ADVANCED
ACCOUNTING
FOR GRADE 10
Revised 15% VAT
TEACHERS GUIDE
Advanced Accounting for Grade 10 Teachers Guide Revised 15% VAT
Lucem Publishers
P O Box 71672,
The Willows
0041
Cover Design:
Marcomedia, Pretoria.
Proof-reading:
M A A van Schalkwyk
Typeset:
Wian van Schalkwyk
Printed and bound by Bindworx, Pretoria
Copyright:
Lucem Publishers 2012
2nd revised edition
1st print
ISBN Number: 978-0-9814000-2-0
© 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
The fact that you are sitting with this book in your hand means that you have chosen Accounting as a
subject. Why Accounting? Is it because you feel that it is a subject that can be used purposefully in
any occupation? Is it because you know that an Accountant is one of the highest paid professions in
South Africa or did you choose it purely because you enjoy numbers or because your parents think it’s
a good subject to have? Whatever the reason, welcome, and we hope you are going to enjoy the
subject Accounting very much and will never regret the choice you have made.
Accounting is described by many people as an “understand subject”. It is true in that, as soon as you
fully understand and can apply certain principles, Accounting becomes a wonderful experience
wherein you can truly live it through every assignment being a practical experience as well as being
able to recognise and meet a challenge. There are two very important points regarding Accounting that
you need to understand and obey if you want to achieve anything in Accounting, viz:
1. Accounting is not only a subject you must understand – there are certain principles and theories
that you will have to learn very well and memorise to be able to understand and apply it to be able
to understand other concepts, and
2. Accounting is a subject where you have to work very hard. If you do not work every day, and
don’t do your homework every day, you will never be successful in Accounting.
In Accounting every new theme follows on the previous work. If you do not understand and master
the previous work, it will be pointless to begin the new work. If you fall behind just once in
Accounting, the chances are very slim that you will ever really catch up – you will just fall further and
further behind until you get to the point that you feel as if you don’t understand anything anymore –
we call this effect of falling further and further behind the “snowball effect” and it is something that
you will immediately begin to experience the first time you don’t do your homework. Homework each
and every day is the most important thing in Accounting.
A further measure that we enforce to curb the “snowball effect” is to regularly write class tests about
work being done in class. You will write a class test during every cycle about the work you are doing
in class. Fortunately, if you do your homework every day, a class test is just like another exercise, For
those who faithfully work hard every day, class tests will be no problem, they will rather be a
challenge to see if you understand the work, and can start with new work.
From everything mentioned above, we just want to say one thing. You know yourself. Accounting is
not a subject for someone who isn’t prepared to faithfully work hard every day. Accounting is for
people who enjoy neatness, orderliness and accuracy. It is also for people who enjoy a challenge –
actually Accounting is a subject for perfectionists – people who are not satisfied with second best.
We hope and trust that you are such a person, and that you are now, more than ever, convinced that
you made the right choice in selecting Accounting as a subject. Good luck and enjoy this year’s
challenges in this subject.
May you, through hard work achieve exactly what you hoped for and much more.
W. van Schalkwyk, B.Com., H.O.D. ( U.P.) )
Compiler
2
CONTENTS
PAGE NO.
THEME
CHAPTER 1
Explanation and summary of accounting concepts
CHAPTER 2
Expansion of cash transactions and the calculation of interest on fixed
deposit and interest on loan.
p. 8 - 21
p. 22 - 50
CHAPTER 3
The General Journal
p. 51 - 82
CHAPTER 4
Formal and informal bookkeeping
p. 83 - 85
CHAPTER 5
Wage and Salary Journals
p. 86 - 103
CHAPTER 6
Correction of errors
p. 104 - 119
CHAPTER 7
Valued added tax (VAT)
p. 120 - 127
CHAPTER 8
Internal control and business ethics
p. 128 - 132
CHAPTER 9
General accepted accounting practice and year-end procedures
p. 133 - 176
CHAPTER 10
Budgets
p. 177 - 198
CHAPTER 11
Manufacturing concerns
p. 199 - 210
CHAPTER 12
Revision for final examination
p. 211 - 240
3
TERM 1
YEAR PLAN (CAPS)
1.
EXPLANTION AND SUMMARY OF ACCOUNTING CONCEPTS
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
1.10
1.11
1.12
Sole trader……………………………………………………………………………………. p. 8
Entity concept…………………………………………………………………………….......
8
Owner’s equity……………………………………………………………………………….
8
Assets…………………………………………………………………………………………
9
Liabilities…………………………………………………………………………………….. 10
Transactions, source documents and subsidiary journals…………………………..……....... 10
Debtors-, Creditors- and General Ledger……………………………………………………
11
Income and expenses……………………………………………………………………........ 11
Profit and loss………………………………………………………………………............... 12
Financial statements………………………………………………………………………….
12
Accounting cycle…………………………………………………………………….............. 12
Classification of ledger accounts…………………………………………………………….. 13
2.
EXPANSION OF CASH TRANSACTIONS
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
2.11
Credit card sales…………………………………………………………...............................
Bank charges…………………………………………………………………………………
Carriage on the purchase of trading stock……………………………………………………
Discount allowed to debtors………………………………………………………………….
Discount received from creditors…………………………………………………………….
Dishonoured cheques received from debtors……………………….……………………......
Dishonoured cheques issued to creditors………………………………………………….....
Fixed deposits and interest on fixed deposit…………………………………………………
Loans and interest on loan.…………………………………………………………………..
Interest on current account…………………………………………………………………...
Interest on overdraft account…………………………………………………………………
3.
GENERAL JOURNAL
3.1
Introduction………………………………………………………………………………......
3.1.1 Columns in the General Journal……………………………………………………………...
3.2
Transactions in the General Journal………………………………………………………….
3.2.1 Drawings of non-cash-items by the owner…………………………………………………...
3.2.2 Donation/Grant of non-cash-items…………………………………………………...............
3.2.3 Apply non-cash-items for advertising purposes……………………………………………...
3.2.4 Reverse discount allowed on dishonoured cheques received from debtors….........................
3.2.5 Reverse discount received on dishonoured cheques issued to creditors……………………..
3.2.6 Interest on accounts in arrear of debtors……………………………………………………..
3.2.7 Interest on accounts in arrear of creditors……………………………………………………
3.2.8 Bad debts and bad debts recovered…………………………………………………………..
3.2.9 Interest on savings account…………………………………………………………………..
3.2.10 Interest on loan capitalized…………………………………………………………………...
3.2.11 Correction of erroneous postings…………………………………………………………….
4
22
22
22
23
24
25
26
27
29
32
32
51
51
52
52
52
52
53
55
57
57
57
58
58
58
4.
FORMAL AND INFORMAL BOOKKEEPING
4.1
4.2
4.3
4.4
4.5
4.6
Differences between formal and informal bookkeeping methods…………………………....
Managing support sources…………………………………………...……………………….
Determining of selling prices………………………………………………………………..
Calculation of cost of sales…………………………………………………………………...
Calculation of remuneration of employees…………………………………………………..
Income and expenses……………………………………………………………………........
83
84
84
84
84
84
TERM 2
5.
WAGE AND SALARY JOURNALS
5.1
5.2
5.3
5.4
5.5
Wage Journal, Salary Journal, Cash Payments Journal and General Ledger..........................
Calculations from given salary scales……………………………………………………......
Gross wages and salaries versus net wages and salaries…………………………………….
Deductions…………………………………………………………………………………....
Employer contributions………………………………………………………………………
6.
CORRECTION OF ERRORS
6.1
6.2
Errors on trial balances………………………………………………………………………. 104
Debtors and creditors reconciliation…………………………………………………………. 107
7.
TAX ON VALUE ADDED (VAT)
7.1
7.2
7.3
7.4
7.5
7.6
General……………………………………………………………………………………….
Definition of VAT………………………………………………………………………........
Necessity and purpose of VAT……………………………………………………………...
Principles regarding VAT………………………………………………………....................
Exempted and zero rated goods………………………………………………………………
VAT calculations…………………………………………………………………..................
8.
INTERNAL CONTROL AND BUSINESS ETHICS
8.1
8.2
8.3
8.4
Definition of internal control....................................................................................................
Basic internal control measures……………………………...……………………………….
Definition of business ethics………………………………………………………………...
Basic principles of business ethics…………………………………………………………...
JUNE-EXAMINATION PAPER
Accounting equation
Subsidiary Journals and posting to Subsidiary Ledgers and General Ledger
Correction of errors
VAT aspects
Internal control
Business ethics
5
86
89
89
90
90
120
120
120
120
121
121
128
128
132
132
TERM 3
9.
GENERAL ACCEPTED ACCOUNTING PRACTICE AND YEAR-END
PROCEDURES
9.1
9.1.1
9.1.2
9.1.3
9.1.4
9.1.5
9.1.6
9.1.7
9.1.8
9.1.9
9.2
9.2.1
9.2.2
Accounting principles………………………………………………………………………..
Entity concept………………………….……………………………………………………..
Double entry principle………………………………………………………………………..
Running concern principle…………………………………………………………………...
Financial period principle…………………………………………………………………….
Historical cost principle………………………………………………………………………
Prudence principle……………………………………………………………………………
Matching principle…………………………………………………………………………...
Consequential principle………………………………………………………………………
Actuality/reality principle……………………………………………………………………
Year-end procedure……………………………………………………………………..........
Pre-adjustment trial balance…………………………………………………………….........
Adjustments…………………………………………………………………………………..
(1)
Bad debts……………………………………………………………………………..
(2)
Depreciation on non-current assets…………………………………………………..
(3)
Accrued expenses………………………………………………………………….....
(4)
Accrued income………………………………………………………………….......
(5)
Prepaid expenses……………………………………………………………………..
(6)
Income received in advance…………………………………………………….........
(7)
Trading stock deficit………………………………………………………………….
(8)
Consumable stores on hand…………………………………………………………..
(9)
Provision for bad debts…………………………………………………….................
Post-adjustment trial balance…………………………………………………………………
Closing transfers……………………………………………………………………………...
(1)
Trading account……………………………………………………………………....
(2)
Profit and loss account………………………………………………………………..
(3)
Steps at closing transfers……………………………………………………………..
Post-closing trial balance…………………………………………………………………….
Prepare financial statements with Notes……………………………………………………..
(1)
Income statement…………………………………………………………………….
(2)
Balance sheet…………………………………………………………………………
Analysis and interpretation of financial statements………………………………………….
(1)
Profitability…………………………………………………………………………...
(a)
Percentage gross profit on turnover…………………………………………..
(b)
Percentage of gross profit on cost of sales………………………………........
(c)
Percentage net profit on turnover……………………………………….........
(d)
Total operating expenses as a percentage of turnover……………………..…
(2)
Return on owner’s equity………………………………………………………….....
(3)
Solvency………………………………………………………………………….......
(a)
Grade of solvency…………………………………………………………….
(b)
Debt/equity ratio……………………………………………..
(4)
Liquidity ratios……………………………………………………………………….
(a)
Current capital ratio…………………………………………………..............
(b)
Acid-test ratio………………………………………………………...............
(c)
Average debtors collection period……………………………………………
(d)
Average creditors settlement period………………………………………….
(e)
Rate of inventory turnover……………………………………………………
9.2.3
9.2.4
9.2.5
9.2.6
9.2.7
6
133
133
133
133
133
133
133
133
134
134
134
134
135
135
136
139
140
141
142
143
144
145
148
148
148
149
150
152
152
153
154
155
156
156
156
156
156
157
157
157
157
157
157
158
158
158
158
TERM 4
10.
BUDGETS
10.1 Difference between financial accounting and managerial accounting…………………….....
10.1.1 Financial accounting................................................................................................................
10.1.2 Managerial accounting……………………………………………………………………….
10.2 Introduction to budgets………………………………………………………………………
10.3 Types of budgets…………………………………………………………………………......
10.3.1 Cash budget…………………………………………………………………………………..
10.3.2 Projected income statement…………………………………………………………………
10.3.3 Zero base budget……………………………………………………………………………..
10.3.4 Capital budget………………………………………………………………..........................
10.3.5 Project budget………………………………………………………………………………..
10.4 Elements of a cash budget…………………………………………………………................
10.4.1 Debtors collection schedule………………………………………………………………….
10.4.2 Creditors settlement schedule………………………………………………………………...
10.4.3 Form of the Cash budget……………………………………………………………………..
11.
177
177
177
177
178
178
178
178
178
178
179
179
180
181
MANUFACTURING CONCERNS
11.1 Difference between manufacturing and trading concerns…………………………………...
11.2 Costs items by manufacturing………………………………………………………………..
11.2.1 Production costs……………………………………………………………………………...
(1) Direct material…………………………………………………………………………...
(2) Direct labour……………………………………………………………………………..
(3) Factory overhead costs…………………………………………………………………..
11.2.3 Administrative costs…………………………………………………………………………
11.2.4 Sales and distribution costs………………………………………………………………….
11.2.5 Calculation of the break-even point…………………………………………………………
12.
REVISION FOR THE FINAL EXAMINATION
12.1
12.2
12.3
12.4
12.5
12.6
12.7
12.8
Accounting equation…………………………………………………………………………
Posting of subsidiary journals……………………………………………………………….
Correction of errors in control accounts…………………………………………………….
Year-end procedures and compiling of financial statement…………………………………
Analysis and interpretation of financial statements…………………………………………
VAT- matters………………………………………………………………………………..
Managerial accounting aspects and cash budgets……………………………………………
Manufacturing aspects………………………………………………………………………
COMPOSITION OF GRADE10 PROMOTION MARK
ASSESSMENT METHOD
WEIGHT
1 Project
30%
June exam
10%
Term tests
20%
Class tests and homework assignments
40%
194
194
194
194
194
194
195
195
196
206
209
210
213
218
220
222
224
MARK
100
(25% of promotion mark)
300
(75% of promotion mark)
400
( 100% )
November exam
7
CHAPTER 1: EXPLANATION AND SUMMARY OF ACCOUNTING CONCEPTS
As mentioned clearly in the Introduction, no new work can be done in Accounting before you are
assured that you understand the work previously done. The following concepts should be known to
you.
1.1
SOLE TRADERS
Different forms of business enterprises are distinguished by virtue of how the capital was
gathered and who is entitled at the end of the financial year to the profit which was made. On
ground of these two aspects there can be distinguished between a sole trader, partnerships and
public companies. In Grade 10 attention will only be devoted to the bookkeeping of sole
traders, i.e. a business where only one owner contributes all the capital and is also entitled
to all the profit.
1.2
BUSINESS ENTITY PRINCIPLE
The entity principle determines that the owner and the business are two separate “persons” or
“entities” each with a separate set of financial records, assets and liabilities. The business
owns therefore separate assets and the owner owns only that share contributed as capital as
his interest in the assets. If there are other liabilities, they will also have interest in the assets
of the business.
The owner of a sole trader can be kept legally liable for all incurred expenses in the name of
the business. If a sole trader becomes insolvent the owner is liable for the outstanding debt
that cannot be repaid. If all the debts cannot be repaid out of the asset sales of the business,
personal assets of the owner must be sold to discharge the debt.
1.3
OWNER’S EQUITY
As mentioned above, the owner has interest in the assets of the business. This interest is
determined by the amount of capital contributed by the owner. If the business has no debt, the
owner will possess 100% of the interest in the assets of the business.
If there are liabilities, the owner will own the interest in the assets which remain after all
liabilities are repaid. This amount should be equal to the initial capital invested by the owner
in the business plus all profits made, less the part of the profits already withdrawn by the
owner.
A simple way to explain the owner’s equity is to assume that the business closes its doors
and all the assets are sold. All the money from the asset sales is thrown on a heap. From this
money all the liabilities have to be repaid (it is their interest in the assets). The money that
remains after all liabilities are repaid, is the money that the owner gets, in other words, it is
his interest in the assets.
From the above the following two logical deductions should be made:
Owner’s equity = Assets – Liabilities
Owner’s equity = Capital + Net profit – Drawings
8
1.4
ASSETS
The assets of a business are the possessions in which the owner and other institutions, outside
the business like banks allowing loans to the business and creditors from whom goods were
bought on credit, have an interest in.
Banks will only allow loans to a business if the bank is sure that they will get their money
back or if they cannot repay, enough assets are available to be sold so that the bank can be
sure they will get their money back.
Same, creditors will only sell on credit to a business if the business is liquid, i.e. the business
can repay its debt with proceeds that the business generates monthly, but, if the business does
not earn enough, the business owns enough assets that can be sold to repay the debt.
For credit lenders it is always important to be aware of the amount of debt a business already
has, in other words, who has already interest in the assets of the business before allowing
further debt.
From the above, the following logical deduction can be made:
Assets = Owner’s equity + Liability
There are mainly three types of assets, two that you are already acquainted to.
1.4.1
Non-current assets (also called fixed assets):
Fixed assets are bought to be used over a long period in a business and in the everyday
operations of the business. We only distinguish between three non-current assets, viz. Land
and buildings, Vehicles, and Equipment. These assets are used so that the business can make
a profit. Naturally the value of these assets will not remain the same over the years. This year
you will experience that the value of vehicles and equipment decrease each year and that it
cannot be sold for the same price that it was bought for.
1.4.2
Financial assets
This is a new concept which will be introduced to you during this year. A financial asset
arises when a business transfers money not needed for a period of time, from the current bank
account where absolute minimum interest is earned, to a fixed deposit account where it is
invested at a higher interest rate for a fixed period at the bank.
1.4.3
Current assets
Assets whose value varies monthly and can relatively easily be transformed into cash in
order to meet monthly obligations, and therefore fairly liquid in nature, are called
current assets. The six current assets, which usually are placed in liquidity order are:
(1) Trading stock - goods purchased for reselling later at a profit.
(2) Debtors control - a summary of all transactions with debtors.
(3) Savings - money in separate bank account with a view to higher interest rates,
but no fixed investment period, is anytime available.
(4) Bank - money in a current account or checking account for day to day payment
transactions.
(5) Petty cash - cash amount for small cash payments made every day.
(6) Cash float - small change (money) needed to start and end every day in the cash
registers.
9
1.5
LIABILITIES
Liabilities are concerns outside the business to whom money is owed and thus having a share
in the assets of the business.
If a business closes its doors, and sell all the assets, all the liabilities have to be repaid firstly
whereupon the owner will be entitled to the remaining money. This can perhaps cause that the
following deduction is not so easy understandable.
Liabilities = Assets – Owner’s equity
There are certain accounting principles and procedure, if applied generally, assure that it
shall be true. These principles will be attended to in detail during the year, and you can look
forward to see how the pieces of the jig-saw puzzle fall in place.
There are mainly two types of liabilities with which you are already acquainted with.
1.5.1
Non-current liabilities (also called long-term liabilities):
Long term liabilities are debt repaid over a period longer than a year. We distinguish only one
non-current liability, viz. Loan: ABSA. This money is used within the business to make a
profit. The bank will of course not lend the money free of charge. The cost linked to the
lending of money is interest that has to be paid. This is a new concept to be looked at in
more detail, at a later stage.
1.5.2
Current liabilities (also called short-term liabilities)
Liabilities repaid over a period shorter than a year, and of which the amount changes
continuously are called current liabilities. The two current assets are:
(1) Creditors control – summary of all transactions with creditors.
(2) Bank overdraft – an arrangement is made with the bank to issue cheques for more
than the amount of money in the current bank account. The bank determines a limit
for the bank overdraft based on the business’ credit ability. This is the same as a loan
and the bank will also charge interest on the overdraft amount.
1.6
TRANSACTIONS, SOURCE DOCUMENTS AND SUBSIDIARY JOURNALS
The first step in the accounting process is to keep book of all the daily transactions which
involves the business. A transaction can be described as any trade action which involves
money. When a transaction incurs a source document is completed that provides information
regarding the transaction. Each transaction is then recorded from the information as it appears
on the source document in the specific subsidiary journal, also called the book of first entry.
Bookkeeping of the following transactions should be known to you:
Transaction
1. Any cash received by the business.
2. Any payments made out from the
current bank account.
3. Small cash amounts paid out of Petty
cash.
4. Goods sold on credit.
5. Any item bought on credit.
6. Items with which debtors are
unsatisfied with, returned to us.
7. Items with which we are unsatisfied,
returned to creditors.
Subsidiary journal
Cash Receipts Journal
(CRJ)
Cash Payments Journal
(CPJ)
Petty Cash Journal (PCJ)
Source document
Duplicate receipt (DREC) or
Cash register roll (CRR)
Cheque counterfoil (CC)
Debtors Journal (DJ)
Creditors Journal
(CJ)
Debtors Allowance
Journal(DAJ)
Creditors Allowance
Journal (CAJ)
Duplicate sales invoice (DCSI)
Original renumbered credit
purchases invoice (CPI)
Duplicate credit note (DC/N)
10
Petty cash voucher (PCR)
Duplicate debit note (DD/N)
1.7
DEBTORS, CREDITORS AND GENERAL LEDGER
For each debtor and creditor a personal account is created in, what we call a “subsidiary
ledger”. Each transaction involving a debtor or creditor must be posted the same day that it
happens, to the creditor or the debtor’s personal account and the balance immediately adapted.
This is done to determine at any given time the amount that a debtor owes us, or the amount
that we owe a specific creditor.
Each transaction is posted separately to the personal account of debtors or creditors. In the
General Ledger a debtors control account and creditors control account is composed which is
a summary of all the separate transactions that appeared during the month in the different
personal accounts. At the end of the month a list of all the outstanding balances of debtors
and creditors, up as it appears in the subsidiary ledgers, are drawn up. The total of the debtors
list has to correspond with the balance of the debtors control account and the total of the
creditors list with the balance of the creditors control account.
1.7.1
1.7.2
The General Ledger is divided in two main sections, viz. the Balance sheet accounts section
and Nominal accounts section.
Balance sheet accounts-section consists of all accounts employed to prepare the
Balance sheet at the end of the year, viz.
(1) The two direct owner’s equity accounts, viz. Capital and Drawings.
(2) All assets, viz. Land and buildings, Vehicles, Equipment, Fixed deposit: ABSA, Trading
stock, Debtors control, Savings account, Bank, Petty cash and Cash float.
(3) All liabilities, viz. Loan: ABSA and Creditors control.
Nominal accounts-section consists of all incomes and expenses employed to prepare the
Income statement and calculate the net profit.
(1) Incomes, e.g. Sales, Rent income, etc.
(2) Expenses, e.g. Cost of sales, Debtors allowance, Telephone, Stationery, etc.
At the end of the month all subsidiary journals are posted to the General Ledger. It is very
important that the double entry principle is always applied when posting to the General
Ledger. The double entry principle determines that for every debit entry a credit entry must be
made in another account and that the accounts must refer to each other. All ledger accounts
must be balanced at the end of the month and a Trial balance drawn up to control whether the
double entry principle was applied correctly.
1.8
INCOME AND EXPENSES
As already mentioned all income and expenditures appear in the nominal accounts section of
the General Ledger.
Income can be described as money earned by the business from any trading activity or any
investment activity, e.g. Sales, Rent income, Interest on fixed deposit, etc.
Expenses can be described as any incurred expenses with regard to trading activities and
finance activities, e.g. Cost of sales, Wages, Interest on loan, etc.
Net profit consists of the income earned less the incurred expenses
Net profit = Income - Expenses
11
1.9
PROFIT AND LOSS
The main reason to start a business, is to make profit. The owner invests capital in a business
to make profit. The capital is used to buy assets to run the business and thus making a profit.
In the case of a sole trader all the profit belongs to the owner. The owner has the choice to
leave the profit, which has been made, in the business and to buy more assets with it to
enlarge the business. It remains the money of the owner, and all profits not withdrawn will
increase his share in the assets of the business. However, if the owner withdraws some of the
profits, it will decrease his share in the business.
Profit is calculated by deducting incurred expenses from the incomes earned. If the expenses
are more than the income, there will be a loss, and the owner’s share and his investment in the
business will decrease.
It is the risk taken by the owner when he starts the business. If the business makes a profit the
investment of the owner can grow but in case of a loss the value of the investment will
decrease.
From the above, the following two logical deductions can be made:
Owner’s equity = Capital + Net profit - Drawings
Owner’s equity = Capital – Net loss – Drawings
1.10
FINANCIAL STATEMENTS
At the end of the financial year, i.e. the twelve months on which an accounting report must be
presented, the financial results of the business are given in an easy readable manner in the
form of two financial statements, viz. the Income statement and the Balance sheet.
1.10.1 Income statement
Only income and expenditures appear in the Income statement to calculate the net profit for
the preceding year. Only nominal accounts appear thus in the Income statement.
1.10.2 Balance sheet
The Balance sheet provides a clear picture of the financial situation of a business on the last
day of the financial year in the form of assets which is equal to owner’s equity plus liabilities.
One can thus see exactly what the interest of the owner and that of outsiders are in the assets
of the business.
1.11
ACCOUNTING CYCLE
It is always important to distinguish between which accounting procedure happens daily,
monthly or only once annually.
Daily procedure: transactions take place, source documents are completed, complete
subsidiary journals, posting to Debtors and Creditors Ledgers.
1.11.2 Monthly procedure: closing off of subsidiary journals, posting to the General Ledger,
prepare a Trial balance, prepare Debtors and Creditors Lists.
1.11.3 Annual procedure: prepare Income statement and Balance sheet, analysis and interpretation
of financial statements.
1.11.1
12
1.12
CLASSIFICATION OF LEDGER ACCOUNTS (Complete on your own during the year)
ASSETS
OWNER’S EQUIPMENT
LIABILITY
Non-current assets
• Land and building
• Vehicle
• Equipment
• (Accumulated
depreciation on
vehicles)
• (Accumulated
depreciation on
equipment)
Financial assets
• Fixed deposit : ABSA
Current assets
• Trading stock
• Debtors control
• (Provision for bad
debts)
• Savings account
• Bank
• Petty cash
• Cash float
• Consumables on hand
• Accrued income
• Prepaid expenses
Direct owner’s equity
Capital
Drawings
Indirect owner’s equipment
Income
• Current income
• Sales
• Rent income
• Discount received
• Interest on
current account
• Interest on
savings account
• Interest on fixed
deposit
• Interest on
overdue accounts
of debtors
• Provision for bad
debts adjustments
Expenses
• Cost of sales
• Debtors allowance
• Telephone
• Stationery
• Wages
• Water and electricity
• Rent expenses
• Salaries
• Insurance
• Repairs
• Fuel
• Advertising
• Donations /Grants
• Postage
• Packing material
• Bank charges
• Discount allowed
• Interest on overdraft
account
• Interest on loan
• Interest on arrear
accounts of creditors
• Pension fund contribution
• Medical fund contribution
• UIF - contribution
• Bad debts
• Depreciation
• Trading stock deficit
• Provision for bad debts
adjustment
13
Non-current liabilities
• Loan: ABSA
Current liabilities
• Creditors control
• Bank overdraft
• Creditors for wages
• Creditors for
salaries
• Pension funds
• Medical funds
• SARS (PAYE)
• UIF
• Accrued expenses
• Income received in
advance
Exercise 1.1
1.
Complete the following table referring to the given clues with reference to the seven transactions
already attended to, the subsidiary journal in which each transaction is recorded as well as the
source document.
Transaction
Subsidiary
Journal
CRJ
1.
2.
3
Cheque counterfoil (CC)
Goods sold on credit to debtors.
4.
CJ
5. Recording of necessary small cash
Payments.
6.
Duplicate credit note
(DC/N)
Duplicate debit note
(DD/N)
7.
2.
Source document
Name the accounting processes happening daily, monthly and annually.
Daily:
Monthly:
Annually:
3.
In which two main sections are the General Ledger divided?
4.
Name any three incomes.
5.
Name any ten expenses.
14
6.
Name the two direct owner’s equity accounts.
7.
Name the current assets in order of liquidity.
8.
Name two kinds of liabilities and give an example of each.
9.
Name the two subsidiary ledgers.
10.
Write down three different ways in which the accounting equation can be recorded.
11.
Name the two financial statements.
12.
Give the definition of the “double entry principle”.
13.
Give the definition of the ‘entity principle”.
14.
Give the definition of a “sole trader”.
15
Exercise 1.2
The following information relates to Park Traders.
INSTRUCTION
1.
Open the given ledger accounts on 1 April 2015 with the given balances and totals.
2.
Post the column totals from the given subsidiary journals to the opened accounts and close
off the accounts properly on 30 April 2015. Accept that the petty cash imprest amount was
restored on 30 April.
INFORMATION
1.
The following figures appeared on 1 April 2015 in the books of the Park Traders:
Trading stock
Debtors control
Bank
Petty cash
Creditors control
Sales
Cost of sales
Debtors allowance
2.
550 000
88 000
23 000
950
63 000
165 000
135 000
3 000
The following column totals appeared in the different subsidiary journals on 30 April 2015:
Cash Receipts Journal
Bank
Debtors control
Sales
Cost of sales
160 000
42 000
?
86 000
Cash Payments Journal
Bank
Creditors control
Trading stock
256 000
41 000
183 000
Debtors Journal
Sales
Cost of sales
31 200
?
Debtors Allowance Journal
Debtors allowance
Cost of sales
3 120
2 600
Creditors Journal
Creditors control
Trading stock
18 000
12 000
Creditors Allowance Journal
Creditors control
Trading stock
4 000
1 500
Petty Cash Journal
Petty cash
Creditors control
Debtors control
Trading stock
830
230
140
300
16
General Ledger of Park Traders
Balance sheet accounts-section
Trading stock
B5
Debtors control
B6
Bank
B7
Petty cash
B8
17
Creditors control
B10
Nominal accounts–section
Sales
N1
Cost of sales
N2
Debtors allowance
N3
Calculation of percentage gross profit on cost price:
18
Exercise 1.3
INSTRUCTION
Analyse the following transactions under the correct headings on the given answer sheet
TRANSACTIONS
1.
The owner T. Pelser starts a business with a capital contribution of R500 000, which he deposits
in the bank account of TP Traders.
2.
The original capital contribution appears to be insufficient, and a loan of R60 000 is negotiated
with ABSA in the name of the business.
3.
A cheque is issued to AA Traders for the following: 2 cash registers @ R1 750 each, shelves for
the shop, R4 500 and a safe, R2 000.
4.
Stationery bought on credit from BB Stationery, R8 000.
5.
The trading license is paid by cheque, R1 800.
6.
Stationery to the value of R1 700 returned to BB Stationery.
7.
Trading stock bought by cheque from DD Suppliers for, R59 000.
8.
Goods sold for cash for R13 230. A mark-up of 35% on the cost price is normally charged on all
stock sold.
9.
Received an amount of R1 450 for services rendered.
10.
Owner took an amount of R500 per cheque for own personal use.
11.
A cheque of R200 given to the petty cash cashier as petty cash imprest amount.
12.
Rent for the month amounts to R5 800, paid by cheque.
13.
Services rendered to client, J. Marais which she will pay later, R240.
14.
Cash cheque, R500 issued for cash float in the cash registers.
15.
Postage paid out of petty cash, R21.
16.
Goods sold on credit to debtor, K. Viljoen, R3 780.
17.
R67 paid out of petty cash for delivery of goods at K. Viljoen. Amount to be added to her
account.
18.
Goods to the value of R486 returned to us by K. Viljoen.
19.
Issued a cheque to BB Stationery for R2 000 as part payment of our debt.
20.
Paid wages, R30 out of Petty cash.
21.
Received R500 from debtor, R. Rood to pay part of his debt.
22.
The petty cash cashier indicates that he has only R45 left in the petty cash at the end of the
month. Issue a cheque to restore the petty cash imprest amount.
23.
Issue a cheque to creditor, D. Human to settle our debt, R2 100.
24.
Repay R5 000 per cheque on the loan at ABSA.
25.
Merchandise bought to the value of R5 000 from FF Stores, paid by cheque. Seeing that we buy
the goods to be sold again, 5% trade discount is allowed.
26.
It was decided that the cash float in each cash register is too much. The float of each cash
register is decreased with R50. This money is deposited in the current bank account.
27.
Pay the telephone account by cheque, R1 900.
28.
Issued a receipt to N. Nagel, a debtor, for R2 300 as repayment of her debt, R2 500.
29.
The bank sent us our monthly bank statement which indicates that the service fees for the
month are R278.
30.
Issued a cheque for R5 600 to HH Traders, a creditor, in settlement of our debt, R6 000.
19
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
diary doc.
journal
no. Subsi- Source
Subsidiary Journal
(Debtors/Creditors)
Account
Account
debited
credited
Account debited
20
Account credited
General Ledger
Debit
Credit
Owner’s equity
Debit
Credit
Liability
Debit
Credit
Assets
30
29
28
27
26
25
24
23
22
21
20
19
18
17
diary doc.
journal
no. Subsi- Source
Subsidiary Ledger
(Debtors/Creditors)
Account
Account
debited
credited
Account debited
21
Account credited
General Ledger
Debit
Credit
Owner’s equity
Debit
Credit
Liabilities
Debit
Credit
Assets
CHAPTER 2: EXPANSION OF CASH TRANSACTIONS
2.1
CREDIT CARD SALES
If a consumer pays by credit card, the transaction is exactly handled the same as cash sales.
Internet transfers to pay for goods and services bought, are lately used more often. If the
transaction is authorized by the bank it means the money is paid into the bank account of the
business, and the transaction is recorded as follows:
Subsidiary
Cash Receipts Journal (CRJ)
Journal
Source document Cash register roll (CRR)/Duplicate credit card slip (DCCS)/Bank
statement (B/S)
Posting
Debit Bank and credit Sales with the sales price.
Debit Cost of sales and credit Trading stock with the cost price
2.2
BANK CHARGES
If a client pays with a credit card, the bank guarantees that the amount will be paid to the
business. For consumers it is eas ier and safer to pay with cred it cards instead than cash, and
therefore more people will buy from the business if a credit card is accepted for sales. The bank
charges for these services that they render. All cost s and levies are indi cated on the bank’s
statement received at the end of the month. These costs ar e not paid per cheque to the bank, but
automatically deducted from th e current account of the business. All expenses deducted
monthly by the bank on the bank statement ar e combined in one expe nse account, viz. Bank
charges. Seeing that it decreases the money in the bank, it is recorded as follows:
Subsidiary
Journal
Source
document
Posting
2.3
Cash Payments Journal (CPJ)
Bank statement (B/S)
Debit Bank charges and credit Ba nk with total amount of all levies and
deductions according to the bank statement.
CARRIAGE ON TRADING STOCK BOUGHT
When any extra cost s are charged for deliverin g trading stock bought, it fo rms part of the cost
price of goods and must be added to the cost price. The Trad ing stock account is debited with
the total amount of the stock purchased plus delivery costs.
EXAMPLE
2015
March 15
17
Bought goods by cheque from Park Merchants, R2 700.
Costs to deliver the goods amount to R75, and paid out of Petty cash.
General Ledger of Menlo Merchants
Trading stock
22
B
2.4
DISCOUNT ALLOWED TO DEBTORS
Sometimes discount is allowed to debtors to
encourage them to sett le their outstanding
accounts earlier. This discount ha s the effect that less money is received for goods sold to
debtors, which means the net profit at the end of the financial year decreases. A new expense
account, viz. Discount al lowed is used to reco rd the discount. Although the debtor does not
pay the full amount owed, the account is notwithstanding decreased with the full amount.
The entry is therefore recorded in the books as follows:
Subsidiary
Cash Receipts Journal (CRJ)
Journal
Source
Duplicate receipt (DREC.)/Bank statement (B/S)
document
Posting
Credit Debtors control as well as the debto r’s personal account in the
Debtors Ledger with the total
amount received and the discount
allowed.
Debit the Bank with the actual amount receiv ed and debit Discount
allowed with the amount of discount.
EXAMPLE
2015
Jan. 20 Issued receip t 13 to A. Nel for R680 in settlement of his account of R700.
Cash Receipts Journal of Menlo Merchants for January 2015
Doc.
no.
Day
Date
2015
Jan. 1
Code
Details
Fol.
Bank
Debtors Ledger of Menlo Merchants
A. Nel
Document no.
Fol.
Debit
Account rendered
CRJ
Discount
allowed
Debtors control
D5
Credit
b/d
General Ledger of Menlo Merchants
Bank
700
B
Debtors control
B
Discount allowed
N
23
Balance
2.5
DISCOUNT RECEIVED FROM CREDITORS
Sometimes discount is received from creditors if we pay an outstanding account earlier than the
agreed period. This discount ha s the effect that we pay less for items bought from creditors.
This advantage will have the eff ect that the profit that the owner has in mind at the end of the
financial year, will increas e. A new income account, viz. Discount received is used to record
the discount. Though the full am
ount due, is not pa id to the creditor, the account is
notwithstanding decreased with the full outstanding amount.
The entry is therefore recorded in the books as follows:
Subsidiary
Cash Payments Journal (CPJ)
Journal
Source
Cheque counterfoil (CC)
document
Posting
Debit Creditors control as well as the creditor’s personal account, with
the total amount paid plus the discount received.
Credit the Bank with the actual am
ount paid and credit Discount
received with the amount for discount.
EXAMPLE
2015
Jan. 23 Issued cheque no. 341 to Menlo Ltd. in settlement of our account of R8 000
after discount of 5% was received.
Cash Payments Journal of Menlo Merchants for January 2015
Doc.
no.
Day
Date
2015
Jan.
Name of payee
Code
1
Fol.
Bank
Creditors Ledger of Menlo Merchants
Menlo Ltd.
Document no.
Fol.
Debit
Account rendered
CPJ
Discount
received
Creditors
control
C5
Credit
b/d
8 000
General Ledger of Menlo Merchants
Bank
B
Creditors control
B
Discount received
N
24
Balance
2.6
DISHONOURED CHEQUES RECEIVED FROM DEBTORS
A cheque is an instruction that a drawer of the cheque gives to his bank to pay money from his
bank account to a specific person. When a debtor pays his debt per cheque an entry into the Cash
Receipts Journal is immediately recorded, and Bank is debited and the debtor’s personal account
as well as the Debtors control credited.
Sometimes it happens that we r eceive a cheque from a debtor in settlement of an outstanding
account but for one or ot her reason the debtor’s bank does not want to give us the money.
Reasons can be that he does not have suffi cient funds in his account or he for got to sign the
cheque or the words and numbers on the che que differ, etc. The cheque can be damaged or the
date on the cheque can be older than six months which means it is staled.
This cheque is returned to us by the bank, marked R.D. which means, we have to go back to the
debtor to find out what the reason is why the bank did not honoured the cheque.
The effect of this entry which has already been recorded in the Cash Receipts Journal when we
received the ch eque, is that it should be cancelled with a contra en try in the Cash Payments
Journal seeing that we have actually never re ceived the money. Bank has to be credited again
and the debtor’s personal account as well as the Debtors control account debited.
EXAMPLE
2015
May 14 The bank returned a cheque, R600 received from a debtor B. Swart, to us marked R.D.
Received this cheque on 3 May 2015 as a payment on his account.
Subsidiary
Journal
Source document
POSTING:
Date
Code
2015
May 1
3
02
Debtors Ledger of Menlo Merchants
B. Swart
Document no.
Fol.
Debit
Account rendered
DREC. 109
D8
Credit
Balance
600
2 000
1 400
b/d
CRJ
General Ledger of Menlo Merchants
Debtors control
2015
May 1 Balance
b/d
2 000
25
2015
May
31 Bank and
discount allowed
B
CRJ
600
2.7
DISHONOURED CHEQUES ISSUED TO CREDITORS
When we pay the debt of a credit or by cheque, an entry in the Cash Paym ents Journal is made
immediately. The Bank is credited and the pers onal account of the cred itor and the Creditors
control debited.
Sometimes it happens that we issu e a cheque to a creditor in
settlement of an outstanding
account but the bank, for one or other reason, does not want to honour the cheque to the creditor.
Reasons for this can be that fund s are insufficient in our account, th e cheque is not signed or the
words and numbers differ. The cheque can be dama ged or the date on the cheque can be older
than six months which means it is staled.
This cheque is then returned by the bank marked R.D. which means that we have to issue a new
cheque to the creditor.
The effect of this entry, with reference to the dishonou red cheque already r ecorded in the Cash
Payments Journal when the cheque was issued, is th at it has to be cance lled with a contra entry
in the Cash Receipts Journal seeing that the cheque was actually never exchanged, and the bank
balance therefore ne ver decreased. The Bank must be debited again and the creditor’s personal
account as well as the Creditor’s control account credited .
EXAMPLE
2015
May 25 The bank returned a cheque, R1 300, issued on 9 May 2015 to creditor, AA Stores as
payment on their account, marked r/d.
Subsidiary
Journal
Source document
POSTING
Date
2015
May 1
9
Code
02
Creditors Ledger of Menlo Merchants
AA Stores
Document no.
Fol.
Debit
Account rendered
CC 121
b/d
CPJ
CPJ
1 300
26
2015
May
1
Balance
Balance
4 000
2 700
1 300
General Ledger of Menlo Merchants
Creditors control
2015
May 31 Bank and discount
received
C8
Credit
B
b/d
4 000
2.8
FIXED DEPOSITS AND INTEREST ON FIXED DEPOSIT
Commercial banks earn profits by obtaining money at a certain interest and then lending it to
people at a higher interest rate. Banks therefore “buy” money at a certain price (named interest)
and sell it then to someone else at a higher price or interest.
Money in a current bank account can be drawn at any given time. The bank is therefore not sure
for how long the money will be available to be lent out, and consequently the bank offers a very
low price or interest on money in a cheque account.
When money is invested at the bank for a fixed period of time, and the bank therefore knows
that they can use the money or lend it out for a specific period of time, they are prepared to offer
a much higher interest rate for the money. Such money invested for a fixed period of time at the
bank is called a fixed deposit. It is good financial management to rather transfer money that is
in a cheque account, not going to be used, to a fixed deposit account in order to earn a higher
interest rate on the money. It requires good planning and drafting of a cash budget to know when
the money is going to be needed and to be converted into cash.
Money in a fixed deposit remains an asset to the business. A fixed investment for a period
longer than a year, is shown in the balance sheet, at the end of the financial year, under the
heading “Financial assets”. If the investment falls due within twelve months after the date of the
balance sheet, it is shown under the Note: Cash and cash equivalents.
Money is mainly invested in a fixed deposit to earn more interest. Interest rates are always given
for a year. Although, banks calculate the interest daily and add it to the investment which means
that compound interest or “interest on interest” is earned, only simple interest is used for
calculation purposes.
2.8.1
Fixed deposit is made
Money is invested from a current bank account into a fixed deposit by crediting an asset
account, viz. Bank and debiting another asset account, viz. Fixed deposit: ABSA
Subsidiary
Journal
Source
document
Posting
Cash Payments Journal (CPJ)
Cheque counterfoil (CC)/Bank statement (B/S)
Asset account, viz. Bank credited and another asset account, viz.
Fixed deposit: ABSA debited.
2.8.2 Interest earned on a fixed deposit
When the interest is received it gets deposited in our current bank account, an asset account, viz.
Bank is debited and an income account, viz. Interest on fixed deposit is credited.
Subsidiary Journal
Source document
Posting
2.8.3
Cash Receipts Journal (CRJ)
Duplicate receipt (DREC) /Bank statement (B/S)
Asset account, viz. Bank debited and income account, viz. Interest on
fixed deposit credited with the amount of the interest.
Fixed deposit matured
When the period of the fixed deposit is over, the amount of the initial investment is again
deposit in the current bank account by debiting an asset account, viz. Bank and to credit
another asset account, viz. Fixed deposit: ABSA.
Subsidiary Journal
Source document
Posting
Cash Receipts Journal (CRJ)
Duplicate receipt (DREC)/Bank statement (B/S)
Asset account, viz. Bank debited and other asset account, viz.
Fixed deposit: ABSA credited.
27
EXAMPLE
INSTRUCTION
Enter the following transactions in the opened accounts in the General Ledger of Park Stores.
TRANSACTIONS
2015
Jan. 1 An amount of R250 000 is transferre d from the current account to a fixed deposit at
FNB. The investment period is twelve months at an interest rate of 4,5 % p.a.
Aug. 30 Received a cheque from FNB for the interest on the fixed deposit for the first
8 months.
Calculation of interest:
Dec. 31 Received a cheque for R253 750 from FNB. It is for the initial amount of the fixed
deposit that has matured as well as the interest for the last 4 months.
Calculation of interest:
POSTING
General Ledger of Park Stores
Fixed deposit : FNB
B8
Interest on fixed deposit
N4
28
2.9
LOANS AND INTEREST ON LOANS
If a sole trader does not have sufficient availabl e capital of its own; a loan can be negotiated
with the bank to help finance the business.
Such a loan is a non -current liability, because it is usuall y negotiated to be repaid over a longer
period than one year. However there is part of the loan that will be repaid in instalments within
twelve months after the date of the balance shee t. This short term instalment appears under the
heading “Current liabilities” in the balance sheet.
Money is lent out by the banks at a fixed interest rate.
2.9.1 Calculation of interest if interest is paid separately and interest rate given.
If interest on the loan is paid at a given interest rate, separately from the capital instalments, then
the calculation of interest at the simple interest rate will be done on the loan amount.
EXAMPLE
Calculate the interest payable for 7 months on a lo an amount of R 300 000 at an in terest rate of
8% p.a.
2.9.2
Calculation of interest if interest is capitalised
If interest is “capitalized” it means that the total interest for the year is calculated and added to
the capital amount of the loan. The instalment, no rmally monthly, repaid on the loan includes
the interest which means that a pa rt of the instalment decreases the capital amount of the loan
and the remainder is for the payment of the interest.
EXAMPLE
Calculate the interest on the loan from the following information:
Balance of loan at the beginning of the period
Interest on loan added
Instalments repaid ( R5 000 per month – include interest)
Balance of loan at the end of the period
Calculation:
29
300 000
?
60 000
264 000
(1)
Negotiation of a loan
When a loan is negotiated the total amount of the loan is paid directly into the current
account of the business and thus an asset account, viz. Bank is debited and a liability,
viz. Loan: ABSA is credited.
Subsidiary
journal
Source
document
Posting
(2)
Cash Receipts Journal (CRJ)
Duplicate receipt (D/REC.)/Bank statement (B/S)
An asset account, viz. Bank is debited and a liability, viz.
Loan: ABSA is credited.
Interest charged on a loan
The cost charged by bank for lending money is named interest. If interest is paid at a
given rate separate to the instalment paid on the loan, an expense account, viz. Interest
on loan is directly debited and an asset account, viz. Bank credited.
Subsidiary
journal
Source
document
Posting
Cash Payments Journal (CPK)
Cheque counter foil (CC)/Bank statement (B/S)
An expense account, viz. Interest on loan is debited and an
asset account, viz. Bank is credited with the interest amount.
If the interest is capitalised a liability, viz. Loan: ABSA is credited and an expense
account, viz. Interest on loan debited, thus bringing the interest first into account. The
total instalment repaid thus includes the interest and the repayment of the loan. This
total amount is then credited to the asset account, viz. Bank and debited to the liability,
viz. Loan: ABSA.
Subsidiary
journal
Source
document
Posting
(3)
Cash Payments Journal (CPJ)
Cheque counterfoil (CC)/Bank statement(B/S)
An expense account, viz. Interest on loan is debited and a
liability, viz Loan: ABSA is credited with the amount of the
interest.
An asset account, viz. Bank is credited and a liability, viz.
Loan: ABSA is debited with the total instalment which
includes the interest and the repayment on the loan.
Repayment of a loan
When an instalment on a loan or the full loan are repaid, then an asset account, viz.
Bank is credited and a liability, viz. Loan; ABSA debited.
Subsidiary
journal
Source
document
Posting
Cash Payments Journal (CPJ)
Cheque counter foil (CC)/Bank statement(B/S)
A liability, viz. Loan: ABSA is debited and an asset, viz. Bank
is credited with the instalment on the loan.
30
EXAMPLE
INSTRUCTION
Record the following transactions in the opened accounts in the General Ledger of Park Stores.
TRANSACTIONS
2015
Jan. 1 A loan of R300 000 is negotiated with FNB at an interest rate of 8% per annum.
May 31 Issue a cheque to FNB for the first 5 month’s interest on the loan.
Calculation of interest:
Dec. 31 Issued a cheque for R64 000 to FNB. It is for the annual instalment on the loon as well
as the interest on the loan for the last 7 months.
Calculation of interest:
POSTING
General Ledger of Park Stores
Loan : FNB
B12
Interest on Loan
N10
31
2.10
INTEREST ON CURRENT ACCOUNT
If the current bank account has a favourable balance; interest at a very low rate is earned on this
money. This interest is an income to the business and is directly add to the bank statement of the
business and thus increase the money in the bank.
Recording of interest on a favourable bank balance is as follows:
Subsidiary
journal
Source
document
Posting
2.11
Cash Receipts Journal (CRJ)
Bank statement (B/S)
An asset account, viz. Bank is debited and an income account, viz.
Interest on current account is credited with the interest amount.
INTEREST ON OVERDRAFT ACCOUNT
If the bank account has an overdraft balance, then the bank charges interest on the borrowed
money. The interest rate on an overdraft bank balance is normally very high and the interest is
calculated daily on the overdraft amounts. This interest is an expense to the business and is
directly added to the bank statement of the business to increase the overdraft amount further, or
to decrease the money in the bank, if the balance became favourable in the meantime.
Recording of interest charged to an overdraft bank balance is as follows:
Subsidiary
journal
Source
document
Posting
Cash Payments Journal (CPJ)
Bank statement (B/S)
A liability account (if it is an overdraft balance) or an asset account (if it
is a credit balance), viz. Bank is credited and an expense account, viz.
Interest on overdraft account is debited with the interest amount.
32
Exercise 2.1
INSTRUCTION
Analyse the following transactions under the given headings on the answer sheet. Accept that the
bank indicates a credit balance for transactions 1 – 12 and a bank overdraft for transactions 13 - 24.
Note the given example.
EXAMPLE
Bought stationery on credit from creditor, Del Stores, R2 800.
TRANSACTIONS:
Favourable bank balance, transactions 1 – 12:
1.
Credit card sales of merchandise, R6 832. Mark-up 22% on cost price.
2.
Received a bank statement indicating that the service fees and levies for the month are R240. .
3.
An amount of R200 paid out of Petty Cash for carriage on trading stock bought.
4.
Received a cheque for R1 850 from a debtor, P. Kok in settlement of his debt of R2 000.
5.
Issued a cheque to AB-Stores for R3 300 in settlement of our debt of R3 500.
6.
Received a cheque from a debtor, A. Nel for R500 returned by the bank, marked R.D.
7.
The bank returned a cheque for R1 300, that we have issued to a creditor, XY-Stores,
marked R.D.
8.
An amount of R20 000 invested on a fixed deposit at ABSA for three months at a rate of
4,5 % per annum.
9.
Another fixed deposit matured. Received a cheque from FNB for the initial amount of R50 000
invested plus three month’s interest at a rate of 5% per annum.
10.
A loan of R100 000 negotiated with Nedbank, at a rate of 9% per annum.
11.
Issued a cheque to repay an instalment of R10 000 on the loan as well as interest for the first
6 months.
12.
The bank statement indicates that R220 interest was earned on the current bank account.
Overdraft bank balance, transactions 13 – 24:
13.
Credit card sales of merchandise with cost price of R3 800. Mark-up 22% on cost price.
14.
Received bank statement indicating that the cash handling fees for the month, amounted
to R92.
15.
An amount of R890 paid by cheque for carriage on trading stock bought.
16.
Received a cheque for R5 400 from a debtor, J. Kruger and allowed a further R500 discount.
17.
Issued a cheque to a creditor, BB Merchants, for R1 800 in settlement of our debt after
deduction of 10% discount.
18.
A cheque received from a debtor, M. Buys for R340 returned by the bank marked R.D.
19.
The bank returned a cheque R910, which we issued to a creditor, Pam Stores, marked R.D.
20.
An amount of R60 000 invested on a fixed deposit at FNB at an interest rate of 5,5% p.a.
21.
Another fixed deposit matured. Received a cheque from ABSA for R25 625. It is for the
initial amount invested plus interest for six month at a rate of 5% per annum.
22.
A loan of R240 000 negotiated with Nedbank, at an interest rate of 9% per annum.
23.
Issued a cheque to pay a quarter of the loan as well as 7 month’s interest.
24.
The bank statement indicated that R980 interest was levied on the overdraft
account.
33
CJ
e.g.
12.
11.
10.
9.
8.
7.
6.
5.
4.
3.
2.
1.
Subsidiary
Journal
no.
CPI
Source
doc.
34
General Ledger
Account debited
Account credited
Stationery
Creditors control
+
Assets
Debit
Credit
-
-
2 800
+
Owner’s equity
Debit
Credit
-
2 800
+
Liability
Debit
Credit
24.
23.
22.
21.
20.
19.
18.
17.
16.
15.
14.
13.
no.
Subsidiary
Journal
Source
doc.
35
General Ledger and Subsidiary Journal
Account debited
Account credited
+
Assets
Debit
Credit
-
180
+
Owner’s equity
Debit
Credit
180
-
+
Liability
Debit
Credit
Exercise 2.2
INSTRUCTION
Use the given information to fully complete the following opened accounts in the General Ledger
of Menlo Merchants.
INFORMATION
On 1 May 2015 the following figures appeared in the General Ledger of Menlo Merchants:
1.
Trading stock
80 000
Debtors control
12 800
Creditors control
15 300
Sales
78 400
Cost of sales
65 000
Debtors allowance
3 650
Discount received
670
Discount allowed
430
2.
On 31 May 2015 the following column totals appeared in the distinguished subsidiary journals:
Cash Receipts Journal
Bank
Discount allowed
Debtors control
Creditors control
Sales
Cost of sales
Sundry accounts
60 000
1 300
14 700
1 900
27 600
?
17 100
Cash Payments Journal
Bank
Discount received
Creditors control
Debtors control
Trading stock
Sundry accounts
50 000
1 860
18 600
2 200
21 700
9 360
Debtors Journal
Sales
Cost of sales
?
29 000
Debtors Allowance Journal
Debtors allowances
Cost of sales
3 220
2 800
Creditors Journal
Creditors control
Trading stock
41 000
23 700
Creditors Allowance Journal
Creditors control
Trading stock
13 100
4 200
Petty Cash Journal
Petty cash
Creditors control
Debtors control
Trading stock
970
450
240
200
36
General Ledger of Menlo Merchants
Balance sheet accounts section
Trading stock
B5
Debtors control
B6
Creditors control
B10
Balance
37
Nominal accounts section
Sales
N1
Cost of sales
N2
Debtors allowance
N3
Discount received
N5
Discount allowed
N8
38
Exercise 2.3
INSTRUCTION
Record the transactions relating to fixed deposits a nd loans in the opened accounts in the General
Ledger of Park Merchants. Show all calculations.
TRANSACTIONS
2014
March 1 Invest an amoun t of R50 000 on fixed deposit at ENB at interest of 10% per annum.
Apr. 30 Nego tiate a loan with ABSA, R20 000 at an interest rate of 15% per annum.
Jun.
1 Received a cheque from ENB for the first 3 month’s interest on our investment.
Aug. 30 Issued a cheque to ABSA for 4 mo nth’s interest on the loan.
Sept. 1 Withdrew R20 000 out of the fixed deposit at ENB.
Oct.
1
Paid an instalment of R8 000 on the loan at ABSA.
2015
Febr. 28 Received th e outstanding interest for the year on the fixed deposit at ENB.
The interest rate on the loan increased on 1 Janu ary 2015 to 16% per annum. Issued a
cheque for the remaining interest for the year, on the loan at ABSA.
CALCULATIONS
1. Interest on fixed deposit – 1 June 2014:
2. Interest on loan – 30 August 2014:
3. Interest on fixed deposit – 28 February 2015:
4. Interest on loan – 28 February 2015:
39
General Ledger of Park Merchants
Balance sheet accounts section
Fixed deposit: ENB
B9
Loan: ABSA
B12
Nominal accounts section
Interest on fixed deposit
N6
Interest on loan
N17
40
Exercise 2.4
INSTRUCTION
Analyse the given transactions under the given headings on the answer sheet.
Note the given example.
TRANSACTIONS
EXAMPLE: Issued a cheque to put fuel in the motor car of the business, R900.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
Issued a cheque to Botha Transport to deliver stock at the business, R750.
Credit card sales of merchandise, R9 775. Mark-up 15% on cost price.
Received an invoice from Robert Computers for ink for the printer bought on credit, R600.
The bank statement showed the following deductions: cheque book R60, deposit book R50,
cash handling fees R80 and credit card levies R110.
Sold trading stock on credit to E. Cronje, R5 520.
Issued a cheque to Robert Computers for R580 in settlement of our debt (refer to no.3).
Paid R60 out of Petty Cash to replace a broken window pane.
Received a cheque of R2 500 on the account of M. de Leeuw.
Issued a cheque for R280 to restore the petty cash imprest amount.
Received M. de Leeuw’s cheque (refer to no. 8) returned by the bank marked R.D.
Interest earned on the credit balance according to the bank statement, R134.
E. Cronje returned goods to us, R299.
Received a cheque R2 100 on account of E. Cronje and allowed discount of 10% to her.
Return stationery with which we are not satisfied to Gert Stores, R800.
The bank returned a cheque of R310 issued to Gert Stores as part payment of our account
marked R.D.
41
CC
e.g.
15.
14.
13.
12.
11.
10.
9.
8.
7.
6.
5.
4.
3.
2.
1.
Source
document
no.
CPJ
Subsidiary
Journal
Account debited
Fuel
Account credited
Bank
General Ledger
42
Debit
Credit
900
Assets
Debit
900
Credit
Owner’s equity
Debit
Credit
Liability
Exercise 2.5
INSTRUCTION
Use the given information to complete the opened accounts fully in the General Ledger of
Park Retail Merchants.
INFORMATION
1.
On 1 September 2015 the following figures appeared in the General Ledger of
Park Retail Merchants:
Trading stock
Debtors control
Creditors control
Sales
Cost of sales
Debtors allowance
Discount received
Discount allowed
2.
44 200
23 190
21 620
33 060
26 000
1 860
4 100
3 180
On 30 September 2015 the following column totals appeared in the different subsidiary journals:
Cash Receipts Journal
Bank
Discount allowed
Debtors control
Creditors journal
Sales
Cost of sales
Sundry accounts
88 800
2 000
25 000
?
54 000
?
8 900
Cash Payments Journal
Bank
Discount received
Creditors control
Debtors control
Trading stock
Sundry accounts
90 000
2 700
18 000
?
63 000
9 800
Debtors Journal
Sales
Cost of sales
?
28 000
Debtors Allowance Journal
Debtors allowance
Cost of sales
3 720
3 100
Creditors Journal
Creditors control
Trading stock
17 450
13 000
Creditors Allowance Journal
Creditors control
Trading stock
4 200
1 720
Petty Cash Journal
Petty cash
Creditors control
Debtors control
Trading stock
43
1 790
280
340
300
;'2APl
General Ledger of Park Retail Dealers
Balance sheet accounts section
Tradiwz_ stock
-------- ---
s
S-n,t- l
bfJ.
'6o1.�-l'\.C,e-
3o ��¥--
,,.PT
,,..��,��o\
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Ca so\- 6 � so._\�.s.
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300
rl'lj
c.oi� \ :�:r
1�3 6c 0
Debtors control
B6
l'.>(ot ;t,� 1qo c{;� 3o Ra_� L o.r.t!I d� �unt
a,\\ O'-',IC::...ol
l>J �3 boo
�cu �5",o,o•o
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"Jt) tSa..,\e.>
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:.,_,.
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p� '-'\ c.a...'-5 h
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Cb�"ln<.S <.e,\ lo'-�CU'\c.e LPA'J
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(1""6tt'l \ r-�Tlti"n s )
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I
c)c.,i:
ll>fo{
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,-�cl; r
I
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4d \9 t+'t'O
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I
44
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la. 30 31.0
1�,s;. 3o Ba.,,..,11 - _, &.,'i�l\1
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t,...,.-,,,,uu
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l<u�r-u Qc.LDLu'\,""K �f\T iL;lOo
3
'ft&- 30 31.0
:33,a J-Y"\ce..
�4-0
Creditors control
:.._.+._ \(
�o..,\�
a.>..is
BS
- -
1;i.3 -boo
bbl
4<a 880
D��ce_
P&-"' c_a__-fJh
I
::2.a>,,;;
�r
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l7
6� t}
lL,� C)
�qo 0
4-\ 97 D
�I"" 14 4-'1<D
Nominal accounts section
Sales
N1
Cost of sales
N2
Debtors allowance
N3
Discount received
N5
Discount allowed
N8
45
Exercise 2.6
INSTRUCTION
Use the given information to only complete the Interest on loan account in the General Ledger of
Park Merchants for the year ended 28 February 2015.
INFORMATION
On 1 March 2014 Park Merchants negotiated a loan of R800 000 with ABSA at an interest rate of
12% per annum.
TRANSACTIONS DURING THE YEAR
2014
Apr. 1 Issued a cheque to ABSA for interest due on loan
July
1
Sept. 1
2015
Febr. 28
Issued a cheque to ABSA to repay an amount of R300 000 on the loan.
Issued a cheque to ABSA for interest due on the loan.
Issued a cheque to ABSA for interest on the loan for the last 6 months. Note that the
interest rate went down on 1 December 2014 to 10%.
Interest on loan
Calculations of interest on loan:
1 April 2014:
1 September 2014:
28 Feb. 2015:
46
N9
Exercise 2.7
INSTRUCTION
Use the given information to record the given information in the opened ledger accounts. All accounts
to be closed off or balanced on 28 February 2015.
INFORMATION
The following balances inter alia appeared on1 March 2014 in the General Ledger of Menlo Retail
Dealers.
Fixed deposit: ABSA
300 000
Loan: Nedbank
500 000
TRANSACTIONS
2014
Apr. 1 Fixed deposit at ABSA increased with R30 000.
May 31 Received interest on fixed deposit for the first 3 months, at an interest rate of 8%.
July 1 Issued a cheque to Nedbank, R20 000 to pay the interest for the first 4 months.
Calculate self the interest rate.
Aug. 31
Issued a cheque to Nedbank for interest due on the loan.
Oct. 31
Paid an instalment of R50 000 on the loan at Nedbank. The interest rate increased today to
15%.
Dec. 1
Received 6 months interest on the fixed deposit. The bank informed us that the interest rate
on the fixed deposit will increase as from 1 January 2015 to 10%.
2015
Febr. 28
Received interest on the fixed deposit for the last 3 months.
Issued a cheque to Nedbank for interest on the loan for the last 6 months.
Calculations of interest on fixed deposit:
May
1 Dec. 2014:
28 Febr. 2015:
Calculations of interest on loan:
1 Jul 2014: (Calculate the interest rate yourself)
31 Aug. 2014:
28 Febr. 2015:
47
General Ledger of Menlo Retail Dealers
Balance sheet accounts section
Fixed deposit: ABSA
Loan: Nedbank
B9
B12
Nominal accounts section
Interest on fixed deposit
N6
Interest on loan
N17
48
Exercise 2.8
INSTRUCTION
Use the given information to complete only the Interest on fixed deposit account in the General
Ledger of Parkie Stores for the year ended 31 May 2015.
INFORMATION
On 1 June 2014 Parkie Stores made a fixed deposit of R600 000 at ABSA at an interest rate of 6% per
annum.
TRANSACTIONS DURING THE YEAR
2014
Aug. 30
Received a cheque from ABSA for interest earned on fixed deposit.
Oct.
1
Dec. 1
2015
May 31
Issued cheque to ABSA to increase the fixed deposit with R300 000.
Received a cheque from ABSA for interest earned.
Received a cheque from ABSA for interest for the last 6 months. Note that the interest
has risen on 1 January 2015 with 1%.
Interest on fixed deposit
Calculations of interest on fixed deposit:
30 August 2014:
1 December 2014:
31 May 2015:
49
N5
Calculations:
50
CHAPTER 3: GENERAL JOURNAL
3.1
INTRODUCTION
The General Ledger is an internal journal in which mainly non-cash transaction as well as
corrections of any posting errors that could have occurred, are recorded. Any transaction that has
not yet been recorded in the already existing seven subsidiary journals, will be recorded in the
General Journal.
3.1.1 COLUMNS IN THE GENERAL JOURNAL (See page 61)
Day
Seeing that the month appears in the heading of the General Journal, it is only
necessary to indicate the day on which the transaction takes place.
The names of the distinguished accounts which are debited and credited are
entered here. The name of the account to be debited is written first and the
account credited, second with a slight indent to make it easy legible.
Details
Seeing that it is internal book entries, and therefore no source documents are to
be completed; a journal narration has to be written for every transaction which
give an explanation of the entry. These narrations are numbered as Journal
vouchers and serve as source documents for references.
Folio
The folio number of the different accounts to be debited and credited is entered
as soon as the posting to the accounts are done.
Debit
This is an amount column indicating the amount with which the account
written first, must be debited.
Credit
This is an amount column indicating the amount with which the specific
account written second with the slight intend, must be credited.
Debit: This column is only used when a debtor’s account must be debited.
Debtors control
It serves as reminder that a transaction affecting a debtor’s personal
account shall also affect the Debtors control account. At the end of the
month this column is added and posted to the debit side of the Debtors
control account with the reference “Sundry accounts (Journal debits)”
Credit: This column is only used when a debtor’s account must be credited.
It serves as reminder that a transaction affecting a debtor’s personal
account shall also affect the Debtors control account. At the end of the
month this column is added and posted to the creditit side of the
Debtors control account with the reference “Sundry accounts (Journal
Debit: credits)”
This column is only used when a creditor’s account must be debited.
Creditors control
It serves as reminder that a transaction affecting a creditor’s personal
account shall also affect the Creditors control account. At the end of the
month this column is added and posted to the debit side of the Creditors
control account with the reference “Sundry accounts (Journal debits)”
Credit This column is only used when a creditor’s account must be credited.
It serves as reminder that a transaction affecting a creditor’s personal
account shall also affect the Creditors control account. At the end of the
month this column is added and posted to the credit side of the
Creditors control account with the reference
“Sundry accounts (Journal credits)”
51
3.2
TRANSACTIONS IN THE GENERAL JOURNAL
3.2.1 DRAWINGS OF NON-CASH ITEMS BY THE OWNER
It sometimes happens that the owner takes something else than cash out of the business, e.g.
Trading stock, Stationery, etc. for his personal use. This Stock/Stationery is always taken at cost price
out of the books.
Subsidiary
journal:
Source
document:
Posting:
General Journal (GJ)
Journal voucher (JV)
Debit Drawings and credit Trading stock/Stationery, etc. with the cost price of the
goods withdrawn.
3.2.2 DONATION/GRANTS OF NON-CASH ITEMS
The business sometimes donates something else than cash to an institution.
Subsidiary
journal:
Source
document:
Posting:
General Journal (GJ)
Journal voucher (JV)
Debit an expense account, viz. Donations/Grants and credit the account given as
donation, e.g. Trading stock/Stationery, etc.
3.2.3 APPLYING NON-CASH ITEMS FOR ADVERTISING PURPOSES
The business sometimes uses its own stock for advertising purposes.
The entry to decrease stock is also done in the General Journal.
Subsidiary
General Journal (GJ)
journal:
Source
Journal voucher (JV)
document:
Posting:
Debit an expense account, viz. Advertising and credit the item used for advertising,
e.g. Trading stock /Stationery, etc.
EXAMPLE
2015
Febr. 14 The owner took goods at cost price of R760 for personal use. Complete journal
voucher 13 to authorize the transaction.
19 Trading stock at cost price of R1 300 donated to the local primary school to be used as a prize
in a draw during the annual carnival.
22 Stationery valued R400 used for advertising purposes.
General Journal of Menlo Merchants for February 2015
GJ
Day
Details
Fol.
52
Debit
Credit
3.2.4 REVERSAL OF DISCOUNT ALLOWED ON DISHONOURED CHEQUES RECEIVED
FROM DEBTORS
If discount was allowed on a cheque received from a debtor, but the cheque refused by the bank for
one or other reason, then the discount allowed also have to be cancelled.
The amount received, is cancelled by a contra entry in the Cash Payment Journal. But, as the
discount does not result in cash flow, it requires an entry in the General Ledger to cancel the
discount.
The total entry is as follows:
Part 1: Cancel the actual amount received from the debtor.
Subsidiary
journal:
Source
document:
Posting:
Cash Payments Journal (CPJ)
Dishonoured cheque (R.D. cheque) / Bank statement (B/S)
Debit Debtors control as well as the debtor’s personal account in the Debtors
Ledger, and credit the Bank with the actual amount received from the debtor.
Part 2: Cancel the discount amount allowed to the debtor.
Subsidiary
journal:
Source
document:
Posting:
General Journal (GJ)
Journal voucher (JV)
Debit Debtors control as well as the debtor’s personal account in the Debtors
Ledger, and credit Discount allowed with the discount amount allowed to the
debtor.
EXAMPLE
2015
Febr. 22 A cheque received from a debtor C. Els, R6 700, returned by the bank, marked R.D. He
has settled his debt of R7 000 on 13 February 2015 with this cheque.
Doc.
no.
Day
Cash Payments Journal of Menlo Merchants for February 2015
Day
Name of payee
Fol.
Bank
General Journal of Menlo Merchants for February 2015
Fol.
Details
Debit
Credit
53
CPJ
Debtors control
GJ
Debtors control
Debit
Credit
Date
2015
Febr.
Debtors Ledger of Menlo Merchants
C. Els
Document no.
Fol.
Code
1
13
Debit
28
b/d
02
DREC. 32
CRJ
6 700
300
03
DREC.32
CRJ
300
-
Sundry accounts
(Total receipts)
CRJ
Debtors control
1
Balance
b/d
10 000
2015
Feb
Discount allowed
2015
Febr.
28
Debtors control
CRJ
7 000
B
6 700
2015
Febr.
Balance
Account rendered
General Ledger of Menlo Merchants
Bank
2015
Febr.
D12
Credit
300
54
B
28
Bank and discount
allowed
CRJ
N
7 000
3.2.5 REVERSE OF DISCOUNT RECEIVED ON DISHONOURED CHEQUES ISSUED TO
CREDITORS
If a cheque issued to creditor is for one or other reason refused/cancelled by the bank, the discount
received on it, also needs to be cancelled.
The amount paid, is cancelled by a contra entry in the Cash Receipts Journal. But, as the discount
does not result in cash flow, an entry is made in the General Ledger to cancel the discount.
The total entry is as follows:
Part 1: Cancel the actual amount paid to the creditor.
Subsidiary
journal:
Source
document:
Posting:
Cash Receipts Journal (CRJ)
Dishonoured cheque (R.D. cheque)/Bank statement (B/S)
Debit the Bank and credit Creditors control as well as the creditor’s personal
account in the Creditors Ledger with the actual amount paid to the creditor.
Part 2: Cancel the discount amount received from the creditor.
Subsidiary
journal:
Source
document:
Posting:
General Journal (GJ)
Journal voucher (JV)
Debit Discount received and credit Creditors control as well as the creditor’s
personal account in the Creditors Ledger with the discount amount received from
the creditor.
EXAMPLE
2015
Febr. 14 The bank returned a cheque previously issued by us on 8 February 2015, to a creditor
Parkie Merchants for R3 200 in settlement of our account R3 500, marked R.D.
Cash Receipts Journal of Menlo Merchants for February 2015
Doc.
no.
Day
Details
Fol.
Bank
General Journal of Menlo Merchants for February 2015
Day
Detail
Fol.
55
Debit
Credit
CPJ
Creditors control
GJ
Creditors control
Debit
Credit
Date
2015
Febr.
Code
1
8
Creditors Ledger of Menlo Merchants
Parkie Merchants
Document no.
Fol.
Debit
C8
Credit
Balance
Account rendered
b/d
3 500
02
CC 213
CPJ
3 200
300
03
CC 213
CPJ
300
-
General Ledger of Menlo Merchants
Bank
B
2015
Febr.
28
Sundry accounts
(Total payments)
Creditors control
2015
Febr.
28
Bank and discount
received
CPJ
3 500
2015
Febr.
1
CPJ
3 200
B
Balance
Discount received
b/d
9 000
N
2015
Febr.
56
28
Creditors control
CPJ
300
3.2.6 INTEREST ON ACCOUNTS OF DEBTORS IN ARREARS
When a credit sales transaction occurs, an agreement takes place on what date the amount due has
to be paid, e.g. after 30 days. If a debtor neglect to pay the amount due on the agreed date, cash
flow problems can be experienced and ways are to be found for the debtor to pay his debt.
Just as discount allowed to debtors can encourage the early payment of debt, interest added to
overdue accounts of debtors can assure that debt is paid in time.
Subsidiary
journal:
Source
document:
Posting:
General Journal (GJ)
Journal voucher (JV)
Debit the debtor’s personal account as well as the Debtors control account and
credit an income account, viz. Interest on overdue accounts of debtors with the
interest amount.
3.2.7 INTEREST ON ACCOUNTS OF CREDITORS IN ARREARS
When a credit purchase transaction occurs, an agreement take place on what date the amount due
has to be paid, e.g. after 30 days. If our business neglects to pay the amount due to the creditor on
the agreed date, the creditor may add interest to our overdue account because the creditor has to
wait longer for his money.
Subsidiary
journal:
Source
document:
Posting:
General Journal (GJ)
Journal voucher(JV)
Debit an expense account, viz. Interest on overdue accounts of creditors and
credit the creditor’s personal account as well as the Creditors control account
with the amount.
3.2.8 BAD DEBTS AND BAD DEBTS RECOVERED
A decision by a business to sell on credit contains the advantage that more people will buy from the
business. Although it is important to investigate each potential debtor’s solvency thoroughly, it
remains a risk to sell on credit and the possibility will always exist that certain debtors won’t pay
their debt.
(1)
BAD DEBTS
If a debtor is not enable to pay his debt, or is declared insolvent, the account can be written
off as bad debts after thorough consideration and the necessary authorization of the
management of the business.
Subsidiary
journal:
Source
document:
Posting:
General Journal (GJ)
Journal voucher (JV)
Debit an expense account, viz. Bad debts and credit the debtor’s personal
account as well as Debtors control account with the amount written off as
bad debts.
57
(2)
BAD DEBTS RECOVERED
Sometimes it happens that a debtor whose account was written off as irrecoverable, comes to pay
his outstanding debt on a much later stage. This amount received has to be recorded as a normal
income in the Cash Receipts Journal.
Seeing that a debtor whose account was written off as irrecoverable is removed from the books, it
cannot be credited when the outstanding amount is probably received at a later stage. An income
account, viz. Bad debts recovered account is credited to cancel the expense which was created when
the account was written off as irrecoverable.
Subsidiary
Cash Receipt Journal (CRJ)
journal:
Source
Duplicate receipt (D.REC.) / Bank statement (B/S)
document:
Posting:
An Asset account, viz. Bank is debited and an income account, Bad debts
recovered, is credited with the amount received.
3.2.9 INTEREST ON SAVINGS ACCOUNT
Interest return on money invested in a savings account, is normally added directly to the savings
account, unless there is a specific request for a transfer to the current bank account. The Cash
Receipts Journal is only used to record transactions which relates to the current bank account, and
interest added to the savings account will therefore be recorded in the General Journal.
Subsidiary
journal:
Source
document:
Posting:
General Journal (GJ)
Journal voucher(JV)
Debit an asset account, viz. Savings account and credit an income account, viz.
Interest on savings account.
3.2.10 INTEREST ON LOAN CAPITALIZED
When interest is capitalized it means that the interest is directly added to the loan account. The
instalment consists therefore out of the capital repayment on the loan plus interest on the loan. The
total instalment is debited against the loan which means that the interest is taken into account
separately.
Subsidiary
journal:
Source
document:
Posting:
General Journal (GJ)
Journal voucher (JV)
Debit an expense account, viz Interest on loan and credit a liability account, viz.
Loan: ABSA with the interest amount capitalized.
3.2.11 CORRECTIONS OF POSTING ERRORS
If an error has occurred with the posting from a subsidiary journal, e.g. Stationery bought posted to
the Equipment account or the wrong debtor or creditor’s account was increased or decreased; the
correction of such an error is also made in the General Ledger.
Subsidiary
journal:
Source
document:
Posting:
General Journal (GJ)
Journal voucher(JV)
Debit and credit the accounts concerned to rectify any errors. Even a “single
journal entry” can be made in case the error was made in only one account.
58
EXAMPLE
INSTRUCTION
Consider the accounts of the debtor and the creditor and complete the missing information and amounts in
the accounts.
INFORMATION
Date
2015
May 1
Code
10
12
Debtors Ledger of Menlo Merchants
J.P. de Wet
Document no.
Fol.
Debit
D1
Credit
Balance
Account rendered
b/d
01
DCSI 23
DJ
02
D.REC. 33
CRJ
2 000
……………
03
….…………
……
………….
0
16
04
PCV 155
PCJ
45
……………
22
01
DCSI 29
……..
1 700
……………
26
06
……………
CPJ
…………..
……………
07
JV 11
GJ
…………..
4 045
07
JV 14
……..
405
……………
28
Date
2015
May 1
Code
8
11
……………
1 500
Creditors Ledger of Menlo Merchants
Dreyer Merchants
Document no.
Fol.
Debit
2 300
C1
Credit
Balance
Account rendered
b/d
01
CPI 443
…….
02
CC 674
CPJ
5 400
…………
03
….…………
……
…………
50
19
04
PCV 189
……
…………
0
21
06
R.D cheque
CRJ
……………
5 400
07
JV 08
……
150
…………
07
JV 10
……
555
…………
25
59
2 870
.…………..
5 600
EXAMPLE OF GENERAL JOURNAL TRANSACTIONS
INSTRUCTION
Complete the given transactions for May 2015 in the General Journal of Park Stores. Journal narrations
must be shown.
TRANSACTIONS
2015
May 5
The owner, J. Els took goods with a cost price of R250 for personal use. Journal voucher 121.
6
Trading stock, R1 600 donated to the local high school for their 50 years festivities.
8
Pens and paper valued, R800 used at the show for the marketing of a new product.
10
Discount of R130 must be cancelled on the dishonoured cheque of debtor, K. du Toit.
11
Discount of R200 must be cancelled on a dishonoured cheque to a creditor, AB Stores.
16
The overdue account of a debtor, W. Heyns who owes R5 000 must be levied with 12% interest
for 3months.
18
Brooklyn Merchants, a creditor, levied our overdue account with R200 interest.
21
G. Swart, a debtor who owes R150 has disappeared, and it was decided to write the account off
as irrecoverable.
22
Interest of R340 was earned on the savings account and directly added to it.
24
Interest on loan from ABSA is capitalized. Instalments of R82 000 was paid during the year.
The outstanding balance of the loan has decreased with R60 000.
26
Stationery R100, bought on credit, accidently posted to the Wage account.
Correct the error.
27
An amount of R300 received on the account of debtor, B. Els was accidently posted to the
account of another debtor, S. Else. Correct the error.
29
Stock valued, R680 returned to a creditor, Menlyn Merchants, accidently posted to the account
of another creditor, Menlyn Pharmacy. Correct the error.
30
Stationery, R60 bought out of Petty cash. The amount was incorrectly posted to the Stationery
account as R600. Correct the error by making only a single journal entry.
Calculations:
60
18.
16.
11.
10.
8.
6.
5.
Day
Details
61
General Journal of Park Stores for May 2015
Fol.
Debit
Credit
Debtors control
Debit
Credit
GJ
Creditors control
Debit
Credit
30.
29.
27.
26.
24.
22.
21.
Day
Details
62
General Journal of Park Stores for May 2015
Fol.
Debit
Credit
Debtor control
Debit
Credit
GJ
Creditor control
Debit
Credit
Exercise 3.1
INSTRUCTION
Use the information to prepare only the Trading stock account in the General Ledger of Menlo Stores for
the period 1 March 2015 to 31 March 2015. Close off the account properly at the end of the period.
INFORMATION
• Stock on hand at cost price of R55 000, on 28 February 2015.
• Bought stock, R24 000 by cheque during March.
• Note that Menlo Stores sell goods at a mark-up of 25% on cost price.
• Goods with cost price of R16 000 sold during the month to debtors.
• Bought stock, R1 200 out of Petty cash.
• Goods, R71 000 bought on credit from creditors during the month.
• Owner took goods at selling price, R560 for his own personal use.
• Goods with a cost price of R23 500, sold for cash.
• Donate stock to the value of R1 350 to the local primary school.
• Stock with which we were not satisfied, R2 300 returned to creditors.
• Debtors returned stock with a cost price of R6 790 to us.
• Stationery bought for R1 530 accidently posted to the Trading stock account. Correct the error.
• Stock valued R3 000 was given as prices during an advertising campaign to promote a new product
series.
General Ledger of Menlo Stores
Trading stock
63
B5
Exercise 3.2
INSTRUCTION
Use the following information to prepare only the Creditors control account in the General Ledger of Park
Stores for the period 1 February 2015 to 28 February 2015. The account must be properly closed off at the
end of the period.
INFORMATION
• The creditors list had a total of R35 200 on 31 January 2015.
• The following was bought on credit during February: trading stock R21 000, stationery R1 900,
equipment R24 100, and fuel R2 000.
• Issued cheques to the value of R32 900 to creditors as repayments on accounts and received further
discount on these amounts, R5 100.
• Made a payment to a creditor out of Petty cash, R140 and received discount on it R10.
• One of the cheques issued to a creditor, R1 500, was refused by the bank. No discount was received
on this cheque.
• The following items with which we were not satisfied, were returned to creditors: trading stock
R1 345, stationery R256 and packing material R578.
• A creditor, G. Visagie, to whom we owe R4 600, levied our account with interest at rate of 15% for
2 months.
General Ledger of Park Stores
Creditors control
64
B10
Exercise 3.3
INSTRUCTION
Use the following information to prepare only the Trading stock account in the General Ledger of Menlo
Stores for the period 1 May 2015 to 31 May 2015. The account must be closed off properly at the end of
the period.
INFORMATION
• There was stock with a cost price of R89 000 not sold on 30 April 2015.
• During May stock to the value of R120 000 was bought by cheque.
• Note that Menlo Stores sell goods at a mark-up of 25% on cost price.
• Goods with a cost price of R40 000 were sold to debtors during month.
• Stock to the value of R500 bought out of Petty cash.
• Goods to the value of R43 000 bought on credit from creditors during the month.
• Owner took goods with a selling price of R3 250 for his personal use.
• Goods with a cost price of R19 800 sold for cash.
• Stock to the value of R3 500 donated to the local primary school.
• Stock with which we were not satisfied returned to creditors, R6 500.
• Debtors returned stock with a cost price of R1 800 to us.
• Stationery bought for R900 accidently posted to the Trading stock account the previous month.
Correct the error.
• Trading stock to the value of R2 900 used for advertising purposes.
General Ledger of Menlo Stores
Trading stock
65
B5
Exercise 3.4
INSTRUCTION
Use the following information to prepare only the Creditors control account in the General Ledger of
Parkie Stores for the period 1 January 2015 to 31 January 2015. The account must be properly balance at
the end of the period.
INFORMATION
• The Creditors list had a total of R42 500 on 31 January 2015 (the end of the month).
• Bought the following on credit during January: trading stock R18 000, stationery R2 700, equipment
R16 300, and fuel R4 000.
• Cheques issued to creditors to the value of R34 800 as repayments on accounts, and received
discount of R5 200 from creditors.
• Made a payment out of Petty cash to a creditor, R230, and received R70 discount on it.
• One of the cheques issued to a creditor, was refused by the bank, R1 800. There was no discount on
this cheque.
• We returned the following items with which we were not satisfied to the creditors: trading stock
R4 500, stationery R500 and packing material R1 200.
• You have to calculate the creditors control account on yourselves on 1 January 2015.
General Ledger of Parkie Stores
Creditors control
66
B10
Exercise 3.5
INSTRUCTION
The General Ledger of Parkie Merchants was destroyed by a fire. You have to use the information from
the Debtors and Creditors Ledger to prepare the control accounts completely for May 2015.
INFORMATION
Date
2015
May
Code
1
5
12
24
26
27
29
Date
2015
May
Code
1
3
11
16
19
24
30
Date
2015
May
01
02
03
01
04
05
06
07
02
02
03
04
01
05
01
05
Code
1
4
14
18
22
24
28
01
01
05
02
03
06
07
01
04
Debtors Ledger of Parkie Merchants
A. Basson
Document number
Account rendered
DCSI 23
DREC. 19
DREC. 19
DCSI 26
PCV 56
DC/N 68
R.D. cheque
Journal voucher 34
DKW 24
Document number
Account rendered
DREC. 12
DREC. 12
PCV 48
DCSI 25
DC/N 67
DCSI 27
DC/N 70
Document number
Account rendered
DCSI 22
DCSI 24
DC/N 66
DREC. 24
DREC. 24
R.D. cheque
Journal voucher 32
DCSI 28
PCV 60
Fol.
b/d
DJ
CRJ
CRJ
DJ
PCJ
DAJ
CPJ
GJ
CRJ
J. Thirion
Fol.
b/d
CRJ
CRJ
PCJ
DJ
DAJ
DJ
DAJ
Z. Kemp
Fol.
b/d
DJ
DJ
DAJ
CRJ
CRJ
CPJ
GJ
DJ
PCJ
67
Debit
340
950
40
800
60
Debit
Credit
D1
520
860
60
950
990
840
1 640
1 700
1 000
800
60
150
700
Credit
D2
18
1 450
288
765
165
230
500
560
40
250
40
Credit
375
560
40
Balance
1 200
550
520
538
1 988
1 700
2 465
2 300
650
30
Debit
Balance
D3
Balance
1 345
1 575
2 075
1 700
1 140
1 100
1 660
1 700
1 950
1 990
Creditors Ledger of Parkie Merchants
Date
2015
May
Code
1
5
11
15
17
24
29
Date
2015
May
Code
1
5
12
16
21
24
27
31
Date
2015
May
01
02
03
04
05
01
02
1
3
14
21
24
25
26
28
30
Triegaardt Wholesalers
Document number
Account rendered
CPI 24
CC 34
CC 34
PCV 50
DD/N 16
CPI 27
CC 51
Fol.
Debit
b/d
CJ
CPJ
CPJ
PCJ
CAJ
CJ
CPJ
Fol.
02
01
05
02
03
04
01
05
Account rendered
CC 30
CPI 25
DD/N 15
CC 41
CC 41
PCV 54
CPI 29
DD/N 18
b/d
CPJ
CJ
CAJ
CPJ
CPJ
PCJ
CJ
CAJ
Code
Document number
Fol.
02
03
01
05
06
02
01
05
02
03
Account rendered
CC 28
CC 28
CPI 26
DD/N 16
DREC. 27
CC 43
CPI 28
DD/N 17
CC 53
CC 53
b/d
CPJ
CPJ
CJ
CAJ
CRJ
CPJ
CJ
CAJ
CPJ
CPJ
De Villiers Merchants
68
1 500
630
C3
Credit
5 500
300
950
50
65
200
450
45
1 230
Balance
3 400
3 000
3 600
3 350
1 350
1 150
1 130
2 630
2 000
600
250
2 000
200
20
500
C2
Credit
400
Debit
2 500
2 950
1 750
1 450
1 400
1 250
1 600
1 100
350
500
Debit
Balance
450
1 200
300
50
150
Van der Westhuizen Stores
Document number
C1
Credit
Balance
5 800
300
950
900
965
465
1 695
1 495
1 045
1 000
General Ledger of Parkie Merchants
Debtors control
B7
Creditors control
B10
69
Exercise 3.6
INSTRUCTION
Record the given transactions according to date order in the personal account of E. Hettasch, as it would
appear in the Debtors Ledger of Menlo Stores. Pay attention to folio numbers and document numbers.
TRANSACTIONS FOR JULY 2015
1
4
7
10
17
22
23
27
E. Hettasch owes R4 600 which relates to purchases during previous months.
Issued credit sales invoice 325 for R7 800 to E. Hettasch for goods sold on credit to her.
Received a cheque for R4 200 from E. Hettasch in settlement of her debt on 1 July 2015.
Issued receipt no. 990 to her.
Sold goods on credit to E. Hettasch, R2 900. Issued credit sales invoice 367 to her.
Paid R100 out of Petty cash to deliver goods at Hettasch. She will repay this amount to us, and it
must for the time being be added to her account. Petty cash voucher 23 was completed to prove the
transaction.
The bank has returned the cheque that we have received from Hettasch on 7 July, marked
”refer to drawer”. Journal voucher 223 proves the transaction.
Levied the account of E. Hettasch with R600 interest. Journal voucher 230.
Received a cheque from E. Hettasch to settle her account after discount of 10% was allowed to her.
Issued receipt 1001 to her.
Date
Code
Debtors Ledger of Menlo Stores
E. Hettasch
Document number
Fol.
Debit
70
D12
Credit
Balance
Exercise 3.7
INSTRUCTION
Use the following information to prepare the opened ledger account completely.
All accounts must be balanced or closed off on 31 May 2015.
INFORMATION
On 1 May 2015 the following balances and totals appeared inter alia in the
General Ledger of Menlo Retail Dealers.
Trading stock R85 000, Debtors control R32 900, Bank R15 800 (Cr.),
Creditors control R26 900, Stationery R5 900.
On 31 May 2015 the following column totals appeared in the subsidiary journals
Cash Receipts Journal
Bank
Debtors control
Discount allowed
Sales
Cost of sales
Sundry accounts
?
16 500
2 100
41 600
?
14 000
Cash Payments Journal
Bank
Creditors control
Discount received
Debtors control
Trading stock
Stationery
Sundry accounts
?
29 700
3 700
1 800
34 000
2 800
2 400
Creditors Journal
Creditors control
Trading stock
Stationery
Sundry accounts
32 800
24 000
?
4 800
Creditors Allowance Journal
Creditors control
Trading stock
Stationery
Sundry accounts
5 600
?
2 000
1 600
71
Debtors Journal
Sales
Cost of sales
28 600
22 000
Debtors Allowance Journal
Debtors allowance
Cost of sales
2 600
1 600
Petty Cash Journal
Petty cash
Trading stock
Stationery
Debtors control
Creditors control
Sundry accounts
950
280
180
120
260
?
General Journal
Debtors control - debits
- credits
160
220
NOTE:
• The following transactions regarding the trading stock still has to be recorded on 31 May 2015 :
o The owner took stock with a selling price of R520 for his personal use.
o Stock to the value of R200 was donated to the primary school.
o Goods with a cost price of R600 were use for advertising purposes.
Calculations:
72
General Ledger of Menlo Retail Dealers
Trading stock
B5
Debtors control
B7
Bank
B8
73
Creditors control
B9
Stationery
N10
74
Exercise 3.8
You are provided with the Creditors control accoun t which has appeared in the General Ledger of
Menlo Merchants. They receive 60 days credit from creditors
INSTRUCTION
Study the account and answer the questions that follow:
Creditors control
2015
Sept.
30
?
CPJ
70 000
?
CAJ
21 750
Sundry accounts
GJ
430
Balance
c/d
54 620
2015
Sept.
1
Balance
b/d
59 000
30
?
CJ
87 000
Sundry accounts
GJ
800
146 800
146 800
Oct.
1
Balance
b/d
54 620
1. Name the source document that support the entry of R87 000 on the credit side.
2. Give the contra accounts for the entry of R70 000 on the debit side.
3. Give ONE possible explanation for the entry of R800 on the credit side.
4. Creditors allowed discount of R2 800 to Menlo Merchants for their early payment. What is thus the actual
amount paid to the creditors.
5. The total of the Creditors List on 30 September was R53 000. Should the bookkeeper mind for it?
Explain briefly.
6. Menlo Merchants are not satisfied with the quality of stock that they buy from the suppliers.
Do you agree? Provide a figure with an explanation to support this opinion.
7. Do you think that the repayment to creditors is too quick? Explain briefly and quote figures to support your
answer.
75
Exercise 3.9
INSTRUCTION
Present the given transactions on 30 April 2015 in the General Journal of Park Merchants.
Note the given example.
Journal narrations can be omitted, but folio references must be given.
EXAMPLE
Debtor, C. Serfontein’s debt R250, to be written off as bad debts.
TRANSACTIONS
1.
The owner, J. Reder, threw fuel belonging to the business, valued R680, into his private car.
2.
Trading stock valued R2 700, posted to the stationery account.
3.
A creditor, Pronk Suppliers levied our account with R120 interest.
4.
A cheque for R1 300 received from debtor, Z. Prinsloo, in settlement of her account of
R1 500 rejected by the bank (Show both entries in the General Journal).
5.
Packing material, R950 used for advertising purposes.
6.
Goods sold on credit to J. Jacobs, R2 600 incorrectly posted to the account of creditor, Jacobs
Suppliers. Correct the error.
7.
The account of K. Mcintyre, a debtor who owes us R4 500, must be levied with 8% interest for 5
month.
8.
Goods at cost price, R200 given for fundraising to the primary school.
9.
A cheque, R9 700 send to a creditor, Zandre Stores, in settlement of our account of
R10 300 returned by the bank marked R.D. (Show both entries in the General Journal)
10.
The credit balance, R450, of a creditor, Le Roux Stores, must be transferred to their account in
our Debtors Ledger.
11.
The Loan account of FNB had the following information:
Loan balance due before payment of instalments
Instalments paid (includes interest)
Loan balance after payment of instalments
Interest on loan to be capitalized.
12.
Interest, R152 to be added to the savings account.
13.
Received an amount of R240 from a debtor, A. Smit whose account is written off as bad debts.
(Indicate the entry in the General Journal).
14.
The wages column in the Cash Payments Journal had an amount of R5 500. It was wrongly
posted to the credit side of the wages account. Correct the error.
76
245 000
134 000
200 000
7.
6.
5.
4.
3.
2.
1.
30
Day
Bad debts
C. Serfontein
Details
77
General Journal of Park Merchants for April 2015
Fol.
Debit
Credit
Debtors control
Debit
Credit
N
250
D
250
250
GJ
Creditors control
Debit
Credit
14.
13.
12.
11.
10.
9.
8.
Day
Details
78
General Journal of Park Merchants for April 2015
Fol
Debit
Credit
Debtors control
Debit
Credit
GJ
Creditors control
Debit
Credit
Exercise 3.10
INSTRUCTION
You are provided with information from the books of Menlo Sports Shop.
Complete the Debtors control account for June 2015. Indicate the entries that concern the General
Journal to earn part-marks. Show the folio references for the journals.
INFORMATION FOR JUNE 2015
1.
The debtors list had a total of R60 000 on 1 June which includes:
• Thirty debtors with debit balances, R64 000.
• Three debtors with credit balances, R4 000 consist of Z. Volschenk R1 500,
N. Venter R2 000 and N. van Zuydam R500.
2.
Sports equipment sold during the month as follows:
• for cash, R89 000, and
• on credit, R45 000.
3.
Total of receipts, R58 000 issued to credit clients in settlement of their accounts. It includes
R1 500 received out of the insolvent estate of R. van Wyngaard. His estate paid
80 cents in the Rand and the balance still has to be written off as irrecoverable.
4.
It was decided to handle the debtors with credit balances as follows:
• Z. Volschenk was repaid with a cheque, R1 500.
• N. Venter’s account of R2 000 must be transferred to the Creditors Ledger.
• N. van Zuydam’s account of R500 has to stay in the Debtors Ledger.
5.
Total of goods returned:
• to suppliers, R16 000.
• by cash clients, R5 900.
• by credit clients, R6 800.
6.
Cheques issued to suppliers in settlement of their accounts, R82 000.
7.
Bank statement received on 28 June, revealed the following:
• direct deposit by a debtor M. van Tonder, R3 800.
• a dishonoured cheque of R6 500. This cheque was originally received from a debtor,
M. van Schalkwyk, in settlement of her account of R6 800.
8.
The overdue account of a debtor, J. van Niekerk, R2 600, must be levied with 12% interest for
5 months.
9.
Credit client R. Cater, complaint that the size of the cricket bat sold to him, was wrong. The
total of the invoice, R3 640, is included in the sales mentioned in item no. 2. It was decided to
provide him with the bat, at cost price. The mark-up is 40% on cost price. The necessary
documentation was completed on 30 June 2015 but not yet recorded.
10.
The Petty Cash Journal indicates that R350 was paid for delivery charges to Van Gass
Transporters on behalf of a debtor.
79
General Ledger of Menlo Sports Shop
Debtors control
Calculations:
80
Exercise 3.11
INSTRUCTION
Use the given information to complete the opened ledger accounts fully. All accounts must be balanced
properly on 28 February 2015.
INFORMATION
On 1 February 2015 the following balances and totals appeared inter alia in the General Ledger of
Absolut Wholesalers.
Trading stock R80 000; Debtors control R112 000, and Creditors control R92 000.
On 28 February 2015 the following column totals appeared in the subsidiary journals:
Cash Receipts Journal
Bank
Debtors control
Discount allowed
Sales
Cost of sales
Sundry accounts
160 000
?
2 100
33 600
30 000
18 500
Cash Payments Journal
Bank
Creditors control
Discount received
Debtors control
Trading stock
Sundry accounts
Creditors Journal
Creditors control
Trading stock
Sundry accounts
57 000
?
16 000
Creditors Allowance Journal
Creditors control
Trading stock
Sundry accounts
4 900
?
1 800
Debtors Journal
Sales
Cost of sales
?
42 000
Debtors Allowance
Debtors allowance
Cost of sales
3 920
3 500
Petty Cash Journal
Petty cash
Trading stock
Debtors control
Creditors control
590
200
?
190
General Journal
Debtors control: debits
credits
Creditors control: debits
credits
1 800
860
600
2 900
183 000
82 000
4 300
?
45 000
52 900
NOTE:
• The following transactions regarding trading stock must be recorded on 28 February 2015:
o The owner took stock at a selling price of R2 688 for personal use.
o Stock at a cost price of R900 used for advertising.
81
General Ledger of Absolut Merchants
Trading stock
Debtors control
Creditors control
82
CHAPTER 4 : FORMAL AND INFORMAL BOOKKEEPING
4.1
DIFFERENCES BETWEEN FORMAL AND INFORMAL BOOKKEEPING METHODS
When one talk about the informal business sector, you refer to persons trading without a
formal bookkeeping system in place, and without source documents and entries for each
transaction in which they are involved. Here we think typical of vendors, news paper sellers,
hawkers, etc. This type of merchant does not use subsidiary journals and ledgers to record
transactions.
At most, notes are made of daily receipts and payments to calculate the funds available to
make new purchases and withdrawals to provide in personal needs.
4.2
MANAGING SUPPORT SOURCES
For most people who earn their income in the informal sector, it is only important to know
whether their income is more than their expenses. They do not mind how many and what type
of assets they possess and they normally do not buy and sell on credit. Consequently, it is not
necessary to prepare subsidiary journals, ledgers and control accounts.
The owner starts the business with minimum capital to generate a subsistence income for him
and his family. Therefore, to keep book of the initial capital is not necessary, and since profits
are actually not retained to enlarge the business, there is no real growth in the capital. Funds
are actually drawn daily to live from, and care is taken that stock is again bought to earn
subsistence income the following day.
Only the most essential assets are bought and it is not actually “be profited” or recorded in the
asset register. The owner rather sees it as necessary expenses, than an asset own by the
business to be exchanged for cash at a later stage. The assets are bought to run the business.
Depreciation does not play any role because the assets would be used for the full life
expectancy of it, when it merely will be replaced.
The only asset of actual importance is the trading stock of the business. It is important to start
every day with enough stock to assure an income for the day, as well as to generate enough
funds to buy new stock for the next day.
If the business sells perishable products, it will try to have all the stock sold at the end of
every day because the business does not necessarily have storage and store facilities, such as
refrigerators and cool stores. If stock is then sometimes not sold, just under the cost price, the
business can experience big losses of stock.
83
4.3
DETERMINING OF SELLING PRICES
The informal sector will not necessarily make use of a specific mark-up.
Also, no specific fixed selling price will exist for each product. This is the reason why,
sometimes bargaining and negotiating over prices, results in a seller being satisfied to even
accept a lower price.
Persons in the informal business sector depend mostly on the daily receipts to satisfy their
own daily needs, and they are therefore prepared to adapt their selling prices to ensure an
income for the day.
4.4
CALCULATION OF COST OF SALES
Books are kept of the amount at which each product was bought and the seller is actually only
interested to sell it at a slightly higher amount just to keep the cash flow of his business going.
The seller usually knows the purchase prices very well and knows exactly at what minimum
amount he can afford to sell the product not to loose on the transaction.
In extreme cases products are sold at prices below cost price. This happens especially when
the owner realizes he has not earned enough income to cover his own personal expenses and
to buy new products. If perishable products are sold, prices are often adapted at the end of the
day to assure that the products are sold and stock not thrown away and thus suffer the full cost
price as a loss.
4.5
CALCULATION OF REMUNERATION OF EMPLOYEES
In most cases it is only the owner of the business that works there himself. That for sure that
he can determine the prices himself and that he knows exactly the minimum amount what he
can accept for each product not to suffer a loss.
If additional employees are employed, fixed daily wages or a commission based remuneration
are to be determined.
Fixed daily wages mean that an employee receives the same amount notwithstanding the
number of products sold. There is thus no motivation for the employee to sell more products
or to be more productive. This is a risky method of remuneration seeing that the owner has no
assurance that there will be enough profit to generate an income for him, to pay the employer
and to buy new stock.
In most cases employees work on a commission basis which means they are remunerated
according to the number of products sold. This motivates an employee to sell as many
products seeing that it increases his wages. This method is also less risky for the owner,
because he is assured that enough income will be available to pay the employee’s commission
and to cover his own expenses.
84
4.6
INCOME AND EXPENSES
We do not need formal accounting knowledge to determine whether a profit or loss was made.
People who form part of the informal sector, for example, vendors, spaza shops, newspaper
sellers, etc. will not use formal bookkeeping to calculate their profit.
A simple calculation of the daily profit made, is usually performed. The cost price of the
stock sold and payments to additional employers will merely be subtracted from the total
income out sales for the day.
The remaining amount must be enough for the owner to pay personal expenses and also
enough to buy stock for the following day.
Exercise 4.1
This exercise must be presented as a research project.
INSTRUCTION
Identify a person involved with informal economic activities, and draw up a questionnaire to find out
more about his/her working activities.
The purpose with the questionnaire is to determine the following:
• Where did he/she get the capital to start the business?
• With more or less how much capital did the business start?
• What non-current assets do the business owes?
• How is record kept of non-current assets?
• Does the business have a separate bank account?
• How often is stock bought?
• How are selling prices determined?
• How do they keep record of the buying and selling of stock?
• Are there any other employees in the business and how are they remunerated?
• How do they keep record of income and expenses?
• How often is profit earned, calculated?
• What happens with the profit that is made?
85
CHAPTER 5: WAGE AND SALARY JOURNALS
Businesses with fulltime employers who are paid weekly, use a separate journal, named Wage Journal
(WJ), to calculate the correct amount which has to be paid to each individual wage-earner. If there are
fulltime employers earning a monthly salary, the amounts payable to salary-earners are calculated in a
separate Salary Journal (SJ).
5.1
WAGE JOURNALS, SALARY JOURNALS, CASH PAYMENTS JOURNAL AND
GENERAL LEDGER
5.1.1
WAGE JOURNALS (WJ)
Wage Journals are weekly compiled; closed off and posted to the General Ledger. The Wage
Journal contains the names of the wage-earners as well as the hours that each of the wageearners have worked during the week and the rate each one has earned per hour. Deductions
for, e.g. pension fund, medical fund, income tax, etc. retained weekly from wage-earners are
recorded in the Wage Journal. Additional contributions to, e.g. the employee’s pension fund
or medical fund made by the employer, are recorded in the Wage Journal.
5.1.2
SALARY JOURNALS (SJ)
Salary Journals are compiled once per month, closed off and posted to the General Ledger.
The Salary Journal contains the names of each salary-earner as well as the gross salary earned
by each one. Deductions, e.g. pension fund, unemployment insurance fund, medical fund, etc.
retained monthly from salary-earners, appear also in the Salary Journal. Additional
contributions to, e.g. the employee’s pension fund, medical fund made by the employer, are
recorded in the Salary Journal.
5.1.3
CASH PAYMENTS JOURNAL (CPJ)
The net wages are paid weekly to wage-earners with a cash cheque which is drawn, and the
amount earned by each wage-earner according to the Wage Journal put into separate wage
envelopes, and handed to each individual wage-earner. Although the net wages are paid
weekly in cash to the workers, only one debit entry is made in the Creditors for wages
account, seeing that is posted as a column total out of the Cash Payments Journal.
When the transfer of the net salary, which each salary-earner earned according to the
Salary Journal, is done in the Cash Payments Journal, only the last cheque numbers, e.g.
CC 21 -24 is written in the document number column. Under the name of “Name of
payee” we write “Sundry salaries“and at “Details of sundries” it is referred to the
account “Creditors for salaries “. The number of the cheque that each salary-earner
receives is written next to the name of the employee, in the Salary Journal.
At the end of the month cheques are issued to pay for all deductions during the month
retained from wage- and salary-earners, as well as the employers’ contributions for the month
according to the Wage and Salary Journals, to the institutions concerned. Only one payment
to each institution is made for the total monthly deductions and contributions.
86
5.1.4
GENERAL LEDGER
Wage Journals are closed off and posted weekly to the General Ledger. Gross wages are
debited to the Wages account, seeing that it represents an expense in respect of the weekly
wages. When contributions are made by employers, it means that the expenses regarding
wage earners increase, and specific expense accounts are then created, e.g. pension fund
contribution.
All deductions, e.g. pension fund, unemployment insurance fund, SARS (PAYE), as well as
creditors for wages, are liabilities that are credited weekly so that the total amount due at the
end of the month can be transferred to a specific institution. Although the net wages are paid
weekly in cash to employees, only one debit entry in the Creditors for wages account is made,
seeing that it is posted as a column total from the Cash Payments Journal.
Salary journals are monthly closed off and posted to the General Ledger. Gross salaries are
debited to the Salary account, seeing that it represents an expense in respect of the monthly
salaries. When contributions are made by employers, it means that the expenses regarding
salary earners increases, and specific expense accounts are then created for each specific
deduction.
All deductions, e.g. pension fund, unemployment insurance fund, SARS (PAYE), as well as
creditors for salaries, are liabilities that are credited so that the total amount due at the end of
the month can be transferred to a specific institution.
EXAMPLE OF COMPLETE LEDGER ACCOUNTS
General Ledger of Menlo Merchants
Creditors for wages
2015
May
31
Bank
CPJ
260
2015
May
B
7
Wages
WJ
65
14
Wages
WJ
65
21
Wages
WJ
65
28
Wages
WJ
65
260
260
Creditors for salaries
2015
May
31
Bank
CPJ
550
2015
May
B
31
Salaries
SARS (PAYE)
2015
May
31
Bank
CPJ
260
260
87
2015
May
SJ
550
B
7
Wages
WJ
20
14
Wages
WJ
20
21
Wages
WJ
20
28
Wages
WJ
20
31
Salaries
SJ
180
260
Pension funds(any deduction)
2015
May
31
Bank
CPJ
780
2015
May
7
14
21
28
31
B
Wages
WJ
20
Pension fund contribution
WJ
40
Wages
WJ
20
Pension fund contribution
WJ
40
Wages
WJ
20
Pension fund contribution
WJ
40
Wages
WJ
20
Pension fund contribution
WJ
40
Salaries
SJ
180
Pension fund contribution
SJ
360
780
2015
May
Wages
7
Sundry accounts
WJ
100
14
Sundry accounts
WJ
100
21
Sundry accounts
WJ
100
28
Sundry accounts
WJ
100
780
N
400
Salaries
2015
May
31
Sundry accounts
SJ
800
Pension fund contribution
2015
Mei
N
7
Pension fund
WJ
40
14
Pension fund
WJ
40
21
Pension fund
WJ
40
28
Pension fund
WJ
40
31
Pension fund
SJ
360
520
88
N
5.2
CALCULATIONS FROM GIVEN SALARY SCALES
Salary-earners are appointed and remunerated according to a specific salary scale. A salary
scale contains information in connection with the initial salary with which the employee
starts, as well as the annual increments. Usually there are different “notches” and a salaryearner qualifies after a couple of years of service for a”notch increment”, which means that
the annual salary increases with a higher percentage. This serves as motivation for employees
to stay longer at a business and assist that the business does no loose experience employees
EXAMPLE OF SALARY SCALE
*Salary-earner 1
(R200 000 x R10 000) – (R250 000 x R30 000) – R400 000
**Salary-earner 2
(R300 000 x R10 000) – (R340 000 x R40 000) – R460 000
5.3
•
Salary-earner 1: The salary scale indicates that he is appointed with a salary of R200 000
per annum. This increases with R10 000 per annum, up till he gets a notch increment of
R250 000, where after it is increased with R30 000 per annum. It takes the employer
5 years to get a notch increment and the maximum salary to be earned is R400 000
per annum.
•
Salary-earner 2: The salary scale indicates that he is appointed with a salary of R300 000
per annum. This increases with R10 000 per annum, up till he gets a notch increment of
R340 000, where after it is increased with R40 000 per annum. It takes the employer 4
years to get a notch increment and the maximum salary to be earned is R460 000 per
annum.
GROSS WAGES AND SALARY VERSUS NET WAGES AND SALARY
The gross amount that an employee earns is the total amount agreed upon for which there
was worked for. If a worker has no deductions the gross amount earned and the net amount
paid to him will be the same. Certain amounts are retained or deducted from each employee
for, e.g. tax, pension fund, etc.
Gross wages are the total amount earned by a wage-earner during the week, and is calculated
by multiplying the number of hours worked with the rate per hour. The net wages are the cash
amount placed in the wage-earner’s wage envelope at the end of the week, after retaining
amounts for transfer payments on behalf of the employee regarding tax, pension fund, etc.
Net wages = gross wages – deductions
The gross salary is the total amount earned during the month by a salary-earner and is
calculated according to a salary scale. The net salary is the amount that appears on the cheque
what the salary-earner receives at the end of the month, after retaining amounts to transfer
payments on behalf of the employee regarding tax, pension fund, etc.
Net salary = gross salary – deductions
89
5.4
DEDUCTIONS
Employees can make arrangements with employers to retain certain amounts of their wages or
salaries earned, and then on behalf of the employers and in their name, transfer payments to
certain institutions. It is important to understand that it is a choice taken by the employer. If
they prefer, they can take the full gross wages or salary and make their own payments, but it
will be more difficult and they can lose power to stipulate.
Typical deductions that an employer can retain from employees’ wages and salaries and then
transfer the payments on behalf of the employees to institutions concerned, include the
following:
5.4.1
Income tax
Salary- and wage-earners are compelled to pay income tax to the South African Revenue
Services according to the pay as you earn system or PAYE system. This means that tax is not
paid in one big amount at the end of the year but monthly in smaller amounts.
5.4.2
Pension fund
Most employers compelled employees to save for their retirement. This is done by retaining
money, and transfers it into a pension fund. The money is invested on the employees’ name to
create an income for the day when the employees retire.
5.4.3
Medical fund
Employers belonging to a medical fund can make an arrangement with the employer to have
the premium deducted from their wages or salaries and transfer it on their behalf to the fund.
5.4.4
Unemployment insurance fund (UIF)
Employees are compelled by the State to provide for insurance in case they perhaps lose their
work. These premiums are generally subtracted from the gross wages and salaries and paid
over to the unemployment insurance fund.
Deductions for e.g. income tax, pension fund, medical fund and unemployment insurance
fund are retained weekly from wage-earners and monthly from salary-earners and at the end
month the total amount are paid by cheque to the specific institution and recorded in the Cash
Payments Journal.
All deductions are liabilities, first to be created and then paid at the end of the month to the
institution concerned.
5.5
EMPLOYER CONTRIBUTIONS
Employers are sometimes prepared to make as “fringe benefits” to the employees’ wages or
salary an extra amount to, e.g. the employees’ pension fund or medical fund. This is done,
making the offer to go and work at a specific business more attractive and to assure that the
best qualified employees are appointed.
If the employer makes an additional contribution to, e.g. the pension fund or medical fund of
the employee, it is debited to a separate expense account, viz. pension fund contribution or
medical fund contribution, because it increases the total costs of wages and salaries.
90
EXAMPLE
The following information is available regarding Parkie Merchants.
INSTRUCTION
1.
2.
3.
4.
Open the given accounts in the General Ledger of Parkie Merchants with the given balances
and totals on 28 May 2015.
Complete the Wages Journal for the week ended 28 May 2015, close off the journal properly
and post the information to the opened accounts in the General Ledger. Complete the entry for
the payment of net wages in the Cash Payments Journal.
Prepare the Salary Journal for the month ended 31 May 2015, close it off and post the
information to the opened accounts in the General Ledger.
Record the payments of all deductions in the Cash Payments Journal for May 2015, close off
the journal and post it to the opened accounts in the General Ledger.
INFORMATION
1.
Provisional balances and totals on 28 May 2015 (The first 3 wage journals already posted):
Creditors and salaries
Creditors and wages
R 10 800
SARS (PAYE)
1 730
Pension fund
948
Medical fund
630
Unemployment insurance fund
156
Salaries
98 000
Wages
22 870
Pension fund contribution
3 792
Unemployment insurance fund contribution
468
2.
Open the Cash Payments Journal on 28 May 2015 with the provisional column totals:
Bank
R 76 098
Creditors control
12 890
Discount received
798
Debtors control
?
Trading stock
28 306
Creditors for wages
10 800
Sundry accounts
14 900
3.
Information regarding the wages week ended on 28 May 2015:
3.1
Parkie Merchants uphold a working week of 45 hours per week. Wage-earners who work
longer than 45 hours per week, are paid at an overtime rate of 2½ times their normal rate. The
basic rate is R14 per hour for all wage-earners. The number of hours of the wage-earners for
the week ending 28 May 2015, are as follows:
B. Volschenk
G. Goldner
J. Fischer
H. Joubert
47 hours
49 hours
42 hours
46 hours
91
3.2
3.2.1
3.2.2
3.2.3
3.2.4
Deductions from wage earners for the week ending 28 May 2015 were as follows:
(All calculations rounded off to the nearest Rand).
Income tax
10% of gross wages withhold as part of deduction for PAYE deduction.
Pension fund
All the employees are members of the MP Pension fund. An amount equivalent to 5% of the
wages for normal time, is deducted weekly from wages for the Pension fund. Parkie
Merchants contributes R2 for every R1 contributed by the employees.
Medical fund
Membership of the Discovery medical fund is compulsory. Married members pay R80 per
week and unmarried members R50 per week. Only J. Fischer is unmarried.
Unemployment insurance fund
Deductions from employees were as follows:
B. Volschenk
R 12
G. Goldner
16
J. Fischer
10
H. Joubert
11
Parkie Merchants contributes to the Unemployment insurance fund on a Rand to Rand basis
for all employees.
4.
Information regarding salaries for the month ending 31 May 2015:
4.1
The following employees are salary earners. There gross salaries per annum are as follows:
S. de Bruyn
R 180 000
D. Mans
216 000
N. Stewart
192 000
4.2
4.2.1
Deductions for the month ended 31 May 2015:
Income tax
Income tax scales for salary earners are as follows:
Notch: 150 000 – 200 000: 37 500 + 30% of amount above R150 000.
Notch: 200 000 – 250 000: 54 200 + 25% of amount above R200 000.
4.2.2
Pension fund
All salary earners contribute 7% of their gross salary to the MP Pension fund. Parkie
Merchants gives a further employers contribution, equivalent to 50% of the amount
contributed by the employees.
4.2.3
Medical fund
Membership to the Discovery medical fund is compulsory. Contributions are calculated as
follows:
Main member - R850, Spouse - R540, First child - R200 and further children - R150 each.
S. de Bruyn is unmarried with no dependants
D. Mans is married with four children and gets R100 discount.
N. Stewart is married, expecting her first child.
D Mans receives discount of R100 on his monthly installments.
Unemployment insurance fund
Deductions from salary earners were as follows:
S. de Bruyn
R 75
D. Mans
106
N. Stewart
86
4.2.4
Parkie Merchants contributes to the Unemployment insurance fund on a Rand to Rand basis
regarding all employees.
92
General Ledger of Parkie Merchants
Balance sheet account section
Creditors for salaries
B
Creditors for wages
B
SARS (PAYE)
B
Pension fund
B
Medical fund
B
93
Unemployment insurance fund
B
Nominal accounts section
Salaries
N
Wages
N
Pension fund contribution
Unemployment insurance fund contribution
94
N
N
Employee
Employee
Hrs.
Hours
Over time
Tariff Amount
Gross
wages
(PAYE)
SARS
Medical
fund
Deductions
Pension
fund
UIF
Total
deductions
salaries
SARS
(PAYE)
Pension
fund
Medical
fund
95
UIF
Total
Salary Journal of Parkie Merchants for the month ended 31 May 2015
Gross
Deductions
Net salary
Ordinary time
Amount
Tariff
Wage Journal of Parkie Merchants for the week ended 28 May 2015
Cheque
number
Net
wages
Pension
fund
UIF
Total
SJ
Employer contributions
Employer contributions
Pension
UIF
Total
fund
WJ
27
26
25
24
31
Totals
a/b
Fol.
76 098
Bank
10 800
Creditors
for wages
14 900
Amount
Cash Payments Journal of Parkie Merchants May 2015
Name of payee
Fol.
CPJ
Sundry accounts
Details
96
• Note that the opening balance of the Creditors for wages column in the Cash Payments Journal, indicates that the net wages of the previous
wage weeks have already been paid to the wage earners.
• All deductions from the Wage and Salary Journals are simultaneously paid to the various institutions, with one cheque per deduction.
CC
20
21 -23
28
Doc. Day
no.
Exercise 5.1
INSTRUCTION
1.
2.
Use the given information from the four Wage Journals and the Salary Journal of Park Stores
to complete the given accounts in General Ledger fully.
Also indicate the entries for the payments of the different deductions.
INFORMATION
1.
Wage Journals
The following information is available regarding the four wage weeks for May 2015:
Week ended
Gross
wages
12 800
11 900
14 500
12 200
5 May 2015
12 May 2015
19 May 2015
26 May 2015
2.
Medical
fund
2 800
2 300
3 100
2 400
SARS
(PAYE)
3 840
3 570
4 350
3 660
UIF
Medical
fund
1 800
2 100
3 300
SARS
(PAYE)
5 000
6 300
7 560
UIF
180
160
220
160
Salary Journal for the month ended 31 May 2015
Name
Gross salary
V. Turvey
H. Möller
U. Fourie
3.
Pension
fund
1 920
1 785
2 175
1 830
12 500
14 000
16 800
Pension
fund
2 500
3 500
4 200
80
120
240
Employer contributions
The following employers’ contributions have not yet been included in the gross wage and gross
salaries:
3.1
Park Stores’ contribution to the Menlo Pension fund amounts to R2,00 for every R1,00
contributed by an employee.
3.2
All the employees belong to the Health medical fund, and Park Stores
contribute an amount equivalent to half of the contribution by an employee.
3.3
For each Rand contributes by an employee to the Unemployment insurance fund, Park Stores
contribute a further 75 cents.
97
General Ledger of Park Stores
Balance sheet accounts section
Creditors for salaries
B
Creditors for wages
B
SARS (PAYE)
B
Pension fund
B
98
Nominal accounts section
Salaries
N
Wages
N
Pension fund contribution
N
Medical fund contribution
N
Unemployment insurance fund contribution
99
N
Exercise 5.3
INSTRUCTION
Use the given information from the four Wage Journals and Salary Journal of Menlo Stores and
complete the given accounts on the answer sheet fully. Also indicate the transfer of the deductions
and employer’s contributions in the ledger.
INFORMATION
Wage Journals
The following information is available regarding the 4 wage weeks in May 2015:
Week ended
5 May 2015
12 May 2015
19 May 2015
26 May 2015
Gross wages
23 800
22 900
21 800
24 000
Pension
fund
1 190
1 146
1 090
1 200
Medical
fund
1 904
1 832
1 744
1 920
SARS
(PAYE)
3 570
3 435
3 270
3 600
UIF
Medical
fund
12 600
SARS
(PAYE)
32 400
UIF
476
458
436
480
Salary Journal for the month ended 31 May 2015
Name
Sundry salaries
Gross salary
180 000
Pension
fund
9 000
3 600
Employer contributions
The employer’s contribution is not yet included in the gross wages and salaries:
1.
Menlo Stores’ contribution to the Pension fund amounts to R2,50 for each R1,00 contributed by
an employee.
2.
For each Rand contributed by an employee to the Medical fund, Menlo Stores also contributes
R1,50.
101
General Ledger of Menlo Stores
Creditors for salaries
B
Creditors for wages
B
5
Pension fund
Medical fund contribution
102
B
N
Exercise 5.4
INSTRUCTION
Indicate the affect of the following transactions on the elements of the accounting equation.
TRANSACTION
1.
The Salary Journal has the following information: Gross salaries for the month, R76 000;
Deductions: SARS (PAYE): R 10 640, Pension fund: R 3040, Medical aid: R 2820
The employer contributes the following:
Pension fund, R1,50 for every R1 contributed by employee;
Medical fund, R0,50 for every R1 contributed by employee.
2.
Net salaries for the month paid by cheque.
3.
Total transfers for the month regarding deductions of salary earners and employers’ contributions
paid: SARS (PAYE), Pensi on fund and Medical fund.
4.
Bank charges amount to R198 for the month.
5.
The owner took stock with a selling price of R1 200 (Cost price, R960) for personal use.
6.
Write off the debtor’s account of R160 as bad debts.
7.
Issue a cheque of R1 320 to a creditor, in settlement of our account, after a discount of 12%.
no.
General Ledger
Asset
Owner’s equity
Liability
Account debited
Account credited
Debit
Credit
Debit
Credit
Debit
Credit
1.
2.
3.
4.
5.
6.
7.
103
CHAPTER 6: CORRECTION OF ERRORS
There are certain control measures build into the accounting processes to assure that correct
accounting principles are usually applied.
Like this, a Trial balance is prepared at the end of each month to, inter alia, control the double entry
principle as well as whether the balances and totals are calculated correctly in the General Ledger, and
amounts correctly posted from the subsidiary journals.
At the end of each month a debtors list is compiled by adding the balances of all the individual debtors
in the Debtors Ledger. The total of the Debtors list has to correspond with the balance of the Debtors
control account in the General Ledger to assure that all transactions regarding debtors has well been
recorded correctly. In the same way a Creditors list is compiled of which the total has to correspond
with the balance of the Creditors control account.
It can happen that errors in the bookkeeping process are made during the month. These errors will be
identified by the mentioned internal control processes, and then have to be corrected.
6.1
ERRORS IN THE TRIAL BALANCE
If the Trial balance does not balance at the end of a month, i.e. the debit side does not equal
the credit side, it indicates that an error was made in the bookkeeping process which has
to be detected and corrected. The following are examples which can cause that the Trial
balance won’t balance:
6.1.1
6.1.2
6.1.3
6.1.4
6.1.5
6.1.6
The Trial balance is added up incorrectly or balances and totals are written on the incorrect
side of a Trial balance.
Balances or totals copied incorrectly from the General Ledger on the Trial balance.
Balances or totals calculated incorrectly in the General Ledger.
Amounts are posted from the subsidiary journals to the incorrect side of the accounts in the
General Ledger.
Amounts are written incorrectly when posted to the General Ledger or columns are added
up incorrectly in the subsidiary journals.
Amounts are recorded incorrectly from the source documents into the subsidiary journals, etc.
Errors must be looked for and rectified, to assure that the Trial balance, balances at the end of
the month.
EXAMPLE
An inexperience bookkeeper of Menlo Merchants prepared a Trial balance on
30 September 2015, but it did not balanced.
INSTRUCTION
Take the information and errors into account and prepare the correct Trial balance on
30 September 2015. Show the corrections in brackets.
INFORMATION
The following incorrect Trial balance was prepared by an inexperience bookkeeper.
Apart from obvious errors where balances and totals were entered on the wrong side of the Trial
balance, certain additional errors were found.
104
1.
2.
2.1
2.2
2.3
2.4
2.5
2.6
2.7
Trial balance of Menlo Ltd. on 30 September 2015
Balance sheet accounts section
Capital
Drawings
Land and buildings
Vehicles
Equipment
Fixed deposit: ABSA
Trading stock
Debtors control
Savings account
Bank
Petty cash
Cash float
Loan: FNB
Creditors control
Nominal accounts section
Sales
Cost of sales
Debtors allowance
Rent income
Discount received
Interest on fixed deposit
Interest on current account
Interest on savings account
Interest on overdue accounts of debtors
Bad debts recovered
Water and electricity
Telephone
Stationery
Wages
Insurance
Repairs
Discount allowed
Bad debts
Interest on loan
Interest on overdue accounts of creditors
Fol.
B1
B2
B3
B4
B5
B6
B7
B8
B9
B10
B11
B12
B13
B14
N1
N2
N3
N4
N5
N6
N7
N8
N9
N10
N11
N12
N13
N14
N15
N16
N17
N18
N19
N20
Debit
R8 000
800 000
24 000
200 000
65 000
91 000
3 000
2 000
500
300
400 000
450
14 000
13 500
3 500
14 000
8 100
2 710
1 600
2 000
23 000
2 800
1 679 460
Credit
R900 000
180 000
300 000
12 000
550 000
30 000
39 000
4 000
12 120
900
650
880
2 029 550
Additional errors tracked
Some balances and totals are entered on the wrong side of the trial balance.
The balance of the Debtors control account is written as R91 000 in the General Ledger
The correct balance is R19 000.
The telephone account is added up wrongly in the General Ledger. The correct total
is R18 500.
Repairs of R650 paid out of Petty cash, was correctly recorded in the Petty Cash Journal
but posted to the repairs account as R560.
Stationery, R600 returned to a creditor was posted to the debit side of the stationery
account.
The Wages column in the Cash Payments Journal was added up with R900 to much and
posted as such.
Cash sales of R15 600 were totally omitted from the books.
105
Trial balance of Menlo Merchants on 30 September 2015
Balance sheet accounts section
Fol.
Debit
Capital
B1
Drawings
B2
Land and buildings
B3
Vehicles
B4
Equipment
B5
Fixed deposit: ABSA
B6
Trading stock
B7
Debtors control
B8
Savings account
B9
Bank
B10
Petty cash
B11
Cash float
B12
Loan: FNB
B13
Creditors control
B14
Nominal accounts section
Sales
N1
Cost of sales
N2
Debtors allowance
N3
Rent income
N4
Discount received
N5
Interest on fixed deposit
N6
Interest on current account
N7
Interest on savings account
N8
Interest on overdue accounts of debtors
N9
Bad debts recovered
N10
Water and electricity
N11
Telephone
N12
Stationery
N13
Wages
N14
Insurance
N15
Repairs
N16
Discount allowed
N17
Bad debts
N18
Interest on loan
N19
Interest on overdue accounts of creditors
N20
106
Credit
6.2
DEBTORS AND CREDITORS RECONCILIATION
One of the internal control measures to check whether transactions regarding debtors and
creditors are correctly recorded, are applied at the end of the month when debtors and creditors
lists drawn up of which the totals must correspond with the balances of the debtors and creditors
control accounts. The control accounts are merely summaries of all the individual transactions
regarding debtors and creditors, and therefore the balances have to correspond with the totals of
the lists of individual debtors and creditors. If the balances and the totals do not correspond,
errors must have occurred in the bookkeeping process; errors need to be tracked down and
corrected.
It is important to distinguish between the following:
6.2.1
Errors only affecting the control account
It sometimes happens that the total of the list is correct and that the balance of the
control account is incorrect. The following examples can cause that the balance of the control
account is incorrect:
• Entries are made on the incorrect side of the control account.
• Entries not intend for a specific control account, is recorded into it.
• The balance of the control account is merely calculated incorrectly.
• Column totals of subsidiary journals incorrectly added or posted incorrectly to the
control account.
6.2.2
Errors that only affects the total of the list
It sometimes happens that the balance of the control account is correct and that only the total of
the list is wrong. The following examples can cause that the total of the list is incorrect:
• The list is added up incorrectly.
• The balance of a debtor or creditor is transferred incorrectly from the subsidiary
ledger to the list and some balances omitted.
• The balance of a debtor or creditor is calculated incorrectly in the personal account.
• Amounts are posted incorrectly from the subsidiary journals to the personal accounts
or perhaps to the incorrect side of the personal accounts.
6.2.3
Errors affecting both the control account and the total of the list
It sometimes happens that both the balance of the control account and the total of the list are
incorrect.
The following examples can cause that both are incorrect:
• Transactions totally omitted from the subsidiary journals.
• Amounts recorded incorrectly from the source documents into the subsidiary
journals.
• Amount entered incorrectly on source documents.
When an error is tracked down, it has to be determined whether it will only affect the control
account or only the lists or both. Only then mistakes can be corrected.
107
EXAMPLE
You are provided with information regarding to Park Merchants on 30 November 2015. The
bookkeeper made a number of errors which caused that the balances of the control accounts and the
totals of the lists do not correspond.
INSTRUCTION
Take the given information into account and analyze the errors made, under the given headings; and
thus to reconcile the balances of the control accounts with the totals of the lists.
INFORMATION
1.
Provisional balances on 30 November 2015:
Debtors control
Creditors control
2.
Provisional totals on 30 November 2015:
List of balances of debtors
List of balances of creditors
3.
3.1
3.2
R4 778
7 420
R4 968
R5 220
Errors and omissions tracked:
Credit sales of R980 not recorded in the Debtors Journal.
The column of debtors allowance in the Debtors Allowances Journal is added up as R180. The
correct total is R380.
Discount received, R100 from a creditor is not entered in the specific subsidiary journal.
Discount, R70 allowed to a debtor, correctly recorded in the subsidiary journal but not posted
to the debtor’s personal account.
The Debtors list is added up R320 too much.
The opening balance of the creditors control is entered wrongly as R2 300. The correct opening
balance is R2 100.
Credit purchases of trading stock, R1 000 posted to the debit side of the personal account of
the creditor.
3.3
3.4
3.5
3.6
3.7
no.
Transactions regarding debtors
Debtors control
Debtors list
Balance
3.1
3.2
3.3
3.4
3.5
3.6
3.7
Total
108
Transactions regarding creditors
Creditors control
Creditors list
Exercise 6.1
The following information was taken from the books of Park Merchants.
INSTRUCTION
1. Prepare the Debtors control account on 31 May 2015, after taking the errors and omissions into
account.
2. Calculate the correct total of the list of individual debtors balances. Show the calculations.
INFORMATION
2015
May
Debtors control
1
Balance
b/d
53 900
31
Bank and discount
CRJ
Sales
Journal debits
2015
May
Bank
CPJ
178
87 400
Debtors allowance
DAJ
692
DJ
190 600
Journal credits
GJ
553
GJ
700
Balance
c/d
331 177
332 600
Jun.
1
Balance
B9
b/d
31
332 600
331 177
The provisional total of the list of individual debtor balances on 31 May 2015 was R156 434, before errors and
omissions were taken into account.
The following errors and omissions came to light
1. Obvious posting mistakes were made with the write down of the Debtors control account.
2. An amount of R90 paid out of the Petty cash, on behalf of a debtor Z. Volschenk, is not recorded
in the books.
3. A cheque of R178 was returned by the bank, marked “insufficient funds“. C. Serfontein has
previously settled her debt of R200 with this cheque. No entry regarding the difference was yet
made.
4. C. Rossouw, a debtor, is insolvent and her balance of R430 must be written off as bad debts.
5. The Debtors Journal was added up, R800 to much.
6. An entry of R405 was correctly recorded in the Debtors Allowance Journal but incorrectly posted
as R504 to M. de Leeuw’s account in the Debtors Ledger.
7. A credit note issued to M. Laidlaw for R390 was not recorded.
8. A debtor, M. Havenga, with a balance of R500, requested that this balance should be transferred
to her account in the Creditors Ledger.
9. The debtors column in the CRJ includes an amount of R600 from a debtor, C. Pronk, which was
written off during February as bad debts.
109
General Ledger of Park Merchants
Debtors
control
Debtors list on 31 May
2015
Provisional total of Debtors
list
Z.
B9
Debit
156 434
Volschenk
C.
Serfontein
C.
Rossouw
M. de
Leeuw
M.
Laidlaw
M.
Havenga
Correct of total of Debtors
list
110
Credit
Exercise 6.2
The following information relates to Menlo Merchants. The totals of the Journals and incorrect
Creditors list are provided.
INSTRUCTION
1. Use the given information to complete the Creditors control account and balance it properly on
28 February 2015.
2. Prepare the correct Creditors list on 28 February 2015. Make sure that the total of the list
correspond with the balance of the Creditors control account. Show calculations in brackets.
3. The owner of Menlo Merchants is worried that the bookkeeper probably forges some of the
funds through the Creditors system. Name TWO of the internal control measures to be applied
by the business to keep control over the creditors.
INFORMATION
1.
The balance of the Creditors control account on 31 January 2015 was R45 922.
2.
The following information was taken from the subsidiary journals for February:
3.
Creditors Journal
Invoices received from suppliers
34 020
Cash Payments Journal
Total of cheques issued
Trading stock bought by cheque
Creditors control column
Discount received from creditors
Total of Sundry column
97 740
49 200
?
864
18 300
Creditors Allowance Journal
Debit notes issued to suppliers
940
Cash Receipts Journal
Receipts issued to creditors for receipt of excess payments
1 010
General Journal
Debtors control
Creditors control
Credit
828
126
Debit
222
234
The following balances appeared on the Creditors List before corrections were made:
Creditors list on 28 February 2015
Truter Suppliers
Nadia Ltd.
M. Jooste
Z. Prinsloo
Lene Merchants
Debit
36
36
111
Credit
26 852
12 374
4 080
5 500
48 806
ADDITIONAL INFORMATION
The following information was not taken into account when the journals were prepared. Seeing that
all the journals are totaled and posted, the errors and omissions have to be recorded in the General
Journal. Take this into account in preparing the Creditors control account. The General Journal is not
required.
1.
2.
3.
4.
5.
6.
A debit balance of R36 on the account of Truter Suppliers, a creditor, must be transferred to their
account in the Debtors Ledger.
An invoice for stock bought on credit on 26 February 2015 from Nadia Ltd. is not recorded. The
invoice indicates a cost price of R2 520 and the carriage of the goods as R200.
There is an adding mistake in the subsidiary ledger account of M. Jooste. Her balance was added
up R130 short.
Lene Merchants allowed cash discount of R170 for an early payment. It was incorrectly recorded
in the Cash Payments Journal as R150.
An amount of R50 in the Creditors Allowance Journal was by mistake posted to the wrong side
of the creditor, Z. Prinsloo’s account.
An amount of R600 was recorded in the trading stock column of the Creditors Journal for
equipment bought for the owner.
1.
Creditors
control
2. Creditors
list Truter
Suppliers
Nadia
Ltd.
M.
Jooste
Z.
Prinsloo
Lene
TotalMerchants
of Debtors
list
3. Name TWO internal control measures to improve the control over
creditors.
112
Exercise 6.3
You are provided with information with regards to Park Stores. The bookkeeper made mistakes which
caused the difference between the balance of the Debtors control account and the total of the Debtors
list.
INSTRUCTION
Take the information into account and use the given table to calculate the correct balance of the
Debtors control account as well as the correct total of the Debtors list.
INFORMATION
1.
Provisional balances and totals on 31 October 2015:
Debtors control
List of debtors balances
2.
2.1
2.2
2.3
2.4
2.5
2.6
2.7
R10 393
7 662
Errors and omissions traced:
The total of the sales column in the Debtors Journal was added up with R100 to much.
An amount of R95 in the debtors control column of the Cash Receipts Journal was not posted
to the personal account of the debtor concerned.
A credit note issued for R28 is not recorded.
The total of the debtors allowance column in the Debtors Allowances Journal, R243 was posted
to the debit side of the Debtors control account.
Credit sales of R890 was posted to the wrong side of the personal account of the concerned
debtor.
Interest on the overdue account of a debtor, R140, was already added to the personal account
of the debtor. No entry for the interest was made in the General Journal.
A debtor’s account of R600 to be written off as bad debts. Although as yet no entry was made
in the books, the account of the debtor no longer appears in the Debtors Ledger.
no.
Debtors control
Debit
Credit
Balance
2.1
2.2
2.3
2.4
2.5
2.6
2.7
Total
Balance
113
Debtors list
Debit
Credit
Exercise 6.4
INSTRUCTION
The Creditors control account and Creditors list was prepared by an inexperience bookkeeper. She
calculated the following figures at the end of the month:
Balance of Creditors control account
R55 670
Total of Creditors list
39 240
1.
2.
Why must the figures correspond?
Calculate the adapted balance of the Creditors control account and total of the Creditors
list. Use the format provided to indicate your calculations.
INFORMATION
An investigation brought the following to light:
1.
An adding mistake in the Creditors list caused that the total was added up R480 short.
2.
A credit purchase invoice for sta tionery bought from Brooklyn Ltd. for R1 960, was
erroneously omitted from the books.
3.
Trading stock returned to Excelsa Ltd., R720, was recorded correctly in the Creditors
Allowances Journal but posted to the creditor’s account of Excelsa Ltd. as R270.
4.
The creditors control total in the Cash Payments Journal is R8 200. The bookkeeper
erroneously credited it in the Creditors control account.
1.
Why should the figures correspond?
2.
Provisional balance/total
Transaction 1.
Creditors control
R55 670
Transaction 2.
Transaction 3.
Transaction 4.
Correct balance/total
114
Creditors list
R39 240
Exercise 6.5
The Creditors control account and Creditors list of Park Stores were prepared by an inexperienced
bookkeeper on 31 May 2015. Seeing that the balance and the total differ, your assistance was
called for.
INSTRUCTION
Use the given information and calculate the correct balance according to the Creditors control
account and the correct total according to the Creditors list. Indicate each change separately.
INFORMATION
1.
2.
3.
4.
5.
6.
7.
8.
9.
no.
The Creditors control column in the Creditors Journal is added up with R1 000 to much.
A credit balance of R2 100 of a debtor in the Debtors Ledger, must be transferred to his
account in the Creditors Ledger.
A debit note for R1 890 issued to a supplier for goods returned was not entered in any
journal.
An entry of R1 200 in the Creditors Journal posted to the wrong side of the creditor’s
account.
An invoice for R2 850 correctly recorded in the Creditors Journal, was not posted to the
creditor’s personal account.
An invoice for R2 800 received from Menlo Wholesalers, accidentally posted to the
account of Menlo Merchants.
A cheque, R4 931, issued to a creditor, incorrectly entered as R4 391 in die Cash
Payments Journal and posted as such.
A creditor, Brooklyn Supplier, has levied Park Stores’ in arrears account with R180
interest. The transaction was recorded correctly in the General Journal but posted to the
wrong side of Brooklyn Suppliers’ account.
There was an adding mistake in a creditor, Park Suppliers’ account. The balance was R90
short.
Description of transaction
Provisional balance/total
Creditors control
73 200
1.
2.
3.
4.
5.
6.
7.
8.
9.
Correct balance/total
115
Creditors list
66 500
Exercise 6.6
The following information appeared on 30 June 2015 in the books of Park Merchants.
INSTRUCTION
Prepare the correct Debtors control account and calculate the correct total of the Debtors list.
INFORMATION
1.
The following incorrect Debtors control account appeared in the General Ledger.
Debtors control
2015
Jun.
Jul.
1
30
1
Balance
Creditors allowance
b/d
CAJ
27 555
1850
Cash sales
Bad debts
Bank
(Dr. control column)
Sales returns
CRJ
GJ
CRJ
52 800
530
124 080
DAJ
2 370
209 185
Balance
b/d
70 267
2015
Jun.
30
Bank (R.D.)
Bank
(repayments to debtors)
Credit sales
Balance
CPJ
CPJ
212
106
DJ
c/d
138 600
70 267
209 185
2.
The provisional total of the list of debtors on 30 June 2015 is R39 867. Accept that the
opening balance of the control account is correct.
3.
Apart from the obvious errors made by the bookkeeper in the abovementioned control
account, a further investigation brought the following to light:
• A credit note for R780 was issued to W. Thiele, a debtor, with regards to goods
returned by him, but no entry was made of this.
•
A credit balance of R387 on debtor, L. Potgieter’s account, must be transferred to her
account in the Creditors Ledger.
•
Interest of R67 still has to be levied on the in arrears account of S. Robbertse, a
debtor.
•
The receipts from debtors, R124 080, includes an amount of R58, recovered from
V. de Leeuw, ‘n debtor whose debt was previously written off as bad debts. This did
not affect the Debtors Ledger.
•
An entry with regards to sales returns of R158, was correctly recorded in the Debtors
Allowance Journal, but incorrectly posted to the wrong side of M. Enslin, a debtor’s
account .
116
General Ledger of Park Merchants
Debtors control
Debtors list
117
Exercise 6.7
Park Stores sell sports equipment on cash and credit. Although their credit terms are 60 days, they
budget that only 80% of the debtors will abide by it.
INSTRUCTIONS
1.
2.
3.
3.1
3.2
4.
Explain why the balance of the Debtors control account and the total of the Debtors list
should be the same.
Name TWO steps that the bookkeeper can follow if there is a difference between the Debtors
control account and the total of the Debtors list.
Calculate the following:
The correct balance of the Debtors control account on 31 March 2015.
The correct amounts owed by the following debtors:
• L. Meyer
• D. Wagner
• L. Grobler
At the end of February the Debtors age analysis is as follows:
Total
R201 200
4.1
4.2
Current
R35 300
30-60 Days
R22 800
61-90 Days
R78 000
>90 Days
R65 100
Are Park Stores debtors managed effective? Explain by quoting figures to support your
opinion.
Name TWO measures that the business can introduce to improve the situation.
INFORMATION
1.
2.
Balance of Debtors control account on 31 March 2015, R200 000.
Balances according to the Debtors Ledger on 31 March 2015:
D. Geyer
R64 500
L. Meyer
R41 200
D. Wagner
R23 000
M. Enslin
R51 500
L. Grobler
R7 900
Total
R188 100
3.
3.1
3.2
3.3
3.4
3.5
The following errors and omissions were discovered and have to be corrected:
The Debtors Journal is added up with R2 600 to much.
An invoice issued to D. Wagner for R1 800 was omitted from the books.
Goods sold on credit to L. Grobler, R8 300, wrongly posted to the account of L. Meyer.
An invoice issued to L. Grobler for R6 000 was posted to the wrong side of her account.
A cheque, R13 500, received earlier from L. Meyer in settlement of her account of R15 000,
returned by the bank, marked R.D. No entry of this was made.
3.6 Stock sold on credit to D. Wagner for R5 800 was correctly entered in the Debtors Journal but was
incorrectly transferred as R8 500 to his personal account.
118
1. Explain why the balance of the Debtors control account and the total of the Debtors
List should be the same.
.
2. Name TWO steps that the bookkeeper can follow if there is a difference between the
Debtors control account and the total of the Debtors List.
3. Calculate the following:
3.1 The correct balance of the Debtors control account on 31 March 2015.
3.2 The correct amounts owed by the following debtors:
Debtor
Calculations
L. Meyer
R41 200
D. Wagner
R23 000
L. Grobler
R7 900
Answer
4.1 Are Park Stores debtors managed effective? Explain by quoting figures to support
your opinion.
4.2 Name TWO measures that the business can introduce to improve the situation.
0
119
CHAPTER 7:
7.1
VALUE ADDED TAX (VAT)
GENERAL
Value added tax (VAT) is a valuable source of income for the budget of South Africa. It is
estimated that ± 27% of the total income of the budget is earned from VAT.
7.2
DEFINITION OF VAT
Valued added tax is tax levied on the goods and services provided by businesses. The standard
rate at which VAT is levied is 15%. Businesses with a turnover more than R1 million per year,
are compelled by law to register for VAT. Businesses with lower turnovers can register for
VAT voluntary. Businesses that register for VAT must levy VAT on behalf of SARS on goods
and services delivered by them and pay it over to SARS. They can also claim back VAT from
SARS on goods and services bought for use in the business.
7.3
NECESSITY AND PURPOSE OF VAT
The State requires income to finance its expenditure and to balance the state budget. Income
from primary taxes such as personal income tax, is insufficient, and therefor secondary taxes
such as VAT needs to be levied.
The advantage of this system to SARS is; they need not wait until the end of the process,
when the product is sold to the consumer, to receive the taxes. Tax is levied and paid over to
SARS as the product is sold from supplier to manufacturer and then to wholesaler, to retail
dealer and finally to the consumer.
7.4
PRINCIPLES ABOUT VAT
VAT is divided in two groups, viz. VAT input and VAT output.
7.4.1 VAT input is the VAT that the business pays to the supplier when goods and services are
bought, and can be claimed back from SARS, if the business is registered for VAT.
7.4.2 VAT output is the VAT that the business levies on the delivery of goods and services to
clients, and must be paid over to SARS.
Every two months the following simple formula is used to calculate the amount of VAT,
which is the VAT over a period of two months, to be paid over to SARS. If the VAT input is
more than the VAT output, then SARS must refund the difference.
VAT payable to SARS = VAT output - VAT input
120
7.5
EXEMPTED AND ZERO-RATED PRODUCTS
There are certain products and services that are exempted from VAT by Law (called exempt
goods) as well as goods and services that are not exempt, but on which a 0% tax rate levied
(called zero- rated goods).
7.5.1
Exempt goods
These are goods and services that according to Law are not levied according to the standard
rate or the zero rate of VAT.
The following are examples of the most commonly except goods and services: financial
services; rental of a private residence; transport of persons on road or rail; educational services
provided by the State, etc.
7.5.2
Zero rated goods
These are goods and services that are levied at a rate of 0% VAT. It mainly consists of basic
foodstuffs and certain necessities. The State can at any time decide to levy these products at the
standard rate.
The following are examples of the most common nil rated goods: brown bread eggs, corn
products and rice, milk, milk powder and milk mixtures, fresh fruit and vegetables, lentils,
dried beans and legumes, sunflower oil, tinned sardines, fuel and diesel.
7.6
VAT CALCULATIONS
At present VAT is calculated at a rate of 15% of the normal selling price of goods and services.
This rate is called the standard rate. VAT is paid over at the standard rate to SARS, every
second month.
Prices of products can be provided before VAT is added or after VAT has already been added.
Before recording any amounts, double check whether VAT is already included or whether it
still must be added.
Amount excluding VAT = Amount including VAT x 100 / 115
and
Amount including VAT = Amount excluding VAT x 115 / 100
121
Exercise 7.3
You are provided with information regarding to Perry General Merchants. The business is registered
as a VAT seller.
INSTRUCTION
7.3.1 What is meant by VAT input and VAT output and how does this influence the payment of
the business to SARS?
7.3.2
With reference to the invoice, calculate the following :
(a) The amount of VAT included in the invoice price of R8 765,00.
(b) The mark-up percentage at which brown bread is sold.
(c) The selling price of a pack of rusks without VAT.
(d) The purchase price of a pack of rusks without VAT.
(e) The purchase price of a pack of rusks with VAT.
(f) The amount of VAT per pack of rusks to be paid over to SARS.
INFORMATION
1.
Perry General Merchants used a secret cost price code to write down the cost prices, viz:
‘VOLKSWAGEN’ where V = 0 and N = 9.
VAT input is excluded when the cost price is worked out on each product.
2.
The following invoice is presented to you:
PERRY GENERAL MERCHANTS
Invoice: 1997
Debit: Hostel
Lynwood Avenue 1
Hatfield
6 May 2019
COST PRICE
PER UNIT
(VAT
excluded)
VAT
RATE
SELLING
PRICE PER
UNIT
(VAT included)
TOTAL
(VAT included)
R
100 x brown bread
W/VV
0%
7,00
700,00
60 x litres fresh milk
S/EV
0%
6,00
360,00
45 x bottles detergents
SV/VV
15%
69,00
3 105,00
50 x packs of rusks
AV/VV
15%
92,00
4 600,00
R8 765,00
TOTAL
124
CHAPTER 8: INTERNAL CONTROL AND BUSINESS ETHICS
8.1
DEFINITION OF INTERNAL CONTROL
Our daily lives are subjected to certain management measures to ensure order and structure
in our society. Think about traffic rules, security measures and even school rules. Control
is part of our lives and is established to be able to exercise orderliness, safety and a
measure of management of society.
In each business certain measures are implemented to assure that set goals are achieved
and to prevent cheating. Internal control refer to control over the compliance with these set
rules and regulations.
8.2
BASIC INTERNAL CONTROL MEASURES
8.2.1
Internal business control measures
Internal control is created and implemented to ensure that the business’ aims are achieved.
These aims are among others to:
• ensure that financial information is accurate and reliable;
• ensure that employees abide by the policy, guidelines and rules of the business;
• ensure that all employees respect and honour the norms and values of the
business;
• protect the assets of the business, and
• ensure that the resources of the business are used economically and effectively.
8.2.2
Internal accounting management measures
Internal accounting forms of control and management form part of the total internal
management system of a business. These measures are not only brought in to ensure that
bookkeeping is accurately and correctly done, but also to protect the business against losses
as a result of fraud and other white-collar crime.
Aims of internal accounting management:
• to ensure that all income earned, is actually received and that it is correctly
recorded;
• to authorise and correctly record all expenses and payments;
• that all assets are properly protected and recorded in the accounting records;
• that all creditors and other liabilities are paid on time and correctly recorded;
• that all accounting reports are 100% correct and reliable,
• that any errors or irregularities in accounting records are detected.
128
8.2.3
Basic internal management processes
Internal control mechanisms and actions will be different in every business. It will depend
on the risk, size, type and diversity of the business. The following basic internal
management measures should be present in most businesses:
(1)
Control of cash payments
Here mechanisms must be put in place to ensure that payments are only made if
properly authorised by the management of the business in respect of monetary business
expenses, and that all payments are properly recorded.
The following are examples that can be helpful with this:
• All cheque books, blank cheques and unused cheques must be locked up in a
safe with access only by authorized people;
• All cancelled cheques must be properly cancelled and destroyed;
• Cheques must only be written out and signed if the necessary documentation,
and authorisation can be shown;
• Paid invoices must be stamped as paid so that they can serve as supporting
documentation for the cheque counterfoil. The stamp must clearly show the
date on which it was paid as well as the cheque number;
• There may never be a signed, blank cheque and cheques made out for cash,
must be forbidden
• Only top management must be authorised to sign cheques – never the
bookkeeper;
• Cheques for large amounts of money must be signed by two people;
• Cheques issued must immediately be entered into the Cash Payments Journal;
• At the end of the month the bank statement must be compared and reconciled
with the Cash Payments Journal;
• The duties of writing out cheques, signing cheques, doing bank reconciliation
and access to receipts, must be divided between different people – it must not
be the same person.
(2)
Control of cash receipts
These processes must ensure that all income that the business earns has actually been
received and that it is correctly and accurately recorded and is deposited into the
current bank account without delay.
The following are examples of mechanisms that can be helpful with this:
• Cash receipts must physically be protected against theft and burglary;
• Someone other than the bookkeeper must receive and open the post and
complete the cash receipts register;
• All receipts must be deposited in the bank as soon as possible;
• All receipts must immediately be recorded in the Cash Receipts Journal;
• At the end of the month the bank statement must be compared and reconciled
with the Cash Receipts Journal;
• Ensure that the person that works with cash receipts, is not the same person
who works with cash payments.
129
(3)
Control of Petty cash
The internal control of Petty cash must ensure that money from Petty cash is only
used for official payments of the business. It must also be ensured that the money is
safe and that payments are properly recorded.
The following are examples of that can be helpful with this:
• Petty cash money must physically be protected against theft;
• Payments from Petty cash must only be used when a cheque cannot be
issued for the specific payment;
• Only one person, namely the Petty cash cashier, must have access to the
Petty cash;
• Each payment out of Petty cash must be supported by a source document for
the payment;
• For every payment from Petty cash the Petty cash cashier must complete and
sign a Petty cash voucher;
• There must be a limit on the amount that can be paid from Petty cash;
• There should be regular unexpected control of the money in Petty cash done
by someone other than the Petty cash cashier;
• Decide in advance on Petty cash imprest, and restore it when it drops too
low.
• When the Petty cash imprest is restored, the request, receipt and cheques for
this must be recorded by someone other than the Petty cash cashier;
(4)
Control of debtors
The internal management process for debtors must ensure that debtors are credit
worthy, that credit sales are properly recorded, reconciliation is done between
personal accounts and the control account and that outstanding accounts are
managed.
The following are examples of mechanisms that will be helpful with this:
• There must be a credit policy in place according to which debtors are approved;
• Regular credit controls should be exercised to identify debtors in arrears;
• Credit sale transactions must be approved in terms of price, payment, credit
availability and limits on the debtors account;
• All credit sales must be fully recorded on pre-numbered credit sales invoices
and signed by the sales person. Account should be given of every invoice
number;
• Monthly statements of outstanding debtors must be evaluated and sent out by
someone other than the bookkeeper;
• The balance of the Debtors control account in the General Ledger must be
reconciled with the total of the Debtors list in the Debtors ledger at the end of
every month;
• Bad debts and other adjustments relating to debtors must be properly
authorised;
• Interest must be charged on overdue accounts of debtors.
130
(5)
Control of creditors
The internal control processes of creditors must ensure that credit purchase invoices
received from creditors, correspond with the items received, as well as being
accurately recorded, reconciled with the creditors accounts and amounts payable
regularly monitored.
The following are examples of mechanisms that can be helpful with this:
• Purchase price and the correctness of invoices received from creditors, must be
controlled;
• The quantity of goods received must be controlled by clearly marking it off on
the invoice;
• Negotiate for the best possible terms and discount;
• Invoices must be properly checked and recorded before it is paid. It can for
example, be stamped;
• The same person must not be responsible for the purchase of goods and for the
receipt thereof;
• Pay creditors as late as possible without interest being levied.
(6)
Wage and salary payments control
The internal management process regarding payment of wages and salaries must ensure
that payments are only made with the necessary authorization to bona fide employees of
the business, and that it is properly recorded.
The following are examples of mechanisms that can be helpful with this:
• There must be a file for every employee with information about the salary
scale, deductions as well as any changes in the status as employee;
• Access to personal files must be limited;
• Detailed time sheets must be used to record employees’ hours and overtime
worked. These time sheets must be signed by the employee’s immediate head
to serve as authorization for the payment for work done;
• The accuracy of the calculation of wages and salaries must be controlled;
• Permanent employees’ salaries must be paid directly into their bank accounts,
or by electronic internet transfers;
• The list of salary earners must regularly be controlled to ensure that all
employees really exist, and are still working in the business.
(7)
Management of Non-current assets
The internal management process of non-current assets must ensure that assets are
only bought and sold with proper authorisation, and that they are adequately secured
and accurately recorded.
The following are examples of mechanisms that can be helpful with this:
• Non-current assets must be physically secured against theft and burglary;
• Proper authorization must be obtained before new assets can be purchased, and
there must be thorough recording in the asset register of every new asset
purchased;
• These asset registers must be regularly controlled by doing a physical
stocktaking, and lost, stolen or damaged inventory must immediately be
reported;
• A depreciation policy must be established and implemented;
131
8.3
DEFINITION OF BUSINESS ETHICS
Ethics refer to the social acceptable or correct way to do something. Businesses normally
include the correct way that they want to do business, in their code of conduct.
A code of conduct is a written set of norms and values about how to behave ethically and
correctly. It is nothing other than a set of rules that regulates the behaviour of members of an
organisation to keep their behaviour within acceptable norms. The code of conduct sets
standards of acceptable behaviour and principles about which the institution feels strongly so
as to ensure a high degree of professionalism. It is very important that all employees take
need of the code of conduct of the business, and belief in it. There should not be a feeling
that it is a set of rules set up by management or the business, to be followed blindly. Input
should be obtained from employees on all levels, in order to draw up a code of conduct for
the business. In this way, the employees will feel empowered, responsible and involved, in
contrast with negative feelings that will exist if the rules are just forced onto them.
8.4
BASIC PRINCIPLES OF BUSINESS ETHICS
All role players in a business should support the following few basic principles of ethical
and professional behaviour:
8.4.1 Integrity
Integrity can be described as the quality that a person possesses to be honest and to possess
strong moral values. A person with integrity will strive to do all assignments given to the
best of his/her ability. He/she will set high standards and will be determined not to lower
these standards.
8.4.2 Objectivity
Objectivity is the ability to behave impartial, honest and without prejudice. A person who is
objective, will make decisions based on facts and will not let personal feelings influence
decisions and recommendations. He/she will always be fair and impartial in the
execution of duties and won’t be influenced by others.
8.4.3 Professional competence and proper care
Professional competence refers to the ability to be able to do your work well by having the
necessary technical ability, qualifications, knowledge and experience. Proper care ensures
that tasks are done responsibly, carefully and promptly.
8.4.4 Confidentiality
Confidentiality refers to the ability to handle any information concerning the business that is
made known to you as employee in the execution of your duties, confidential. Information
may not be given to anyone outside the business, unless required professionally or by law.
8.4.5 Professional behaviour
Professional behaviour refers to the manner a person behaves in the workplace. Employees
should never behave in any way that may have a negative impact on the reputation of his
profession or employer. Someone who is professional, should at all times be circumspect,
polite, friendly and courteous, and always consider others.
132
CHAPTER 9: GENERAL ACCEPTED ACCOUNTING PRACTICE AND
YEAR-END PROCEDURES
9.1
ACCOUNTING 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:
9.1.1 Entity principle
The business operates separate from the owner. The owner only has claim on his owner’s
equity in the business.
9.1.2 Double entry principle
For every debit entry there is a credit entry made in another account. These accounts refer to
each other.
9.1.3 Going concern principle
This concept accepts that the business will conduct a trading existence in the foreseeable
future. Decisions should be taken carefully without threatening this principle.
9.1.4 Financial period principle
The financial period is the specific period for which a concern reports on its income and
expenditure. It also gives a picture of the concern’s financial situation with regards to assets,
owner’s equity and liabilities at the end of the period. Usually reporting is done on a period
over 12 months, called the financial year.
9.1.5 Historical cost principle
According to this principle the business has to record in its books all non-current assets at
the original costs it was bought.
9.1.6 Prudence principle
This principle determines that assets should be recorded in such a manner that it will reflects
the most realistic picture and value of the asset. Although non-current assets must be shown,
according to the historical cost principle, at the original cost price, provision for depreciation
on non-current assets should also be made. Take realistic notice of debtors by providing for
debtors who perhaps not going to pay their debt, by creating a provision for bad debts and
adjust it annually.
9.1.7 Matching principle
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.
133
9.1.8 Consequential principle
Similar transactions should be handled in the same way from one financial year to the
following, e.g. the method of calculating depreciation on non-current assets, or the valuation
method of trading stock. If methods change, it should be made public in the financial
statements.
9.1.9 Actuality principle
According to this, a mistake will be left in the books if it has no actual influence on the
result for the financial year, e.g. a cheque of R100 too much, was issued for wages, 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.
9.2
YEAR-END PROCEDURES
Some accounting procedures take place daily, others monthly, and a few only once per year.
For instance, source documents are completed daily and recorded in the subsidiary journals.
At the end of each month the subsidiary journals are closed off and posted to the General
Ledger and a Trial balance is compiled.
All these procedures take place during the financial year, and must be executed very
accurately to enable calculating the correct profit at the end of the period and thus present an
accurate report on the financial position of an enterprise.
The accounting procedures performed at the end of each year to prepare a report of the
business activities for a certain period, include the following steps, to be discussed in more
details:
•
•
•
•
•
•
•
Pre-adjustments trial balance
Adjustments
Post-adjustments trial balance
Closing transfers
Post closing trial balance
Prepare financial statements with Notes
Analysis and interpretation of financial statements
9.2.1 Pre-adjustments trial balance
The Trial balance prepared at the end of the last month of the financial year and to which the
subsidiary journals are posted at the end of the last month contain all actual figures of
transactions during the year. It thus indicates actual receipts, payments, sales and purchases
that took place during the year.
These amounts are not necessarily the “correct” amounts which were received or paid, in
accordance with the matching principle for the period, and therefore it first have to be
changed or “adjusted”, from there the name “Pre-adjustments trial balance”.
134
9.2.2 Adjustments
The figures appearing in the Pre-adjustments trial balance must be adjusted or corrected in
order to calculate the correct net profit for the specific period which is reported on. It also
assures that an accurate and most realistic picture of the business is shown on the last day of
the financial period.
Actual receipts must be adjusted to indicate the income received for the period or the income
that should have been received. Like this actual payments also have to be adjusted to
indicate the incurred expenses for the period or the expenses that should have been paid.
The following year-end adjustments are done to comply with the accounting principles:
(1)
Bad debts
The prudence principle determines that the value of the assets must be realistic. An
age analysis of debtors is prepared at the end of the year to determine which debtors
are probably not going to pay their debt. After receiving authorization the debt is
written off as bad debts.
Debit an expense account, viz. Bad debts and credit an asset account, viz.
Debtors control as well as the debtor’s personal account with the total
amount written off.
EXAMPLE
2015
Febr. 28 The account of a debtor, L. Serfontein, already owing an amount of R240
for 7 months to be written off as bad debts. Journal voucher 6.
General Journal of Menlo Merchants for February 2015
Day
Details
Fol.
Debit
GJ
Debtors Control
Credit
Credit
General Ledger of Menlo Merchants
Debtors control
Bad debts
135
B
N
(2)
Depreciation written off on non-current assets
According to the prudence principle the most realistic value for non-current assets
must be shown in the Balance sheet. It will be the value at which non-current assets
can be sold if the business closes its doors. To calculate this value, depreciation is
written off annually on vehicles and equipment.
According to the historical concept principle, non-current assets also have to be
shown at the original cost price paid for it. It means that the vehicle and equipment
accounts cannot be decreased only with the depreciation. Two new ledger accounts
are created, viz. Accumulated depreciation on vehicles and Accumulated
depreciation on equipment, which are actually the credit sides of vehicles and
equipment. All the depreciation is recorded in these accounts.
Transaction to write off depreciation on non-current assets, is done as follows:
Debit an expense account, viz. Depreciation and credit a negative asset, viz.
Accumulated depreciation on vehicles or Accumulated depreciation on
equipment with the amount written off for the specific period.
Mainly two methods to calculate depreciation exist, viz.
(a)
Depreciation calculated on cost price (Fixed instalment-/Straight line
method)
According to this method depreciation is calculated as a percentage of the
original cost price of the asset. This will mean the asset will be used
beforehand by the business for a period. If the asset still has a value at the end
of the period, it is called the residual value. The depreciation that can
therefore be written off on an asset, is the difference between the cost price
and the residual value. It is written off in equal portions over the period that
the asset is going to be used.
(b)
Depreciation calculate on book value Diminishing balance-/Carrying
value method)
According to the diminishing balance method, depreciation is calculated as a
percentage of the carrying value/book value of the asset concerned, i.e. the
amount written off as depreciation decreases annually. The asset is thus used
indefinitely by the business.
Carrying value calculated as follows:
Carrying value = Cost price – Total accumulated depreciation of previous years
136
EXAMPLE
INSTRUCTION
1.
Open the ledger accounts with the given balances on 1 March 2014.
2.
Calculate the depreciation written off on vehicles and equipment for the
financial year ended 28 February 2015.
3.
Present the journal entries for the adjustment for depreciation and post it to the
ledger accounts.
INFORMATION
On 1 March 2014 the following balances appeared in the books of
Menlo Merchants:
Vehicles(at cost price)
Equipment(at cost price)
Accumulated depreciation on vehicles
Accumulated depreciation on equipment
R600 000
380 000
150 000
136 800
ADJUSTMENTS AND ADDITIONAL INFORMATION
1.
During the financial year a new vehicle and new equipment was bought by
cheque. The following information relates to the transactions:
2.
Details
Date purchased
Cost price
Vehicle
Equipment
1 May 2014
1 January 2015
R240 000
R90 000
Depreciation must be written off as follows:
• on vehicles at 10% per annum on cost price, and
• on equipment at 20% per annum on the diminishing balance
method.
Calculations
Used the whole year:
Vehicles
New vehicles bought:
Used the whole year:
Equipment
New equipment bought:
137
General Journal of Menlo Merchants for February 2015
Day
Details
Fol.
GJ
Debit
Credit
General Ledger of Menlo Merchants
Vehicles
B
Equipment
B
Accumulated depreciation on vehicles
B
Accumulated depreciation on equipment
Depreciation
GJ GJ
GJ
GJ
138
B
N
(3)
Accrued expenses (expenses payable)
According to the matching principle the exact expenses that should be paid for the
specific period must be taken into account to calculate the profit at the end of the
financial year.
If expenses are incurred for the financial year, but not paid in full, it means that an
amount is still outstanding or payable.
A current liability is created, viz. Accrued expenses, and it is shown under the Note,
Trade and other creditors in the Balance sheet.
Seeing that the amount is still outstanding, and to be paid in the next financial year, a
reverse entry to the expense account concerned has to be made on the first day of the
new financial year, preventing that it is again treated as an expense in the New Year.
Debit the expense account which was paid too little, e.g. Interest on loan
and credit a current liability, viz. Accumulated expenses
EXAMPLE
The following figures appeared in the Pre-adjustments trial balance of Menlo
Merchants on 28 February 2015, the end of the financial year:
Loan: ABSA
R580 000
Interest on loan
R58 000
ADJUSTMENT
The interest rate on the loan at ABSA is 12% per annum. Make provision for interest
in arrears on the loan.
General Journal of Menlo Merchants for February 2015
Day
Details
Fol.
General Ledger of Menlo Merchants
Accrued expenses
Interest on loan
139
GJ
Debit
Credit
B
N
(4)
Accrued income (income receivable)
According to the matching principle the exact income that should have been
received for the specific period must be taken into account to calculate the profit
at the end of the financial year.
If income is earned for the financial year, but not received in full, it means that an
amount is still outstanding or receivable.
A current asset is created, viz. Accrue d income, and it is shown under the Note,
Trade and other debtors in the Balance sheet.
Seeing that the amount is still outstanding, and to be received in the next financial
year, a reverse entry to the income account concerned has to be made on the first day
of the new financial year, preventing that it is again treated as an income in the new
year.
Debit a current asset, viz. Accrued income and credit the income account
concerned with less income received, e.g. Interest on fixed deposit.
EXAMPLE
The following figures appeared in the Pre-adjustments trial balance of Menlo
Merchants on 28 February 2015, the end of the financial year:
Fixed deposit: ABSA
R250 000
Interest on fixed deposit
R12 500
ADJUSTMENT
The interest rate on the fixed deposit at ABSA is 6% per annum. Make provision for
interest in arrears on fixed deposit.
General Journal of Menlo Merchants for February 2015
Day
Details
Fol.
General Ledger of Menlo Merchants
Accrued income
Interest on fixed deposit
140
GJ
Debit
Credit
B
N
(5)
Prepaid expenses
According to the matching principle the exact expenses that should be paid for the
specific period must be taken into account to calculate the profit at the end of the
financial year.
If an expense for the following year has incurred, but already paid during the present
year, it means that an amount was paid too much or in advance and the expense thus
has to decrease and the full payment must not be deducted from the present year’s
profit.
A current asset is created, viz. Prepaid expenses, and it is shown under the Note:
Trade and other debtors in the Balance sheet.
Seeing that the amount has already been paid, and need not to be paid again in the
financial year that follows, a reverse entry to the expense account concerned, has to
be made on the first day of the new financial year so that the payment can be
deducted as an expense from the profit of the correct financial year for which the
expenses were incurred.
Debit a current asset, viz. Prepaid expenses and credit the expense account
concerned which was paid to much, e.g. Insurance.
EXAMPLE
The following figures appeared in the Pre-adjustments trial balance of Menlo
Merchants on 28 February 2015, the end of the financial year:
Insurance
R175 500
ADJUSTMENT
The insurance premium amounts to R13 500 per month.
General Journal of Menlo Merchants for February 2015
Day
Details
Fol.
General Ledger of Menlo Merchants
Prepaid expenses
Insurance
141
GJ
Debit
Credit
B
N
(6)
Income received in advance
According to the matching principle the exact income that should have been
received for the specific period must be taken into account to calculate the profit
at the end of the financial year.
If an income earned for the following year, already been received during the present
year, it means that the amount received was too much or it was received in advance.
The income thus has to decrease and the total receipts not added to the profit of the
present financial year.
A current liability, viz. Inco me received in advance is created and shown under the
Note: Trade and other creditors in the Balance sheet.
Seeing that the amount has already been received, and need not to be received again
in the following financial year, a reverse entry to the income account concerned, has
to be made on the first day of the new financial year so that the receipts can be added
as an income to the profit of the correct financial year for which the income was
earned.
Debit the income account concerned which was received too much, e.g.
Rent income and credit a current liability, viz. Income received in advance.
EXAMPLE
The following figures appeared in the Pre-adjustments trial balance of the Menlo
Merchants on 28 February 2015, the end of the financial year:
Rent income
R119 000
ADJUSTMENT
Rent received up till 30 April 2015.
General Journal of Menlo Merchants for February 2015
Day
Details
Fol.
General Ledger of Menlo Merchants
Income received in advance
Rent income
142
GJ
Debit
Credit
B
N
(7)
Trading inventory deficit
According to the prudence principle the value of all assets must be realistic and it
must be reliable of what the asset is worth at the end of the financial year.
The balance of the Trading stock account in the General Ledger presents the value of
the stock that should be on hand according to bookkeeping procedures
Provision is not made for stock losses of which the bookkeeper is not aware, e.g.
theft of stock, broken stock, etc. A physical stock-taking is necessary to count the
stock and to evaluate it and thus determining the actual value of the stock on hand.
The balance of the Trading stock account needs to be adjusted so that the actual
value of the stock on hand as determined by the physical stocktaking, and required
by the prudence principle, appears in the Balance sheet.
Debit an expense account, viz. Trading stock deficit and credit an asset
account, viz. Trading stock with the difference between the balance of the
Trading stock account and the physical stock-taking, i.e. amount of stock
missing.
EXAMPLE
The following figures appeared in the Pre-adjustments trial balance of Menlo
Merchants on 28 February 2015, the end of the financial year:
Trading stock
R140 000
ADJUSTMENT
Trading stock on hand according to physical stock-taking, R137 000.
General Journal of Menlo Merchants for February 2015
Day
Details
Fol.
GJ
Debit
Credit
General Ledger of Menlo Merchants
Trading stock
B
Trading stock deficit
N
143
(8)
Consumables stores on hand
According to the matching principle only expenses which were actually needed to
make the profit for the year should be shown as expenses for that specific financial
year.
The total of the Stationery account in the General Ledger indicate the total amount
for which stationery was bought during the financial year and not the expense
regarding stationery which was actually needed to make a profit. Consumables such
as, i.e. Stationery, is not totally consumed during a financial year and thus the total
amount spend should not be shown as expenses.
A physical stock-taking at the end of the financial year indicates how much
stationery is left over. This stationery must not be subtracted as an expense from the
profit of the year. It is debited to a current asset account, viz. Consumables stores
on hand and is shown under the Note: Stock in the Balance sheet. Seeing that this
stock isgoing to be consumed during the following year, it should be reversed
according to the matching principle on the first day of the new financial year to be
shown as an expense in the new year.
Debit an asset account, viz. Consumables stores on hand and credit the
expense account concerned, i.e. Stationery with the amount left over
according to the physical stock-taking.
EXAMPLE
The following figures appeared in the Pre-adjustments trial balance of Menlo
Merchants on 28 February 2015, the end of the financial year:
Stationery
R12 000
ADJUSTMENT
Stationery on hand according to physical stock-taking, R1 400.
General Journal of Menlo Merchants for February 2015
Day
Details
Fol.
General Ledger of Menlo Merchants
Consumables stores on hand
Stationery
144
GJ
Debit
Credit
B
N
(9)
Provision for bad debts
According to the prudence principle the value of the debtors should be shown as
realistic as possible in the Balance sheet.
Each year a certain percentage of the debtors will not pay their debt. From the
experience of previous years the business should be able to predict the percentage
debtors not going to pay their accounts. Provision must be made for the debt of these
debtors to be written off as bad debts so that the figure of debtors may show the most
realistic amount that can be received.
(a)
Creating Provision for bad debts
Debit an expense account, viz. Provision for bad debts adjustment
and credit a negative asset, viz. Provision for bad debts with the
total amount of the provision created.
EXAMPLE
The following figures appeared in the Pre-adjustments trial balance of Menlo
Merchants on 28 February 2015, the end of the financial year:
Debtors control
R24 000
ADJUSTMENT
It is expected that 5% of the debtors are not going to pay their debt. Create a provision
for bad debts.
General Journal of Menlo Merchants for February 2015
Day
Details
Fol.
GJ
Debit
Credit
JV 14
General Ledger of Menlo Merchants
Provision for bad debts
Provision for bad debts adjustment
Note to Balance sheet
Trade and other debtors
Trade debtors
Provision for bad debts
Net trade debtor
145
B
N
(b)
Increase of Provision for bad debts
If provision for bad debts already exists, it only has to be adjusted annually to
reflect the provision that has been made for the percentage of debtors
expected to be written off as bad debts.
If the debtors therefore increase, then the provision for bad debts should also
increase and recorded as follows:
Debit an expense account, viz. Provision for bad debts adjusted and
credit a negative asset, viz. Provision for bad debts with the difference
between the present balance of Provision for bad debts and the amount
the new balance should be.
EXAMPLE
The following figures appeared in the Pre-adjustments trial balance of Menlo
Merchants on 28 February 2016, the end of the financial year:
Debtors control
R30 000
Provision for bad debts
R1 200
ADJUSTMENT
Adjust the Provision for bad debts to 5% of the outstanding debtors.
General Journal of Menlo Merchants for February 2016
Day
Details
Fol.
GJ
Debit
Credit
JV 15
General Ledger of Menlo Merchants
Provision for bad debts
Provision for bad debts adjustment
Note to Balance sheet
Trade and other debtors
Trade debtors
Provision for bad debts
Net trade debtors
146
B
N
(c)
Decrease of Provision for bad debts
If a provision for bad debts already exists, it only has to be adjusted annually
to reflect the provision that has been made for the percentage of debtors
expected to be written off as bad debts.
If the debtors therefore decrease, then the provision for bad debts should also
decrease and recorded as follows:
Debit a negative asset, viz. Provision for bad debts and credit an income
account, viz. Provision for bad debts adjusted, with the difference
between the present balance of Provision for bad debts and the amount
the new balance should be.
EXAMPLE
The following figures appeared in the Pre-adjustments trial balance of Menlo
Merchants on 28 February 2017, the end of the financial year:
Debtors control
R21 000
Provision for bad debts
R1 500
ADJUSTMENT
Adjust the provision for bad debts to 5% of outstanding debtors.
General Journal of Menlo Merchants for February 2017
Day
Details
Fol.
GJ
Debit
Credit
JV 16
General Ledger of Menlo Merchant
Provision for bad debts
B
Provision for bad debts adjustment
N
Note to Balance sheet
Trade and other debtors
Trade debtors
Provision for bad debts
Net Trade debtors
147
9.2.3 Post-adjustment trial balance
After the adjustments have been made, a Trial balance is again drawn up to assure that
the posting of all adjustments were done correctly. This Trial balance, containing the
correct income and expenditure for the year, is known as the Post-adjustments trial
balance.
The Nominal account section contains the amounts of the income and expenditures used
to calculate the correct net profit for the year. The Balance sheet accounts section
contains the correct amounts regarding the assets, owner’s equity and liabilities which are
needed to give the financial position of the business, according to the general accepted
accounting principles, on the last day of the financial year.
9.2.4 Closing transfers
All income and expenses relate only to the specific financial year in which it was earned
or incurred and it is therefore closed off at the end of the financial to calculate the net
profit for that specific year.
The only balance sheet account which is closed off at the end of the financial year, is the
Drawings account. It is done to determine the owner’s interest in the business at the
beginning of the new financial year.
Nominal accounts are closed off to the following two final accounts:
(1)
Trading account
The profit that the business makes by just “trading”, which means buying goods at
a lower price and then selling it at a higher price, is called the gross profit.
Another name for gross profit is also “trading profit”.
Gross profit is calculated step by step in the Trading account as follows:
(a)
(b)
(c)
(d)
Close-off Debtors allowance to Sales
(Dt. Sales; Cr. Debtors allowance)
Close-off Sales to Trading account
(Dt. Sales; Cr. Trading account)
Close-off Cost of sales to Trading account
(Dt. Trading account; Cr. Cost of sales)
Transfer gross profit from the Trading account to Profit and loss account
(Dt. Trading account; Cr. Profit and loss account)
The Trading account will always be the second last nominal account, and the form
of the Trading account is as follows:
Trading account
N49
2015
Febr.
28
Cost of sales
Profit and
account
(gross profit)
loss
GJ
80 000
GJ
20 000
100 000
148
2015
Febr.
28
Sales
(104 000 – 4 000)
GJ
100 000
100 000
(2)
Profit and loss account
After calculating the gross profit, all other incomes can be added and expenses
subtracted to calculate the net profit for the year. The final account used to
calculate the net profit is known as the Profit and Loss account.
The net profit is calculated in the Profit and loss account, step by step, as follows:
(a)
Transfer the gross profit from the Trading account to the Profit and loss account
(Dt. Trading account; Cr. Profit and loss account)
Close-off all other incomes to the Profit and loss account
(Dt. “Income account”; Cr. Profit and loss account)
Close-off all other expenses to the Profit and loss account
(Dt. Profit and loss account; Cr. “ Expenses”)
Transfer the net profit from the Profit and loss to Capital
(Dt. Profit and loss account; Cr. Capital)
(b)
(c)
(d)
The Profit and loss account will always be the last nominal account, and the form
is as follows:
Profit and loss account
N50
2015
Febr.
28
Telephone
GJ
700
Stationery
GJ
Wages
2015
Febr.
28
GJ
20 000
800
Trading account
(gross profit)
Rent income
GJ
3 000
GJ
1 500
Discount received
GJ
2 000
Interest on loan
GJ
2 800
GJ
500
Salaries
GJ
4 000
GJ
900
Rent expenses
GJ
3 100
GJ
1 800
Bank charges
GJ
600
GJ
800
Discount allowed
GJ
300
Bad debt
recovered
Interest on
current account
Interest on fixed
deposit
Interest on
savings account
Pension fund contribution GJ
200
Bad debts
GJ
150
Depreciation
GJ
3 250
Trading stock deficit
GJ
200
Provision for bad debts
adjustment
Capital
(net profit)
GJ
400
GJ
11 000
29 000
149
29 000
(3)
Sequence of closing transfers
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Close-off Debtors allowance to the Sales
(Dt. Sales; Cr. Debtors allowance)
Close-off Sales to the Trading account
(Dt. Sales; Cr. Trading account)
Close-off Cost of sales to the Trading account
(Dt. Trading account; Cr. Cost of sales)
Transfer the gross profit from the Trading account to the Profit and loss account
(Dt. Trading account; Cr. Profit and loss account)
Close-off all other incomes to the Profit and loss account
(Dt. “Income account”; Cr. Profit and loss account)
Close-off all other expenses to the Profit and loss account
(Dt. Profit and loss account; Cr. “Expense account”)
Transfer the net profit from the Profit and loss account to Capital
(Dt. Profit and loss account; Cr. Capital)
Close-off Drawings to Capital
(Dt. Capital; Cr. Drawings)
EXAMPLE
INSTRUCTION
Give the journal entries for all the closing transfers and complete the opened
accounts in the General Ledger. Journal narrations are not required.
INFORMATION
The following figures appeared, inter alia in the Post-adjustments trial balance of
Menlo Merchants on 28 February 2015, the end of the financial year:
Extract from the Post-adjustment trial balance of Menlo Merchants on 28 February 2015
Balance sheet accounts section
Fol.
Debit
Credit
Capital
Drawings
B1
B2
Sales
Cost of sales
Debtors allowance
Rent income
Discount received
Bad debts recovered
Interest on current account
Interest on fixed deposit
Interest on savings account
Telephone
Stationery
Wages
Interest on loan
Salaries
Rent expenses
Bank charges
Discount allowed
Pension fund contribution
Bad debts
Depreciation
Trading stock deficit
Provision for bad debts adjustment
N1
N2
N3
N4
N5
N6
N7
N8
N9
N10
N11
N12
N13
N14
N15
N16
N17
N18
N19
N20
N21
N22
Nominal accounts section
150
14 000
560 000
18 000
4 900
6 400
13 500
19 000
23 500
16 000
650
850
800
1 400
6 600
1 400
560 000
690 000
28 800
12 000
5 800
1 900
16 000
2 700
800
General Journal of Menlo Merchants for February 2015
Day
Details
Fol.
General Ledger of Menlo Merchants
Capital
151
GJ
Debit
Credit
B1
Sales
N1
Trading account
N23
Profit and loss account
N24
9.2.5 Post-closing trial balance
After the closing transfers have been made, a Trial balance is again drawn up to assure
that the posting of all closing transfers were done correctly. This Trial balance, is known
as the Post-closing trial balance
All nominal accounts as well as the drawings account are closed off. The Post-closing
trial balance shall therefore consists of only Balance sheet accounts with the correct
amounts, regarding assets, owner’s equity and liabilities needed to give the financial
position of the business, according to general accepted accounting principles, at the last
day of the financial year.
9.2.6 Prepare financial statements and Notes
At the end of the financial year the financial results of the business are presented in an
easy readable and understandable way, by means of the following two financial
statements.
152
(1)
Income statement
The Income statement is used to present in an easy, understandable way the
calculation of the net profit for the present financial year. It thus contains only
income and expenses, in other words, only nominal accounts.
Note that interest is not part of the normal operating activities of the business and
should therefore be shown separately.
The form of the Income statement is as follows:
Income statement of Menlo Merchants for the year ended 28 February 2015
Turnover (sales – debtors allowance)
800 000
Cost of sales
(600 000)
200 000
Gross profit
80 000
Other operating income
Rent income
65 000
Discount received
8 000
Bad debts recovered
7 000
280 000
Gross operating income
(150 000)
Operating expenses
Bank charges
2 000
Wages
33 000
Salaries
56 000
Advertising
4 000
Consumable goods
6 000
Stationery
8 000
Bad debts
1 500
Pension fund contribution
2 500
Medical fund contribution
3 400
Provision for bad debts adjustments
600
Trading stock deficit
800
Depreciation
32 200
130 000
Operating profit
Interest-income
(1)
15 000
145 000
Profit before interest expenses /finance charges
Interest expenses/finance charges
(2)
(35 000)
110 000
Net profit for the year
(1) Interest – income
Interest on current account
Interest on savings account
Interest on fixed deposit
Interest on debtors accounts in arrears
(2) Interest – expenses
Interest on overdraft account
Interest on loan
Interest on creditors accounts in arrears
153
2 000
5 000
7 000
1 000
15 000
6 000
27 000
2 000
35 000
(2)
Balance sheet
The Balance sheet is used to indicate the financial position of the business on the
last day of the financial year, in an easy understandable way. It indicates the value
of the assets and the owner’s interest in the assets as well as the liabilities incurred
to assist in financing the assets. It therefore consists only of balance sheet
accounts written in the known equation: assets equal owner’s equity plus
liabilities.
Note that on the face of the Balance sheet it is referred to Notes where certain
amounts first have to be calculated.
The form of the Balance sheet always looks as follows:
Assets
Non-current assets
Property, plant and equipment
Financial assets
Fixed deposit: ABSA
Current assets
Stock
Trading and other debtors
Cash and cash equivalents
Total assets
3
4
5
6
Equity and liabilities
Owner’s equity
Non-current liabilities
Mortgage loan: ABSA
Current liabilities
Trade and other liabilities
Loan payable within 12 months
Bank overdraft
Total equity and liabilities
7
8
3. Fixed assets/Tangible assets/Property, plant and equipment
Land and
Vehicles
buildings
800 000
660 000
140 000
100 000
60 000
30 000
10 000
900 000
300 000
200 000
200 000
400 000
320 000
50 000
30 000
900 000
Equipment
Total
Carrying value beginning of the
year
Cost price - beginning of the
year
Accumulated depreciation
300 000
120 000
80 000
500 000
300 000
200 000
150 000
650 000
-
(80 000)
(70 000)
(150 000)
Movements
Additions at cost price
Depreciation for the year
100 000
100 000
-
40 000
60 000
(20 000)
20 000
35 000
(15 000)
160 000
195 000
(35 000)
Carrying value –end of the year
Cost price - end of the year
Accumulated deprecation
400 000
400 000
-
160 000
2 260 000
(100 000)
100 000
1 1185 000
(85 000)
660 000
4 845 000
(185 000)
154
4. Stock
Trading stock
Consumables on hand
55 000
5 000
60 000
5. Trade and other debtors
Trade debtors
Provision for bad debts
Net trading debtors
Prepaid expenses
Accrued income
Deposit for water and electricity
25 000
(2 500)
22 500
2 500
3 000
2 000
30 000
6. Cash and cash equivalents
Fixed deposit (matures within 12 months)
Savings account
Bank
Cash float
Petty cash
7. Owner’s equity
Balance at the beginning of the year
Additions during the year
Net profit for the year
Drawings during the year
8. Trade and other creditors
Trade creditors
Accrued expenses
Income received in advance
Creditors for salaries
Creditors for wages
Pension fund
Medical fund
SARS (PAYE)
\
9.2.7
3 000
2 000
6 300
500
800
10 000
200 000
50 000
110 000
(60 000)
300 000
230 000
16 000
24 000
16 000
4 000
12 000
13 000
5 000
320 000
Analysis and interpretation of financial statements
It is very important that figures obtained from financial statements, can be interpreted
so that informed decisions can be taken regarding profitability, rent ability, liquidity and
solvency of the business.
The following calculations and ratios are specifically applicable to sole traders:
155
(1)
Profitability
(a)
Percentage gross profit on turnover
Formula
Gross profit
Turnover
Meaning
X
100
1
= …… %
Note! Turnover = Sales – Debtors allowances
(b)
Percentage gross profit on cost of sales
Formula
Gross profit
Cost of sales
Meaning
X
100
1
= …… %
(c)
The profitability and effectiveness of the
business’s operations are evaluated. If
the percentage is lower than the set
profit margin it can indicate that trading
stock went missing or that trading
discount was allowed or that goods were
sold at a lower price because it was
outdated or damaged.
Percentage net profit on turnover
Formula
Net profit
Turnover
Meaning
X
100
1
= …… %
Note! Turnover = Sales – Debtors allowances
(d)
The
answer
determines
which
percentage of each rand that the business
receives, is profit. This ratio indicates to
the owner whether the set profit margin
is met. If the rate is lower than the set
profit margin, a possibility of theft of
stock can exist.
Compare this percentage with previous
years. If the percentage decreases,
attention needs to be given to decrease
expenses or to increase the mark-up.
Although it will depend on the type of
product sold, the percentage must be
more or less a third of the percentage of
the gross profit on turnover, otherwise
the expenses are too high.
Total operating expenses as percentage of turnover
Formula
Total operating expenses
Turnover
Meaning
X
= …… %
Note! Turnover = Sales – Debtors allowances
156
100
1
Total expenses refer to operating
expenses which exclude cost of sales
and interests. Compare this percentage
with that of previous years to see
whether the expenses of the business are
checked and under control. The answer
indicates the percentage of each rand
that the business receives, used for the
payment of operating expenses.
(2)
Return on owner’s equity
Formula
Meaning
Net income
Average owner’s equity
X
100
1
= ……%s
Note! Average owner’s equity refers to:
½ (opening balance + closing balance)
(3)
Solvency
(a)
Degree of solvency
Formula
Meaning
Total assets : Total liabilities
…… : 1
Note!
Total liabilities = Non-current liabilities +
Current liabilities
(b)
The acceptable norm is 1:1. Should the
business have more liabilities than
assets, it means that some of the
owner’s equity has to be used to repay
liabilities. It implies that the owner
would part of his investment.
Debt/Owner’s equity ratio
Formula
Meaning
Non-current liabilities : Owner’s equity
….…. : 1
(4)
This represents the returns earned on
owner’s equity. It must be compared
with the previous year’s returns as well
as with the following:
• Interest rate on bank investments
• Similar investments, i.e. the rate
that similar businesses offer.
• Debt/owner’s equity ratio.
• Market conditions
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.
Liquidity ratios
Liquidity has to do with the tempo that a business takes changing its assets to “hard cash”.
These ratios indicate how comfortable a business can meet its short term liabilities.
(a)
Current capital ratio
Formula
Meaning
Current assets : Current liabilities
…… : 1
Always remember to compare the present year’s ratio
with that of the previous year.
157
The acceptable norm is 2:1. If the ratio
is 2:1 or more, the liquidity position 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.
(b)
Acid-test ratio
Formula
Meaning
(Current assets – Stock) : Current liabilities
…… : 1
Always remember to compare the ratio of the present
year with that of the previous year.
(c)
Average debtor’s collection period
Formula
Meaning
Average debtors
Credit sales
X
365
1
= ……. days
Note!
Average debtors = ½ (opening balance + closing
balance) of Trade debtors.
(d)
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 through
offering discounts or imposing interest
charges on arrear accounts.
Average creditor’s settlement period
Formula
Meaning
Average creditors
Credit purchases
X
365
1
= …… days
Note!
Average creditors = ½ (opening balance + closing
balance) of Trade creditors.
(e)
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
more sooner, or to negotiate with the
creditors for a longer settlement
period, or to increase the stock
turnover rate.
This is also a very important liquidity
ratio. An attempt is made to bargain with
creditors to repay what is owing 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 longterm relationships.
Rate of inventory turnover
Formula
Meaning
Cost of sales
Average stock
= …….. times per yea
Note! Average stock = ½ (Stock beginning of the year
+ Stock end of the year)
158
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.
Exercise 9.1
INSTRUCTION
Record the entries for the following adjustments in the opened ledger accounts on the answer sheet
on 28 February 2015, the end of the financial year of Park Merchants.
ADJUSTMENTS
1. The Debtors control account has a balance of R34 000. Make provision for bad debts at 8% of
outstanding debtors.
2. Park Merchants owns a building and lease a section of it as offices at R14 500 per month from
1 September 2005. An amount of R188 500 appeared on the Rent income account on
28 February 2015.
3.
Insurance amounts to R2 500 per month. On 28 February 2012 the Insurance account had
a total of R22 500.
General Ledger of Park Merchants
Provision for bad debts adjustment
Rent income
Insurance
159
Exercise 9.2
INSTRUCTION
1.
Use the given answer sheet and calculate the balance of the Accumulated depreciation on vehicles account on
1 March 2014.
2.
Complete the opened accounts on the answer sheet in full. Start with the balance on 1 March 2014 and record the
adjustments and closing transfers on 28 February 2015.
3.
Mention the date on which the equipment was bought.
INFORMATION
The following information regarding Menlo Merchants was given to you on 28 February 2015, the last day of the
financial year of the business.
1.
Vehicles
Menlo Merchants own the following three vehicles:
Vehicles
Registration number
Date bought
Purchase price
1. Toyota truck
2. BMW 318
3. Mercedes E320
WSD 997 GP
XXD 553 GP
ZWS 632 GP
1 March 2012
1 September 2013
1 December 2014
R 120 000
R 300 000
R 450 000
Depreciation written off on vehicles at 10% per annum on book value.
2.
Equipment
The balance of Equipment on 1 March 2014 was R870 000 and the balance of Accumulated depreciation on
equipment on 1 March 2014 was R525 625.
All the equipment was bought at the same time, when the business started. Depreciation is written off on
equipment at 25% per annum on the cost price.
Calculations of depreciation on 28 February 2015
Vehicle 1 : Toyota truck
Vehicle 2 : BMW 318
Vehicle 3 : Mercedes E320
Depreciation on veDepreciation on ve
R R
R 49 470
Rthe year
Depreciation on equipment for the year
1. Calculation of balance of accumulated depreciation on vehicles on 1 March 2014
Vehicle 1: Toyota truck
1 March 2012 – 28 February 2013
1 March 2013 – 28 February 2014
Vehicle 2: BMW 318
1 September 2013 – 28 February 2014
Balance of accumulated depreciation on
vehicles on 1 March 2014
160
2.
General Ledger of Menlo Merchants
Accumulated depreciation on vehicles
B7
Accumulated depreciation on equipment
B8
Depreciation
N34
3. Mention the date on which the equipment was bought.
161
Exercise 9.3
INSTRUCTION
Take the given information into account and match the accounting term in Column A with the correct
definition in Column B. Write the correct letter next to the definition, on your answer sheet.
INFORMATION
COLUMN A
COLUMN B
1. Prudence principle
A. Non-current assets recorded at the original cost price.
2. Financial year
B. Something not having a big influence to be corrected
the following year.
C. Income and expenditure shown in the year it were
earned or made.
D. For each debit entry a credit entry is made.
3. Entity principle
4. Matching principle
5. Historical cost principle
6. Consequential principal
7. Going concern principle
8. Double entry principle
9. Actuality principle
10. GAAP
COLUMN A
1. Prudence principle
E. The business will conduct trading existence in the
foreseeable future.
F. General accepted accounting practice to report on the
financial position of a business.
G. Accounting statements to reflect the most realistic
values and figures at all times.
H. Twelve month period for which financial reports are
prepared.
I. Owner function separate from the business with his
own set of financial records.
J. Depreciation written off according to the same method
each year.
Column B
COLUMN A
6. Consequential principle
2. Financial year
7. Going concern principle
3. Entity principle
8. Double entry principle
4. Matching principle
9. Actuality principle
5. Historical cost principle
10. GAAP
162
Column B
Exercise 9.4
INSTRUCTION
Take the given information into account, complete the required ledger accounts on the answer sheet
fully. If applicable, indicate the reverse entries at the beginning of the financial year.
INFORMATION
1.
The following balances and totals, inter alia, appeared in the Pre-adjustment Trial balance of
Park Merchants on 28 February 2015, the end of the financial period of the business.
Extract from Pre-adjustment Trial balance of Park Merchants on 28 February 2015
Balance sheet accounts section
Debit
Credit
Vehicles
750 000
Equipment
800 000
Accumulated depreciation on vehicles
180 000
Accumulated depreciation on equipment
230 000
Fixed deposit: Nedbank
150 000
Trading stock
98 230
Debtors control
78 560
Provision for bad debts
8 200
Loan: ABSA
350 000
Nominal accounts section
Rent income
82 088
Interest on fixed deposit
1 500
Interest on loan
60 000
Insurance
117 600
Stationery
18 300
2.
The following adjustments on 28 February 2015 still have to be recorded:
2.1. Depreciation on vehicles written off at 15% per annum on cost price. New vehicle bought on
30 September 2014 for R150 000.
2.2. Depreciation on equipment written off at 12% per annum according to the diminishing balance
methods. New equipment bought on 1 August 2014 for R150 000.
2.3. Stock on hand according to physical stock-taking:
• trading stock, R96 785
• stationery, R2 100
2.4. A debtor owing R1 560 is insolvent. Write off the account as irrecoverable.
2.5. Adjust the balance of the provision for bad debts to 8% of the outstanding debtors.
2.6. Negotiate a loan at ABSA on 1 July 2007 at a fixed interest rate of 18% per annum. Repayment
of R50 000 on the loan, each year on 31 May.
2.7. Made a fixed deposit on 1 January 2015 at Nedbank at an interest rate of 7% per annum.
2.8. Insurance includes the premiums for March 2015 and April 2015.
2.9. Rent income increased on 1 January 2015 with 8%. The total of the Rent income account
includes the rent for March 2015.
163
General Ledger of Park Merchants
Accumulated depreciation on vehicles
B
Trading stock
B
Provision for bad debts
B
Consumables on hand
B
Accrued income
B
Accrued expenses
B
Rent income
N
164
Interest on fixed deposit
N
Interest on loan
N
Insurance
N
Stationery
N
Depreciation
N
165
Exercise 9.5
INSTRUCTION
Take the given information into account and complete the required ledger accounts fully on the
answer sheet. If applicable, indicate the reverse entries at the beginning of the new financial year.
INFORMATION
1. The following balances and to tals appeared in the Pre-adjustment Trial balance of Menlo
Merchants on 28 February 2015, the end of the financial year of the business.
Extract from the Pre-adjustment Trial balance of Menlo Merchants on 28 February 2015
Balance sheet accounts section
Debit
Credit
Vehicles
900 000
Accumulated depreciation on vehicles
250 000
Trading stock
65 900
Debtors control
26 000
Provision for bad debts
1 020
Loan: ABSA
510 000
Nominal accounts section
Rent income
71 040
42 500
Interest on loan
Stationery
15 980
2.
The following adjustments still have to be recorded in the books on 28 February 2015:
2.1 Depreciation written off on vehicles at 15% per year on the book value. New vehicle bought on
31 December 2014 for R360 000. The bookkeeper forgot to record it.
2.2 Stock on hand according to a physical stock-taking:
• trading stock, R64 000
• stationery, R2 980.
2.3 A debtor owing R2 000 is insolvent. Write the account off as irrecoverable.
2.4 Adjust the balance of the provision for bad debts to 5% of outstanding debtors.
2.5 Negotiated a loan at ABSA on 1 July 2014 at a fixed interest rate of 15% per annum. Loan
increased on 30 October 2014 with R60 000.
2.6 Rent income increased on 1 July 2014 with 12%. Rent for February 2015 not yet received.
Calculations:
166
General Ledger of Menlo Merchants
Accumulated depreciation on vehicles
Trading stock
B
B
Provision for bad debts
B
Rent income
N
Interest on loan
N
Stationery
N
167
Exercise 9.6
INSTRUCTION
1.
2.
3.
Complete the opened ledger account on the answer sheet fully.
Complete the journal entries for all closing transfers on 28 February 2015. Journal narrations
are not necessary.
Should the owner be satisfied with the net profit for the year? Why you say so?
INFORMATION
The following balances and totals appeared in the Post-adjustment Trial balance of
Menlo Merchants on 28 February 2015, the end of the financial period of the business.
Extract from the Post-adjustments Trial balan ce of Menlo Merchants on 28 February 2015
Balance sheet accounts section
Debit
Credit
Capital
3 187 500
Drawings
47 500
Nominal accounts section
Sales
2 124 000
Cost of sales
1 560 000
Debtors allowances
18 000
Rent income
23 900
Discount received
6 890
Interest on fixed deposit
21 870
Bad debits recovered
1 340
Telephone
6 000
Interest on loan
23 340
Stationery
12 750
Water and electricity
18 600
Bad debts
7 540
Trading stock deficit
3 100
Provision for bad debts adjustment
230
Depreciation
18 440
General Ledger of Menlo Merchants
Capital
B1
Sales
N1
Trading account
N16
168
General Journal of Menlo Merchants for February 2015
Day
Detail
Fol.
GJ
Debit
3. Should the owner be satisfied with the net profit for the year? Why do you say
so?
169
Credit
Exercise 9.7
INSTRUCTION
1.
Take the given information into account and pr epare the Income statement of Menlo Stores for
the year ended 28 February 2015 completely (show the calculations in brackets).
2.
How would you present the fixed deposit at ABSA in the Balance sheet?
3.
Calculate the balance of Debtors control on 28 February 2014, the end of the previous financial
year.
INFORMATION
Extract from the Pre-adjustments Trial bala nce of Menlo Stores on 28 February 2015
Balance sheet accounts section
Debit
Credit
Vehicle
760 000
Accumulated depreciation on vehicles
150 000
Fixed deposit: ABSA
600 000
Trading stock
34 950
Debtors control
65 000
Provision for bad debts
3 500
Nominal accounts section
Sales
680 000
Cost of sales
500 000
Debtors allowance
30 000
Rent income
95 900
Discount received
2 100
Interest on fixed deposit
16 000
Bad debts recovered
1 350
Telephone
13 200
Interest on overdraft
2 800
Stationery
5 600
Advertising
29 600
Bad debts
970
ADJUSTMENTS AND ADDITIONAL INFORMATION
1.
Depreciation on vehicles written off at 12% per annum on carrying value.
2.
Stock on hand according to physical stock-taking on 28 February 2015: trading stock, R32 800
and stationery R530.
3.
Rent for March 2015 and April 2015 already received.
4.
Adjust the provision for bad debts to 5% of the outstanding debtors.
5.
Made a fixed deposit at ABSA on 1 October 2014 at an interest rate of 8%. A third of the deposit
to be withdrawn on 1 November 2015.
6.
Telephone account, R1 400 for February 2015 not yet paid.
7.
Advertising includes an amount of R2 900 for an advertisement still to appear in March 2015.
8.
According to the bank statement interest of R320 was charged during February to the bank
overdraft account.
Calculations:
170
Income statement of Menlo Stores for the year ended 28 February 2015
2. How will you present the Fixed deposit at ABSA in the Balance sheet?
3. Calculate the balance of Debtors control on 28 February 2014, the end of the previous
financial year.
171
Exercise 9.8
INSTRUCTION
Take the given information into account and complete the Balance sheet and Notes to the Balance
sheet on the answer sheet fully. The accounts to which reverse entries are made, can be left out in the
Notes.
INFORMATION
The following balances appeared in the Post- closing Trial balance of Park Merchants on
1.
28 February 2015, the end of the financial period of the business.
Post-closing Trial balance of Park Merchants on 28 February 2015
Balance sheet accounts section
Debit
Credit
Capital
1 016 350
Land and buildings
800 000
Vehicles
650 000
Equipment
420 000
Accumulated depreciation on vehicles
190 000
Accumulated depreciation on equipment
152 000
Fixed deposit: ABSA
300 000
Deposit: Water and electricity
3 500
Trading stock
23 000
Debtors control
53 000
Provision for bad debts
2 650
Savings account
16 000
Bank
28 000
Petty cash
2 500
Cash float
4 000
Loan: FNB
880 000
Creditors control
54 000
SARS (PAYE)
1 800
Pension fund
2 200
Accrued income
4 900
Accrued expenses
7 600
Prepaid expenses
3 100
Income received in advance
3 400
Consumables on hand
2 000
2 310 000
2 310 000
2.
2.1
2.2
2.3
2.4
2.5
2.6
ADDITIONAL INFORMATION
Net profit for the year amounts to R180 000. Owner withdrew R70 000 during the year and
increased his capital with R45 000 during the year.
Bought a new building, value R200 000 as well as a new vehicle, R80 000 and equipment,
R34 000 during the year.
Depreciation for the year amounts to R64 000 on vehicles and R41 000 on equipment.
Stipulations of the fixed deposit at ABSA provides for the withdrawal of R60 000 on
1 September each year
Issued a cheque for R4 000 to a creditor, on 24 February 2015. The cheque is dated for
24 March 2015.
Loan at FNB is repaid in equal monthly instalments of R4 500 per month.
172
Balance sheet of Park Merchants on 28 February 2015
Assets
76
3
4
5
6
Total assets
Equity and liabilities
7
8
Total equity and liabilities
Notes to the financial states
3. Property, plant and equipment
Land and
buildings
Carrying value at beginning of the
year
Movements during the year
Carrying value at end of the year
4. Stock
173
Vehicles
Equipment
Total
5. Trade and other debtors
6. Cash and cash equivalents
7. Owner’s equity
8. Trade and other creditors
174
Exercise 9.9
INSTRUCTION 1
Take the given information into account and complete the opened accounts in the General Ledger of
Menlo Stores from 1 March 2014 to 28 February 2015, the end of the financial year.
Note! The accounts must be balanced or closed-off, correctly on 28 February 2015.
INFORMATION
The loan statement received from Nedbank indicates the following:
Balance of loan on 1 March 2014
800 000
Monthly instalments (includes interest: R12 000 x 12)
144 000
Interest for the year
24 000
Balance of loan on 28 February 2015
680 000
General Ledger of Menlo Stores
Loan: Nedbank
B12
Interest on loan
N15
INSTRUCTION 2
Complete the missing figures by using cross control and balancing figures.
3. Property, plant and equipment
Land and
buildings
Vehicles
Cost price beginning of the year
Movements during the year
2 300 000
(-)
380 000
Additions at cost price
Depreciation for the year
Total
1 160 000
Carrying value beginning of the year
Accumulated depreciation
Equipment
(960 000)
650 000
800 000
1 600 000
(-)
( 85 000)
Cost price end of the year
1 580 000
1 920 000
Accumulated depreciation
(-)
Carrying value end of the year
175
( 770 000)
Exercise 9.10
INSTRUCTION
Do the required calculations with regard to 2015 and comment briefly on each.
INFORMATION
The following information relates to Menlo Merchants for the years ended 30 June 2014
and 30 June 2015.
30 June 2015
2 183 120
250 000
318 640
284 500
?
450 000
56 900
604 800
?
?
?
?
Non-current assets at carrying value
Financial assets
Current assets
Trading stock
Owner’s equity
Non-current liabilities
Current liability
Net profit
Solvency
Return on owner’s equity
Current capital ratio
Acid-test ratio
1.
Degree of solvency:
Comment:
2.
Return on owner’s equity:
Comment:
3.
Current capital ratio:
Comment:
4. Acid-test ratio:
Comment:
176
30 June 2014
?
180 000
290 000
?
1 890 000
278 000
?
498 000
2,3 : 1
21%
7,3 : 1
2,1 : 1
CHAPTER 10: BUDGETS
10.1
THE DIFFERENCE BETWEEN FINANCIAL AND MANAGERIAL ACCOUNTING
Up to now we were mostly busy with Financial accounting, i.e. recording the
transactions in books of first entry and ledgers and drawing up of final accounts so that
an Income statement and Balance sheet can be prepared at the end of the financial year.
10.1.1 FINANCIAL ACCOUNTING
Financial accounting can therefore be described as the collection and recording of
financial information during a financial year in order to determine the result at the end of
the year by calculating the profit or loss and to give the correct and realistic financial
position of the business.
The following steps are followed:
Transactions take place and are recorded in source documents.
1.
2.
Source documents are classified and recorded in the subsidiary journals.
3.
Subsidiary journals are closed off and posted to the General Ledger.
4.
Accounts are closed off and a Trial balance drawn up.
5.
Year-end adjustments are made and financial statements drawn up.
Information provided by financial accounting, is not of use on its own for cost control
and decisions to be made by management, it must firstly be further analyzed, and that
is where Managerial accounting comes in.
10.1.2 MANAGERIAL ACCOUNTING
Managerial accounting uses the information provided by financial accounting of
previous periods to plan for the future of the business. Managerial accounting puts
more emphasis on aspects such as cost control, budgets, cash flow and profit planning.
Where Financial accounting provides information to people within and outside the
business, Managerial accounting is mainly used within the business. It focuses on
where the company is headed to, by taking decisions on what has happened in the past.
10.2
INTRODUCTION TO BUDGETS
In this Chapter we are going to give attention to budget aspects. Planning and controlling
are important for any business if it wants to achieve its full potential. A Budget is an
essential instrument to help with the planning for the future of a business. We can
therefore say that a Budget is a prediction of what will happen within a certain period in
the future.
To be able to make a reasonable accurate prediction of what will happen to a business in
future, information can be obtained from the following sources:
• Results from previous years’ financial statements.
• General tendencies within the specific business milieu, e.g. tourism.
• Future expectations
• Economic climate
177
A Budget can be drawn up for one month, three months, six months, a year or even a few
years , depending on the size, nature and needs of the business.:
• A Short term budget is normally for a period less than one year.
• A Medium term budget is normally for one year.
• A Long term budget is normally for a number of years.
10.3
TYPES OF BUDGETS
10.3.1 CASH BUDGET
A Cash budget only attends to the cash situation of a business for a future period, named
the budget period. It estimates the expected receipts and payments for a specific period
based on previous year’s results. Its aim is to determine the cash balance at the end of the
budget period.
10.3.2 PROJECTED INCOME STATEMENT
A Projected income statement is used to predict the profit a business should make for a
specific period. It estimates the expected income and expenses for a specific period
based on the results of previous years.
10.3.3 ZERO BASE BUDGET
With a Zero base budget, every item on the Budget is evaluated from scratch, it does not
refer to previous year’s expenses when the budget is drawn up. Every item is again
considered to ascertain whether the specific expense is actually necessary, and whether
the income cannot be managed better to increase the income.
10.3.4 CAPITAL BUDGET
A Capital budget only attends to the future expansion of non-current assets. It explains
the planned cost for purchases, expansion or improvement to fixed assets. Maintenance
costs and protection of present non-current assets can also form part of the Capital
budget of a business.
10.3.5 PROJECT BUDGET
When a business steers a specific project, e.g. a grand new marketing campaign, or the
building of new offices, etc. a “once off” budget is drawn up to determine whether the
project will be profitable or not, and to calculate the total cost of the project beforehand.
The carefully compiled Budget has to be followed strictly to prevent spending too much,
and thus causing financial pressure on the business to probably borrow money to finance
the project. The business can experience cash flow problems if they do not stick to the
Budget.
178
10.4
ELEMENTS OF CASH BUDGET
Although it is important to be knowledgeable on the different types of budgets, further
attention will only be given to Cash budgets and Projected income statements.
The Cash budget is used to monitor and plan the liquidity situation of the business. The
most important word to remember when preparing a Cash budget is “cash”. Only items
having an influence on the cash situation of the business are taken into account in the
Cash budget. It is all about the short-term responsibilities; whether the business will be
able to meet its short term liabilities or whether alternative arrangements can be made,
e.g. for a loan or a bank overdraft.
The Cash budget consists of the following elements:
1.
Cash receipts
It is a forecast of all cash that should actually be received during the budget period,
e.g. cash sales, cash from debtors, etc.
2.
Cash payments
A prediction of cash that should actually be paid during the budget period, e.g.
cash purchases of stock, payments to creditors, etc.
3.
Cash surplus/(deficit)
Cash receipts less cash payments represent a surplus if the receipts for the period
are more than the payments. If the predicted payments are going to be more than
the receipts, there will be a deficit for the period, meaning that care must be taken
in good time that enough cash will be available to finance the cash.
4.
Bank (initial balance)
It shows the balance of the current bank account at the beginning of the budget
period.
5.
Bank (final balance)
It shows the balance of the bank account at the end of the budget period, after the
expected surplus is added or expected shortage deducted.
Summarized elements can be presented as follows:
Cash receipts
R200 000
Cash payments
(60 000)
Cash surplus/(deficit)
140 000
Bank (initial balance)
30 000
Bank (final balance)
170 000
10.4.1 DEBTORS COLLECTION SCHEDULE
It is tried, by virtue of information gathered from previous periods, to determine at what
point of time debtors will repay their debt. This is a very important calculation seeing
that cash received from debtors represents a substantial part of the monthly cash receipts.
10.4.2 CREDITORS SETTLEMENT SCHEDULE
Good financial management implies that beforehand it has to be determined at which
stage it will be the best to pay amounts due to creditors, to enable to qualify for discount,
and to assure that interest will not be added to accounts in arrears. There must be
budgeted beforehand to have enough cash available for the payments.
179
EXAMPLE
The following information relates to Menlo Stores for the period 1 January 2015 till
30 June 2015.
INSTRUCTION
Use the information to do the following:
1.
Prepare the Debtors collection schedule for the three months April, May and June.
2.
Prepare the Creditors settlement schedule for the three months April, May and June.
INFORMATION
1.
Sales:
January
Actual sales
February
March
April
Estimated sales
May
June
R700 000
R728 000
R630 000
R644 000
R714 000
R784 000
Note:
•
60% of sales are on credit.
•
Debtors settle their debt as follows:
ƒ 50% in the same month of the credit sales transaction to qualify for the 5%
discount.
ƒ 30% in the month after credit transactions took place.
ƒ 18% during the second month after the credit sales took place.
ƒ 2% is written off as bad debts in the third month.
2.
Purchase of trading stock:
•
Stock sold is replaced the same month, so that fixed stock levels can always be
maintained at the beginning of the month.
•
Trading stock sold at a mark-up of 40% on cost price.
•
20% of the purchases are cash.
•
Creditors are paid the mont h after the credit transacti on took place to qualify for
8% discount.
1. Debtors collection schedule
Credit sales
February
April
May
June
April
May
June
March
April
May
June
Total
2. Creditors settlement schedule
Credit purchases
March
April
May
180
10.4.3 FORM OF THE CASH BUDGET
Cash budget of Menlo Stores for the three months ended 30 June 2015
Cash receipts
Cash sales
Receipts from debtors
Interest on fixed deposits received
Rent income received
Fixed assets sold for cash
Loan concluded and cash received
Fixed deposits that matures
Cash payments
Cash purchases of stock
Payments to creditors
Operating expenses paid e.g. wages
Cash drawings by owner
Cash purchases of fixed assets
Repayments on loans
Fixed deposits made
Surplus/(deficit) for the month
Bank balance – beginning of the month
Bank balance – end of the month
April
May
June
Total
(6 300)
600
400
300
5 000
(3 900)
5 000
1 100
( 3 300)
500
250
350
2 000
200
300
1 100
1 400
(5 100)
350
200
350
200
4 000
(3 100)
1 400
(1 700)
(14 700)
1 450
850
1 000
5 000
2 000
400
4 000
(6 700)
5 000
(1 700)
2 400
800
300
100
500
700
-
3 600
500
400
100
600
2 000
2 000
700
200
100
600
400
-
8 000
2 000
900
300
1 700
400
700
2 000
Take note that all the above listed transactions are cash transactions. Activities such as
bad debts, depreciation, discount received, discount allowed, drawings of trading stock
by the owner, etc. are non cash transactions which are not shown in the Cash budget.
181
Exercise 10.1
INSTRUCTION
Answer the questions with reference to the given Cash budget of Menlo Security.
INFORMATION
Menlo Security renders security services to customers at R70 per hour. The owner decided to
the increase the tariff to R74 per hour for the following financial year. Security guards all work
the same number of hours in a year, and they are paid weekly for the hours worked.
The security guards of Menlo Security have strike the past month because they were unhappy
with the working conditions and the proposed budget for 2015.
The owner looked at the budget for the year. The business already owns a vehicle to transport
security guards, and budgeted for a new motor-car for the owner. There is also budgeted to send
the manager to a five day seminar in England to learn more about security measures. The
journey will cost more or less R60 000.
The Cash budget for the year ended 30 September 2015 together with the corresponding budget
and the actual figures for 2014 are given below. The budget also indicates the percentage
change in the estimated figures.
Menlo Security
Cash budget for the year ended 30 September 2015
2014
Estimate
Training courses for security guards
Office telephone and electricity
Motor vehicle operating expenses
Interest on loan
Refreshments for office staff
Cost for security Menlo Cricket club
Bank charges
Overseas seminar
Uniforms for security guards
Maintenance of building
Drawings by owner
Purchase vehicle for owner
Cash surplus (deficit) for the year
Cash balance beginning of the year
890 200
823 200
12 000
5 000
50 000
654 756
45 000
130 000
141 120
50 236
12 000
20 000
36 000
7 000
8 400
2 000
15 000
0
6 000
18 000
164 000
0
235 444
160 075
Actual
889 200
823 200
12 000
4 000
50 000
712 356
45 000
150 000
141 120
50 236
8 000
16 500
35 000
7 000
8 500
10 000
19 000
0
8 000
14 000
200 000
0
186 844
160 075
958 960
870 240
14 400
4 320
70 000
1 297 219
54 000
225 000
152 410
60 009
8 800
16 500
70 000
13 200
9 000
10 000
15 500
60 000
3 000
19 800
240 000
340 000
(338 259)
346 919
Cash balance end of the year
395 519
346 919
8 660
Cash receipts
Fee income for security services
Rent income
Interest on fixed deposit
Loan from ABSA
Cash payments
Salary of secretary
Salary of manager
Wages of six security guards
Employers contribution to pension fund
182
Estimate
2015
% Difference
+ 8%
+ 6%
+ 20%
- 13%
+ 40%
+ 98%
+ 20%
+ 73%
+ 8%
+ 19%
- 27%
- 18%
+ 94%
+ 89%
+ 7%
+ 500%
+ 3%
- 50%
+ 10%
+ 46%
-
1. Explain what the following mean.
Financial accounting
Managerial accounting
2. Why is it important to prepare a cash budget annually?
3. The owner will prepare a business ethics code to display in the office.
Explain why this is a good idea.
Name TWO points that you will include in a business ethics code.
4. Was it necessary for the business to take out a loan in 2014 and to increase it in 2015?
Give TWO reasons for your answer.
5. The owner is satisfied that the salaries, wages and employer’s contributions were well controlled
during 2014. Identify another THREE operating expenses which were controlled well and give
figures to support your answer.
183
6. Calculate the following for 2014.
The number of hours worked by each security guard.
The wages earned by security guards per hour.
7. The owner wants to solve the dispute leading to the strike as soon as possible. He approached you for
advice. You said that he has to meet with the guards, acknowledge their grievances, but he also has
to put his point of view. Write him a report and mention the following.
Name 2 points to support the owner’s point of view.
Name 2 points that the guards probably will suggest.
Name 2 points to be considered in the recompiling of the budget.
184
Exercise 10.2
You are the accountant of Park Merchants, and had prepared a Cash budget for the three
months ended 31 March 2015, to present to the owner.
INSTRUCTION
10.2.1 What is the main aim when preparing a Cash budget?
10.2.2 You have identified the following figures at the end of October 2014. Explain what you
would say to the owner in connection with the following items, at the end of October:
October 2014
Budgeted
Actual
R23 000
R18 000
R15 000
R24 000
R72 000
R22 000
R25 000
R25 000
Repairs and maintenance
Telephone
Rent income
Advertising
10.2.3 Calculate the total sales expected for February 2015.
10.2.4 Prepare the Debtors collection schedule for the period ended 31 March 2015 to check
the figures in the Cash budget.
10.2.5 The owner is of opinion that it would be a good idea to start selling on credit, but the
shop manager disagrees. Name ONE point, taken from the question, to support the
owner’s opinion, and ONE point against his opinion. Give figures to support your point
of view.
10.2.6 Refer to the completed Cash budget for the three months ended 31 March 2015 that
follows. The owner can not actually interpret the budget and asked you to highlight the
most important aspects. Explain THREE points excluding the abovementioned. Provide
figures from the question to support your explanations.
INFORMATION
1.
Credit sales
The owner decided to start with credit sales as from 1 February 2015. It is expected that
credit sales would make out 80% of all the total sales. The business uses a mark-up of
50% on cost price at all times. Debtors are expected to pay as follows:
• 10% during the same month of credit sales transactions.
• 55% during the month after credit transactions took place.
• 28% during the second month after the credit transaction took place.
• 7% expected to be written off as irrecoverable.
2.
Mortgage loan
The owner decided to take out a mortgage loan on the property bought for cash, years
ago. Interest at 15% p.a. is added to the loan.
185
Park Merchants
Cash budget for the three months ended 31 March 2015
2015
2015
January
February
675 000
1 176 600
Receipts
Cash sales
600 000
144 000
Collections from debtors
57 600
Loan from ABSA
900 000
Rent income
72 000
72 000
Interest on fixed deposit
3 000
3000
Fixed deposit matures
771 700
960 470
Payments
Cash purchases of stock
400 000
480 000
Repayment of loan and interest
10 370
Bank charges
13 000
8 000
Insurance
7 700
7 700
Salaries
140 000
140 000
Wages
60 000
62 400
Telephone
16 000
16 000
Advertising
15 000
15 000
Sundry expenses
20 000
21 000
Purchase of vehicles
Vehicle expenses
Drawings by Dandre
100 000
200 000
Surplus/(deficit) for the month
(96 700)
216 130
Cash at the beginning of the month
55 000
(41 700)
Cash at the end of the month
(41 700)
174 430
10.2.1 What is the main aim when preparing a Cash budget?
10.2.2 Explaining of:
Repairs and maintenance
Telephone
Rent income
Advertising
186
2015
March
1 093 600
162 000
381 600
80 000
470 000
1 240 780
540 000
10 370
8 000
10 010
168 000
62 400
16 000
15 000
22 000
180 000
9 000
200 000
(147 180)
174 430
27 250
10.2.3 Calculate the total sales expected in February 2015.
10.2.4 Debtors collection schedule for the three months ended 31 March 2015
Credit sales
Collections
February
February
March
R648 000
March
10.2.5 The owner is of opinion that it would be a good idea to start selling on credit, but the
shop manager, disagrees. Name ONE point, taken from the question, to support the
owner’s opinion, and ONE point against his opinion. Give figures to support your
point of view.
ONE point to support the owner’s opinion:
ONE point against the owner’s opinion:
10.2.6 Refer to the completed Cash budget for the three months ended 31 March 2015 that
follows. The owner cannot actually interpret the budget and asked you to highlight the
most important aspects. Explain THREE points excluding the abovementioned.
Provide figures from the question to support your explanations
.
Point 1:
Point 2:
Point 3:
187
Exercise 10.3
INSTRUCTION
10.3.1 Calculate only the amount to be rece ived from debtors in May and June.
10.3.2 Name three ways to assure that debtors will pay their debt.
INFORMATION
The following actual and budgeted figures with reference to sales for the six months ended
30 June 2015 are given to you.
Jan.
Febr.
March
Apr.
May
Jun.
Total sales
R230 000
R178 000
R340 000
R280 000
R450 000
• Take note that 60% of the total sales are on credit to debtors.
• Debtors pay their accounts as follows:
o 50% in the month after the sales and they receive 4% discount.
o 30% in the second month after sales.
o 15% in the third month after sales.
o 5% written off as bad debts after three months.
10.3.1 Calculate receipts from debtors during May and June 2015.
Credit sales during:
Total receipts from debtors during:
May
June
Febr.
March
Apr.
May.
10.3.2 Name three ways to assure that debtors pay their debts.
188
R500 000
Exercise 10.4
You are provided with the Cash budget of Menlo Merchants for the three months ended
28 February 2015.
INSTRUCTION
10.4.1 Explain why a business needs to prepare a Cash budget every year.
10.4.2 Calculate the figures indicated at A – E in the cash budget.
10.4.3 The rent income to increase by 8% from January 2015. Calculate the rent income
figure for January 2015.
10.4.4 Refer to salaries and wages in the Cash budget.
• Calculate the percentage increase granted to the employees from 1 January 2015.
• Will the employees be satisfied with this increase? Explain briefly.
10.4.5 Calculate the expected receipts from debtors for January 2015.
INFORMATION
Note: Not all figures are shown below.
Extract from cash budget
December
2014
291 000
225 000
47 500
9 000
Estimated receipts
Cash sales (75% of total sales)
Debtors (30 days less 5%)
Rent income
Interest on fixed deposit
Capital
Estimated payments
Drawings
Motor vehicles expenses
Fixed deposits
Salaries and wages
Cash surplus/deficit
Cash at the beginning of the month
Cash at the end of the month
240 000
17 500
4 000
105 000
51 000
72 000
123 000
189
January
2015
355 000
112 500
?
?
400
150 000
310 000
12 500
4 000
60 000
109 200
45 000
A
B
February
2015
140 000
94 225
35 625
?
400
390 000
12 500
4 000
109 200
C
D
E
10.4.1 Explain why a business needs to compile a Cash budget every year?
10.4.2 Calculate the figures as indicated at A – E in the Cash budget.
A
B
C
D
E
10.4.3 Calculate the rent income figure for January 2015.
10.4.4 Refer to the salaries and wages in the Cash budget:
• Calculate the percentage increase granted to employees as from 1 January 2015.
•
Will the employees be satisfied with this increase? Explain briefly.
10.4.5 Calculate the expected receipts from debtors in January 2015.
190
Exercise 10.5
The uncompleted Cash budget and additional information of Park Merchants are provided to
you. The shop is situated in a very busy shopping centre.
INSTRUCTION
10.5.1 Refer to the proposed Cash budget and the additional information to calculate the
figures marked [a] to [e].
10.5.2 With reference to the item Fixed deposit (1 November), as shown in the Cash
budget, explain what is expected to happen with the Fixed deposit on 1 November.
10.5.3 Park Merchants planned to buy a new vehicle during the budget period. Use the Cash
budget to calculate the expected total cost price of the vehicle.
10.5.4 The sales assistant complaint to the owner about her proposed salary increase during
November 2015. Comment on her complaint.
10.5.5 Calculate the percentage with which the rent expense will increase at the end of
October.
10.5.6 At the end of October 2015 you have compared the actual figures for advertising
with the Cash budget figures and found the following difference. Give ONE point of
advice to the owner in this regard:
October
October
Difference
Estimated
Actual
Advertising
R 6 000
R2 300
- R3 700
INFORMATION
1.
Actual and estimated sales figures:
Total sales
Aug.
208 000
Cost of sales
160 000
•
•
•
Actual
Estimated
Sept.
221 000
Oct.
176 800
Nov.
182 000
170 000
136 000
140 000
30% of total sales are on credit each month.
40% of all stock is bought on credit.
A fixed level of trading stock on hand is maintained right through the year,
by replacing stock on a monthly basis.
2.
It is expected that debtors will pay their accounts as follows:
• 60% in the month that follows on the month of sales.
• 35% in the second month that follows the month of sales.
• 2% written off in the third month that follows the month of sales.
3.
Creditors paid in full in the month following the month in which purchases were
made, to qualify for 5% discount.
191
Cash budget of Park Merchants for October and November 2015
October
November
Receipts
Cash sales
Debtors collection
Fixed deposit (1 November)
Interest on fixed deposit (5% p.a.)
Other operating income received
Payments
Cash purchase of trading stock
Payments to creditors
Fixed deposit (1 November)
Deposit – purchase of vehicle
Instalment payment -vehicle (12 equal instalments)
Rent expenses
Salary – shop manager
Salary – sales assistant
Consumable goods
Advertising
Other operating expenses paid
Surplus/(deficit) for the month
Bank balance at the end of the month
Bank balance at the end of the month
123 760
61 620
250
?
[a]
[c]
60 000
250
?
[b]
[d]
40 000
16 000
14 000
6 000
8 000
6 000
?
37 900
(42 800)
(4 900)
84 000
51 680
20 000
8 000
17 440
15 960
7 260
8 720
6 000
?
(6 100)
?
[e]
10.5.1 Refer to the Cash budget and information given, to calculate the figures [a] tot [e].
[a] November 2015 cash sales
[b] October 2015 cash purchases of trading stock
[c] November 2015 Debtors collection
[d] October 2015 payment to creditors
[e] Bank balance at the end of November 2015
192
10.5.2 Explain what is expected to happen with the fixed deposit on 1 November.
10.5.3 Investigate the Cash budget to calculate the expected total cost price of the vehicle.
10.5.4 The sales assistant complaint to the owner about her salary increase in November 2015.
Comment on the complaint.
10.5.5 Calculate the percentage with which rent expenses will increase at the end of October.
10.5.6 Provide ONE point of advice to the owner with reference to advertising.
193
CHAPTER 11: MANUFACTURING CONCERNS
11.1
DIFFERENCE BETWEEN MANUFACTURING AND TRADING CONCERNS
When one refers to a trading concern one means a business merely buying products to sell it
again at a profit. When one refers to a manufacturing concern, we think of concerns which
buy material and raw materials and process it into a product that the concerns can sell. These
concerns therefore do not buy finished manufactured products, but manufacture the products
themselves and then sell it.
11.2
COSTS ITEMS AT MANUFACTURING CONCERNS
All costs items of a manufacturing concern can be divided in three types of costs, viz.
• Production costs
• Administrative costs
• Sales and distribution costs
11.2.1 PRODUCTION COSTS
It is the incurred expenses by the concern to produce a product. It therefore includes all the
expenses from the buying of raw materials, e.g. wood to manufacture a desk and the paying
of the factory workers to manufacture the desks, the rent of the factory and paying the wages
of the cleaners.
Production costs consist of three costs:
(1)
Direct material
It is costs of raw material and other materials used during a period to manufacture
products. Direct material is a variable cost in the production process seeing that the
amount of material used is directly proportional to the number of products
manufactured. Together with direct labour it forms the primary costs in the
production process.
(2)
Direct labour
It is the total costs of wages of factory workers in the production process. Sometimes
direct labour is referred to as “handling labour” seeing that these workers have to
handle the product physical to manufacture it. Employers’ contributions, regarding
factory workers, also have to be added to the cost of direct wages. Direct wages are
a variable cost in the production process seeing that the numbers of hours spend by
the factory workers in the production process are directly proportional to the number
of products manufactured. Together with the direct material it forms the primary
costs in the production process.
(3)
Factory overhead costs
All costs incurred in the factory and not directly related to the production process are
referred to as factory overhead costs. It for example includes the following: salary of
factory foreman, wages of factory cleaners, detergents and other consumables used in
the factory, factory insurance, water and electricity used by the factory, depreciation
on factory equipment, etc.
Factory overhead costs are a fixed cost in the production process, seeing that it will
not necessarily increase or decrease if more or less products are manufactured.
194
11.2.2 ADMINISTRATIVE COSTS
Apart from the factory where products are manufactured, the manufacturing concern will
also have a separate administrative section where, for example, the bookkeeping process is
done, orders placed, wages and salaries of workers are made up, etc. Expenses regarding the
administrative section got nothing to do with the production process and are therefore kept
separately.
Administrative costs include the following: salary of the secretary, wages of office cleaners,
detergents and other consumables used in the office, office insurance, water and electricity
of the office, depreciation on office furniture, etc.
Administrative costs are a fixed cost seeing that it will not increase or decrease if more or
less products are manufactured.
11.2.3 SALES AND DISTRIBUTION COSTS
Apart from the factory where products are manufactured and the administrative section
where administrative tasks are executed, the manufacturing concern will also have a separate
section responsible for the marketing, selling and distribution of the manufactures products.
Expenses specifically relating to the selling and distribution of finished manufactured
products are called sales and distribution costs. It, for example, includes: salaries of sales
staff, wages of cleaners of sales room, detergents and other consumables used in the sales
room, advertisements, bad debts, fuel for vehicles used for deliveries, depreciation on
delivery vehicles, etc.
Sales and distribution costs are variable costs seeing that it will increase or
decrease with regard to the number of products manufactured and consequently to be sold.
Summarized the following:
Total production costs = direct material + direct labour + factory overhead costs
Primary costs = direct material + direct labour
Fixed costs = factory overhead costs + administrative costs
Variable costs = direct material + direct labour + sales and distribution costs
195
11.3
CALCULATION OF BREAK-EVEN POINT
It is a very important consideration for any enterprise to determine how many products must
be manufactured and sold before a profit is shown, in other words how many products must
be sold to cover all the fixed costs. This number of products that allows the enterprise to
“break-even” is known as the “break-even sales volume”.
Suppose the selling price is R100. The variable costs, i.e. direct material + direct labour +
sales and distribution costs to manufacture and sell a product, amount to R60. This means
that each product sold, contributes an amount of R40 regarding the payment of fixed costs.
The fixed costs, i.e. factory overhead costs + administrative costs must first be covered
before a profit can be made.
If 500 of the abovementioned products are manufactured and sold, it would mean that
R20 000 (500 x R40) will be available to pay the fixed costs. If the fixed costs are R34 000,
850 of the product (R34 000/R40) must be manufactured and sold to break even.
These 850 products we call “break-even point”. It reflects exactly how many of a product
must be manufactured and sold before a business begins to show a profit.
FORMULA:
Break-even point = Fixed costs/(Selling price per unit – Variable costs per unit)
= ……………. units
EXAMPLE
Menlo Merchants manufactures and sell T-shirts
INSTRUCTION
Take the information into account to calculate the break-even point for 2015.
INFORMATION
During the year 30 000 T-shirts were manufactured and sold at selling price of R50 each.
The following costs were incurred during the year:
Direct material costs
Direct labour costs
Sales and distribution costs
Factory overhead costs
Administrative costs
R 600 000
R 200 000
R 100 000
R 200 000
R 150 000
Calculate the break-even point for 2015.
Should the concern be satisfied with the number of units manufactured at the moment? Explain.
196
Exercise 11.1
The following information relates to Menlo Manufacturers, a concern manufacturing kitchen
cupboards.
INSTRUCTION
Calculate the following for the year ended 28 February 2015:
11.1.1 Direct labour costs
11.1.2 Direct material costs
11.1.3 Factory overhead costs
11.1.4 Administrative costs
11.1.5 Sales and distribution costs
11.1.6 Break-even point
INFORMATION
1. Stock at the beginning of the financial year 1 March 2014
Raw materials
Cleaning materials on hand
R150 000
35 000
2.
Transactions for the year ended 28 February 2015
Raw materials bought
Carriage paid on raw materials bought
Cleaning materials bought
Wages of cleaners
Salary of factory foreman
Commission of sales manager
Salary of the bookkeeper
Depreciation on factory equipment
Depreciation on office furniture
Depreciation on sales vehicle
Maintenance of factory
Insurance
Bad debts
Sundry administrative expenses
Rent expenses
R280 000
20 000
65 000
540 000
168 000
96 000
90 000
26 000
18 500
15 000
16 500
252 000
2 600
50 400
360 000
3.
Stock at the end of the financial year 28 February 2015
Raw materials
Cleaning materials on hand
R130 000
10 000
4.
5.
6.
2 000 units were manufactured during the year and sold.
Selling price per unit is R1 200.
15% of the cleaning materials were used in the administrative office, 30% in the salesroom and
the remainder in the factory.
7. The 15 factory workers each worked 145 days during the year. Their normal working hours are
8 hours per day and they receive R25 per hour for normal time.
Each worker worked 40 hours overtime during the year. The overtime tariff is double that of
the tariff for the normal time.
8. There are 10 cleaners of which 6 work in the factory, 3 in the administrative office and 1 in the
sales department.
9. Insurance should be divided between factory, administrative office and sales department in the
ratio 5:3:2.
10. Rent expenses are calculated according to the floor area. The factories fill 600 square meters,
the office 100 square meters and the salesroom 200 square meters.
197
11.1.1
Direct labour costs
Direct material costs
Raw material at the beginning of the year
Purchases during the year
Carriage on purchases
11.1.2
Raw material at the end of the year
Direct material used in the production process
Factory overhead costs
Cleaning materials
Wages of cleaners
Salary of factory foreman
Depreciation on factory equipment
Maintenance of factory
Insurance
Rent expenses
11.1.3
Administrative costs
Cleaning materials
Wages of cleaners
Salary of bookkeeper
Depreciation on office furniture
Insurance
Sundry administrative expenses
Rent expenses
11.1.4
Sales and distribution cost
Cleaning materials
Wages of cleaners
Commission of sales manager
Depreciation on sales vehicle
Insurance
Bad debts
Rent expenses
11.1.5
11.1.6
Break-even point
198
Exercise 11.2
Park Manufactures manufacture plastic chairs. The information relates to the year ended
30 June 2015.
INSTRUCTION
11.2.1 Give ONE example of a fixed and ONE example of a variable cost.
11.2.2 Explain why it is important to calculate the expected break-even point for a business
before the financial year starts.
11.2.3 Use the given figures to calculate the break-even point.
11.2.4 Should Park Manufacturers be satisfied with the present production figures.
Explain why you say so.
INFORMATION
Number of chairs manufactured
Sales for the year (all units manufactured are sold)
Total fixed costs
Total variable costs
11.2.1 One example of a fixed cost:
One example of a variable cost:
11.2.2 Explain why it is important to calculate the expected break-even point for a
business before the financial year starts.
11.2.3 Use the given figures to calculate the break-even point.
11.2.4 Should Park Manufacturers be satisfied with the present production figures.
Explain why you say so.
199
12 000
R480 000
R240 000
R300 000
Exercise 11.3
INSTRUCTION
Use the given information and complete the Production statement of Park Manufacturers for the
year ended 28 February 2015.
INFORMATION
Stock on hand on 1 March 2014
Raw material
Work-in-progress stock
Consumables
R120 000
240 000
30 000
Transactions during the year
Consumables bought
Raw materials bought
Factory worker’s wages according to the Wage journal
Factory foreman’s salary
90 000
420 000
396 000
120 000
Stock on hand on 28 February 2015
Raw material
Work-in-progress stock
Consumables
140 000
80 000
50 000
Production statement for Park Manufacturers for the year ended 28 February 2015
Direct costs
Factory overhead costs
Total production costs during the year
Work-in-progress stock for the year
Production costs of stock available for sales
Work-in-progress stock at the end of the year
Costs of production of finished products
200
Exercise 11.4
Menlo Manufacturers make garden furniture from cast iron.
INSTRUCTION
11.4.1 Prepare the Production statement for the year ended 28 February 2015.
(1)
Indicate the Note for direct material.
(2)
Indicate the Note for factory overhead costs.
11.4.2 Prepare the Trading statement for the year ended 28 February 2015
11.4.3 Calculate the following:
(1)
Unit cost of a garden set rounded off to the nearest rand.
(2)
The mark-up on cost price.
INFORMATION
Stock on hand on 1 March 2014
Raw materials
Work-in-progress
Finished products in stock
Cleaning materials
160 000
48 000
684 000
43 000
Transactions during the year
Cleaning materials bought for cash
Raw materials bought for cash
Import duties paid on raw materials
Raw materials used in production during the year
Factory wages according to Wage journal
Factory foreman’s salary
Administrative staff’s salaries
Cleaner’s wages
Medical fund contributions of factory workers
Factory electricity paid
Maintenance paid on factory equipment
Rent expenses
Depreciation on factory equipment
Depreciation on delivery vehicles
Sales (cash and credit)
Stock on hand on 28 February 2015
Raw material
Work-in-progress
Finished products stock
Cleaning materials
28 000
200 000
15 000
?
160 000
192 000
156 000
288 000
20 000
94 600
28 800
480 000
19 000
23 000
1 890 000
33 345
133 000
504 000
11 000
201
ADJUSTMENTS
1.
2.
3.
4.
5.
6.
15% of the cleaning materials were used for the administrative office, 40% for the sales
department and the remainder for the factory.
There are 8 cleaners of which 5 work in the factory, 2 in the administrative department
and 1 in the sales department.
Factory electricity is the same each month. It is only paid up till the end of January
2015.
Rent expenses to be divided between the factory, the sales and administrative
departments in the ratio 5:1:2. All rent is paid for the financial year but the rent has
increased with 10% on 1 January 2015. The bookkeeper has neglected to bring the
increase for January and February into account.
A consignment raw material imported from America was delivered on
28 February 2015. The entry for this was not yet recorded.
The costs were as follows: (the exchange rate is $1,00 = R8,20)
Cost of raw material, $2 500
Import duty amounts to 9% of cost of raw material.
Total number of units manufactured: 720 units
11.4.1 Production statement of Menlo Manufacturers for the year ended 28 February 2015
Primary costs
Factory overhead costs
Total production costs for the year
Work-in-progress stock beginning of the year
Production costs of stock available to be sold
Work-in-progress stock end of the year
Cost of production of finished products
Notes to the Production cost statement
(1) Raw material costs/Direct material
202
(2) Factory overhead costs
11.4.2 Trade statemen t of Menlo Manufacturers for the year ended 28 February 2015
Sales
Cost of sales
Balance of finished products at the beginning of the year
Production costs of finished products during the year
Balance of finished products at the end of the year
Gross profit
11.4.3 Calculations:
(1) Unit costs to manufacture each garden set
(2) Mark-up on cost price.
203
Exercise 11.5
Menlo Manufacturers manufacture beds.
INSTRUCTION
11.5.1 Refer to information par.8 and calculate the direct labour costs for the month.
11.5.2 Prepare the Production cost statement for the month ended 31 March 2015. Present a
separate note for Factory overhead costs. Give all other calculations in brackets.
11.5.3 Calculate the unit cost of production of 340 beds finished for March 2015.
11.5.4 The owner is of opinion that the strikes had a huge negative effect on his business. Name
TWO points from the question to indicate that he is correct.
11.5.5 The owner is worried about the control with regards to certain costs.
Make TWO proposals how to improve the effectiveness in the usage of direct raw
material and direct labour.
INFORMATION FOR MARCH 2015
1.
Stock on hand at the beginning and the end of the month:
1 March 2015
Raw material stock
25 000
Work-in-progress
78 000
Finished products
Nil
Cleaning materials
3 500
2.
3.
4.
5.
6.
7.
8.
9.
31 March 2015
37 000
56 000
Nil
4 000
Raw materials bought during the month, R152 000.
Depreciation on factory machinery amounts to R2 842.
Factory maintenance paid in March, R4 600. An amount of R1 400 still due.
Water and electricity paid for March, R8 200. The administrative office used 20% of this
and the balance used by the factory.
Rent and insurance are divided between the factory and the administrative office according
to the floor area. The factory consists of 820 square meters, while the office consists of 380
square meters. The monthly rent for the whole premises amounts to R42 000, and the
annual insurance premium for the whole premises amounts to R36 000.
Purchases of cleaning materials, R72 000. The factory use 60% of all the cleaning materials
and the balance is used by the office.
The 18 factory workers work 8 hours each day.
The normal tariff is R52 per hour per worker.
Normally there are 21 working days in a month, but as a result of the strikes, the factory
was only for 16 working days in March 2015 in production.
To catch up with the lost time the factory workers each works 9 hours overtime during the
month. The overtime rate is 2½ times the normal tariff.
Although they worked overtime they could not reached the target of 430 beds. They could
only finished 340 beds. The break-even point is 380 beds.
The factory cleaner earns R3 000 per month.
The factory foreman earns R12 000 per month. The bookkeeper forgot to record the
foreman’s pension. The employee’s pension cont ribution is 8% and that of the employer
9%. The contributions are added to the salary account.
11.5.1 Refer to information par.8 and calculate the direct labour costs for the month.
204
11.5.2 Production cost statement for the month ended 31 March 2015.
Primary costs
Total costs of production
Work-in-progress on 1 March 2015
Work-in-progress on 31 March 2015
Production costs of finished goods
Factory overhead costs
11.5.3 Calculate the unit cost of production of 340 beds finished for March 2015.
11.5.4 The owner is of opinion that the strikes had a huge negative effect on his business.
Name TWO points from the question to indicate that he is correct.
11.5.5 The owner is worried about the control with regards to certain costs.
Make TWO proposals how to improve the effectiveness in the usage of direct raw material
Make TWO proposals how to improve the effectiveness with the Direct labour.
205
CHAPTER 12 : REVISION
Exercise 12.1 (Accounting equation; 100 marks, 60 minutes)
Analyse the following transactions under the given headings on the answer sheet.
Transactions occurred on 28 February 2015, the end of the financial year.
1.
2.
3.
4.
5.
6.
7.
Bank statement indicate the following: service fees, R160 and cash handling levy, R240.
Goods sold on credit to G. de Koker, R9 100. Mark-up 40% on cost price.
Received a cheque, R5 600 from M. Meyer, in settlement of her debt of R6 000.
Bought stationery on credit from Duanne Merchants, R2 400.
Issued a cheque for R8 100 to Wian Stores to settle our account of R9 000.
Amount of R20 000 invested at ABSA on a fixed deposit at an interest rate of 5% p.a.
A previous fixed deposit at Nedbank expired. The initial deposit was R80 000. Received a
cheque from Nedbank for the amount of the deposit as well as interest for 6 months at a rate of
4%.
8. The bank statement indicated a credit with regards to the interest on the current account, R300.
9. A loan negotiated with FNB, R200 000 at an interest rate of 8,5%.
10. Paid an instalment of R30 000 on the loan at FNB as well as interest for 3 months.
11. Issued a credit note to G. de Koker for goods returned by him, R2 240.
12. Issued a debit note to Duanne Merchants for stationery returned to them, R500.
13. Account of D. Moller who owes us R150, to be written off as bad debts.
14. Owner took goods to the value of R1 200 for own personal use.
15. D. Moller paid R150, previously written off as bad debts.
16. Depreciation to be written off on the carrying value of vehicles, at 10%. The business has only
one delivery van bought on 1 June 2012 for R300 000.
17. Rent for January and February still outstanding. Rent expenses amounts to R15 000 per month.
Rent increases annually on 1 February with 8%.
18. Interest on fixed deposit outstanding. An amount of R120 000 invested on 1 December 2014 at
an interest rate of 4,5%. An amount of R1 000 for interest was already received.
19. Insurance paid till 30 April 2015. Total amount paid, is R33 600.
20. Amount of R18 000 received for services rendered, already recorded. Work only to be completed
at the end of May. It is decided to add a quarter of the income to the profit of the present year
and the remainder to the profit of the year following.
21. Trading stock has a balance of R88 000. According to a physical stock-taking, stock on hand was
R83 000.
22. Spend R11 500 on stationery for the y ear. Of this only R10 000 was used.
23. Provision for bad debts to decrease with R540.
24. Salary Journal indicates the following with regard to February:
Gross salary
R60 000
SARS
(PAYE)
R11 000
Deductions
Pension fund
UIF
R4 800
R1 200
Employer’s contributions
Pension fund
UIF
R9 600
R1 800
25. Cheque issued to the South African Revenue Service for the payment of the monthly tax
deductions from wage and salary-drawers, R45 900.
Calculations:
206
12.
11.
10.
9.
8.
7.
6.
5.
4
3.
2.
1.
no.
Subsidiary
journal
Source
document
Account debited
Account credited
General Ledger and Subsidiary Ledger
207
Debit
Credit
Owner’s equity
Debit
Liability
Credit
Debit
Asset
Credit
26.
25.
24.
23.
22.
21.
20.
19.
18.
17.
16.
15.
14
13.
no.
Subsidiary
journal
Source
document
Account debited
Account credited
General Ledger and Subsidiary Ledger
208
Debit
Credit
Owner’s equity
Debit
Liability
Credit
Debit
Assets
Credit
Exercise 12.2 (Posting from subsidiary journals; 50 minutes, 30 minutes)
Use the given information to complete the opened ledger accounts fully.
All accounts to be balanced on 28 February 2015.
INFORMATION:
On 1 February 2015 the following figures appeared in the General Ledger of Park Merchants.
Trading stock R120 000; Debtors control R87 000 and Creditors control R76 000
The following column totals appeared on 28 February 2015 in the subsidiary journals:
Cash Receipts Journal
Bank
Debtors control
Discount allowed
Sales
Cost of sales
Sundry accounts
?
25 800
1 800
27 600
?
6 500
Cash Payments Journal
Bank
Creditors control
Discount received
Debtors control
Trading stock
Sundry accounts
Creditors Journal
Creditors control
Trading stock
Sundry accounts
27 000
?
9 000
Creditors Allowance Journal
Creditors control
Trading stock
Sundry accounts
3 700
?
1 780
Debtors Journal
Sales
Cost of sales
51 840
43 200
Debtors Allowance Journal
Debtors allowance
Cost of sales
3 120
2 600
Petty Cash Journal
Petty cash
Trading stock
Debtors control
Creditors control
General Journal
Debtors control: debits
credits
Creditors control: debits
credits
870
130
240
?
NOTE:
The following transactions must still be recorded on 28 February 2015:
o Owner took stock at selling price of R6 720 for his personal use.
o Stock with a cost price of R356 used for advertising purposes.
209
156 000
26 500
1 990
?
26 000
98 900
490
160
245
129
General Ledger of Park Merchants
Trading Stock
Debtors control
Creditors control
210
Exercise 12.3 (Correction of errors; 50 marks, 30 minutes)
You are provided with information regarding Menlo Merchants. The bookkeeper made a few
errors when reconciling the Debtors control account with the Debtors list.
INSTRUCTION
12.3.1 Menlo Merchants require that new clients must provide their personal details which
include proof of residential address and monthly income before selling on credit to
them. Explain why it is necessary. Name TWO points.
12.3.2
Compile the correct Debtors list on 31 May 2015 and indicate how you will adjust the
Debtors control account by using the format provided.
INFORMATION
1.
The bookkeeper discovered that he had made a few errors when he prepared the Debtors
control account.
2.
The Debtors control account and Debtors list differs with R6 470.
The following summary was prepared on 31 May 2015:
Balance of Debtors control account
R70 663
Total of Debtors list
R77 133
Park Merchants
17 600
Kloof Merchants
55 473
Absolut Suppliers
3 400
Swart Stores
660
Difference
R6 470
3.
Errors on Park Merchants account:
• Interest calculated wrongly on the balance of the account. Adjust for additional
interest of R165.
• VAT at 14% was omitted on invoice 811 of 30 April 2015.Total sales without VAT
was R16 500.
4.
Errors on Kloof Merchants account:
• Credit note of R3 080 was wrongly indicated in the Debtors Ledger as ‘n debit
entry. The General Ledger is correct.
• Kloof Merchants maintained that they have paid R13 200 the previous month which
does not appear on their account statement. An investigation indicated that the
payment was wrongly posted to the account of Park Merchants.
• Kloof Merchants issued a dishonoured cheque for R2 750 in settlement of an
amount of R3 100. The entries in the CRJ and CPJ were recorded correctly. The
cancellation of the discount was not recorded in the Debtors Ledger. The control
account was correct.
5.
Additional errors indicated on the Debtors reconciliation statement:
• Debt of debtor, Swart Stores, R660, written off as bad debts. The amount was
posted to the Debtors control account but not to the debtor’s personal account.
• Absolut Suppliers appeared in the Debtors Ledger and the Creditors Ledger. Their
credit balance of R2 124 in the Creditors Ledger must be transferred to their
account in the Debtors Ledger.
211
12.3.1 Menlo Merchants require that new clients must provide their personal details which
includes proof of residential address and monthly income before selling on credit to them.
Explain why it is necessary. Name TWO points.
12.3.2 Compile the correct Debtors list on 31 May 2015 (indicate changes in brackets).
Debtors list on 31 May 2015
Park Merchants
Kloof Merchants
Absolut Suppliers
Swart Stores
Total
List of adjustments to Debtors control account
Amount
Account debited
Account credited
Exercise 12.4 (Correction of errors; 10 marks, 6 minutes)
INSTRUCTION
Calculate the correct total of the Creditors list on 31 August 2015.
INFORMATION
Creditors control balance on 31 August 2015
Total of Creditors list on 31 August 2015
R54 200
R50 240
An investigation revealed the following problems regarding the Creditors Ledger:
1.
Goods to the value of R4 200 returned to a creditor, was posted to account of the creditor
concerned as R6 200.
2.
Credit purchases of stationery R520, posted to the wrong side of the account of the creditor
concerned.
3.
A payment of R2 100 was posted to a wrong creditor’s account.
4.
Creditors with debit balances of R920 were transferred to the Debtors Ledger. The doing of
the necessary entries in the creditor’s accounts was neglected.
Correct total of Creditors list on 31 August 2015
212
Exercise 12.5 (Year-end procedures and financial statements; 60 marks, 30 minutes)
You are provided with information relating to Menlo Merchants
INSTRUCTION
12.5.1 Calculate the correct net profit for the year.
12.5.2 Complete the Note for fixed assets to the financial statements on 31 December 2015.
12.5.3 Complete the Balance sheet on 31 December 2015 (Indicate calculations in brackets where
necessary).
Some figures are already provided on the answer sheet. Owner’s equity to be calculated with a
balancing figure.
INFORMATION
1.
Figures taken from the Ledger accounts on 31 December 2015:
Capital
Fixed deposit: ABSA
Fixed deposit: Nedbank
Creditors control
Petty cash
Equipment
Accumulated depreciation on equipment
Mortgage loan: ABSA
Bank overdraft
Depreciation
Salaries of managers
R
?
30 000
95 000
18 600
7 000
575 000
86 000
?
6 000
27 000
38 000
2.
Adjustments and additional information:
Provisional net profit amounts to R343 500. Adjustments not yet taken into account:
2.1
The business has bought new equipment to the value of R170 000 on credit on
31 December 2015. The equipment was received but no entry was made of it.
Depreciation on equipment, R27 000, is recorded. On examination it was founded that the
amount should have been, R22 000.
The figure of trading and other receivables is correct. The bookkeeper omitted the trading
stock deficit of R19 000, and the decrease of provision for bad debts from R5 000 to
R4 500 out of the Profit and loss account.
The managers of the business are entitled to the following salaries per year:
Ras R30 000, and Pelser R23 000. Pelzer’s salary is paid in full. 50% of the amount due to
Ras is paid. Make provision for the outstanding amount to Ras.
The fixed deposit at Nedbank, expires on 1 April 2016.
Interest on loan is capitalized. The loan statement of ABSA on 31 December 2015, was as
follows.
Rand
2.2
2.3
2.4
2.5
2.6
Balance on 1 January 2015
Interest levied
Monthly payments including interest (12 months x R6 000)
Balance on 31 December 2015
Interest for the year not yet recorded.
Capital payments on the loan for the following financial year amounts to R8 500
per month.
According to the bank statement, cheque no. 786 for R2 000 issued to a creditor, has not
yet been presented to the bank for payment, seeing that it is dated for 12 January 2016.
The rent agreement with the new tenant had the following clause:
Rent of R2 400 per month for the period 1 April 2015 to 31 December 2015 must be used
to smarten up the existing equipment of Menlo Ltd. The tenant has met the agreement and
the equipment of Menlo Ltd. was upgraded. This amount is considered as essential
regarding the increase of the value of the equipment. No entry has been recorded in this
regard.
213
•
•
2.7
2.8
320 000
47 600
72 000
?
12.5.1
Calculate the correct net profit for the year.
Incorrect net profit
343 500
Correct net profit
12.5.2
Note of fixed assets to the financial statements on 31 December 2015
Fixed assets
Carrying value at the beginning of the year
Cost price at the beginning of the year
Depreciation at the beginning of the year
Movements during the year
Additions at cost price
Equipment
Depreciation for the year
Carrying value at the end of the year
Cost price at the end of the year
Accumulated depreciation at the end of the year
12.5.3
Balance sheet of Menlo Ltd. on 31 December 2015
Assets
Non-current assets
Financial assets
Current assets
Stock
Trading and other receivables
500 000
150 000
Total assets
Equity and liabilities
Owner’s equity
Non-current liabilities
Current liabilities
Total equity and liabilities
214
Exercise 12.6 (Income statement and Note of fixed assets; 60 marks, 36 minutes)
Information relates to Menlo Merchants for the year ended 28 February 2015.
INSTRUCTION
12.6.1
12.6.2
Complete the Income statement for the year ended 28 February 2015.
Complete the Note for non-current assets on 28 February 2015.
INFORMATION
1.
Extract of figures from the Pre-adjustments Trial balance on 28 February 2015
Fixed deposit: ABSA (4% p.a.)
Vehicles
Equipment
Accumulated depreciation on vehicles
Accumulated depreciation on equipment
Trading stock
Debtors control
Provision for bad debts
Loan: Nedbank
Sales
Debtors allowance
Cost of sales
Rent income
Discount received
Interest on fixed deposit
Interest on loan
Salaries
Pension fund contribution
UIF contribution
Stationery
Bank charges
Telephone
Bad debts
215
800 000
400 000
380 000
180 000
60 000
42 000
35 000
1 940
620 000
2 133 000
53 000
1 300 000
133 200
2 400
27 000
?
108 000
6 480
4 320
18 000
480
10 900
1 000
2.
ADJUSTMENTS AND ADDITIONAL INFORMATION ON 28 FEBRUARY 2015
2.1
Stock on hand according to a physical stock-taking:
• Trading stock, R38 000
• Stationery, R4 000.
2.2
Cheque for R4 100, issued to a creditor in settlement of our debt of R4 500, returned by
the bank marked R.D.
2.3
Entries appearing on the bank statement:
• Service fees, R320
• A deposit of R3 000 by a debtor written off as bad debts during the previous
year
2.4
Account of debtor owing R200 to be written off as bad debts.
2.5
Provision for bad debts adjusted to R1 740.
2.6
Interest on loan is capitalized. The loan statement had the following information:
Amount due at the beginning of the year
680 000
Interest capitalized
?
Instalments paid during the year (includes interest)
117 800
Amount due at the end of the year
620 000
2.7
Increased fixed deposit at ABSA on 1 June 2014 with R100 000. Receive interest
quarterly.
2.8
Details of an employee working since 1 February 2015 at the business, accidently
omitted from February’s Salary Journal.
Details of salary were as follows:
Gross
Deductions
Employer’s contribution
salary
SARS
Pension
UIF
Pension
UIF
(PAYE)
fund
fund
Rand for
4% of gross
6 000
1 080
360
240
rand basis
salary
2.9
Depreciation to be provided as follows:
• On vehicles at 10% on carrying value.
New vehicle of R150 000 bought on 1 January 2015.
Purchase transaction not yet recorded.
• On equipment at 20% on cost price.
New equipment of R80 000 bought on 1 December 2014.
Purchase transaction already recorded.
2.10
Telephone account for February 2015 received, but not yet paid, R1 300.
2.11
Rent income increased as from 1 January 2015 with 10%. Rent for February 2015 still
outstanding.
216
12.6.1 Income statement of Menlo Merchants for the year ended 28 February 2015
Sales
Cost of sales
Gross profit
Other operating income
Rent income
Discount received
Gross operating income
Operating expenses
Salaries
Pension fund contribution
UIF contribution
Stationery
Bank charges
Telephone
Bad debts
Operating profit
Interest- income
Profit before interest-expense
Interest-expense
Net profit for the year
12.6.2 Notes to the financial statements
None-current assets
Vehicles
Carrying value at the beginning of the year
Cost price
Accumulated depreciation
Movement
Additions at cost price
Depreciation for the year
Carrying value at the end of the year
Cost price
Accumulated depreciation
217
Equipment
Exercise 12.7 (Analyses and interpretation of financial statements; 25 marks 15 minutes)
INSTRUCTION
Calculate the following with regard to 2015 and comment briefly on each.
12.7.1 Degree of solvency
12.7.2 Return on owner’s equity
12.7.3 Current capital ratio
12.7.4 Acid test ratio
INFORMATION
The following information relates to Menlo Stores for the years ended 31 December 2014
and 31 December 2015.
31 Dec. 2015
872 500
320 000
676 500
564 300
?
280 000
165 000
100 800
?
?
?
?
Non-current assets at carrying value
Financial assets
Current assets (Trading stock included)
Trading stock
Owner’s equity
Non-current liability
Current liability
Net profit
Degree of solvency
Return on owner’s equity
Current capital ratio
Acid-test ratio
12.7.1 Degree of solvency:
Comment:
218
31 Dec. 2014
?
478 000
789 000
?
560 000
360 000
?
98 000
6,4 : 1
14,7%
5,6 : 1
2,3 : 1
12.7.2 Proceeds of owner’s equity:
Comment:
12.7.3 Current capital ratio:
Comment:
12.7.4 Acid-test ratio:
Comment:
219
Exercise 12.8 (VAT – matters; 40 marks, 24 minutes)
Excel Stores is registered as a tax vendor with SARS. Their mark-up is 100% on cost. Most
of the journal totals for June 2018 are provided. These totals were verified as correct.
REQUIRED:
12.8.1 What is the difference between VAT output and VAT input?
12.8.2 Complete the missing details marked [1] to [10].
Accept that all amounts are subjected to VAT at the standard rate of 15%.
12.8.3 Calculate the amount owed to/by SARS.
12.8.4 Give your opinion on each of the following case studies:
(1) According to the announcement by the Minister of Finance any business with
an annual turnover of more than R1 000 000 per year must register for VAT.
The annual turnover of XY Suppliers is R3½ million. The owner does not intend
registering for VAT even though he charges his clients VAT.
He is of opinion that prices of products will be too high if he adds 15% to all the
selling prices.
(2) H2H Stores, is a registered VAT merchant. Large amounts of money are
written off annually as “bad debts” which they claim back from SARS as VAT
arguing that they have not received the money from the debtors. Most of
the amounts were received from the debtors.
INFORMATION:
Totals of subsidiary journals on 30 June 2018:
Cash Receipts Journal
Bank
[2]
VAT
output
[1]
Cost of sales
Debtors control
Sales
50 000
25 000
4 400
Sundry
accounts
14 000
Trading stock
Consumables
Creditors control
Sundry accounts
80 000
3 500
[4]
8 500
Cash Payments Journal
Bank
114 900
VAT
input
[3]
Petty Cash Journal
Petty cash
[6]
VAT input
1 050
Trading stock
[5]
Consumables
500
Sundry accounts
2 000
VAT output
11 100
Sales
[7]
Cost of sales
[8]
VAT output
[10]
Debtors allowance
3 000
Cost of sales
1 500
VAT input
9 150
Trading stock
45 000
Consumables
9 200
Equipment
6 800
Trading stock
4 600
Consumable
2 300
Equipment
1 100
Debtors Journal
Debtors control
[9]
Debtors Allowance Journal
Debtors control
3 450
Creditors Journal
Creditors control
70 150
Creditors Allowance Journal
Creditors control
9 200
VAT input
1 200
220
Exercise 12.9 (Cash budgets; 50 marks, 30 minutes)
The financial year of Menlo Merchants ends on 30 June 2015.
INSTRUCTION
Prepare the following for May and June 2015:
12.9.1
12.9.2
Debtors collection schedule (only cash received)
Cash budget
INFORMATION
1.
Balance and totals on 30 April 2015
Bank (Cr.)
17 000
Rent income
9 000
2.
Sales
March
April
May
June
•
•
Actual
108 000
120 000
Budget
114 000
156 000
Credit sales amounts to 80% of the total sales.
Gross mark-up is 20% on cost price.
3.
Debt of debtors collected as follows:
• 30% paid in the same month
• 50% paid after 30 days (in the following month)
• 18% paid after 60 days (in the second month)
• 2% written off after 90 days as bad debts
4.
70% of the purchase of trading stock is on credit. Creditors are paid in the second
month after purchases to qualify for a 5% discount. A constant stock level is usually
maintained.
5.
Salaries amounts to R120 000 per annum. Salaries increase with 10% on 1 May 2015.
6.
An office suite is leased since 1 December 2014. The agreement stipulates that the
rent increases after six months with 10%. The tenant signed a debit order for the
monthly rent.
7.
Provide for the purchase of new equipment on 1 May 2015 for R40 000. A deposit of
R10 000 will be paid and the remaining amount from 1 June 2015 in 10 equal
instalments.
8.
Other operating expenses amounts to R4 000 per month. It is expected to increase as
from 1 June 2015 with 5%.
222
12.9.1 Debtors collection schedule for May and June 2015
Month
Credit sales
Receipts from debtors in:
May
June
March
April
May
June
12.9.2 Cash budget for two months May and June 2015
May
June
Cash receipts
Cash sales
Cash of debtors
Rent income
Cash payments
Cash purchases
Payments to creditors
Salaries
Equipment
Other operating expenses
Cash surplus/(deficit)
Bank (opening balance)
Bank (final balance)
Calculation:
March
Cost of sales
Cash purchases
Credit purchases
Payments to creditors
223
April
May
June
Exercise 12.10 (Production costs and break-even point; 15 marks, 9 minutes)
Menlo Manufacturers manufactures wood benches. The following information applies to the year
ended 30 November 2015.
INSTRUCTION
12.10.1 Name two examples of direct production costs and factory overhead costs.
12.10.2 Explain why it is important for a business to calculate the expected break-even point
before the beginning of the financial year.
12.10.3 Use the given figures to calculate the break-even point.
12.10.4 Should Menlo Manufacturers be satisfied w
ith their present production figure? Explain
why you say so?
INFORMATION
Number benches manufactured
Sales for the year (all manufactured units are sold)
Total fixed costs
Total variable costs
4 000
R1 200 000
R234 000
R480 000
12.10.1 Two examples of direct production costs:
Two examples of factory overhead costs:
12.10.2 Why it is important for a business to calculate the expected break-even point before the beginning of
the financial year?
12.10.3 Use the given figures to calculate the break-even point.
12.10.4 Should Menlo Manufacturers be satisfied with their present production figure? Explain why
you say so?
224
Exercise 12.11 (Production costs; 20 marks, 12 minutes)
INSTRUCTION
Use the given information and complete the Production statement of Park Manufacturers for the
year ended 30 December 2015. Show a separate Note for factory overhead costs.
INFORMATION
Stock on hand on 1 January 2015
Raw material
Work-in-process stock
Consumables
65 000
32 000
8 600
Transactions during the year
Consumables bought
Raw material bought
Factory worker’s wages according to the Wages Journal
Rent of factory
Factory foreman’s salary
Depreciation on factory equipment
32 400
115 000
160 000
55 000
85 000
20 000
Stock on hand on 31 December 2015
Raw material
Work-in-process stock
Consumables
30 000
27 000
11 000
Production statement of Parkie Manufacturers for the year ended 28 February 2015
Direct costs
Factory overhead costs
Total production costs
Work-in-process stock beginning of the year
Production costs of stock available to be sold
Work-in-process stock at the end of the year
Cost of production of finished products
Factory overhead costs
225