER 10: INVENTORY SYSTEMS
10.1
DEFINITION AND EXPLANATION OF THE DIFFERENT INVENTORY SYSTEMS
A business either uses the perpetual (continuous) inventory system or the periodic inventory
system to record transactions regarding trading stock. The system that we have used thus far is
called the perpetual inventory system.
10.1.1 Perpetual inventory system
According to this system changes in stock are recorded on a continuous basis in the Trading stock
account. When stock is bought, the Trading stock account is debited with the cost price of the
stock and every time stock is sold, the Trading stock account is credited with the cost price of the
stock that was sold.
This method is usually used by businesses that trade in goods of which the individual cost price of
each item is easily determined e.g. Vehicles, Jewelry etc. These businesses usually sell less items
but at higher prices.
The opening balance of the Trading stock account represents the cost of stock that is on hand at
the beginning of the financial period. During the financial year all transactions regarding changes
in stock will continuously by recorded in the Trading stock account. The closing balance of the
Trading stock account will therefore show the cost price of stock that should be on hand on the
last day of the financial year. However a physical stock take will have to be done at the end of the
year in order to determine if the closing balance of the Trading stock account, according to the
recording process during the year, actually does represent the stock on hand. If this is not the case,
the balance of the Trading stock account must be adjusted by creating a Trading stock deficit or
Trading stock surplus in order for the new financial year to start with the correct balance in the
Trading stock account that reflects the actual stock on hand.
10.1.2 Periodic inventory system
When using the perpetual inventory system the cost price of the stock sold has to be calculated
every time that stock is sold. There are, however, many businesses where this is not possible or
cost effective to every time calculate the individual cost price of single items e.g. Supermarkets,
Hardware stores etc. The periodic inventory system is used by businesses that usually sell large
volumes of items at lower prices.
Under this system all transactions regarding stock are not continuously recorded and therefore it
cannot be determined how much stock should be on hand at any given time. All stock bought is
debited against the Purchases account. When stock is sold, only the sales transaction is recorded –
no entry is made of the cost of sales. The cost price of the stock that is on hand at the end of the
financial year will be determined by a physical stock take. The stock on hand, called the Closing
stock will also be the Opening stock for the following year.
If the periodic inventory system is being used the cost price of the stock sold during the year must
be determined as follows:
Opening stock (10 items x R20)
200
Plus: Purchases (30 items x R20)
600
Cost of stock available to be sold
800
Minus: Closing stock (8 items x R20)
(160)
Cost of sales
640
264
10.1.3 Advantages and disadvantages of the periodic- and perpetual inventory systems
10.2
(a)
Perpetual inventory system:
 There is better control over stock.
 Changes in stock volumes are recorded on a continuous basis.
 Theft or stock shortages can be detected easier and more quickly.
 Both stock purchases and sales are recorded in the Trading stock account.
 This system is however quite expensive to use and requires a complicated outlay
which might include computerization, barcodes and scanning equipment.
(b)
Periodic inventory system:

It is cost effective and doesn’t call for any complicated outlay or expensive
equipment.

It is not necessary to calculate the cost of sales on a continuous basis.

Theft and stock shortages cannot be detected that easily. A stock take will first be
necessary to be able to determine the cost of sales and then draw a comparison
between the cost of sales and the expected cost of sales according to the actual
fixed mark-up.
RECORDING OF TRANSACTIONS IN SUBSIDIARY JOURNALS ACCORDING TO
THE PERIODIC INVENTORY SYSTEM
The subsidiary journals will be adjusted as follows if the periodic inventory system is in use:
Cash receipts journal
The column for “Cost of sales” is omitted.
Cash payments journal
The column for “Trading stock” is replaced by a
column for “Purchases”. The Purchases account is an
expense and will be debited with the total purchases
of stock made during the month.
Debtors journal
The column for “Cost of sales” is omitted.
Debtors allowances journal
The column for “Cost of sales” is omitted.
Creditors journal
The column for “Trading stock” is replaced by a
column for “Purchases”.
Creditors allowances journal
The column for “Trading stock” is replaced by a
column for “Purchases”. Purchases will be credited
with the total amount of stock returned during the
month.
Petty cash journal
The column for “Trading stock” is replaced by a
column for “Purchases”.
General journal
All transactions regarding trading stock will be
posted to the Purchases account e.g. Withdrawal of
stock by the owner, Donations of stock etc.
265
Specific transaction will differ as follows if the periodic inventory system is being used:
Perpetual inventory system
General ledger
Account
Account
debited
credited
Transaction
Cash sales of trading
stock
Periodic inventory system
General ledger
Account
Account
debited
credited
Bank
Sales
Cost of sales
Trading stock
Cash purchases of
trading stock
Trading stock
Bank
Purchases
Bank
Carriages paid on
delivery of trading
stock
Trading stock
Bank
Carriage on
purchases
Bank
Trading
stock
bought from petty
cash
Trading stock
Petty cash
Purchases
Petty cash
Credit purchases of
trading stock
Trading stock
Creditors
control
Purchases
Creditors
control
Debtors control
Sales
Debtors control
Sales
Cost of sales
Trading stock
Creditors
control
Trading stock
Creditors
control
Purchases
Debtors
allowances
Debtors control
Debtors
allowances
Debtors control
Trading stock
Cost of sales
Withdrawals
Trading stock
Withdrawals
Purchases
Donations
Trading stock
Donations
Purchases
Credit
sales
trading stock
Return of
purchased
of
stock
Return of stock sold
Withdrawal of stock
by the owner
Stock donated
266
Bank
Sales
No entry made
No entry made
No entry made
10.3
ADAPTING LEDGER ACCOUNTS FOR THE PERIODIC INVENTORY SYSTEM
10.3.1 Purchases account versus Trading stock account
All transactions regarding the purchase and return of stock by the business, which would have
been recorded in the Trading stock account under the perpetual inventory system, will be recorded
in the Purchases account under the periodic inventory system. Because of the fact that Purchases
forms part of the cost of sales for the year it is regarded as an expense and must be closed off to
the Trading account at the end of the financial year.
10.3.2 Opening stock- and Closing stock accounts
Opening stock represents the value of trading stock that is on hand at the beginning of the
financial year. It is thus the closing stock that had not been sold during the previous year. Because
of the fact that opening stock forms part of the cost of sales for the year it is regarded as an
expense and the Opening stock account must therefore be closed off to the Trading account at the
end of the financial year.
Closing stock refers to the value of the trading stock that has not been sold on the last day of the
financial year. The value of the closing stock is determined by a physical stock take. It must be
brought into consideration by debiting the amount against the Trading stock account and crediting
it against the Closing stock account. The trading stock on hand is an asset to the business and will
form the opening stock for the following year. Closing stock will decrease the cost of sales for the
year and is therefore seen as a negative expense and therefore the Closing stock account must be
closed off to the Trading account at the end of the financial year.
10.3.3 Carriage on purchases
If additional cost had been incurred in order to deliver stock to the business this cost will also
form part of the cost of sales for the year. A separate account viz. Carriages on purchases will be
created in the General ledger. All delivery charges regarding stock will be recorded it. Because of
the fact that the carriages on purchases forms part of the cost of sales for the year it is regarded as
an expense and therefore the Carriage on purchases account must be closed off to the Trading
account at the end of the financial year.
10.3.4 Customs duty and Import taxes
There can be various other costs involved in the purchase of stock. If stock is imported from
overseas customs duty and import tax will have to be paid. In such cases separate accounts for
Customs duty and Import duty will be created in the General ledger. Because of the fact that these
expenses form part of the cost of sales for the year the Customs duty account as well as the Import
duty account must be closed off to the Trading account at the end of the financial year.
267
10.3.5 Trading account
The Trading account is used to determine the gross profit at the end of the financial year by
deducting the cost of sales from the actual sales for the year.
Under the perpetual inventory system it is very easy to close off the Sales account and the Cost of
sales account to the Trading account in order to determine the gross profit for the year.
The following entries will occur in the Trading account at the end of the year if the perpetual
inventory system is being used:
Trading account
Cost of sales
600 000
Sales
750 000
Profit and loss account
150 000
750 000
750 000
However if the periodic inventory system is being used all the accounts that have an influence on
the cost of sales must be closed off separately to the Trading account.
The following entries will occur in the Trading account at the end of the year if the periodic
inventory system is being used:
Trading account
Opening stock
200 000
Sales
750 000
Purchases
400 000
Closing stock
100 000
Carriage on purchases
70 000
Import duty
30 000
Profit and loss account
150 000
850 000
850 000
The following steps will be applicable to the first four steps regarding closing transfers at the end
of the financial year:
Step
1.
2.
Perpetual inventory system
Close off Debtors allowances to Sales
Close off Sales to the Trading account
3.
Close off Cost of sales to the Trading
account
4.
Post the Gross profit from the Trading
account to the Profit and loss account
268
Periodic inventory system
Close off Debtors allowances to Sales
Close off Sales to the Trading account
Bring Opening stock into consideration
Close off Opening stock to the Trading
account
Close off Purchases to the Trading
account
Close off Carriage on purchases, Import
duty etc. to the Trading account
Bring Closing stock into consideration
Close off Closing stock to the Trading
account
Post the Gross profit from the Trading
account to the Profit and loss account
1.2
1.3
Trading statement of Lucem Traders for the year ended 28 February 2018
ooo -· so ooo)
.Y 10 ooo
Sales
( 9bD
Cost of sales
Opening stock
Purchases
Carriage on purchases
Import duty
Cost of stock available to be sold
Closing stock
Gross profit for the year
-
( J-,70 DOO)
-,2c;-006
12...0 ODO
30 000
IS 000
'7<90 000
( 2..Z-0 000 �
...... 21..LD o 00
The business maintains a fixed profit margin of 40% on cost. Determine the value of the stock
that was stolen during the year.
/00
Cost:of'sa\e.sctccordi rt:1
to profi/;rviarcj,·;,,
(o_)t of sales uccordi� to SiDc.k.. -f::.aJ.e :
/. ( G 70 ooo - b�ooo�)
= f<.
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· 910 ooox
b 70 o oo
/'-fl) :==b.5000') �
.f)
value o-t dock stolen ,,
EXERCISE 10.1
The following information was taken from the financial records of Brooklyn Traders. Brooklyn Traders
uses the periodic inventory system to record transactions regarding trading stock.
REQUIRED:
10.1.1 Complete the accounts provided in the General ledger of Brooklyn Traders for the period 1 July
2017 to 30 June 2018.
10.1.2 Complete the Trading statement for the year ended 30 June 2018.
10.1.3 The business maintains a fixed profit margin of 25% on cost. Determine the value of the stock that
was stolen during the year.
INFORMATION:
1.
On 1 July 2017 a balance ofR69 000 appeared in the Trading stock account.
2.
The following totals appeared in the records ofLucem Traders on 28 February 2018:
Sales
710 000
Debtors allowances
60 000
Purchases
451 000
Carriage on purchases
12 000
Customs duty
7 000
3.
Stock on hand on 30 June 2018 amounted to R44 000 as per physical stock count.
270
EXERCISE 10.3
The following information concerns Moosa Traders. The business maintains a fixed profit margin of 80%
on cost and uses the periodic inventory system.
REQUIRED:
10.3.1 Complete the accounts provided for the period 1 December 2018 to 31 December 2018, the end of
the financial year. Show all closing transfers on 31 December 2018.
10.3.2 Determine the value of stock that was stolen during the year.
INFORMATION:
1.
On 1 December 2018 the following balances and totals appeared in the records of Moosa Traders:
Trading stock (1 January 2018)
Sales
Debtors allowances
Purchases
Carriage on purchases
2.
On 31 December 2018 the following column totals appeared in the subsidiary journals:
Cash receipts journal
Bank
Debtors control
Discount allowed
Sales
Sundry accounts
3.
490 000
6 675 000
392 000
2 570 000
509 600
620 000
160 000
15 000
?
125 000
Cash payments journal
Bank
Creditors control
Discount received
Purchases
Carriage on purchases
Debtors journal
Sales
245 000
Debtors allowances journal
Debtors allowances
38 000
Creditors journal
Creditors control
Purchases
Carriage on purchases
Stationery
Sundry accounts
480 000
256 000
?
48 000
145 000
Creditors allowances journal
Creditors control
74 500
Purchases
?
Carriage on purchases
8 600
Stationery
5 900
Sundry accounts
22 000
530 000
187 000
24 000
?
47 000
Additional information and adjustments:
(a)
The owner took trading stock costing R5 600 for personal use.
(b)
Trading stock with a selling price of R8 100 was donated to the primary school.
(c)
Stock on hand on 31 December 2018 amounted to R301 900 as per physical stock count.
274
CHAPTER 11: VALUED ADDED TAX (VAT)
11.1
DEFINITION AND PRINCIPLES
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CHAPTER 12: REVISION FOR THE YEAR-END EXAM
12.1
BANK RECONCILIATION AND CREDITORS RECONCILIATION
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COST ACCOUNTING
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January
CASH RECEIPTS
1 305 730
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CASH PAYMENTS
598 000
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CASH SURPLUS / (DEFICIT)
707 730
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Credit sales during:
February
1 103 850
1 400 000
(296 150)
March
841 420
633 500
207 920
1RYHPEHU
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January
Receipts from debtors during:
February
March