Ch1 Companies Term 1

CHAPTER 1
Companies
Concepts, unique ledger accounts and bookkeeping
1 CH1 COMPANIES TERM 1 - 23 January 2023

Progression
▪ Grade 10: Concepts, unique ledger accounts and bookkeeping of

sole traders

partnerships and clubs

companies
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Introduction
❖ Up until now in accounting, we have dealt with two types of business:
Sole proprietor (in Grade 10) Partnerships (in Grade 11)
❖ Companies originated as a result of the shortcomings of these other types of business.

❖ The main differences between companies and sole proprietors or partnerships are as follows:
Sole proprietor Partnership Company
One owner Two or more partners Shareholders
Not a separate legal entity Not a separate legal entity Separate legal entity
No legal regulations A few legal regulations Bound by Companies Act
Profits are distributed in specific Profits belong to the company and are paid out to
Profits belong to owner
ratios to partners shareholders by way of dividends
Owner has unlimited liability Partners have unlimited liability Shareholders’ liability is limited
(liable for all debts/losses) (liable for all debts/losses) (the company as a legal entity is liable for debts/losses)
Managed by owner Managed by partners Managed by board of directors
Memorandum of Incorporation (MOI) and Notice of

No foundation documents Partnership agreement
Incorporation
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Legal entity
❖ According to the business dictionary, a legal entity has legal capacity to:
• enter into agreements or contracts,
• assume obligations,
• incur and pay debts,
• sue and be sued in its own right, and
• to be held responsible for its actions.
❖ In other words, a company as a legal entity implies the following:

• A company has its own rights and responsibilities.
• The company operates independent from its shareholders. Company
independent from its
• The company owns the assets in its own right.
Shareholders
• The income generated belongs to the company.
• The company as an entity is liable for tax.
• The company is liable for the its obligations.
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Advantages of a company
❖ Separate legal entity
• A company has a legal existence separate from its management and shareholders.
• A company may own assets in its own right, may incur debt and perform jural acts.
❖ Limited liability to shareholders

• Should a company fail, a shareholder’s only loss is the value of their shares.
• The personal assets of the shareholder are protected.
• This is not the case with a sole proprietor and partnership, where the personal
assets of the proprietor or partners may be confiscated should the business fail.
❖ Continuity
• Directors, managers and employees only act as agents of the company.
• If they leave, retire or die, the company remains in existence.
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Disadvantages of a company
❖ Companies are costly and complex to administer.
❖ Companies are regulated by the Companies Act, which protect the shareholders.
❖ Statutory audit of financial statements for companies with public liability are required.
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Companies Act COMPA
ACT
NIES
f 2008
No.71 o
❖ South Africa has a well-developed and formally regulated Companies Law regime.
❖ The Companies Act 61 of 1973 used to regulate all matters relating to companies.
❖ In April 2011, a new Companies Act 71 of 2008 became law.
❖ The aims of the new Companies Act are:

• to simplify the procedure for forming companies, and
• to reduce the cost of forming and running a company.
❖ The new Act brings relief to smaller companies that could not afford high audit fees.
❖ The Companies Act covers aspects such as:

• the procedures for forming a company,
• how capital may be raised,
• how companies should be run and
• what information should be disclosed in financial statements.
❖ The Companies Act is administered by the Registrar of Companies, who issues

registration certificates to registered companies as evidence of incorporation.
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Types of companies
❖ The following is a summary of the various types of companies that may be formed:
Profit Non-profit
companies companies
Private Personal liabilities State-owned Public Non-profit

company (Pty) Ltd company Inc. company SOC Ltd company Ltd company
Its Memorandum of MOI states that the They are defined in The public is invited Certain aspects of
Incorporation (MOI) directors and past terms of the Public to buy shares and the Companies
prevents it from directors are jointly Finance these shares can be Act do not apply to
offering securities to liable, together with Management Act or transferred freely. these companies.
the public and the company, for any are owned by a
restricts the debts and liabilities municipality.
transferability of that were contracted
securities. during their periods of
office.
❖ In Grade 12 we will limit our discussions to:

• the difference between public and private companies, and
• the bookkeeping process of public companies.
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Public and private companies
The following table compares the differences between these two types of companies:
Aspect Public company Private company
May be incorporated by … one person one person
“Limited” “Proprietary Limited”

Company name ends in …
(abbreviation: Ltd.) (abbreviation: (Pty) Ltd.)
Minimum number of directors Three One
Shares offered to public Public is invited to buy shares. Public is not invited to buy shares.
Shares can only be transferred after approval

Transferability of shares Shares can be transferred freely.
by the Board of Directors.
Appointment of an auditor, audit Public companies must appoint an auditor, Private companies appoint an audit committee
committee and company secretary audit committee and company secretary. only to the extent provided for in the MOI.
Must have audited financial statements that

Only need to be audited if certain requirements
Audit requirements should be presented to shareholders at the
are met (mainly for larger private companies)
AGM within six months after financial year-end.
Only need to appoint a Social and Ethics

Appointment of a Social and
Must appoint a Social and Ethics Committee. Committee if certain requirements are met
Ethics Committee
(mainly for larger private companies).
Capital raised by … issuing shares to the public issuing shares to the owners

Formation of a company
When registering and founding a company, the Companies Act stipulates the following:
Memorandum of Incorporation (MOI):

The founding company must first draw up the following: a document that sets out rights, duties and
responsibilities of shareholders, directors
Memorandum of Incorporation (MOI) and others within and relation to a company
Notice of Incorporation
Notice of Incorporation:
these must then be submitted to the … a formal announcement to the public,
indicating the formation of a new legal entity
Registrar of Companies
(Companies and Intellectual Property Commission or CIPC)
The Registrar will then:

• approve the name of the company
• enter information about the company in the Companies Register
• endorse the Notice of Incorporation and Memorandum of Incorporation.
A registration certificate will then be issued to the

company so that it can commence business.
The company must then compile a prospectus.

Prospectus:
The prospectus should contain, among others: a document describing the main features of a
• the name of the company, business for prospective buyers
• the address of the company,
• the detail of the directors,
• the particulars of share capital, etc.

Board of Directors
❖ The shareholders, as the “owners” of a company, elect a Board of Directors (“board”)

to act as the coordinating and policy-making body of the company.
❖ The board must consist of at least three directors.
❖ Most boards of public companies have between eight and twelve directors.
❖ A director of a company must exercise his powers and perform his functions:
• in good faith and for a proper purpose
• in the best interest of the company
• with a high degree of skill, care and diligence.
❖ A director of a company may be held personally liable for any loss, damage or costs
sustained by the company as a result of a breach of the director’s:
• fiduciary duty (duty to act in good faith and in the best interest of the company); or
• the duty to act with care, skill and diligence.
❖ Directors can be executive, non-executive or independent.
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Board of Directors (continued)
❖ Executive directors
• are involved in the day-to-day management of the company, and/or
• are in full-time salaried employment of the company.
❖ Non-executive directors
• are independent of management on all issues including strategy, performance,
sustainability resources, transformation, employment equity etc.
❖ Independent directors
• should not have been employed by the company during the previous three years,
• should be totally independent from the company, and
• should provide independent judgment and broad business experience to the board.
❖ Some of the board’s roles and functions are to:

• provide strategic direction to the company and approve strategic plans
• retain effective control of the company and ensure that it complies with all laws and regulations
• delegate appropriate powers to management and to monitor them on an ongoing basis
• identify and monitor key risks and ensure that the company has effective internal control
measures to manage all risks
• identify and monitor key performance areas for the board and management.
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Management of the company
❖ Not all board members are involved in daily routine activities.
❖ A management team is usually appointed to do this.
❖ Management consists of a managing director and other officials, who are responsible for
controlling and managing the company’s activities.
❖ There may be a manager for each department of the company (e.g. a sales manager,
purchases manager, human resources manager, marketing manager etc.).
❖ The main role of management is to ensure that the company meets its objectives.
❖ A good manager will be able to:

• define strategies and goals for the company
• apply financial, budgetary, personnel, policy and security judgments
• do strategic planning by setting targets and making sure benchmarks are achieved
• lead, motivate, do teambuilding and have good relationships with employees
• have good communication skills externally and internally in their organisation.
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Independent auditors and the audit committee
Independent auditors
❖ All public companies must appoint a registered independent auditor at every AGM.
❖ The independent auditors perform an audit of the company’s financial statements.
❖ The independent auditors then provide an independent opinion on the accuracy and
reliability of the company’s financial statements.
Audit committee
❖ The shareholders of all public companies must appoint an audit committee at every AGM.
❖ Some of the duties of the audit committee include:

• nominating an independent auditor and determining the audit fee
• ensuring the appointment of the auditor complies with all regulations
• evaluating the company’s exposure and responses to significant risks
• ensuring effective communication between directors, management,
internal auditors and external auditors
• reviewing compliance with JSE listing requirements and King III.
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Social and ethics committee
❖ The new Companies Act requires all public companies and state owned companies (as
well as many other larger companies) to appoint a social and ethics committee.
❖ The committee must comprise at least three directors, of whom at least one should be
an independent non-executive director.
❖ The social and ethics committee is required to report to the shareholders at the AGM.
❖ The primary function of the social and ethics committee is to monitor the company’s
activities relating to, amongst other:
• social and economic development;
• good corporate citizenship;
• the environment;
• consumer relationships; and
• certain employment-related matters.
❖ This is very much in line with the policies of King III, which states that the board should
ensure that the company’s ethics are managed effectively.
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Shareholders
usually one vote for
every share they own
❖ A shareholder has the following rights:
• Voting power on major issues

(e.g. electing directors and fundamental changes)
they share in the profits
of the company
• An entitlement to dividends
• Ownership in a portion of the company

they will share in the final distribution
of net assets upon liquidation
• Opportunity to inspect the company’s records
❖ The following should be transacted during the AGM:
• Presentation of the directors’ report, audited financial statements

and report of the audit committee
• Election of directors
• Appointment of an auditor and an audit committee
• Any matters raised by shareholders.
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Johannesburg Stock Exchange Limited (JSE)
❖ The Johannesburg Stock Exchange Limited (JSE) is the largest stock exchange in Africa.
❖ The JSE provides a market where shares can be traded freely under a regulated procedure.
❖ The JSE is bound by the provisions of the Stock Exchange Control Act 1 of 1985 (SECA).
❖ The JSE is required by SECA to look after the interests of both:

• the investing public, and
• its member companies.
❖ The JSE’s “Listing Requirements” are the rules and regulations that need to be complied with
by all its member companies.
❖ The “Listing Requirements” set regulations for, amongst others:

• the preparation of financial statements
• audit requirements
• corporate governance, etc.
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Shares
❖ A company needs funds to start and run a business, it can get these funds in the following ways:
Selling shares Generating profit Borrowing through loans
❖ There are two basic classes of shares that a company may issue:
Ordinary shares Preference shares
Usually outperform preference shares on the stock markets, Preference shareholders have preference over ordinary
but are riskier from an investor’s point of view. shareholders if the company is liquidated
Dividends on ordinary shares are not guaranteed – Generally a fixed percentage dividend is paid annually
depends on the profitability and cash flow of the company. on preference shares
❖ In Grade 12, we will only deal with ordinary shares, not preference shares.
❖ Authorised and issued share capital

• Authorised shares are the maximum number of shares a company’s MOI permits it to issue.
• Issued shares are the number of shares the company has actually sold.
• Issue price is the price at which the shares are sold.
• The difference between the authorised share capital and the issued share capital is known
as the reserve or unissued share capital.
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Example: Issuing ordinary shares
Information:
According to the Memorandum of Incorporation (MOI) of Danjo Traders Ltd, they are authorised to
issue 100 000 ordinary shares.
On 1 March 2018, Danjo Traders Ltd issued 60 000 shares to the public at R16,50 per share.
On 31 March 2018, applications for all 60 000 shares together with their payments were received.
Required:
1. Show the entries in the journals
2. Post to the General Ledger
3. Show the effect on the accounting equation and how it will be reflected in the notes to the
financial statements.
Solution:
Entry in the Cash Receipts Journal:
Cash Receipts Journal of Danjo Traders Ltd for March 2018 CRJ
Sundry accounts
Doc Analysis of
Day Details Fol. Bank
no. receipts Details
Amount
65 31 Shareholders B1 990 000 00 990 000 00 990 000 00 Ordinary share capital

Example: Issuing ordinary shares (continued)
Posting to the General Ledger:

General Ledger of Danjo Traders Ltd
Balance Sheet accounts
Dr Ordinary Share Capital B1 Cr

2018
Mar 31 Bank CRJ 990 000 00
Dr Bank B6 Cr
2018
Mar 31 Ordinary share capital CRJ 990 000 00
The effect on the accounting equation:

A=O+L
Assets Owner’s equity Liabilities
Effect Reason Effect Reason Effect Reason
+ 990 000 Cash increase + 990 000 Increase in ordinary share
capital

Example: Issuing ordinary shares (continued)
Notes to the financial statements:
Danjo Traders Ltd

NOTES TO THE FINANCIAL STATEMENTS
7. ORDINARY SHARE CAPITAL
AUTHORISED
Number of ordinary authorised shares: 100 000 shares
ISSUED
60 000 ordinary shares in issue at 1 March 2018
60 000 additional shares issued during the financial year at issue price R16,50 each 990 000
60 000 ordinary shares in issue at 31 March 2018 990 000

Income tax
❖ In a sole proprietor or partnership, the net profit belongs to the owner or partners and
therefore the owner or partners must pay tax in their personal capacities.
❖ Since a company is a legal entity, the net profit belongs to the company and the
company has to pay income tax.
❖ Income tax is paid to the South African Revenue Services (SARS).
❖ Provisional tax
• Companies are obliged to pay provisional tax during the tax period.
• The first provisional tax payment is due six months into the financial year.
• The second provisional tax payment is due at the end of the financial year.
❖ At the end of the financial year, companies are required to:

• calculate their income tax for the year,
• submit this information to SARS by completing a tax return form, and
• submit their financial statements to SARS.
❖ SARS will then perform an independent tax calculations and issue the company with
a final tax assessment, which states the amount of income tax due for the year.
❖ Any outstanding income tax needs to be paid within seven months of the year end.
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Income tax (continued)
❖ Provisional tax payments are recorded in the company’s Cash Payments Journal and
debited against the SARS (Income Tax) account.
Debit: SARS (Income Tax) Credit: Bank
❖ As this is an advance payment, the SARS (Income Tax) account is considered an asset
until the company calculates its final tax at the end of the financial year.
❖ The income tax calculated at the end of the year is considered a year-end adjustment
and is recorded in the General Journal.
Debit: Income Tax Credit: SARS (Income Tax)
❖ Should the provisional tax paid be less than the total income tax due, then:
• the SARS (Income Tax) account will have a credit balance and be considered a liability.
❖ Should the provisional tax paid exceed the total income tax due, then:
• the SARS (Income Tax) account will have a debit balance and be considered an asset.
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Income tax (continued)
Diagram illustrating the timing of the various income tax payments:
Beginning of 6 months after beginning Last day of 7 months after end

financial year of financial year financial year of financial year
1 Mar 2017 31 Aug 2017 28 Feb 2018 30 Sep 2018
Submit tax return form
First provisional Second provisional Third (final)

tax payment tax payment tax payment
Receive tax assessment

Example: Income tax
The financial year of Danjo Traders Ltd ends on 28/29 February. On 1 March 2018, the balance of the
SARS (Income Tax) account was nil.
Provisional payments for income tax made during the year ended 28 February 2019 were as follows:
• First provisional payment on 31 August 2018 R75 000
• Second provisional payment on 28 February 2019 R80 000
Danjo Traders Ltd calculated the profit before tax for the year ended 28 February 2019 to be R540 000. Tax
should be provided for at 30% for the 2019 tax year.
Required:
1. Show the journal entries for the year 1 March 2018 to 28 February 2019.
2. Show the entries in the General Ledger for the period 1 March 2018 to 28 February 2019.
3. Show the effect of the transactions from 1 March 2018 to 28 February 2019 on the accounting equation.
4. Show the entry for SARS (Income Tax) on 28 February 2019 in the notes to the Financial Statements.
Entries in the journals:
Cash Payments Journal of Danjo Traders Ltd CPJ

Sundry accounts
Date Details Fol. Bank
Amount Details
31 Aug 2018 SARS 75 000 00 75 000 00 SARS (income tax)
28 Feb 2019 SARS 80 000 00 80 000 00 SARS (income tax)
General Journal of Danjo Traders Ltd for February 2019 GJ

Day Details Fol. Debit Credit
28 Income tax (540 000 × 30%) 162 000 00

SARS (income tax) 162 000 00

Example: Income tax (continued)
Dr SARS (Income Tax) B12 Cr

2018 2019
Aug 31 Bank CPJ 75 000 00 Feb 28 Income tax (540 000 × 30%) GJ 162 000 00
2019
Feb 28 Bank CPJ 80 000 00
Balance c/d 7 000 00
162 000 00 162 000 00
2019
Mar 1 Balance b/d 7 000 00
Nominal accounts
Dr Income Tax N22 Cr
2019 2019
Feb 28 SARS (income tax) GJ 162 000 00 Feb 28 Appropriation account GJ 162 000 00
162 000 00 162 000 00

The effect on the accounting equation: A=O+L

Date
31 Aug 2018 – 75 000 Cash decreases – 75 000 Debt to SARS decreases
28 Feb 2019 – 80 000 Cash decreases – 80 000 Debt to SARS decreases
28 Feb 2019 – 162 000 Income tax – decreases + 162 000 Debt to SARS increases
remaining profit
Danjo Traders Ltd

NOTES TO THE FINANCIAL STATEMENTS ON 28 FEBRUARY 2019
9. TRADE AND OTHER PAYABLES
Trade creditors –
SARS (income tax) 7 000
7 000

Danjo Traders Ltd made the following payments to SARS during the financial year ending 29 February 2020:
• On 31 May 2019, paid R7 000 that was still payable to SARS for income tax from the previous period.
• First provisional payment on 31 August 2019 R85 000
• Second provisional payment on 29 February 2020 R85 000
Danjo Traders Ltd calculated the profit before tax for the year ended 29 February 2020 to be R550 000.
Tax should be provided for at 30% for the 2020 tax year.
Required:
2. Show the entry for SARS (Income Tax) on 29 February 2020 in the notes to the Financial Statements.
Dr SARS (Income Tax) B12 Cr

2019 2019
May 31 Bank CPJ 7 000 00 Mar 1 Balance b/d 7 000 00
2020
Aug 31 Bank CPJ 85 000 00 Feb 29 Income tax (550 000 × 30%) GJ 165 000 00
2020
Feb 29 Bank CPJ 85 000 00 Balance c/d 5 000 00
177 000 00 177 000 00

2020

Posting to the General Ledger (continued):
Nominal accounts
Dr Income Tax N22 Cr
2020 2020
Feb 29 SARS (income tax) GJ 165 000 00 Feb 29 Appropriation account GJ 165 000 00
165 000 00 165 000 00
Danjo Traders Ltd

5. TRADE AND OTHER RECEIVABLES
Trade debtors –
SARS (income tax) 5 000
5 000

Dividends
Shareholders receive dividends as a “reward” for the money they invested in a company.
Interim dividends
❖ These dividends are declared and distributed (paid) during the financial year.
❖ Since an interim dividend is paid immediately, this transaction will be entered in the CPJ.
❖ This will then be recorded in the General Ledger as follows:
Debit: Dividends on Ordinary Shares Credit: Bank
Final dividends
❖ These dividends are declared at the end of the financial year, but are not distributed.
❖ Since final dividends are only declared and not distributed, this will be reflected as a liability
in the Statement of Financial Position (Balance Sheet) at the end of the financial year.
❖ These final dividends will only be paid in the next financial period.
❖ Since this is a non-cash transaction, this transaction will be entered in the GJ.
❖ This willDebit:
thenDividends
be recorded in the General
on Ordinary Shares Ledger as follows:
Credit: Shareholders for Dividends
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Example: Dividends
The financial year of Danjo Traders Ltd ends on 28/29 February.
On 28 February 2018, Danjo Traders Ltd had an issued share capital of R990 000 consisting of 60 000 ordinary shares.
Transactions with regards to dividends for the financial year ending 28 February 2019:
• Declared and paid interim dividends of 20 cents per share on 31 August 2018
• Declared a final dividend of 60 cents per share on 28 February 2019
Transactions with regards to dividends for the financial year ending 29 February 2020:
• Pay the amount owed to shareholders declared in the previous financial year on 2 April 2019
• Declared and paid an interim dividend of 43 cents per share on 31 August 2019
• Declared a final dividend of 107 cents per share on 29 February 2020
Required:
1. Show the journal entries on 31 August 2018 and 28 February 2019.
3. Show the effect of the transactions from 1 March 2018 to 28 February 2019 on the accounting equation.
4. Show the entry for Shareholders for dividends on 28/29 February 2019 and 2020 in the notes to the Financial Statements.
Cash Payments Journal of Danjo Traders Ltd for August 2018 CPJ
Doc Sundry accounts

no. Amount Details
31 Shareholders (60 000 × 0.20) 12 000 00 12 000 00 Dividends on ordinary shares

28 Dividends on ordinary shares 36 000 00

Shareholders for dividends 36 000 00
[Final dividends declared (60 000 × 0.60)]

Example: Dividends (continued)

Dr Shareholders for Dividends B13 Cr
2019 2019
Apr 2 Bank CPJ 36 000 00 Feb 28 Dividends on ordinary shares GJ 36 000 00
36 000 00 36 000 00
2020
Feb 29 Dividends on ordinary shares GJ 64 200 00
Nominal accounts
Dr Dividends on Ordinary Shares N24 Cr
2018 2019
Aug 31 Bank CPJ 12 000 00 Feb 28 Appropriation account GJ 48 000 00
2019
Feb 28 Shareholders for dividends GJ 36 000 00
48 000 00 48 000 00
2019 2020
Aug 31 Bank (60 000 × 0.43) CPJ 25 800 00 Feb 29 Appropriation account GJ 90 000 00
2020
Feb 29 Shareholders for dividends GJ 64 200 00
(60 000 × 1.07)
90 000 00 90 000 00

Example: Dividends (continued)

Date
31 Aug 2018 – 12 000 Cash decreases – 12 000 Dividends – distribution of profit
28 Feb 2019 – 36 000 Dividends – distribution of profit + 36 000 Debt to Shareholders for
dividends increases
Danjo Traders Ltd

NOTES TO THE FINANCIAL STATEMENTS ON 28 FEBRUARY 2019 AND 29 FEBRUARY 2020
9. TRADE AND OTHER PAYABLES 28 Feb 2019 29 Feb 2020
Trade creditors – –
SARS (income tax) 7 000 –
Shareholders for dividends 36 000 64 200
43 000 64 200

Retained income (accumulated profit)
❖ Reserves are part of the equity of a company.
❖ They consist of profits that are not distributed, but are saved for future use.
❖ Although there are other types of reserves, we will only discuss retained income.
❖ Retained income is the portion of the net profit that is not distributed to shareholders
in the form of dividends during the current financial year.
❖ Retained income is kept in reserve and these funds can be used:

• to create bigger future profits (by re-investing these funds in the company), or
• to pay future dividends.
❖ The retained income amount is calculated in the Appropriation account.
❖ This calculation is performed by subtracting:

• the income tax for the year, and
• the dividends for the year
Retained income = Net profit – Income tax – Dividends
… from the net profit for the year.
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Example: Retained income
The financial year of Danjo Traders Ltd ends on 28/29 February. On 28 February 2018, Danjo Traders Ltd
had an issued share capital of R990 000 consisting of 60 000 ordinary shares.
On 28 February 2019 the following information was given:
• Net profit for the year ending 28 February 2019, according to the Profit & Loss account, was R540 000.
• Income tax for the financial year amounted to R162 000.
• Total dividends declared and paid during the financial year amounted to R48 000.
Required: Create the Appropriation and Retained Income accounts in the General Ledger.
Dr Appropriation account F3 Cr
2019 2019
Feb 28 Income tax GJ 162 000 00 Feb 28 Profit and loss GJ 540 000 00
Dividends on ordinary shares GJ 48 000 00
Retained income GJ 330 000 00
540 000 00 540 000 00
Dr Retained Income B2 Cr
2019
Feb 28 Appropriation GJ 330 000 00
Note:
• In the following financial year, the balance of the Retained Income account must first be written back to the Appropriation account.
• The amount available for distribution would then be this retained income plus the profit generated during the current year.

Example: Retained income (continued)
On 1 March 2019 the following balances appeared in the books of Danjo Traders Ltd:
• Ordinary share capital R990 000
• Retained income R330 000
On 29 February 2020, the end of the financial year, the following information was given:
• Net profit for the year ending 29 February 2020 was R550 000.
• Income tax for the financial year amounted to R165 000.
• Total dividends declared and paid during the financial year amounted to R90 000.
Required:
1. Show the entries as they would appear in the General Journal.
2. Create the Appropriation and Retained Income accounts in the General Ledger.
3. Show Note 8 to the Financial Statements for Retained Income.
Entries in the General Journal:

29 Retained income 330 000 00

Appropriation account 330 000 00
(Write back retained income from previous year)
Profit and loss account 550 000 00

(Net profit transferred to Appropriation account)

Income tax 165 000 00
Dividends on ordinary shares 90 000 00
Retained income 625 000 00
(Calculating new balance for retained income)

Example: Retained income (continued)
Dr Appropriation account F3 Cr
2020 2020
Feb 29 Income tax GJ 165 000 00 Feb 29 Profit and loss GJ 550 000 00
Dividends on ordinary shares GJ 90 000 00 Retained income GJ 330 000 00
Retained income GJ 625 000 00
880 000 00 880 000 00
2020 2019
Feb 29 Appropriation GJ 330 000 00 Mar 1 Balance b/d 330 000 00
2020
Feb 29 Appropriation GJ 625 000 00

Danjo Traders Ltd
8. RETAINED INCOME
Balance on 1 March 2019 330 000
Net profit after tax (550 000 – 165 000) 385 000
Dividends (90 000)
Balance on 28 February 2020 625 000

Interest capitalised
What is interest?
❖ Interest can be:
• the cost of borrowed money (interest on loan) or
• the earnings on an investment (interest on fixed deposit).
❖ The total interest expense must be disclosed separately on the Income Statement.
❖ There are different ways to calculate interest.
Simple interest
❖ Simple interest is calculated on the original amount only. Where:
A = the final amount, including the interest
❖ Accumulated interest is not used in this calculation. P = the principal amount (the original amount
borrowed/invested)
❖ The formula for simple interest is: i = the interest rate for one period
A = P(1 + i.n)
n = number of periods
Compound interest
❖ Compound interest is calculated on the total of the principal (original) amount plus interest
accumulated during past periods.
❖ So we say interest is earned on interest (interest is compounded).
❖ The formula for compound interest is:
A = P(1 + i )n
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Example: Interest capitalised
Information:
R3 000 is invested in a fixed deposit account at a bank for four years. The interest is 12% p.a.
Required:
Show the value of the investment at the end of the four years if:
• Simple interest is used
• Compound interest is calculated on a annual basis.
Calculations:
Simple interest Compound interest
The interest is 12% on R3 000 each year for 4 years. The At the end of each year, the interest is added to the principal (original) amount
interest received is the same every year. and 12% interest is then calculated on the total amount.
End of year 1: R3 000 + (0,12)(R3 000) = R3 360 End of year 1: R3 000 + (0,12)(R3 000) = R3 360
End of year 2: R3 360 + (0,12)(R3 000) = R3 720 End of year 2: R3 360 + (0,12)(R3 360) = R3 763,20
End of year 3: R3 720 + (0,12)(R3 000) = R4 080 End of year 3: R3 763,20 + (0,12)(R3 763,20) = R4 214,78 (to the nearest cent)
End of year 4: R4 080 + (0,12)(R3 000) = R4 440 End of year 4: R4 214,78 + (0,12)(R4 214,78) = R4 720,56 (to the nearest cent)
By using the formula for each it is much faster:
Simple interest Compound interest
A = P(1 + i.n) = R3 000 [1 + (0,12)(4)] = R4 440 A = P(1 + i )n = R3 000(1 + 0,12)4 = R4 720,56

Interest capitalised (continued)
❖ We have seen how interest is calculated mathematically, but how will the bookkeeper
enter this information in the business’s books?
❖ The bookkeeper needs to apply GAAP’s matching principle.
❖ This principle should be applied as follows:
Interest on fixed deposit earned in a financial period, must be accounted for as income
in that financial period, even if it will only be received in a later period. GAAP
Matching
Interest on loan incurred in a financial period, must be accounted for as an expense
in that financial period, even if it will only be paid in a later period.
❖ Most lending institutions (banks etc.) capitalised interest on loans.
❖ This means the interest is charged (added) directly to the loan account.
❖ Since the interest is not actually being paid, this entry can not be made in the CPJ.
❖ Therefore this transaction will be recorded in the General Journal, as follows:
Debit: Interest on Loan Credit: Loan
❖ Banks usually send statements to the business at the end of each period to indicate
the amount of interest that has accrued.
____________________________________________________________________________________

Example: Interest on loan capitalised
On 1 March 2017, Joanne’s Boutique applied for a loan of R100 000 from AB Bank.
The application was successful and the proceeds of the loan were paid into the
bank account of Joanne’s Boutique.
The loan agreement stipulates that interest on loan will be capitalised and that loan Required:
instalments of R6 000 are payable every 6 months starting on 31 August 2017. 1. Complete the entries in the journals.
On 28 February 2018, the loan statement reflected that the interest for the year had 2. Post to the General Ledger.
amounted to R9 200. 3. Show the effect on the accounting equation.
Cash Receipts Journal of Joanne’s Boutique for March 2017 CRJ
Doc Analysis of Sundry accounts

no. Day Details Fol. receipts Bank
Amount Details
BS 1 AB Bank 100 000 00 100 000 00 Loan: AB Bank
Cash Payments Journal of Joanne’s Boutique for the year ended 28 February 2018 CPJ
Doc Sundry accounts

Date Details Fol. Bank
no. Amount Details
BS 31 Aug 2017 AB Bank 6 000 00 6 000 00 Loan: AB Bank
BS 28 Feb 2018 AB Bank 6 000 00 6 000 00 Loan: AB Bank
General Journal of Joanne’s Boutique for February 2018 GJ

28 Interest on loan 9 200 00
Loan: AB Bank 9 200 00
(Adjustment for interest on loan for the year)

Example: Interest on loan capitalised (continued)
General Ledger of Joanne’s Boutique
Dr Loan: AB Bank Cr
2017 2017
Aug 31 Bank CPJ 6 000 00 Mar 1 Bank CRJ 100 000 00
2018 2018
Feb 28 Bank CPJ 6 000 00 Feb 28 Interest on loan GJ 9 200 00
109 200 00 109 200 00
2018
Nominal accounts
Dr Interest on Loan Cr
2018 2018
Feb 28 Loan: AB Bank GJ 9 200 00 Feb 28 Profit and loss GJ 9 200 00
9 200 00 9 200 00
Note:
• The Interest on Loan account is closed off to the Profit and Loss account as it is regarded as an expense for the financial period.
• It is the cost of borrowing the money from the bank, the finance cost.

Example: Interest on loan capitalised (continued)

+ 100 000 Cash in bank increases + 100 000 Loan increases
– 6 000 Cash in bank decreases – 6 000 Loan decreases
– 6 000 Cash in bank decreases – 6 000 Loan decreases
– 9 200 Interest on loan is an expense + 9 200 Loan increases

Interest on loan capitalised (continued)
Flow diagram showing the process followed in the previous example:
An application is made The loan is approved by AB Bank Instalments of R6 000 are paid to AB Bank every six
for a loan of R100 000. and paid to the business. months. The instalments include capital repayments
as well as interest which is calculated by the bank.
AB Bank processes the The entry is made in the CRJ:
application. The entry is made in the CPJ:
Debit: Bank
Debit: Loan: AB Bank
Credit: Loan: AB Bank
Credit: Bank
The interest on loan is recorded in At the end of the financial year the business needs to
the General Journal: know what the finance cost (interest) is on the loan.
Debit: Interest on loan AB Bank would have sent them a loan statement
periodically, reflecting this information.
Credit: Loan: AB Bank
____________________________________________________________________________________

Directors’ fees
❖ Directors’ fees is the remuneration earned by the directors of a company.
❖ This remuneration may include:

• the salaries of the executive directors,
• compensation to non-executive directors for attending meetings,
• bonuses, car allowances and medical and retirement benefits.
❖ The remuneration of directors is determined by the company’s remuneration committee.
❖ This proposed remuneration must be approved by the shareholders at the AGM.
❖ Remuneration packages should be reviewed annually to ensure that they are fair and
market-related.
❖ Directors’ fees is recorded as an expense in the books of the company.
❖ Directors’ fees paid during the financial year will be entered in the CPJ.
Debit: Directors’ Fees Credit: Bank
❖ Directors’ fees owing at the end of the financial year will be entered in the GJ.
Debit: Directors’ Fees Credit: Accrued Expense
____________________________________________________________________________________

Audit fees
❖ Audit fees is the fee charged by the independent auditor for performing an audit.
❖ The company’s audit committee is responsible for appointing an independent

auditor and negotiating the audit fee.
❖ Audit fees is recorded as an expense in the books of the company.
❖ Audit fees paid during the financial year will be entered in the CPJ.
Debit: Audit Fees Credit: Bank
❖ Audit fees owing at the end of the financial year will be entered in the GJ.
Debit: Audit Fees Credit: Accrued Expense
❖ A company may also choose to make provision for the audit in the same year as
that of the financial statements being audited.
❖ The company will then have to estimate the cost of the audit.
❖ Debit:
This transaction Audit
will alsoFees
be entered in the GJ. Credit: Provision for Audit Fees
____________________________________________________________________________________

Buying back shares
❖ The most common way in which companies “return wealth” to their shareholders is
by paying dividends.
❖ However, another way is by buying back shares (repurchase of shares).
❖ Buying back shares means a company buys back its own shares on the stock
exchange – almost like investing in itself.
❖ Some of the reasons why companies would buy back shares include:
• to increase the relative ownership stake of each investor

(since there would be fewer issued shares)
• to increase the market value of its shares

(if the company feels that their shares are undervalued by the market)
• to improve the financial ratios

(however, this should not be done to manipulate financial indicators,
as that is not good corporate governance)
❖ Share buy-back transactions are only allowed to take place if:

• permitted in the MOI and approved by a special resolution.
• the solvency and liquidity of the company satisfies certain specific tests.
____________________________________________________________________________________

Buying back shares (continued)
❖ How is a share buy-back carried out?
• Shareholders will be presented with a tender offer to sell all or a portion of

their shares back to the company within a certain time frame.
• The tender offer will state the number of shares the company is looking to
buy back, as well as the price they are willing to pay.
• Interested shareholders will then submit their tenders, stating the number
of shares and the price they are willing to accept.
• Once the company has received all the tenders, they will find the right
combination to buy back shares at the lowest price.
Amount recorded in the Ordinary Share Capital account

Debit: Ordinary Share Capital = no. of shares repurchased × original selling price
Amount recorded in the Retained Income account

Debit: Retained Income
= no. of shares repurchased × amount exceeding original price
❖ The transaction will be entered in the business’s books as follows:

Credit: Bank Amount recorded in the Bank account
= the amount paid
____________________________________________________________________________________

Example: Buying back shares
The financial year of Danjo Traders Ltd ends on 28/29 February.
On 1 March 2019, the following balances appeared in the books of Danjo Traders Ltd:
• Ordinary share capital (60 000 shares at R6,50 each) R390 000
• Retained income R320 000
On 30 June 2019, the company bought back 20 000 shares at R7 each.
Required:
1. Complete the entries in the journals.
2. Post to the General Ledger.
3. Show the effect on the accounting equation.
4. Show the note to the financial statements for ordinary share capital.
Calculations:
• Amount paid for the shares = 20 000 × R7 = R140 000
• Ordinary share capital amount = 20 000 × R6,50 = R130 000
• Retained income amount = 20 000 × R0,50 (R7 – R6,50) = R10 000
Cash Payments Journal of Danjo Traders Ltd for June 2019 CPJ
Sundry accounts
Doc
no. Amount Details
30 Shareholders 140 000 00 130 000 00 Ordinary share capital
10 000 00 Retained income

Example: Buying back shares (continued)
Dr Ordinary Share Capital B1 Cr

2019 2019
Jun 30 Bank CPJ 130 000 00 Mar 1 Balance b/d 390 000 00
390 000 00 390 000 00
2019
Jul 1 Balance b/d 260 000 00
2019 2019
Jun 30 Bank CPJ 10 000 00 Mar 1 Balance b/d 320 000 00
320 000 00 320 000 00
2019
Jul 1 Balance b/d 310 000 00

Example: Buying back shares (continued)

– 140 000 Cash decreases – 130 000 Ordinary share capital decreases
– 10 000 Retained income decreases
Danjo Traders Ltd

7. ORDINARY SHARE CAPITAL

AUTHORISED
Number of ordinary authorised shares: 100 000 shares
ISSUED
60 000 ordinary shares in issue at 1 March 2019 390 000
20 000 ordinary shares bought back during the financial year (130 000)
40 000 ordinary shares in issue at 29 February 2020 260 000

Solutions to activities
▪ Activity 1.1 ▪ Activity 1.11

▪ Activity 1.8
▪ Activity 1.9
▪ Informal assessment 1.1
▪ Activity 1.10
▪ Informal assessment 1.2
________________________________________________________________________
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Ch1 Companies Term 1

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Ch1 Companies Term 1

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CHAPTER 1

1 CH1 COMPANIES TERM 1 - 23 January 2023

▪ Grade 10: Concepts, unique ledger accounts and bookkeeping of

▪ Grade 11: Concepts, unique ledger accounts and bookkeeping of

▪ Grade 12: Concepts, unique ledger accounts and bookkeeping of

2 CH1 COMPANIES TERM 1 - 23 January 2023

Sole proprietor (in Grade 10) Partnerships (in Grade 11)

❖ Companies originated as a result of the shortcomings of these other types of business.

Sole proprietor Partnership Company

One owner Two or more partners Shareholders

No legal regulations A few legal regulations Bound by Companies Act

Managed by owner Managed by partners Managed by board of directors

Memorandum of Incorporation (MOI) and Notice of

3 CH1 COMPANIES TERM 1 - 23 January 2023

❖ In other words, a company as a legal entity implies the following:

4 CH1 COMPANIES TERM 1 - 23 January 2023

❖ Limited liability to shareholders

5 CH1 COMPANIES TERM 1 - 23 January 2023

❖ In April 2011, a new Companies Act 71 of 2008 became law.

❖ The aims of the new Companies Act are:

❖ The Companies Act covers aspects such as:

❖ The Companies Act is administered by the Registrar of Companies, who issues

6 CH1 COMPANIES TERM 1 - 23 January 2023

Private Personal liabilities State-owned Public Non-profit

❖ In Grade 12 we will limit our discussions to:

7 CH1 COMPANIES TERM 1 - 23 January 2023

Aspect Public company Private company

May be incorporated by … one person one person

“Limited” “Proprietary Limited”

Minimum number of directors Three One

Shares can only be transferred after approval

Must have audited financial statements that

Only need to appoint a Social and Ethics

8 CH1 COMPANIES TERM 1 - 23 January 2023

Memorandum of Incorporation (MOI):

The Registrar will then:

A registration certificate will then be issued to the

The company must then compile a prospectus.

9 CH1 COMPANIES TERM 1 - 23 January 2023

❖ The shareholders, as the “owners” of a company, elect a Board of Directors (“board”)

❖ The board must consist of at least three directors.

❖ Directors can be executive, non-executive or independent.

10 CH1 COMPANIES TERM 1 - 23 January 2023

❖ Some of the board’s roles and functions are to:

11 CH1 COMPANIES TERM 1 - 23 January 2023

❖ A management team is usually appointed to do this.

❖ A good manager will be able to:

12 CH1 COMPANIES TERM 1 - 23 January 2023

❖ The independent auditors perform an audit of the company’s financial statements.

❖ Some of the duties of the audit committee include:

13 CH1 COMPANIES TERM 1 - 23 January 2023

14 CH1 COMPANIES TERM 1 - 23 January 2023

• Voting power on major issues

• Ownership in a portion of the company

❖ The following should be transacted during the AGM:

• Presentation of the directors’ report, audited financial statements

• Appointment of an auditor and an audit committee

• Any matters raised by shareholders.

15 CH1 COMPANIES TERM 1 - 23 January 2023

❖ The JSE is required by SECA to look after the interests of both:

❖ The “Listing Requirements” set regulations for, amongst others:

16 CH1 COMPANIES TERM 1 - 23 January 2023

Selling shares Generating profit Borrowing through loans