Study & Master Accounting Grade - by (Author) Elsabe Conradie, de

Study & Master
Grade
Study & Master
12
12
Accounting
Accounting
Accounting Learner’s Book

Study & Master Accounting Grade 12 has been especially
developed by an experienced author team according to the
Curriculum and Assessment Policy Statement (CAPS). This new
and easy-to-use course helps learners to master essential
content and skills in Accounting.
The comprehensive Learner’s Book includes:
case studies which deal with issues related to the real world,
and move learners beyond the confines of the classroom
margin notes to assist learners with new concepts –
especially GAAP flashes, that give learners guidance on
General Accepted Accounting Practice
CAPS
examples with solutions after the introduction of each
new concept.
The Teacher’s Guide includes:
a daily teaching plan, divided into the four terms, that
guides the teacher on what to teach per day and per week
moderation templates to assist teachers with assessment
solutions to all the activities in the Learner’s Book.
The CD-Rom with a PowerPoint® presentation includes:
CAPS
interactive examples to explain new concepts
links to all solutions to activities and assessments in
the Learner’s Book
a colourful, exciting and dynamic interface with
numerous graphics and tables designed to enhance
the learning experience.
Study & Master

Elsabé Conradie, a 2012 runner up for the National Teaching Awards for
Excellence in Secondary Teaching in the Western Cape, had her successes as an
educator highlighted when five of her Grade 12 learners were amongst the
WCED top 10 Accounting learners. Mandy Moyce is an experienced Accounting
teacher and subject head for Accounting and is currently the deputy principal at
the school where she teaches. Derek Kirsch taught Accounting, Business Studies
and Computer Studies before starting his own business developing educational
software. He is responsible for the innovative PowerPoint® presentation included
with this material.
Grade
12
Grade
12
Learner’s Book
www.cup.co.za
I S B N 978-1-107-66690-0
Elsabé Conradie • Derek Kirsch • Mandy Moyce

9 781107 666900
SM_Accounting_12_LB_CAPS_ENG_A4_cvr4.indd 1-3 2013/06/12 8:47 AM

Study & Master
Accounting
Grade 12
Learner’s Book

Consultant: Sophia M. Brink CA(SA) MCom.Tax
SM Accounting_G12_LB_TP
Acc GR12 LB.indb 1 Pantone.indd 1 2013/06/06 5:18PM
6/6/13 6:02:58 PM
cambridge university press
Cambridge, New York, Melbourne, Madrid, Cape Town,

Singapore, São Paulo, Delhi, Mexico City
Cambridge University Press

The Water Club, Beach Road, Granger Bay, Cape Town 8005, South Africa
www.cup.co.za
© Cambridge University Press 2013
This publication is in copyright. Subject to statutory exception

and to the provisions of relevant collective licensing agreements,
no reproduction of any part may take place without the written
permission of Cambridge University Press.
First published 2013
ISBN 978-1-107-38141-4
Editor: Christine de Nobrega

Typesetter: Brink Publishing & Design
Illustrators: Sue Beattie, Claudia Eckhard (Devine Dezine) and Warren Brink (Brink Publishing)
Cover image: Fotostock SA
……………………………………………………………………………………………………………
Cambridge University Press has no responsibility for the persistence or
accuracy of URLs for external or third-party internet websites referred to in
this publication, and does not guarantee that any content on such websites is,
or will remain, accurate or appropriate. Information regarding prices, travel
timetables and other factual information given in this work are correct at
the time of first printing but Cambridge University Press does not guarantee
the accuracy of such information thereafter.
……………………………………………………………………………………………………………
acknowledgements
Gallo Images: p.7

Big Stock: p.350 (all)
Shoprite Holdings for permission to use extracts from its 2011 Integrated Report: Chapter 5
If you want to know more about this book or any other Cambridge University Press
publication, phone us at +27 21 4127800, fax us at +27 21 419-8418 or send an e-mail to
capetown@cambridge.org
Acc GR12 LB.indb 2 6/6/13 6:02:58 PM

Contents
How to use this book iv
Chapter 1 F inancial accounting of companies – concepts, unique

ledger accounts and bookkeeping 1
Chapter 2 Financial accounting of companies – Final accounts,

Post-closing Trial Balance, IFRS and GAAP 41
Chapter 3 Financial accounting of companies – Financial statements 73
Chapter 4 Financial accounting of companies – analysis and interpretation

of financial statements 129
Chapter 5 Financial accounting of companies – analysis of published

financial statements 163
Chapter 6 Ethics 182
Chapter 7 Interpretation and reporting on the movement of fixed assets 205
Chapter 8 Financial accounting of close corporations 218
Chapter 9 Internal control 230
Chapter 10 Inventory systems 246
Chapter 11 Reconciliations 267
Chapter 12 Value-added Tax (VAT) 303
Chapter 13 Cost Accounting and manufacturing businesses 348
Chapter 14 Budgeting 394
Chapter 15 Revision activities 436
Glossary 475
Acc GR12 LB.indb 3 6/6/13 6:02:58 PM

HOW TO USE THIS BOOK
This book follows the Curriculum and Assessment Policy Statement (CAPS)
for Grade 12 Accounting.All the financial reports and statements are formatted
according to the latest CAPS.
This book also has the following extra features to help you study:
jural acts
Definitions are provided for new or difficult
enter into legal agreements and
assume legal rights and obligations words that appear for the first time.
i See an example of an audit

report on p 177
Info boxes provide additional information
to the topic being discussed.
A company's earnings are

its profits generated in a
financial period. Notes in the margin remind you of
important points.
GAAP flash
Historical cost principle: The GAAP flashes appear where GAAP
asset remains in the books of the
business at its original cost price
principles are being applied.
until it is disposed of.
Risk! warnings highlight potential problems

RISK! that a business may face.
KING CODE
The King Code crown indicate where the
King Code III is relevant.
INTERNAL
CONTROL
The internal control icon shows you where
internal control processes should be applied.
The internal audit icon shows where

INTERNAL internal
INTERNAL AUDIT
AUDIT
audit procedures will help you
to reduce risk within certain business
functions.
Acc GR12 LB.indb 4 6/6/13 6:02:59 PM

Chapter 1
Financial accounting of companies –
concepts, unique ledger accounts and
bookkeeping
By the end of this chapter, you will be able to: Key concepts
• Define and explain accounting • Bookkeeping of companies: • Companies Act • MOI
concepts unique to companies: Journals ■
• JSE • authorised shares
■Companies – public and private Ledger accounts ■
• issued shares • issue
■Companies Act Trial Balances ■
price • provisional income
■Registrar of Companies – (dealt with in Chapter 2) tax • tax assessment
Registration certificate • Transactions include: • interim dividends
■Memorandum of Incorporation Issuing of shares at issue price
■ • final dividends • limited
■Income tax / provisional Buying back shares ■ liability • corporate
income tax Loans and interest capitalised
■
governance • separation
■Dividends Income tax ■
of ownership • retained
income • directors’ fees
■Shares Dividends ■
• audit fees • interest

■Issue price Directors’ fees ■
capitalised • buying back
■Earnings Audit fees ■
shares
■Shareholders • Analysis and indication of the effect
■Directors of transactions on the accounting
■Auditors equation of a company
■Limited liability • Integration of ethical considerations
■Separation of ownership relating to companies – roles
from control of shareholders and directors,
■Retained income manipulation of share prices,
■Authorised share capital corporate governance, etc.
■Issued share capital • Application of GAAP principles
■Johannesburg Stock Exchange and IFRS
( JSE)
Do you have our

Memorandum of
Incorporation on file?
There is some information
I need to check.
F i n a n cia l acc o u n ti n g o f c o m pa n ies – c o n cepts , u n i q u e l e d ger acc o u n ts a n d b o o k k eepi n g • C h a p t e r 1 1
Acc GR12 LB.indb 1 6/6/13 6:02:59 PM

1. Introduction
Until now you have been dealing with two types of business: sole proprietor
(Grade 10) and partnerships (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 listed in the table below.
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 belong to owner Profits are distributed in Profits belong to the
specific ratios to partners company and are paid out
to the shareholders by way
of dividends
Owner has unlimited Partners have unlimited Shareholders’ liability is
liability – liable for all debts/ liability – liable for all debts/ limited – the company as
losses losses a legal entity is liable for
debts/losses
Managed by owner Managed by partners Managed by board of
directors
No foundation documents Partnership agreement Memorandum of
Incorporation and Notice of
Incorporation
2. 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
legal entity company as a legal entity implies the following:
has legal capacity to enter into agreements • A company has its own rights and responsibilities and operates independent
or contracts, assume obligations, incur from its shareholders.
and pay debts, sue and be sued in its • The company owns the assets in its own right.
own right, and to be held responsible • The income generated belongs to the company and therefore the company as
for its actions
an entity is liable for tax.
• The company is liable for the company’s obligations.
2.1 Advantages (benefits) of a company

• A legal existence separate from its management and shareholders – A company
jural acts may own assets in its own right, may incur debt and perform jural acts.
enter into legal agreements and assume • Limited liability to shareholders – Should a company’s business fail, a
legal rights and obligations shareholder’s only loss is the value of their shares. The personal assets of the
shareholder are protected. With a sole proprietor and partnership this is not the
limited liability case. In other words, the personal assets of the proprietor or partners may be
the concept whereby a person’s financial confiscated should the business fail.
liability is limited to the amount invested • Continuity – Directors, managers and employees only act as agents of the
in the company. The investor is not company. If they leave, retire or die, the company remains in existence.
personally responsible for the debts and
obligations of the company.
2.2 Disadvantages of a company
• Companies are costly and complex to administer.
• Companies are regulated by complex Corporations Law, and comprehensive
regulations of the Companies Act apply which protect the shareholders.
• Statutory audit of financial statements for companies with public liability
are required.
2 Chapter 1 • F i n a n cia l acc o u n ti n g o f c o m pa n ies – c o n cepts , u n i q u e l e d ger acc o u n ts a n d b o o k k eepi n g
Acc GR12 LB.indb 2 6/6/13 6:02:59 PM

3. Companies Act
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
Act are to simplify the procedure for forming companies, and to reduce the cost
of forming and running a company. Smaller companies could not afford the high
audit fees and the new Act brings relief to these companies. The Companies Act Companies Act
is administered by the Registrar of Companies and covers aspects such as the regulates many aspects of a company’s
procedures for forming a company, how capital may be raised, how they should be existence and conduct
run and what information should be disclosed in financial statements.
3.1 Registrar of Companies

The Minister of Finance shall, subject to the laws governing the public service,
appoint a Registrar of Companies, who shall exercise the powers and perform the
duties assigned to the Registrar by this Act. The Registrar of Companies will issue a
registration certificate as evidence of the incorporation and registration of a company.
3.2 Types of companies

Profit companies Non-profit companies
Private company Personal liabilities State-owned Public company Ltd. NPC
(Pty) Ltd. company Inc. company SOC Ltd.
Its MOI prevents it from MOI states that the They are defined in The public is invited Certain aspects of
offering securities to directors and past terms of the Public to buy shares and the Companies Act
the public and restricts directors are jointly Finance Management these shares can be do not apply to these
the transferability of liable, together with the Act or are owned by a transferred freely. companies.
securities. company, for any debts municipality.
and liabilities that were
contracted during their
periods of office.
In Grade 12, we will only look at the difference between public and private
companies and we will only discuss the bookkeeping process of public companies.
3.3 Public and private companies i The public interest score for each
financial year is calculated as the
The following table compares the differences between the two types of companies. sum of the following:
Public company Private company • Number of points equal to the number
One person may incorporate a public company. One person may incorporate a private company. of employees
• One point for every R1 million in
The company name ends in “Limited”, The company name ends in “Proprietary
outstanding unsecured debt (e.g.
abbreviated to Ltd. Limited”, abbreviated to (Pty) Ltd.
loans, creditors)
The minimum number of directors is three. The minimum number of directors is one.
• One point for every R1 million in
The public is invited to buy shares. The public is not invited to buy shares. turnover during the financial year
Shares can be transferred freely. Shares can only be transferred after approval • One point for every security holder
by the Board of Directors.
Public companies must appoint an auditor, Private companies appoint an audit committee
audit committee and company secretary. only to the extent provided for in the MOI. company secretary
All public companies must have audited Private companies only need to be audited if:
ensures the Board remains aware of its
financial statements that should be • It has assets exceeding a value of R5 million.
duties and responsibilities and attends
presented to shareholders at the AGM within • Their public interest score exceeds 750 points.
all meetings of the Board and its sub-
six months after financial year-end. • Public interest score is between 300 and 750.
committees
• The financial statements were internally
compiled.
Public companies must appoint a Social and Private companies only need to appoint a
Ethics Committee. Social and Ethics Committee if their public
interest score exceeds 750 points.
They raise capital by issuing shares to the public. They raise capital by issuing shares to the owners.
F I n A n C I A l A C C o u n T I n G o F C o m PA n I E S – C o n C E P T S , u n I q u E l E d G E R A C C o u n T S A n d B o o k k E E P I n G • C h a p t e r 1 3
Acc GR12 LB.indb 3 6/6/13 6:03:00 PM

Memorandum of 3.4 Formation of a company
Incorporation (MOI) A company is founded in terms of the regulations of the Companies Act 71 of
a document that sets out rights, duties 2008. When registering and founding a company, the Companies Act stipulates the
and responsibilities of shareholders, following:
directors and others within and relation
• A Memorandum of Incorporation (MOI) and Notice of Incorporation must
to a company
be drawn up and submitted to the Registrar of Companies (Companies and
Notice of Incorporation
Intellectual Property Commission or CIPC).
• The Registrar will then:
a formal announcement to the public,
indicating the formation of a new
■ approve the name of the company
legal entity ■ enter the prescribed information concerning 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.
prospectus • A prospectus has to be compiled. The prospectus should contain, among
a document describing the main features
others, the name and address of the company, details of the directors,
of a business for prospective buyers particulars of share capital, etc.
3.5 Board of Directors

The shareholders, as the “owners” of a company, elect a Board to act as the co-
ordinating and policy-making body of the company. The Board must consist of
at least three directors. The MOI may allow for a higher number of directors
if required. Most boards of public companies have between eight and twelve
directors.
The directors of a company are elected by the holders of voting rights in the
company, but the Act does allow for the direct appointment of a director by a
person specified in the MOI. However, at least 50% of directors must be elected by
the shareholders.
A person acting in the capacity of a director must exercise his powers and
perform his functions:
• in good faith and for a proper purpose
• in the best interest of the company
• with the degree of skill, care and diligence that may reasonably be expected of
someone with the same knowledge and skills.
jointly and severally Directors of a company may be held jointly and severally liable for any loss,
both together and separately damage or costs sustained by the company as a result of a breach of the director’s
fiduciary duty or the duty to act with care, skill and diligence.
Directors can be executive, non-executive or independent. The King III Report
fiduciary defines these as follows:
being responsible for property and power • Executive directors are involved in the day-to-day management of the
entrusted to you company and/or 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 have not been employed by the company in any way
during the previous three years and should be totally independent from any
business relationship (supplier/customer) with the company, since their role is
to bring to the Board independent judgment and broad business experience.
Acc GR12 LB.indb 4 6/6/13 6:03:00 PM

King III and the JSE listing requirements recommend that the positions of chairperson
chairperson and chief executive officer (CEO) of the company should be someone who presides over a meeting,
separated, or that the Board appoint a lead independent director who will bring committee, board etc.
some independence to board discussions.
Some of the Board’s roles and functions are to: Chief Executive Officer (CEO)
• provide strategic direction to the company and approve strategic plans the managing director who controls the
• retain full and effective control of the company work of the other directors
• ensure that the company complies with all laws and regulations
• delegate appropriate powers to management and to monitor them on an
KING CODE
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.
3.6 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 officials, who are responsible for controlling and managing the company’s i King III: a document that sets out
rights, duties and responsibilities of
activities. There may be a manager each for sales, purchases, assets, human shareholders, directors and others within
resources, marketing etc. and in relation to a company
Management is extremely important and is described as “the process of JSE listing requirements: rules and
working with and through others to achieve organisational objectives in an regulations to which all listed companies
efficient and ethical manner” (Kreitner-Kinicki: 2006). and directors must comply
The main role of management in a company is to meet their company’s
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 to ensure that benchmarks are
reached in time
• lead, motivate, do teambuilding and have good relationships with employees
• have good communication skills externally and internally in their organisation.
3.7 Independent auditors

All public companies must appoint a registered independent auditor (in terms of
the Auditing Professional Act) at every Annual General Meeting (AGM). When a Annual General Meeting
firm is appointed as auditor, the audit committee must also verify the independence usually referred to as an AGM; a formal
of the individual that will be responsible for the audit. The Act provides for the meeting which is held once a year
regular rotation of auditors, so the appointed auditor must be rotated every five
years. The independent auditor expresses an opinion on the financial statements
and indicates whether the user can rely on the financial statements.
3.8 Audit and Risk Committee

The shareholders of all public companies must appoint an audit committee at
every AGM. The audit committee should consist of at least three members who
must be directors of the company and:
• NOT be involved in the day-to-day management of the company
• NOT be a full time executive employee for the company for the past three
financial years
• NOT be a material supplier or customer of the company so that outside parties
think that person’s judgement would be affected by that relationship
• NOT be related to anybody who falls within the above criteria.
Acc GR12 LB.indb 5 6/6/13 6:03:00 PM

The duties of the audit committee include:
• nominating an independent auditor
• determining the audit fee
• ensuring the appointment of the auditor complies with the Companies Act and
other relevant legislation
• determining the nature and extend of non-audit services
• preparing a report to be included in the annual financial statements describing
how the committee carried out to its functions, stating whether the auditor
was independent, and commenting on the financial statements, accounting
practices and internal control measures of the company
• receiving and dealing with relevant complaints
• making submissions to the board regarding the company’s accounting
principles, financial controls, recording and reporting
• evaluating the company’s exposure and responses to significant business,
strategic, statutory and financial risks
• ensuring effective communication between directors, management and internal
and external auditors
• reviewing compliance with JSE listing requirements and King III.
3.9 Social and Ethics Committee

According to the Act, every listed public company and other company that has,
in any of the previous five years, had a public interest score of at least 750 points,
must appoint a Social and Ethics Committee at their AGM. The committee must
consist of at least three directors. At least one of these directors must not be
involved in the day-to-day management of the company’s business. The Social and
Ethics Committee must consult with a social and ethics advisory panel, which are
representatives from the employees of the company, the community, as well as
certain professional bodies. The Social and Ethics Committee must report to the
shareholders at the AGM.
The Social and Ethics Committee has to monitor the company’s activities with
regards to matters relating to:
• social and economic development
• good corporate citizenship, including where the company:
■ promotes equality, prevents unfair discrimination and reduces corruption
■ contributes to development of communities where it does most of its
business
■ records sponsorship, donations and charitable giving
• the environment, health and public safety, including the impact of the
company’s activities
• consumer relationships, including the company’s advertising, public relations
and compliance with consumer protection laws
• labour and employment.
3.10 Shareholders
A shareholder has the following rights:
• Voting power on major issues such as electing directors and fundamental
changes. This takes place at the AGMs. Usually a shareholder gets one vote for
every share they own.
• An entitlement to dividends – they share in the profits of the company.
• 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 books and records.
Acc GR12 LB.indb 6 6/6/13 6:03:00 PM

The following should be transacted during the AGM:
• Presentation of the directors’ report, audited financial statements and report of i Promoters: are the initial
group of people who decide to
the audit committee start the company.
• Election of directors
• Appointment of an auditor and an audit committee
• Any matters raised by shareholders.
4. Separation of ownership from control

(corporate governance)
To separate ownership from control means that owners have delegated part of Separation of ownership
their control and rights to the managers of the company. However, they do keep one group of people, the directors,
the right to take away the delegated control and rights from the managers if they is responsible to manage the money
are dissatisfied with how the business is managed. In companies, the shareholders contributed by another group of people,
elect directors, who appoint managers. Directors must represent shareholders’ the shareholders
interest and determine the broad policies that the managers will carry out.
In a company, in contrast to a partnership, ownership is separated from
operational control. This separation creates the need for independent monitoring
and control. The Companies Act provides rules and regulations for the directors to
follow to safeguard the company’s shareholders.
5. Johannesburg Stock Exchange Limited (JSE)

The JSE Limited, previously the JSE Stock Exchange, is the largest stock exchange JSE
in Africa. The JSE provides a market where shares can be traded freely under a a place where shareholders can buy and
regulated procedure. sell shares according to certain rules
The JSE is bound by the provisions of the Stock Exchange Control Act 1 of
1985 (SECA), and all actions taken and requirements issued must be in terms
of this Act. The JSE is required by SECA to look after the interests of both the
investing public and its members.
It is the duty of
the JSE to prescribe
the rules and IFRS
regulations, in the International Financial Reporting
form of the Listing Standards
Requirements, with
which all member
companies and
directors must
comply, including
that companies
should adopt
IFRS in financial
statements,
requirements in
respect of auditors,
requirements
regarding
corporate
governance, etc.
Acc GR12 LB.indb 7 6/6/13 6:03:01 PM

Activity 1.1
Match the persons or institutions listed in Column A, with their description in Column B.
Write out these descriptions in your Exercise Book, so that you a have a summary of all
the people and institutions connected to companies.
Column A: Person / Institution Column B: Description

1. promoters A. provides a market where shares can be
traded freely under a regulated procedure
2. shareholders B. the initial group of people who decided to
start a company
3. Registrar of Companies C. involved in the day-to-day management of
the company and a member of the Board
4. independent auditor D. a member of the Board not involved in the
day-to-day management of the company;
brings independent judgment to the Board
5. Chief Executive Officer (CEO) E. the owners of a company and who have
voting rights
6. SARS F. expresses an opinion on the financial
statement and indicates whether the reader
can rely on the financial statements
7. company secretary G. the institution to which a company must pay
tax on the profit earned
8. JSE H. the managing director who controls the
work of the other directors
9. executive director I. attends all Board and sub-committee
meetings and ensures that all the legal
matters relating to a company are attended to
10. Non-executive director J. a group that monitors the impact of the
company’s activities on the environment and
public health and reports to shareholders
11. Social and Ethics Committee K. issues a registration certificate so that a
company can start doing business
6. Shares
A company needs funds to start and then run a business. They can get these funds
in the following ways:
• raising funds from the shareholders (selling shares)
• generating profit (internal source)
• borrowing through loans (external source).
There are two basic classes of shares that a company may issue:
• ordinary shares
• preference shares.
Preference shareholders have preference over the ordinary shareholders in the
event where a company is liquidated. Ordinary shares are therefore riskier from
an investor’s point of view, but they usually outperform preference shares on the
stock markets.
Ordinary shareholders are not guaranteed to receive dividends because
ordinary dividends depend on the profitability of a company and its cash flow.
Preference shareholders generally receive a fixed percentage dividend annually.
In Grade 12, however, we are only going to deal with ordinary shares, not
preference shares.
Acc GR12 LB.indb 8 6/6/13 6:03:01 PM

6.1 Authorised and issued share capital
Authorised shares are the maximum number of shares a company’s
Memorandum of Incorporation permits it to issue.
Issued shares are the number of shares the company has actually sold.
Issue price is the price for 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.
6.2 Issuing shares: Bookkeeping

Example
Issuing ordinary shares
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
1. Journal entry
The entry for this transaction can be done either in the General Journal or the
Cash Receipts Journal.
Cash Receipts Journal of Danjo Traders Ltd. for March 2018 CRJ
Doc. Day Details Fol. Analysis of Bank Sundry accounts
no. receipts Amount Details
65 31 Shareholders B1 990 000 990 000 990 000 Ordinary share capital
B6
OR
General Journal of Danjo Traders Ltd. for March 2018 GJ

Doc. no. Day Details Fol. Debit Credit
31 Bank B6 990 000
Ordinary share capital B1 990 000
(Issue 60 000 shares @ R16,50)
2.
General Ledger of Danjo Traders Ltd.
Balance Sheet accounts
Dr Ordinary Share Capital B1 Cr
Date Details Fol. Amount Date Details Fol. Amount
2018
Mar 31 Bank CRJ 990 000
Acc GR12 LB.indb 9 6/6/13 6:03:01 PM

Example continued
Dr Bank B6 Cr
2018
Mar 31 Ordinary share capital CRJ 990 000
3.
Assets Owner’s equity Liabilities

Effect Reason Effect Reason Effect Reason
+ 990 000 Cash increase + 990 000 Increase in ordinary
share capital
Danjo Traders Ltd.

NOTES TO THE FINANCIAL STATEMENTS
7. ORDINARY SHARE CAPITAL
AUTHORISED
Number of ordinary authorised shares: 100 000 shares
ISSUED
0 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 28 February 2019 990 000
Activity 1.2
According to the Memorandum of Incorporation of Xoseka Traders Ltd., they are

authorised to issue 110 000 shares. On 1 July 2019 Xoseka Traders Ltd. offered 60 000
ordinary shares for sale to the public at R7 per share.
By 31 July 2019 the company had received applications and full payment for all
these shares.
The financial year of Xoseka Traders Ltd. ends on 30 June.
Required
1. Show the entry for this transaction in the Cash Receipts Journal for July 2019.
2. Show the entry in the General Ledger.
3. Show the effect on the accounting equation.
4. Prepare the note for Share Capital to the financial statements.
Activity 1.3
Francken Ltd. are registered to issue 140 000 ordinary shares. The following entry
appeared in their books on 1 March 2018, the beginning of their financial year:
Ordinary share capital R200 000 (50 000 shares)
On 1 May 2018 the company offered a further 70 000 ordinary shares to the public at
R4,30 each. By 31 May 2018 the company had received applications and full payment for
all these shares.
Required
1. Show the entry for this transaction in the General Journal for May 2018.
2. Show the entry in the Ordinary Share Capital account in the General Ledger.
4. Prepare the note for Share Capital to the financial statements.
Acc GR12 LB.indb 10 6/6/13 6:03:01 PM

7. Income tax
In a sole proprietor or partnership, the net profit belongs to the owner or partners.
The owner or partners therefore pay tax in their personal capacities.
As mentioned previously, a company is a legal entity. The net profit therefore
belongs to the company and the company has to pay income tax. tax return form
South African Revenue Services (SARS) is responsible for calculating the
has to be completed in order to file income
amount of income tax the companies have to pay. It bases its calculations on a taxes with SARS every year
company’s tax return form. Once the amount has been calculated, SARS sends
the company a tax assessment form, stating the amount of income tax due.
In terms of existing legislation, companies are obliged to pay provisional tax assessment form
tax during the tax period. The first provisional tax is due six months after the a form that SARS sends to the company to
beginning of the financial year. This transaction is recorded in the company’s Cash state the amount of income tax that is due
Payments Journal and debited against the SARS (Income Tax) account. As this is an
advance payment, it is considered an asset until the company calculates its final tax provisional tax
at the end of the financial year.
a system that allows companies to
A second payment is then made to SARS, and is recorded in the same way as provide for their final tax liability by
the first at year end. paying at least two instalments during
Companies are required to submit their financial statements to SARS. A final the year of assessment
tax assessment is then issued by SARS and outstanding income tax needs to be paid
within seven months of their year end. For our purposes, income tax is considered
a year-end adjustment. It is recorded in the General Journal as follows:
Debit: Income Tax account
Credit: SARS (Income Tax) account
Two provisional payments Receive tax 7 months after

Beginning of assessment year end
financial year
1st payment 2nd payment 3rd payment
01 Mar 2017 31 Aug 2017 28 Feb 2018 30 Sep 2018
6 months
Last day of
financial year
First payment: 6 months after beginning of

financial year Submit tax
Second payment: last day of financial year return form
Third payment: 7 months after year end
Should the provisional tax paid be less than the total tax due, the SARS
(Income Tax) account will have a credit balance and be considered a liability.
However, should the provisional tax paid exceed the total tax due, the
SARS (Income Tax) account will have a debit balance and be considered an asset
(advance payment).
Acc GR12 LB.indb 11 6/6/13 6:03:02 PM

Example
Income tax
The financial year of Danjo Traders Ltd. ends on 28/29 February.
Transactions for the financial year 1 March 2018 to 28 February 2019

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.

The following payments were made to SARS during the financial year:
• Paid R7 000 that was still payable to SARS according to the calculations on
31 May 2019.
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
1. Show the journal entries for the year 1 March 2018 to 28 February 2019.
2. Show the effect of these transactions from 1 March 2018 to 28 February 2019
on the accounting equation.
3. Show the entries in the General Ledger for the period 1 March 2018 to
29 February 2020.
4. Show the entry for SARS (Income Tax) on 28 February 2019 and 29 February
2020 in the notes to the Statement of Financial Position (Balance Sheet).
Solution
1. The entry for this transaction can be done in the General journal or the
Cash Payments Journal:
Cash Payments Journal of Danjo Traders Ltd. CPJ

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

28 Income tax 162 000
SARS (income tax) 162 000
(540 000 × 30%)
Acc GR12 LB.indb 12 6/6/13 6:03:02 PM

Example continued
2. Accounting equation
Date Assets Owner’s equity Liabilities

2018 –75 000 Cash decreases –75 000 Debt to SARS
31 Aug decreases
2019 –80 000 Cash decreases –80 000 Debt to SARS
28 Feb decreases
2019 –162 000 Income tax +162 000 Debt to SARS
28 Feb – decreases increases
remaining
profit
3.
Dr SARS (Income Tax) B12 Cr
2018 2019
Aug 31 Bank CPJ 75 000 Feb 28 Income tax (540 000 × 30%) GJ 162 000
2019
Feb 28 Bank CPJ 80 000
Balance c/d 7 000
162 000 162 000
2019 2019
May 31 Bank CPJ 7 000 Mar 01 Balance b/d 7 000
2020
Aug 31 Bank CPJ 85 000 Feb 29 Income tax (550 000 × 30%) 165 000
2020
Feb 29 Bank CPJ 85 000 Balance c/d 5 000
177 000 177 000
2020
Mar 01 Balance b/d 5 000
Nominal account
Dr Income Tax N22 Cr
2019 2019
Feb 28 SARS (income tax) GJ 162 000 Feb 28 Appropriation GJ 162 000
162 000 162 000
2020 2020
Feb 29 SARS (income tax) GJ 165 000 Feb 29 Appropriation GJ 165 000
165 000 165 000
Acc GR12 LB.indb 13 6/6/13 6:03:02 PM

Example continued
4.
Danjo Traders Ltd.
NOTES TO THE FINANCIAL STATEMENTS ON 29 FEBRUARY 2019
9. TRADE AND OTHER PAYABLES
Trade creditors –
7 000

5. TRADE AND OTHER RECEIVABLES
Trade debtors –
5 000
Activity 1.4
The financial year of Tungata Traders Ltd. ends on 28/29 February.

On 1 March 2020 the balance of the SARS (Income Tax) account was nil. Provisional
payments for income tax made during the year ended 28 February 2021 were as follows:
Tungata Traders Ltd. calculated the profit before tax for the year ended 28 February 2021
to be R570 000. Tax should be provided for at 30% for the 2021 tax year.

The following payments were made to SARS during the financial year:
Tungata Traders Ltd. calculated the profit before tax for the year ended 28 February 2022
to be R620 000. Tax should be provided for at 30% for the 2022 tax year.
Required
1. Show the journal entries for the period 1 March 2020 to 28 February 2021.
2. Show the effect of these transactions from 1 March 2020 to 28 February 2021 on the
accounting equation.
3. Show the entries in the General Ledger for the period 1 March 2020 to 28 February
2022.
4. Show the entry for SARS (Income Tax) on 28 February 2021 and 28 February 2022 in
the notes to the Statement of Financial Position (Balance Sheet).
Acc GR12 LB.indb 14 6/6/13 6:03:02 PM

8. Dividends
dividends
How are shareholders rewarded for the money they invested in a company if the
the part of the profit that is paid out to
profit generated belongs to the company as legal entity? Shareholders receive shareholders
dividends on their shares.
According to the new Companies Act, a company has to fulfil certain
requirements to declare and distribute dividends: solvency test
• The Board of Directors must authorise the distribution. requires the assets of a company to equal
• It reasonably appears that the company will satisfy the solvency and liquidity or exceed the liabilities
tests immediately after completing the proposed distribution; in other words, it
won’t go into liquidation if it pays out all the dividends. liquidity test
Interim dividends are declared and distributed (paid) during the financial year and requires that the company should be able
to pay its debts as they become due in the
before the company’s annual earnings are finalised. A company may choose to pay
ordinary course of business for a period of
interim dividends quarterly or half-yearly as long as it has enough undistributed 12 months after the transaction has been
profits brought forward from previous financial years. As interim dividends are concluded
a payment, the transaction will be entered in the CPJ and will be recorded in the
General Ledger as follows:
interim dividends
Debit: Dividends on Ordinary Shares (O/E –) paid to shareholders during the
Credit: Bank (A –) financial year
Final dividends are declared at the end of the financial year when the directors
final dividends
are aware of the company’s profitability and financial strength. As final dividends
are only declared, not distributed, at the end of the financial year, it will be declared at the end of the financial year
entered as a liability in the Statement of Financial Position (Balance Sheet). These
final dividends will only be paid in the next financial period. As this is a non-cash
transaction, it will be entered in the GJ and will be recorded in the General Ledger
as follows:
Debit: Dividends on Ordinary Shares (O/E –)
Credit: Shareholders for Dividends (L +)
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.

The following transactions with regards to dividends took place during the
financial year:
• 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

The following transactions with regards to dividends took place during the
financial year:
• 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
Acc GR12 LB.indb 15 6/6/13 6:03:02 PM

Example continued
Required
1. Show the journal entries on 31 August 2018 and 28 February 2019.
2. Show the effect of these transactions from 1 March 2018 to 28 February 2019
on the accounting equation.
3. Show the entries in the General Ledger for the period 1 March 2018 to
29 February 2020.
4. Show the entry for Shareholders for dividends on 28 February 2019 and
29 February 2020 in the notes to the Statement of Financial Position
(Balance Sheet).
Solution
1. The entry for this transaction can be done in the General journal or the Cash
Payments Journal.
Cash Payments Journal of Danjo Traders Ltd. for August 2018 CPJ
Doc. Day Details Fol. Bank Sundry accounts
no. Amount Details
31 Shareholders 12 000 12 000 Dividends on ordinary shares
R60 000 × ___20  

 100
OR

28 Dividends on ordinary shares 36 000
Shareholders for dividends 36 000
60
(Final dividends declared (60 000 × ___
 100 ))

2018 –12 000 Cash decreases –12 000 Dividends –
31 Aug distribution of
profit
2019 –36 000 Dividends – +36 000 Debt to
28 Feb distribution of Shareholder
profit for dividends
increases
3.
Dr Shareholders for Dividends B13 Cr
2019 2019
Apr 02 Bank CPJ 36 000 Feb 28 Dividends on ordinary shares GJ 36 000
36 000 36 000
2020
Feb 29 Dividends on ordinary shares GJ 64 200
Acc GR12 LB.indb 16 6/6/13 6:03:02 PM

Example continued
Nominal account
Dr Dividends on Ordinary Shares N24 Cr
2018 2019
Aug 31 Bank (60 000 × 0,2) CPJ 12 000 Feb 28 Appropriation account GJ 48 000
2019 Shareholders for dividends
Feb 28 (60 000 × 0,6) GJ 36 000
48 000 48 000
2019 2020
Aug 31 Bank (60 000 × 0,43) CPJ 25 800 Feb 29 Appropriation account GJ 90 000
2020 Shareholders for dividends
Feb 29 (60 000 × 1,07) GJ 64 200
90 000 90 000
4.
Danjo Traders Ltd.
Trade creditors –
43 000
Danjo Traders Ltd.

Trade creditors –
64 200
Activity 1.5
The financial year of Tungata Traders Ltd. ends on 28/29 February. On 29 February 2020,
Danjo Traders Ltd. has an issued share capital of R800 000 consisting of 160 000 ordinary
shares.

The following transactions with regards to dividends took place during the financial year:
• Declared and paid interim dividends of 16 cents per share on 31 August 2020
The following transactions with regards to dividends took place during the financial year:
• Paid the amount owed to shareholders that was declared in the previous financial year
on 6 April 2021.
• Declared and paid an interim dividend of 18 cents per share on 31 August 2021
Acc GR12 LB.indb 17 6/6/13 6:03:02 PM

Required
1. Show the journal entries on 31 August 2020 and 28 February 2021.
2. Show the effect of these transactions from 1 march 2020 to 28 February 2021 on the
accounting equation.
3. Show the entries in the General ledger for the period 1 march 2020 to28 February 2022.
4. Show the entry for Shareholders for dividends on 28 February 2021 and 28 February
2022 in the notes to the Statement of Financial Position (Balance Sheet).
A company’s earnings are 9. Retained income (accumulated profit)

its profits generated in a
financial period. Reserves are part of the equity of a company and consist of profits that are not
distributed, but are saved for future use. We should distinguish between retained
income and other reserves, but in Grade 12 we are only going to look at retained
income.
retained income Retained income is the portion of the earnings or net profit that is not
the part of the profit that is not distributed distributed to shareholders in the form of dividends during the current financial
to the shareholders year. It is kept in reserve to use for future payments of dividends or it can be used
to create bigger profits in the future.
The retained income amount is calculated in the Appropriation account, after
income tax and dividends for the year are deducted.
Example
Calculating retained income
February 2018 Danjo Traders Ltd had an issued share capital of R990 000
On 28 February 2019 the following information was given:
• Net profit for the accounting period ending 28 February 2019, according to
the Profit and 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.
Solution
The Appropriation and Retained Income accounts will be as follows:

Dr Appropriation account F3 Cr
2019 2019
Feb 28 Income tax GJ 162 000 Feb 28 Profit and loss account GJ 540 000
Dividends on ordinary shares GJ 48 000
Retained income GJ 330 000
540 000 540 000
18 Chapter 1 • F I n A n C I A l A C C o u n T I n G o F C o m PA n I E S – C o n C E P T S , u n I q u E l E d G E R A C C o u n T S A n d B o o k k E E P I n G
Acc GR12 LB.indb 18 6/6/13 6:03:03 PM

Example continued
Dr Retained Income B2 Cr
2019
Feb 28 Appropriation account GJ 330 000
Retained Income is an owner’s equity account, as it is the part of the

profit that was not distributed to the shareholders.
In the following financial year, the balance of the Retained Income account first
needs to be written back to the Appropriation account. The amount available for
distribution would then be the retained income of the previous financial year plus
the profit generated during the current financial year.
Example
Calculating retained income (continued)
February 2018 Danjo Traders Ltd has an issued share capital of R990 000
On 1 March 2019 the following balances appeared in the books of Danjo
Traders Ltd.:

Retained income B2 330 000
On 29 February 2020, the end of the financial year, the following information
was given:
• Net profit for the accounting period ending 29 February 2020, according to
the Profit and Loss account, was R550 000.
• Income tax for the financial year amounts to R165 000.
• Total dividends declared and paid during the financial year amounts to
R90 000.
Required
1. Create the Appropriation and Retained Income accounts in the General
Ledger.
2. Show the entries as they would appear in the General Journal.
3. Show Note 8 to the Financial Statements for Retained Income.
Solution
1.
2020 2020
Dividends on ordinary shares GJ 90 000 Retained income GJ 330 000
880 000 880 000
Acc GR12 LB.indb 19 6/6/13 6:03:03 PM

Example continued
2020 2019
Feb 29 Appropriation account GJ 330 000 Mar 01 Balance b/d 330 000
2020
2.
29 Retained income 330 000
Appropriation account 330 000
(Write back retained income from previous year)
Profit and loss account 550 000
(Carry net profit over from Profit and Loss to
Appropriation account)
Income tax 165 000
Dividends on ordinary shares 90 000
Retained income 625 000
(Calculating new balance for retained income)
3.
Danjo Traders Ltd.
NOTES TO FINANCIAL STATEMENTS ON 29 FEBRUARY 2020
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
Activity 1.6
The financial year of Zoey Ltd. ends on 28/29 February. On 28 February 2019 Zoey Ltd. has
an issued share capital of R798 000 consisting of 133 000 ordinary shares.
On 1 March 2019 the following balances appeared in the books of Zoey Ltd.:

On 29 February 2020, the end of the financial year, the following information was given:
• Net profit for the accounting period ending 29 February 2020, according to the Profit
and Loss account, was R532 000.
• Income tax for the financial year amounted to R159 600.
• Total dividends declared and paid during the financial year amounted to R148 960.
Acc GR12 LB.indb 20 6/6/13 6:03:03 PM

Required
1. Show the Appropriation account in the General Ledger on 29 February 2020.
2. Show these closing transfers on 29 February 2020 in the General Journal.
3. Show the note for retained income for the notes to the financial statements on
29 February 2020.
Informal assessment 1.1 Concepts relating to companies
Marks: 24 Time: 12 minutes
Match the concepts relating to companies in Column A to the explanations for each
concept in Column B. Write the number in Column A along with the correct explanation
rewritten in full.
Column A: Concept Column B: Explanation

1. Authorised shares A. the portion of the earnings distributed to the
shareholders
2. Issued shares B. an entity that has the 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
3. Issue price C. the portion of the profit that the government is
entitled to and is paid over to SARS
4. Dividends D. the investor is not personally responsible for the
debts and obligations of the company
5. Interim dividends E. a portion of the earnings that are kept by the
company for future use
6. Final dividends F. dividends that are paid during the financial year
7. Income tax G. the price at which shares are sold
8. Provisional income tax H. dividends that are declared, but not yet paid, at
the end of the financial year
9. Legal entity I. shareholders own the company, but the directors
run the company
10. Limited liability J. the number of shares that a company has decided
to issue up to a certain date
11. Separation of K. the maximum number of shares a company is
ownership from control permitted to issue according to its MOI
12. Retained income L. payments that are made to SARS during the
financial year (six months after financial year-end)
[12 × 2 = 24]
Example
Combined transactions
Nelson Traders Ltd. began operating on 1 March 2012. The company has an
issued share capital of R100 000 comprising 20 000 shares. During the financial
year, the following transactions took place:
2022
August
31 Paid provisional income tax to SARS of R36 000 (cheque no. 128).
31 The company declared and paid interim dividends of 75c per share
(cheque no. 129).
Acc GR12 LB.indb 21 6/6/13 6:03:03 PM

Example continued
2023
February
27 The company paid further provisional income of R24 000.
28 A final dividend of 20% of the share capital is declared.
The net profit of the company as calculated in the Profit and Loss account was
R210 000.
According to SARS, income tax amounts to 30% of the net income.
Required
1. Show the transactions in the Cash Payments Journal for 31 August.
2. Show the entries for the above transactions in the General Ledger.
3. Show the entries in the General Journal for 28 February 2023.
Solution
1.
Cash Payments Journal of Nelson Traders Ltd. for August 2022 CPJ
Doc Day Name of Payee Fol. Bank Sundry accounts
no. Amount Details
128 31 SARS B8 36 000 36 000 SARS (income tax)
Dividends on ordinary
129 31 Shareholders N22 15 000 15 000 shares
2.
General Ledger of Nelson Traders Ltd.
2022 2023
Aug 31 Bank CPJ 36 000 Feb 28 Income tax 63 000
2023
28 Balance c/d 3 000
63 000 63 000
2023
The provisional income tax payments are entered as a debit in the SARS (Income
Tax) account while Bank is credited.
The income tax for the year is calculated as follows:
R210 000 × 30% = R63 000
The Income Tax account is debited and the SARS (Income Tax) account credited
with this amount.
The balance of R3 000 remaining at the end of the financial year indicates
that the company still owes SARS R3 000.
The SARS (Income Tax) account is therefore a liability account in this example
because the company owes SARS money.
Acc GR12 LB.indb 22 6/6/13 6:03:03 PM

Example continued

2023
This account is only used for the entry at the end of the financial year
when dividends have been declared but have not yet been paid.
The Shareholders for Dividends account is therefore a liability because
the company still owes the shareholders R20 000.
Dr Income Tax N21 Cr

2023 2023
Feb 28 SARS (income tax) GJ 63 000 Feb 28 Appropriation account GJ 63 000
63 000 63 000
This account is also created at the end of the financial year.
Note
Provisional income tax is not entered in this account. It is a nominal
account that decreases profit, and is closed to the Appropriation account
at the end of the financial year.

2022 2023
Aug 31 Bank CPJ 15 000 Feb 28 Appropriation account GJ 35 000
2023
Feb 28 Shareholders for dividends GJ 20 000
35 000 35 000
Calculation of dividends
R20 000 × 0,75 = R15 000
R100 000 × 20% = R20 000
Note that the interim dividends declared and paid during the year are
entered
into this account. The contra-entry is made in Bank because the
dividends have been paid.
The contra-entry for the R20 000 entered at the end of the financial
year is made in the Shareholders for Dividends account because the
dividends have been declared but have not yet been paid.
The Dividends on Ordinary Shares account is also a nominal account,
a distribution of profit,and is closed to the Appropriation account at the
end of the financial year.
Therefore the company’s total distribution in respect of dividends
for the financial year was R35 000
Acc GR12 LB.indb 23 6/6/13 6:03:03 PM

Example continued
2023 2023
Dividends on ordinary shares GJ 35 000
Accumulated profits GJ 112 000
210 000 210 000
This is the third final account after the Trading account and the Profit and Loss
account have been completed.
The company therefore has R210 000 to use for payments. Income tax of
R63 000 is due and it has been decided to pay out dividends totalling R35 000 to
shareholders.
The remaining R112 000 (210 000 – 63 000 – 35 000) is entered into the
Retained Income account.
2023
This amount represents the portion of the net income that has not been
appropriated, but has been retained by the company for its own use.
The Retained Income account is similar to an owner’s Capital account: it
increases the owner’s interest or, as it is called in the case of a company, the
shareholders’ equity.
3.
General Journal of Nelson Traders Ltd. on February 2023 GJ
28 Income tax N21 63 000
SARS (income tax) B8 63 000
(Income tax to the year brought into account)
Dividends on ordinary shares N22 20 000
Shareholders for dividends B9 20 000
(A dividend of 20% of the share capital has been
declared)
Appropriation account F3 210 000
Income tax N21 63 000
(Closing transfers)
Acc GR12 LB.indb 24 6/6/13 6:03:04 PM

Activity 1.7
Alexi Traders ltd. began operating on 1 march 2022.The company has an issued share
capital of R400 000, consisting of 100 000 shares.
during the financial year the following transactions took place:
2022
31 Aug Paid provisional income tax of R58 700 (cheque no. 368) to SARS.
31 Aug declared and paid interim dividends of 70c per share (cheque no. 369).
2023
27 Feb The company paid a further R21 300 as provisional income tax.
28 Feb A final dividend of 15% of share capital is declared.
The net profit of the company as calculated in the Profit and Loss account amounts to
R280 000. According to SARS, the company’s income tax is 30% of its net income.
Required
1. Show the entries made in the Cash Payments Journal on 31 August.
2. Show the relevant entries in the General Journal on 28 February 2023 (11 lines).
3. Show the following ledger accounts: Retained income (2 lines), SARS (income tax)
(7 lines), Shareholders for dividends (2 lines), Income tax (2 lines), dividends on
ordinary shares (3 lines), Appropriation account (5 lines).
Activity 1.8
ngoma limited is authorised to issue 1 000 000 shares.
on 1 march 2019 the following balances appeared in their books:

ordinary share capital R500 000 (500 000 shares)
Retained income R29 600
Shareholders for dividends R17 500
SARS (income tax) (cr) R5 300
Transactions during the financial year

2019
15 mar Paid the amounts owed in respect of dividends and income tax from the
previous financial year.
01 Aug Paid provisional income tax of R54 780.
17 Sep Paid interim dividends of 4c per share.
2020
25 Feb Paid provisional tax of R61 040.
net profit was calculated as R352 000.
The tax assessment for income tax for the year amounts to R108 000.
A final dividend of 8c per share was declared.
Required
Show the following ledger accounts: Retained income (3), SARS (income tax) (7), The number in brackets indicates
Shareholders for dividends (4), Income tax (3), dividends on ordinary shares (5), how many lines to leave open for
Appropriation account (7). each account.
Activity 1.9
Popeye ltd. is registered with an authorised share capital of 800 000 ordinary shares.
550 000 of these shares were issued on 29 February 2020.
Acc GR12 LB.indb 25 6/6/13 6:03:04 PM

On 1 March 2020 the following balances appeared in the company’s books:
SARS (income tax) R6 780 (dr)
Transactions for the year ended 28 February 2021

2020
12 mar Paid the amount owed in respect of dividends to shareholders.
31 Aug Paid provisional tax of R53 200 to SARS.
15 Sep declared and paid interim dividends of 5c per share.
01 nov Issued a further 50 000 shares to the public at 70c per share and received the
applications and payments by 30 november 2020.
2021
21 Feb Paid a further R73 520 as provisional income tax to SARS.
28 Feb The Profit and Loss account showed a net profit of R460 000.
The tax assessment amounts to 30% of net profit.

A final dividend of 9c per share was approved at the AGm. When doing the
calculations, bear in mind that more shares were issued during the year.
Required
The number in brackets indicates
Show the following ledger accounts: ordinary share capital (4), Retained income (3),
how many lines to leave open for SARS (income tax) (7), Shareholders for dividends (4), Income tax (3), dividends on
each account. ordinary shares (5Appropriation account (7).
10. Loans and interest capitalised

IAS 10.1 Loans
International Accounting Standards IAS 39 deals with the acknowledgement and measurement of loans.
A liability is classified as a current liability if it needs to be settled within 12
months of financial year-end. IAS 1 refers to the following with regards to loans:
International Financial Reporting
Standards (IFRS) are standards • Non-current liabilities (long-term liabilities) must be shown on the Statement
based on principles, along with of Financial Position (Balance Sheet).
interpretations and the framework • Total interest expense must be disclosed separately on the Income Statement
adopted by the International Accounting (Statement of Comprehensive Income) as part of finance costs.
Standards Board (IASB). Many of the
standards forming part of IFRS are known
by the older name of International 10.2 interest on loan capitalised
Accounting Standards (IAS). The IAS were What is interest? Interest can be the cost of borrowed money (interest on loan) or
issued between 1973 and 2001 by the the earnings on an investment (interest on fixed deposit).
Board of the International Accounting
Standards Committee (IASC). On 1 There are different ways to calculate interest.
April 2001 the new IASB took over from
the IASC the responsibility for setting
International Accounting Standards. 10.2.1 Simple interest
During its first meeting, the new Board Simple interest is calculated on the original amount only. Accumulated interest is
adopted existing IAS and Standing not used in calculations.
Interpretations Committee standards
(SICs). The IASB has continued to develop The formula for simple interest is:
standards, calling the new standards IFRS.
A = P(1 + i.n)
where:
A = the final amount, including the interest
P = the principal amount (the original amount borrowed or invested)
i = the interest rate for one period
n = number of periods
Acc GR12 LB.indb 26 6/6/13 6:03:04 PM

10.2.2 Compound interest
With compound interest, interest is calculated on the principal (original) amount
as well as the interest accumulated during past periods. So interest is earned on
interest (interest is compounded).
The formula for compound interest is:
A = P(1 + i)n
Example
The difference between simple and compound interest
R3 000 is invested in a fixed deposit account at a bank for 4 years. The interest is
12% p.a.
Required
Show the value of the investment at the end of the 4 years if:
1. simple interest is used
2. compound interest is calculated on a annual basis.
12
Note that 12% = ___
100 = 0,12.
1. Simple interest 2. Compound interest
The interest is 12% on R3 000 each year for At the end of each year the interest is added
4 years. The interest received is the same to the principal (original) amount and 12% is
every year. then calculated on the total amount.
End of first year: End of first year:
R3 000 + (0,12)(3 000) R3 000 + (0,12)(3 000)
= R3 360 = R3 360
End of second year: End of second year:
R3 360 + (0,12)(3 000) R3 360 + (0,12)(3 360)
= R3 720 = R3 763,20
End of third year: End of third year:
R3 720 + (0,12)(3 000) R3 763,20 + (0,12)(3 763,20)
= R4 080 = R4 214,78 (to the nearest cent)
End of fourth year End of fourth year:
R4 080 + (0,12)(3 000) R4 214,784 + (0,12)(4 214,784)
= R4 440 = R4 720,56 (to the nearest cent)
It is much faster to use the formula for each.
1. Simple interest 2. Compound interest
R3 000 (1 + (0,12)(4)) R3 000 (1 + 0,12)4
= R4 440 = R4 720,56
This is how the interest is calculated mathematically. But how will the bookkeeper
enter this information in the business’s books?
The bookkeeper needs to apply the matching principle of GAAP. The interest GAAP flash
earned in a financial period, must be taken into consideration for that financial matching principle : interest
period as an income, even though the business will only receive the amount earned in a financial period, must
when the fixed deposit matures after four years. The bank will send the business a be taken into consideration for that
statement at the end of each period to indicate the amount of interest earned. financial period.
Let’s use the same example as the one we just worked through. Interest on
loans is capitalised most of the time by lending institutions. This means the
interest is charged directly to the loan account. Interest on Loan will be debited and IAS23 deals with capitalising the
the Loan account will be credited. This entry can thus not be made in the CPJ, and interest on loan in the financial
statements.
has to be done in the General Journal.
Acc GR12 LB.indb 27 6/6/13 6:03:04 PM

Example
Interest on loan capitalised
2017
01 Mar 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
the following:
• Interest on loan is capitalised.
• The loan instalment amounts to R1 000 and is payable on the 28th
of every month starting on 28 March 2017.
2018
28 Feb The loan statement reflected the following:
• Interest paid for the year, R9 200
• Capital paid on loan for the year, R2 800
Required
1. Complete the journals
2. Post to the General Ledger.
Solution
1.
Cash Receipts Journal of Joanne’s Boutique for March 2017 CRJ
Doc. Day Details Fol. Analysis of Bank Sundry accounts
no. receipts Amount Details
BS 1 AB Bank 100 000 100 000 Loan: AB Bank
Cash Payments Journal of Joanne’s Boutique for the year ended February 2018 CPJ
Doc. Date Name of payee Fol. Bank Sundry accounts
no. Amount Details
2017
BS 28 Mar AB Bank 1 000 1 000 Loan: AB Bank
2017
BS 28 Apr AB Bank 1 000 1 000 Loan: AB Bank
2017
BS 28 May AB Bank 1 000 1 000 Loan: AB Bank
2017
BS 28 Jun AB Bank 1 000 1 000 Loan: AB Bank
2017
BS 28 Jul AB Bank 1 000 1 000 Loan: AB Bank
2017
BS 28 Aug AB Bank 1 000 1 000 Loan: AB Bank
2017
BS 28 Sep AB Bank 1 000 1 000 Loan: AB Bank
2017
BS 28 Oct AB Bank 1 000 1 000 Loan: AB Bank
2017
BS 28 Nov AB Bank 1 000 1 000 Loan: AB Bank
2017
BS 28 Dec AB Bank 1 000 1 000 Loan: AB Bank
2018
BS 28 Jan AB Bank 1 000 1 000 Loan: AB Bank
2018
BS 28 Feb AB Bank 1 000 1 000 Loan: AB Bank
Acc GR12 LB.indb 28 6/6/13 6:03:04 PM

Example continued
General Journal for Joanne’s Boutique on February 2018 GJ

GL 28 Interest on loan 9 200
Loan: AB Bank 9 200
(Adjustment for interest on loan for the year)
2.
General Ledger of Joanne’s Boutique
Dr Loan: AB Bank Cr
2017 2017
Mar 28 Bank CPJ 1 000 Mar 01 Bank CRJ 100 000
2018
Apr 28 Bank CPJ 1 000 Feb 28 Interest on loan GJ 9 200
May 28 Bank CPJ 1 000
Jun 28 Bank CPJ 1 000
Jul 28 Bank CPJ 1 000
Aug 28 Bank CPJ 1 000
Sep 28 Bank CPJ 1 000
Oct 28 Bank CPJ 1 000
Nov 28 Bank CPJ 1 000
Dec 28 Bank CPJ 1 000
2018
Jan 28 Bank CPJ 1 000
Balance c/d 97 200
109 200 109 200
2018
Nominal account
Dr Interest on Loan Cr
2018 2018
Feb 28 Loan: AB Bank GJ 9 200 Feb 28 Profit and loss GJ 9 200
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.
Acc GR12 LB.indb 29 6/6/13 6:03:05 PM

Example continued

Payments on –12 000 Cash in bank –12 000 Loan
loan during the decreases decreases
year
(R1 000 × 12)
2018 –9 200 Interest on +9 200 Loan
28 Feb loan is an increases
Interest expense
capitalised
This flow chart regarding loans and interest capitalised tracks the transactions as
they took place in this example:
An application is The loan is approved by AB Bank An instalment of R1 000 will be paid to

made for a loan of and paid to the business. An entry AB Bank each month. The instalment
R100 000 and AB is made in the CRJ. includes capital repayments, as well as
Bank processes the Debit: Bank interest which is calculated by the bank.
application. Credit: Loan: AB bank The entry is made in the CPJ.
Debit: Loan: AB Bank
Credit: Bank
At the end of the financial year the business

Record the interest on the loan in needs to know what the finance cost (interest)
the General Journal. is on the loan. AB Bank would have sent them
Debit: Interest on loan a loan statement periodically, reflecting this
Credit: Loan: AB Bank information.
Activity 1.10
on 1 February 2016 lindiwe ltd. applied for a loan from AB Bank. The loan of R100 000
was granted and they received the money on 1 march 2016, the first day of the financial
year. At the end of the financial year lindiwe ltd. received the following loan statement
from the bank:
AB BANK
LOAN STATEMENT ON 28 FEBRUARY 2017
Interest capitalised 10 500
Monthly payments in terms of the loan agreement. These monthly payments include interest and
capital repayments of the loan. (18 000)
The capital repayments on the loan will remain constant at R18 000 per annum
until the loan is fully repaid
Required
The number in brackets indicates 1. Show the following accounts in the General ledger: loan: AB Bank (5), Interest on loan (2).
how many lines to leave open for 2. Show the effect of these transactions on the accounting equation.
each account. 3. How will this loan be shown on the face of the Statement of Financial Position
(Balance Sheet)?
Acc GR12 LB.indb 30 6/6/13 6:03:05 PM

11. Directors’ fees
A company will have a remuneration committee that is responsible for the
assessment and approval of a broad remuneration strategy in the company. It also
determines the remuneration of non-executive directors, as well as the short- and remuneration
long-term incentive pay structure for executive management. The proposals with reward; pay
regards to directors’ fees must be approved by the shareholders at the AGM.
A company can structure packages of directors to incorporate their basic
pay, car allowance, and any medical and retirement benefits. Remuneration
packages are reviewed annually and are monitored to ensure that they are fair
and market-related.
Remuneration of directors can be divided in two categories which must be
disclosed in the notes to the financial statements:
• For services as director: compensation to directors for attending meetings
• For other services: the salaries of the executive directors, for example the salary
of the managing director of the company.
Example
Disclosing directors’ fees in notes to the financial statements
The following note to the financial statements appeared in published financial
statements of Tungata Ltd. for the year ended 30 June 2017:
2017 2016
Note 36
Non- Non-
Directors’
Executive executive Total Executive executive Total
emoluments
R’000 R’000 R’000 R’000 R’000 R’000
Salaries and fees 4 602 2 318 6 920 5 105 2 118 7 223
Incentive
bonuses 285 – 285 – – –
Retirement fund
contribution 954 – 954 1 059 – 1 059
Medical aid
contribution 50 – 50 64 – 64
Vehicle benefits 578 – 578 735 – 735
Total 6 469 2 318 8 787 6 963 2 118 9 081
The payment of directors’ fees during the financial year will be entered in the
books as follows:
Debit: Directors’ Fees (expense)
Credit: Bank (asset)
Directors’ fees that are in arrears at the end of the financial year will be entered in
the books as follows:
Debit: Directors’ Fees (expense)
Credit: Accrued Expenses (liability)
Example
Directors’ fees
The following transaction took place on 31 March 2018
Issued cheque no. 459 to pay the salary of the managing director, G Mojela,
of Danjo Traders Ltd. for March 2018, R115 000.
Required
1. Enter the transaction in the relevant journal.
3. Show the entries in the General Ledger.
Acc GR12 LB.indb 31 6/6/13 6:03:05 PM

Example continued
Solution
1.
Cash Payments Journal of Danjo Traders Ltd. for March 2018 CPJ
Doc Day Details Fol. Bank Sundry accounts
no. Amount Details
459 31 G Mojela 115 000 115 000 Directors’ fees
2018 –115 000 Cash decreases –115 000 Directors’ fees
Mar expense
3.
Dr Bank B10 Cr
2018
Mar 31 Directors’ fees CPJ 115 000
Nominal account
Dr Directors’ Fees N12 Cr
2018
Mar 31 Bank CPJ 115 000
Activity 1.11
The following transaction took place on 30 June 2019:

Issued cheque no. 877 to pay the salary of the managing director, P Dingaan, of
KLR Ltd. for June 2019, R131 000.
Required
12. Audit fees

As mentioned previously, the duties of the audit committee include nominating
an independent auditor and determining the audit fee. They must also ensure
that the appointment of the auditor complies with the Companies Act and other
relevant legislation. No disclosure of audit fees is required in terms of the new
Companies Act.
The payment of audit fees will be entered in the books as follows:
Debit: Audit Fees
Credit: Bank
Acc GR12 LB.indb 32 6/6/13 6:03:05 PM

If audit fees are still payable at the end of the financial year, the transaction will be
entered in the books as follows:
Debit: Audit Fees (expense)
Credit: Accrued Expenses (liability)
The above entries will be made when a company only takes the audit of the
previous year’s books into account during the existing financial year; in other
words, when the services are rendered.
A company can also choose to make provision for the audit in the same year as
that of the financial statements being audited. They will then have to estimate the
cost of the audit. This transaction will be entered in the books as follows:
Debit: Audit Fees (expense)
Credit: Provision for Audit Fees (liability)
Example
Audit fees
Transaction
On 28 February 2019, the end of the financial year, R8 020 is payable to
AllahParkerVisser Chartered Accountants for audit fees.
Required
Solution
1.
28 Audit fees 8 020
Accrued expense 8 020
(Audit fees payable)
2019 –8 020 Audit fees – +8 020 Accrued
Feb expense expenses
increases
3.
Dr Accrued Expenses B21 Cr
2019
Feb 28 Audit fees GJ 8 020
Nominal account
Dr Audit Fees N13 Cr
2019
Feb 28 Accrued expenses GJ 8 020
Acc GR12 LB.indb 33 6/6/13 6:03:05 PM

Activity 1.12
The financial year of KLR Ltd. ends on 28 February.
Transaction
On 28 February 2018, the end of the financial year, R9 760 is payable to Mojalefa
Chartered Accountants for audit fees.
Required
13. Buying back shares

There are a number of ways in which companies can return wealth to their
shareholders. One way is paying dividends to shareholders. Another way is buying
back shares. Buying back shares means a company buys back its own shares on the
stock exchange – almost like investing in itself. Why would they do that? Here are
some motives that could drive companies to buy back shares:
• The relative ownership stake of each investor increases because there are fewer
shares, or claims, on the company.
• Companies feel that their shares are undervalued by the market – it shows that
management feels the shares are worth more.
• It improves the financial ratios. However, a company should not do this to
manipulate financial indicators. That is not good corporate governance.
The principles for a share buy-back transaction (repurchase of shares) are:
• It must be approved by the Memorandum of Incorporation and a special
resolution.
• The solvency and liquidity test must be done.
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 a 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.
The transaction will be entered in the business’s books as follows:
Debit: Ordinary Share Capital (number of shares repurchased × original
selling price)
Debit: Retained Income (number of shares repurchased × amount exceeding
original price)
Credit: Bank (the amount paid)
Example
Buying back shares
Original issuing of shares
On 1 March 2018, Danjo Traders Ltd. issued 60 000 ordinary shares at R6,50
each. The entries in the General Ledger are as follows:
Debit: Bank R390 000
Credit: Ordinary Share Capital R390 000
Acc GR12 LB.indb 34 6/6/13 6:03:05 PM

Example continued
Required
Show the entries in the General Ledger.
Solution
2018
Mar 31 Bank CRJ 390 000
Dr Bank B6 Cr
2018
Mar 31 Ordinary share capital CRJ 390 000
Buy back of shares

On 30 June 2019 the company buys back 20 000 shares at R7 each. Buying back
of shares must, in total, be written back to equity (IAS 32).
The entries in the General Ledger are as follows:
Debit: Ordinary Share Capital 20 000 × R6,50 (selling price) = R130 000
Debit: Retained Income 20 000 × R0,50 (R7 – R6,50) = R10 000
Credit: Bank 20 000 × R7 = R140 000
Required
1. Show the entries in the journals.
2. Update the General Ledger.
3. Show the effect on the accounting equation and the notes to the financial
statements.
Solution
1.
Cash Payments Journal of Danjo Traders Ltd. for June 2019 CPJ
Doc Day Details Fol. Bank Sundry accounts
no. Amount Details
30 Shareholders 140 000 130 000 Ordinary share capital
10 000 Retained income
OR
General Journal of Danjo Traders Ltd. for June 2019 GJ

30 Ordinary share capital B1 130 000
Bank B6 140 000
(Buy back shares: 20 000 at R7)
Acc GR12 LB.indb 35 6/6/13 6:03:06 PM

Example continued
2.
2019 GJ 2018
Jun 30 Bank CPJ 130 000 Mar 31 Bank CRJ 390 000
2019 GJ
Jun 30 Bank CPJ 10 000
Dr Bank B6 Cr
2019 Ordinary share capital and Retained
Jun 30 income 140 000
Accounting equation
Issue of +390 000 Cash increases +390 000 Increase in
shares ordinary share
capital
Buy –140 000 Cash decreases –130 000 Ordinary
back of share capital
shares decreases
–10 000 Retained
income
decreases
Danjo Traders Ltd.

NOTES TO THE FINANCIAL STATEMENTS
AUTHORISED
ISSUED
60 000 ordinary shares in issue at the beginning of the year (01/03/19) 390 000
20 000 ordinary shares bought back during the financial year (130 000)
40 000 ordinary shares in issue at the end of the year (29/02/20) 260 000
Activity 1.13
On 1 July 2018, the beginning of the financial period, the following balances appeared in
the accounting records of SJ Ltd.:
Balance Sheet accounts Fol. Debit Credit

Ordinary share capital (200 000 shares sold at R3 each) B1 600 000
Acc GR12 LB.indb 36 6/6/13 6:03:06 PM

on 31 october 2018, SJ ltd. bought back 30 000 shares at R3,20 per share.
Required
1. Show the entry for this transaction in the General ledger.
3. Show the note for Issued share capital at the end of the financial year.
Activity 1.14
Ace ltd. was founded by the promoters with an authorised share capital of 800 000
ordinary shares. 500 000 of these shares were issued by 28 February 2018.
on 1 march 2017 the following balances appeared in the company’s books:
Fol. Debit Credit

Ordinary share capital (500 000 shares) 1 250 000
Loan: XY Bank 120 000
SARS(income tax) 7 665
Accrued expense (audit fees) 5 200

2017
01 mar Reversed the adjustment for audit fees that was still payable at the end of the
previous financial year
30 mar Paid the amount owed in respect of dividends to shareholders, as well as the
audit fees of R5 200
31 Aug Paid provisional tax of R63 000 to SARS
30 Sep declared and paid interim dividends of 18c per share
01 nov Bought back 50 000 shares at R2,80. These shares were originally purchased
at R2,50.
2018
27 Feb Paid a further R71 000 as provisional income tax to SARS.
28 Feb Received the following loan statement from XY Bank:

Monthly payments in terms of the loan agreement. These monthly payments include interest and
capital repayments of the loan. (28 800)
Balance on 28 February 2018 ?
The amount payable to dlamini Chartered Accountants for audit fees amounts to R6 450.
This will be paid on 31 march 2018.
The Profit and Loss account, after taking the above transactions into consideration,
showed a net profit of R488 000.
The tax assessment amounts to R146 400.
A final dividend of 36c per share was approved and declared.
Required
Show the following ledger accounts: ordinary share capital (5); Retained income (5); The number in brackets indicates
loan: XY Bank (5); SARS (income tax)(7); Shareholders for dividends (4); Interest on loan (2); how many lines to leave open for
Audit fees (4); Income tax (3); dividends on ordinary shares (5); Appropriation account (7). each account.
Balance or close off all accounts on 28 February 2018.
Acc GR12 LB.indb 37 6/6/13 6:03:06 PM

Activity 1.15
Mega Ltd. was founded on 1 March 2018 with 400 000 authorised ordinary shares. When
the company was founded, 300 000 shares were issued and offered to the public at R2,05
per share.
On 28 February 2019, the end of the previous financial year, the following balances
appeared in the company’s accounts:
Fol. Debit Credit

Ordinary share capital (300 000 shares) 615 000
SARS(income tax) 4 790
Loan: AB Bank 300 000
Accrued expense (Audit fees) 9 900
Transactions
• The accrued expense for audit fees on 1 March 2019, the first day of the financial year,
must be written back.
• On 10 March 2019 the outstanding tax was paid to SARS and payments were made to
shareholders for dividends declared in the previous financial year.
• Paid TYJ Chartered Accountants R9 900 for the amount payable for audit fees on
1 April 2019
• Paid the salary of director H Dingaan on 30 June 2019, R43 200
• A cheque for R44 120 was sent to SARS on 25 August 2019 as a provisional tax
payment.
• On 18 October 2019 an interim dividend of 18c per share was paid to shareholders.
• Bought back 20 000 shares at R2,20 each on 1 December 2019. These shares were
originally sold at R2,05 each.
• Provisional tax of R29 700 was paid to SARS on 15 February 2020.
• Received a loan statement from AB Bank on 27 February 2020. Interest of R31 500
should be capitalised.
• On 29 February 2020 the following transactions and calculations were made:
■ Closed off retained income to the Appropriation account.
■ The net profit was calculated as R260 000 in the Profit and Loss account and
carried over to the Appropriation account.
■ Tax for the year was calculated at R78 000.
■ A final dividend of R106 000 was declared.
■ All the closing transfers at the end of the year were done.
Required
1. Show the entries in the Cash Payments Journal during the year ended 29 February
2020. (10 lines)
2. Show the entries in the General Journal during the year ending 29 February 2020.
(20 lines)
Activity 1.16
The information below was taken from the records of Berg River Traders Ltd.
Required
Show the effects, with reasons, of these transactions on the accounting equation.
Acc GR12 LB.indb 38 6/6/13 6:03:06 PM

Transactions
1. The Board of Directors decided to issue a further 100 000 ordinary shares at R5 each.
All applications and full payment have been received and banked and all applications
allocated.
2. Shareholders were paid R54 000 for dividends declared in the previous financial year.
3. R34 600 was paid to SARS for provisional income tax.
4. Paid an interim dividend of R132 000
5. Paid the salary of director L Genade for October 2019, R23 100
6. Bought back 30 000 shares at R5,10 each on 1 November 2019. These shares were
originally sold at R5 each.
7. Received a loan statement from Sure Bank on 29 February 2020. Interest of R16 700
should be capitalised.
8. Audit fees of R8 600 are still payable at the end of the financial year.
9. A final dividend of 26c per share was declared by the directors. The total number of
shares issued on that date was 430 000 shares.
10. SARS calculated the company’s tax at the end of the financial year and issued an
assessment for R67 800.
Activity 1.17
VIP Ltd. has 300 000 authorised shares. The company’s accounting period ends on the last
day of February each year.
The following balances appeared in the company’s books on 1 March 2014:

Ordinary share capital (150 000 shares) R485 000
Loan: AB Bank R250 000
Required
Analyse the transactions in the following table. An example has been done for you.
Date General Ledger Accounting equation
Account Account Amount Assets Owners’ equity Liabilities
debited credited
+195
e.g. Bank Debtors Control 195 –195 0 0
Transactions for the financial period 1 March 2014 to 28 February 2015

2014
12 Mar Received a tax assessment and paid the amount due to SARS
20 Mar Paid the amount owed to shareholders for 2014 dividends
30 Mar Paid the audit fees of R7 900
30 Apr 40 000 shares were issued at R3,20 each. Applications and payments were
received and entered in the books.
31 Jul Paid provisional income tax of R36 120 to SARS
31 Aug Declared and paid interim dividends of R36 000
30 Sep Paid directors’ fees of R22 800
2015
31 Jan Bought back 10 000 shares at R3,25 per share. The shares were originally issued
at R3,20 each.
28 Feb Received a loan statement from LK Bank. Interest of R26 250 on the loan should
be capitalised.
The income tax for the accounting period was calculated at R104 200.
The directors declared a final dividend of R70 000.
Acc GR12 LB.indb 39 6/6/13 6:03:06 PM

Informal assessment 1.2 Ledger accounts
Carlton ltd. has 120 000 ordinary shares authorised. The company’s accounting period
ends on the last day of February every year.
on 1 march 2017, the balances/totals below appeared in the company’s General ledger:
SARS (income tax) (dr) R9 450
Shareholders for dividends (cr) R60 000
Transactions for the financial period

2017
25 mar Paid the amount owed to shareholders for dividends declared during the
previous financial year.
30 Jun The company offered a further 25 000 shares to the public at R8,50 each, with
15 September 2017 as the closing date for applications.
31 Aug Issued a cheque for R42 400 to SARS for provisional income tax.
declared and paid an interim dividend of 101c per share on all issued shares.
15 Sep Applications together with the payments due were received for 25 000 shares.
All shares were allocated and a receipt was issued.
2018
21 Feb made a second payment of R38 100 in respect of provisional income tax.
28 Feb The final accounts were drawn up and the Profit and loss account showed a net
profit of R310 000 for the accounting period.
Income tax was calculated accurately at R93 000.
The total dividend declared by the directors for the accounting period amounted
to 15% of the issued share capital.
Required
draw up the following accounts in the General ledger of Carlton ltd. and balance or close
them on 28 February 2018:
1. ordinary share capital (3 lines) [5]
2. SARS (income tax) (5 lines) [9]
3. dividends on ordinary shares (3 lines) [11]
4. Appropriation account (5 lines) [10]
Remember
Interim dividend paid during financial year
Final dividend declared at the end of financial year
Total dividend Total amount for dividends paid and declared for the
current financial year
Acc GR12 LB.indb 40 6/6/13 6:03:07 PM

Chapter 2
Final accounts, Post-closing Trial Balance,
IFRS and GAAP
• Explain the accounting cycle and Bad debts ■
• trading stock deficit/
accounting period Bad debts recovered ■
surplus • consumable
• Define and explain International Correction of errors/omissions ■
stores on hand
Financial Reporting Standards (IFRS) Accrued income (receivable) ■
• depreciation on cost
and General Accepted Accounting Income received in advance ■ price • depreciation
(deferred) on diminishing balance
Practice (GAAP)
Expenses prepaid • bad debts • bad debts
Historical cost
■
■
Accrued expenses (payable) recovered • accrued

Prudence
■
income (receivable)
■
Materiality Provision for bad debts ■

■
Interest capitalised • income received in

Business entity rule
■
■
advance (deferred)
Going concern Adjustments related to ■
■
• expenses prepaid
Matching
■
income tax • provision for bad debts
• Complete the bookkeeping of Adjustments related to the ■
• interest capitalised
companies payment and declaration of • income tax • dividends
• Do the following year-end dividends • Trading account
adjustments: • Prepare the final accounts of a • Profit and Loss account
Trading stock deficit/surplus
■
company • Appropriation account
• Prepare the Trial Balances • reversal of adjustment
Consumable stores on hand
■
Depreciation (on cost price/

■
• Reverse adjustments, i.e. accruals,
straight line or diminishing income received in advance and
balance methods) prepayments
I agree – we had a trading stock

deficit of R5 300 this year.
I am really concerned about our

stock control, Randall.
F i n a n cia l acc o u n ti n g o f c o m pa n ies – F i n a l acc o u n ts , P o st - c l o si n g T ria l B a l a n ce , I F R S a n d G A A P • C h a p t e r 2 41
Acc GR12 LB.indb 41 6/6/13 6:03:07 PM

1. Accounting cycle for a company
The accounting cycle begins with recording transactions on source documents
such as invoices and cheques, and ends with the completion of a Post-closing Trial
Balance. There are ten main steps in the cycle.
Step 1: Record transactions on source

This takes place on a
documents, namely invoices, cheques,
daily basis.
receipts, debit notes, credit notes etc.
Step 2: Analyse and journalise transactions in

CRJ, CPJ, CJ, DJ, DAJ, CAJ, GJ etc.
Steps 2, 3 and 4
occur as often as
Step 3: Post the journals to the General needed during an
Ledger, Debtors Ledger and Creditors Ledger. accounting period,
usually every
month.
Step 4: Prepare a Trial Balance.
Step 5: Prepare a Pre-adjustment

Trial Balance.
Step 6: Do the necessary adjustments at the

end of the accounting period.
Step 7: Prepare a Post-adjustment

Trial Balance. Steps 5–10 occur
at the end of the
accounting period.
Step 8: Prepare financial statements.
Step 9: Journalise and post the closing

entries to the Trading, Profit and Loss and
Appropriation accounts.
Step 10: Prepare a Post-closing Trial Balance

(consisting only of Balance Sheet accounts).
2. Accounting period
A business needs to keep accounts in such a manner that the results are known
at frequent intervals. Companies will therefore adopt a 12-month period for
measuring the income/profit of the company. This time interval is called an
accounting period. At the end of each accounting period all nominal accounts are
closed off to the Trading and Profit and Loss accounts in order to calculate the net
profit for that accounting period. This way, the results (profit) of one accounting
period can be compared to the next.
The Companies Act requires every company to have a financial year end.
The date must be specified in the company’s Notice of Incorporation. Where the
financial year end falls on a Saturday, Sunday or public holiday, the financial year
end will fall on the next business day.
42 Chapter 2 • F i n a n cia l acc o u n ti n g o f c o m pa n ies – F i n a l acc o u n ts , P o st - c l o si n g T ria l B a l a n ce , I F R S a n d G A A P
Acc GR12 LB.indb 42 6/6/13 6:03:07 PM

3. IFRS and GAAP Accounting standards
The objective of preparing financial statements is to provide information about GAAP: Generally Accepted
Accounting Practice
a business, which a variety of users use to make financial decisions. These users
include external users such as existing investors (shareholders), potential new IFRS: International Financial Reporting
Standards
investors, SARS, banks and creditors, and internal users such as the owners and the
management of the business. Since all these users rely on this information in their IAS: International Accounting Standards
decision making, it is critically important that financial statements are accurate,
reliable, relevant and comparable, and that they present a fair representation of the
state of affairs of the business.
In order to meet these requirements, financial statements must be prepared
according to specific rules and regulations. These rules and regulations are known
as accounting standards. Over the years, various accounting standards have
been developed, both nationally and internationally, by independent accounting
governing bodies. These accounting standards are used to regulate the preparation
of financial statements and have to be followed when recording and reporting
financial information. We will discuss two commonly used accounting standards:
Generally Accepted Accounting Practice (GAAP) and International Financial
Reporting Standards (IFRS).
3.1 Generally Accepted Accounting Practice (GAAP)

Generally Accepted Accounting Practice (GAAP) is a collection of published
principles, rules, procedures and guidelines that govern how the financial events of
a business are recognised, measured and reported. Collectively, these documents
are referred to as the Statements of GAAP. Historically, most countries have
developed their own Statements of GAAP. The version of GAAP developed for
South Africa was simply called the South African Statements of GAAP or SA
GAAP. Similarly, US GAAP is the version of GAAP that was produced for the
United States of America. SA GAAP has expanded over the years and contains
numerous accounting statements (known as the AC 100 series), which have been
issued and approved by an independent national standard-setting body known
as the Accounting Practices Board (APB). Until fairly recently, all companies in
South Africa were required, by law, to prepare their annual financial statements in
compliance with SA GAAP.
3.2 International Financial Reporting Standards (IFRS)

In 2001, the International Accounting Standards Board (IASB) was established with
the primary objective of formulating a single set of high-quality financial reporting
standards that could be used by all countries. These financial reporting standards
are known as the International Financial Reporting Standards (IFRS). This set of
accounting standards is fast becoming the global standard for the preparation of
public company financial statements. The use of IFRS in many countries around
the world has enhanced the comparability of financial statements worldwide.
Prior to the formation of the IASB, the International Accounting Standards
Committee (IASC) issued several accounting standards between 1973 and 2001
known as the International Accounting Standards (IAS). When the IASB took over
the responsibility for setting international accounting standards from the IASC in
April 2001, it decided to adopt the existing IAS as part of IFRS.
Over the past decade in South Africa, there has been steady phasing-out of
SA GAAP and a move towards the adoption of IFRS as the prescribed accounting
standard.
F I n A n C I A l A C C o u n T I n G o F C o m PA n I E S – F I n A l A C C o u n T S , P o S T - C l o S I n G T R I A l B A l A n C E , I F R S A n d G A A P • C h a p t e r 2 43
Acc GR12 LB.indb 43 6/6/13 6:03:07 PM

3.3 Adoption and application of IFRS in South Africa
• In February 2004, the APB took a decision to align SA GAAP with IFRS by
including the contents of IFRS as part of SA GAAP.
• From 1 January 2005, all companies listed on the JSE were required to prepare
financial statements in compliance with IFRS.
• From 1 May 2011, all public companies were required to prepare financial
statements in compliance with IFRS (as per the new Companies Act).
• At an APB meeting held on 28 February 2012, it was decided that SA GAAP will
be withdrawn and will cease to apply in respect of financial years commencing
on or after 1 December 2012. This means that IFRS should now be applied by
all companies, as well as any other entity that was previously required to apply
SA GAAP, when preparing financial statements.
3.4 Fundamental GAAP principles

Both SA GAAP and IFRS contain detailed statements covering specific areas of
financial reporting. These statements are based on the core fundamental principles
of Generally Accepted Accounting Practice (fundamental GAAP principles), which
provide the framework for good accounting practice. These fundamental GAAP
principles are as follows.
GAAP principle Description Example

Entity rule The financial affairs of the owners The business has its own bank account
should be kept separate from those and the owners each have their own bank
of the business – they are separate accounts.
entities.
Historical cost concept Assets should be entered at their Land and buildings purchased for R500 000
historical cost; this is the amount that must be entered at that amount in the books
was originally paid for them. of the business, even if the business is able to
receive a lot more for it after a couple of years.
Going concern concept The financial statements of a business If a business had stationery printed in the
are prepared with the assumption that name of the business to the value of R5 000
the business will continue operating in and it is unused at the end the financial
the foreseeable future. period, it will be shown at that value in
the financial statements as a current asset.
However, if the business will be closing down
in the next financial period, this stationery will
have no value.
Matching concept Income and expenses must be The telephone account for February 2015
accounted for in the correct time must be taken into account for the financial
period (the one in which they were period ending 28 February 2015, even though
incurred). the account will only be paid in March 2015.
Prudence concept When uncertain results are estimated If the business expects to make a profit of
it is important to ensure that assets R100 000 on the sale of part of the building,
and income are not overstated and it will not be entered in the books until the
liabilities and expenses are not transfer of the land has been concluded.
understated.
Concept of materiality Information is material when its While consumable costs may be included
omission or misstatement can influence in the Sundry Expenses account, interest
the economic decisions of users who on overdraft must be shown in a specific
rely on the financial statements. account, as it is material to know what the
finance cost on the overdraft is.
Acc GR12 LB.indb 44 6/6/13 6:03:07 PM

Activity 2.1
Match the GAAP principles in Column A to the transactions or descriptions in Column B.

Write out your answers in full.
Column A: Concept / Rule Column B: Transaction / description

1. Business entity concept A. An asset will be entered in the assets account at
its original cost price.
2. Historical cost rule B. It must be assumed that a business will continue
for the foreseeable future as this could affect the
valuation of assets such as inventory and stationery
on hand.
3. Rule of prudence C. Stationery unused at the end of a financial year
will be seen as an asset and not an expense for
that financial period.
4. Matching concept D. All information relevant for decision making
should be provided – irrelevant information
should not be highlighted.
5. Materiality principle E. If the owner’s insurance is paid with a business
cheque, it will be entered in the books as
drawings.
6. Going concern concept F. Inventory will always be shown at its lowest of
cost price or net realisable value, and not at the
amount the business can possibly receive for it
upon sales.
4. Final accounts
Final accounts are the means of conveying to the management, directors,
shareholders and interested outsiders a concise picture of profitability and results
of the accounting period, after the accounting period is over. These accounts are a
summary of all the transactions recorded in the subsidiary books and ledgers. All
the information needed to prepare the final accounts can be found in the Post-
adjustment Trial Balance. Let’s have a look at the final accounts of a company.
Trading account
Purpose: To calculate gross profit
The Sales and Cost of Sales accounts are closed of to the Trading account.
Gross profit = sales – cost of sales
Gross profit is carried over from the Trading account to the Profit and Loss account.
Profit and Loss account

Purpose: To calculate net profit
All the other income and expenses accounts are closed off to the Profit and Loss account.
Net profit = gross profit + other income – expenses
Net profit is carried over from the Profit and Loss account to the Appropriation account.
Appropriation account
Purpose: Indicates how much of the profit is distributed towards income tax, dividends for
shareholders and to increase/decrease reserves
Acc GR12 LB.indb 45 6/6/13 6:03:07 PM

5. Year-end adjustments
Year- end adjustments are when we adjust an entry to an account at the end of
a fiscal year in order to properly state it in the financial statements. Book figures
need to be adjusted to the physical stock-take values, and various adjustment s
include the accrual or deferral of a revenue or expense item in order to apply
GAAP/IFRS.
5.1 Year-end adjustments covered in previous grades

The following is a summary of the year-end adjustments that were covered in
Grades 10 and 11. These related to a sole proprietor and partnership, but apply to a
company as well.
Adjustment: TRADING STOCK DEFICIT
Example
According to the Pre-adjustment Trial Balance (the business’s books) the balance
of the Trading Stock account is R52 300 on 28 February 2019, the last day of the
financial year.
A physical stock take on 28 February 2019 revealed that trading stock worth
R49 800 is on hand.
GAAP flash Calculations and explanation of adjustment

Prudence principle: Assets and
R52 300 – 49 800 = R2 500
income should not be overstated We want our financial statements to be as accurate as possible and we need to
and liabilities and expenses should apply the GAAP principles. If we keep the Trading Stock account at R52 300 we
not be understated. The value of will not be applying the prudence principle, as we will be overstating an asset.
inventory should be calculated at net We therefore need to adjust the Trading Stock account so that the amount in our
realisable value.
books is the same as the physical stock take. So we need to deduct R2 500 from
our Trading Stock account.
Entry in General Journal

Debit Credit
Trading stock deficit 2 500
Trading stock 2 500
Accounting equation
–2 500 Trading stock –2 500 Trading stock
decreases deficit is an
expense
Adjustment: TRADING STOCK SURPLUS
Example
According to the Pre-adjustment Trial Balance (the business’ books) the balance
of the Trading Stock account is R52 300 on 28 February 2019, the last day of the
financial year.
A physical stock take on 28 February 2019 revealed that trading stock worth
R53 100 is on hand.
46 Chapter 2 • F I n A n C I A l A C C o u n T I n G o F C o m PA n I E S – F I n A l A C C o u n T S , P o S T - C l o S I n G T R I A l B A l A n C E , I F R S A n d G A A P
Acc GR12 LB.indb 46 6/6/13 6:03:08 PM

Calculations and explanation of adjustment
R53 100 – 52 300 = R800
The physical stock-take count is more than the balance of trading stock in our
books. This could be due to a mistake that was made in the books, or an invoice
omitted from the books. The amount in our books must be the same as the
physical stock take. We must therefore add R800 to the Trading Stock account.

Debit Credit
Trading stock 800
Trading stock surplus 800
Accounting equation
+ 800 Trading stock +800 Trading stock
increases surplus is an
income
Adjustment: CONSUMABLE STORES ON HAND
Example
Stationery of R3 100 was purchased during the financial year. At the end of the
financial year, stationery of R600 was not used, according to a physical count.

GAAP flash
This stationery will only be used in the next financial year and is therefore not an
Going concern concept: The
expense for the current financial year. It was, however, entered in the Stationery
financial statements of the business
account upon purchase and is thus included in the R3 100. The amount closed off are prepared with the assumption that
as an expense for stationery for the current financial year should only be R2 500, the business will continue operating
the value the stationery actually used. We therefore need to apply the matching in the foreseeable future. Stationery
principle of GAAP/IFRS and deduct R600 from the Stationery account. printed in the business’s name that
remains unused at the end of the
year is therefore seen as an asset
Entry in General Journal (consumable stores). If, however,
Debit Credit the business is closing down, this
stationery would have no value and
Consumable stores on hand 600
would be written off as an expense.
Stationery 600
Accounting equation
+600 Consumable stores +600 Stationery is an
on hand is an asset expense that
decreases
Adjustment: DEPRECIATION ON COST PRICE
Example
Equipment R56 000
Accumulated depreciation on equipment R22 470
Write off depreciation on equipment at 10%p.a on the cost price.
Acc GR12 LB.indb 47 6/6/13 6:03:08 PM

GAAP flash Calculations and explanation of adjustment
Historical cost concept:
R56 000 × 10% = R5 600
Assets should be entered in the The R5 600 can be seen as the wear and tear on the equipment for the financial
asset account at historical cost. year or the cost of using the equipment for the year. Depreciation is an imputed
Depreciation will therefore be expense and by writing off depreciation we apply the matching principle of
entered in a separate account called GAAP/IFRS. Accumulated depreciation is a negative asset as it shows how
Accumulated Depreciation.
much the value of the equipment decreased in total. This depreciation cannot
be entered in the Equipment account as we need to apply the historical cost
principle of GAAP/IFRS and only enter the cost price of the equipment in the
Equipment account.

Debit Credit
Depreciation 5 600
Accumulated depreciation on equipment 5 600
Accounting equation
–5 600 The value of –5 600 Depreciation is
equipment an expense
decreases
Adjustment: DEPRECIATION ON DIMINISHING BALANCE
Example
Vehicles R120 000
Accumulated depreciation on vehicles R33 500
Depreciation on vehicles should be calculated at 15% p.a. on the diminishing
balance at the end of the financial year.

(R120 000 – 33 500) × 15% = R12 975
The R12 975 can be seen as the wear and tear on the vehicles for the financial
year or the cost of using the vehicle for the year. Depreciation is an imputed
expense and by writing off depreciation we apply the matching principle of
GAAP/IFRS. Accumulated depreciation is a negative asset as it shows how much
the value of the vehicle decreased in total. This depreciation cannot be entered in
the Vehicles account as we need to apply the historical cost principle of GAAP/
IFRS and only enter the cost price of the vehicle in the Vehicles account.

Debit Credit
Depreciation 12 975
Accumulated depreciation on vehicles 12 975
Accounting equation
–12 975 Value of –12 975 Depreciation is
vehicles an expense
decreases
Acc GR12 LB.indb 48 6/6/13 6:03:08 PM

Adjustment: BAD DEBTS
Example
M Franken owes the business R4 800. She is declared insolvent and her insolvent
estate pays out 40c in the rand. The rest should be written off.

Amount received: R4 800 × 0,4 = R1 920
Amount written off: R4 800 × 0,6 = R2 880
The amount received of R1 920 will increase the Bank account and the R2 880
should be added to Bad Debts. Debtors Control will decrease with the total amount
of R4 800.
Entry in the Cash Receipts Journal (CRJ)

Bank Debtors Control
M Franken 1 920 1 920
Entry in General Journal (GJ)

Debit Credit Debtors control
Debit Credit
Bad debts 2 880
M Franken 2 880 2 880
Accounting equation
–4 800 Debtors decreases –2 880 Bad debts is an
expense
+1 920 Cash increases
Adjustment: BAD DEBTS RECOVERED
Example
Debtor A Lawrence, whose debt had been written off in the previous month,
paid R300 directly into the bank account.

This debtor was removed from the Debtors Ledger in the previous month. We
can therefore not credit Debtors Control. We will debit Bank and credit Bad Debts
Recovered, which is an income account.
Entry in Cash Receipts Journal

Detail Bank Sundry accounts
Amount Detail
A Lawrence 300 300 Bad debts recovered
Accounting equation
+300 Cash increases +300 Bad debts
recovered is
income
Acc GR12 LB.indb 49 6/6/13 6:03:08 PM

Adjustment: CORRECTION OF ERRORS
Example
Stationery purchased on credit for R400, was entered in the business books as
trading stock.

You want to take the R400 out of the Trading Stock account and put it into the
Stationery account. Therefore you will correct the mistake by debiting Stationery
and crediting Trading Stock. Nothing needs to be adjusted within Creditors Control.

Debit Credit
Stationery 400
Trading stock 400
Accounting equation
–400 Trading stock –400 Stationery is an
decreases expense
Adjustment: OMISSIONS
Example
Trading stock of R600, returned to a creditor Wilson & Co, has not been entered
in the books.

Credit Trading Stock with R600 and debit Wilson & Co.

Debit Credit Creditors control
Debit Credit
Wilson & Co 600 600
Trading stock 600
Accounting equation
–600 Trading stock –600 Debt to
decreases creditors
decreases
Acc GR12 LB.indb 50 6/6/13 6:03:08 PM

Adjustment: ACCRUED INCOME (INCOME RECEIVABLE)
Example
The rent income for February 2017, the last month of the financial year, is still
receivable, R2 300.

GAAP flash
It is an income for this financial year and should be taken into account for the
Matching concept: Income and
current financial year (matching principle of GAAP). The business should
expenses must be accounted for in the
add R2 300 to Rent Income. Accrued Income is an asset, as it is money owed to correct time period.
the business.

Debit Credit
Accrued income 2 300
Rent income 2 300
Accounting equation
+2 300 Accrued income +2 300 Rent income
is an asset is income that
increases
Adjustment: INCOME RECEIVED IN ADVANCE (DEFERRED INCOME)
Example
Received R3 400 from the tenant during February 2017, the end of the financial
year. It is an advance payment for the March 2017 rent.

Although the business has already received the money, they have not yet earned
it. It is an income for the next financial year. The matching principle must be
applied and therefore we should deduct the R3 400 from Rent Income for the
current financial year. The contra entry will be in the Income Received in Advance
account, which is a liability as the business now owes the tenant the service.

Debit Credit
Rent income 3 400
Income received in advance 3 400
Accounting equation
–3 400 Rent income +3 400 Income
is income that received in
decreases advance is a
liability
Acc GR12 LB.indb 51 6/6/13 6:03:09 PM

Adjustment: EXPENSES PREPAID
Example
The financial year ends on 28/29 February. Paid for an advertisement contract of
6 months on 1 January 2017, R7 800.

Four out of the six months paid for the advertisement fall within the next
financial year. It is not an expense for this financial year as four of the six
advertisements will only be placed in the next financial year. The business
should apply the matching principle and deduct R5 200 (R7 800 × 4 ÷ 6) from
Advertisements. The contra account is Expenses Prepaid, which is an asset, as the
advertisement company now owes the business the service that was prepaid.

Debit Credit
Expenses prepaid 5 200
Advertisements 5 200
Accounting equation
+5 200 Expenses +5 200 Advertisements is
prepaid is an an expense that
asset decreases
Adjustment: ACCRUED EXPENSES (EXPENSES PAYABLE)
Example
Directors’ fees of R23 400 is still payable on 28 February 2017, the end of the
financial year.

It is an expense that was incurred during the current financial year and therefore
the business should add it to Directors’ Fees (matching principle). The contra
account is Accrued Expenses, which is a liability as it is money that is owed to the
directors.

Debit Credit
Directors’ fees 23 400
Accrued expenses 23 400
Accounting equation
–23 400 Directors’ fees +23 400 Accrued
is an expense expenses is a
that increased liability
Acc GR12 LB.indb 52 6/6/13 6:03:09 PM

Adjustment: PROVISION FOR BAD DEBTS – INCOME
Example
Debit Credit
Debtors control 23 400
Provision for bad debts 1 056
Adjustment:
Provision for bad debts should be adjusted to 4% of outstanding debtors.

R23 400 × 4% = R936. Provision for bad debts should be adjusted to R936. The
business should therefore deduct R120 (R1 056 – R936) from Provision for Bad
Debts. Provision for Bad Debts should be debited with R120 and the contra account,
Provision for Bad Debts Adjustment, should be credited.

Debit Credit
Provision for bad debts 120
Provision for bad debts – adjustment 120
Accounting equation
+120 Provision for +120 Provision for
bad debts is a bad debts-
negative asset adjustment
that decreased credited is an
income
Adjustment: PROVISION FOR BAD DEBTS – EXPENSE
Example
Debit Credit
Adjustment:
Provision for bad debts should be adjusted to 5% of outstanding debtors.

R19 860 × 5% = R993. Provision for bad debts should be adjusted to R993.
The business should therefore add R89 (R993 – R904) to Provision for Bad Debts.
Provision for Bad Debts should be credited with R89 and the contra account,
Provision for Bad Debts Adjustment, should be debited.

Debit Credit
Provision for bad debts – adjustment 89
Acc GR12 LB.indb 53 6/6/13 6:03:09 PM

Accounting equation
–89 Provision for –89 Provision for
bad debts is a bad debts
negative asset debited is an
that increased expense
Adjustment: INTEREST CAPITALISED
GAAP flash Example

Concept of materiality: Interest
Received the following loan statement from the bank on 28 February 2017, the
on loans is material information as last day of the financial year:
it relates to the decisions taken on
finance options and finance cost. It Loan statement of QT Bank for the 12 months ended 28 February 2017
should therefore be shown in the Balance of loan on 1 March 2016 R200 000
financial statements.
Interest capitalised R21 000
Instalments on loan, paid monthly: R2 500 × 12 (R30 000)
Balance of loan on 28 February 2017 191 000
Adjustment:
The monthly payments were entered in the CPJ and posted to the Bank and Loan
accounts every month. The interest on capital, however, still needs to be entered
in the business’s books.

The interest is capitalised and therefore needs to be added to the Loan account.

Debit Credit
Interest on loan 21 000
Loan: QT Bank 21 000
Accounting equation
–21 000 Interest on loan +21 000 Loan increases
is an expense
Acc GR12 LB.indb 54 6/6/13 6:03:09 PM

5.2 New adjustments relating to companies
5.2.1 Adjustment for income tax
As mentioned in Chapter 1, the following transactions with regards to SARS and
income tax will take place during the financial year:
Two provisional payments Receive tax 7 months after

Beginning of assessment year end
financial year
1st payment 2nd payment 3rd payment
01 Mar 2017 31 Aug 2017 28 Feb 2018 30 Sep 2018
6 months
Last day of
financial year
First payment: 6 months after beginning of

financial year Submit tax
Second payment: last day of financial year return form
Third payment: 7 months after year end
That is why the SARS (Income Tax) will always have a debit balance at the end of provisional tax
the financial year, because of the provisional tax payments that were made. estimated payments that are made to
After the tax return form was submitted, SARS will then issue the business with SARS during the year
the tax assessment, showing how much income tax is payable for the financial
year. This amount for Income tax is the amount that will be closed off to the tax assessment
Appropriation account and shown on the face of the Income Statement. a document issued by SARS to confirm
Should the provisional tax paid be less than the total tax due, the SARS (Income the amount of income tax payable by
Tax) account will have a credit balance and be considered a liability. This account the company
will then be shown in the notes to the financial statements as a current liability
under Trade and other payables.
However, should the provisional tax paid exceed the total tax due, the SARS
(Income Tax) account will have a debit balance and be considered an asset (advance
payment). This account will then be shown in the notes to the financial statements
as a current asset under Trade and other receivables.
Example
Danjo Traders Ltd.

Pre-adjustment Trial Balance as at 28 February 2019
Debit Credit
Balance Sheet account
Acc GR12 LB.indb 55 6/6/13 6:03:09 PM

Example continued
After completion of the audit, the income tax figure for the year was calculated
at R162 000.
Required
Show the entries in the following company records:
1. General Journal
2. General Ledger
3. Trial Balance.
Solution
The following entries will be made in the company’s books.
1.
Doc. Day Details Fol. Debit Credit
no.
28 Income tax 162 000
2.
General Ledger of Danjo Traders Ltd. Total income tax for
Balance Sheet account the year
Provisional income tax
Dr paid during the year SARS (Income Tax) B12 Cr
2019 2019
Feb 28 Balance b/d 155 000 Feb 28 Income tax GJ 162 000
Balance c/d 7 000
162 000 162 000
2019
Nominal account
Amount still payable to
Dr Income Tax SARS – a liability N22 Cr
2019 2019
Feb 28 SARS (income tax) GJ 162 000 Feb 28 Appropriation account GJ 162 000
162 000 162 000
3.
Danjo Traders Ltd.
Post adjustment Trial Balance as at 28 February 2019
Debit Credit
Nominal account
Income tax 162 000
Acc GR12 LB.indb 56 6/6/13 6:03:09 PM

5.2.2 Adjustment for dividends
As mentioned in Chapter 1, dividends are the part of the profit that is paid out to
shareholders.
Interim dividends are declared and distributed (paid) during the financial
year and before the company’s annual earnings have been worked out. As interim
dividends are a payment, the transaction will be entered in the CPJ and the
following will happen in the General Ledger:
Debit: Dividends on Ordinary Shares
Credit: Bank
Final dividends are declared at the end of the financial year. As final
dividends are only declared, not distributed, at the end of the financial year, it
will be entered as a liability in the Statement of Financial Position (Balance Sheet).
These final dividends will only be paid in the next financial period. As this is a
non-cash transaction it will be entered in the General Journal and General Ledger
as follows:
Debit: Dividends on Ordinary Shares
Credit: Shareholders for Dividends
Example
Adjustment for dividends
On 28 February 2018 Danjo Traders Ltd. has an issued share capital of
R990 000 consisting of 60 000 ordinary shares.
Danjo Traders Ltd.

Debit Credit
Nominal account
Adjustment at the end of the financial year

Declared a final dividend of 60c per share on 28 February 2019
Required
Show the entries in the following company records:
1. General Journal
2. General Ledger
3. Trial Balance.
Solution
The following entries will be made in the company’s books:
1.
Doc. Day Details Fol. Debit Credit
no.
28 Dividends on ordinary shares 36 000
(Final dividends declared (60 000 × [60/100]))
Acc GR12 LB.indb 57 6/6/13 6:03:10 PM

Example continued
2.
Dividends payable to
shareholders - liability
2019
36 000
Interim dividends Total dividends

Nominal account
2019 2019
Feb 28 Saldo a/b 12 000 Feb 28 Appropriation account GJ 48 000
2019Feb Shareholders for dividends GJ 36 000
48 000 48 000
Final dividends
3.
Danjo Traders Ltd.
Debit Credit
Nominal account
Activity 2.2
The following information was taken from the accounting records of Thobani Traders Ltd.
Their financial year ends 30 June 2018. The business has an issued share capital of
R900 000, consisting of 150 000 ordinary shares.
Required
1. Complete the table provided.
2. Complete the Appropriation account provided.
Adjustment Account Account Amount

debited credited
1. On 1 June 2018 the business received
R560 from debtor, V Buhrman, previously
been written off as a bad debt. The
bookkeeper incorrectly posted the
amount to the Debtors Control account.
2. Goods with a selling price of R752 were
returned by debtor C Taylor. No entry was
made of this transaction. The business uses
a mark-up of 60% on cost price.
3. After taking the transaction above into
account, the Trading Stock account in the
business’s books shows a balance of R61 700.
According to a physical stock take on
30 June 2018 the trading stock on hand is
R58 600.
Acc GR12 LB.indb 58 6/6/13 6:03:10 PM

Adjustment Account Account Amount
debited credited
4. Stationery worth R1 090 was not used
during the financial year.
5. Depreciation on equipment should be
calculated at 10% per annum on the
cost price. The cost price of equipment
is R67 900 and the accumulated
depreciation on equipment is R32 100.
6. Depreciation on vehicles should be
calculated at 15% per annum on the
diminished balance. The cost price of
vehicles is R130 000 and the accumulated
depreciation on vehicles is R46 800.
7. Debtor G Baxter, who owes the business
R1 040, has been declared insolvent. We
received 30c in the rand on 29 June 2018.
The rest should be written off as a bad
debt. No entry has been made in this
regard.
8. Provision for bad debts should be
increased by R103.
9. Received the following from the bank:
Statement of fixed deposit at QT Bank
Balance on 1 July 2017 8 000
Interest capitalised 640
Balance on 30 June 2018 8 640
10. Rent of R3 900 has been received from
a tenant one month in advance, for July
2018.
11. An amount of R8 000 is owed to the
independent auditor for his services.
12. An annual insurance premium of R7 800
was paid on 1 September 2017. It expires
on 31 August 2018.
13. Income tax for the year is calculated
at 28% of net profit. See Appropriation
account below for net profit.
14. The interim dividend paid during the
financial year was R240 000. This was
entered in the books. On 30 June 2018 the
directors declared a final dividend of 186c
per share.
General Ledger of Thobani Traders Ltd.

Final account
2018 2018
Jun 30 Income tax GJ Jun 30 Profit and loss account GJ 890 000
Dividends on ordinary shares GJ Retained income GJ 198 700
Retained income GJ
Acc GR12 LB.indb 59 6/6/13 6:03:10 PM

6. The Trial Balance
As mentioned previously, the business will prepare a Trial Balance at the end of
each month. At the end of the financial year the following Trial Balances are used.
Pre-adjustment Year-end Post-adjustment Closing Post-closing

Trial Balance adjustments Trial Balance transfers Trial Balance
A summary of all the

Prepared after the year-end Consists of only Balance
balances and totals at
adjustments are done. Sheet accounts, as all the
the end of the year
New accounts such as Accrued nominal accounts have been
Income and Expenses Prepaid closed off to the Trading,
are included. Profit and Loss and
Appropriation accounts.
Example
Trial Balance
The following accounts are highlighted as they are unique to a company.
Danjo Traders Ltd.
Post-adjustment Trial Balance as at 28 February 2019
Fol. Debit Credit These two accounts
are the shareholders’
Balance Sheet accounts equity accounts.
This amount is payable
… to SARS for tax deducted
…. from salaries
SARS (PAYE) B20 2 500 This is payable to

SARS (VAT) B21 11 900 SARS for VAT. Output
tax – Input tax
Amount owed to SARS
for income tax
….
….
Amount owed to
shareholders for
dividends declared, but
Nominal accounts not yet paid
…..
These are expenses
…… unique to a company
Directors’ fees N30 500 000 and will be closed
off to the Profit and
Audit fees N31 80 020 Loss account.
….
Income tax for the
accounting period,
Dividends on ordinary shares Total dividends for the N35 48 000 to be closed off to
year, paid and declared. Appropriation account
Closed off to the XXX XXX
Appropriation account.
Acc GR12 LB.indb 60 6/6/13 6:03:10 PM

Activity 2.3
According to the Memorandum of Incorporation (MOI), RTI Ltd. is authorised with 500 000
ordinary shares. 300 000 of these shares have already been issued.
RTI Ltd.
Fol. Debit Credit
Balance Sheet accounts section
Ordinary share capital B1 1 200 000
SARS (PAYE) B20 3 100
SARS (VAT) B21 12 400
SARS (Income tax) B22 3 208 2 500
Nominal accounts 7 000
Directors’ fees N30 600 000
Audit fees N31 79 600
Shareholders for dividends XXX XXX
Required
Answer the following questions with regards to RTI Ltd. Refer to the above
Trial Balance where necessary.
1. If we assume that all the shares were issued at the same price, what was the issue
price per share?
2. How many more shares can RTI Ltd. offer to the public, according to the MOI?
3. Which account will be debited and credited when shares are issued?
4. Why would the directors retain R210 000 of the profits, instead of distributing all of it
to the shareholders?
5. Why does the Companies Act state that directors’ fees should be disclosed in the
financial statements?
6. To which account will directors’ fees be closed off at the end of the
financial year?
7. What is the difference between an internal auditor and an external
independent auditor?
8. Who will appoint the independent auditor?
9. Audit fees are estimated at R50 000 at the end of the financial year. How will this be
entered in the business’s books? Which account will be debited and which account
will be credited?
10. Why does the SARS (Income Tax) account have a debit balance?
11. If the income tax rate on companies is 28% of net profit, how much net profit before
tax did the company earn during this financial year?
12. How much was paid to SARS during the financial year as provisional income tax?
13. What will happen if the provisional amount paid is less than the total income tax for
the year?
14. How much was paid to shareholders as interim dividends during the financial year?
15. What is the amount of dividends per share that was declared at the end of the
financial year?
Acc GR12 LB.indb 61 6/6/13 6:03:10 PM

Example
Final accounts and Post-closing Trial Balance
Nelson Traders Ltd. has an authorised share capital of 40 000 shares. Their
financial year ends on the last day of February.
Nelson Traders Ltd.

Fol. Debit Credit
Ordinary share capital (35 000 shares) B1 195 000
Land and buildings B3 296 660
Vehicles B4 64 000
Equipment B5 20 400
Accumulated depreciation on vehicles B6 20 560
Accumulated depreciation on equipment B7 6 410
Trading stock B8 32 600
Debtors control B9 14 700
Provision for bad debts B10 690
Bank B11 2 340
Cash float B12 400
Creditors control B15 16 780
Loan: XY Bank B16 24 000
Fixed deposit: AB Bank B17 9 400
Nominal accounts
Sales N1 421 680
Costs of sales N2 240 000
Debtors allowances N3 7 680
Rates and taxes N4 3 420
Packaging N5 8 530
Stationery N6 1 642
Wages N7 30 000
Insurance N8 2 600
Bad debts N9 350
Water and electricity N10 2 418
Rent income N11 18 850
Interest on loan N12 2 240
Unemployment Insurance Fund contributions N16 1 600
827 120 827 120
Acc GR12 LB.indb 62 6/6/13 6:03:10 PM

Example continued
Adjustments and additional information
• The owner, W Xoseka, donated goods with a retail value of R576
(cost price: R360) to the local high school. No entry has been made.
• Stock as on 28 February 2014 according to a stock take:
Trading stock R29 900
Packaging R2 470
Stationery R186
• A debtor that owes R400 has to be written off as a bad debt.
• Adjust debtors to 5% of outstanding debt.
• Rent for March 2014 has been received.
• The loan from XY Bank was made on 1 September 2011 on the following
conditions:
Interest is due every six months, on 28 February and 31 August, at a rate of
16% per year
The capital is to be redeemed in equal annual instalments of R4 000 each on
31 August of every year.
To date, all payments have been made annually on this date.
• Insurance includes an annual premium of R1 128, which was paid on
1 October 2013.
• Depreciation has to be brought into account as follows:
at 20% per annum on the diminishing balance on vehicles
at 10% per annum on the cost price of equipment
• Received a statement from AB-Bank on 28 February 2014:
Balance of fixed deposit on 1 March 2013 9 400
Interest capitalised 600
Balance of fixed deposit on 28 February 2014 10 000
• The directors declared a final dividend of 50c per share.
• The income tax was calculated at R38 125.
Required
Take into consideration the adjustments and additional information and do the
following:
1. Draft a Post-adjustment Trial Balance as at 28 February 2014.
2. Compile, balance and close the following accounts in the General Ledger:
Retained income, SARS (income tax), Dividends on ordinary shares, Trading
account, Profit and loss account, Appropriation account.
3. Compile the Post-closing Trial Balance as at 28 February 2014.
Acc GR12 LB.indb 63 6/6/13 6:03:11 PM

Example continued
Solution
1.
Nelson Traders Ltd.
Fol. Debit Credit
Land and building B3 296 660
Vehicles B4 64 000
Equipment B5 20 400
Accumulated depreciation on vehicles (20 560 + 8 688) B6 29 248
Accumulated depreciation on equipment (6 410 + 2 040) B7 8 450
Trading stock (32 600 – 360 – 2 340) B8 29 900
Debtors control (14 700 – 400) B9 14 300
Provision for bad debts (690 + 25) B10 715
Bank B11 2 340
Cash float B12 400
SARS (income tax) (36 700 – 38 125) B14 1 425
Fixed deposit: AB Bank (9 400 + 600) B17 10 000
Consumable stores on hand B18 2 656
Income received in advance B19 1 450
Accrued expenses B20 1 920
Prepaid expenses B21 658
Nominal accounts
Sales N1 421 680
Cost of sales N2 240 000
Debtors allowances N3 7 680
Rates and taxes N4 3 420
Packaging (8 530 – 2 470) N5 6 060
Stationery (1 642 – 186) N6 1 456
Salaries N7 30 000
Insurance (2 600 – 658) N8 1 942
Bad debts (350 + 400) N9 750
Water and electricity N10 2 418
Rent income (18 850 -1 450) N11 17 400
Interest on loan (2 240 + 19 200) N12 4 160
Dividends on ordinary shares (14 000 + 17 500) N14 31 500
UIF contributions N15 1 600
Donations N16 360
Trading stock deficit (32 600 – 360 – 29 900) N17 2 340
Provision for bad debts adjustment N18 25
Depreciation (8 688 + 2 040) N19 10 728
Interest on fixed deposit N20 600
859 318 859 318
Acc GR12 LB.indb 64 6/6/13 6:03:11 PM

Example continued
2.
2014 2014
Feb 28 Appropriation account GJ 118 400 Feb 28 Balance b/d 118 400
2014

2014 2014
Feb 28 Balance b/d 36 700 Feb 28 Income tax GJ 38 125
Balance c/d 1 425
38 125 38 125
2014
The balance is the total provisional payments made during the year.
Nominal account
2014 2014
Feb 28 Balance b/d 14 000 Feb 28 Appropriation account GJ 31 500
Shareholders for dividends GJ 17 500
31 500 31 500
The balance is the interim dividends paid during the year.

Number of shares issued: R175 000 ÷ 5 = R35 000
35 000 × 50c = R17 500
Final accounts
Dr Trading account F1 Cr
2014 2014
Feb 28 Costs of sales GJ 240 000 Feb 28 Sales (421 680 – 7 680) GJ 414 000
Profit and loss GJ 174 000
414 000 414 000
Acc GR12 LB.indb 65 6/6/13 6:03:11 PM

Example continued
Dr Profit and Loss account F2 Cr

2014 2014
Feb 28 Rates and taxes GJ 3 420 Feb Trading account GJ 174 000
Packaging GJ 6 060 Rent income GJ 17 400
Stationery GJ 1 456 Interest on fixed deposit GJ 600
Salaries GJ 30 000
Insurance GJ 1 942
Bad debts GJ 750
Water and electricity GJ 2 418
Interest on loan GJ 4 160
Directors’ fees GJ 36 000
Audit fees GJ 1 780
UIF contributions GJ 1 600
Donations GJ 360
Trading stock deficit GJ 2 340
Provision for bad debts GJ 25
Depreciation GJ 10 728
Appropriation account GJ 88 961
192 000 192 000
Dt Appropriation account Kt
2014 2014
Dividends on ordinary shares GJ 31 500 Retained income GJ 118 400
207 361 207 361
Calculating adjustments
Trading Stock
Balance b/d 32 600 Donation 360
Balance c/d 29 900
32 600 32 600
Debtors Control Provision for Bad Debts

Balance 400 Balance 690
b/d 14 300 Pr.B/D adjust b/d 25
14 700 14 700 715
Acc GR12 LB.indb 66 6/6/13 6:03:11 PM

Example continued
R14 300 × 5% = R715
R18 850 ÷ 13 = R1 450 Income received in advance
R28 000 × 16% × __ 6  = R2 240 and R24 000 × 16% × __

 12 6  = R1 920
 12
R1 128 × __ 7  = R658

 12 Prepaid expenses
Depreciation on vehicles: (R64 000 – 20 560) × 20% = R8 688

Depreciation on equipment: R20 400 × 10% = R2 040
Debit: Fixed Deposit R600

Credit: Interest on Fixed Deposit R600
3.
Nelson Traders Ltd.
Post-closing Trial Balance as at 28 February 2014
Fol. Debit Credit
Land and buildings B3 296 660
Vehicles B4 64 000
Equipment B5 20 400
Accumulated depreciation on vehicles B6 29 248
Accumulated depreciation on equipment B7 8 450
Trading stock B8 29 900
Debtors control B9 14 300
Provision for bad debts B10 715
Bank B11 2 340
Cash float B12 400
Fixed deposit B17 10 000 17 400
Consumable stores on hand B18 2 656
Income received in advance B19 1 450
Accrued expenses B20 1 920
Prepaid expenses B21 658
438 974 438 974
Acc GR12 LB.indb 67 6/6/13 6:03:11 PM

Activity 2.4
The information below was taken from the books of Board Limited, a public company that
specialises in importing and distributing skateboards.
Board Limited
Debit Credit
Ordinary share capital (160 000 shares issued) 180 000
Equipment 56 500
Vehicles 86 000
Loan: HP Bank (17% p.a.) 50 000
Trading stock 190 000
Bank 14 000 2 340
Cash float 1 000
Creditors control 36 800
Nominal accounts
Sales 920 000
Costs of sales 392 000 17 400
Debtors allowances 8 500
Rent income 20 000
Interest on current account 1 200
Rent paid 44 000
Salaries and wages 90 000 1 450
Insurance 12 500 1 450
Interest on loan 6 375 1 450
Bad debts 19 200 1 450
Directors fees 150 000 1 450
Audit fees 13 925 1 450
Sundry expenses 8 200 1 450
1 270 400 1 270 400

• The company is registered with 200 000 authorised shares.
• The company uses the perpetual inventory system. Skateboards with a retail value of
R4 950 and a cost price of R1 980 have been returned by a debtor.
This has not been entered into the accounts.
• A stock take on 28 February 2019 found that the stock on hand is worth
R188 000.
Acc GR12 LB.indb 68 6/6/13 6:03:11 PM

• A debtor that owes Board Limited R7 800 has been declared insolvent. The insolvent
estate will pay creditors 60c to the rand on 1 May 2019. The rest of the money must
now be written off as bad debt. No entry has been made.
• The provision for bad debt must be increased to R14 000.
• Although no invoice has been received, audit fees of R3 750 are outstanding.
• Three months’ interest on the loan still has to be paid for the accounting period.
• Due to a miscalculation one of the directors received R1 500 too much in directors’
fees. The amount has to be treated as an advance payment.
• Rent income (R2 400) for February 2019 is outstanding.
• Provision for depreciation on vehicles must be made at a rate of 10% per annum on
the cost price and at a rate of 20% per annum on the carrying value for equipment. No
fixed assets have been bought or sold during the current financial year.
• Consumable goods have been entered as sundry expenses. On 28 February 2019 a
stock take found that the company has consumable stores on hand of R1 300.
(Hint: There are 160 000 issued shares and interim dividends of R12 800 have been
declared and paid during the year.)
• Income tax of R65 177 has to be brought into account.
Required
1. Do the Post-adjustment Trial Balance as at 28 February 2019.
2. Show the final accounts in the General Ledger and the appropriation of the profit:
Retained income (5 lines), SARS (income tax) (5 lines), Dividends on ordinary shares
(4 lines), Trading account (5 lines), Profit and loss account (14 lines), Appropriation
account (7 lines).
3. Compile the Post-closing Trial Balance of Board Limited on 28 February 2019.
7. Reversal of adjustments
Adjustments that were made at the end of a financial year need to be reversed
(written back) at the beginning of the new financial year. By doing this we apply
the matching principle of GAAP.
In the previous example, stationery to the value of R1 642 was purchased during
the financial year. At the end of the year, stationery to the value of R186 was not
used. This stationery will only be used in the next financial year and therefore we
deducted the R186 from Stationery and debited Consumable Stores on Hand. Now, at
the beginning of the next financial year we must reverse the adjustment and write it
back to Stationery, as it will be used in the next financial year.
The following timeline illustrates the above example.
01 Mar 2013 Stationery of R1 642 purchased 28 Feb 2014

during financial year
R186
Stationery of R1 642 – R186

(R1 456) used during financial year 01 Mar 2014 28 Feb
2015
Adjustment at end Reversal of adjustment on

of financial year. 1st day of new financial year.
Deduct R186 from Write stationery of R186 back, as
stationery. it will be used in the new year.
Acc GR12 LB.indb 69 6/6/13 6:03:12 PM

Activity 2.5
We are using the same company Board limited from Activity 2.4.
The following balances appeared in the Post-closing Trial Balance on
28 February 2019.
Debit Credit
Accrued expenses (for audit fees R3 750 and interest on loan R2 125) 5 875
Accrued income (rent income) 2 400
Consumable stores on hand (stationery) 1 300
Prepaid expenses (directors’ fees) 1 500
Required
do the reversal of adjustments in the books of Board ltd. on 1 march 2019, the first day of
the financial year.
The number in brackets indicates Show the entries in the following accounts in the General ledger: Accrued expenses
how many lines to leave open for (4 lines), Accrued income (2), Consumable stores on hand (2), Prepaid expenses (2), Audit
each account. fees (2), Interest on loan (2), Rent income (2), Stationery (2), directors’ fees (2).
Activity 2.6
You are provided with information relating to Zola limited, a public company for the
financial year ended 30 June 2019.
Zola Ltd.
Fol. Debit Credit
Loan from ASD Bank 167 000
Land and buildings 1 422 000
Vehicles 140 000
Equipment 59 000
Bank 95 928
Petty cash 2 000
Consumable stores on hand (1 July 2018) 244
Acc GR12 LB.indb 70 6/6/13 6:03:12 PM

Nominal accounts
Sales 4 977 280
Cost of sales 3 100 000
Rent income 27 750
Interest on current account 1 488
Salaries and wages 580 000
Stationery 3 210
Insurance 21 000
Directors fees 340 000
Bank charges 19 562
Bad debts 4 346
Sundry operating expenses 31 600
6 318 070 6 318 070
Adjustments on 30 June 2019

• The bookkeeper did not do the reversal of adjustment for consumables stores on
hand at the beginning of the financial year. The consumables stores on hand consist
of stationery that was not used in the previous financial year. Do the reversal of
adjustment.
• The physical count at the end of the year revealed the following:
Stationery R390
• Audit fees for the current financial year is estimated at R80 000 and should be taken
into account as an accrued expense.
• Rent has been received for 15 months.
• The amount for insurance includes an annual premium of R7 800 which expires on 31
October 2019.
• The following loan statement was received from ASD Bank:

Monthly instalment on loan (44 040)
Make the necessary adjustments.

• Provision for bad debts must be adjusted to 4% of outstanding debtors.
• Depreciation is written off at the following rates:
On equipment at 10% per annum on the cost price
On vehicles at 20% per annum on the diminished balance
• Income tax is calculated at 28% of net profit, R203 812.
• A final dividend of R140 000 has been declared but not paid.
• On 30 June 2019 the company bought back 30 000 shares at R2,10 each. These shares
were originally sold at R2 each. No entry has been made of this transaction.
Acc GR12 LB.indb 71 6/6/13 6:03:12 PM

Required
1. Show the entries for all the adjustments in the General Journal. narrations may be
omitted.
2. Prepare a Post-adjustment Trial Balance as at 30 June 2019.
The number in brackets indicates 3. Show the following accounts in the General ledger: ordinary share capital (5),
how many lines to leave open for Retained income (5), SARS (income tax) (4), dividends on ordinary shares (4),
each account. Stationery (5), Trading account (4), Profit and loss account (15), Appropriation
account (7).
4. Prepare a Post-closing Trial Balance on 30 June 2019.
Informal assessment 2.1 Bookkeeping of a company
1. State whether the following statements are TRuE of FAlSE. If false, give the
correct answer. [14]
1.1 The net profit is calculated in the Trading account.
1.2 The account Dividends on Ordinary Shares is an operating expense.
1.3 Retained income is the portion of the net profit that is kept in the company
to assist the company in paying shareholders for dividends and other future
activities that will benefit the company and, thereby, the shareholders.
1.4 directors’ fees in an operating expense.
1.5 The concept of materiality states that information is material when its omission
can influence the decision of users.
1.6 Interim dividends are the dividends that are declared at the end of the
financial year.
1.7 The Post-closing Trial Balance consists of only Balance Sheet accounts.
2. Refer to the account in the General ledger and answer the questions that follow. [6]
Dr Rent Income Cr
2021 2020
Feb 28 Income received in advance 2 2 233 Mar 01 Income received in advance 1 2 030
2021
Profit and loss 24 360 Feb 28 Bank 24 563
26 593 26 593
2.1 Give a short explanation for entry 1 .

2.2 Give a short explanation for entry 2 .
2.3 With what percentage did the rent increase on 1 march 2021?
Acc GR12 LB.indb 72 6/6/13 6:03:12 PM

Chapter 3
Financial statements
• Prepare the financial statements of a ■ Accrued expenses (payable) • Statement of
company ■ Provision for bad debts Comprehensive Income
• Do the following year-end ■ Adjustments related to (Income Statement)
• Statement of Financial
adjustments: income tax
Position (Balance Sheet)
Trading stock deficit/surplus
■ ■ Adjustments related to the
• Cash Flow Statement
■ payment and declaration of • trading stock deficit/
Depreciation (on cost price/
■ dividends surplus • conflict
straight line, on diminishing • Integration of reporting and control of interest • share
balance methods) of fixed assets manipulation • insider
Bad debts
■ • Integration of ethical considerations trading • corporate
Bad debts recovered
■ relating to companies. governance
Correction of errors / omissions
■ • Integration of internal audit
Accrued income (receivable)
■ and control processes relating to
Income received in advance
■ companies
(deferred) • Application of GAAP principles
Expenses prepaid
■ and IFRS
I would like to compile an audit

trail of all our fixed assets.
Certainly, I’ll fetch the fixed assets
register and financial statements.
F i n a n cia l acc o u n ti n g o f c o m pa n ies – F i n a n cia l state m e n ts • C h a p t e r 3 73
Acc GR12 LB.indb 73 6/6/13 6:03:12 PM

1. Annual financial statements
All companies are required to maintain accurate and complete accounting records.
In addition, all companies are required to prepare annual financial statements. The
Minister of Finance, after consulting the Financial Reporting Standards Council,
may make Regulations regarding the financial reporting standards (IFRS) to be
used when preparing financial statements.
They must be prepared within six months after financial year-end.
The Companies Act requires annual financial statements to:
• include an auditor’s report
• include a report by the directors with respect to the state of affairs, the business
and profit or loss of the company
• be approved by the Board – one signature of an authorised director only
• be sent in summarised form only to shareholders – a full set of financial
statements should be available electronically (on the website)
• be presented to shareholders at first shareholders’ meeting after such approval.
All public companies must be audited. Public companies must appoint an audit
committee.
The financial statements of an entity shall include a:
• Statement of Comprehensive Income (Income Statement)
• Statement of Financial Position (Balance Sheet)
• Statement of Change in Equity (not for Grade 12)
• Cash Flow Statement
• Notes to the financial statements.
1.1 The purpose of financial statements

The purpose of financial statements is to provide information about the financial
position, financial performance and cash flow of a business to a wide variety of
users. The financial statements also show if the resources of the business were
managed effectively.
1.2 Qualitative properties of financial statements

The qualitative properties of the financial statements make them useful to the
different parties using them. These properties are:
• Intelligibility: Information should be intelligible to its users.
• Applicability: Users should be able to use the information for decision-making
purposes.
• Reliability: Information is reliable if it is free of from mistakes and it is
unbiased, prudent and complete.
• Comparability: The business should be able to compare statements from the
one year to the next. Similar entities should also be able to compare statements
in order to evaluate their performance.
74 Chapter 3 • F i n a n cia l acc o u n ti n g o f c o m pa n ies – F i n a n cia l state m e n ts
Acc GR12 LB.indb 74 6/6/13 6:03:13 PM

1.3 Income Statement (Statement of Comprehensive Income) The IFRS term for an Income
The Income Statement measures a company’s financial performance over a specific Statement is a Statement
accounting period. It is a summary of its revenues and expenses and shows the net of Comprehensive Income. But for
Grade 12 we will continue to use
profit or loss incurred for the specific accounting period. Income Statement.
Example
The face of the Income Statement
(Name of company)
Income Statement for the year ended (date)
Note R
Sales XXX
Cost of sales (XXX)
Gross profit XXX
Other operating income XXX
Rent income XXX
Income from services rendered XXX
etc. XXX
Gross operating income XXX

Operating expenses (XXX)
These are expenses
Water and electricity XXX unique to a company.
Directors’ fees XXX
Audit fees XXX
etc. XXX
Operating profit (loss) XXX

Interest income 1 XXX
Profit (loss) before interest expense XXX
Interest expense / Finance cost 2 (XXX) These are new items,
Profit (loss) before tax XXX not found on the
Income tax (XXX) Income Statement of
a partnership or sole
Net profit (loss) after tax 8 XXX proprietor.
F I n A n C I A l A C C o u n T I n G o F C o m PA n I E S – F I n A n C I A l S TAT E m E n T S • C h a p t e r 3 75
Acc GR12 LB.indb 75 6/6/13 6:03:13 PM

The IFRS term for a Balance Sheet 1.4 Statement of Financial Position (Balance Sheet)
is a Statement of Financial Position. The Statement of Financial Position (Balance Sheet) shows the financial position
In Grade 12 we will use both terms so that of the company on a specific date, the last day of the accounting period. The
you get used to the new terminology.
financial position gives the status of the company’s assets, liabilities and owner’s
equity. It is based on the accounting equation:
Assets = Equity + Liabilities
Example
The face of the Statement of Financial Position (Balance Sheet)
Name of company
Statement of Financial Position (Balance Sheet) at (date)
Note R
ASSETS
NON-CURRENT ASSETS XXX
Fixed / tangible assets 3 XXX
Financial assets: Fixed deposit (longer than 12 months) XXX
This section is the same
CURRENT ASSETS XXX as that of a partnership
Inventories 4 XXX or sole proprietor.
Trade and other receivables 5 XXX
Cash and cash equivalents 6 XXX
TOTAL ASSETS XXX
Sole proprietor
EQUITY AND LIABILITIES Owner’s equity
SHAREHOLDERS’ EQUITY (CAPITAL AND RESERVES) XXX Partnership
Capital
Share capital (Equity capital) 7 XXX
Current account
Retained income (Accumulated profits) 8 XXX Company
Share capital
NON-CURRENT LIABILITIES XXX Retained income
Long-term loans XXX
CURRENT LIABILITIES XXX

Trade and other payables 9 XXX Same as other
business entities
Bank overdraft XXX
Current portion of loan (could be placed in note 9) XXX
TOTAL EQUITY AND LIABILITIES XXX
76 Chapter 3 • F I n A n C I A l A C C o u n T I n G o F C o m PA n I E S – F I n A n C I A l S TAT E m E n T S
Acc GR12 LB.indb 76 6/6/13 6:03:13 PM

1.5 Notes to financial statements
The notes to the financial statements are essential if the financial reports are to
be properly understood. The notes to the financial statements report the detail
and additional information so that there is no doubt as to what the totals are
made up of.
Example
The face of the notes to the financial statements
(Name of company)
NOTES TO THE FINANCIAL STATEMENTS AT (DATE)
1. INTEREST INCOME
On fixed deposit XXX
On savings account XXX
On overdue debtors XXX
On current bank account XXX
XXX
2. INTEREST EXPENSE
On loan XXX
On overdraft XXX
On overdue creditor account XXX
XXX
3. FIXED / TANGIBLE ASSETS

Land and Vehicles Equipment Total
buildings
Carrying value at the beginning
of the year XXX XXX XXX XXX
Cost XXX XXX XXX XXX
Accumulated depreciation (XXX) (XXX) (XXX)
Movements
Additions at cost price XXX XXX XXX XXX
Disposals at carrying value (XXX) (XXX) (XXX)
Depreciation (XXX) (XXX) (XXX)
Carrying value at the end of the
financial year XXX XXX XXX XXX
Cost price XXX XXX XXX XXX
Accumulated depreciation (XXX) (XXX) (XXX)
4. INVENTORIES
Trading stock XXX
Consumable stores on hand XXX
XXX
Acc GR12 LB.indb 77 6/6/13 6:03:13 PM

Example continued

Trade debtors XXX
Provision for bad debts (XXX)
This is new. Only use if Net trade debtors XXX
SARS (income tax) has a SARS – income tax XXX
debit balance.
Expenses prepaid XXX
Income accrued (receivable) XXX
Deposits paid for water and electricity XXX
XXX
6. CASH AND CASH EQUIVALENTS

Bank XXX
Cash float XXX
Petty cash XXX
Savings account XXX
Fixed deposit (less than 12 months) XXX
XXX
Authorised shares 7. ORDINARY SHARE CAPITAL

must be disclosed so AUTHORISED
that shareholders can
determine their % Number of ordinary authorised shares: XXX shares
shareholding. ISSUED
XXX ordinary shares in issue at the beginning of the year XXX
XXX additional shares issued during the financial year at issue price R XX each XXX
XXX shares bought back during the financial year (XXX)
XXX ordinary shares in issue at the end of the year XXX
This is the same 8. RETAINED INCOME

information that
Balance at the beginning of year XXX
is entered in the
Appropriation account. Net profit (loss) for the year after tax XXX
Dividends on ordinary shares (XXX)
The amount owed Paid XXX
to shareholders for Recommended XXX
dividends at the end
of the year.
Balance at the end of the year XXX
Acc GR12 LB.indb 78 6/6/13 6:03:13 PM

Example continued

Trade creditors XXX
Expenses accrued (payable) XXX
Income received in advance (deferred) XXX
Creditors for salaries XXX
Pension Fund XXX The amount owed
Medical aid Fund XXX to shareholders for
Shareholders for dividends XXX dividends at the end
of the year.
SARS XXX
Income tax XXX
Only if SARS (income tax)
PAYE XXX has a credit balance
VAT XXX
XXX
1.6 Cash Flow Statement

The Cash Flow Statement expresses the company’s results in terms of cash in and
out of the business. It shows the receipts and payments that changed the cash
account during a specific accounting period. The Cash Flow Statement shows
the movement of cash in terms of operating activities, investing activities and
financing activities.
Example
The face of a Cash Flow Statement
(Name of company)
CASH FLOW STATEMENT FOR THE YEAR ENDED (date)
Note R
Cash effects of operating activities XXX
Cash generated (utilised) from operations 1 XXX
Interest paid (XX)
Dividends paid 3 (XX)
Income tax paid 4 (XX)
Cash effects of investing activities (XXX)

Purchases of non-current /fixed assets 5 (XXX)
Proceeds from sale of non-current/fixed assets XXX
Investment matured XXX
Investment placed/increased (XXX)
Cash effects from financing activities XXX

Proceeds from shares issued XXX
Buying back shares (XXX)
Proceeds from long-term loans XXX
Payment of long-term loans (XXX)
Net change in cash and cash equivalents XXX

Cash and cash equivalents at the beginning of the year XXX
Cash and cash equivalents at the end of the year XXX
We will learn more about the Cash Flow Statement later in this chapter.
Acc GR12 LB.indb 79 6/6/13 6:03:14 PM

2. Directors’ report
The annual financial reports of a company must include a directors’ report.
The directors’ report is prepared by the Board of Directors and should report
on the following:
• A declaration of directors’ responsibilities
• Compliance with financial reporting regulations such as the Companies Act,
King III report IFRS, King III and JSE listing requirements
• Existence of system of internal control as risk management within the business
a report on corporate governance in
South Africa
• Conclusion on quality of internal controls, financial records, accounting
policies and financial statements
• The state of affairs, the business and profit or loss of the company
directors’ report • Going concern: The Board will review the financial position of the company to
a report by the directors with respect to conclude if it has adequate resources to continue with operations in the future.
the state of affairs, the business and profit • Approval of financial statements by the Board of Directors and signed by an
or loss of the company
authorised director
The directors’ report must be presented to the shareholders at the first
shareholders meeting after the statements have been approved by the Board. We
i See an example of a directors’ report
on p 174. will learn more about the directors’ report in Chapter 5.
3. Audit report
An external audit gives an independent review on a company’s financial
information and provides assurance on the accuracy and reliability of financial
disclosures. The audit report provides shareholders with an objective opinion of
the company’s financial position and whether they followed accounting rules and
principles. The audit report is reviewed by the Audit and Risk Committee.
audit report An audit report can often be divided in three paragraphs:
Paragraph 1 will state the responsibilities of the auditor and those of
provides assurance on the accuracy and
reliability of financial disclosures
the directors.
Paragraph 2 states that reporting standards such as GAAP and IFRS were used.
Paragraph3 gives the opinion of the auditor.
i See an example of an audit report
on p 177.
There should be close co-operation between the internal and external auditors
in order to ensure appropriate combined audit coverage and minimal duplication.
We will learn more about the audit report in Chapter 5.
Case study 3.1
Read the following extract from the directors’ Report of distell published 24 August 2011.
Then answer the questions that follow.
Business ethics and organisational integrity Transparency and accountability through Ethics Line
distell is committed to conducting its business on the At distell, our values are supported by the belief that
basis of full legal compliance, with integrity and with good conduct is essential to our business, its continuity
proper regard for ethical business practices. It expects all and its growth. We encourage all employees to use our
directors and employees to comply with these principles, toll-free Ethics line responsibly and to report any activity
to act in the best interest of the company at all times, of fraud, theft, breach of ethics and other risks.
and, in particular, to avoid conflicts of interest and to The line is operated by an independent third party,
refrain from insider trading, illegal anticompetitive 24 hours a day every day, where unethical behaviour
activities and bribery and corruption. and irregularities can be reported anonymously and
management has formulated policies and procedures confidentially. during 2010 and 2011 we ran several
that address key ethical risks, such as conflict of interest, awareness programmes, aimed at explaining what
accepting inappropriate gifts, and acceptable business constitutes ethical or unethical behaviour and to sensitise
conduct. stakeholders as to how to use the Ethics line responsibly.
80 Chapter 3 • F I n A n C I A l A C C o u n T I n G o F C o m PA n I E S – F I n A n C I A l S TAT E m E n T S
Acc GR12 LB.indb 80 6/6/13 6:03:14 PM

Business ethics and organisational integrity Transparency and accountability through Ethics Line
Distell’s code of ethics and conduct is designed During 2011 we received and successfully
around a set of values as set out on page 3. investigated 51 calls in total. Only a minority of calls
The code also covers areas such as compliance indicated wrongful conduct, resulting in dismissals or
with laws and regulations as well as ethical conduct preventative measures. However, no material control
principles. It also provides for an administrative process breakdowns or financial losses were identified during
for communication and compliance. investigations.
Source: Directors’ Report of Distell published 24 August 2011
Questions
1. Who must comply with ethical business principles?
2. Explain the following terms:
2.1 conflict of interest
2.2 insider trading
2.3 illegal anti-competitive activities
2.4 bribery and corruption.
3. What are the key ethical risks?
4. What areas does Distell’s code of ethics cover?
5. What did Distell do to ensure good conduct and to reduce the risks of unethical
behaviour?
6. What will happen if a person reported on the Ethics Line is found guilty of unethical
behaviour?
7. According to the King III report a company should act responsibly towards the
community and the environment. Companies should outline the impact of
their businesses on all three spheres in which it operates: economic, social and
environmental (triple bottom line).
Match the actions and initiatives Distell undertook in 2011 in Column A, to the
economic, social and environmental issues addressed in Column B.
COLUMN A COLUMN B
1. Engaged with government A. Sustaining their communities
departments to explore co-operative
ventures to address alcohol abuse
2. Supported numerous education for B. Preserving their environment
employment initiatives (in addition to
Stellemploy and Bergzicht) including
sponsoring bursary schemes at higher
education institutes
3. A number of initiatives including C. Responsible drinking
skills training, succession planning,
retention strategies, internships and
bursaries have been implemented to
address transformation
4. Implemented the Greenhouse Gas D. Good corporate governance
reporting database for all South
African operations and submitted
their first report to the Carbon
Disclosure Project (CDP)
5. A plan to address certain aspects E. Economic equity
of King III was approved for
implementation during 2011 and
progress was monitored by the
audit and risk committee and
reported to the Board
Acc GR12 LB.indb 81 6/6/13 6:03:14 PM

Activity 3.1
Match the documents listed in Column A to their descriptions in Column B. Rewrite the
correct description next to the document is Column A in your exercise book, so that you
have a summary to learn from.
Column A: Person / Institution Column B: Description

1. Income Statement A. Reflects whether or not the shareholders
can rely on the financial statements
2. Statement of Financial Position B. Reflects the financial results (profit/loss) for
(Balance Sheet) the company for the financial period
3. Cash Flow Statement C. Gives the status of the company’s assets,
owner’s equity and liabilities
4. Directors’ report D. Shows the movement of cash in terms of
operating, investing and financing activities
and the effect it had on the liquid funds of
the company
5. Independent Audit report E. A written, verbal explanation, of a
company’s operations during a
financial year
6. Certificate of Incorporation F. Used to advertise a company and to give
information to potential shareholders
7. Memorandum of G. An invitation to shareholders to a formal
Incorporation (MOI) meeting that is held once a year
8. Shares register H. A document issued by SARS that states the
amount of income tax a company needs
to pay
9. Tax assessment I. A document issued by the Registrar of
Companies that indicates the formation of a
new legal entity; allows a company to start
trading
10. Notice of AGM J. A document that sets out rights, duties and
responsibilities of shareholders, directors
and others within and relation to a company
11. Prospectus K. A record that is kept of every shareholder
and the number of shares he/she owns
12. Companies Act L. A report on corporate governance in
South Africa
13. The King III Report M. Regulates all matters pertaining to
companies
Example
Financial statements: Income Statement and Statement of Financial Position
(Balance Sheet)
Required
Use the information in the example on page 62 to compile the financial
statements of Nelson Traders on 28 February 2014.
Acc GR12 LB.indb 82 6/6/13 6:03:14 PM

Example continued
Solution
Nelson Traders Limited
INCOME STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2014
Note R
Sales 414 000
Cost of sales (240 000)
Gross profit 174 000
Other operating income 17 400
Rent income 17 400
Gross operating income 191 400

Operating expenses (98 879)
Rates and taxes 3 420
Packaging 6 060
Stationery 1 456
Salaries 30 000
Insurance 1 942
Bad debts 750
Water and electricity 2 418
Audit fees 1 780
Unemployment Insurance Fund contributions 1 600
Donations 360
Depreciation 10 728
Operating profit (loss) 92 521

Interest income 1 600
Profit (loss) before interest expense 93 121
Interest expense 2 (4 160)
Profit (loss) before tax 88 961
Income tax (38 125)
Net profit (loss) after tax 8 50 836
Acc GR12 LB.indb 83 6/6/13 6:03:14 PM

Example continued

STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) AT 28 FEBRUARY 2014
Note R
ASSETS
NON-CURRENT ASSETS 353 362
Fixed / tangible assets 3 343 362
Financial assets: Fixed deposit (longer than 12 months) 10 000
CURRENT ASSETS 47 199

Inventories 4 32 556
Trade and other receivables 5 14 243
Cash and cash equivalents 6 400
TOTAL ASSETS 400 561
EQUITY AND LIABILITIES

SHAREHOLDERS’ EQUITY 332 736
Share capital 7 195 000
Retained income 8 137 736
NON-CURRENT LIABILITIES 20 000

Mortgage loan (longer than twelve months) 20 000
CURRENT LIABILITIES 47 825

Trade and other payables 9 41 485
Bank overdraft (if any) 2 340
Current portion of loan (due within 12 months) 4 000
TOTAL EQUITY AND LIABILITIES 400 561

NOTES TO THE FINANCIAL STATEMENTS AT 28 FEBRUARY 2014
1. INTEREST INCOME
On investments 600
On current bank account
On overdue debtors
600
2. INTEREST EXPENSE
On loans 4 160
On overdraft
On overdue creditors (interest paid)
4 160
Acc GR12 LB.indb 84 6/6/13 6:03:14 PM

Example continued

buildings
Carrying value at beginning of year 246 660 43 440 13 990 304 090
Cost 246 660 64 000 20 400 331 060
Accumulated depreciation – (20 560) (6 410) (26 970)
Movements
Additions 50 000 50 000
Disposals at carrying value
Depreciation (8 688) (2 040) (10 728)
Carrying value at end of year 296 660 34 752 11 950 343 362
Cost 296 660 64 000 20 400 381 060
Accumulated depreciation – (29 248) (8 450) (37 698)
4. INVENTORIES
Consumable stores on hand 2 656
32 556

Trade debtors 14 300
Provision for bad debts (715)
Net trade debtors 13 585
Expenses prepaid 658
Income accrued (receivable)
SARS – income tax (if there is a debit balance)
Deposits paid for water and electricity
14 243

Fixed deposits (maturing within 12 months)
Savings account
Bank
Cash float 400
Petty cash
400
Acc GR12 LB.indb 85 6/6/13 6:03:14 PM

Example continued

AUTHORISED
ISSUED
30 000 ordinary shares in issue at the beginning of the year 169 000
0 shares bought back during the year (0)
5 000 additional shares issued during the financial year 26 000
35 000 ordinary shares in issue at the end of the year 195 000
8. RETAINED INCOME
Balance at the beginning of the year 118 400
Net profit (loss) after tax for the year 50 836
Dividends on ordinary shares (31 500)
Paid 14 000
Recommended 17 500
Balance at the end of the year 137 736

Trade creditors 16 780
Expenses accrued (payable) 1 920
Income received in advance (deferred) 1 450
SARS – income tax (if there is a credit balance) 1 425
SARS (PAYE) 2 410
Creditors for salaries
Unemployment Insurance Fund (UIF)
Pension Fund
Medical Aid Fund
41 485
Activity 3.2
Use the information from the records of Bobby Ltd. to complete these reports.
Required
1. Compile the Income Statement for the year ended 28 February 2019 after adjustments
have been made.
2. Compile the Statement of Financial Position (Balance Sheet) on 28 February 2019.
3. Prepare the notes to the financial statements on 28 February 2019.
Acc GR12 LB.indb 86 6/6/13 6:03:15 PM

Information
Bobby Ltd.
Fol. Debit Credit
Mortgage loan: Lion Bank ?
Land and buildings 400 000
Vehicles 160 000
Equipment 50 000
Bank 11 522
Petty cash 500
Nominal accounts
Sales 863 210
Costs of sales 448 990
Packaging 7 452
Rent income 29 900
Commission received 22 740
Bad debts 1 870
Insurance 12 000
Municipal services 13 670
Bank charges 987
Telephone 9 363
Dividends on ordinary shares 2 40 000
1 530 352 1 530 352

• Bobby Ltd. has 500 000 authorised shares. During the financial year 50 000 ordinary
shares were issued at R2,50 per share and entered as such.
• A stock take on 28 February 2019 showed the following:
• Trading stock on hand R59 320
• Packaging on hand R988
• Rent remained unchanged for the current financial period and rent for March 2019
has been received.
• Commission (R4 900) for February 2019 has not yet been received.
• The account of L Moss, a debtor, has to be written off, R700.
• The provision for bad debt has to be adjusted to 5% of outstanding debtors.
Acc GR12 LB.indb 87 6/6/13 6:03:15 PM

• The insurance includes an annual premium of R3 600 paid for the period 1 October
2018 to 30 September 2019.
• The following bank statement was received from Lion Bank:
• Balance on 1 March 2018 R89 300
• Interest capitalised ?
• Instalments paid during the year R(18 000)
• Balance on 28 February 2019 R82 900
• Equipment (cost price: R7 000) was sold for R2 400 cash on 28 February 2019. The
accumulated depreciation to the date of sale amounts to R5 900. No entry was made.
• Make provision for depreciation as follows:
on equipment, R5 000 for the year (includes depreciation for previous transaction)
on vehicles, at 20% per year on the diminished balance
• Audit fees of R15 630 are still payable.
• Income tax for the accounting period amounted to R59 230.
• A final dividend of 20c per share was declared.
Activity 3.3
Queen Traders Ltd. has been registered with an authorised share capital of 125 000 shares.
Required
1. Compile the Statement of Comprehensive Income (Income Statement) for the year
ended 28 February 2018 after the year-end adjustments have been completed.
3. Prepare the notes to the financial statements on 28 February 2018.
Information
Queen Traders Ltd.
Fol. Debit Credit
Vehicles 125 000
Equipment 72 000
Bank 51 540
Cash float 250
Petty cash 120
Fixed deposit: UniBank 50 000
Loan: King Bank 45 000
Acc GR12 LB.indb 88 6/6/13 6:03:15 PM

Nominal accounts
Sales 1 275 128
Telephone 7 670
Bad debts 1 214
Interest on overdraft 156
Interest on current account 250
Insurance 16 800
Stationery 1 750
Rent income 32 900
Rent expense 28 420
Bank charges 2 824
Wages 93 845
Audit fees 15 200
2 054 139 2 054 139

• On 30 June 2017 the company issued 25 000 shares at R4,25 per share. Applications
and payments for the full amount were received and entered in the books.
• A computer (cost price: R7 240) was sold for R2 500 cash on 1 March 2017. The
accumulated depreciation amounted to R5 320. No entry was made.
• Improvements of R100 000 was made to land and buildings during the year.
• Depreciation has to be brought into account as follows:
vehicles at 15% per year on the cost price
equipment at 20% per year on the carrying value
• The account of a debtor, W William, (R280) has to be written off as a bad debt.
• Provision for bad debts must be adjusted to 4% of debtors.
• Stock on hand on 28 February 2018:
Stationery R215
• Rent for March and April 2018, at R2 350 per month, has been received.
• The fixed deposit was invested on 1 May 2017 at an interest rate of 9% per year for
3 years. Interest must be capitalised.
• Interest of 14% per year is outstanding on the loan. The loan is repaid annually on
28 February in instalments of R10 000 each. All payments have been made and recorded.
• Insurance includes an annual premium of R8 640 that was paid on 30 September 2017.
• A final dividend of 65c per share was declared.
• Income tax for the year amounted to R39 352.
Activity 3.4
Simlin Ltd. was incorporated on 1 March 2018, with an authorised share capital of
600 000 ordinary shares.
Acc GR12 LB.indb 89 6/6/13 6:03:15 PM

Required
1. Compile the Statement of Comprehensive Income (Income Statement) for the year
ended 28 February 2019 after the year-end adjustments have been done.
3. Prepare the notes to the financial statements.
Information
Simlin Ltd.
Fol. Debit Credit
Vehicles 270 000
Equipment 16 000
Loan: Help-Us Bank (20% per year) 60 000
Bank 70 380
Cash float 800
Petty cash 700
SARS (PAYE) 220
Nominal accounts
Sales 772 500
Debtors allowances 500
Bank charges 3 040
Audit fees 14 460
Pension fund contribution 920
Rent income 65 280
Bad debts 710
Stationery 860
Discount allowed 940
Discount received 1 100
Bad debts recovered 290
Insurance 12 000
1 859 090 1 859 090
Acc GR12 LB.indb 90 6/6/13 6:03:15 PM

• Simlin Ltd. bought back 50 000 shares at R2 each during the financial year. It was
correctly recorded.
• Stock with a retail value of R400 was delivered to the stores on 28 February 2019. It
was purchased from Clegg Wholesalers and priced at a 60% mark-up. The transaction
was not entered in the company’s books.
• Stock take was done on 28 February 2019 and stock on hand was calculated at
R42 340. The stock mentioned in item 2 was included.
• Stationery on hand, R100.
• Provision is made for depreciation on vehicles at 30% per year on the diminishing
balance, and on the cost price for equipment at 15% per year. Take into consideration
that a new vehicle was bought on1 September 2018 for R70 000 and the transaction
was recorded in the company’s books.
• The loan was taken out on 1 March 2018. R10 000 of the loan amount was repaid on
31 August 2018 and it has to be repaid on 31 August in annual instalments of R10 000.
Make provision for interest on the loan.
• The account of C Richards, who owes R800, has to be written off as a bad debt.
• Provision for bad debt has to be kept at 5% of outstanding debtors.
• An annual insurance premium of R7 920 was paid on 1 October 2018.
• Rent received until 31 August 2018 amounted to R4 800 per month.
On 1 September 2018, the monthly rent increased by 10%. The tenant paid rent one
month in advance.
• The details of an employee, N van Niekerk, who had been employed on 1 February
2019, were omitted from the Salaries Journal for February 2019. The details of his
salary were as follows:
Gross monthly salary R4 000
Deductions
PAYE R850
Pension fund R80
Net salary R3 070
The company contribution to the pension fund is R40. By 28 February, no payments
had been done in respect of N van Niekerk’s salary.
• A final dividend of 5c per share was declared on 28 February 2019.
• Income tax for the year was calculated at R48 580.
Activity 3.5
Use the information for WOW Traders Ltd. to compile the necessary.
Required
1. Compile the Appropriation account of WOW Traders Ltd.
2. Complete the Balance Sheet of WOW Traders Ltd. on 28 February 2022, with full notes.
Acc GR12 LB.indb 91 6/6/13 6:03:15 PM

Information
List of balances on 28 February 2022 (after adjustments)
Balance Sheet accounts Amount
Retained income (1 March 2021) 29 637
Equipment 4 150
Vehicles 26 000
Mortgage loan: POW Bank 20 000
Fixed deposit: VIP Bank 50 000
Bank (dr) 17 446
Cash float 750
SARS (income tax) (dr) 65 000
Consumer stores on hand 1 475
Prepaid expenses 675
Income received in advance 1 500
Accrued income 350
Additional information
• Net income before tax came to R148 422.
• Income tax for the accounting period amounted to R63 875.
• A dividend of 15% on the par value of shares was declared at the end of the year. An
interim dividend of R7 000 was declared and paid during the year.
• WOW Traders Limited has an authorised share capital of 200 000 ordinary shares.
During the year 10 000 ordinary shares were issued at R1,10 per share.
• The mortgage loan is repaid in equal monthly instalments of R1 000 each.
• Depreciation for the year was calculated and recorded as follows:
on vehicles R2 600
on equipment R622
• New equipment to the value of R1 200 was bought and correctly brought to book
during the year.
Activity 3.6 (challenge)
You are provided with the Pre-adjustment Trial Balance of LEX Ltd. at the end of their
financial year. The company buys and sells a wide range of televisions and DVD players,
but also does repairs for its customers, for which it charges a fee. The company is
registered at an authorised share capital of 300 000 ordinary shares
Unfortunately their accountant fell ill recently and was not able to complete the
financial statements. Your assistance is required.
Required
Use the Pre-adjustment Trial Balance and the list of adjustments, in order to complete
the following:
Acc GR12 LB.indb 92 6/6/13 6:03:15 PM

1. Income Statement for the year ended 28 February 2018
2. Balance Sheet on 28 February 2018 (show calculations in brackets if note is not
required)
3. Show the following notes to the Balance Sheet:
3.1 Trade and other receivables
3.2 Share capital
3.3 Retained income
Lex Ltd.
Pre-adjustment Trial Balance of Lex Ltd. as at 28 February 2018
Fol. Debit Credit
Loan from AB bank 70 000
Equipment at cost price 245 000
Accumulated depreciation on equipment (on 01/03/2017) 89 700
Bank 132 100
Cash float 1 200
Nominal accounts
Sales 2 260 720
Repairs income 108 660
Wages and salaries 170 000
Rent income 10 530
Pension fund contribution 12 450
Sundry expenses 670 000
3 910 250 3 910 250
Adjustments
• A dissatisfied customer was issued with the following credit note. This credit note
was erroneously omitted from the relevant journal. The mark up on goods sold is 80%
on cost.
Acc GR12 LB.indb 93 6/6/13 6:03:15 PM

LEX Ltd. Credit note 113
Credit: Mrs W Visser Unit price Total

P.O. Box 224
Paarl
1 DVD player returned R2 880 R2 880
R2 880
• Rent was received for 11 months. The rent increased with 10% on 1 July 2017.
• The loan from AB Bank (12% p.a.) is annually repaid in instalments of R10 000 on
1 December. Provide for outstanding interest.
• An employee C Nel was employed on 1 February 2018. His information was omitted
from the salary journal for February 2018 by accident.
Gross salary R5 000
Deductions:
PAYE R1 600
Pension fund R200
For every R1 deducted from his salary towards the pension fund, the business
contributes R2. Do all necessary entries.
• Provision for bad debts must be adjusted to R1 121.
• An advertisement contract of R5 600 was paid on 1 January 2018. That is for seven
monthly advertisements from 1 January to 31 July 2018.
• After the stock take was done on 28 February 2018 a trading stock deficit of R1 090
was calculated. No entry was made of this.
• On 1 February 2018 the business sold old equipment to one of the directors for
R9 000 cash. The cost price of this equipment was R12 000 and accumulated
depreciation written off up to 1 March 2017 was R2 280.
• He had supplied as post-dated cheque (which falls due on 31 March 2018). No entry
was made of this transaction.
• Depreciation is calculated at 10% p.a. on the diminished balance. The depreciation for
the year still needs to be calculated and entered.
• A final dividend of 30c per share has been declared by the directors.
• Income tax for the year amounts to R96 701.
• During the financial year 50 000 shares was issued at R6,70 per share. This transaction
was recorded.
Informal assessment 3.1
Financial statements: Income Statement, control over stock and GAAP principles
You are provided with the Pre-adjustment Trial Balance of Jumaats Ltd. at the end of
their financial year. The company buys and sells musical instruments and they also do
repairs on musical instruments. The company is registered at an authorised share capital
of 300 000 ordinary shares.
Required
Use the Pre-adjustment Trial Balance and the list of adjustments, in order to complete the
following:
1. Prepare the Trading Stock account in the General ledger of Jumaats Ltd. and balance
the account on 28 February 2019. [8]
Acc GR12 LB.indb 94 6/6/13 6:03:15 PM

2. Referring to the loss of trading stock due to a fire and the trading stock deficit, identify
a problem that Jumaats Ltd. seems to have with regards to stock control and give a
solution to prevent this from happening again. [6]
3. Which GAAP principle is applied with the following adjustments?
3.1 Adjustment 1 on rent income [2]
3.2 Stationery is included with sundry expenses [2]
4. Prepare the Income Statement for the year ended 28 February 2019. [44]
Information
Jumaats Ltd.
Pre adjustment Trial Balance of Jumaats Ltd. as at 28 February 2019
Fol. Debit Credit
Fixed deposit: SAFE Bank 53 000
Equipment at cost price 320 000
Accumulated depreciation on equipment (on 1/3/2018) 127 800
Bank 24 567
Cash float 1 400
Nominal accounts
Sales 4 326 592
Current income 89 760
Rent income 14 300
Interest on fixed deposit ?
Pension fund contribution 8 100
Insurance 12 300
Telephone 11 642
Audit fees 26 200
Sundry expenses 39 200
6 076 588 6 076 588
Acc GR12 LB.indb 95 6/6/13 6:03:16 PM

Adjustments
• A store room in the building is let at R1 100 per month. One month’s rent was received
in advance.
• A statement was received from SAFE Bank with regards to the interest earned on the
fixed deposit. It reflected the following:
Balance on 1 March 2018 R50 000
Interest capitalised R3 000
Balance on 28 February 2019 R53 000
• An invoice issued to N Levy for repairs done to a guitar, R310, was not entered in the
business’s books.
• On 19 October 2018, R600 was received from J Scholtz, whose account had previously
been written off as irrecoverable. The amount was entered in the Debtors Control
column in the Cash Receipts Journal.
• Provision for bad debts must be adjusted to R1 872.
• Water and electricity of R899 is still payable on 28 February 2019.
• Included in the insurance amount is an annual insurance premium of R3 780, paid on
1 November 2018.
• Unused stationery according to the physical stock take amounts to R112. Stationery
is included with sundry expenses.
• A fire in the store room caused trading stock to the value of R5 300 to be destroyed.
The insurance company will not pay for this loss as it was due to negligence of one
of the employees. No entry has been made.
• Trading stock on hand according to a physical stock take done on 28 February 2019
is R104 200.
• Depreciation on equipment is calculated at 10% p.a. on the cost price. Note than a
computer with a cost price of R4 800 and accumulated depreciation of R3 100 on
1 March 2018 was taken over by one of the directors for R1 000 cash on 30 September
2018. No entries have been made in respect of the disposal of this asset.
• Income tax for the year amounts to R139 280.
PIC Ltd. has an authorised share capital of 500 000 ordinary shares. The company’s
accounting period ends on the last day of February every year.
Required
1. Compile the following accounts in the General Ledger of PIC Ltd. for 1 March 2014 to
28 February 2015:
SARS (income tax) [13]
Dividends on ordinary shares [7]
Appropriation account [10)
2. Compile the equity and liabilities section of the Balance Sheet dated
28 February 2015. [15]
3. The following notes to the financial statements dated 28 February 2015:
Ordinary share capital [8]
Retained income [6]
Trade and other payables [11]
Information
The balances in the following accounts on 1 March 2014 were:
Ordinary share capital R530 000 (250 000 shares issued)
Acc GR12 LB.indb 96 6/6/13 6:03:16 PM

The balances in the following accounts on 28 February 2015 were:
ordinary share capital R614 800
Creditors control R36 980
Accrued expenses R1 250
Income received in advance R890
Transactions from 1 March 2014 to 28 February 2015

2014
12 mar Received the company’s tax assessment and paid the amount due to SARS by
cheque. Paid the amount due to shareholders as dividends by cheque.
30 Jun Paid provisional income tax of R34 890 to SARS
31 Aug declared and paid an interim dividend of R55 000 to shareholders
30 Sep 40 000 shares were issued during the year. Applications together with payment
for all the shares issued were received and entered in the company’s books.
25 oct Paid provisional income tax of R44 600 to SARS
01 nov The company borrowed R200 000 from AB Bank at an interest rate of 16%
per annum. Interest is to be paid half-yearly. A cheque was received for the
full amount of the loan and brought to book. The loan has to be repaid in ten
equal instalments due on 1 november annually.
2015
15 Feb Paid provisional income tax of R21 900
• The final accounts were compiled and the net profit in the Profit and loss account
comes to R289 000.
• Income tax for the accounting period was calculated accurately at R127 980.
4. The Cash Flow Statement

The Companies Act stipulates that a Cash Flow Statement must accompany the
company’s financial statements. This statement identifies the inflow and outflow
of cash during a specific period. An analysis of the Cash Flow Statement answers
the following questions:
• Did the company generate sufficient cash from its operations in order to pay
the interest expense, dividends to shareholders and taxation?
(Remember: the term operations refers to the company’s core function. In
other words, what it does in order to generate an income from for example
sales, services or commission?)
• How were capital development projects (expansions) financed?
• Is the company a net generator or user of cash?
• Does the company generate sufficient cash from its operations to maintain its
present operating capacity?
Shareholders in the company may also want to know why less cash is available in The IFRS term for a Cash Flow
spite of a larger net profit, or what affected the change in the cash balance from Statement is a Statement of Cash
one year to the next. Flows. In Grade 12 we will continue to
Users of financial information can determine the sources (where the cash use Cash Flow Statement but you need to
came from) and application (how the cash was spent) of cash during a specific recognise both terms.
accounting period by studying the Cash Flow Statement of the company.
4.1 The flow of cash

Cash from its operations is the most important source of cash for a business.
If a business does not generate a positive cash flow from its operations, it will
be difficult for the business to meet its financial obligations. But there are other
sources of cash as well. Look at the diagram below.
F I n A n C I A l A C C o u n T I n G o F C o m PA n I E S – F I n A n C I A l S TAT E m E n T S • C h a p t e r 3 97
Acc GR12 LB.indb 97 6/6/13 6:03:16 PM

Sources of cash (inflow) Application of cash (outflow)
operations operations
loans acquired loans repaid
disposal of assets cash purchase of tangible assets
issue of share capital dividends
fixed deposit expired taxation
investment in fixed deposit
4.2 Layout of the Cash Flow Statement

This statement consists of three main sections.
cash flow from operating activities
cash flow from investing activities
cash flow from financing activities
The sum total of the three sections reconciles with the fourth section:
net changes in cash and cash equivalents
• Operating activities are the company’s main source of income. In this section
certain information from the Income Statement is used, as well as information
with regards to receivables, inventories and payables from the Balance Sheet.
• Investing activities comprise, among others, looking at and implementing the
company’s investments by way of capital development projects. This section is
affected by the purchase and the disposal of tangible assets.
• Financing activities analyse the ways in which the company’s activities have
been financed. Money could have been raised by taking out a loan or by issuing
additional shares. Repayment of loans will also affect this section.
Activity 3.7
Answer the questions below in your exercise book.

1. What is the purpose of drawing up the Cash Flow Statement?
2. Name an activity resulting from operations that will cause an outflow of cash.
3. Explain why the acquisition of a loan results in an inflow of cash.
4. Why is the investment in a fixed deposit an outflow of cash?
5. Name two items in the Income Statement that will have no effect on cash
(non-cash items).
6. Look at the layout of the Cash Flow Statement as explained above. What are the
advantages of this format to shareholders?
Acc GR12 LB.indb 98 6/6/13 6:03:16 PM

4.2.1 Notes to the Cash Flow Statement
There are two main notes to the Cash Flow Statement:
Note 1 Cash generated by operations
Note 2 Cash and cash equivalents
The three notes below are not disclosure requirements and may be shown as
notes, ledger accounts or T-accounts.
Note 3 Dividends paid
Note 4 Taxation paid
Note 5 Tangible assets purchased
4.3 Completing the Cash Flow Statement

In order to draw up the Cash Flow Statement, we need the Income Statement for
the current year and the Statement of Financial Position (Balance Sheet) of the
business for two consecutive years: the previous and the current year. The business
will therefore first complete the Income Statement and the Statement of Financial
Position and then the Cash Flow Statement.
The example below illustrates from where the necessary information for
completing the Cash Flow Statement is extracted.
Example
You are provided with the financial statements of Silverwood Ltd.
Required
Prepare the Cash Flow Statement for the year ended 28 February 2019.
Silverwood Limited
Note R
Sales 420 000
Other operating income (103 095)
Depreciation 4 800 b
Other expenses 98 295
Operating profit 69 645

Interest income 1 1 450 d
Profit before interest expense 71 095
Interest expense 2 (1 210) c
Profit before tax 69 885 a
Income tax (24 445) n
Net profit after tax 8 45 440
Acc GR12 LB.indb 99 6/6/13 6:03:16 PM

Example continued
Silverwood Limited
STATEMENT OF FINANCIAL POSITION AT 28 FEBRUARY 2019
Note 2019 2018
ASSETS
NON-CURRENT ASSETS 271 835 235 165
Fixed / tangible assets 3 261 835 220 165
Financial assets: Fixed deposit: AB Bank 10 000 15 000 v
CURRENT ASSETS 126 950 115 180

Inventories 4 30 200 29 100 e
Trade and other receivables 5 42 600 33 400
Cash and cash equivalents 6 54 150 52 680
TOTAL ASSETS 398 785 350 345

SHAREHOLDERS’ EQUITY 340 185 290 745
Share capital 7 220 000 195 000 u
Retained income 8 120 185 95 745
NON-CURRENT LIABILITIES
Mortgage bond: XY Bank 10 000 20 000 w
CURRENT LIABILITIES 48 600 39 600

Trade and other payables 9 48 600 39 600
TOTAL EQUITY AND LIABILITIES 398 785 398 785
Silverwood Limited
3. FIXED/TANGIBLE ASSETS
Land and buildings Vehicles Equipment
Carrying value at beginning of year 120 000 65 505 34 660
Cost 120 000 97 000 87 730
Accumulated depreciation (31 495) (53 070)
Movements
Additions 30 000 q 3 000 r 14 270 s
Disposals at carrying value (800) t
Depreciation (1 865) b (2 935) b
Carrying value at end of year 150 000 65 840 45 995
Cost 150 000 98 000 102 000
Acc GR12 LB.indb 100 6/6/13 6:03:16 PM

Example continued

28 Feb 2019 28 Feb 2018
Trade debtors (which includes accrued income and
prepaid expenses) 42 150 33 400 r
SARS (income tax) 450 p
42 600 33 400

28 Feb 2019 28 Feb 2018
Bank 52 850 51 380 h
Cash float 800 800 i
Petty cash 500 500 j
54 150 52 680
8. RETAINED INCOME
Accumulated profits on 28 February 2018 95 745
Net profit after tax for the period 45 440
Dividends on ordinary shares (21 000) k
Interim dividends paid 9 000
Final dividends paid 12 000 m
Accumulated profits on 28 February 2019 120 185

28 Feb 2019 28 Feb 2018
Trade creditors (including accrued expenses and
income received in advance) 36 600 26 800 g
Shareholders for dividends 12 000 m 10 000 l
SARS – income tax – 2 800 o
48 600 39 600
Acc GR12 LB.indb 101 6/6/13 6:03:16 PM

Example continued
Solution
Silverwood Limited
CASH FLOW STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2019
Note R
Cash effects of operating activities 27 940 (i)
Cash generated (utilised) from operations 1 75 845
Interest paid (1 210)
Dividends paid 3 (19 000)
Income tax paid 4 (27 695)
Cash effects of investing activities (41 470) (ii)

Purchase of fixed assets 5 (47 270)
Proceeds from sale of fixed assets 800 t
Investments matured/placed 5 000 v
Cash effects of financing activities 15 000 (iii)

Proceeds from shares issued 25 000 u
Long-term loans paid (an outflow of cash) (10 000) w
Net change in cash and cash equivalents (i + ii + iii) 2 1 470

Cash and cash equivalents at the beginning of the year 2 52 680
Cash and cash equivalents at the end of the year 2 54 150
Silverwood Limited
NOTES TO THE CASH FLOW STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2019
1. RECONCILIATION BETWEEN NET PROFIT BEFORE TAX AND CASH GENERATED
FROM OPERATIONS
Net profit before taxation 69 885 a
Adjustments in respect of:
Depreciation 4 800 b
Interest expense 1 210 c
Operating profit before changes in working capital (a + b + c) 75 895
Cash effects of changes in working capital (50)
Change in inventory (29 100 – 30 200) (1 100) e
Change in receivables (33 400 – 42 150) (8 750) f
Change in payables (26 800 – 36 600) 9 800 g
Cash generated from operations 75 845

Net change 2009 2008
Bank 1 470 52 850 51 380 h
Cash float – 800 800 i
Petty cash – 500 500 j
1 470 54 150 52 680
Acc GR12 LB.indb 102 6/6/13 6:03:17 PM

Example continued
3. DIVIDENDS PAID
Dividends for year as reflected in financial statements (21 000) k
Balance at the beginning of the year (10 000) l
Balance at the end of the year 12 000 m
Dividends paid (19 000)
4. INCOME TAX PAID

Income tax for year as reflected in financial statements (24 445) n
Balance at the beginning of the year Cr (2 800) o
Balance at the end of the year Dr (450) p
Income tax paid (27 695)
5. FIXED ASSETS PURCHASED

Land and buildings (30 000) q
Vehicles (3 000) r
Equipment (14 270) s
(47 270)
Activity 3.8
Use the above example to complete the table below in your exercise book. Number
column A ‘c’ to ‘w’. Find the items listed ‘c’ to ‘w’ on the Income Statement and Balance
Sheet. List each item’s description and identify where it is found, first in the Income
Statement or Balance Sheet and then in the Cash Flow Statement.
Where found: Income In which General

Where found in the
Column A Description Statement or Balance Ledger account it will
Cash Flow Statement
Sheet be found
a Profit before tax Income Statement Note 1 Appropriation
b Depreciation Income Statement Note 1 Accumulated
depreciation
4.4 Making the Cash Flow Statement easy to understand

The notes to the Cash Flow Statement are completed first, and then the Cash Flow
Statement itself. In order to understand the Cash Flow Statement, we will explain
each note individually and then complete the Cash Flow Statement.
4.4.1 Note 1: Cash generated by operations (part 1)

For the purpose of clarity we will explain this note in three parts.
The first part is determining operating profit before changes in working capital. In
order to complete this section of the note we will need the following information
from the Income Statement for the current financial year.
Acc GR12 LB.indb 103 6/6/13 6:03:17 PM

Example
Part 1
Required
Use the information below to calculate the operating profit before changes in
working capital.
Information
Extract from the Income Statement of Dlamini Ltd. for the year ended 30 June 2019
Depreciation 22 000
Interest expense 11 800
Profit before tax 52 000
Solution
Extract from the Income Statement of Dlamini Ltd. for the year ended 30 June 2019
Profit before taxation 52 000
Adjustment for:
Depreciation 22 000
Operating profit before changes in working capital 85 800
The following should help you to understand the way in which we have dealt with
depreciation and interest income:
• Depreciation is a non-cash item and therefore does not apply to cash flow. It
must thus be added back to net profit before tax for the purpose of determining
the flow of cash for the year.
• Interest income must be subtracted from net profit before tax, and interest
expense must be added back. These will appear separately in the Cash Flow
Statement because they are important disclosure items.
Activity 3.9
Use the given information to calculate the operating profit before changes in working
capital.
Calculation of operating profit before changes in working capital

Depreciation 15 000
4.4.2 Note 1: Cash generated by operations (part 2)

This second part is determining changes in the working capital. Working capital
is simply current assets less current liabilities. For the purpose of the Cash Flow
Statement, current assets will include inventory and trade and other receivables
only and current liabilities will include trade and other payables only. Cash and
cash equivalents and bank overdraft are analysed separately.
The diagram on the next page shows the influence of working capital on cash.
Acc GR12 LB.indb 104 6/6/13 6:03:17 PM

+ Inventory – + Debtors – – Creditors +
an increase a decrease an increase a decrease a decrease an increase
in inventory in inventory in debtors in debtors in creditors in creditors
+ Cash – + Cash – + Cash –

results in a results in a results in a results in a results in a results in a
cash inflow cash outflow cash inflow cash outflow cash inflow cash outflow
Note
• An outflow of cash is shown in brackets: (0,00)
• An inflow of cash is shown without brackets: 0,00
In order to complete this section of the note you will need the notes to
Inventories, Trade and other receivables and Trade and other payables for two
consecutive financial years.
Example
Part 2
Required
Use the information below to calculate the changes in working capital and the
cash generated from operations.
Information from notes to the financial statements of Dlamini Ltd. on 30 June

4. INVENTORIES
2019 2018
Trading stock 164 400 133 800
165 000 134 000

2019 2018
Trade debtors 68 300 75 600
Provision for bad debts (3 415) (3 780)
Net trade debtors 64 885 71 820
Income accrued (receivable) 560 720
66 255 73 220

2019 2018
Trade creditors 62 000 85 000
Expenses accrued (payable) 514 1 210
Income received in advance (deferred) 1 200 1 100
Shareholders for dividends 12 000 10 000
SARS – income tax 4 110 3 480
79 824 100 790
Acc GR12 LB.indb 105 6/6/13 6:03:17 PM

Example continued
Use the information below to calculate the changes in working capital and the
Information from notes to the financial statements of Dlamini Ltd. on 30 June

4. INVENTORIES
2019 2018
165 000 134 000

2019 2018
Income accrued (receivable) 560 720
66 255 73 220

2019 2018
79 824 100 790
Note
• When calculating Trade and other receivables, SARS (income tax) must be
excluded.
• When calculating Trade and other payables, SARS (income tax) and
shareholders for dividends must be excluded. These amounts will be analysed
separately in another note.
Solution
Cash effects of changes in working capital (47 631)

Increase in inventory (134 000 – 165 000) (31 000)
Decrease in receivables (73 220 – 66 255) 6 965
Decrease in payables (85 000 + 1 210 + 1 100) – (62 000 + 514 + 1 200) (23 596)
Cash generated from operations (85 800 – 47 631) 38 169
Acc GR12 LB.indb 106 6/6/13 6:03:17 PM

Example continued
Note
• Inventory has increased by R31 000. This means that the company has more
inventory on hand and would have bought more during the year, resulting in
an outflow of cash.
• Receivables decreased by R6 965. This means that more debtors settled their
debt, resulting in an inflow of cash.
• Payables decreased by R23 596. This means that more cash was used to pay
creditors, resulting in an outflow of cash.
Activity 3.10
Required
Use the information below to calculate the changes in working capital and the cash
generated from operations.
Information from the notes to the financial statements of Wallace Ltd. on 30 June
4. INVENTORIES
2019 2018
Consumable stores on hand 500 2 000
71 500 82 000

2019 2018
Income accrued (receivable) 1 250 1 000
SARS (income tax) – 4 810
79 410 71 730

2019 2018
SARS – income tax 2 890 –
84 925 84 660
Activity 3.11
Required
Use the information below to prepare Note 1: Reconciliation between net profit before
tax and cash generated from operations.
Information from the Income Statement of Naidoo Ltd. for the year ended 28 February 2019
Depreciation on vehicles 5 800

Depreciation on equipment 4 300
Interest on mortgage bond 4 000
Acc GR12 LB.indb 107 6/6/13 6:03:17 PM

Information from the notes to the financial statements of Naidoo Ltd. on 28 February 2019
4. INVENTORIES
2019 2018
105 600 80 600

2019 2018
SARS (income tax) 2 410 –
28 820 22 330

2019 2018
SARS – income tax – 4 026
61 400 69 626
4.4.3 Note 1: Cash generated by operations (alternative)

Often the depreciation amount is not given and needs to be calculated. The
simplest way to do this is to reconstruct the Accumulated Depreciation account as it
would appear in the General Ledger.
Example
Required
Use the information below to calculate operating profits before changes in
working capital.
Information from the Income Statement of Dlamini Ltd. for the year ended 30 June 2019

Depreciation on vehicles ?
Depreciation on equipment ?
Net profit before tax 87 900
Acc GR12 LB.indb 108 6/6/13 6:03:17 PM

Example continued
Information from the notes to the financial statements of Dlamini Ltd.
Vehicles Equipment Total
Cost 87 600 52 000 139 600
Accumulated depreciation (12 800) (9 600) (22 400)
Cost 109 600 55 000 164 600
Accumulated depreciation (15 300) (16 700) (32 000)
A motorcycle with a cost price of R8 000 was sold at the carrying value of R5 600
on 30 June 2019.
Accumulated Depreciation on Vehicles Accumulated Depreciation on Equipment

Asset disposal 2 400* Balance b/d 12 800 Balance b/d 9 600
Balance c/d 15 300 Depreciation 4 900* Depreciation 7 100*
17 700 17 700 16 700
* Asset disposal R8 000 – 5 600 = R2 400 *Depreciation R16 700 – 9 600 = R7 100
**Depreciation R2 400 + 15 300 – R12 800
= R4 900
Solution
Note 1: Reconciliation between profit before tax and cash generated from operations
Net profit before tax 87 900

Adjustment for:
Depreciation (4 900 + 7 100) 12 000
Interest expense (4 800 + 520) 5 320
Activity 3.12
Required
Use the information below to calculate the cash generated from operations and show the
note to the Cash Flow Statement for the reconciliation between net profit before tax and
Information from the Income Statement of Sassy Ltd. for the year ended 28 February 2019

Interest on mortgage bond ?
Depreciation ?
Income tax 30 956
Net profit for the year 146 434
Acc GR12 LB.indb 109 6/6/13 6:03:17 PM

Information from the notes to the financial statements of Sassy Ltd.
Cost 340 000 90 000 61 000
Cost 120 000 46 000
Accumulated depreciation 355 000 (34 800) (22 810)
Equipment costing R15 000 was sold at the carrying value of R7 240 on
28 February 2019.
4. INVENTORIES
28 Feb 2019 28 Feb 2018
Consumable stores on hand 800 1 100
97 500 53 400

28 Feb 2019 28 Feb 2018
51 610 71 430

28 Feb 2019 28 Feb 2018
Income received in advance (deferred) 980 1 750
55 945 54 965
The following information was extracted from the Balance Sheet:
Non-current liabilities
28 Feb 2019 28 Feb 2018
Mortgage bond: Savemore Bank (9,5% p.a.) 34 000 20 000
An extension of R14 000 was approved on the mortgage bond on 1 September

2018. This was used to finance the revamping of the office block.
4.4.4 Note 2: Cash and cash equivalents

The purpose of the Cash Flow Statement is to reconcile cash movements during
the year with cash and cash equivalents. The bank overdraft is not shown in
the note to cash and cash equivalents (Note 6) in the Balance Sheet, but will
be considered when completing Note 2 to the Cash Flow Statement where the
overdrawn amount will be shown in brackets.
Acc GR12 LB.indb 110 6/6/13 6:03:18 PM

Example
You are provided with the following financial information for Dlamini Ltd.
Required
Complete the note for Cash and cash equivalents to the Cash Flow Statement on
30 June 2019.
Information from the notes to the financial statements of Dlamini Ltd. on 30 June
2019 2018
Bank 77 419 144 120
Cash float 450 450
Petty cash 1 500 1 000
79 369 145 570
Solution
Bank (66 701)* 77 419 144 120
Cash float – 450 450
Petty cash 500 1 500 1 000
(66 201)* 79 369 145 570
* Bank has decreased from 2018 to 2019. This has resulted in an outflow of cash,
therefore the amount is in brackets.
Petty cash has increased from 2018 to 2019. This has resulted in a net inflow of
cash, therefore no brackets are required.
** The net change represents the total outflow of cash during the financial year
(145 570 – 79 369).
Activity 3.13
Required
Use the information below to complete Note 2: Cash and cash equivalents to the Cash
Flow Statement.
Information from the notes to the financial statements of Feds Ltd. on 30 June
2019 2018
Bank 121 070 55 021
Cash float 1 000 600
Petty cash 750 750
122 820 56 371
Acc GR12 LB.indb 111 6/6/13 6:03:18 PM

Activity 3.14
Required
Use the information below to show the note to the Cash Flow Statement for Note 2:
Cash and cash equivalents.
Information from the Balance Sheet of Sharp Ltd. on 31 October

5. CURRENT LIABILITIES
2019 2018
Trade and other payables 65 426 65 600
Bank overdraft 2 130 –
Information from the notes to the financial statements of Sharp Ltd. on 31 October
2019 2018
Bank – 15 200
Cash float 1 100 1 100
Petty cash 800 600
1 700 16 900
4.4.5 Note 3: Dividends paid

This note determines the dividend paid to shareholders in cash during the financial
year. The information needed to determine this amount can be extracted from the
notes to the financial statements for retained income (Note 9) and trade and other
payables (Note 10).
The note appears as follows:
3. DIVIDENDS PAID
Amount in the notes to the financial statements ① (xxx)
Balance at the beginning of the year ② (xxx)
Balance at the end of the year ③ xxx
Cash amount paid (xxx)
① represents the amount for dividends paid and recommended as it appears in the
notes to the financial statements for retained income (Note 9). This amount must
be shown in brackets.
② represents the balance owed at the end of the previous financial year as it
appears in the notes to the financial statement for trade and other payables
(Note 10). This amount must be shown in brackets
③ represents the balance owed at the end of the current financial year as it appears
in the notes to the financial statements for trade and other payables
(Note 10). This amount must not be shown in brackets.
Note
An alternate method to calculate the amount paid the shareholders in respect
of dividends would be to draw up the Shareholders for Dividends and Dividends on
Ordinary Shares accounts.
Acc GR12 LB.indb 112 6/6/13 6:03:18 PM

Example
Required
Calculate the dividend paid to shareholders for the year ended 30 June 2019.
9. RETAINED INCOME
Net profit after tax for the year 31 200
Ordinary share dividends: (20 000)
Paid (Interim) 8 000
Declared (Final) 12 000

2019 2018
79 824 100 790
Solution
3. DIVIDENDS PAID
Amount in the notes to the financial statements (8 000 + 12 000) (20 000)
Balance at the beginning of the year (10 000)
Cash amount paid (–R20 000 – R10 000 + R12 000) (18 000)
Alternative calculation to note 3
Shareholders for Dividends Dividends on Ordinary Shares

Bank* 10 000* Balance b/d 10 000 Bank* 8 000 Appropriation 20 000
Dividends
on ordinary Shareholders
shares 12 000 for dividends 12 000
Note
*The cash amount paid is R10 000 + 8 000 = R18 000.
Activity 3.15
Required
Calculate the dividend paid to shareholders for the year ended 28 February 2019.
Acc GR12 LB.indb 113 6/6/13 6:03:18 PM

Information from the notes to the financial statements on 28 February
9. RETAINED INCOME
Ordinary share dividends: (75 000)
Paid (Interim) 40 000
Declared (Final) 35 000

2019 2018
98 100 61 000
Activity 3.16
Information
The following information was obtained from Skye Ltd. with regards to their
financial records:
• The financial year is from 1 March 2018 to 28 February 2019.
• Number of issued shares: 250 000 at R10 per share as at 1 March 2018.
• An additional 100 000 ordinary shares were issued to the public on 1 December 2018.
Transactions in respect of dividends for the financial year ended 28 February 2019
R180 000 to shareholders on An interim dividend of 80c a

Paid 5 March 2018 for the dividend share on 31 August 2018
declared on 28 February 2018
A final dividend of 65c a share
Declared
on 28 February 2019
Required
Calculate the cash amount paid to shareholders for dividends for the year ended
28 February 2019.
4.4.6 Note 4: Taxation paid

This represents the cash amount paid for income tax to SARS during the current
financial year. The information needed to determine this amount can be extracted
from the Income Statement and the notes to the financial statements for trade and
other receivables (Note 5) and trade and other payables (Note 10).
The note appears as follows:
4. TAXATION PAID
Amount from the Income Statement ① (xxxx)
Balance owing at the beginning of the year ② (xxx) if credit balance
Balance owing at the end of the year ③ xxx if credit balance
Cash amount paid (xxx)
Acc GR12 LB.indb 114 6/6/13 6:03:18 PM

① The amount for income tax as it appears in the Income Statement. This amount
must be shown in brackets.
② This information is obtained from the notes to Trade and other receivables
(debit balance) or Trade and other payables (credit balance) for the previous year.
③ This information is obtained from the notes to Trade and other receivables
(debit balance) or Trade and other payables (credit balance) for the current year.
Note
An alternative method to calculate the amount paid to SARS for income tax would
be to draw up the SARS (Income Tax) account.
Example
Required
Calculate the cash amount paid to SARS for income tax for the year ended
30 June 2019.
Information from the Income Statement of Dlamini Ltd. for the year ended 30 June 2019

Taxation (20 800)
Information from the notes to the financial statements on 30 June

2019 2018
79 824 100 790
Solution
4. TAXATION PAID
Amount from the Income Statement (20 800)
Balance owing at the beginning of the year (cr) (3 480)
Balance owing at the end of the year(cr) 4 110
Cash amount paid (20 170)
Alternative method to Note 4

SARS (Income Tax)
Bank* 3 480 Balance b/d 3 480
Bank* 16 690 Income tax 20 800
Balance c/d 4 110
* To work out the cash amount paid for the current year:
R20 800 – 4 110 = R16 690
The cash amount paid is R16 690 + 3 480 = R20 170
Acc GR12 LB.indb 115 6/6/13 6:03:18 PM

Activity 3.17
Required
Calculate the cash amount paid to SARS for income tax for the year ended 28 February 2019.
Information from the Income Statement for the year ended 28 February 2019

Tax (27 230)
Information from the notes to the financial statements on 28 February 2019

2019 2018
Income received in advance (deferred) 1 310 835
85 651 83 221
Activity 3.18
Required

Tax (14 460)

2019 2018
79 410 71 730
2019 2018
84 925 84 660
Activity 3.19
Required
Acc GR12 LB.indb 116 6/6/13 6:03:18 PM

Tax (30 956)

2019 2018
28 820 22 330
2019 2018
Expenses accrued (payable) 1 200 1 000
61 400 69 626
4.4.7 Note 5: Tangible assets purchased

The note to the financial statements for tangible assets (Note 3) is used to calculate
the value of fixed assets purchased during the financial year.
Note
When calculating tangible assets purchased during the financial year, it is
important to take into account any fixed assets sold (disposed of ) during the
financial year. Depreciation, to be used in Note 1, can also be calculated when
preparing this note.
Example
You are provided with the following financial information for Dlamini Ltd.
Required
Complete Note 5: Fixed/tangible assets purchased to the Cash Flow Statement
on 30 June 2019.
Vehicles Equipment Total
Cost 400 000 100 000 500 000
Movements
Additions ? ? ?
(18 000 – 12 400) (5 600) (5 600)
Depreciation (22 000) (22 000)
Cost 450 000 112 000 562 000
Equipment to the value of R18 000 was traded in at carrying value on 1 June 2019.
The accumulated depreciation to date of sale amounted to R12 400.
Acc GR12 LB.indb 117 6/6/13 6:03:18 PM

Example continued
Equipment
Balance b/d 100 000 Asset disposal 18 000
Purchases 30 000* Balance c/d 112 000
Calculations
Land and buildings R450 000 – 400 000 = R50 000
Equipment R18 000 + 112 000 – 100 000 = R30 000
Solution
Note 5: Fixed/Tangible assets purchased
Land and buildings (50 000)

Equipment (30 000)
(80 000)
If only the carrying value is given, use the following for your calculations:
Beginning of the year xxx
Add additions xxx
less asset disposal (xxx)
less depreciation (xxx)
xxx
Activity 3.20
Required
Use the information below to calculate the amount that will appear in the Income
Statement for depreciation as well as the amount that will appear in the Cash Flow
Statement for tangible assets purchased.
Information
Cost 590 000 365 000 72 100
Cost 650 000 340 000 82 100
• A vehicle costing R125 000 was sold at carrying value on 30 April 2018. The
accumulated depreciation to date amounted to R61 500.A new vehicle was purchased
on the same day.
• No equipment was sold during the year although new equipment was purchased.
Acc GR12 LB.indb 118 6/6/13 6:03:18 PM

4.5 Completing the Cash Flow Statement
Example
This is a continuation of the examples on the previous pages, therefore the
information to do the Cash Flow Statement will be extracted from these
examples. Further information for the completion of the Cash Flow Statement is
given below.
Required
Complete the face of the Cash Flow Statement on 30 June 2019.
Information
Extract from the Balance Sheet on 30 June 2019
Equity and liabilities 2019 2018
Capital and reserves 666 200 605 000
Ordinary share capital 7 550 000 500 000
Non-current liabilities
Mortgage loan: MM Bank 90 000 120 000
Solution
Dlamini Limited
CASH FLOW STATEMENT FOR THE YEAR ENDED 30 JUNE 2019
Note R
Cash effects of operating activities (11 801)
Cash effects of investing activities (74 400)

Proceeds from sale of fixed assets (18 000 – 12 400) 5 600
Cash effects of financing activities 20 000

Proceeds from shares issued (550 000 – 500 000) 50 000
Long-term loans paid (120 000 – 90 000) (30 000)
Net change in cash and cash equivalents 2 (66 201)

Cash and cash equivalents at the beginning of the year 2 145 570
Activity 3.21
The following information was taken from the financial records of Brimstone Ltd.
The financial year ends annually on 28 February. Brimstone Ltd. is registered with an
authorised share capital of 1 000 000 ordinary shares at R5 each.
Required
Prepare the Cash Flow Statement together with notes for the year ended 28 February 2019.
Acc GR12 LB.indb 119 6/6/13 6:03:19 PM

Information
Brimstone Limited
Note R
Sales 1 101 920


Interest income 1 –
Income tax (67 500)
Brimstone Limited
BALANCE SHEET AT 28 FEBRUARY 2019
Note R R
ASSETS 2019 2018
NON-CURRENT ASSETS

Inventories 4 180 820 177 360
TOTAL ASSETS 956 572 856 540

Share capital 7 600 000 480 000
Mortgage bond: ABSA Bank 120 000 160 000
CURRENT LIABILITIES
Acc GR12 LB.indb 120 6/6/13 6:03:19 PM

Brimstone Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 FEBRUARY 2019
Carrying value at beginning of year 400 000 – 41 200
Cost 400 000 – 56 000
Accumulated depreciation – (14 800)
Movements
Additions 200 000 80 000
Disposals at carrying – (8 360)
Cost 600 000 80 000 44 000

AUTHORISED
ISSUED
600 000 ordinary shares in issue at the end of the year 600 000
8. RETAINED INCOME
Paid 72 000
Recommended 36 000

28 Feb 2019 28 Feb 2018
91 672 166 140
Activity 3.22
The following information was taken from the accounting records of Crafty Furn Ltd.
The financial year ends annually on 28 February. Crafty Furn Ltd. is registered with a share
capital of 1 000 000 ordinary shares.
Required
Prepare a Cash Flow Statement together with the notes to the year ended 28 February 2019.
Acc GR12 LB.indb 121 6/6/13 6:03:19 PM

Information
Extract from Income Statements for the year ended 28 February 2019
Interest on loan ?
Depreciation on equipment ?
Depreciation on vehicles ?
Income tax 90 000
Crafty Furn Limited

Note R R
ASSETS 2019 2018
NON-CURRENT ASSETS

Inventories 4 141 440 144 600
TOTAL ASSETS 1 132 140 835 700

Share capital 7 720 000 480 000
Mortgage bond: First Bank (16% p.a.) 200 000 150 000

Bank overdraft – 20 000
TOTAL EQUITY AND LIABILITIES 1 132 140 835 700
Crafty Furn Limited

Extract from the notes to the financial statements for the year ended 28 February 2019
Cost 240 000 329 000 194 000
Cost 400 000 479 000 224 000
Accumulated depreciation – (173 000) (49 000)
Acc GR12 LB.indb 122 6/6/13 6:03:19 PM

2019 2018
95 500 88 600

2019 2018
Bank 10 700 –
Petty cash 500 300
14 200 2 500

28 Feb 2019 28 Feb 2018
72 000 110 700
• Equipment costing R50 000 was sold at the carrying value of R24 000 during the year.
New equipment was bought during the year.
• No vehicles were sold during the year.
• Dividends were paid and declared during the current financial year.
• The loan was increased on 30 November 2018. Interest on the loan is calculated at
16% per annum.
Activity 3.23
Paarl Outdoor Ltd. sells tents, camping equipment and other outdoor items.
On 30 November 2018 they had issued 4 000 000 shares.
On 1 February 2019 they issued a further 400 000 shares.
Required
Prepare the Cash Flow Statement, with notes, on 30 November 2019.
Information
Extract from the Income Statement for the year ended 30 November 2019:
Income tax 450 000

Depreciation 56 000
Acc GR12 LB.indb 123 6/6/13 6:03:19 PM

Extract from the Statement of Financial Position (Balance Sheet) as at 30 November 2019:
2019 2018
Non-current / Tangible assets at carrying value 1 841 625 1 732 625
Fixed deposit 0 10 000
Inventories 850 300 720 500
Trade and other receivables 480 000 562 200
Cash and cash equivalents 88 975 -
Ordinary shareholders’ equity 2 339 000 2 112 000
Ordinary share capital 2 304 000 2 100 000
Retained income 35 000 12 000
Non-current liabilities: Loan: BC Bank 320 000 350 000
Bank overdraft - 55 000
• Trade and other debtors comprise:
2019 2018
Prepaid expenses 15 000 10 000
• Trade and other creditors comprise:

2019 2018
Accrued expenses (Interest on loan) 8 800 9 625
SARS (Income tax) 2 400 –
• The loan repayment was made on 1 June 2019.

• A fixed deposit matured on 30 September 2019.
• Fixed / Tangible Assets comprise Land and Buildings, Equipment and Vehicles.
Equipment and Land and Buildings were purchased during the year and Vehicles were
sold at carrying value (cost R150 000; accumulated depreciation R65 000).
• Interim dividends paid during the year (2019), R308 000.
Acc GR12 LB.indb 124 6/6/13 6:03:19 PM

Activity 3.24
Joele Ltd. has an authorised share capital of 700 000 ordinary shares.
Required
Use the information provided to prepare the following:
1. The Asset Disposal account on 30 November 2019. Refer to number 6 of the
information provided.
2. Complete the Appropriation account on 29 February 2020.
3. Prepare the Cash Flow Statement and notes for the year ended 29 February 2020.
Information
• Figures extracted from the Income Statement of Joele Ltd. on 29 February 2020:
Depreciation on vehicles R22 392
Depreciation on equipment R5 728
Audit fees R38 000
Directors' fees R90 000
Interest on loan from director (interest is capitalised) R12 000
Net income before tax R180 000
• 180 000 new shares were issued on 1 March 2019 at 70c per share.
• Interim dividends of R50 400 were paid during the current financial year.
• On 28 February 2019, Joele Ltd. had a loan from a director of R75 000. The balance of
this loan is R132 000 on 29 February 2020. The loan agreement stipulates that interest
is to be capitalised and that repayments of R1 200 per month are to be made to the
director. During the year the loan was also increased.
• Figures extracted from the Balance Sheet of Joele Ltd. as at the end of February:
2020 2019
Retained income R39 600 R52 200
Carrying value of total tangible (fixed) assets R322 000 R246 200
Creditors' control R35 000 R28 000
SARS (income tax) R5 250 (dr) R4 000 (cr)
Shareholders for dividends R88 200 R40 000
Debtors' control R63 000 R66 000
Inventories R116 150 R86 200
Cash and cash equivalents R93 600 R8 000 (cr)
• On 30 November 2019 Joele Ltd. sold their only vehicle for cash. The vehicle was
sold at book/carrying value. This vehicle was originally bought on 1 March 2017 for
R80 000. A new vehicle was purchased on the same day to replace the vehicle sold.
All vehicles are depreciated at 20% p.a. using the cost price method. These
transactions have been recorded. No other tangible assets were sold during the
current financial year.
Acc GR12 LB.indb 125 6/6/13 6:03:19 PM

Liberty Ltd. is a public company in the manufacturing sector. The company has an
authorised share capital of R1 000 000 consisting of 2 million shares. The information
below appeared in the company’s records.
Required
Prepare the Cash Flow Statement of Liberty Ltd., together with notes, for the year ended
31 December 2019.
Information
Liberty Ltd.
INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2019
Note R
Sales 712 000
Operating profit 197 800
Income tax (60 172)
Liberty Ltd.
BALANCE SHEET AT 31 DECEMBER 2019
Note R R
ASSETS 2019 2018
NON-CURRENT ASSETS

Inventories 4 45 800 30 600
Cash and cash equivalents 6 200 38 157
TOTAL ASSETS 773 240 491 842

Share capital (issue price 50c) 7 260 000 200 000
Mortgage bond: Investec Bank (18%) 350 000 180 000

Acc GR12 LB.indb 126 6/6/13 6:03:19 PM

Extract from the notes to the financial statements for the year ended 31 December 2019
Land and buildings Vehicles and equipment
2019 2018 2019 2018
Cost 450 000 230 000 300 000 180 000
Accumulated depreciation – – (79 000) (35 200)
• No fixed assets were sold during the current financial year.

• Fixed assets were purchased during the current financial year.
• Trade and other receivables consist only of trade debtors.
• Cash and cash equivalents consist only of bank and a cash float that was R200 for
both 2018 and 2019.
• The additional shares were issued on 31 December 2019
• A dividend of 9c per share was paid on 30 June 2019. There were 400 000 ordinary
shares in issue when the dividend was paid. A final dividend was declared, but has not
yet been paid.

2019 2018
91 300 76 160
Case study 3.2
Companies and ethics

The table contains examples of unethical behaviour that companies could display.
Read through the explanations and examples carefully. Then read through the case
studies that follow.
Unethical behaviour Explanation Examples

Market manipulation A deliberate attempt to Churning: when a trader places both buy and sell orders
artificially increase or at the same time to increase activity and therefore attract
decrease a company’s other investors
share price Painting the tape: when a group of traders create activity or
rumours to drive up the price of stock
Cornering: purchasing enough of a particular stock to gain
control of the supply and be able to set the price for it
Illegal insider trading Buying or selling shares “Tipping” information or using the “tipped” information to
while possessing important do trading in order to make a profit or avoid losses
confidential information
about a company
Corporate When directors do not act Accounting fraud: when directors manipulate financial
governance failure in the best interest of the indicators to mislead shareholders
shareholders Disclosure violations: when directors do not disclose
accurate and complete financial statements
The following articles showcase unethical behaviour in companies. Read each case
carefully, linking the behaviour to an unethical action in the table. Write a short summary
for each case study on what happened, what unethical behaviour took place and what
the consequences were.
Acc GR12 LB.indb 127 6/6/13 6:03:20 PM

Case 1
Batt Bros. Building Supplies, Ltd., another corporation and six individuals were
involved in a fraudulent scheme wherein Batt shares were issued and subsequently
traded in a market that was inflated by overwhelmingly positive but false press
releases about Batt’s prospects. The respondents sought to conceal the extent of
their involvement by trading through nominee accounts, creating a misleading
appearance of trading activity in Batt securities and obtaining trading profits of
R35,1 million. They were fined for more than R40 million.
Case 2
Four employees of GHJ Energy, including former president and CEO Robert Cole,
bought GHJ Energy shares after the company began producing oil from a large new
oil resource pool that had not yet been disclosed to the public. The respondents
received market bans and monetary penalties of two to three times the amounts
they gained through their insider trading.
Case 3
Elizabeth Mfuleni and her son Siya traded securities of Capital G Financial Services
Inc. with undisclosed knowledge that the company would report a material net loss
for its quarterly financial results. Elizabeth Mfuleni was a senior accountant in Captal
G’s investment reporting group and she tipped the information to her son. Mfuleni
and her son admitted to engaging in illegal insider trading and making false and
misleading statements. In addition to bans from the securities market, the Mfulenis
must disgorge all profits obtained of R2 177 665 and pay an administrative penalty
of R2 100 000, plus costs. The penalty represents two times the profits made and
losses avoided.
Case 4
The case of Extreme Real Estate Inc., Michausdal Research Associates Inc., Theo
Donaldson and Michael Holtzhauzen illustrates the importance of transparency
in compensation structures around investments. Extreme Real Estate Inc. paid
compensation to individuals who assisted with the sale of investments but did
not disclose that information to investors in the Offering Memorandum. Penalties
totalling R350 000 was assigned.
Case 5
In Kanton, the misbehaviour of top executives (Leonard Cupido, Ahmed Kahn
and Anton du Preez) was possible because of the inaction of both the Board and
the auditing firm. By means of the pre-paid transactions, these Kanton executives
managed to transform increases in leverage into positive cash flows. They inflated
earnings and hid debt. The external auditors shredded incriminating evidence in the
Kanton scandal.
Case 6
Skubuza Maureng engaged in multiple-market manipulation schemes which
enabled him to artificially increase the value of the stock of Darktown Capital
Corporation (DEC) by three times its value. As one example, Maureng touted the
stock in an internet blog where he alluded to conversations with the CEO of DEC
who stated that important good news was about to surface about the company
while he purchased large volumes of the stock. Maureng pleaded guilty to the
charge and was fined R280 000.
Acc GR12 LB.indb 128 6/6/13 6:03:20 PM

Chapter 4
Financial accounting of companies – Key concepts
• gross profit on sales
analysis and interpretation of financial • gross profit on cost of
statements sales • net profit on sales

• operating expenses on
sales • operating profit
on sales • current ratio
By the end of this chapter, you will be able to:
• acid test ratio • stock
• Calculate and comment on the ■Solvency ratio turnover rate • stock
following financial indicators ■Debt equity ratio holding period • average
Gross profit on sales
■ ■Return on shareholders’ equity debtors collection period
Gross profit on cost of sales
■ ■Return on total capital employed • average creditors
Net profit on sales
■ ■Net asset value per share collection period
Operating expenses on sales
■ ■Dividends per share • solvency ratio • debt
equity ratio • return on
Operating profit on sales
■ ■Earnings per share
shareholders’ equity
Current ratio
■ • Integrate the reporting and control • return on total capital
Acid test ratio
■ of fixed assets employed • net asset value
Stock turnover rate
■ • Integrate the ethical considerations per share • dividends per
Stock holding period
■ relating to companies share • earnings per share
Average debtors collection
■ • Integrate the internal audit and • shareholders • directors
period control processes relating to • share manipulation
Average creditors collection
■ companies • corporate governance
period • ethical conduct
Our shareholders should be very

happy with their dividends per
share this year.
Yes, and our earnings per

share will definitely attract
more investors.
F i n a n cia l acc o u n ti n g o f c o m pa n ies – a n a lysis a n d i n terpretati o n o f fi n a n cia l state m e n ts • C h a p t e r 4 129
Acc GR12 LB.indb 129 6/6/13 6:03:20 PM

1. Introduction
Financial reporting focuses mainly on reporting on the financial position and
the financial results of a business. The analysis and interpretation of financial
statements is an evaluation process, aimed at evaluating the current and previous
financial position and results of the business. The primary purpose of the analysis
and interpretation of financial statements is to make informed decisions and
estimates about the future position and results of the business.
The limitations of financial information should be taken into consideration
when estimates about the future are made. Some of these limitations are:
• Financial statements are historical documents.
• Inflation is not taken into account.
• Other information should also be taken into account, such as technological
changes, changes in consumer preference, economical environment, tendencies
in the business sector and changes in the business.
2. Stakeholders who use financial statements

Stakeholders who use financial statements generally belong to one of two groups:
internal users and external users.
2.1 Internal users of financial statements

• Board of Directors: Financial statements allow the Board of Directors to
evaluate the performance of the management in relation to the achievement of
objectives. It helps them set the future strategic direction and objectives of the
company.
• Managers: They analyse and interpret financial statements in order to
determine if all sections were run effectively. They will also use these figures
for future planning. It helps managers to make informed decisions on how to
adjust tactics to exploit opportunities and ward off potential threats.
• Employees: They are interested in financial statements to determine its ability
to provide remuneration, pension and employment opportunities. The reports
also help employees when negotiating collective bargaining agreements with
management.
2.2 External users of financial statements

• Suppliers: Suppliers use the financial statements to assess the credit worthiness
of the business before determining credit terms.
• Lenders: Lenders use financial statements to assess credit worthiness before
allowing short-term overdrafts, long-term loans, leasing finance for equipment
purchases, mortgages for property, etc.
• Government departments: Government departments such as SARS will use
financial statements to ascertain the propriety and accuracy of taxes and other
duties declared and paid.
• Labour unions: They will use the financial statements to gather information
for wage negotiations.
• Investors: Investors will use the statements to assess the financial strength and
potential of a company before purchasing shares. Existing shareholders will use
the statements to evaluate the company’s performance.
• Competitors: They will use the statements to benchmark their own financial
results.
130 Chapter 4 • F i n a n cia l acc o u n ti n g o f c o m pa n ies – a n a lysis a n d i n terpretati o n o f fi n a n cia l state m e n ts
Acc GR12 LB.indb 130 6/6/13 6:03:20 PM

3. Analysis and interpretation
The analysis of financial information includes the further investigation and analysis
processing of this information in order to provide specific information to a further investigation and processing of
decision maker. information
Example: The purchases manager wants to know the amount of stock on hand
and the turnover rate for the stock.
The interpretation of information includes determining the reasons for the interpretation
situation and the results it might imply in the future. finding reasons for the situation and
stating possible results this may create in
Example: The purchases manager will investigate why the rate of stock turnover the future
decreased and the implication of that will be on the business cash-flow situation.
4. Comparable measuring standards

In order to judge or measure if the financial results were satisfactory, the business
should use measuring standards to compare with the figures. There are four basic
measuring standards that can be used:
• A target, pre-calculated standard or budget
• Historical information of the business – the same figures from previous
financial years can be compared. empiric
• Figures from similar businesses or businesses in the same business sector
derived from or guided by past experience
• Empiric accepted standards. Included in these are the experience and or experiment
background of the analyser
5. Ratio analyses
You were already introduced to ratio analyses in Grades 10 and 11. In Grade 12
we will expand on those and will perform some ratio analyses used specifically
in companies.
Financial ratios covered in Grades 10 and 11 were:
• Gross profit on sales
• Gross profit on cost of sales
• Net profit on sales
• Operating expenses on sales
• Operating profit on sales
• Current ratio
• Acid test ratio
• Stock turnover rate
• Stock holding period
• Average debtors collection period
• Average creditors payment period
• Solvency ratio
(See summary on page 135.)
Financial ratios can be divided in the following categories.
Liquidity ratios Focus on the company’s ability to pay short-term

obligations, such as creditors, short-term loans,
shareholders for dividends and SARS.
The liquidity ratios are the current ratio and acid test ratio.
The stock turnover rate, debtors collection period and
creditors payment period help to indicate why there are
problems with liquidity.
Acc GR12 LB.indb 131 6/6/13 6:03:20 PM

Financial leverage Indicate how a company is financed, if they will be able
(Debt) ratios – risk to meet long-term obligations, and the risk factor.
indicators(gearing) The financial leverage ratios are the solvency ratio and
debt : equity ratio.
Efficiency ratios Indicate how efficient a company uses its assets and
resources to produce sales.
The ratios that can be used are stock turnover rate,
stock holding period, debtors collection period and
creditors payment period.
Profitability ratios Indicate if a company is generating a profit and an
adequate return on assets and equity invested in the
company. It can also indicate how efficient a company
is using its assets and how effective it manages
operations.
Profitability ratios can be divided into margins and
returns.
margin ratios are gross profit margin, operating profit
margin and net profit margin.
Return ratios are return on equity and return on capital
employed.
Market value ratios used by investors and management to see how a
company is doing compared to others in the same
industry. They also allow you to compare the one year
with next for your own company.
market price per share These ratios are return on equity, net asset value per
the quoted price at which an investor can share, earnings per share, dividends per share and
buy or sell at any given time market price per share.
The following guidelines should be followed when commenting on a ratio:

• State whether the ratio has increased or decreased in comparison to the
previous year. It is very important that you quote figures.
• State what the increase or decrease can be attributed to.
• Reach a conclusion on the company’s performance, whether it is liquidity,
profitability, efficiency, solvency, gearing, financing or return on investment.
The following ratios are specific to a company and new work for Grade 12.
5.1 Debt : Equity ratio (Gearing ratio)

The Debt : Equity ratio indicates how much debt is used to finance the company in
comparison to the amount of equity used. It is much riskier using debt financing
than using equity financing and that is why this is a risk indicator. It is calculated as
follows:
Debt : Equity
OR
Non-current liabilities : Shareholders’ equity
OR
Long-term liabilities : Shareholders’ equity
Shareholders’ equity = share

To comment on the debt: equity ratio you will look at the following:
capital + retained income • A decrease indicates that a company is relying less on debts financing – an
Debt : Equity = foreign capital : own
indication of financial health.
capital = how is business financed • An increase means more risk and it usually means a company has less cash
available for general operations and to pay suppliers, since it needs to cover its
interest expense and instalments.
132 Chapter 4 • F I n A n C I A l A C C o u n T I n G o F C o m PA n I E S – A n A lY S I S A n d I n T E R P R E TAT I o n o F F I n A n C I A l S TAT E m E n T S
Acc GR12 LB.indb 132 6/6/13 6:03:20 PM

5.2 Return on shareholders’ equity
This is the most important profitability ratio, as it shows shareholders how
effectively the money they invested in the company is being used. It is calculated
as follows:
Net profit after tax
_______________________
    
     100
 × ___1 
Average shareholders’ equity
Where average shareholders’ equity =  __12 (shareholders’ equity beginning of the
year + shareholders’ equity end of the year).
To comment on return on shareholders’ equity you will look at the following: return on shareholders’
• Compare to the previous year’s figures. equity
• It allows shareholders to compare the rate of return in the business with the how effective a shareholders’ money is
rate of alternative investments. managed
• There are a couple of factors that could have an influence on this ratio, for
instance how long the business has been running, economic climate and
whether new shares were issued during the year.
• If the return on shareholders’ equity is, say, 20%, it means that the company
generated 20 cents profit for every R1 in equity.
5.3 R
eturn on average capital employed (ROACE)/Return on EBIT
capital employed (ROCE) earnings before interest and tax
This ratio indicates the profit the company earned on the capital (money)
employed (used). It measures the business profitability or the efficiency with which
return on capital employed
capital (money) is utilised to generate revenue.
profit generated from money invested by
Profit before tax and finance cost (EBIT) ___
ROACE = ________________________________
           ×  100 1 
shareholders and loans
Average capital employed
Profit before tax and finance cost (EBIT) ___
ROCE = ________________________________
     
     ×  100
1 
Capital employed end of the year
Where capital employed = shareholders’ equity + long-term loans
OR
Capital employed = total assets – current liabilities
To comment on ROACE / ROCE, you will look at the following:
• Compare to the previous year’s figures.
• ROACE / ROCE should always be higher than the interest rate on borrowed
money, otherwise an increase in loans will decrease shareholders’ earnings.
• If a company has a low ROACE / ROCE, it means it is using its resources
inefficiently.
5.4 Net asset value per share (NAVPS) net asset value per share
The net asset value per share (NAVPS) is sometimes also referred to as the also book value per share; how much a
book value per share. It indicates the value per share of a company, and is share is worth
calculated as follows:
Shareholders’ equity
____________________
       × ___  100
1 
Number of shares issued
To comment on net asset value per share (NAVPS), you will look at the following:
• Compare to the previous year’s figures.
• Compare to market prices – take into consideration that market prices will
usually be higher. Because of the historical cost principle of GAAP, asset
values are usually understated, which means NAVP will be lower, while
supply and demand forces of the marketplace generally push stock prices
above book value.
Acc GR12 LB.indb 133 6/6/13 6:03:20 PM

• There is also another way of looking at it: If the NAVPS is much lower than the
market value, the financial markets are probably experiencing a bull market.
If the NAVPS and market value are closer together, financial markets probably
have a bear market.
EPS 5.5 Earnings per share (EPS)

Earnings per share is an indicator of a The disclosure of earnings per share provides the criteria with which a company
company’s profitability. can measure its performance. It is very important that directives should be put
down for the calculations of EPS, otherwise every business will use criteria that
will benefit their position.
IAS 33 provides specific guidelines and criteria to ensure that EPS is calculated
consistently.
According to IAS 33, basic earnings per share should be calculated as after
tax for the financial year (earnings) divided by the weighted average number of
ordinary shares. The weighted average number of ordinary shares is the number
of shares issued at the beginning of the year plus the number of shares issued
during the year, multiplied by a time-weight factor.
In Grade 12, however, we are going to simplify this ratio as follows:
Net profit after tax (earnings)
EPS = _____________________________________
Number of issued shares at the end of the year
To comment on earnings per share (EPS) you will look at the following:
• Compare figures to the previous year’s EPS. Comment if there was an increase
or decrease.
• Look at the profitability of the company as it would affect EPS.
DPS 5.6 Dividends per share (DPS)

Dividends per share is the total dividends Dividends per share (DPS) are the total dividends paid and declared in a financial
for every issued share. year per share issued.
IAS 01 demands that a company should disclose the dividend per share, but
no specific criteria are provided for its calculation. However, DPS is generally
An investor will compare the
calculated by dividing the number of shares issued on the last day of registration
following indicators before
investing in a company’s shares: into the dividends paid and declared during the financial period. In Grade 12 we
will calculate it as follows:
• Net asset value per share
• Earnings per share Dividends paid and declared (ordinary dividends)
DPS = _______________________________________
• Dividends per share Number of shares issued end of the year
• Market price per share. To comment on dividends per share you will look at the following:
• Compare figures to the previous year’s DPS. Comment if there was an increase
or decrease.
• An increase in DPS is usually a good sign as it shows the directors of the
company believe that the growth can be sustained.
• A decrease in DPS can indicate to investors that the company is not doing well
financially and could lead to a drop in market value, as investors might sell off
their shares.
• DPS and EPS can be compared to each other, as earnings per share shows how
much the profit the business made per share and dividends per share shows
how much of that profit per share was paid out to the shareholders.
Acc GR12 LB.indb 134 6/6/13 6:03:21 PM

Summary of ratios used in the analysis and interpretation of financial statements
of companies
Questions Financial Ratios Possible comment

answered indicators
• The percentage is compared to the previous year’s and
% Gross companies in similar industries.
profit on Gross profit 100 • It shows how well a company controls the cost of its
 ___________ × ____
  inventory.
cost of sales Cost of sales 1
(turnover) • If it is below the expected profit margin it can be due to
Margin ratios the following: discount was allowed with sales to increase
Did the business turnover, mistakes was made calculating prices, with source
achieve their documents or entries in the books, strong competition thus
profit margin? pushing the selling price down, suppliers increased their
% Gross profit
Gross profit 100 prices thus increasing the cost price, all normal stock losses,
on sales  __________ ×  ____
Sales 1 including theft of stock (periodic inventory system).
(turnover)
• Generally, the larger the gross profit margin, the better.
Operating profit ____ • Measures overall operating efficiency.

   ×  100
 ______________
Sales 1 • It tests the cost control of the business – that is the business
% Operating
control over operating expenses.
profit on sales Also known as EBIT –
• It is compared to the previous year’s figures.
(turnover) Earnings Before Interest
• A decrease in this percentage indicates the business was less
and Tax
efficient in controlling expenses.
• This percentage is very much the same as the previous one,
but after interest expense and tax were taken into account.
Margin ratios • A comparison of operating profit on sales with this figure will
% Net profit
How well does Net profit after tax ____ show the effect finance costs had on the business.
on sales    ×  100
 _______________
the business Sales 1 • A percentage of 7% for instance would indicate that for every
(turnover)
control its R1 in sales 7 cents is profit.
overheads / • A decrease in this percentage indicates the business was less
expenses? efficient in controlling expenses.
• This indicates what percentage of sales is spent on operating
expenses.
% Operating • This also tests the cost control of the business and will be
expenses Operating expenses ____ compared to previous year’s figures.
_________________
     ×  100
on sales Sales 1 • A decrease in this percentage indicates the business was
(turnover) more efficient in controlling expenses.
• If this percentage is too high the business should look at ways
to cut overhead costs.
Current assets : Current • Both these ratios test if the business has enough current
Current ratio
liabilities (liquid) assets to pay creditors, bank overdrafts, short-term
loans etc.
• A good indication for the current ratio is that there should be
at least TWO current assets for every ONE current liability.
Liquidity
(Current assets – Inventory) • The acid test ratio tests the ability of the business to settle
Will the business
: Current liabilities current debts under abnormal circumstances such as a bad
be able to pay
economic depression.
short-term
OR • It is sometimes difficult to convert inventory into cash and
obligations
this ratio tests if the business has enough liquid assets to do
(debt), such as
(Trade and other so, without taking inventory into consideration.
bank overdraft,
Acid test ratio receivables + cash) : • The current assets which can be readily liquidated (debtors
creditors and
Current liabilities and cash) should be at least equal to the current liabilities and
short-term
not less, in other words 1:1.
loans?
Note: • If it is less, the business might struggle to meet short-term
How well did
Inventory = Trading obligations.
the business
inventory + Consumables • A possible way to improve the acid test ratio is to sell off
manage their
on hand excess stock and to collect debts sooner.
working capital?
• This ratio should also not be too high as it could indicate
that excess funds are tied up in current assets which are not
earning a return for the business.
Net working Current assets – current You should have a positive net working capital in order to pay
capital liabilities short-term obligations.
Acc GR12 LB.indb 135 6/6/13 6:03:21 PM

answered indicators
Stock Cost of  
sales
 __________________
  
• The number of days/months stock on hand will vary
turnover rate Average trading stock from one business to the next depending on the type
of business and products they sell.
• The more effective a business can increase their rate of
Average trading stock ____
365
 __________________
     ×   stock turnover, the more profit they can make.
Cost of sales 1
Stock • It will be compared to the previous year’s figures and
holding OR some objectives the business set for themselves.
period • If stock turnover is too high , the business can run out
Efficiency Average stock ___
     ×  12
____________ of stock.
ratios Cost of sales 1
• If stock turnover is too low, stock can become
How effective obsolete.
did you manage
• A business should try to collect debts within 30 days.
working capital Average
• If the collection period decreases, the business should
and what effect debtors Average debtors ___365
 ______________
     ×  
1
look at its credit and collection policy – the collection
did it have an on collection Credit sales
of debts could improve by screening new debtors,
liquidity? period
charging interest and setting credit limits.
• A business should negotiate a longer payment period
with creditors – they should, however, make sure they
Average
pay creditors on time to prevent interest charged on
creditors Average creditors ____
365
 _______________
  
   ×   overdue accounts.
payment Credit purchases 1
• An increase in the number of days a business takes
period
to pay creditors can indicate that the business has
liquidity problems.
• This indicates if business will be able to settle total
obligations.
Solvency ratio
Total assets • It can also show how many assets are financed
Do the assets
: total Total assets : Total liabilities through debt.
exceed the
liabilities • This should be at least 1:1 for a business to be solvent.
liabilities?
• It is, however, more acceptable if it is 2:1 as that would
indicate there are TWO assets for every ONE liability.
Financial • This ratio gives an indication how the business is
leverage –risk financed.
indicator • Capital provided by the shareholders = own capital.
Non-current assets : Shareholders’
By what means • Funds borrowed from other institutions = foreign
equity
is the business capital.
financed? Debt : Equity • A business that relies mainly on own capital is often
OR
Is the business ratio seen as a low-risk business and would more easily
credit worthy / obtain a loan.
Long-term liabilities : Shareholders’
low geared? • One can assume that a business with a debt : equity
equity
Will the bank ratio under 0,5:1 is low geared and credit worthy, while
grant the a business with a ratio above 1:1 is highly geared.
business a loan?
• This percentage gives and indication how much
return the shareholders earned on the capital invested
Net profit after tax 100
 ____________________      × ___
Average shareholders‘ equity
  1
in the business.
Return on • It allows them to compare the rate of return in the
Return shareholders‘ Where average shareholders‘ equity business with the rate of alternative investments such
Does the equity =  __12 (shareholders‘ equity beginning as a fixed deposit.
business earn (gearing) of the year + shareholders‘ equity • There are a couple of factors that could have an
a good return end of the year) influence on this ratio, for instance how long the
on the capital business has been running, economic climate and
invested in the whether new shares were issued during the year.
business? Profit before tax + finance cost (EBIT) ___
__________________________ 100 • This indicates how effective the funds were used
Return on          ×  
Average capital employed 1
through operating activities.
total capital • The percentage obtained should be higher than the
employed Where capital employed
= shareholders‘ equity + long-term interest paid on borrowed capital.
(ROACE) • EBIT = Earnings Before Interest and Tax
loans
Acc GR12 LB.indb 136 6/6/13 6:03:21 PM

answered indicators
• It can be compared to market price – take into
consideration though that market price will usually be
Net asset value higher. Because of the historical cost principle of GAAP,
Shareholders‘ equity
per share  ____________________
    100
   × ____ asset values are usually understated, which means NAVP
Number of shares issued 1
(NAVPS) will be lower, while supply and demand forces of the
marketplace generally push stock prices above book value.
• NAV = book value per share = what is it worth
• Compare the results to the previous year’s DPS.
Market value
• Having an increase in DPS is usually a good sign as it
ratios
shows the directors of the company believe that the
Financial
growth can be sustained.
indicators
• A decrease in DPS can indicate to investors that the
specific to
Dividends per Dividends on ordinary shares company is not doing well financially and could lead
companies.  ____________________
   × ___
    100
1

share (DPS) Number of shares issued to a drop in market price, as investors might sell off
It evaluates
their shares.
the economic
• DPS and EPS can be compared to each other, as earnings
status of your
per share shows how much the profit the business made
company.
per share and dividends per share shows how much of
that profit per share was paid out to the shareholders.
• Compare the results to the previous year’s EPS.
• Profitability has an effect on earnings per share.
Earnings per Net profit after tax • There are a couple of factors that could have an
 ____________________
    100
   × ____
share (EPS) Number of shares issued 1 influence on this ratio, for instance how long the
business has been running, economic climate and
whether new shares were issued during the year.
Example
Analysing and interpreting financial statements
Below are the Income Statement, Balance Sheet and some notes to the financial
statements of CDK Limited for the year ended 28 February 2015, as well as
comparative figures for 2014. The company is registered with an authorised share
capital of 200 000 ordinary shares worth R2 each.
CDK Limited
Note R R
2015 2014
Sales 1 290 000 1 080 000
Cost of sales (941 605) (771 428)
Gross profit 348 395 308 572
Other operating income 20 400 18 000
Gross operating income 368 795 326 572

Operating expenses (195 024) (205 715)
Operating profit (loss) before tax 173 771 120 857

Interest income 1 1 992 1 853
Profit (loss) before interest expense 175 763 122 710
Interest expense 2 (14 400) (18 000)
Profit (loss) before tax 161 363 104 710
Income tax (64 545) (41 884)
Net profit (loss) after tax 8 96 818 62 826
Acc GR12 LB.indb 137 6/6/13 6:03:21 PM

Example continued
CDK Limited
Note R R
ASSETS 2015 2014
Fixed/tangible assets 3 534 630 521 400
Financial assets
Fixed deposit 5 000 5 000

Inventories 4 101 230 98 700
TOTAL ASSETS 759 210 724 580

Share capital 7 376 000 352 000
NON-CURRENT LIABILITIES 120 000 150 000

Mortgage loan 120 000 120 000

Bank overdraft (if any)
Short-term loans 30 000 30 000
CDK Limited
2015 2014
SARS – income tax (if there is a debit balance) 4 506
40 120 36 780
Acc GR12 LB.indb 138 6/6/13 6:03:21 PM

Example continued
8. RETAINED INCOME
2015 2014
Balance at the beginning of the year 132 498 119 673
Net profit (loss) after tax for the year 96 818 62 826
Dividends on ordinary shares (60 000) (50 000)
Paid 20 000 20 000
Recommended 40 000 30 000
Balance at the end of the year 169 316 132 498

2015 2014
SARS – income tax (if there is a credit balance) 1 042
63 894 60 082
• Credit sales for 2015 amounted to R247 678.
• Credit purchases for 2015 amounted to R228 125.
• The turnover rate of stock was 7,8 during 2014.
• The return on average shareholders’ equity for 2014 was 13,1%.
Required
Complete the analysis and interpretation of the financial statements.
Solution
1. Margin ratios
a. Gross profit as a percentage of cost price
gross profit 100
= __________
  cost price ×  ___
1 
2015 2014
______
 941 100
348 395 × ___ 308 572 ___
______ 100
605   1   771 428 ×   1 
= 37% = 40%
b. Gross profit as a percentage of sales

gross profit ___
   ×  100
= __________ 1 
sales
2015 2014
 1348 395 ___
________ 100 308 572 ___
________ 100
290 000 ×   1   1 080 000 ×   1 
= 27% = 28,6%
Acc GR12 LB.indb 139 6/6/13 6:03:21 PM

Example continued
Comments
• The percentage profit earned on the cost price decreased by 3% from 2014 to
2015.
• The percentage gross profit decreased by 1,6% from 2014 to 2015.
• This may have been the result of sales, incorrect stocktaking or stock lost
through theft or damages (if periodic inventory system), or suppliers
increasing their prices.
2. Margin ratios – cost control operating profit on sales

a. Operating profit on sales = ____________________
    
  100 
   ×  ___
sales 1
2015 2014
173 771 ___
 ________ 100 120 857 ___
________ 100
1 290 000 ×   1   1 080 000 ×   1 
= 13,5% = 11,2%
Comments
• This ratio increased with 2,3% from 2015 to 2014.
• The business had better control over expenses.
b. Net profit as a percentage of sales

net profit after tax ___
     ×  100
= _______________
  1 
sales
2015 2014
96 818
 ________ 100
___ 62 826
________ 100
___
1 290 000 ×   1   1 080 000 ×   1 
= 7,5% = 5,8%
Comment
• Net profit as a percentage of sales increased by 1,7%. This means that
the company’s cost control has improved. It can improve even more, as it
indicates the company keeps 7,5 cents as profit for every R1 in sales.
c. Operating expenses as a percentage of sales
operating expenses on sales ___
100
=  ______________________
  
 
   ×    
1
sales
2015 2014
195 024 ___
 ________ 100 205 715 ___
________ 100
1 290 000 ×   1   1 080 000 ×   1 
= 15,1% = 19%
Comment
• Operating expenses as a percentage of sales decreased by 3,9%. This is very
good and shows that the company has cut its overheads, thereby improving
its cost control.
3. Liquidity
a. Current ratio = current assets : current liabilities
2015 2014
219 580 : 93 894 198 180 : 90 082
= 2,3 : 1 = 2,2 : 1
Acc GR12 LB.indb 140 6/6/13 6:03:21 PM

Example continued
b. Acid test ratio = (current assets – stock) : current liabilities

2015 2014
(219 580 – 101 230): 93 894 (198 180 – 98 700): 90 082
= 118 350 : 93 894 = 99 480 : 90 082
= 1,3 : 1 = 1,1 : 1
Comments
• The acid test ratio for 2015 showed a slight improvement on 2014 from 1,1 : 1
to 1,3 : 1. The company will be able to meet its short-term commitments.
• The liquid current assets cover the current liabilities.
4. Stock
a. Rate of stock turnover = [cost of sales/average stock] = number of times
per year
2015
 ________________
1   (101 230 + 98  100
941 605   × ___
1 
__ 700)
2
941 605 × ___
=  ______ 100
99 865   1 
= 9,4 times per year
Comment
• The rate of stock turnover has improved from 7,8 in 2014 to 9,4 in 2015.
b. Number of months’ stock on hand/stock holding period
average stock 12
=  ___________ ×  __
1 
cost of sales
2015
 21 (101 230 + 98 700) 12
__
________________
=    × __
941 605     1 
99 965 __
=  ______ 12
941 605 ×   1 
= 1,3 months’ stock is on hand
5. Credit control average debtors ___
a. Debtors collection period =  _____________     ×  365
1 
credit sales
 __21 (40 652 + 32 077) 365
=  _______________  × ___
247 678     1 
36 365,5 ___ 365

=  _______
247 678 ×   1 
= 53,6 days
Comments
• The company should try to collect all debts within 30 days. At present its
credit control is poor.
• Debtors can be encouraged to settle bills sooner by offering them discount
and charging interest on accounts that are in arrears.
Acc GR12 LB.indb 141 6/6/13 6:03:22 PM

Example continued
average creditors ___
365
b. Creditors payment period =  ______________   
   ×   1
credit purchases
 __21 (22 094 + 29 429) 365
_______________
=    × ___
228 125     1 
25 761,5 ___ 365

=  _______
228 125 ×   1 
= 41,2 days
Comment
• The company should negotiate with creditors to be allowed 60–90 days to pay
its accounts.
6. Solvency
total assets : total liabilities
2015 2014
759 210 : (120 000 + 93 894) 724 580 : (150 000 + 90 082)
= 759 210 : 213 894 = 724 580 : 240 082
= 3,5 : 1 =3:1
Comments
• Solvency improved from 2014 to 2015.
• In 2015 the company had 3,5 assets for every one liability, which means its
solvency is very good.
7. Debt/shareholders’ equity ratio
Long-term liabilities : shareholders’ equity
= 120 000 : 545 316
= 0,2 : 1
Comments
• The debt/shareholders’ equity ratio is very good.
• The company is creditworthy.
• The company is mostly financed with own capital.
• The company is low geared.
8. Return on average shareholders’ equity

net profit after tax
_______________________
          100
 × ___1 
average shareholders’ equity
96 818   × ___
=  _________________  100
1   (545 316 + 484
__ 498) 1 
2
______
=  514 100
96 818  × ___
907   1 
= 18,8%
Comment
The percentage returns went up from 13,1% in 2014 to 18,8% in 2015.
Acc GR12 LB.indb 142 6/6/13 6:03:22 PM

Example continued
9. Return on average capital employed

profit before interest expense ___
 _______________________
        ×  100
1 
average capital employed
175 763
=  _________________________________
    × ___  100
1   (545 316 + 120  
__ 000 + 484 498 + 150 000) 1 
2
=  649 763
175
______ 100
___
907 ×   1 
= 27%
Comments
• The company shows a 27% return on capital employed.
• This is considerably more than the interest it is paying on borrowed capital.
10. Earnings per share (EPS)

net profit after tax
= ____________________
      100
   × ___
1 
number of shares issued
2015 2014
96 818 ___
 ______ 100 62 826 ___
______ 100
160 000 ×   1   150 000 ×   1 
= 60,5c per share = 41,9c per share
Comments
• EPS went up by 18,6c from 2014 to 2015.
• The increase is probably the result of increased profitability of the company.
11. Dividends per share (DPS)
dividends in ordinary shares ___
=  ______________________
        ×  100
1 
2015 2014
60 000 ___
 ______ 100 50 000 ___
______ 100
160 000 ×   1   150 000 ×   1 
= 37,5c per share = 33,3c per share
Comments
• Dividends per share went up from 2014 to 2015.
• The company’s shareholders should be satisfied.
• It indicates that the directors have confidence that the growth can be
sustained.
12. Net asset value per share (NAVPS)

shareholders’ equity
=  ____________________
    100
   × ___
1 
2015 2014
545 316 ___
 ______ 100 484 498 ___
______ 100
160 000 ×   1   150 000 ×   1 
= 340,8c = 323c
Comment
• The net asset value per share increased by 17,8c from 2014 to 2015.
Acc GR12 LB.indb 143 6/6/13 6:03:22 PM

Activity 4.1
Required
Complete the following table. The first one has been done as an example.
Financial indicator Formulae / ratio: Indication of:

% Gross profit on cost of sales Gross profit 100 Mark-up %
 ___________ × ____
 
(turnover) Cost of sales 1
% Gross profit on sales
(turnover)
% Operating profit on sales
(turnover)
% Net profit on sales
(turnover)
% Operating expenses on
sales(turnover)
Current ratio
Acid test ratio
Net working capital
Stock turnover rate
Stock holding period
Average debtors collection
period
Average creditors payment
period
Total assets : total liabilities
Debt: Equity ratio
Return on shareholders‘
equity
Return on total capital
employed (ROACE)
Net asset value per share
(NAVPS)
Dividends per share (DPS)
Earnings per share (EPS)
Activity 4.2
Alto Limited is registered with 600 000 ordinary shares.
Required
Use the extracts from the financial statements for 2011 and 2012 to calculate and
interpret the following:
1. Gross profit as a percentage on cost price for 2011 and 2012
2. Net profit as a percentage on sales for 2011 and 2012
3. Rate of stock turnover for 2012
4. Solvency for 2012
5. Current ratio for 2012 and 2011
6. Debtors collection period for 2012
7. Creditors payment period for 2012
8. Debt/shareholders’ equity for 2012
9. Return on average shareholders’ equity for 2012
10. Return on average capital employed for 2012
11. Earnings per share for 2011 and 2012
12. Dividends per share for 2011 and 2012
13. Net asset value per share for 2011 and 2012
Acc GR12 LB.indb 144 6/6/13 6:03:22 PM

Information
Alto Limited
Note R R
2012 2011
Sales 2 245 320 2 069 440
Cost of sales (1 496 880) (1 293 400)
Gross profit 748 440 776 040
Other operating income
Gross operating income

Operating expenses (436 520) (599 320)
Operating profit (loss) before tax 311 920 200 720

Interest income 1 2 800 1 500
Income tax (102 000) (60 884)
Alto Limited
Note R R
ASSETS 2012 2011
NON-CURRENT ASSETS

TOTAL ASSETS 893 020 907 290

Share capital 7 530 000 480 000
CURRENT LIABILITIES
Acc GR12 LB.indb 145 6/6/13 6:03:22 PM

Alto Limited
2012 2011
44 760 35 320
8. RETAINED INCOME
2012 2011
Net profit after tax for the year 196 720 99 336
Paid 30 000 20 000

2012 2011
SARS – income tax (if there is a credit balance) 2 500 5 720
122 100 183 090
• Credit sales for 2012 amounted to R211 935.
• Stock turnover rate was 42 for 2011.
• The return on average shareholders’ equity for 2011 was 19,4%.
• On 29 February 2012 the company had 92 000 shares in issue.
Acc GR12 LB.indb 146 6/6/13 6:03:22 PM

Activity 4.3
Nola Limited is registered with 800 000 ordinary shares.
Required
Use the extract from the 2012 and 2013 financial statements to do the following:
1. Gross profit as a percentage on sales for 2012 and 2013
2. Operating expenses as a percentage on sales for 2012 and 2013
3. Number of months’ inventory on hand for 2013
4. a. The current ratio on 28 February 2013
b. The acid test ratio on 28 February 2013
5. Debtors collection period for 2013
6. Creditors payment period for 2013. Credit purchases for the year ended 28 February
2013 came to R379 775.
7. Based on the results of Questions 1 to 6, make suggestions how the company can
improve its liquidity.
8. Debt/shareholders’ equity ratio for 2013
9. Should the company need money to expand its business, would you advise it to get
another loan or to issue more ordinary shares? Give reasons for your answer. (Refer
briefly to Question 8.)
10. Return on average shareholders’ equity for 2013
11. Return on average capital employed for 2013
12. Earnings per share for 2012 and 2013
13. Dividends per share for 2012 and 2013
14. Net asset value per share for 2012 and 2013
Information
Nola Limited
Note R R
2013 2012
Credit sales 375 000 365 000
Cash sales 341 000 315 000
Cost of sales (364 000) (340 000)
Gross profit 352 000 340 000
Other operating income (150 350) (156 335)
Operating profit (loss) 201 650 183 665

Interest income 1 – –
Income tax (76 150) (78 200)
Acc GR12 LB.indb 147 6/6/13 6:03:22 PM

Nola Limited
Note R R
ASSETS 2013 2012
NON-CURRENT ASSETS

Cash and cash equivalents 6 500 800
TOTAL ASSETS 780 500 467 860

Share capital (83 000 shares) 7 249 000 249 000

Current portion of loan 10 000 10 000
Nola Limited
2013 2012
55 730 49 140
8. RETAINED INCOME
2013 2012
Net profit after tax for the year 82 500 85 465
Paid 30 000 63 490
Acc GR12 LB.indb 148 6/6/13 6:03:23 PM

2013 2012
SARS – income tax (if there is a credit balance) – 2 060
79 500 59 360
Activity 4.4
The information on the next page was taken from the statement of Daniele Traders
Limited. The company’s financial year ended on the last day of February.
Required
1. a. Calculate the acid test ratio for 2019.
b. Briefly comment on the acid test ratio for 2018 and 2019. (Refer to the table setting
out the ratios on the next page.)
2. Suggest two ways in which the company can improve its liquidity.
3. Calculate the debt/shareholders’ equity ratio for 2019.
4. Are the circumstances favourable or unfavourable for taking out loans? Motivate your
answer. The interest rate on long-term loans is 14,5%. (Refer to the table setting out
the ratios.)
5. The directors are considering expanding the company’s business activities, but need
a rather large amount of capital to do so. They can raise it by borrowing R200 000
at the interest rate mentioned in Question 4, by issuing more shares or through a
combination of the two. Make a recommendation to them.
6. Calculate the net asset value per share. You have received an offer to purchase your
shares at R2,80 each. Would you consider selling them?
7. Should the shareholders be satisfied with the earnings and dividends per share?
Information
Ratios and percentages based on the financial statements
2019 2018
1 Acid test ratio ? 0,45 : 1
2 Average debtors collection period 60 days 49 days
3 Average creditors payment period 55 days 50 days
4 Return on total capital employed 26,3% 35,6%
Extract from the Income Statement for the year ended 28 February 2019
2019
Net profit after tax 97 500
Income tax 52 500
Acc GR12 LB.indb 149 6/6/13 6:03:23 PM

Extract from the Balance Sheet on 28 February 2019
Note R R
ASSETS 2019 2018
NON-CURRENT ASSETS

Cash and cash equivalents 6 – 6 500
SHAREHOLDERS’ EQUITY
Share capital 7 225 000 165 000
Long-term liabilities 150 000 100 000

Additional information and notes

• The company has authorised shares of 400 000 ordinary shares. Additional shares
were issued on 1 March 2018.
• 75 000 shares in issue on 28 February 2018.
• 100 000 shares in issue on 28 February 2019.

2019 2018
Expenses prepaid 4 200 2 100
8. RETAINED INCOME

2019 2018
SARS – income tax (if there is a credit balance) 2 000 –
Acc GR12 LB.indb 150 6/6/13 6:03:23 PM

Activity 4.5
The information on the next page was taken from the accounts of Melissa Traders Limited
for the years ended 28 February 2013 and 2014. The company is registered with a share
capital of 500 000 ordinary shares.
Required
1. Calculate the number of ordinary shares issued on 1 March 2013.
2. Comment on the liquidity of the company. Refer to the ratios below.
2014 2013
Current ratio 1,11 : 1 0,84 : 1
Acid test ratio 0,47 : 1 0,38 : 1
3. Calculate the period (in days) for which the company has inventory on hand.
4. Calculate the average number of days the company had to wait for debtors to settle
their debt during 2014.
5. Calculate the earnings per share for 2014.
6. Calculate the return on average shareholders’ equity for 2014.
7. A shareholder was offered R2 for each of his shares. Should he consider selling?
8. How can the company improve liquidity?
Information
Extract from the Income Statements for the years ended 28 February 2013 and 2014
2014 2013
Sales (The total for 2014 includes credit sales of R426 320.) 608 820 600 600
Cost of sales 405 880 400 400
Profit before tax 210 000 154 800
Income tax 73 500 54 180
Interest expense 9 750 12 000
Extract from the Post-closing Trial Balance for the years ended 28 February 2013 and 2014
2014 2013
Ordinary share capital (The issue rate per share is R1,50.) 420 000 300 000
Long-term liabilities (15% p.a.) 50 000 80 000
Land and buildings 399 490 204 560
Equipment at carrying value 94 320 122 320
Vehicles at carrying value 138 400 184 540
Trading inventory 103 450 63 350
Debtors control 64 150 52 650
Cash 11 360 –
Creditors control 87 760 90 530
Accrued expenses 16 800 12 750
SARS (income tax) 2 610 (cr) 4 140 (cr)
Acc GR12 LB.indb 151 6/6/13 6:03:23 PM

You are presented with extracts from the financial statements of EC Limited, a registered
company with authorised shares of 2 000 000 ordinary shares.
Required
1. Calculate the following:
a. The date on which the additional loan was made. Take into consideration that the
interest on the loan is 20% p.a.
b. The acid test ratio and the current ratio for 2011
c. The debt/equity (gearing) ratio as on 28 February 2011
d. The return on average shareholders’ equity on 28 February 2011
2. Comment on the company’s liquidity. Refer to your calculation in Question 1b and
consider the fact that the acid test ratio in 2010 was 0,7 : 1 and that the current ratio
in 2010 was 1,5 : 1.
3. a. At what price were the additional shares issued?
b. Will you sell the shares you hold in this company for 65 cents each?
(Hint: Calculate the net asset value per share before you answer this question.)
c. If the market price on the JSE Securities Exchange South Africa were 80 cents per
share, would you buy additional shares in this company? Consider the following
before you answer: dividends per share, gearing ratio, liquidity, net asset value,
and so on.
d. What did the company invest in during the current financial year?
e. List two possible reasons why the company could have sold one of its vehicles
during the year.
f. Why is depreciation added back to profit before tax in the Cash Flow Statement?
g. Explain why the increase in stock is seen as an outflow of cash.
h. Which activities could have caused the significant increase in the bank balance?
i. There was an increase in debtors from 2010 to 2011 and a decrease in creditors
from 2010 to 2011. Explain, by referring to the notes, why this was not good for the
cash flow of the business during the current year.
j. Nearly all of the profits after tax for 2011 were allocated to shareholders in the
form of dividends. In your opinion, will shareholders be happy with this decision?
(Refer to the Retained income note.)
Information
Extract from the Income Statements for the years ended 28 February 2013 and 2014
2011 2010
Profit before tax 214 200 150 754
Income tax 85 680 60 300
Acc GR12 LB.indb 152 6/6/13 6:03:23 PM

EC Limited
BALANCE SHEET AS AT 28 FEBRUARY 2011
Note R R
ASSETS 2011 2010
Tangible assets (carrying value) 3 673 600 566 600
Financial assets: Fixed deposit 5 000 20 000

Inventories 4 102 600 98 300
TOTAL ASSETS 914 560 770 050

Share capital 7 576 600 375 000
Mortgage loan: Investec Bank (20%) 120 000 100 000


Cost 450 000 138 000 80 000
Cost 500 000 163 000 110 000
• On 28 February 2011, EC Limited bought a new vehicle from Marais Motors on credit.
The old vehicle with a cost price of R65 000 was traded in at the carrying value of
R31 200 on the same day.
• No equipment was sold during the financial year, although equipment was bought.
Acc GR12 LB.indb 153 6/6/13 6:03:23 PM

28 Feb 2011 28 Feb 2010
109 560 84 350

28 Feb 2011 28 Feb 2010
Bank 23 000 –
Cash float 600 600
Petty cash 200 200
23 800 800

AUTHORISED
Number of authorised ordinary shares: 2 000 000
ISSUED
1 060 000 ordinary shares in issue at the end of the year 576 600
8. RETAINED INCOME
28 Feb 2011 28 Feb 2010
Net profit (loss) after tax for the year 128 520 90 454

28 Feb 2011 28 Feb 2010
38 010 90 760
Acc GR12 LB.indb 154 6/6/13 6:03:23 PM

EC Limited
CASH FLOW STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2011
Note R
Cash effects of operating activities (41 620)
Cash effects of investing activities 153 800

Proceeds from sale of fixed assets (65 000 – 38 800) 31 200
Investments matured/placed 15 000
Cash effects of financing activities 221 600

Proceeds from shares issued 201 600
Long-term loans received/paid 20 000
Net change in cash and cash equivalents 2 56 180

Cash and cash equivalents at the beginning of the year 2 (32 380)
EC Limited
NOTES TO THE CASH FLOW STATEMENT FOR THE YEAR ENDED 28 FEBRUARY 2011
1. RECONCILIATION BETWEEN NET PROFIT BEFORE TAX AND CASH GENERATED FROM
OPERATIONS
Net profit before taxation 214 200
Adjustments in respect of:
Depreciation 31 800
Cash effects of changes in working capital (75 600)
Change in inventory (4 300)
Change in receivables (20 350)
Change in payables (50 950)
Cash generated from operations 191 400

Bank 56 180 23 000 (33 180)
Cash float – 600 600
Petty cash – 200 200
56 180 23 800 (32 380)
Acc GR12 LB.indb 155 6/6/13 6:03:23 PM

3. DIVIDENDS PAID
Dividends for year as reflected in financial statements (119 680)
Dividends paid (114 280)
4. INCOME TAX PAID

Income tax for year as reflected in financial statements (85 680)
Balance at the end of the year (4 860)
Income tax paid (97 740)
5. FIXED ASSETS PURCHASED

Land and buildings (50 000)
Vehicles (90 000)
Equipment (30 000)
(170 000)
The financial indicators of AT Ltd. for the past two years are supplied.
Required
Study the information below and answer the questions that follow. The appropriate
financial indicators must be quoted is in your answers.
Financial indicators 2015 2014
Operating profit on sales 30% 28%
Net income after tax on sales 20% 25%
Current ratio 4,9 : 1 2,1 : 1
Acid test ratio 1,7 : 1 1,1 : 1
Stock turnover velocity 5,9 times 3,8 times
Solvency ratio 3,4 : 1 5,8 : 1
Debt/shareholders’ interest ratio 0,34 : 1 0,09 : 1
Return on total capital employed 23% 32%
Return on shareholders’ interest 32% 37%
Dividends per share (DPS) 25 cents 19 cents
Earnings per share (EPS) 30 cents 35 cents
Net asset value per share (NAV) 134 cents 129 cents
Market value per share 142 cents 151 cents
1. Does the company have a liquidity problem? Explain briefly. Refer to the liquidity
ratios as well as the stock turnover velocity.
2. A director has enquired about the operating profit on sales, which have improved,
whereas the percentage net profit (before tax) on sales has decreased. Supply the
director with a brief explanation.
3. AT Ltd. is considering taking out an additional long-term loan of R100 000 at 19%
interest p.a. What advice would you give the directors? Keep in mind that the current
loan R100 000 is. In your explanation refer to the debt/shareholders’ interest ratio and
any other relevant financial indicators.
Acc GR12 LB.indb 156 6/6/13 6:03:24 PM

4. As a shareholder of AT Ltd., will you be satisfied with the performance of the company
for 2015? Refer specifically to the percentage returns, DPA and VPA.
5. The nominal value of the shares at AT Ltd. is R1,00. Shares are offered to the existing
investors at R1,29. Will you consider buying additional shares in this company? Explain
your answer briefly, and supply two reasons for your opinion.
Activity 4.8
The information provided was extracted from the accounting records of Geco Ltd. The
company has an authorised share capital of 1500 000 ordinary shares.
Required
1. Complete the Cash Flow Statement for the year ended 28 February 2011. Notes to the
Cash Flow Statement are not required. However, calculations must be shown.
2. Calculate the acid test ratio on 28 February 2011 and comment on the liquidity of the
company. The acid test ratio in 2010 was 0,9 : 1.
3. Calculate the net asset value (NAV) per share for the year ended 28 February 2011.
4. Calculate the following for the year ended 28 February 2011 and comment briefly:
a. the average debtors collection period
b. the average creditors payment period.
5. Calculate the stock turnover rate for the year ended 28 February 2011.
Information
2011 2010
Ordinary share capital 678 000 440 000
Loan: TKZ Bank 130 000 170 000
Tangible assets at carrying value 549 000 420 000
Inventory 61 000 73 000
Bank (favourable) 30 130 –
SARS (income tax) (cr) – 10 000
SARS (income tax) (dr) 4 000 –
Prepaid expenses 320 600
Sales (all on credit) 1 295 100
Depreciation: On vehicles 28 000
On equipment 30 000
The company marks up its goods at 80% on the cost price.

Credit purchases of stock for the current financial year amounted to R541 200.
Acc GR12 LB.indb 157 6/6/13 6:03:24 PM

• Changes in working capital were calculated to be negative R37 870.
• The company’s total dividend for the year ended 28 February 2011 was R60 000.
• The note for tangible assets appears as follows:

Cost 180 000 200 000 120 000
Cost 320 000 160 000 190 000
A vehicle was sold at carrying value during the financial year, while no new vehicles were
bought.
New equipment was purchased during the financial year, while no equipment
was sold.

Marks: 80 Time: 1 hour
The financial year of White Water Adventures Ltd. ends annually on 28 February.
Required
1. Complete the following General Ledger accounts:
1.1 Accumulated depreciation on vehicles (8 lines) [8]
1.2 Asset disposal (6 lines) [3]
1.3 Appropriation account (6 lines) [6]
2. Complete the following notes to the Cash Flow Statement:
2.1 Reconciliation between profit before tax and cash generated from
operations [18]
2.2 Income tax paid [6]
2.3 Dividends paid [6]
3. Show only the section for financing activities in the Cash Flow Statement for the
year ended 28 February 2011. [5]
4. Answer the questions below. Show workings, where applicable, to two
decimal places.
4.1 Calculate the profit mark-up on credit sales. The profit mark-up on cash sales
is 50%. Why would the mark-up on cash sales differ from the mark-up on credit
sales? Comment briefly. [5]
4.2 Calculate the net asset value (NAV) per share on 28 February 2011. [5]
4.3 The new shares were issued at 225 cents per share. Comment briefly on the
price of the newly issued shares. Refer to the net asset value as calculated in
question 4b. [4]
4.4 Identify two possible ways in which the funds from the issue of the shares
were used. [4]
4.5 Calculate the average debtors collection period for the year ended
28 February 2011. [4]
4.6 Name three options that the company can consider to improve its liquidity. [6]
Acc GR12 LB.indb 158 6/6/13 6:03:24 PM

Information
2011 2010
Sales 745 000 560 000
Cost of sales 478 750 359 860
Depreciation ? 14 800
Income tax 58 800 33 600
Sales for 2011 are made up as follows:

Cash sales 315 000
Credit sales 430 000
Cost of sales for 2011 is made up as follows:

Cost price of cash sales 210 000
Cost price of credit sales 268 750

Notes 2011 2010
Ordinary share capital 575 000 350 000
Long-term loan (12,5% p.a.) 140 000 200 000
Tangible assets at carrying value 2 656 330 475 000
Inventory 204 000 189 000
Bank (dr) 18 700 –
Additional information and notes to the financial statements

• White Water Adventures Ltd. has an authorised share capital of 500 000 ordinary
shares. On 28 February 2010 200 000 shares were in issue.

Cost 270 000 280 000 54 700
Cost 360 000 320 000 80 630
A vehicle with a cost price of R110 000 was sold on 31 August 2010 at the carrying value
of R50 000 cash. The depreciation written off for the period 1 March 2010 to 31 August
2010 amounts to R9 000.
Acc GR12 LB.indb 159 6/6/13 6:03:24 PM

2011 2010
188 100 148 400

2011 2010
118 400 104 200
Case study 4.1
The following articles appeared in the Fin Week Top 200, 2006. Read through the articles
and discuss in class.
Article 1
ONE OF THE MOST EFFECTIVE MEASURES

In THIS YEAR’S [2006] SuRVEY of the acid test ratio or quick ratio of companies, it
would seem that a cash cow once again occupies the top position on the list.
last year, the top position was filled by Wooltru (with an acid test ratio of 116),
but this year it’s Gencor’s turn to shine (30). Wooltru, who paid out most of its
cash to shareholders in 2005, has ended this year in ethical position with a more
reasonable quick ratio of 14.
The acid test ratio (or quick ratio) is one of the most effective measures used to
determine the financial status of a company. It’s very much like a doctor taking the
pulse of a patient.
To calculate the acid test ratio, the value of the company’s current assets
(excluding inventory) is divided by its current liabilities. It is without doubt the
quickest and simplest way of determining how solvent a company really is.
So, if a company has current assets amounting to R50 million and current
liabilities amounting to R25 million, creditors would have no reason to be nervous
should the company fail to make a good profit one year.
However, creditors (including banks) would start getting edgy if a company
that is experience tough financial times, reports that their current assets of
R5 million are overshadowed by their current liabilities of R65 million. This means
that, should the current assets be liquidated, it would not raise enough funds to
cover the current obligations (liabilities). And if the fixed assets are rather sparse as
well, then creditors will really start worrying in earnest.
It stands to reason that cash cows such as Gencor and Wooltru, as well as
cash-rich investments such as Enterprise Risk management, Venfin and Real Africa
Holdings, find themselves high on the list of top performers. They have minimal
(if any) current liabilities, because they don’t have to borrow money for new
investments and don’t need to take out interest-bearing loans to finance their
business activities.
most companies that feature in the top 20 are either cash cows (moribo, m Cubed,
Village and nail) or a type of investment trust (Purple Capital, Arch Equity and Johnnic).
MARC HASENFUSS
Acc GR12 LB.indb 160 6/6/13 6:03:25 PM

Article 2
Investment in South Africa Capital structures
STRONG BALANCE SHEETS

WEAKENED CAPITAL STRUCTURES IN A FEW SECTORS ONLY
IT’S RATHER ConSPICuouS that most of the notarised companies displayed
exceptionally strong Balance Sheets at the end of 2005. Some analysts feel it
may be too strong, and that South African companies don’t use debt financing
often enough.
The capital structures of practically all the large companies have improved
over the past five years, even after they paid out high dividends. many companies
have lowered their dividend cover over the past few years, have paid out special
dividends and returned capital to shareholders through a reduction of capital or
buy-back of shares.
Thanks to strong cash flows and sound capital and asset management, Balance
Sheets continue to strengthen.
The debt ratio of most companies has improved tremendously. long- and
short-term liabilities as a percentage of total capital has, in most instances,
decreased. In some instances, the debt ratio dropped by more than half.
In the case of the two telecommunications sectors – nowadays there is one
for cellular phone companies and one for landlines – the ratio of long-term
liabilities to capital has improved, since the debt incurred to build expensive
communications networks has been reduced each year by the strong cash flow
that has emanated from these networks.
Telkom’s long-term liabilities have decreased from R25 milliard to a mere
R12 milliard in 2005. mTn’s long-term liabilities have dropped from R5,3 milliard
to R3,4 milliard.
The metal production sector’s average ratio of long-term liabilities to total
capital has decreased from 32% to only 8,6%, despite high dividend payments and
a few special dividends.
once again, companies have benefited from a strong cash-flow position and
the completion of capital projects several years ago.
Another noticeable change has been observed in the media sector, where
long-term liabilities, from a high point of 54% of total capital in 2000, dropped to
a very improved 14%. The ratio of shareholders’ equity to total capital improved
from only 18% to an impressive 49%. This was mainly ascribed to the restructuring
of naspers, the largest company in this sector, in which they disposed of their
international television interests (as well as their drain on capital).
There are a few sectors whose capital structures have weakened compared
to five years ago. The most noticeable changes occurred in the computer industry,
which did not experience as many good days’ trading as in the commodities market.
ADRIAAN KRUGER
F I n A n C I A l A C C o u n T I n G o F C o m PA n I E S – A n A lY S I S A n d I n T E R P R E TAT I o n o F F I n A n C I A l S TAT E m E n T S • C h a p t e r 4 161
Acc GR12 LB.indb 161 6/6/13 6:03:27 PM

Article 3
Performance measurement Stock turnover rate
REVEALING RATIO
COMPARING APPLES WITH APPLES
THE SToCk TuRnoVER RATE is a revealing ratio – but it is not a measure that can
be applied across all sectors.
It’s not reasonable to compare the stock turnover rate of a company in the
services sector with that of a company in the motor vehicle industry, for example.
The one has practically no trading stock, while the other has the tough task of
trying to move capital goods off the sales floors of dealerships.
The stock turnover rate is the number of times per year a company turns over
its stock (in other words, sells its stock).
At the top of the list (rather predictably) are the service-orientated companies
such as the Tote-betting Phumelela, as well as technology providers AdC,
Compuclearing and EoH.
Classic service companies such as Primeserv, Command Holdings, City lodge
and AdvTECH also performed well, while the trinity of notarised casino operators
(Gold Reef, Peermont and Sun International) are also among the leaders.
The true test of the stock turnover rate, however, lies within the companies
that specialise in getting the goods to the consumer, such as food distributors
and retailers.
The winner of the retailer section (and 46th overall) is Spar, with a rather
impressive stock turnover rate of 38 times. With that rate they beat their
supermarket competitors Woolworths (19 times), Pick n Pay (18) and Shoprite (11).
It’s interesting to note that Spar’s turnover increased from last year’s 36%, while
Pick n Pay and Shoprite’s turnovers dropped slightly.
Fashion retailer Truworths achieved a stock turnover rate of 14 times, while
the furniture group lewis is in a favourable position with nearly 16 times. The
automotive retailer Combined motor Holdings had an excellent stock turnover
rate of nearly 7,5 times.
Fruit and vegetables exported Intertrading is leading the food companies with
a stock turnover rate of 137 times. Intertrading’s position on the list may be slightly
distorted due to the fact that the group also has a sizable services component that
is involved in the distribution of consumable commodities.
The poultry groups – Astral (26 times), Rainbow (16) and Sovereign (15) – fared
rather well, as did the sugar groups Illovo (11) and Crookes (17). It would appear
that the fishing group oceana, which has suffered some difficult economic trading
conditions during recent times, has dropped slightly compared to its peers in the
food sector, with a stock turnover rate of 9 times.
When looking at the large manufacturing companies, SABmiller has achieved a
bubbling stock turnover rate of 21 times, while PPC (which is reflecting the revival
in the development of the country’s infrastructure) achieved 18 times and Afrox a
decent 16 times.
It would seem that some of the ‘lighter’ industrial companies also did well, such
as Control Instruments (12 times), Howden (9), Steinhoff International (9) and kAP
International (9).
MARC HASENFUSS
Acc GR12 LB.indb 162 6/6/13 6:03:29 PM

Chapter 5
analysis of published financial statements
• Analyse and interpret the published Statement of Comprehensive Income of a • Directors’ Report
public company • Independent
• Analyse and interpret the published Statement Financial Position of a public Auditor’s Report
company • Abridged Statement
• Analyse and interpret the published Statement of Cash Flows of a public of Comprehensive
company Income (Income
• Analyse and interpret the published Directors’ Report of a public company Statement) • Abridged
• Analyse and interpret the published Independent Auditor’s Report of a public Statement of Financial
company Position (Balance Sheet)
• Abridged Statement of
• Discuss issues of good corporate governance
Cash Flows (Cash Flow
• Discuss the ethical issues arising from corporate governance
Statement) • corporate
governance
Have you read the auditor’s report
yet, Mrs Patel?
Yes I did, but I don’t understand

what they mean by “unqualified
audit opinion”.
It means they are happy with the

results of our audit.
F i n a n cia l acc o u n ti n g o f c o m pa n ies – a n a lysis o f p u b l ishe d fi n a n cia l state m e n ts • C h a p t e r 5 163
Acc GR12 LB.indb 163 6/6/13 6:03:29 PM

1. Introduction
disclosure laws Public companies are subject to detailed disclosure laws about their operating
results, financial position, cash flow position, management compensation and
laws that state what information a
company must release to the public other areas of their business. Disclosure laws are designed to protect shareholders
by revealing important operational and financial information.
2. Disclosure requirements
In Chapter 3, you prepared detailed financial statements for financial reporting
and internal use. These were used to reflect on the historic information of the past
financial year and to plan (forecast) for the next financial year.
According to the Companies Act, however, a public company is required
abridged to prepare a report in which an abridged version of the financial statements is
published. These abridged financial statements are published in the Annual Report,
shortened
which is a glossy yet more concise version of the actual financial statements. Those
reading the abridged financial statements are not too concerned about the detail of
smaller items, so certain items don’t need to be disclosed. Only material items have
to be disclosed in the abridged financial statements.
3. The Annual Report

The Annual Report consists of five main components:
• Statement of Comprehensive Income (Income Statement)
• Statement of Financial Position (Balance Sheet)
• Statement of Cash Flows (Cash Flow Statement)
• Directors’ Report
• Independent Auditor’s Report
The Annual Report is issued to all shareholders and is published in major
newspapers and financial publications soon after the end of the company’s
financial year. It is usually published on the company’s website as well.
Activity 5.1
Fill in the missing words by matching the components of the Annual Report to the correct
descriptions.
Components:
Statement of Financial Position Directors’ Report Independent Auditor’s Report
Statement of Cash Flows Statement of Comprehensive Income
1. The __________ reflects the operating profit, income tax and net profit for the
financial year.
2. The __________ reflects the net worth of the company as well as its assets and
liabilities.
3. The __________ shows how the operating activities of the company affect the liquid
funds of the company.
4. The __________ expresses in verbal terms how the company has performed over the
past year and explains other information not found in the financial statements.
5. The __________ expresses an opinion on whether the financial statements of the
company are reliable or not.
164 Chapter 5 • F i n a n cia l acc o u n ti n g o f c o m pa n ies – a n a lysis o f p u b l ishe d fi n a n cia l state m e n ts
Acc GR12 LB.indb 164 6/6/13 6:03:29 PM

4. Published financial statements of a public company
To explain financial statements of a company better, we will analyse and discuss
an actual example of financial reports, using Shoprite Holdings Ltd’s 2011 Annual
Report. Shoprite Holdings Ltd. is Africa's largest food retailer and operates 1 303
corporate and 427 franchise outlets in 17 countries across Africa and the Indian
Ocean Islands. They reported turnover of R41,054 billion for the six months ended
December 2011.
The company's headquarters are situated in the Western Cape. Shoprite
Holdings Ltd. is a public company listed on the JSE, with secondary listings
on both the Namibian and Zambian Stock Exchanges. Its ownership therefore
lies in the hands of its almost 5 000 shareholders. The group is continuing its
implementation of a strategic expansion programme to maintain its position as
the leading food retailer on the continent.
The statements are published in R’000 (Rand thousand) so is does not show
the last three zeros. For instance, an amount published as R72 297 777 in the
statements will actually be R72 297 777 000 (seventy-two billion, two hundred and
ninety-seven million, seven hundred and seventy-seven thousand rand)
In the next section we analyse each of the five main components of the Annual
Report of Shoprite Holdings Ltd.
5. Analysing the Annual Report

When analysing this report we will use the following calculations:
• The profitability of the company using the margin ratios
• The liquidity and efficiency of the company
• The solvency, gearing and risk of the company
• The return ratios of the company
• The returns earned by the company and by the shareholders using the
market value ratios
As discussed in Chapter 4, the following guidelines should be followed when
commenting on a ratio:
• State whether the ratio has increased or decreased in comparison to the
previous year.
• State what the reason(s) could be for the increase or decrease.
• Reach a conclusion on the company’s performance.
5.1 Profitability of the company

5.1.1 Background on profitability ratios
This indicates if a company is generating a profit and an adequate return on assets
and equity invested in the company. It can also indicate how efficient a company is
using its assets and how effectively it manages operations. Profitability ratios can
be divided into margins and returns. Margin ratios are the gross profit margin,
operating profit margin and net profit margin. Return ratios are return on
shareholders’ equity and return on total capital employed. We will analyse return
ratios later in this chapter.
5.1.2 Margin ratios used

• Gross profit on sales
• Gross profit on cost of sales
• Net profit on sales
• Operating expenses on sales
Acc GR12 LB.indb 165 6/6/13 6:03:29 PM

To analyse the profitability of the company we use the information on the
Statement of Comprehensive Income (Income Statement).
used as
operating
expenses
166 Chapter 5 • F I n A n C I A l A C C o u n T I n G o F C o m PA n I E S – A n A lY S I S o F P u B l I S H E d F I n A n C I A l S TAT E m E n T S
Acc GR12 LB.indb 166 6/6/13 6:03:29 PM

Calculation Calculation Result The ratios have already been
Margin ratio calculated using the correct
2011 2010 2011 2010
Gross profit on sales formulas. Refer to Chapter 4 pages 135
1. _________ 100
14 673 369 × ____ 13 254 592 × ____
_________ 100 20,3% 19,7%
(turnover) 72 297 777 1 67 402 440 1 to 136 to familiarise yourself with all the
ratios and formulas again.
Gross profit on cost _________ 100
14 673 369 × ____ 13 254 592 × ____
_________ 100
2. 25,5% 24,5%
of sales 57 624 408 1 54 147 848 1
3. Net profit on sales _________ 100

2 529 542 × ____ 2 287 296 × ____
_________ 100 3,5% 3,4%
72 297 777 1 67 402 440 1
Operating expenses _________ 100
12 542 513 × ____ 11 340 279 × ____
_________ 100
4. 17,3% 16,8%
on sales 72 297 777 1 67 402 440 1
Operating profit on _________ 100
3 907 718 × ____ 3 387 037 × ____
_________ 100
5. 5,4% 5,0%
sales 72 297 777 1 67 402 440 1
5.1.3 Comments on profitability using margin ratios

• Gross profit on sales is higher in 2011 and this had a positive effect (caused it
to be higher) on operating profit as well as net profit on sales.
• Gross profit on cost of sales is higher in 2011 which means that they earned
more profit from their stock. This could be because they used a higher mark-up
percentage in 2011 compared to 2010, or they could have sourced cheaper stock
which affects cost of sales.
• Operating expenses on sales is higher in 2011 which means that they spent
more on expenses in relation to sales in 2011 than they did in 2010. Even
though expenses are higher, it did not have a negative effect (cause to be lower)
on operating profit on sales because gross profit is higher.
Conclusion
Profitability of the Shoprite Holdings Ltd. has remained relatively constant with
only minor changes in certain ratios. All the ratios have increased from 2010 to
2011, yet the changes are not significant.
5.2 Liquidity and efficiency of the company

5.2.1 Background on liquidity and efficiency
The liquidity ratios focus on the company’s ability to pay short-term obligations,
such as creditors, short-term loans, shareholders for dividends and SARS. The
liquidity ratios are the current ratio and acid test ratio. The stock turnover rate,
debtors collection period and creditors payment period can help to indicate why
there are problems with liquidity.
The efficiency ratios indicate how efficient a company uses its assets and
resources to produce sales. The ratios that can be used are stock turnover rate,
stock holding period, debtors collection period and creditors payment period.
5.2.2 Liquidity and efficiency ratios used

• Current ratio
• Acid test ratio
• Stock turnover rate
• Stock holding period
• Average debtors collection period
• Average creditors payment period
F I n A n C I A l A C C o u n T I n G o F C o m PA n I E S – A n A lY S I S o F P u B l I S H E d F I n A n C I A l S TAT E m E n T S • C h a p t e r 5 167
Acc GR12 LB.indb 167 6/6/13 6:03:30 PM

To analyse the liquidity and efficiency of the company, we will look at the
Statement of Financial Position (Balance Sheet) as well as the Statement of
Comprehensive Income (Income Statement).
Acc GR12 LB.indb 168 6/6/13 6:03:30 PM

Liquidity/ Calculation Calculation Result The ratios have already been
efficiency 2011 2010 2011 2010 calculated using the correct
ratio formulas. Refer to Chapter 4 pages 135
1. Current ratio 11 357 577 : 12 450 311 10 416 433 : 10 985 656 0,9 : 1 0,95 : 1 to 136 to familiarise yourself with all the
(11 357 577 – 7 055 867): (10 416 433 – 6 114 538):
2. Acid test ratio 0,35 : 1 0,39 :1
12 450 311 10 985 656
57 624 408
_________ 54 147 848
_________
Stock turnover 6 585 202 6 114 538 8,75 8,8
3.
rate (average inventory) (inventory 2010) times times
Stock holding 6 585 202 × ____

_________ 365 6 114 538 × ____
_________ 365 41,7 41,2
4.
period 57 624 408 1 54 147 848 1 days days
Average debtors
5. collection *
period
Average
6. creditors #
payment period
5.2.3 Comments on liquidity and efficiency

• Current ratio decreased from 2010 to 2011 by 0,05 (5 cents). For every R1 they
owe their creditors they have 90 cents.
• Acid test ratio decreased from 2010 to 2011 by 0,04 (4 cents). For every R1 they
owe their creditors they have 35 cents in liquid assets (debtors and cash).
Conclusions
Current and acid test ratios
Although this business has quite a high stock holding they operate in a
predominantly cash environment (they are a supermarket) so they will not
struggle to pay back their creditors. A business of this particular nature must hold
a large amount of stock.
Rate of stock turnover and stock holding period

There has not been a significant change in these indicators. On average they
replace stock every 41 days which is good for a business in this type on industry.
The company sells a variety of stock item from furniture (low stock turnover rate)
to perishable items (very high stock turnover rate).
Average debtors collection and creditors payment period

* The group sells furniture on an instalment sale basis which means that debtors
purchase furniture over a two-year period. Credit sales are not available in the
financials.
# No information was available in the financials with regards to credit purchases.
5.3 Solvency and financial leverage (risk indicators or gearing)

of the company
5.3.1 Background on gearing and risk
These ratios indicate how a company is financed, and whether they will be able to
meet long-term obligations. It also highlights the company’s risk factor.
5.3.2 Financial leverage (debt) ratios used

• Solvency ratio
• Debt : equity ratio
Acc GR12 LB.indb 169 6/6/13 6:03:30 PM

To analyse the liquidity, risk, gearing and solvency of the company we will look at
the Statement of Financial Position (Balance Sheet).
The ratios have already been Solvency/debt Calculation Calculation Result

calculated using the correct ratio 2011 2010 2011 2010
formulas. Refer to Chapter 4 pages 135
1. Solvency ratio 20 703 757 : 13 560 307 17 991 697 : 12 019 681 1,53 : 1 1,50 : 1
to 136 to familiarise yourself with all the
2. Debt : Equity ratio 26 177 : 7 143 450 21 534 : 5 972 016 0,003 : 1 0,003 :1
5.3.3 Comments on financial leverage

• Solvency ratio increased from 2010 to 2011 by 0,03 (3 cents). For every R1 owe
in total liabilities they have R1,53 with which to pay them. The company is
solvent and they can repay all their liabilities comfortably.
• Debt : Equity ratio remained the same. Their gearing is very low and they
have very little borrowed capital in relation to their equity (own capital). Their
financial leverage is favourable and they are credit worthy.
Conclusion
This is a low-risk company to invest in because they are solvent and their gearing is
low. They will be able to meet their obligations very comfortably.
5.4 Returns ratios

5.4.1 Background on returns ratios
Return ratios are the return on average shareholders’ equity and the return on
average capital employed. This forms part of the profitability ratios discussed in
Section 5.1 of this chapter.
5.4.2 Returns ratios used

• Return on average shareholders’ equity
• Return on average capital employed
To analyse the returns earned by the company we will look at the Statement of
Comprehensive Income as well as the Statement of Financial Position.
The ratios have already been Calculation Calculation Result

Returns ratio
calculated using the correct 2011 2010 2011 2010
formulas. Refer to Chapter 4 pages 135 Return on average _________ 100
2 529 542 × ____ 2 287 296 × ____
________ 100
1. 38,6% 38,3%
to 136 to familiarise yourself with all the shareholders’ equity 6 557 733 1 5 972 016 1
ratios and formulas again. Return on average 3 492 778 × ____
100
2. ________ 100
4 002 332 × ____ ________ 52,5% 49,9%
capital employed 7 629 743 1 7 006 041 1
5.4.3 Comments on returns ratios

• Return on shareholders’ equity remained the same at 38%. This is a good
return on their investment in the company. When compared with an alternative
investment in a bank, this investment is very good and was a worthwhile
investment for the shareholder. Shareholders will be happy with this return
earned by the company on their equity.
• Return on capital employed increased by 2,6% from 2010 to 2011. This
percentage return on capital employed is very good and the company is using
their resources very well. The percentage earned on capital employed is much
higher than the interest paid on borrowed finance (probably 8% to 10%). The
increase can be attributed to the increase in operating profit from 2010 to 2011
while borrowing remained relatively stable.
Acc GR12 LB.indb 170 6/6/13 6:03:30 PM

Conclusion
The company is earning good returns on the invested capital, own and borrowed.
5.5 Market value ratios

5.5.1 Background on market value ratios
The market ratios will be used by investors and management to see how the
company is performing compared to others in the same industry. They also allow
you to compare the one year with next for your own company.
5.5.2 Market value ratios used

• Earnings per share
• Dividends per share
• Market price per share as on the JSE.
To analyse the market value ratios we will look at the Statement of
Comprehensive Income as well as the Statement of Financial Position.
Result
Market value ratio
2011 2011
1. Earnings per share (EPS) 495,9 cents 450,1 cents Compare
these with
2. Dividends per share (DPS) 253 cents 227 cents each other
3. Net asset value per share (NAV PS) 1 400 cents 1 167 cents Compare
these with
4. Market price per share (MPPS) 10 180 cents 8 285 cents each other
5.5.3 Comments on market value ratios

• Earnings per share and dividends per share shows that the company earned
495,9 cents per share and paid and declared dividends of 253 cents per share.
The company has thus retained 243 cents per share for growth and expansion.
The earnings per share and dividends per share both increased by about 10%
from the previous year.
• The net asset value per share increased by almost 20% from the previous year.
This shows that the company is growing fairly rapidly. The company’s market price
per share on the JSE is significantly higher than its net asset value per share. This
means that its shares are in demand and potential shareholders are prepared to pay
considerably more than the NAVPS for a share. This shows that investors are investing
in the company based on its profitability rather than its underlying net asset value.
Conclusion
This company is an established company and has produced very good financial
results over the past years. The shareholders should be satisfied with both the
earnings per share and the dividends per share for 2011.
6. Statement of Cash Flows (Cash Flow Statement)

As discussed in Chapter 3, the Statement of Cash Flows reflects the effect of
business activities on cash flows. By interpreting the Statement of Cash Flows we
should be able to answer the following questions:
• Are the normal day-to-day activities sufficient for the company to pay its debts?
• What did the company do with surplus cash?
• Can this company sustain itself in the long term?
• Why did the company need to borrow money during the year?
• What was the borrowed money used to finance?
Acc GR12 LB.indb 171 6/6/13 6:03:30 PM

The Cash Flow Statement consists of three main types of activities:
a) Cash flows from operating activities: these are the main income-earning
activities of the company and are the most important indicator of the
company’s success. This amount must be positive to indicate that the company
Denotes where the money came from is successful and that they generated cash from their activities
b) Cash flows from financing activities: these activities fund the infrastructure
of the company. This includes issuing more shares, borrowing funds and paying
back loans.
c) Cash flows from investing activities: these involve the actual establishment of
the infrastructure that came from investing activities. This includes expanding
Denotes what the money was spent on
the business by buying buildings, refurbishing premises and acquiring other
fixed assets in order to increase profit making potential.
The directors and shareholders want see a positive cash flow from these activities
to ensure that the sustainability of the company is secure. The three activities
reflect cash effects which result from deliberate and intentional decisions made by
the directors and also at which level of efficiency the company is operating.
To analyse these effects let’s look at the Statement of Cash Flows for Shoprite
Holdings Ltd.
Acc GR12 LB.indb 172 6/6/13 6:03:31 PM

Comments on Statement of Cash Flows
• Cash flows from operating activities is a positive amount of R1 543 646 000
(one billion, five hundred and forty-three million, six hundred and forty-six
thousand rand) for the year ended 30 June 2011.
• Working capital, which are the funds needed in order to support the trading
activities of the company, shows an outflow of R1 324 359 000 (an outflow of
cash is seen in brackets). This means that net working capital (current assets –
current liabilities) resulted in a cash outflow for the financial year under review.
This does not have to be seen as a negative amount because the operating profit
is positive and in order to generate the operating profit, the operations had to
be financed by working capital.
• Cash flows from investing activities is a negative amount of R2 937 011 000.
This is as a result of the purchase of more buildings (information obtained
from the notes). This means that the business expanded, thereby expanding
their profit-making potential.
• Cash flows from financing activities is a positive amount of R9 329 000 which
is an increase in borrowed funds (obtained from notes). They borrowed more
money so cash flowed into the business, which is why the amount is positive.
7. Directors’ Report
The Annual Report of a company must include a Directors’ Report. The Directors’
Report is prepared by the Board of Directors and should include the following:
• A declaration of directors’ responsibilities
• Compliance with financial reporting regulations such as the Companies Act,
IFRS, King III and JSE listing requirements
• Existence of system of internal control as risk management within the entity
• Conclusion on quality of internal controls, financial records, accounting
policies and financial statements
• The state of affairs, the business and profit or loss of the company
• Going concern: the Board will review the financial position of the company to
conclude if it has adequate resources to continue with operations in the future.
• Approval of financial statements by the Board of Directors and signed by an
authorised director
The next two pages contain the Directors’ Report of Shoprite Holdings Ltd.
Acc GR12 LB.indb 173 6/6/13 6:03:31 PM

Acc GR12 LB.indb 174 6/6/13 6:03:31 PM

Acc GR12 LB.indb 175 6/6/13 6:03:31 PM

8. The Independent Auditor’s Report
All public companies must appoint a registered (in terms of the Auditing
Professional Act), independent auditor at every AGM. Where a firm is appointed
as auditor, the audit committee must also verify the independence of the
individual that will be responsible for the audit. The Act provides for the regular
rotation of auditors. The designated auditor must be rotated every five years. The
Audit and Risk Committee independent auditor expresses an opinion on the financial statements and indicates
whether the reader can rely on the financial statements.
An audit committee must be appointed
every year at the AGM. The audit An external audit gives an independent (outsider’s) review on a company’s
committee should consist of at least three financial information and provides assurance on the accuracy and reliability of
directors of the company who are not financial disclosures. The Independent Auditor’s Report provides shareholders
involved in the day-to-day management with an objective opinion of the company’s financial position and whether they
of the company and who are not full-time followed accounting rules and principles. The Auditor’s Report is reviewed by the
executive employees of the company.
Audit and Risk Committee.
The Auditor’s Report is a formal opinion given by an independent external
auditor based on their external audit on the company. An Auditor’s Report is
considered an important tool when reporting financial information to the users of
the financial information of the company.
The Auditor’s Report will inform one of the following results:
• An unqualified opinion
• A qualified opinion, or
• An adverse opinion.
An unqualified audit report – also known as a clean report – means that the
external auditor finds the financial statements to be free from discrepancies and
that it gives a true and fair view of the financial reporting framework used in
preparing and presenting the financial statements.
The report will contain the following comment:
In our opinion, the financial statements fairly present, in all material respects, the
financial position of the company at 30 June 20… and the results of their operations
and cash flows for the year then ended in accordance with International Financial
Reporting Standards (IFRS) and in the manner required by the Companies Act in
South Africa.
A qualified audit report is issued when the external auditor encounters one or two
situations that do not comply with the prescribed accounting standards (IFRS/
GAAP). However, the rest of the financial statements are fairly presented.
In our opinion, the financial statements fairly present the financial position of the
company at 30 June 20…, except for the eﬀects of ……………….
An adverse audit report is issued when the external auditor determines that the
financial statements of the company being audited are materially misleading
and when considered as a whole do not conform to the prescribed accounting
standards (IFRS/GAAP).
In our opinion, because of the significance of ………...., the financial statements

DO NOT fairly present, in all material respects.......
Acc GR12 LB.indb 176 6/6/13 6:03:32 PM

An Auditor’s Report can often be divided in three paragraphs:
Paragraph 1 states the responsibilities of the auditor and that of the directors.
Paragraph 2 states that reporting standards such as GAAP and IFRS were used.
Paragraph 3 contains the opinion of the auditor.
Let’s look at the Independent Auditor’s Report of Shoprite Holdings Ltd.
Comment on the Auditor’s Report of Shoprite Holdings Ltd. The full Shoprite Holdings
The independent auditor was PricewaterhouseCoopers Inc. and they reported on Ltd. Annual Financial Report 2011
the fact that they have audited the financial statement of Shoprite Holdings Ltd. can be found at
as well as the Directors’ Report. They laid out the responsibilities of the directors http://www.shopriteholdings.co.za/
for the financial statements (paragraph 2) and their responsibilities (paragraph 3). files/1019812640/Investor_Centre_Files/
Annual_Reports/Annual-Report-2011/
They have found that the information obtained was sufficient and appropriate to
Annual%20Report%202011%20
provide a basis for their audit opinion. English_web.pdf
In their opinion they find that the audit is unqualified in all material respects
and that the company’s financial statements were fairly presented in line with the
International Financial Reporting Standards (IFRS).
Acc GR12 LB.indb 177 6/6/13 6:03:32 PM

Activity 5.2
You are provided with an extract from the Auditor’s Report for Brickfield manufacturers
ltd. Read the report and answer the questions that follow.
Extract from the Independent Auditor’s Report

The directors neglected to disclose the following. Included in the Trade debtors shown
on the Balance Sheet of 31 december 2020 and 31 december 2019 is an amount of R1
200 000 which is the subject of lawsuit and against which no provision for bad debt has
been made. In our opinion, full provision of R1 200 000 should have been in the year
ended 31 december 2019 and the amount written off as a bad debt in 2020.
Audit opinion
In our opinion, the financial statements fairly present the financial position of the
company at 31 december 2020, except for the financial effect of not making the
provision referred to in the preceding paragraph.
Blou & neku

Chartered Accountants (SA)
Registered Accountants and Auditors
Questions
1. What is the role of the independent auditor?
2. Who appoints the independent auditor? Why do they appoint the auditing company?
3. Explain the difference between an unqualified and a qualified audit report.
4. What type of report did Brickfield manufacturers ltd. receive: unqualified or qualified?
5. Explain what an adverse audit report is and why a company should not receive this
type of opinion of their financial results.
6. The CEo did not want to increase the provision for bad debts. He also didn’t want
to write off the debt because he wanted to inflate his asset value in the books. The
CEo’s instruction to the accountant was to not adjust debtors because this substantial
amount will have a negative effect on their financial results and on their liquidity and
market value ratios.
a. list five ratios that will be specifically affected by the decision not to write off the debt.
b. The CEo argues that the debtor should rightfully remain in the books until the
lawsuit has been concluded. However, the auditor believes that the amount
should have been written off. Briefly explain why the auditor feels this way.
c. Which GAAP principal is the CEo not complying with by keeping the debt in his
books?
Activity 5.3
You are provided with an extract from the Auditor’s Report for Arthur Allen ltd. Read the
report and answer the questions that follow.
Audit opinion
We have examined the financial statements set out on pages 8–32. In our opinion,
the financial statements fairly present, in all material respects, the financial position
of the company at 30 June 20… and the results of their operations and cash flows for
the year then ended in accordance with International Financial Reporting Standards
(IFRS) and in the manner required by the Companies Act in South Africa.
Blou & neku

Acc GR12 LB.indb 178 6/6/13 6:03:33 PM

Questions
1. State the type of report: unqualified or qualified.
2. Should the shareholders be satisfied or dissatisfied with the Auditor’s Report?
3. Why did the auditors mention the page numbers 8 – 32 in their report?
4. According to the Companies Act, all financial affairs of public companies must be
audited an independent external auditor. Why do you think that this is an important
requirement of the Act?
5. luzuko mangale, a trainee accountant, was appointed on the audit team to audit
Arthur Allen. However, her dad is a director at Arthur Allen. Her team manager is not
aware of this.
a. Should she continue with the audit or should she inform her manager? Advise her
on her course of action.
b. Would the audit be an objective audit if she remains on the team?
Activity 5.4
You are provided with an extract from the Auditor’s Report for murray & Solomon ltd.
Read the report and answer the questions that follow.
Extract from the independent Auditor’s Report

As explained in note 16.2 to the financial statements, the company’s financing
arrangements expired and the amount outstanding was payable on 31 december
2020. The company has been unable to renegotiate or obtain replacement financing
and is considering entering insolvency proceedings. These events indicate a material
uncertainty which may cast significant doubt on the company’s ability to continue
as a going concern and therefore it may be unable to realise its assets and discharge
its liabilities in the normal course of business. The financial statements (and notes
thereto) do not disclose this fact and have been prepared on the going concern basis.
Audit opinion
In our opinion, because of the significance of the omission of the information
mentioned above, the financial statements do not fairly present, in all material
respects, the financial position of the company at 31 december 2020 and the results
of their operations and cash flows for the year then ended in accordance with
International Financial Reporting Standards (IFRS) and in the manner required by the
Companies Act in South Africa.
Questions
1. What type of Auditor’s Report comment did the company receive?
2. What are the consequences to the company having received this type of report?
3. The auditor’s report refers to the International Financial Reporting Standards (IFRS).
Explain why auditors have to take IFRS into account when expressing their opinion.
4. Why is it important for auditors to belong to a professional body such as SAICA?
5. What would happen to the auditor if they failed to carry out their audit duties properly?
6. The following table contains extracts from typical Auditor’s Reports. Explain why a
shareholder would find these extracts important.
Section extracted from an Auditor’s Report Message the auditor is

conveying to the shareholders
We have audited the annual financial statements of
Murray and Solomon set out on pages 20 – 41 for the
year ended 31 December 2020.
These financial statements are the responsibility of the
company’s directors. Our responsibility is to express an
opinion on these financial statements based on our audit.
Acc GR12 LB.indb 179 6/6/13 6:03:34 PM

Section extracted from an Auditor’s Report Message the auditor is
conveying to the shareholders
An audit includes:
1. Examining on a test basis, evidence supporting the
amounts in the financial statements; ….
2. Assessing the accounting principles used and
significant estimates made by management; ….
3. Evaluating the overall financial statement presentation …
Audit opinion:
In our opinion, the financial statements fairly present, in all
material respects, the financial position of the company
at 30 June 2020 and the results of their operations and
cash flows for the year then ended in accordance with
International Financial Reporting Standards (IFRS) and in the
manner required by the Companies Act in South Africa.
9. Corporate governance
9.1 Definition
Corporate governance refers to how organisations are managed, how policies
and laws are formulated and how politics affect the overall performance of
entrepreneurial activities in an economy.
Corporate governance can also be referred to the way corporations are
governed. It is the technique which requires organisations to be managed
effectively. Business has to be carried out in ways that satisfy stakeholders. It is
about balancing individual and societal goals, as well as economic and social goals.
Good corporate governance principles include; transparency, honesty, integrity,
trustworthiness, openness and accountability.
KING CODE To ensure good corporate governance, there must be a mutual understanding
between shareholders’ interests and other stakeholders involved, such as the
government, employees, suppliers, customers etc.
Source: www.deloitte.com
One of the main aims addressed by the King Committee is the issue of corporate
governance. It is all too common in society and business today to find unethical
behaviour, misappropriation of funds and employee misconduct. The King Code
III refers to ‘the right way of doing things’ in a company. Companies are most
vulnerable to bad corporate governance because of the gap between its ‘owners’, the
shareholders, and the company itself. It is the directors’ responsibility to apply the
framework that governs the company and that ensures good corporate governance.
Activity 5.5
Match the word in column A with the explanation on column B. Write only the number
and the letter, for example 1. A.
Column A Column B
1. Accountability A. An intentional manipulation of information or data
in order to commit a crime
2. Comply with legislation B. All decisions are made and are guided by set values
and principles
3. Transparency C. Treating everyone equitably and not favouring any
particular party above the other
4. Risk management D. When making a decision, having a consideration for
any factor that might impact society at large
5. Independence E. Adhering to what is laid down in the Companies Act
and the laws of the country
Acc GR12 LB.indb 180 6/6/13 6:03:34 PM

Column A Column B
6. Fairness in dealing with F. Being free from influence, bias and conflict of
stakeholders interest
7. Sensitivity to social and G. Taking responsibility for something that should be
environmental issues carried out as part of the duties at work
8. Responsible H. Being held answerable for ensuring that the daily
management operations of the company are exercised diligently
and with due care in order to achieve the best
possible outcome for all
9. Fraud I. All relevant information must be disclosed to
shareholders and nothing must be hidden from them
10. Ethical decisions J. Expecting in advance that the company might face
danger and threats and planning in such a way as to
avoid them
Study the following extract from the Corporate Governance Report of Prima Clothing ltd.
and answer the questions that follow.
The Board governs according to the principles of discipline, responsibility, fairness,

social responsibility, transparency and accountability of directors to all material
stakeholders. These principles are reflected in the group’s business principles, internal
controls and policies.
With regard to the financial year under review, the directors of Prima Clothing
believe that it complied with all the significant requirements of king III. In instances
where we do not comply, this is stated and explained.
The Group’s corporate governance practices are embedded in the following:
Ethical and moral behaviour
The Group is committed to promoting the highest standards of ethical behaviour
among its directors, management, and employees.
Stakeholder communication
The Group strives to have transparent, open and clear communication with all its
material stakeholders.
Insider trading and price sensitive information

The Group has implemented a closed period policy to govern share trades by the
Group’s directors and employees.
Questions
1. Who is responsible for corporate governance in Prima Clothing ltd.?
2. Which important characteristics of the corporate governance principles do they
adhere to as laid out by the king III report?
3. The report mentions material stakeholders. Good corporate governance is not only
limited to how the company interacts with its customers. name other stakeholders
who are just as important as customers with regards to corporate governance.
4. Prima Clothing ltd. wants to build another clothing factory on an open piece of land
near the Intaka Islands in the Western Cape. This lake is a protected environmental
bird sanctuary. Prima Clothing claims that the development will not interfere with the
biodiversity but environmentalists are opposed to the development.
a. Comment on the above scenario. do you think that Prima Clothing is acting sensitively?
b. Which corporate governance issue are they neglecting to consider in this situation?
Acc GR12 LB.indb 181 6/6/13 6:03:35 PM

Key concepts Chapter 6
• quality assurance
• ongoing support and Ethics
training • professional
code of conduct • SAICA
• SAIPA • IRBA • IIA SA By the end of this chapter, you will be able to:
• CIMA • disciplinary • Understand the role of professional bodies
procedures • misconduct • Demonstrate knowledge of disciplinary and punitive measures that are applied
• punitive measures for non-compliance with the Code of Professional Conduct
• ethical leadership • Understand the King Code III policies governing ethical behaviour in the
• ethical corporate financial environment
culture • sustainability • Understand various aspects of the legislation governing companies prescribed
• corporate citizenship in the Companies Act, including:
• integrated reporting ■ Legislation relating to directors
• risk governance
• directors’ performance
■ Business rescue
evaluation • directors’
■ Dispute resolution
remuneration • standards ■ The appointment of a social and ethics committee
of directors’ conduct ■ Provisions relating to transparency and accountability You’ll also be investing
• conflict of interest in the well-being of the
environment and society
• liability of directors
– companies have to by
• business rescue
law nowadays!
• dispute resolution
• social and ethics
I want to buy some shares in a company
committee • transparency one day. Now I know that directors
and accountability need to keep to the laws in the
Companies Act and the principles of
King III. My money will be safe.
And we know that the external auditors

will make sure the financials are
accurate and material.
182 Chapter 6 • E thics
Acc GR12 LB.indb 182 6/6/13 6:03:35 PM

1. Introduction
In Grade 10 we learnt about the importance of ethical and professional conduct in
the business environment. We learnt that businesses and organisations use written
codes of ethics to set the standards of conduct expected from their employees
and members. We discussed that these codes of ethics are based on fundamental
ethical principles such as integrity, objectivity, professional competence and due
care, confidentiality, professional behaviour and technical standards.
In Grade 11, we expanded on these concepts and further explained that ethical and
professional conduct requires organisations and individuals to:
• Be accountable for their actions and decisions
• Perform and report on their duties in a transparent manner
• Carry out their duties in a sustainable manner that doesn’t compromise the
economic, environmental and social well-being of others.
This year we will focus our attention on the governance of ethical and professional
conduct, with particular regard to professionals working in the financial
environment and the regulations relating to companies. We will discuss the role
of professional bodies and their disciplinary function and examine some of the
key policies contained in the King Code III relating to the governance of ethical
behaviour. Finally, we will look at legislation governing companies, by examining
various sections of the Companies Act.
2. The role of professional bodies

Professional bodies are organisations whose members are individual professionals
such as accountants, lawyers, doctors, etc. These organisations aim to serve the
interests of their members, their members’ employers, the profession and the
public in general. Professional bodies usually perform a regulatory function and
play a key role in ensuring that their members:
• Are suitably qualified and highly skilled
• Remain up to date with the latest developments in their profession
• Adhere to the standards of professional and ethical conduct required by
their profession.
We will discuss the role of professional bodies by taking a closer look at the
functions they perform in assuring the quality of their members; providing their
members with ongoing support and training and regulating the professional and
ethical conduct of their members.
2.1 Key functions performed by professional bodies

2.1.1 Quality assurance
Professional bodies play a central role in ensuring that their members are well-
educated, suitably qualified and that they possess the necessary skills and expertise
to enter their profession. By setting strict qualification requirements, professional
bodies provide assurance of the quality of their members. This “stamp of
approval” plays a vital role in providing employers, clients and the general public
with confidence and assurance in the ability and professional competence of
their members. In order to achieve this, professional bodies typically perform the
following functions:
• Setting educational standards and development of curricula
• Accreditation of training institutions
• Providing and distributing learning material
E thics • C h a p t e r 6 183
Acc GR12 LB.indb 183 6/6/13 6:03:35 PM

• Setting and administering professional admission examinations
• Assessing practical experience
• Awarding qualifications.
2.1.2 Ongoing support and training

As is the case with most professions, the accounting profession is dynamic and
continually evolving. New accounting standards are being developed, new
legislation is being introduced and guidelines, methods and techniques are being
revised on a regular basis. In order to ensure that their members are kept abreast
of these changes, professional bodies perform an essential role in providing their
members with ongoing support and training. This is accomplished by:
• Organising conferences, seminars and workshops
• Publishing professional journals or magazines
• Distributing newsletters
• Maintaining websites and updating content on a regular basis
• Providing a network for professionals to meet and discuss their field of
expertise.
2.1.3 Regulation of professional and ethical conduct

Professional bodies usually prescribe a code of conduct for their members. This
code sets out the standards of professional and ethical behaviour that are required
by their profession. Members are required to adhere strictly to this code. The code
of conduct is enforced by the disciplinary function of the professional body, which
investigates complaints against members, implements disciplinary procedures and
takes action against members found guilty of non-compliance or improper conduct.
Through the development and enforcement of a professional code of conduct,
professional bodies play a crucial role in ensuring that their members perform
their duties in a professional and ethical manner. This is particularly important
in the accounting profession, where employers, clients and investors make
financial decisions based on the services and information provided by accounting
professionals.
2.2 Professional bodies in South Africa

There are a number of professional bodies for the accounting profession in South
Africa. These professional bodies play a key role in ensuring that accountants and
auditors are well trained, properly qualified and that they meet both the technical
requirements and ethical standards of their profession. These professional bodies
include:
• The South African Institute of Chartered Accountants (SAICA)
• The South African Institute of Professional Accountants (SAIPA)
• The Independent Regulatory Board for Auditors (IRBA)
• The Institute of Internal Auditors South Africa (IIA SA)
• The Chartered Institute of Management Accountants (CIMA)
2.2.1 The South African Institute of Chartered accountants (SAICA)

The South African Institute of Chartered Accountants (SAICA) is the largest
accounting body in South Africa and one of the leading Institutes in the world.
SAICA’s main objective is “to serve the interests of the chartered accountancy
designation profession and society, by upholding professional standards and integrity.”
letters that appear after a person’s name, Chartered Accountants, registered with SAICA, are entitled to use the prestigious
indicating that person’s professional CA(SA) designation. However, in order to qualify as a CA(SA), the following
qualification
requirements need to be successfully completed:
Acc GR12 LB.indb 184 6/6/13 6:03:36 PM

• B Com Accounting degree or equivalent undergraduate qualification
• Certificate in the Theory of Accounting (CTA) or equivalent postgraduate
qualification
• Pass Part I of the qualifying Examination (qE 1)
• Complete three years’ articles (practical training)
• Pass Part II of the qualifying Examination (qE 2) – (Financial management route)
OR
Pass the Public Practice Examination (PPE) – (Auditing route)
SAICA provides a wide range of support services and products to its members
External auditor
that include seminars, workshops, books, e-learning products, newsletters and
guidance with technical queries. SAICA also has a Continuing Professional • Cannot be an employee of the
Development (CPD) policy, which requires its members to continuously develop, business
improve and broaden their knowledge in order to maintain and enhance their • Provides comfort on quality and
professional competence. integrity of financial statements
• Reports to the shareholders
Members of SAICA are required to adhere to SAICA’s Code of Professional
Conduct. This code prescribes the standards of ethical and professional conduct
expected of chartered accountants working in South Africa. SAICA’s Code of Internal auditor
Professional Conduct is based on the following fundamental ethical principles:
• Integrity • Can be positioned strategically
within the business
• Objectivity
• Reports to the directors
• Professional competence and due care
• Confidentiality
• Professional behaviour
SAICA's disciplinary process plays a crucial role in maintaining the integrity of

the chartered accountancy profession and protecting public interest. Through Forensic auditor
its Professional Conduct Committee and Disciplinary Committee, the Institute • Will investigate a business where
strives to protect the public from unethical practices and unprofessional conduct there is a possibility of fraudulent
from its members. SAICA's disciplinary process will be discussed in more detail activities
later in this chapter. • Will often be the expert witness
at a trial
One of SAICA’s primary objectives is to transform the accounting profession
and facilitate community upliftment. In 2002, SAICA established the Thuthuka
Project in order to drive the growth and transformation efforts of the profession,
by providing education support to African learners and students. The following
information about the Thuthuka Project and the Thuthuka Bursary Fund was
extracted from the SAICA website:
The Thuthuka Project

’Thuthuka‘ is a Zulu verb, meaning "to develop", indicating the action-based
perspective with which transformation is being driven. Since its inception in 2002,
Thuthuka has grown from one provincially-based project to over 20 projects
throughout South Africa. The number of potential candidates reached is significant,
and the results of the programmes are providing indications of the impact to be made.
How to get a bursary

The purpose of the project is to annually place between 250–300 fully bursared
black African and Coloured students at selected SAICA-accredited universities in
cohorts of 50 per university on special undergraduate BCom Accounting education
programmes. The accredited universities that are part of the programme are the
university of kwaZulu-natal, university of Johannesburg, Stellenbosch university,
university of Pretoria, university of Cape Town, Free State university and the nelson
mandela metropolitan university.
ETHICS • Chapter 6 185
Acc GR12 LB.indb 185 6/6/13 6:03:37 PM

The Thuthuka Bursary Fund is looking for academically strong learners who aspire to
become Chartered Accountants. Students who do exceptionally well in mathematics
and have excellent marks in their other subjects to qualify for university entrance
may apply.
Do you qualify?
• do you have 60% in mathematics in your Grade 11 Final Results (level 5)?
• do you have enough points to qualify for university entrance?
• do you come from a family that cannot support you financially at tertiary level?
• Are you an African or Coloured learner?
If you answered YES to all the questions above, then you qualify.
To apply
• download the Application Form from SAICA’s website (www.saica.co.za).
• Request application forms via SAICA's contact centre, call 08610 72422.
Source: Adapted from https://www.saica.co.za/learnersStudents/Thuthuka/
tabid/714/language/en-uS/default.aspx and https://www.saica.co.za/
learnersStudents/Thuthuka/ThuthukaBursaryFund/tabid/716/language/en-ZA/
default.aspx
2.2.2 The South African Institute of Professional Accountants (SAIPA)

The South African Institute of Professional Accountants (SAIPA) is the second
largest accounting institute in South Africa, and is the leading accountancy institute
representing suitably qualified professional accountants in the country. SAIPA’s
primary focus is “the advancement of the Professional Accountant to meet the
changing needs of the accountancy profession in all facets of business and finance”.
SAIPA’s members receive the designation, “Professional Accountant (SA)”.
However, in order to qualify as a Professional Accountant (SA), the following
requirements need to be successfully completed:
• A degree in the field of accounting

• Completed 3 years’ SAIPA articles or 6 years’ verifiable experience
• Pass the Professional Evaluation (PE) examination
SAIPA provides support to all members through its publications, online

newsletters and interactive website. The Institute also assists members with
technical and tax related queries. SAIPA’s Continued Professional Development
(CPD) division provides opportunities for members to improve and update
their knowledge and skills through additional courses and resources. SAIPA sets
mandatory requirements for its members to ensure ongoing learning and to
maintain consistently high standards.
All members of SAIPA are required to adhere to its Code of Conduct, which
aims to:
• Raise the level of professionalism and the quality of service rendered to the
public
• Enhance the credibility of the accountancy profession
• Increase the confidence of the public in the profession.
SAIPA’s Code of Conduct sets out the fundamental ethical principles to which all
its members must adhere. These principles, which are almost identical to those
listed in SAICA’s Code of Professional Conduct, are as follows:
186 Chapter 6 • ETHICS
Acc GR12 LB.indb 186 6/6/13 6:03:38 PM

• Integrity
• Objectivity
• Confidentiality
• Technical standards
Compliance with the Code of Conduct is enforced by SAIPA’s Investigations and
Disciplinary Committees. SAIPA has comprehensive investigation and disciplinary
procedures that are aligned with the requirements of the International Federation
of Accountants (IFAC).
2.2.3 The Independent Regulatory Board for Auditors (IRBA)

The Independent Regulatory Board for Auditors (IRBA) is the statutory body,
incorporated in terms of the Auditing Profession Act, which governs the auditing
profession in South Africa. The IRBA’s primary objective is “to protect the financial
interests of the South African public and international investors in South Africa
through the regulation of audits conducted by registered auditors, in accordance
with internationally recognised standards and processes”.
In terms of the Auditing Profession Act, any person who wishes to perform the
attest (audit) function must register with the IRBA. These persons are referred to attest function
as Registered Auditors, and they are entitled to use the designation RA.
the duties an accountant performs when
conducting an audit
Before being allowed to register with the IRBA, prospective registered auditors
need to pass the Public Practice Examination (PPE) and successfully complete all
the other SAICA qualification requirements.
The core values of the IRBA are independence, integrity, objectivity, commitment,
accountability and transparency. The IRBA seeks to uphold these values while
performing its key role of providing support to registered auditors and protecting
public interest. The IRBA endeavours to achieve its objectives by:
• Providing ongoing support and training to registered auditors in order
to ensure that they remain duly competent and up-to-date with the latest
professional standards
• Developing and maintaining internationally comparable auditing and ethical
standards
• Providing rules and guidelines for professional ethics, including a Code of
Professional Conduct for Registered Auditors and Rules Regarding Improper
Conduct
• Inspecting and reviewing the work of registered auditors and their practices to
monitor their compliance with the professional standards
• Investigating and taking appropriate action against registered auditors in
respect of non-compliance with standards and improper conduct
2.2.4 The Institute of Internal Auditors South Africa (IIA SA)

The Institute of Internal Auditors South Africa (IIA SA) is part of an international
network representing the interests of Internal Auditors worldwide. The IIA
SA’s objectives are “to build the internal auditing profession, its credibility and a
thriving business environment in South Africa”.
The Institute's foremost qualification is that of Certified Internal Auditor (CIA). In
order to achieve the Certified Internal Auditor (CIA) designation, candidates must
successfully complete the following requirements:
Acc GR12 LB.indb 187 6/6/13 6:03:38 PM

• A relevant three-year degree or diploma and three years' relevant experience, OR
a four-year degree or diploma plus two years' relevant experience
• Pass the International CIA examination
The IIA SA serves internal auditors in South Africa by providing a wide range of
support and educational services, which include technical guidance, professional
training programmes, certification programmes, continuing professional
development opportunities, conferences and networking opportunities. In
addition, members are required to adhere to the IIA SA’s continuing professional
development requirements, in order to ensure that they continue to develop and
enhance their technical skills.
Members of the IIA SA are expected to maintain the highest standard of
professional and ethical of conduct. They are required to adhere to both the
Institute’s Code of Ethics and the International Standards for the Professional
Practice of Internal Auditing. According to the IIA SA’s Code of Ethics, internal
auditors are expected to apply and uphold the following principles:
• Integrity
• Objectivity
• Confidentiality
• Competency
2.2.5 The Chartered Institute of Management Accountants (CIMA)

The Chartered Institute of Management Accountants (CIMA) is a worldwide
professional body for management accountants. CIMA’s qualifications are
“internationally recognised and widely respected, giving CIMA students and
members the assurance that they are associated with one of the best Institutes in
the field of business and management accounting”.
CIMA’s members are entitled to use the designation, “ACMA”, which indicates
that they are recognised Associate Chartered Management Accountants. In order
to achieve this qualification, candidates must successfully complete the following
requirements:
• CImA Certificate in Business Accounting

• CImA Professional qualification levels (this includes three levels, namely, the
operational, managerial and Strategic levels)
• CImA Professional Competence (also known as ToPCImA – Test of Professional
Competence in management Accounting), which comprises of:
■ three years’ relevant work experience
■ the Professional Competence examination.
CIMA is committed to maintaining public confidence in the management

accounting profession and upholding the highest ethical and professional
standards by:
• Helping their members to develop both their technical ability and their
professional capacity
• Ensuring the competency and integrity of its members
• Promoting and monitoring best practice
• Ensuring that the knowledge and skills of their members remains up-to-date
through continuing professional development
• Requiring their members to comply with the CIMA code of ethics.
Acc GR12 LB.indb 188 6/6/13 6:03:38 PM

CIMA’s Professional Standards and Conduct department is responsible for ensuring
these high standards are achieved and maintained. CIMA’s code of ethics is based
on the following core principles of ethics:
• Integrity
• Objectivity
• Confidentiality
Activity 6.1
1. Briefly explain the role that professional bodies play in ensuring that their members:
a. Are suitably qualified and highly skilled when they enter the profession
b. Remain up to date with the latest developments in their profession
c. Adhere to the standards of professional and ethical conduct required by
their profession.
2. Copy and complete the following table in your Exercise Book.
Professional body Abbreviation Professional title Designation

Chartered Accountant
Professional Accountant (SA)
The Independent Regulatory
Board for Auditors
IIA SA
Management Accountant
3. Each of the professional bodies discussed in this chapter require their members to
adhere to either a Code of Conduct or a Code of Ethics. These codes are all based
on similar ethical values. Briefly discuss why it is so important for accountants and
auditors to adhere to each of the following fundamental ethical principles:
a. Integrity
b. Objectivity
c. Professional competence
d. Confidentiality
3. Disciplinary procedures and punitive measures

As mentioned previously, professional bodies play a crucial role in maintaining the
integrity of their profession and protecting public interest. In order to accomplish
this, professional bodies endeavour to ensure that their members comply with
their professional codes of conduct. This code is enforced by the professional
body’s disciplinary function, which establishes structures and procedures to deal
with complaints against members and institutes strict punitive measures against
members found guilty of non-compliance or improper conduct.
Although disciplinary procedures and punitive measures may vary from one
professional body to another, the disciplinary processes instituted by most
accounting professional bodies are reasonably similar. We will thus use SAICA’s
disciplinary process as an illustrative example to discuss disciplinary procedures
and punitive measures in more detail.
3.1 SAICA’s disciplinary process

SAICA’s Code of Professional Conduct sets the standards of professional and
ethical conduct required from its members. Members of SAICA are required
to sign an ethics pledge in which they promise to adhere to the Institute’s Code
Acc GR12 LB.indb 189 6/6/13 6:03:38 PM

of Professional Conduct. SAICA enforces this code through its disciplinary
process, which investigates complaints against members, implements disciplinary
procedures and takes action against members who do not comply with their Code
of Professional Conduct.
SAICA's disciplinary process, which is governed by the Institute's constitution and

by-laws by-laws, comes into operation once an allegation of improper or unprofessional
conduct has been made against a member. The complaint against a member is
the written rules of an organisation
then considered against the Code of Professional Conduct. If it is found that there
is a prima facie case of misconduct, the complaint is then dealt with in accordance
prima facie
with SAICA’s by-laws and may be referred to either SAICA’s Professional Conduct
true, genuine or adequate at first sight
Committee (PCC) or its Disciplinary Committee (DC) for adjudication.
3.1.1 Misconduct
Misconduct may be broadly defined as conduct by a member that does not adhere
to the standards of professional and ethical behaviour prescribed in SAICA’s Code
of Professional Conduct. The following are some examples of misconduct that are
listed on the SAICA website:
• Breach of professional confidentiality
• Unethical conduct
• Conflict of interest or improper relationships
• Criminal convictions
• Excessive charging
• Unprofessional conduct
• Pretending to be a CA(SA) – this is a criminal offence
• Failure to uphold professional competence and due care in the performance of
professional (no s) duties
• Unauthorised advertising
• Breach of the Continuing Professional Development Policy.
3.1.2 SAICA’s complaints procedure and disciplinary process

The following summary of SAICA’s complaints procedure and disciplinary process
was adapted from information provided on SAICA’s website:
• All complaints must be lodged with The Project director: legal Compliance and
discipline.
• The Project director: legal, Compliance and discipline, will first verify whether the
person complained against (the accused) is a member of SAICA.
• If that person is a member of the Institute, the Project director: legal, Compliance
and discipline will consider the allegations.
• If there is a prima facie contravention of the by-laws, the accused will be notified
of the complaint and given twenty-one (21) days to respond to the complaint.
• If the period within which to respond lapses without a response being received,
or if a response is procured but is not satisfactory, then the matter will be referred
either to:
■ the Professional Conduct Committee (PCC) – if the allegations relate to a
general allegation of professional conduct, or
■ the disciplinary Committee (dC) – if the matter relates to a serious allegation
of misconduct.
• Where possible, SAICA shall seek to apply alternative dispute resolution measures,
such as mediation and/or arbitration in an effort to exhaust all possible avenues
prior to putting matters through one of the committees that adjudicate over
matters (PCC or dC).
Acc GR12 LB.indb 190 6/6/13 6:03:39 PM

• In instances where an accused provides the Institute with a response to a
complaint against him and permits the Institute to share his/her response
with the complainant, the complainant will be offered twenty-one (21) days to
respond thereto. Thereafter, the matter shall either be resolved or referred to the
appropriate committee for adjudication.
3.2 Punitive measures imposed by SAICA

The punishment imposed by SAICA on a member found guilty of misconduct will
depend on the severity of the offence. A member who is found guilty of a minor
transgression may be:
• cautioned; or
• reprimanded; or
• fined.
If a member is found guilty of a more serious act of misconduct, the member
may be:
• suspended from membership; or
• struck-off from membership.
The Professional Conduct Committee has limited sentencing powers and
may only caution, reprimand or fine an offending member. If the Professional
Conduct Committee considers the offence to be so serious that it might warrant a
more severe penalty, such as suspension, it will refer the matter to the Disciplinary
Committee.
Activity 6.2
1. Briefly explain the purpose of professional body’s disciplinary function.

2. list three examples of misconduct relating to the accounting profession. Provide a
brief explanation for each of your examples.
3. There are various punitive measures that SAICA can impose on a member found guilty
of misconduct. list the following punitive measures in order of severity (starting with
the least severe and ending with the most severe).
suspended fined cautioned struck-off reprimanded
4. What type of offence would a person, who falsely claims to be a CA(SA), be

committing?
4. King Code III – Policies governing ethical behaviour

The King Code is an internationally acclaimed report on corporate governance KING CODE
that was drawn up by a South African committee chaired by former High Court
judge, Mervyn King. The King Code provides policies, principles and guidelines
for good and ethical corporate governance. The third revised King Code,
commonly referred to as King III, came into effect in March 2010. Although King
III uses terms such as “company”, “boards” and “directors”, it is important to
realise that the principles in the Code apply to all entities and not only companies.
However, for the purposes of this section we will primarily discuss the King Code
in relation to companies.
King III provides a comprehensive list of principles relating to good corporate
governance, together with detailed recommendations relating to the adoption
and application of each of the principles. Ultimately, any company that properly
Acc GR12 LB.indb 191 6/6/13 6:03:40 PM

applies these principles should go a long way to ensuring that it is governed
stakeholders ethically and is carrying out its duties in the best interests of all its stakeholders.
any group affected by and affecting the
For this reason, all companies listed on the JSE are now required to either apply
company‘s operations (King III) King III or else explain why they have not done so.
We will examine some of the key policies and principles in King III that relate to
the governance of ethical behaviour in the corporate environment.
4.1 Ethical leadership

Leadership in a company is provided by the Board of Directors. The Board is
elected by the shareholders of the company and is responsible for managing and
controlling the affairs of the company. The Board has a legal obligation to act in
the best interests of the company and an ethical duty to direct the company in
a responsible, professional and transparent manner. The Board should provide
effective, responsible and ethical leadership. This is a central aspect of King III,
which states that:
“Good corporate governance is essentially about effective, responsible
leadership. Responsible leadership is characterised by the ethical values of
responsibility, accountability, fairness and transparency.”
Based on this statement, King III provides the following principle:
Principle:
“The Board should provide effective leadership based on an ethical foundation.”
King III elaborates on this principle by stipulating that ethical leaders should:
• Conduct business in an ethical and sustainable manner
• Consider the impact of the company’s strategies and operations on the
economy, society and the environment
• Not compromise the natural environment or the well-being of future
generations
• Consider the company’s impact on internal and external stakeholders
• Consider the legitimate interests and expectations of all their stakeholders in
their decision-making and strategy.
The use of the term “ethical foundation” in this principle, relates to the fact that
ethics is a fundamental and essential requirement of good governance. King III
further specifies that the Board should ensure that all decisions and actions are
based on the following four ethical values:
• Responsibility: The Board should assume responsibility for the assets and
actions of the company and be willing to take corrective actions to keep the
company on a strategic path that is ethical and sustainable.
• Accountability: The Board should be able to justify its decisions and actions to
shareholders and other stakeholders.
• Fairness: The Board should ensure that it gives fair consideration to the
legitimate interests and expectations of all stakeholders of the company.
• Transparency: The Board should disclose information in a manner that enables
stakeholders to make an informed analysis of the company‘s performance and
sustainability.
King III also provides recommendations relating to the composition of the Board,
which emphasise the importance of further characteristics of ethical leadership,
such as objectivity and independence. King III advises that:
Acc GR12 LB.indb 192 6/6/13 6:03:40 PM

• The Board should comprise of a majority of non-executive directors.
• The majority of non-executive directors should be independent.
• The Chairman of the Board should be an independent non-executive director.
• The Board should have a minimum of two executive directors (the CEO and
the financial director).
4.2 Ethical corporate culture

Ethical conduct is not only required from corporate leadership, but should exist
throughout the company. King III provides that, over and above its responsibility
to provide ethical leadership, the Board should also take responsibility for ensuring
that there is an ethical corporate culture in the company. This policy is broadly
covered in the following principle:
Principle:
“The Board should ensure that the company’s ethics are managed effectively.”
In order to accomplish this objective, King III stipulates that the Board should
ensure that:
• It builds, promotes and sustains an ethical corporate culture in the company
• It determines the ethical standards of the company
• These standards are formulated in a code of conduct
• The code of conduct is adhered to by all members of the company (including
the Board itself )
• The company’s ethical standards are integrated into all the company’s
strategies and operations
• The company’s ethical performance is assessed, monitored, reported
and disclosed
• The company complies with all applicable laws.
4.3 Sustainability
Sustainability may be defined as the ability to maintain economic, social and
environmental resources. There is a growing awareness of sustainability issues,
both globally and locally. In King III there is an increased focus on sustainability.
King III emphasises the need for companies to address sustainability issues, operate
in a sustainable manner and consider the interests of society. King III stresses the
crucial need for today’s leaders to incorporate sustainability objectives in their
strategies and to integrate economic, environmental and social considerations into
their decision making. King III provides the following principle:
Principle:
“The Board should appreciate that strategy, risk, performance and sustainability
are inseparable.”
King III expands on this principle, by providing that the Board should ensure that
the company’s strategy:
• Is aligned with its sustainability objectives and values
• Considers the legitimate interests and expectations of all its stakeholders
• Has been thoroughly examined for risks relating to finance, ethics, conduct,
compliance and sustainability
• Will result in sustainable outcomes taking account of people, planet and profit
• Meets its current needs without compromising the ability of future generations
to meet their needs.
Acc GR12 LB.indb 193 6/6/13 6:03:40 PM

4.4 Corporate citizenship
The concept of corporate citizenship stems from the fact that companies are, in
many ways, regarded as citizens of the countries in which they operate. As such,
companies are expected to adhere to the same standards of ethical behaviour
that are required from ordinary citizens. Thus a company that is a responsible
corporate citizen should operate in an ethical, responsible and sustainable manner,
without jeopardising the current or future social, environmental and economic
well-being of society.
Principle:
“The Board should ensure that the company is and is seen to be a responsible
corporate citizen.”
As a corporate citizen, a company has a social and moral responsibility towards

society. The Board should ensure that the company upholds this responsibility.
Furthermore, the Board should ensure that the company is seen to be a good
corporate citizen, as this will help to enhance the company’s reputation and
promote its public image.
Accordingly, King III stipulates that the Board should:
• Consider not only on financial performance but also the impact of the
company’s operations on society and the environment
• Protect, enhance and invest in the well-being of the economy, society and the
environment
• Ensure that collaborative efforts with stakeholders are embarked upon to
promote ethical conduct and good corporate citizenship
• Ensure that management develops corporate citizenship policies
• Ensure that measurable corporate citizenship programmes are implemented.
4.5 Integrated reporting

Integrated reporting requires companies to broaden their accountability beyond
simply reporting on financial performance. Companies are now also expected to
report annually on their social performance and their impact on the environment.
Integrated reports should be prepared in a transparent manner and should disclose
information regarding the impacts that the company has had on society, the
environment and the economy.
Integrated reporting is also known as “triple bottom line” accounting and requires
a shift in mindset away from a purely “bottom line” approach that is exclusively
concerned with financial profit. The “triple bottom line” refers to the “social,
environmental and economic” performance of a company and is also often referred
to as “people, planet, profit”. The difference between the “bottom line” approach
and the “triple bottom line” approach is illustrated in the following flow diagram:
Bottom line Economic performance Pr
Social performance People
Triple bottom line Environmental performance Planet
Economic performance Pr
Acc GR12 LB.indb 194 6/6/13 6:03:41 PM

Principle:
“The Board should ensure the integrity of the company’s integrated report.”
The Board should ensure that:

• An integrated report, including the annual financial statements, is prepared
annually
• The integrated report provides an accurate and fair representation of the
company’s financial and sustainability performance
• The integrated report adequately conveys information about the social,
economic and environmental impact of the company on the community in
which it operates
• There are controls to enable it to verify and safeguard the integrity of its
integrated report
• The audit committee oversees integrated reporting and assists the Board by
reviewing the financial statements and sustainability disclosures
• The integrated report discloses both the positive and negative impacts of the
company’s operations
• The integrated report conveys the company’s plans to improve the positives
and eradicate the negatives in the financial year ahead.
4.6 Risk governance

One of the key responsibilities of the Board is to ensure that risks are governed,
managed and controlled effectively. The Board has an ethical duty to ensure that the RISK!
company does not operate in a reckless manner or take excessive risks. Furthermore,
the Board should ensure that effective processes and systems are established to
uncover fraud, corruption, unethical behaviour and any other irregularities.
Principle:
“The Board should be responsible for the governance of risk.”
King III provides many principles and much guidance relating to the governance of
risk, the role of the audit committee and the internal audit function. It advises that
although the Board should delegate risk management duties to an audit committee
(or a risk committee), the responsibility for the governance of risks remains with
the Board. The Board should:
• Understand the potential impact of risk-taking on shareholders and other
stakeholders
• Determine the levels of risk the company is able to tolerate
• Ensure that there is an effective risk management process
• Ensure that there is an effective system of internal controls
• Ensure that an effective risk-based internal audit is performed by an
independent internal audit function
• Ensure that the internal audit provides a written assessment of the effectiveness
of the company’s system of internal controls and risk management
• Receive assurance regarding the effectiveness of the risk management process
• Provide assurance regarding the governance of risk to stakeholders in the
integrated report.
Acc GR12 LB.indb 195 6/6/13 6:03:42 PM

4.7 Directors’ performance evaluation and remuneration
King III provides a number of policies relating to the evaluation of directors’
performances and the remuneration paid to directors. These policies help to
ensure that directors are accountable for their actions and are remunerated in a
fair and ethical manner. In addition, these policies help to provide transparency by
requiring the disclosure of certain information relating to the performance and
remuneration of directors.
King III provides the following principle relating to performance evaluation:
Principle:
“The evaluation of the Board, its committees and the individual directors should be
performed every year.”
King III further recommends that:

• The performance evaluations should be carried out by the chairman or an
independent service independent service provider.
provider • The results of performance evaluations should be:
an independent firm that specialises in
■ used to identify training needs for directors
conducting performance evaluations ■ disclosed in the integrated report
■ considered when a director is nominated for re-appointment
■ considered in determining the remuneration of a director.
King III recommends that a remuneration committee should be established
to assist the Board in setting and administering remuneration policies. King
III provides the following fundamental principle relating to remuneration of
directors:
Principle:
“Companies should remunerate directors and executives fairly and responsibly.”
King III discusses remuneration policies and practices in some detail and provides
various recommendations relating to accountability and transparency, which include:
• Remuneration policies should be linked to the director’s contribution to
company performance.
• Companies should disclose the remuneration of each individual director and
the salaries of the three most highly-paid employees.
non-binding advisory vote • Shareholders should pass a non-binding advisory vote on the company’s
yearly remuneration policy.
a vote that is merely used to indicate the
shareholders’ opinion on a matter (it is not
• The Board should determine the remuneration of executive directors in
enforceable) accordance with the remuneration policy put to shareholder’s vote.
Acc GR12 LB.indb 196 6/6/13 6:03:42 PM

Activity 6.3
Read the following scenarios relating to King Enterprises Ltd. Each of the scenarios
describes a practice carried out by the company or its directors that either displays good
governance or poor ethical conduct. For each of the scenarios, indentify the King III
principle that is, or is not, being applied and briefly explain why the conduct is considered
to be either good governance; poor governance or unethical behaviour.
1. The head office of King Enterprises Ltd. is situated near to Prince Park Senior
Secondary School. Members of the Board recently noticed that the school’s soccer
field was in very poor condition and decided to donate R250 000 to the school to
upgrade the field. The company also sponsored the school’s soccer teams with new
soccer jerseys. The company name and logo were printed on the back of the soccer
jerseys.
2. A recent newspaper article reported that a factory owned by King Enterprises Ltd.
was dumping its waste into a nearby river. The directors had apparently approved
this strategy based on the fact that it would be more profitable for the company.
They claimed that the cost of disposing this waste in a proper manner would be very
expensive.
3. At the AGM of King Enterprises Ltd., a shareholder complained that the company’s
annual reports only included financial information and had no reference to the
sponsorship of Prince Park Senior Secondary School or the dumping of waste by the
company’s factory.
4. The combined remuneration paid to the four directors of King Enterprises Ltd. for the
financial year ended 28 February 2013 amounted to R24,5 million. This was despite
the fact that the company’s profits were down 35% from the previous period.
5. The Board appointed a new chairperson in June 2013. She has made some big
changes to the manner in which the company is managed. She and the rest of the
Board have created a new ethical culture throughout the company by ensuring that
all employees adhere strictly to the company’s code of conduct and by integrating the
company‘s new ethical standards into all of its strategies and operations.
5. Legislation governing companies

Companies in South Africa are governed by the Companies Act 71 of 2008. This
Companies Act replaced the previous Companies Act 61 of 1973 and came into
effect on 1 May 2011. The Companies Act contains the laws that companies
in South Africa are required to comply with and includes laws relating to the
formation, financing, governance and financial reporting requirements of
companies.
In this section, we will discuss various aspects of the Companies Act pertaining
to the duties, liability and remuneration of directors. We will also examine some
new features of the Act relating to business rescue, dispute resolution and the
appointment of a social and ethics committee. Finally, we will consider certain
provisions in the Act relating to transparency and accountability.
5.1 Legislation relating to directors

5.1.1 Standards of directors’ conduct
The directors of a company are entrusted by its shareholders with the
responsibility of running the company. Although many of the everyday functions
of the company are delegated to management, the responsibility for the acts
committed in the name of the company rests with the directors. Directors are thus
expected, and required, to carry out their duties according to the highest standards
Acc GR12 LB.indb 197 6/6/13 6:03:42 PM

of ethics and expertise. The Companies Act prescribes the standards of director’s
conduct by way of the following provision:
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 the degree of care, skill and diligence that may reasonably be expected of
a director.
5.1.2 Conflict of interest

A conflict of interest occurs where a director’s obligation to act in the interest of
the company is at odds with his own personal financial interests. For example, a
conflict of interest would occur where a director votes on a contract between the
company and a business that is owned by the director or a relative of the director.
Directors have a duty to put the interests of the company before their own
personal interests and are required to avoid any possible conflict of interests with
the company. The Companies Act provides that:
If a director of a company has a personal financial interest in respect of a matter
to be considered at a meeting of the Board, or knows that a related person has a
personal financial interest in the matter, the director must:
• Disclose the interest before the matter is considered at the meeting
• Disclose to the meeting any material information relating to the matter
• Leave the meeting immediately after making any disclosure
• Not take part in the consideration of the matter.
The Act further provides that if a director acquires a personal financial interest
in a contract that had already been approved by the company, the director must
promptly disclose to the Board the nature and extent of that interest.
5.1.3 Liability of directors

A director of a company may be held personally liable for any loss, damage or
fiduciary duty costs sustained by the company as a result of a breach of the director’s fiduciary
duty to act in good faith and in the best
duty or the duty to act with care, skill and diligence. The Companies Act provides
interest of the company certain specific actions for which a director will be held liable to the company for
any loss, damage or costs incurred by the company. These actions include:
• Acting on behalf of the company without the proper authority to do so
• Being a party to an act or omission with the intention to defraud shareholders,
employees or creditors
• Signing a financial statement that was false or misleading in a material respect
• Issuing a prospectus that contained an untrue statement.
5.1.4 Directors’ remuneration

The subject of directors’ remuneration, and in particular exorbitant performance
bonuses awarded to directors, has been a controversial issue in recent times. The
Companies Act aims to provide shareholders with a certain degree of control over
remuneration paid to directors, by stipulating that:
• A company may pay remuneration to its directors for their service as directors,
special resolution provided that such remuneration may only be paid in accordance with a special
resolution approved by the shareholders within the preceding two-year period.
a binding decision requiring the support of
at least 75% of the votes The Act also requires greater transparency in respect of remuneration paid to
directors, by providing that:
• If the annual financial statements are required to be audited, they must
contain detailed information about any remuneration received by each director
of the company.
Acc GR12 LB.indb 198 6/6/13 6:03:42 PM

5.2 Business rescue
The Companies Act introduces provisions relating to business rescue. Business
rescue may be described as the process of attempting to rescue a potentially viable
company that is experiencing financial difficulties and thereby prevent it from
going into liquidation. The Act defines business rescue as the rehabilitation of a liquidation
company that is financially distressed by temporary supervision of the company becoming insolvent or going bankrupt
and its management.
As mentioned, the alternative to business rescue is usually liquidation. When a
business is liquidated, most stakeholders suffer in one way or another. Creditors
usually only receive a fraction of what is owed to them; employees lose their jobs;
other businesses lose a trading partner; the community loses a potentially thriving
business that could be contributing to the economy and the owner’s (shareholders)
are left with the scraps (if anything at all). Thus the opportunity to rescue a
business is usually very much in the best interests of all its stakeholders.
The Act allows for business rescue proceedings to be initiated either:
• on a voluntary basis (by way of a directors’ resolution); or
• through a court order (after application by a shareholder, creditor or employee
of the company).
However, the Act stipulates that business rescue proceedings can only be initiated
if the company in question is:
• financially distressed (likely to become insolvent in the near future); and
• there appears to be a reasonable prospect of rescuing the company.
Business rescue proceedings are dealt with extensively in the Companies Act.
Although business rescue proceedings are fairly complicated, both from a practical
and a legal perspective, the fundamental steps involved in this process may be
summarised as follows:
• The company must notify all affected persons (shareholders, creditors, employees
and any registered trade union representing employees of the company) that
business rescue proceedings have been initiated.
• during business rescue proceedings, no legal proceeding (other than criminal
proceedings) may be commenced against the company and no person may apply
for the liquidation of the company.
• The company must appoint a business rescue practitioner to supervise the
company and its management on a temporary basis.
• The company must notify all affected persons of the appointment of the
practitioner.
• The company must provide the practitioner with all information relating to the
affairs of the company.
• The practitioner must meet with the creditors and employees; and inform them
on the prospect of rescuing the company.
• The practitioner and management must prepare and publish a business rescue
plan for consideration by the affected parties
• The practitioner must meet with all affected persons to consider and vote on the
adoption of the business rescue plan.
• If the business rescue plan is adopted, it is binding on the company and all of its
creditors.
• If the business rescue plan is rejected, the company will be liquidated.
Acc GR12 LB.indb 199 6/6/13 6:03:43 PM

• Business rescue proceedings end when:
■ the court sets aside the resolution or order that began those proceedings;
■ a business rescue plan has been adopted and implemented;
■ a business rescue plan has been proposed and been rejected;
■ the practitioner files a notice to terminate the business rescue proceedings, or
■ the proceedings have been converted by court to liquidation proceedings.
Business rescue requires the buy-in from various affected stakeholders and if the
company is successfully rescued, it should ultimately be in the best interest and to
the mutual benefit of all concerned.
5.3 Dispute resolution

The financial environment is governed by complex legislation and is saturated
with countless agreements, contracts and transactions. As a result, it is inevitable
that disputes, disagreements, contraventions and complaints frequently arise. The
Companies Act provides various procedures that may be used to address such
complaints, disputes or contraventions. These are:
• Attempting to resolve the matter through alternative dispute resolution (ADR)
• Applying to the Companies Tribunal for arbitration in the matter
• Applying to the High Court for relief
• Filing a complaint with the Takeover Regulation Panel or the Companies and
Intellectual Property Commission.
Alternative dispute resolution (ADR) is the term used to describe methods of
resolving disputes, which do not involve conventional legal action through the
courts. Although there are a number of ADR techniques that may be used to help
settle disputes between parties, we will consider two of the methods that are often
employed, namely mediation and arbitration:
• Mediation is a way of resolving disputes with the assistance of a third party
called a mediator. The mediator facilitates the resolution process by helping the
parties to reach an agreement. The mediator may make recommendations, but
does not impose a binding decision on the parties.
• Arbitration is a way of resolving disputes with the assistance of a third party
called an arbitrator. The arbitrator acts as a private judge, who reviews the facts
of the dispute and imposes a decision that is legally binding to both parties.
Contracts often include a clause stipulating that any future dispute concerning
the contract will be resolved by arbitration.
In recent years, the use of alternative dispute resolution has become increasingly
popular. Some of the advantages of ADR are that it is quicker, cheaper and less
intimidating than court action. Furthermore, ADR processes are confidential and
allows for greater flexibility in resolving disputes.
5.4 Social and Ethics Committee

Another significant feature of the new Companies Act is the requirement of
all public companies and state-owned 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 primary function of the Social and Ethics Committee is to monitor the
company’s activities relating to, among others, social and economic development;
good corporate citizenship; the environment; consumer relationships and certain
employment-related matters. The social and ethics committee is required to report
to the shareholders at the AGM.
Acc GR12 LB.indb 200 6/6/13 6:03:43 PM

This provision is very much in line with the policies of King III and in particular KING CODE
relates to the principle that requires the Board to ensure that the company’s ethics
are managed effectively.
5.5 Transparency and accountability

One of the fundamental aspects of company law is to ensure that companies
operate and report in a transparent manner and are accountable for their actions
and decisions. The Companies Act requires companies to adhere to certain
measures to ensure transparency and accountability. The Act provides that all
companies are required to:
• Have at least one registered office in South Africa
• Maintain certain records for a period of seven years
• Maintain accurate and complete accounting records
• Prepare annual financial statements which satisfy the financial reporting
standards
• File an annual return (including a copy of its annual financial statements and
any other prescribed information).
The Act further provides that public companies and state-owned companies
must have their financial statements audited. Public companies and state-owned
companies are also required to comply with certain additional transparency and
accountability requirements of the Act, which requires these companies to:
• Appoint a company secretary
• Appoint an independent auditor
• Establish an audit committee.
Activity 6.4
Match each of the aspects of the Companies Act in Column A with the most appropriate
description/scenario in Column B. Write down only the numbers (1.–8.) and the
corresponding letters (A.–H.).
Column A Column B
Aspect of the Companies Act Description/scenario
1. Standards of directors’ A. Involves the use of non-conventional methods
conduct to resolve disagreements, such as mediation
and arbitration
2. Conflict of interest B. Must be approved by a special resolution of
the shareholders within the preceding two-
year period
3. Liability of directors C. A director must perform his functions in good
faith, in the best interest of the company and
with a high degree of care, skill and diligence.
4. Directors’ remuneration D. All companies are required to maintain
accurate and complete accounting records
and prepare annual financial statements in
accordance with financial reporting standards.
5. Business rescue E. Required to monitor the company’s activities
relating to issues such as social and economic
development; good corporate citizenship and
the environment
6. Alternative dispute F. A director, without the approval of the rest
resolution of the Board, invests company funds in an
extremely risky venture. The venture fails and
the company loses 90% of the investment.
Acc GR12 LB.indb 201 6/6/13 6:03:44 PM

Column A Column B
Aspect of the Companies Act Description/scenario
7. Social and ethics committee G. A director attends a Board Meeting at which
a decision was taken to award the company’s
advertising contract to a marketing firm
owned by the director’s wife.
8. Transparency and H. The rehabilitation of a financially distressed
accountability company by temporary supervision of the
company and its management
Case study 6.1
Read the following article, which appeared on the Ethics Monitor website, and answer the
questions that follow.
IT IS VITAL FOR A BUSINESS TO MANAGE ETHICS WELL

There are six key reasons why businesses should actively manage, measure, monitor
and report on their ethics.
1. Managing ethics and reporting on ethics are legal requirements in terms of the
Companies Act 71 of 2008.
A new provision of the Companies Act mandates that every state-owned
company, listed public company and most other large companies establish a
social and ethics committee by 1 may 2012. The committee is appointed by
the Board and needs to comprise no less than three directors or prescribed
officers (senior managers or executives), at least one of whom has served as a
non-executive director for the previous three financial years. The committee is
required to draw matters to the attention of the Board as required, and to report
to the shareholders at the company’s AGm.
2. Managing ethics and reporting on ethics are primary recommendations of the
King III Report on Corporate Governance in South Africa.
The king III Report recognises ethics as a central feature of corporate governance.
Chapter 1, “Ethical leadership and corporate citizenship”, includes two noteworthy
principles: Principle 1.1 which states that “The Board should provide effective
leadership based on an ethical foundation” and Principle 1.3 which states that
“The Board should ensure that the company’s ethics are managed effectively”. The
king III Report specifically recommends the assessment, monitoring, reporting
and disclosure of an organisation’s ethical performance, which is “necessary to
provide the Board and management with relevant and reliable information about
the achievement of ethics objectives, the outcome of ethics initiatives and the
quality of the company’s ethics performance.”
3. Directors’ liability in terms of the Companies Act and directors’ responsibility
in terms of King III warrant that they support the regular measurement and
monitoring of ethics.
directors should insist on the regular measurement and monitoring of the
company’s ethics using an independent survey. The survey will provide them with
good insight into the company’s ethical status so that they can make informed
decisions as regards necessary remedial actions. This applies particularly to
non- executive directors who have limited opportunity to personally assess the
business’s ethical behaviour and risk.
Acc GR12 LB.indb 202 6/6/13 6:03:45 PM

4. The effective management and measurement of ethics reduces the risk of
ethical failures and the associated costs. The cost of ethical failure can be very
damaging to an organisation, whether financially, in the forms of fines or legal
settlements, in falling share price, or in eroded market and customer confidence.
Conducting regular ethics surveys is an important feature of a risk strategy to
avoid these costs.
5. A good ethical reputation is an asset which builds ethical capital.
A good ethical reputation brings with it many advantages: It increases brand
equity. It favours easier access to capital and a lower cost of capital. It enhances
employee commitment and customer loyalty. It supports the recruitment and
retention of top talent for employees and the Board. It supports good stakeholder
relationships.
6. Ethics is a valuable source of competitive advantage.
many sources of competitive advantage offer only a limited window of
competitive opportunity because of the ease and speed with which they can
be copied. A unique source of competitive advantage, which cannot be easily
copied, is therefore far more valuable. An ethical culture and an ethical reputation
offer such a source of competitive advantage because it is not easy to copy, it
cannot be bought or sold, and it cannot be owned, but must be lived every day.
Cynthia Schoeman md, Ethics monitoring & management Services (Pty) ltd.
Source: http://www.ethicsmonitor.co.za/Article.aspx?AId=26
Questions
1. What are the main functions of a social and ethics committee?
2. list the two king III principles, mentioned in the article, which stress the importance of
ethics in good corporate governance?
3. Why is it important for directors to “insist on the regular measurement and monitoring
of the company’s ethics”?
4. list and briefly explain three ways in which ethical failures can be costly to a company.
5. list five advantages that a company can gain from having a good ethical reputation.
6. Why, according to the author of this article, is ethics such a valuable source of
competitive advantage?
Case study 6.2
Read the following article, which appeared in the Business Report of the Cape Times on
2 may 2012, and answer the questions that follow.
SPUR SHAREHOLDERS SUPPORT PAY HIKES

by Ann Crotty
AlmoST five months after originally rejecting it, last week Spur shareholders voted
in support of a 40% increase in non-executive director pay for the 2011 and 2012
financial years.
At the group’s AGm in december last year, shareholders refused to vote in favour
of the special resolution needed to authorise the 40% hike in directors’ fees. They also
refused to endorse the restaurant group’s remuneration policy. However, as this was
the subject of a non-binding vote by shareholders, the resolution did not need to be
resubmitted at last week’s general meeting of shareholders.
In a Stock Exchange news Service announcement issued last week, Spur said all
of the resolutions presented to shareholders had been approved. The announcement
did not give any details about the level of support for the various resolutions.
Acc GR12 LB.indb 203 6/6/13 6:03:46 PM

last year’s vote created an extremely unusual and potentially difficult situation
for Spur.
The new Companies Act requires that remuneration may be paid to directors
“only in accordance with a special resolution approved by the shareholders within the
previous two years”.
It appears that Spur had paid the directors for the year to June last year before the
december AGm. At that AGm the shareholders effectively prohibited them from doing
so. Voting at last week’s general meeting has resolved the situation for the Board.
It is unclear why the shareholders voted against the special resolution in
december. A number of analysts said there could have been concern about the fact
that the Board was attempting to secure retrospective approval for the directors’ fees.
Also of concern was that the non-executive directors’ fees increased significantly last
year and were due to increase significantly again this year.
It also appears that the Board and shareholders were unclear about the status of
“abstention” votes. The new Companies Act includes the number of “abstentions” in
the calculation of the total votes.
In the circular issued to shareholders ahead of last week’s meeting, the Board
noted that in line with the requirements of the regulations of the Companies Act,
a social and ethics committee had been elected. The committee consists of non-
executive director keith Getz, chief executive Pierre van Tonder and chief financial
officer Ronel van dijk.
The regulations require the committee to monitor issues relating to the un Global
Compact Principles, the Employment Equity Act, the Broad-based Black Economic
Empowerment Act, matters of employment and the promotion of equality, the
environment and labour.
Spur shares fell 0,6% to close at R16.50 on monday.
Source: Business Report in the Cape Times, 2 may 2012
Questions
1. The article refers to two issues relating to directors’ remuneration which were not
approved by the shareholders at the Spur Group’s AGm in december 2011.
a. What were the two issues?
b. Which of the two issues is governed by the new Companies Act?
c. What does the new Companies Act stipulate in regard to this issue?
d. The other issue is dealt with in king III. Write down a fundamental principle of king
III relating to remuneration of directors.
2. Briefly explain the meaning of the following terms:
a. a special resolution
b. a non-binding vote
3. Give the basic principle of ethics that is referred to in each of the following statements:
a. Companies like the Spur Group should provide full disclosure of each individual
executive and non-executive director‘s remuneration.
b. directors of companies like the Spur Group have a duty to act in the best interest
of the company are answerable to the shareholders.
4. According to the article, the Spur Group has recently elected a specific committee that
is required by the new Companies Act.
a. What is the name of this committee?
b. Briefly describe the main function of this committee.
5. Why do you think the share price of the Spur Group fell after it was announced that
the shareholders had approved the 40% increase in non-executive director pay?
Acc GR12 LB.indb 204 6/6/13 6:03:47 PM

Chapter 7
Interpretation and reporting on the
movement of fixed assets
• Make informed decisions on the outcome of the movement of fixed assets • purchase and
• Determine the age of an asset acquisition of fixed
• Determine the lifespan of an asset assets • depreciation
• Interpret on the asset disposal process • accumulated
• Report on asset disposal depreciation • carrying
• Calculate how often an asset needs to be replaced value • historical cost
• Know what the GAAP principles are with regards to fixed assets • internal auditing
• Relate to ethical issues pertaining to fixed assets • control of fixed assets
• Understand and discuss internal audit and internal control processes with • fixed asset register
• lifespan of fixed assets
regards to fixed assets
• age of fixed assets
• replacement rate of
I updated the fixed assets fixed assets • net realisable
register to show the new value of fixed assets
computers we received
• disposal of fixed assets
this morning.
• trade-in
Thanks, I’ll come around

later to verify the update
and sign the register.
I n terpretati o n a n d rep o rti n g o n the m o ve m e n t o f fixe d assets • C h a p t e r 7 205
Acc GR12 LB.indb 205 6/6/13 6:03:48 PM

1. Introduction
In Accounting, assets of a more
In Grade 11 you learnt that fixed (tangible) assets are bought in order to generate
permanent nature are referred to as an income for the business. They are resources that are bought to bring in
either fixed or tangible assets. In this book immediate and future economic benefit for the business.
we will use fixed assets as this is the most
common term used. Example: A business delivering packages to customers cannot operate without a
delivery vehicle. The delivery vehicle allows them to conduct their business and
therefore brings in income for the business.
Without fixed assets a business cannot function properly. Assets are recorded
under five main categories:
• Land and buildings • Equipment
• Vehicles • Office furniture
• Machinery
2. Many uses of fixed assets

Fixed assets are used in many business functions, where they:
• Assist in the production of goods, for example, sewing machines used to make
dresses
• Assist in administration, for example, office computers used to capture
accounting transactions
• Make shopping convenient for customers, for example, shop shelves and tills in
acquisition a supermarket
the act of adding to a collection • Speed up operating processes, for example, a delivery vehicle used to deliver
stock to various customers.
procurement
the process of getting supplies, the 3. Purchase or acquisition of fixed assets
procedure followed when acquiring The business will buy an asset after it is established that it needs the asset and
fixed assets
when all the proper acquisition and procurement procedures have be completed.
The asset will be recorded into the books of the business at its cost price according
GAAP flash to the historical cost principle, which states that when an asset is bought it is
Historical cost principle: The recorded and remains in the books at its original cost price.
asset remains in the books of the
business at its original cost price Once procedure has been followed, the item is purchased and when it arrives at the
until it is disposed of.
business premises it is entered into the books as follows:
General Ledger Accounting equation

Transaction Source document
Account debit Account credit A OE L
Bought vehicle on credit Invoice Vehicles Creditors control + +
Bought equipment cash Cheque counterfoil Equipment Bank +
–
Land and buildings purchased Transfer deed Land and buildings Mortgage bond + +
and a mortgage bond taken out
against the purchase price
Owner of a close corporation gave Journal voucher Vehicles Capital + +
a delivery vehicle as part of his
capital contribution
The cost price of the asset includes a variety of expenses and is determined
as follows:
Cost price = purchase price + direct costs
Direct costs are costs attributed to bringing the asset into a workable state and
include: transport costs, delivery costs or handling costs incurred in getting the
asset to the business premises and installation costs.
206 Chapter 7 • I n T E R P R E TAT I o n A n d R E P o R T I n G o n T H E m o V E m E n T o F F I X E d A S S E T S
Acc GR12 LB.indb 206 6/6/13 6:03:48 PM

Activity 7.1
Required
Use the information provided for Muso Stores to answer the questions below.
1. The table contains a list of double entries entered into the General Ledger of Muso
Stores during the financial year. Write down the transactions that gave rise to the
particular entries being made. An example has been completed for you to follow.
General Ledger
No. Transaction
Account debited Account credited
e.g. Equipment Bank Bought equipment for cash
a. Vehicles Creditors Control
b. Creditors Control Equipment
c. Equipment Capital
d. Land and Buildings Mortgage Bond
e. Bank Equipment
2. What is the cost price of a vehicle if the following information is made available?
Purchase price R245 000
Licensing fee R525
Installation of alarm and tracking device R2 150
3. Which amount will be entered into the Vehicles account as the historical cost value if
the vehicle bought costs R185 000 and a deposit of R65 000 is paid on the vehicle?
a. R120 000 c. R185 000
b. R250 000 d. R65 000
INTERNAL AUDIT
4. The owner of Muso Stores bought a vehicle for R85 000 and paid cash. The vehicle
INTERNAL AUDIT
has an actual book value of R160 000 but he bought it for a cheaper price because the
previous owner was emigrating (leaving the country). He wants the bookkeeper to
enter the vehicle into the books at R160 000.
Can he instruct her to do this? Give three reasons for your answer.
5. Mention three actions that the business must take after an asset is purchased.
4. Internal auditing of fixed assets INTERNAL

INTERNAL AUDIT
AUDIT
Fixed assets must be properly recorded and monitored and be regularly audited.
The audit process includes the following:
INTERNAL AUDIT
INTERNAL AUDIT
• Check the mileage travelled on each vehicle.
• Check that the vehicles are in proper
working order.
• Check that they are being used for the
purpose for which they were bought.
• Check that the computers and machines are in working order
and that they are where they are supposed to be.
• Ensure that the fixed asset register is properly updated
fixed asset register
when assets are bought, revalued, sold or depreciated.
• Perform a physical stock count of each fixed asset owned a book in which all assets owned by the
by the business and reconcile the physical stock count with business is recorded
the fixed asset register.
Acc GR12 LB.indb 207 6/6/13 6:03:49 PM

After an audit, the business should fix broken assets and get rid of redundant ones.
It is therefore vital that an internal audit of fixed assets be done regularly and that
staff report malfunctioning assets to management on time.
5. Proper use of fixed assets

The acquisition (purchase) of fixed assets results in huge cash outflows for the business.
It is therefore vital that the business maintains proper control of its fixed assets.
Controls for fixed assets include:
INTERNAL
CONTROL
• Proper authorisation and approvals is needed for purchasing stock.

• Fixed assets must be secured against theft, misuse and loss.
• Before a fixed asset is bought, the proper authorisation and permission must be
obtained from management.
• Proper records of the asset must be kept and any movement of fixed assets must
be properly recorded.
• Stock take of assets should be done regularly and accurately.
• Proper checks and audits of fixed assets must be done.
• Lost, stolen, damaged or destroyed assets must be
reported immediately.
• Depreciation policies must be established.
• They should have a maintenance plan and assets should be
serviced regularly.
Activity 7.2
Answer the following questions on internal auditing and controls.

1. What is a fixed asset register?
2. Zandile is the internal auditor of Nayo Transport Company. Explain how the fixed asset
register will assist her in the course of her duties.
3. Match the statement in Column A to the word in Column B. Write only the number
(1.–5.) with the correct answer’s letter (A.–F.).
Column A Column B
1. Assets are recorded in the books at their A. Depreciation
original cost.
2. The collective amount written off against the B. Fixed assets
assets cost price over a period of time.
3. Assets which makes the administrative C. Vehicles
process easy to manage
4. Assets which are bought for the purpose of D. Accumulated depreciation
generating an income
5. The imputed expense written off against the E. Historical cost principle
asset’s cost price every year
F. Equipment
208 Chapter 7 • I n terpretati o n a n d rep o rti n g o n the m o ve m e n t o f fixe d assets
Acc GR12 LB.indb 208 6/6/13 6:03:50 PM

4. mike works for a sound and lighting company. He decided to use some of the sound
equipment over the weekend for his cousin’s party without asking permission from his
supervisor. He received payment from his cousin for the “hire” of the sound equipment.
a. What could happen to mike if his supervisor finds out he used the equipment?
b. Was it ethical of mike to receive payment for the use of the equipment?
c. What advice would you give the company in order prevent something like this
from happening again?
d. Why is it important for the business to do regular internal audits on their fixed assets?
6. Lifespan of a fixed asset lifespan
Every fixed asset has a lifespan or a useful economic life. Because fixed assets “work” (for a fixed asset) how long an asset will
be economically useful to the business
in generating an income for the business, they wear and tear or become obsolete.
They break and become outdated, especially computers and machines. Sometimes
a fixed asset becomes too expensive for the business to maintain or fix. The business wear and tear
can therefore not keep the fixed asset forever. However, planned and regular damage that happens to a fixed asset or
maintenance of the fixed asset can prolong the useful life of that fixed asset. item during ordinary use over a period
of time
6.1 Lifespan of a new fixed asset
When a new fixed asset is purchased, the following is considered when
determining the lifespan of that particular asset:
• How long will the particular asset be economically useful? For example,
vehicles are often replaced when their service warrant expires. After this it
becomes costly to maintain the vehicle. Computers are often replaced by
newer, faster models which allows for more processing speed.
• How efficient is a machine in producing items? For example, machines are
replaced after they have produced a certain number of garments or because
more technologically advanced ones are available.
There is no set formula in determining the lifespan of a new fixed asset because it
all depends on the nature of business, the type of fixed asset and what that asset
will be used for.
6.2 Lifespan of an existing fixed asset

The following example explains the calculation that can be used to determine the
useful life of an existing fixed asset.
Example
Required
Determine the useful life of an existing fixed asset based on the information
provided.
Information
Cost price of the fixed asset R320 000
Accumulated depreciation R192 000
Carrying value R128 000
Depreciation on the above asset is R64 000 (20% p.a. on the cost price).
Solution
We use the following formula to work out the useful life of a fixed asset: This calculation is only possible
when the business uses the straight
Cost price
___________ line (cost price) method of depreciation.
Depreciation = ______ years
320 000 = 5 years
Therefore: ______
64 000
I n T E R P R E TAT I o n A n d R E P o R T I n G o n T H E m o V E m E n T o F F I X E d A S S E T S • C h a p t e r 7 209
Acc GR12 LB.indb 209 6/6/13 6:03:50 PM

age of a fixed asset 7. Age of a fixed asset
how long the business has had the According to the historical cost principle, when a fixed asset is bought it is
fixed asset
recorded and remains in the books at its original cost price. Each year the fixed
asset is depreciated and the accumulated depreciation reduces the value of the
GAAP flash fixed asset in the books. We apply the following formula to work out the carrying
Historical cost principle: The fixed (book) value of the fixed asset:
asset remains in the books of the Carrying (book) value = Cost price – accumulated depreciation
business at its original cost price
until it is disposed of. Example
Required
Determine the age of an existing fixed asset based on the information provided.
Information
Depreciation on the above fixed asset is R64 000 (20% p.a. on the cost price).
Solution
This calculation is only possible We use the following formula to work out the age of a fixed asset:
when the business uses the straight
line (cost price) method of depreciation. Accumulated depreciation
_____________________
Depreciation = ______ years
192 000 = 3 years
Therefore: ______
64 000
replacement rate 8. Replacement rate of a fixed asset

what it would cost to replace an old fixed Fixed assets need to be replaced from time to time. This means that an old fixed
asset with a new one
asset is sold and is replaced with a new one. Because there is value in the old fixed
asset, the value of the old fixed asset is set off against the price of the new one.
When a fixed asset needs to be replaced, the following formula is applied to
calculate what it would cost to replace the old fixed asset with a new one:
Replacement rate = Cost price of new fixed asset – carrying value of old fixed asset
Example
Required
Determine the replacement rate of an existing fixed asset based on the
information provided.
Information
The business decided to replace the above fixed asset with a new one because the
maintenance on the old fixed asset was becoming expensive. The new fixed asset
will cost R500 000.
Solution
We use the following formula to determine the replacement rate of a fixed asset:
Replacement rate = Cost price of new fixed asset – carrying value of old fixed asset
Therefore: R500 000 – 128 000 = R372 000
210 Chapter 7 • I n T E R P R E TAT I o n A n d R E P o R T I n G o n T H E m o V E m E n T o F F I X E d A S S E T S
Acc GR12 LB.indb 210 6/6/13 6:03:50 PM

9. Net-realisable value (NRV) GAAP flash
The net-realisable value of a fixed asset is the value that the business would receive Prudence principle:
for a fixed asset if they were to sell it, less any expenses incurred in selling the A conservative approach is used
when valuing assets.
asset. We can therefore say that it is the cash amount that the fixed asset would be
converted into once it is sold. If the business discloses the NRV in their financial
records, it would be a conservative estimate in line with GAAP.
However, in the case of Land and Buildings where the market value could be
higher than the historical cost, the business will have to motivate why it would
want to revalue the land and buildings it owns. The conservative approach would
be to revalue it to lower than market value because the market value might not be
realised if it was sold.
Example: If a building that was bought for R500 000 a few years ago has a market
value of R1,8 million, the business could revalue the building to R1 million.
Activity 7.3
1. You are presented with the following information extracted from the books of Salie
Caterers (Pty) ltd.:
Historical Accumulated Carrying value

cost price depreciation
Vehicle A ? 87 000 58 000
Vehicle B 230 000 ? 161 000
The company’s policy is to depreciate its vehicles at 10% p.a. using the straight-line
method (on cost price).
a. Calculate the useful life of Vehicle A.
b. Calculate the age of Vehicle B.
c. If Vehicle B were to be replaced by a new vehicle costing R195 000, what would the
replacement rate of the new vehicle be?
2. The notes to the Balance Sheet of Salie Caterers states that the value of its building
is R800 000 as when it was purchased 10 years ago. The company found out that
the current market value of the building is R2,5 million. The company accountant
insists that the business continues to reflect the building at a value of R800 000 in the
Balance Sheet.
a. mention the GAAP principle that is being adhered to.
b. one of the directors would like to see the building revalued to R1,8 million and
not at the market value of R2,5 million. mention the GAAP principle that is being
adhered to.
c. Revaluing the building would mean the company would be increasing its net
worth. What is net worth and how would it increase? Explain using your own values.
3. Provide reasons why the company would want to sell one of its vehicles.
4. Why is it important for a business to know the age of its fixed assets?
5. Why is it important for a business to know the useful life of its fixed assets?
10. Disposal of fixed assets

In Grade 11 we learnt that a fixed asset is sold when it is no longer needed by
the business or needs to be replaced. Machines and computers often need to be
replaced or upgraded because of technological advances in the industry. Vehicles
often need to be replaced because of wear and tear, which makes them very
expensive to maintain. When this happens, the business will sell its old fixed assets
I n T E R P R E TAT I o n A n d R E P o R T I n G o n T H E m o V E m E n T o F F I X E d A S S E T S • C h a p t e r 7 211
Acc GR12 LB.indb 211 6/6/13 6:03:50 PM

and replace them with new ones. This process is called asset disposal. In Grade 12
you will analyse and interpret the asset disposal process.
The following is a summary of transactions entered in the business’s books
when recording the disposal of fixed assets. Fixed assets could be sold for cash or
on credit, or traded in on a new fixed asset.
10.1 Asset sold for cash

Account to Account to
Transaction Amount
debit credit
Sold an old computer for R1 500 cash. Asset disposal Equipment R6 000
The original cost price of the computer Accumulated
was R6 000 and the accumulated depreciation Asset disposal R5 000
depreciation to date of sale was R5 000. on equipment
Bank Asset
(R6 000 – 5 000 = R1 000 carrying value) R1 500
disposal
(R1 500 – 1 000 = R500 profit) Profit on sale
Asset disposal R500
of asset
10.2 Asset sold on credit

Account to Account to
Transaction Amount
debit credit
Sold an industrial sewing machine on Asset disposal Equipment R20 000
credit to B Bheki for R8 000. The original Accumulated
cost price of the machine was R20 000 depreciation Asset disposal R10 200
and the accumulated depreciation to on equipment
date of sale was R10 200. Debtors Asset
R8 000
control disposal
(R20 000 – 10 200 = R9 800 carrying value) Loss on sale of
(R8 000 – 9 800 = R1 800 loss) Asset disposal R1 800
asset
10.3 Asset traded in

Transaction Account to debit Account to credit Amount
Traded in an old truck, which originally Asset disposal Vehicles R120 000
cost the company R120 000, for a new Accumulated
truck. The accumulated depreciation depreciation Asset disposal R78 000
on the old truck to date of sale was on vehicles
R78 000. The old truck was traded in
at the carrying value.
Creditors Asset
R42 000
(R120 000 – 78 000 = R42 000 carrying control disposal
value)
11. Analysing and interpreting a fixed asset register

All information concerning fixed assets purchased by the business must be kept
in a fixed asset register. This register must be updated annually when the asset
has depreciated.
A special procedure called asset disposal is followed when either selling an asset
or disposing of it in another way. The movement of fixed assets is recorded in the
notes to the financial statements. The fixed asset register for a particular asset is
closed off as soon as the asset has been sold.
Acc GR12 LB.indb 212 6/6/13 6:03:50 PM

Activity 7.4 (baseline assessment)
The following is an extract from the fixed asset register of D&M Roofing Contractors:
Fixed asset register of D&M Roofing Contractors Folio 2

Make: Nissan 4×4 2.7 Diesel Van (CA 857 325)
Model: 2011
Date of purchase: 01 March 2001 Date sold: 01 March 2013
Purchased from: Africa Cars Sold to: B Nagels
Cost: R67 500 Sold for: R15 000 cash
Depreciation: 10% per annum
Date Depreciation Accumulated Carrying value
depreciation
29 February 2002 R6 750 R6 750 R60 750
28 February 2003 R6 750 R13 500 R54 000
1 March 2003-28 February 2009 pass
28 February 2010 R6 750 R60 750 R6 750
28 February 2011 R6 749 R67 499 R1
Required
1. What method was applied to depreciate this vehicle? State the reason for your choice.
2. How long is the useful life of this vehicle?
3. For how many years did the business keep this vehicle?
4. Give one possible reason why the business could have sold this vehicle.
5. Would you say that the business had utilised this vehicle to its optimum potential?
The following is an extract from the fixed asset register of Tandi’s Builders:
Fixed asset register of Tandi’s Builders Folio 1

Make: Delivery vehicle –Toyota Hilux
Model: 2017
Date of purchase: 01 September 2017 Date sold: 01 March 2021
Purchased from: Best Vehicles Sold to: Buddy Motors
Cost: R160 000 Sold for: R75 000 trade-in
Depreciation: 20% per annum
depreciation
29 February 2018 R16 000 R16 000 R144 000
28 February 2019 R28 800 R44 800 R115 200
29 February 2020 R23 040 R67 840 R92 160
28 February 2021 R18 432 R86 272 R73 728
Required
1. What method was used to depreciate this vehicle? State the reason for your choice.
2. For how many years did the business keep this vehicle?
3. Why would Tandi want to trade in the Toyota Hilux?
4. Calculate the profit or loss made on the trade-in of this vehicle.
5. Would you say that the business had good use from this vehicle?
Acc GR12 LB.indb 213 6/6/13 6:03:50 PM

Required
The following is an extract from the fixed asset register of Woodcraft:
Fixed asset register of Woodcraft Folio 7

Description: Makita bench saw
Date of purchase: 01 March 2016 Date sold: 29 February 2020
Purchased from: Tools for Africa Sold to: Peter’s Wood Works
Cost: R3 500 Sold for: R1 500 on credit
Depreciation: 10% p.a. on the diminishing balance
depreciation
28 February 2017
28 February 2018
28 February 2019
29 February 2020
Required
Copy the register above into your Exercise Books and then answer Questions 1 to 3.
1. Complete the depreciation, accumulated depreciation and carrying value columns.
2. Calculate the profit earned or loss suffered on the sale of the asset.
3. The asset was replaced because the owner wanted a more technologically advanced
asset. What benefits would a new bench saw offer the business?
4. Think about the use and value of assets to answer the questions below.
a. Would the rate of depreciation be higher for vehicles or for computers? Motivate
your answer.
b. Why would computers be replaced more often than vehicles?
12. Analysing and interpreting the General Ledger

accounts and the Fixed Assets note
The General Ledger provides valuable information with regards to the purchase,
depreciation and disposal of fixed assets. It provides details such as specific dates of
the purchase and sale of each asset. By studying the General Ledger assets accounts
such as Vehicles and Equipment, the accountant will be able to provide management
with information with which they make important decisions. The Fixed/Tangible
Assets note to the Balance Sheet will provide an overview of the movement in the
value of fixed assets for the financial year concerned. These records are tools used
by management to analyse and interpret fixed asset information.
Activity 7.7
West Manufacturing (Pty) Ltd. started their business on 1 September 2019. The current
financial year ends on 28 February 2021.
Required
Study the information in the following ledger accounts. Then answer the questions
that follow.
Acc GR12 LB.indb 214 6/6/13 6:03:50 PM

Information
General Ledger of West Manufacturing (Pty) Ltd.
Dr Vehicles Cr
2019 2020
Sep 01 Creditors control CJ 100 000 00 Feb 29 Balance c/d 160 000 00
Bank CPJ 60 000 00
160 000 00 160 000 00
2020 2020
Mar 01 Balance b/d 160 000 00 Sep 01 Asset disposal GJ 60 000 00
Sep 01 Creditors control CJ 100 000 00 30 Balance c/d 200 000 00
260 000 00 260 000 00
2020
Oct 01 Balance b/d 200 000 00
Dr Accumulated Depreciation on Vehicles Cr

2020 2020
Sep 01 Asset disposal GJ 12 000 00 Feb 29 Depreciation GJ 16 000 00
Sep 01 Depreciation GJ 6 000 00
2021
Feb 28 Depreciation GJ 30 000 00
Nominal account
Dr Profit on Sale of Asset Cr
2021 2020
Feb 28 Profit and loss GJ 6 000 00 Sep 01 Asset disposal GJ 6 000 00
Depreciation is provided for at 20% per annum on the cost price of vehicles.
Questions
1. How many vehicles did the business purchase on 1 September 2019?
2. What method of payment was used to purchase the vehicles?
3. On what date did the business sell one of the vehicles?
4. For how long did the business keep this vehicle?
5. Why do you think this vehicle was sold so soon?
6. Did the business sell the vehicle for cash, on credit or did they trade it in? State the
reason for your answer.
7. What is the selling price of the vehicle? Reconstruct the Asset Disposal account to
calculate this.
8. Do you think the business received a fair price for the vehicle they sold? Answer yes or
no, and state the reason for your answer.
Acc GR12 LB.indb 215 6/6/13 6:03:51 PM

Activity 7.8
The following note was extracted from the financial statements of Mkefa Resources Ltd.
on 31 August 2021.
Information
Cost 240 000 125 000 11 400
Movements
Additions 60 000 62 500 2 300
Disposals at carrying value – (620)
Cost 300 000 187 500 12 300
The equipment was sold on credit to R Allie at carrying value on 31 August 2021.
Required
Use the information to answer the following questions.
1. Reconstruct the Asset Disposal account.
2. Name the account to be debited and the account to be credited with the R22 250.
3. The additional vehicle was bought on credit for R62 500. Show the effect of this
transaction on the accounting equation (A = OE + L).
4. What amount will be disclosed in the Balance Sheet for fixed assets?
5. According to which concept of GAAP, must fixed assets be disclosed at their carrying
value in the financial statements?
Informal assessment 7.1 (challenge)

1. Complete the note to the financial statements for Fixed/tangible assets found in
the Balance Sheet of Moletsane Investments (Pty) Ltd., a private company owned
by A Moletsane and B Moletsane, as on 30 June 2020. [14]

buildings
Carrying value at beginning of year 1 850 000 (a) (b) (c)
Cost 1 850 000 480 000 (d) 2 500 000
Accumulated depreciation – (e) (87 040) (519 040)
Movements
Additions (f) – (g) 473 000
Disposals at carrying value – – (16 384) (16 384)
Depreciation – (47 999) (h) (i)
Carrying value at end of year 2 300 000 (j) (k) (l)
Cost 2 300 000 480 000 143 000 2 923 000
Accumulated depreciation – (m) (70 016) (n)
Acc GR12 LB.indb 216 6/6/13 6:03:51 PM

• During the year, additions were made to the building.
• All the old equipment was disposed of on the last day of the financial year.
• The new equipment was bought on the last day of the financial year.
• Vehicles are depreciated at 10% on the cost price.
• Equipment is depreciated at 20% p.a. on the diminishing balance.
2. Explain the value of Vehicles at the end of the financial year. [2]
3. Reconstruct the Asset Disposal account of Moletsane Investments (Pty) Ltd.
The equipment was donated to a children’s home by shareholder A at the
carrying value. [7]
4. Shareholder B was unhappy with the fact that the equipment was donated and wanted
to sell it at a profit of R7 200. The company received several offers for the equipment.
4.1 Argue in favour of shareholder A for donating the equipment to the
children’s home. [3]
4.2 Argue in favour of shareholder B for wanting to sell the equipment and make
a profit of R7 200. [3]
5. What affect would the sale of the asset at a profit of R7 200 have had on the
financial statements? [2]
You are provided with the information relating to fixed asset of Kagee Traders for the
financial year March 2016 to February 2017.
Required
Study the ledger accounts given below and answer the following questions.
1. Calculate the rate of depreciation applied to vehicles. [5]
2. State the method of depreciation applied to vehicles. Give a reason for your answer. [4]
3. Calculate the carrying value of Vehicles on 28 February 2017. [10]
4. Calculate the carrying value of Vehicles sold on 31 August 2016. [6]
5. Calculate the profit or loss on the sale of vehicles on 31 August 2016 [5]
6. What amount for depreciation will appear in the Profit and Loss account on
28 February 2017? [6]
Information
General Ledger of Kagee Traders
Dr Vehicles Cr
2016 2016
Mar 01 Balance b/d 81 000 00 Aug 31 Asset disposal 27 000 00
Dr Accumulated Depreciation on Vehicles Cr

2016 2016
Aug 01 Asset disposal 22 950 00 Mar 01 Balance b/d 38 400 00
Aug 31 Depreciation 1 350 00
Nominal account
Dr Asset Disposal Cr
2016 2016
Aug 31 Vehicles 27 000 00 Aug 31 Accum. Depreciation on Vehicles ?
Debtors control 9 000 00
Acc GR12 LB.indb 217 6/6/13 6:03:51 PM

Chapter 8
Financial accounting of close corporations
Key concepts By the end of this chapter, you will be able to:
• close corporations • Define and explain the following concepts unique to a close corporation:
• legal entity • limited ■ Founding statement
liability •continuity ■ Members
• Founding Statement ■ Loans to members
• members • members’ ■ Loans from members
interest • Certificate of ■ Distribution to members
Membership • loans to • Compare a close corporation and a public company and know the differences
members • loans from with regards to:
members • distribution ■ Formation
to members ■ Ownership
■ Distribution of profits
■ Taxation
• Compare the financial statements of a public company and a CC and know
the differences
Have you spoken to the

accountant yet about converting
from a CC to a Pty Limited?
I should be receiving the

information this week. Then
we can fill in all the documents
and begin the process.
218 Chapter 8 • F i n a n cia l acc o u n ti n g o f c l o se c o rp o rati o n s
Acc GR12 LB.indb 218 6/6/13 6:03:51 PM

1. Introduction
In Grade 10 you learnt about the sole proprietor, the form of business ownership
belonging to only one person. In Grade 11 you learnt about the partnership, suited
for 2 to 20 people. These types of business entities do not have legal personality
and are not separate from their owners. Both these business entities are relatively
easy to form but have a disadvantage in that the owners or partners are fully liable
for the debts of the business. These types of business also lack continuity.
In Chapter 1 of this book you learnt about public and private companies and
the main differences between these two. You also learnt that companies are a lot
more regulated and that they are quite expensive to form.
In this chapter, you will discover that a close corporation (CC) is easier to
form and a more flexible type of business to run compared to a company. It was
originally introduced to enable smaller businesses to obtain corporate status with a
legal personality separate from its owners (who are known as members), as well as
providing limited liability and continuity.
However, the new Companies Act has made it easier for small businesses to
start trading as companies, and the CC is now being phased out (see article on
page 220). But CCs will still be around for several more years, and part of your
Accounting duties in the real world may require you to know how to do the books
of a CC.
2. Why were close corporations introduced?

The main intention of the Close Corporations Act 69 of 1984 is for a business to
form a legal entity that is easier to administer than a company formed in terms
of the Companies Act. Another reason is that the administration of a company
is complex, so forming a CC is attractive because it is simpler and less expensive
to operate. From 1 January 1985, it became possible for a business to register as a
close corporation (CC) under the Close Corporations Act.
3. Characteristics of a close corporation

The characteristics made the CC an attractive option to small businesses:
• It is simpler to form than a company and designed in such a way that an
ordinary person would be able to draft the papers and register the CC
themselves.
• It is ideally suited for small businesses.
• Managerial and administrative requirements are less formal than those of a
company.
• Its formation, management and administration is regulated by the Close
Corporations Act 69 of 1984.
• It is required to have an Accounting Officer.
• Members of a CC are not required take an active role in running the business.
However, in most cases the members of the CC are also the managers of the
business.
• All members must take part in decision making.
4. Reasons for choosing a CC as a form of business

• Legal procedures with regards to registration and administration are relatively
easy and inexpensive.
• A CC is a legal entity which means that it has legal persona and thus exists
separately from its members.
F i n a n cia l acc o u n ti n g o f c l o se c o rp o rati o n s • C h a p t e r 8 219
Acc GR12 LB.indb 219 6/6/13 6:03:51 PM

• The members have limited liability which means that the members are not
personally liable for the debts of the CC.
• The CC does not have to submit audited financial statements to the Registrar.
• It has legal personality separate from its members and therefore has continuity.
This means that if a member sells his member’s interest or dies there will be no
interruption in business activities.
• An AGM need not be held as in the case of a company. However, meetings
should be held between members on an ad hoc basis.
• All members take part in the management of the business.
• A CC may become a shareholder in other companies
As mentioned earlier, CCs are being phased out and according to the new
Companies Act 71 of 2008, no new CCs may be formed. Companies may also no
longer convert to CCs. The following articles below address this issue.
THE NEW COMPANIES ACT AND CLOSE CORPORATIONS

The Companies Act 71 of 2008 which were formed and incorporated
(New Companies Act) came into effect prior to 1 May 2011 (including those
on 1 May 2011. whose registration was pending before
The New Companies Act has the Registrar of Companies on that date)
not repealed (cancelled) the Close remain in existence until wound up,
Corporations Act 69 of 1984 (Close deregistered or converted to a company.
Corporations Act), nor has it done away The provision in the Close
with close corporations. Corporations Act which provided for
Rather, it will: the conversion of companies to close
corporations has been repealed (revoked).
• ultimately result in the phasing out of
It would appear that the intention
close corporations;
behind phasing out close corporations is
• provide for the conversion of close to have one uniform set of rules governing
corporations to companies; and corporate entities, which rules will be
• amend the close corporations Act with applied differently depending on the
the result that certain provisions of nature of the corporate entity’s business,
the New Companies Act govern close rather than formalities associated with
corporations as well as companies. incorporation.
From 1 May 2011, close corporations may
no longer be formed. Close corporations
Source: Article was extracted from http://www.coxyeats.co.za/wp-content/uploads/Circular_No_2_Close-

Corporations.pdf (published 2 June 2011)
THE FUTURE OF CLOSE to CCs will be accommodated by the

new Companies Intellectual Property
CORPORATIONS Commission (CIPC) which is scheduled to
be implemented at the same time that the
Pretoria, Thursday, 10 March 2011 –
Act is put into effect.
Registration of close corporations (CC)
will cease under the new Companies Conversion to private company
Act which comes into effect on 1 May The new Act does not force close
2011; however currently registered close corporations to convert into companies.
corporations will still be maintained. However, due to simplified legislation,
reduction of regulatory burden and
The new Companies Act provides for simplicity of formation, this is encouraged.
the continued existence of currently The private company will replace the
registered close corporations (CC), but CC as the preferred vehicle for small and
negates any further registrations of new medium businesses under the new Act.
CCs. All existing CCs registered with the The Companies and Intellectual
Companies and Intellectual Property Property Commission
Registration Office (CIPRO) as of the As provided for in the New Companies
effective date of the new Act (1 May) will Act 71 of 2008, CIPRO and the Office of
continue to exist, and all amendments Companies and Intellectual Property
Acc GR12 LB.indb 220 6/6/13 6:03:51 PM

Enforcement (OCIPE) will join to form • Non-profit companies: which are
a Commission on the 1st of May 2011. the successor to companies limited
The Commission will be known as the by guarantee and Section 21
Companies and Intellectual Property companies; and
Commission (CIPC). • For profit companies which are:
The Commission will perform the ■ private companies;
following functions: registration of ■ public companies;
companies, co-operatives and intellectual ■ personal liability companies;
property rights, public education and
awareness, enforcement, research,
■ state-owned companies.
legal advisory services and stakeholder
For more information, customers can
management.
visit the CIPC website on www.cipc.co.za
Categories of companies or the Call Centre on 0861 843 384.
The new Companies Act provides for two
categories of companies:
Source: Article downloaded from http://www.cipc.co.za/Publications_files/MediaReleases/

TheFutureOfCloseCorporations.pdf [Accessed 13 August 2012]
5. The Founding Statement

Any intention to register a CC had to be followed by the completion of the CK1
form which is called the Close Corporation Founding Statement. This Statement
had to be signed by all those intending to become members of the CC and had to
be lodged for approval by the CC Registration Office.
The CK1 form contains the following particulars:
a. The full name of the close corporation
b. The principal business to be carried on by the close corporation
c. (i) A postal address; and
(ii) The physical address of the close corporation
d. The full name of each member, including the identity number and residential
address
e. The size, expressed as a percentage, of each member's interest in the close
corporation
f. Particulars of the contribution of each member to the close corporation
g. (i) Any amounts of money; and
(ii) A description, and statement of the fair value, of any property or any
service rendered
h. (i) The name and postal address of a qualified person or firm appointed as the
Accounting Officer of the close corporation
(ii) The date of the end of the financial year of the close corporation.
6. Members of a CC
The owners of a CC are called members. There may be a minimum of one
member and a maximum of 10 members in a CC. Only natural persons may
be members of a CC and not juristic persons like companies or trustees. Every
member must make an initial contribution, which is recorded in the Founding
Statement. This may be in the form of money, other assets or services provided to
the CC in connection with and for the purpose of forming the close corporation.
7. Certificate of Membership
Each member will receive a Certificate of Membership which is signed by every
member. This Certificate must state the member’s percentage interest in the CC.
Acc GR12 LB.indb 221 6/6/13 6:03:52 PM

8. Member’s interest
The member’s interest is the percentage of the total capital invested in the CC.
For example: Member A owns 25% and member B owns 30% while member
C owns 45%.
30% + 25% + 45% = 100% (the members’ interest which is the total capital invested).
However, the member’s interest does not necessarily have to be equally
proportioned to their capital invested into the CC.
Another way of explaining this is if Buhle, Samantha and Cwenga contributed
R320 000, R450 000 and R670 000 respectively, the Founding Statement could
reflect their member’s interest as follows:
Buhle 25%
Samantha 30%
Cwenga 45%
Activity 8.1
1. Define the term “legal entity”.

2. Define the term “limited liability”.
3. What are the owners of a CC called?
4. How many owners can a CC have?
5. When a person wants to form a CC, which document must they complete?
6. Explain the main reason why CCs came into existence.
7. Name the Act that governs CCs.
8. Explain what it means when reference is made to a CC having continuity.
9. Who oversees the accounting processes of a CC?
10. What must a company submit to the Registrar, but a CC does not have to?
9. Loans to members
Under certain circumstances, loans can be made to members by the CC. It can
only be done if consent is received in writing from all the members. This loan to
a member is an asset to the CC and will reflect in the Balance Sheet as such. It
is an asset because it is considered to be an investment. The CC may charge the
member interest on the loan as well.
10. Loans from members

In the same way that a loan can be made to a member, money can also be
borrowed from a member. This loan from a member is a liability to the CC
because it is money owed to someone. Interest will be paid to the member on the
borrowed amount. The loan from a member will appear in the Balance Sheet as a
liability.
A loan agreement will be drawn up in both cases and the member and CC must
comply with what is stipulated in the loan agreement. Sometimes the members of
the CC can agree on an interest-free loan to or from a member.
11. Distribution to members

The distribution of net profit after tax to members is not automatic. Members
must agree to whether a distribution of profits will be made. A distribution will
only be made after the financial statements have been completed and the solvency
and liquidity requirements are met. The distribution is not regarded as a normal
Acc GR12 LB.indb 222 6/6/13 6:03:52 PM

operating expense but rather as an appropriation of profits in the Transactions
with members note in the financial statements.
Profits that have not been distributed to members will be regarded as retained
income (accumulated profits).
12. Comparing a company to a CC

Let’s have a look at the similarities and differences between the characteristics of a
company and a close corporation.
The following table compares the characteristics of a company to a close
corporation:
Company Close corporation

Is a registered legal entity Is a registered legal entity
Owners called shareholders Owners called members
Owners have limited liability for debts of the Owners have limited liability for debts of
company the CC
Continuity of ownership because shares can Continuity of ownership because
be sold membership can be transferred.
– Private company sale of share are
restricted
– Public company sale of shares on the JSE
Private company: can have one or more Minimum of one and maximum of
shareholders 10 members
Public company: 7 to an unlimited amount of
shareholders
Founded by completing a Memorandum of Founded by completing a Founding
Incorporation Statement
Owners (shareholders) own shares in the Owners (members) holds members‘ interest
company. in the CC.
Shareholders’ investment in the business is Members’ investment in the business is called
called Share Capital. Member’s Contributions.
Shareholders earn profits according to the Members earn profits according to their
number of shares owned in the company. percentage member’s interest held in the CC.
Shareholders’ share of the profits is called a Members’ share of the profits is called a
Dividend. Distribution to Members.
Company pays tax on net profit earned CC pays tax on net profit earned before
before the appropriation of dividends to remaining profits are distributed to members.
shareholders.
Has to hold an AGM of shareholders AGM not required; only ad hoc meetings
Directors are responsible for the day-to-day Members are responsible for the day-to-day
management of the company. management of the close corporation.
Has to employ the services of an external Has to employ the services of an Accounting
auditor Officer who draws up the financial
statements.
Annual Financial Statements must be Annual financial statements do not need to
audited. be audited.
Acc GR12 LB.indb 223 6/6/13 6:03:52 PM

Activity 8.2
Rewrite the table below in your Exercise Books. Then complete the table to show the
similarities and differences between a public company and a close corporation.
Public company Close corporation

Founded by completing a ___
Name of business must end with
___.
Number of owners
The owners referred to ___
___ are responsible for the day-
to-day management.
Legal persona? (yes/no)
Continuity
Liability of the owners
Share of the profits is called ___
Taxation
Auditing financial statements
13. Differences between the Financial Statements of a

CC and a Company
Just as a company and close corporation differ in characteristics, so too do they
differ in the way their financial statements look.
Companies Close corporation

(unique accounts) (unique accounts)
Income Statement
(Statement of Comprehensive Income)
Audit fees (an expense) Remuneration: Accounting officer (an
expense)
Directors’ fees (an expense) Salary: Member A (an expense)
Rent income: Member A (an income)
Interest on loan to members (under
interest income: Note 1)
Interest on loan from members (under
interest expense: Note 2)
Balance Sheet
(Statement of Financial Position)
Share Capital (Note 7) Members Contributions (Note 8)
Loans to members (a non-current asset:
Note 4)
Loans from members (a non-current liability:
Note 10)
Ordinary share dividends (an expense) Distribution to members (an expense)
Shareholders for dividends (a liability) Distribution payable to members (a
liability)
The main difference between the different forms ownership is the way the business
deals with its ownership (capital) accounts. While some of the account names
differ, the way they are treated in the books is exactly the same.
On the next few pages, examples of the Income Statement and the Balance
Sheet together with the unique notes of a CC that differ from those of a company
are provided. You will not be required to complete the accounting records of a
Acc GR12 LB.indb 224 6/6/13 6:03:52 PM

CC for examination, but you have to be aware of the differences in the financial
statements of both forms of ownership.
Crown CC
Income Statement for the year ended 28 February 2018
Note R
Sales
Cost of sales
Gross profit
Other operating income
Rent income
Rent income: Crouch
Provision for bad debts adjustment
Profit on sale of assets
Gross operating income

Operating expenses
Salary: Owen
Bad debts
Trading stock deficit
Stationery
Water and electricity
Insurance
Depreciation
Salaries
Pension fund contribution
Remuneration: Accounting officer
Bank charges
Sundry expenses
Operating profit (loss)

Interest income 1
Profit (loss) before interest expense
Interest expense 2
Profit (loss) before tax
Income tax
Net profit (loss) after tax 8
Acc GR12 LB.indb 225 6/6/13 6:03:52 PM

Crown CC
Balance Sheet at 28 February 2018
Note R
ASSETS
NON-CURRENT ASSETS
Fixed/tangible assets 3
Loans to members
CURRENT ASSETS
Inventories 4
Trade and other receivables 5
Cash and cash equivalents 6
TOTAL ASSETS

MEMBERS’ FUNDS
Members’ contributions 7
Retained income 8
Mortgage Bond: AB Bank
Loan from members
CURRENT LIABILITIES
Trade and other payables 9
TOTAL EQUITY AND LIABILITIES
Crown CC
1. INTEREST INCOME
From loans to members
Note: This note will contain all the other interest accounts such as Interest on
Fixed Deposit and Interest on Current Account.
2. INTEREST EXPENSE
On mortgage bond
On loans from members
Note: This note will contain all the other interest accounts such as Interest on Loans.
Acc GR12 LB.indb 226 6/6/13 6:03:52 PM

3. TANGIBLE ASSETS
Buildings
Carrying value on 28 February 2017
Cost
Accumulated depreciation
Movements
Additions at cost
Depreciation for the year
Carrying value on 28 February 2018
Cost
4. LOAN TO CROUCH
Balance on 28 February 2017
New loans during the year
Note: Interest at 7,5% p.a. is charged on the loan and has to be repaid on
1 September 2018.
5. INVENTORIES
Trading stock

Net trade debtors
Trade debtors
Provision for bad debts
Prepaid expense
Accrued income
SARS (Income tax) (if debit balance)

Bank (if debit balance)
Cash float
Petty cash
Acc GR12 LB.indb 227 6/6/13 6:03:52 PM

8. MEMBERS’ CONTRIBUTIONS
Members’ contributions on 28 February 2017
New contributions made during the year
Contributions withdrawn during the year
Members’ contributions on 28 February 2018
9. RETAINED INCOME
Net profit for the year
Distributions to members
10. LOAN FROM OWEN

Repayments during the year
New loans during the year
Note: Interest at 9% p.a. is charged on the loan. No date for repayment has
been stipulated.

Trade creditors
Accrued expenses
Income received in advance
Distribution payable to members
SARS (PAYE)
Pension fund
Note: If SARS (Income tax) has a credit balance it will appear in the above note.
12. TRANSACTIONS WITH MEMBERS

Net profit before tax is shown after the following transactions with members:
Crouch Owen Total
Interest paid
Salaries
Interest received
Rent income
Acc GR12 LB.indb 228 6/6/13 6:03:52 PM

Informal assessment 8.1 (openbook assessment)
Study the templates of the financial statements of Crown CC in the most recent example.
Then answer the questions below.
1. Compare the Income Statement of a public company on page 75 to the Income
Statement of Crown CC on page 225.
1.1 Name one income account and two expense accounts that are unique
to a CC. [3]
1.2 Name one expense unique to a public company that will never appear in
the Income Statement of a CC. [1]
1.3 Is it possible for a CC to have audit fees as an expense in its Income Statement?
[2]
2. Explain the difference between loans to members and loans from members. [4]
3. Compare the Balance Sheet of a public company with that of a CC and name the
three differences in the Balance Sheet of a CC. [3]
4. Compare the notes to the financial statement of a public company with that of a CC.
4.1 Which notes are completely different to that of a public company? [5]
4.2 Which notes are similar to that of a public company with only a minor
difference? [3]
4.3 Which notes are exactly the same as that of a public company? [4]
Acc GR12 LB.indb 229 6/6/13 6:03:52 PM

Chapter 9
Key concepts Internal control
• audit evidence
• compliance tests
• substantive tests • audit By the end of this chapter, you will be able to:
procedures • inspection • Demonstrate knowledge of the application of internal control and internal
• vouching • scanning audit processes in a business environment relating to:
• tracing • observation ■ gathering audit evidence
• inquiry • re-performance ■ audit sampling
• confirmation • analytical ■ internal audit reports
review • reconciliation ■ accountable management of resources
• audit sampling • statistical • Understand the difference between the roles of internal and external auditors
sampling • non-statistical
sampling • sampling
techniques • random
number sampling
• systematic or interval
sampling • stratified
sampling • cluster
sampling • judgmental
sampling • haphazard
sampling • internal audit Sir, I use these audit procedures when I do my
homework. You see, I first inquire by asking
report • interim reports
Naledi what we are supposed to do; then I
• chief audit executive observe what Jane is doing; and then I inspect
(CAE) • internal audit Saliem’s homework to confirm my answers.
resources • internal
auditor • external auditor
Who can tell me about

the audit procedures for
gathering audit evidence?
230 Chapter 9 • I n ter n a l c o n tr o l
Acc GR12 LB.indb 230 6/6/13 6:03:53 PM

1. Introduction
In Grade 10, we learnt that internal control processes and procedures are
implemented by businesses to protect against risks. We looked at internal control
processes relating to the receipt and payment of cash, as well as the disbursement
of petty cash. We further examined internal control processes used to guard
against risks relating to other aspects of the financial environment such as debtors,
creditors, payroll, inventory and fixed assets.
In Grade 11, we expanded our knowledge by looking at management of risk
in more detail and introduced the concept of internal auditing. We explained
that the purpose of an internal audit is to determine the effectiveness of the
risk management and internal control systems of a business. We discussed that
the internal audit function is performed by internal auditors who are usually
employees of the business and that the main objectives of an internal audit are to:
• Perform an assessment of the risk management and internal control of the
business
• Provide assurance on areas of risk that are adequately managed and controlled
• Identify any weaknesses in the risk management and internal control systems
• Provide management with recommendations for improving the risk
management and internal control of the business.
This year we will look at the application of internal control and internal
audit processes in more detail. We will discuss audit procedures and sampling
techniques used to gather audit evidence, and look at internal audit reports and
the management of internal audit resources. We will then end the chapter by
comparing the roles and objectives of internal and external auditors.
2. Gathering audit evidence INTERNAL

INTERNAL AUDIT
AUDIT
The information that internal auditors gather during the course of an audit
is called audit evidence. Internal auditors form their conclusions based on
this information and use the audit evidence to support their opinions and
recommendations. So the effectiveness of the audit depends on the quality of the
audit evidence collected. should be adequate, appropriate and based on sufficient, audit evidence
reliable, relevant and useful information. the information gathered during the
course of an audit, which the internal
2.1 Compliance and substantive tests auditors use to support their opinions
and conclusions
The types of tests that are performed by internal auditors to obtain audit evidence
may be broadly classified as compliance tests (tests of control) and substantive tests
(tests of detail).
• Compliance tests involve the review of internal control processes to determine
whether the controls are working as intended and are being adhered to and
applied correctly. They test whether internal controls exist and are effective.
• Substantive tests involve testing, checking and verifying the detail and
accuracy of financial and operating information. They test whether the
information is complete, valid and correct.
2.2 Audit procedures

Internal auditors use various methods and techniques to gather audit evidence and
perform compliance and substantive tests, known as audit procedures. Although audit procedures
internal auditors may apply many different types of audit procedures to collect
the various methods, techniques and tests
information, we will focus on some of the more commonly used methods of performed by internal auditors to gather
gathering audit evidence. audit evidence
I n ter n a l c o n tr o l • C h a p t e r 9 231
Acc GR12 LB.indb 231 6/6/13 6:03:53 PM

2.2.1 Inspection
The auditors physically examine documents, records, reconciliations and assets in
order to ascertain whether the internal control procedures are being carried out
correctly and are operating efficiently. Other auditing techniques included here are
vouching, scanning and tracing.
Example: Internal auditors may inspect the records for a sample of transactions to
verify the journal entries against the supporting source documents. This process is
commonly known as vouching. The auditors may then perform further inspections
to check that the postings to the General Ledger accounts were processed correctly
and then continue to trace these amounts through to the Trial Balance.
Another form of inspection, called scanning, involves a quick but careful
examination (scan) of records for any suspicious or usual entries. Internal auditors
also perform physical inspections of assets to make sure the assets listed in the
Fixed Asset Register actually exist.
2.2.2 Observation
Internal auditors observe employees carrying out specific processes and
procedures. By monitoring activities being performed, internal auditors can
determine whether the internal control procedures are being complied with and
can gauge the effectiveness of the processes.
Example: Internal auditors may observe physical counts of inventory, purchase
orders being placed or the control of access to restricted areas.
2.2.3 Inquiry
Internal auditors ask questions in order to obtain information from people both
inside and outside the business. Inquiries may range from formal written requests
to informal oral discussions. Inquiries may also be conducted by using surveys or
questionnaires. Although inquiry is generally considered to provide weak evidence,
it is often a useful if you need to verify or support findings. The information
also often assists internal auditors to identify deficiencies or potential flaws in
the internal control systems. This may lead to further investigation using other
techniques in order to obtain more reliable evidence.
Example: Internal auditors may interview employees and ask them questions
relating to the performance of their duties. Through these interviews, internal
auditors can obtain useful information regarding the control environment and can
determine whether the employees understand the control objectives.
2.2.4 Re-performance or computation

Tasks that have already been performed are re-performed to test whether they
are accurate, correct and complete. This testing technique involves re-performing
calculations, reconciliations and recordkeeping procedures and enables the internal
auditors to evaluate the accuracy and reliability of the information processed
through various control systems.
Example: Internal auditors may perform independent counts of cash and
inventory or may re-perform certain interest calculations.
Acc GR12 LB.indb 232 6/6/13 6:03:53 PM

2.2.5 Confirmation or corroboration corroborative evidence
Internal information is verified by obtaining confirmation or corroborative information acquired from a different
evidence from an independent source. Generally, internal auditors try to get this source that is used to support or verify
type of supporting evidence from an external third party and will request such information obtained during an audit
confirmation in writing.
Example: Internal auditors may request confirmation of bank account balances
from the bank or verify accounts receivables by communicating directly with
debtors. In addition, an internal auditor, who is concerned about the validity
of a particular cheque issued to a supplier, will contact the supplier to request
confirmation that the cheque in question was actually received.
2.2.6 Analytical review

Financial and operating information is examined by performing ratio analysis,
trend analysis and comparisons with budgets and information from previous
financial periods. The aim of this analysis is to identify any unusual items or
unexpected fluctuations that require further investigation.
Example: Internal auditors may perform a comparison of the current year’s
expenditure for salaries with the salary figures in the previous year’s Income
Statement and the Projected Income Statement for the new year. If the internal
auditors discovered a significant difference between these salaries amounts, they
would investigate further to establish the cause of this variation.
2.2.7 Reconciliation
Two sets of figures that are based on similar information are compared and then
the differences are accounted for by balancing the one set of figures back to the
other. Where there are differences that cannot be easily accounted for, internal
auditors will conduct further investigations. While these investigations usually
result in the detection of errors, they may in some instances lead to the discovery
of fraud.
Example: Internal auditors may perform bank reconciliations to reconcile Cash
Journals with bank statements.
Activity 9.1
Match each of the audit procedures in Column A with the most appropriate description in
Column B. Write down only the numbers (1.–7.) and the corresponding letters (A.–G.).
Column A Column B
Audit procedure Description
1. Inspection A. verifying internal records against data received
from an external source
2. Observation B. comparing two sets of similar data and
resolving the differences between them
3. Inquiry C. a physical examination of records
4. Re-performance D. includes ratio analysis, trend analysis and
comparisons with historical information and
forecasts
5. Confirmation E. monitoring activities being performed
6. Analytical review F. re-performing tasks that have already been
performed
7. Reconciliation G. asking employees questions about the duties
they perform
Acc GR12 LB.indb 233 6/6/13 6:03:53 PM

Activity 9.2
1. Briefly define the term “audit evidence”.

2. List four qualities that the information obtained from an internal audit should have so
that the audit evidence is both adequate and appropriate.
3. Provide another term that is used to describe:
a. compliance tests
b. substantive tests
4. Briefly explain the difference between compliance tests and substantive tests.
5. While conducting an internal audit of the purchasing process and the internal controls
relating to creditors, internal auditors performed various audit procedures in order to
gather evidence. For each of the tests or techniques described below, provide the type
of the audit procedure that is being applied.
a. Internal auditors drew up a list of all the creditors with balances of more than
R20 000 and then requested written statements from those creditors in order to
verify the balances.
b. Internal auditors check the accuracy of a number of high-value purchase orders
by recalculating the amounts and totals on each invoice.
c. Internal auditors compared the total monthly purchases during the period under
review with the corresponding figures from the previous three years, as well as the
projected amounts in the budgets.
d. Internal auditors compiled a list of balances from the Creditors Ledger and
compared the total of the list with the balance in the Creditors Control account.
The amounts were found to be different and the internal auditors decided to
investigate further in order to account for this difference.
e. Internal auditors spent a morning in the purchasing department and watched the
employees performing various task relating to the ordering process.
f. Internal auditors examined a number of purchase orders in order to check that
they were prepared according to set policy, were pre-numbered and were signed
by an authorised purchasing officer.
g. Internal auditors interviewed key personnel in the purchasing department and
asked them various questions about the procedures that they follow when placing
an order.
INTERNAL
INTERNAL AUDIT
AUDIT
3. Audit sampling
Another technique that is commonly used during the evidence gathering phase
of an internal audit is known as audit sampling. Although audit sampling is not
usually classified as a direct method of gathering information, it is an extremely
valuable auditing tool that is frequently used to support many of the audit
procedures mentioned in Section 2.
audit sampling
the application of audit procedures to less It is not feasible or practical for internal auditors to test and check every
than 100% of the population to enable transaction, document and record of a business. This would require a vast amount
the auditor to evaluate audit evidence of time and resources and thus the cost would greatly outweigh the benefit.
about some characteristic of the items
Instead, internal auditors usually examine only a selected sample of items from
selected to form or assist in forming a
conclusion concerning the population. each particular aspect under review and then draw a conclusion about that aspect
based on the sample results. This process is known as audit sampling.
In simple terms, audit sampling is a process whereby internal auditors select and
test a sample of items from a large group of items. They then use those test results
to draw conclusions and express an opinion about the entire group.
Before we discuss audit sampling in more detail, we will first define some of the
terms that will be used in this section.
Acc GR12 LB.indb 234 6/6/13 6:03:53 PM

• Population: The entire set of items that are being considered for testing. For
example, if a test is being performed to verify that purchases orders were properly
authorised during a particular period, then the population would be all the
purchase orders that were issued during that period.
• Population size: The total number of items in the population
• Audit sample: The set of items selected from the entire population that will
actually be tested
• Audit sample size: The total number of items in the audit sample
• Sample selection: The process that is used to select the audit sample
A fundamental requirement of audit sampling is to obtain audit evidence that is

sufficient, reliable, relevant and useful. Ideally, an audit sample should be large
enough to provide internal auditors with suitable evidence to support the audit
opinion, yet small enough to be completed in a relatively short period of time.
3.1 Basis for gathering audit samples

When applying audit sampling, internal auditors need to make two important
decisions regarding the audit sample. The first is to decide how many items to
include in the audit sample (the audit sample size) and the second is to decide
which items to include in the audit sample (the sample selection). These decisions
are generally based on and determined by the audit sampling approach to be used.
There are two main approaches to audit sampling:
• Statistical sampling
• Non-statistical sampling.
3.1.1 Statistical sampling

Statistical sampling involves an objective scientific approach, which uses statistically selected
mathematics as a basis for selecting an audit sample that represents the entire sample
population. a sample that is selected by using
In other words, the results of tests performed on a statistically selected mathematics to determine which items
to select.
sample should provide a fairly accurate assessment of the whole population.
Example: Out of a population of 1 000 purchase orders, a sample of 100 purchase
orders were selected and checked for proper authorisation. It was found that two
purchase orders were not signed by an authorised purchasing officer. Thus 2% of
the sample was not properly authorised.
If the sample was statistically selected and is representative of the population,
then it can be expected that approximately 2% of the total population would
not have been properly authorised. This equates to roughly 20 out of the total
population of 1 000 purchase orders. Based on this data, the internal auditor will
be able to express an opinion on how effective the process was that was used to
authorise purchase orders.
When applying statistical sampling, internal auditors use mathematics to:
• Determine the population size
• Determine the audit sample size (i.e. the number of item to be tested)
• Select the audit sample (i.e. which items from the population should be tested)
• Assess the reliability of the entire population, based on the results obtained
from the tests performed on the audit sample.
InTERnAl ConTRol • Chapter 9 235
Acc GR12 LB.indb 235 6/6/13 6:03:54 PM

For enrichment purposes
As mentioned earlier, internal auditors use mathematics to select an audit sample
that is representative of the population. It is important to understand that the term
“representative of” does not mean “exactly the same as”, but instead means “similar
to”. Thus, when applying statistical sampling, there is always a possibility that the
sample results may be different to the results that would have been achieved if
the entire population was tested. Statistics allows us to deal with this uncertainty
by building two factors into our calculation of the required sample size. The first is
called the confidence level, which is a measure of the probability that the sample will
represent the population. The second factor is called the margin of error, which is a
measure of how closely the sample represents the population.
Example: Internal auditors discovered that a few sales invoices were totalled
incorrectly. They decide to use statistical sampling to establish the extent of the
problem. The internal auditors set the confidence level to 95% and the margin of
error to 3%. Based on these factors, they calculate mathematically that they need to
check 300 out of the population of 2 000 sales invoices. The sample results showed
that 15 out of the 300 sales invoices tested had adding mistakes, which equals 5%
of the sample. Thus based on a confidence level of 95% and a margin of error of 3%,
the internal auditors can conclude that they are 95% certain that between 2% (5%
– 3%) and 8% (5% + 3%) of the entire population of sales invoices would be totalled
incorrectly. In other words, there is a 95% certainty that between 40 and 160 of the
sales invoices would have adding mistakes.
If internal auditors require a greater degree certainty, they can increase the
confidence level or decrease the margin of error; however either of these adjustments
will increase the required sample size. In practice, internal auditors will first set the
confidence level and margin of error to levels that they consider to be acceptable and
then calculate the required audit sample size based on these factors.
Example: In the example above, the internal auditors may have decided to keep the
confidence level at 95%, but change the margin of error to 1%. The required sample
size would then have increased and it may have been calculated that they would
need to check 500 out of the population of 2 000 sales invoices. The new sample
results showed that 20 out of the 500 sales invoices tested had adding mistakes,
which equals 4% of the sample. Thus based on a confidence level of 95% and a
margin of error of 1%, the internal auditors could conclude that they are 95% certain
that between 3% (4% – 1%) and 5% (4% + 1%) of the entire population of sales
invoices would be totalled incorrectly. In other words, there is a 95% certainty that
between 60 and 100 of the sales invoices would have adding mistakes.
If the internal auditors felt that the results achieved in the second example provided
a fair and accurate representation of the extent of the problem, then they would form
an opinion and provide recommendations for improvement, based on these result.
236 Chapter 9 • InTERnAl ConTRol
Acc GR12 LB.indb 236 6/6/13 6:03:55 PM

There are several advantages to using statistical sampling:
• The audit sample is selected randomly and without bias, so all items in the
population have an equal chance of being chosen.
• The audit sample size is determined mathematically to be representative of
the population.
• It provides a measure of the reliability of the entire population, based on
pre-determined levels of accuracy (confidence level and margin of error).
• It allows the internal auditor to explain and justify his opinion based on
mathematical evidence.
3.1.2 Non-statistical sampling

Non-statistical sampling is often referred to as judgemental sampling and involves
a subjective approach that is not mathematically or statistically based. In this subjective
approach, internal auditors determine sample sizes and select audit samples
based on personal feelings, beliefs or
based on their judgement or by using a random, but unstructured process. opinions, instead of on facts
A sample selected using this approach is not intended to be representative of the
population and thus should not be relied upon to provide an accurate assessment
of the entire population.
Example: An experienced internal auditor wants to verify that the purchase
orders of the past year have been properly authorised. The internal auditor has
audited the purchases department several times over the years and knows that
the purchasing officer, Mrs Khumalo, is very diligent and keeps strict control over
purchasing. Mrs Khumalo has been with the business for over ten years. However,
she was on leave for the whole of April and during that time her assistant Mr Jones
was left in charge of authorising purchases.
Based on her experience and using her judgement, the internal auditor decides
to check a relatively small sample of purchases orders from the period that Mrs
Khumalo was at work. She randomly selects five purchase orders from each month
that Mrs Khumalo worked. The internal auditor feels that a larger audit sample
is required for the month of April and so she decides to check 40 purchase orders
from that month.
When applying non-statistical sampling, internal auditors rely on their experience,
judgement and intuition to:
• Determine the audit sample size
• Select the audit sample
• Assess the reliability of the entire population, based on the results obtained
from the sample items tested.
There are also several advantages to using non-statistical sampling:
• It is normally less time consuming and thus less expensive to apply.
• The auditor can incorporate his/her knowledge and experience in selecting the
audit sample and this may help to ensure that the most material and risky
items are tested.
• It is can be applied to small populations (under 100 items), while statistical
sampling is not appropriate for populations of this size.
• It usually does not require a complete and accurate calculation of the
population size, which could be complicated and time-consuming.
Acc GR12 LB.indb 237 6/6/13 6:03:55 PM

Activity 9.3
1. What is the main reason why internal auditors use sampling?

2. Copy the following table into your Exercise Books. Then use it to create a comparison
between statistical sampling and non-statistical sampling, by selecting the correct
word or phrase from the options provided in brackets.
Statistical sampling Non-statistical sampling
(Subjective / Objective) approach (Subjective / Objective) approach
Based on (mathematics / auditor’s Based on (mathematics / auditor’s
judgement) judgement)
Sample is (expected / not intended) to be Sample is (expected / not intended) to be
representative of the population. representative of the population.
Audit sample is (purposely biased / selected Audit sample is (purposely biased / selected
randomly). randomly).
Generally (less / more) time consuming and Generally (less / more) time consuming and
thus (less / more) expensive. thus (less / more) expensive.
(Not appropriate for / Can be applied to) small (Not appropriate for / Can be applied to) small
populations populations
3. Match each of the sampling terms in Column A with the appropriate description in
Column B. Write down only the numbers (1.–5.) and the corresponding letters (A.–E.).
Column A Column B
Sampling term Description
1. Population A. the set of items selected for testing
2. Population size B. the process that is used to select the
audit sample
3. Audit sample C. the total number of items in the
population
4. Audit sample size D. the entire set of items that are being
considered for testing
5. Sample selection E. The total number of items in the audit
sample
3.2 Basic sampling techniques

Once internal auditors have determined the size of the audit sample they need,
they then decide which items from the population to include in the sample. This
process is known as sample selection and the methods that are used to select audit
samples are called sampling techniques. Sampling techniques used by internal
auditors either relate to the statistical sampling process or the non-statistical
sampling approach. We will therefore examine some of the sampling techniques
that are more commonly used in each of the two approaches.
3.2.1 Statistical sampling techniques

• Random number sampling: This technique involves selecting audit sample
items on a completely random basis. The items are selected in such a way that
each item in the population has an equal chance of being selected. Internal
auditors often use computer programmes to generate these random selections.
• Systematic or interval sampling: This technique involves selecting audit
sample items using a fixed interval between selections. The fixed interval, called
the sampling interval, is determined by dividing the population size by the
sample size. The first item is randomly selected from within the first interval and
the other items are then selected at fixed intervals starting from the first item.
Acc GR12 LB.indb 238 6/6/13 6:03:55 PM

Example: If this technique is used to select a sample of 50 items out of a
population of 1 000 items, then the sampling interval would be 20 (1 000 ÷ 50).
Therefore, the population is divided into 50 consecutive sets of 20 items each
and the first interval would contain items 1 to 20. The first item is then selected
by randomly choosing a number between 1 and 20. If the number selected is
12, then the audit sample would start with the 12th item. The other items to
be selected would follow with fixed intervals of 20 between them. Thus the
sample would contain the following items: 12, 32, 52, 72, 92, 112 etc.
This technique is generally simpler to use than random number sampling.
A further benefit of systematic sampling is that it ensures that the selected
items are evenly spread throughout the population. However, before applying
this technique, the internal auditor should ensure that the population is not
structured in a manner that corresponds to this pattern.
• Stratified sampling: This technique involves breaking the population into sub-
groups and then selecting independent audit samples from each of sub-groups.
A stratified sampling technique may be appropriate for a population in which
there are substantial variations in monetary value.
Example: A population of invoices may consist of a large number of low-
value invoices and small number of high-value invoices. The internal auditor
may feel that high-value invoices require more attention and so decides to split
the population into two sub-groups based on value. Each of these sub-groups
would then be sampled independently. The internal auditor may decide to test
all of the high-value invoices, but only select a relatively small audit sample
from the low-value sub-group for testing.
• Cluster sampling: This technique is usually used when natural groupings or
clusters exist within a population, such as bundles of documents or files of
invoices in a filing cabinet. Cluster sampling involves the random selection
of clusters of items rather than individual items. The selected clusters are
then examined by either testing each item in the cluster or drawing a random
sample of items from each cluster.
Cluster sampling is useful when items are filed across a number of shelves or
stored in a number of filing cabinets. In such cases, employing random number
sampling techniques would be physically time-consuming and thus costly.
3.2.2 Non-statistical sampling techniques

• Judgmental sampling: In this technique, audit samples are selected based on
the internal auditor’s knowledge and judgement and are thus purposely biased
or skewed. These audit samples will usually include items that the auditor
considers to be most material or most likely to be at risk. However, audit
samples that are selected in this manner are unlikely to be representative of
the population.
• Haphazard sampling: In this technique, audit samples are selected at random
without following a structured or statistical approach. Although the selection
is not purposely biased, the audit sample is not mathematically based and thus
should not be relied upon to provide an accurate assessment of the population.
Acc GR12 LB.indb 239 6/6/13 6:03:55 PM

Activity 9.4
Match each of the sampling techniques in Column A with the most appropriate description
in Column B. Write down only the numbers (1.–6.) and the corresponding letters (A.–F.).
Column A Column B
Sampling technique Description
1. Random number sampling A. A population is divided into sub-groups
and then independent audit samples are
selected from each of sub-groups.
2. Systematic or interval sampling B. Audit sample items are specifically selected
by the internal auditor and are thus
purposely biased or skewed.
3. Stratified sampling C. Audit sample items are selected by
randomly selecting bunches of naturally
grouped items.
4. Cluster sampling D. Audit sample items are selected at random
without following a structured or statistical
approach.
5. Judgmental sampling E. Audit sample items are selected using a
fixed interval between selections, with a
random start.
6. Haphazard sampling F. Audit sample items are selected on a
completely random basis.
INTERNAL
INTERNAL AUDIT
AUDIT
4. Internal audit reports
Once all the internal audit procedures and tests have been completed and the
audit evidence gathered, the internal auditors will analyse and review the evidence
obtained. The internal auditors will then draw conclusions and formulate
their opinions based on this evidence. The next step in the audit process is the
compilation of the internal audit report. In this report, the internal auditors will
present the audit findings, express their opinions and provide recommendations
for improvement. The internal audit report is usually addressed to senior
management, the audit committee or the Board of Directors.
4.1 The purpose of the internal audit report

The primary functions of the internal audit report are to:
• Provide assurance on those areas where risks are being effectively managed and
controlled
• Document and highlight those areas where risk management and control is
inadequate
• Provide recommendations for improvement in those areas where the
management and control of risk was found to be inadequate.
One of the key objectives of the internal audit function is to facilitate the
improvement of risk management and internal control. The internal audit report
plays a central role in achieving this objective, by conveying the internal auditors’
recommendations for improvement and convincing management to take action.
Management’s decision to take action and implement the recommended changes
is often influenced by the quality and strength of the arguments put forward
in the report. Thus it is very important that the recommendations provided in
the internal audit report are clearly presented, properly justified and adequately
supported by suitable audit evidence.
Acc GR12 LB.indb 240 6/6/13 6:03:56 PM

4.2 Attributes of the internal audit report
The quality of the internal audit report reflects not only the value of the internal
audit, but also the image of the entire internal auditing function. Furthermore,
this report is often the main source of contact that senior management has with
internal auditing. Thus internal auditors should take great care in drafting the
report and should ensure that it promotes the value, quality and image of the
internal auditing function. Internal audit reports should:
• Be prepared and issued on time
• Contain information that is accurate and complete
• Be clearly written, logical and easily understood
• Be convincing, yet concise and to the point
• Be written in an objective and constructive manner.
4.3 Content of the internal audit report

Although the structure and format of internal audit reports may vary from one
internal audit to the next, generally the content of most internal audit reports
should include the following:
• The purpose, objectives and scope of the audit
• The approach, methods and procedures used in the audit process
• The audit results, findings and conclusions
• The auditors’ opinions and recommendations for improvement
• An acknowledgement of any action already taken, or proposed, by
management in response to audit recommendations.
4.4 Interim reports

Interim reports are reports that are made during the course of the audit. These
reports may either be provided in writing or performed orally. The main reasons
for providing interim reports are to:
• Inform management of a significant finding that requires immediate attention
(e.g. a serious control weakness or a suspicion of fraud)
• Update management on the progress of a lengthy audit
• Notify management of a significant change in the scope of the audit
The main advantage of interim reporting is that it provides management with
an opportunity to take corrective action while the audit is in progress. This can
eliminate certain audit concerns and can result in the final internal audit report
being more favourable. In addition, where interim reports are used to report on
the progress of a lengthy audit, they may help to keep the audit on track and may
assist the internal auditors to build towards the final internal audit report.
Activity 9.5
1. What are the three main purposes of the internal auditors report?
2. Who is responsible for deciding whether to take action to correct control weaknesses
identified in the internal auditors report?
3. An internal auditors report should be well presented, clearly written and adequately
supported by suitable audit evidence.
a. Give two reasons why this is so important.
b. List five attributes of a high-quality internal auditors report.
4. What is an interim report?
5. Give three reasons why internal auditors may be required to provide management
with an interim report.
Acc GR12 LB.indb 241 6/6/13 6:03:56 PM

INTERNAL
INTERNAL AUDIT 5. Management of internal audit resources
AUDIT
The person who holds the most senior position within the internal auditing
function is usually referred to as the chief audit executive (CAE). The CAE is
responsible for managing the internal audit activity and ensuring that it adds
value to the organisation. Although the CAE normally reports directly to senior
management, the audit committee or the Board, it is vital that the CAE remains
independent from management and is thus able to carry out his/her duties in an
objective and unbiased manner.
One of the CAE’s primary responsibilities is to ensure that internal audit
resources are effectively managed. Internal audit resources may be described as
the people or objects that are required to perform an internal audit. Employees
(internal auditors) are by far the largest resource used in the internal audit activity;
however other resources may include external consultants, computer equipment
and auditing software. Internal audit resources cost money and thus need to be
carefully managed and controlled. According to the International Standards for the
Professional Practice of Internal Auditing:
The chief audit executive must ensure that internal audit resources are appropriate,
sufficient, and effectively deployed to achieve the approved plan.
Although it is senior management’s responsibility to ensure that the internal

audit function has adequate resources, the CAE is responsible and accountable for
ensuring that internal audit resources are:
• Appropriate: The internal auditors must have the technical knowledge,
suitable skills and the required expertise to perform the audit activities.
• Sufficient: There must be an adequate number of internal auditors, so as
to ensure that the audit activities are performed on time and to the extent
required.
• Effectively deployed: The internal auditors must be assigned to activities that
best suit their skills and competence, so as to ensure that the audit is performed
efficiently and effectively.
The CAE should continually monitor and assess the resourcing needs of the
internal audit activity and should address any skill deficiencies or staff shortages
that may arise. Furthermore, the CAE should ensure that internal audit resources
are used economically and efficiently. Ultimately, the CAE is responsible for the
effective management of internal audit resources and is accountable to senior
management, the audit committee or the Board.
6. Difference between the roles of internal and

external auditors
While there are some similarities in the methods used and the tasks performed
by internal and external auditors, there are a number of fundamental differences
between the roles of the two auditing functions.
The main role of the internal auditor is to help the organisation to accomplish
its objectives by evaluating the effectiveness of its risk management and control
systems; and providing management with assurance and recommendations for
improvement.
In contrast, the primary objective of the external auditor is to serve the
interests of shareholders and the public, by providing an independent opinion
on the accuracy and reliability of the organisation’s financial statements. The
external auditor will assess whether the financial statements present a true and
Acc GR12 LB.indb 242 6/6/13 6:03:56 PM

fair reflection of the organisation’s financial position and whether they have been
prepared in accordance with the prescribed financial reporting standards.
The following table provides a summary of some of the key differences between
internal and external auditing:
Criteria Internal auditing External auditing

To evaluate the organisation's To assess the organisation's
risk management and financial records and provide
control systems; and an independent opinion on
Objective
provide assurance and the accuracy of the financial
recommendations for statements
improvement
Internal auditors are External auditors are
Employee /
usually employees of the independent contractors.
contractor
organisation.
Serves the needs of the Serves the interests of
Serves organisation and its shareholders and other
management or Board external stakeholders
Covers all aspects Focuses primarily on financial
Scope of work and operations of the aspects of the organisation
organisation
Independent from the Independent from the
Independence
activities audited organisation
Concerned with all forms of Mostly concerned with
Fraud
fraud relating to any activity financial fraud
Frequency of Performed continuously Performed periodically,
audit throughout the year usually once a year
Generally not a legal Legal requirement for all
Legal
requirement in South Africa public companies and many
requirement
other companies
Although the specific roles and objectives of internal and external auditors differ,
they do cover a certain amount of common ground and can benefit from each
other’s findings, expertise and knowledge. Thus internal and external auditors
should meet periodically to discuss common audit issues and results. Moreover,
senior management or the Board should ensure that there is co-operation between
internal and external auditors, as this will enhance the overall efficiency and
effectiveness of the entire audit process.
Activity 9.6
The following statements relate to the management of internal audit resources and the
differences between internal auditing and external auditing. In each statement a word or
phrase is missing. Complete the statement by providing the missing word or phrase.
1. The person who is responsible for managing the internal audit activity is known as the
___________.
2. In order to be able to carry out his/her duties in an objective manner, it is essential
that the CAE remains ___________ from management.
3. The CAE must ensure that internal audit resources are ___________, ___________ and
___________ to achieve the approved plan.
4. The CAE should continually ___________ and assess the resourcing needs of the
internal audit activity.
Acc GR12 LB.indb 243 6/6/13 6:03:56 PM

5. The CAE is responsible for the effective management of internal audit resources and is
thus ___________ to senior management, the audit committee or the Board.
6. The primary objective of ___________ is to evaluate the organisation's risk
management and control systems; and provide assurance and recommendations for
improvement.
7. The primary objective of ___________ is to assess the organisation's financial records
and provide an independent opinion on the accuracy of the financial statements.
8. Internal auditors are usually employees of the organisation, whereas external auditors
are ___________.
9. Internal auditors serve the needs of the organisation and its management or Board,
while external auditors serve the interests of ___________ and other external
stakeholders.
10. An internal audit can cover all aspects and operations of the organisation, whereas an
external audit focuses primarily on ___________ aspects of the organisation.
11. Internal auditors are independent from the ___________, while external auditors are
independent from the organisation.
12. Internal auditors are concerned with all forms of fraud relating to any activity, whereas
external auditors are mostly concerned with ___________ fraud.
13. An internal audit is performed continuously throughout the year, while an external
audit is performed ___________.
14. An internal audit is generally not a legal requirement in South Africa, while an
external audit is a legal requirement for all ___________ companies and many other
companies.
15. Senior management or the Board should ensure that there is ___________ between
internal and external auditors.
Case study 9.1 (challenge)
Read the following passage and then answer the questions below.
Siyanda manufacturers is a business that manufactures children’s toys out of recycling

material. The business uses solar panels and a wind turbine to generate electricity for
its factory and this power is enough to cover 90% of the energy used by the business.
When the business first started, it sold its products to the local community directly
from its factory and had an average yearly sales of about 2 000 units. However, the
business has boomed over the last couple of years. Two years ago, the business
received a massive boost by being part of a documentary program on television
about sustainable development and environmentally friendly products made in
South Africa. As a result of this exposure and positive publicity, the business started
receiving orders from all over the country.
In order to keep up with the demand, Siyanda manufacturers recently expanded its
operations and launched a new website last year. The business now receives most
of its orders via the Internet and delivers its products directly to customers all over
the South Africa. At the beginning of the year, Siyanda manufacturers installed a
new computer system, which it now uses to process customer orders and control
customer accounts. The business has already sold over 25 000 units in first two month
of the current year.
The following information relates to the internal auditing function of Siyanda

manufacturers:
Acc GR12 LB.indb 244 6/6/13 6:03:57 PM

• The business currently employs two internal auditors, Themba Testa and
Sally Checker.
• Themba is a newly qualified CIA. Themba previously worked for a large clothing
manufacturer for five years and was mainly involved in setting up internal control
systems and procedures.
• Sally is a trainee internal auditor, who decided to change her career path after
qualifying as a CA.
• due to the low sales volumes in the past, the internal auditors had been able to
examine and perform tests on almost every document and record of the business.
• last year the internal auditors had to work long hours and over several weekends
in order to complete the audit on time.
• Themba’s main duties relate to examining and testing the accuracy of the
financial information of the business, while Sally is mostly involved in assessing
the adequacy of the operational controls and procedures of the business.
• neither of the internal auditors has much knowledge of statistics or experience in
conducting an audit of computer-based systems.
Questions
1. mention two sustainable practices used by Siyanda manufacturers.
2. Besides the ethical consideration, list and explain two other ways in which Siyanda
manufacturers benefit from operating in a sustainable manner.
3. Themba is a qualified CIA. What does the designation CIA stand for? What is the name
of the professional body that oversees this profession in South Africa?
4. Sally is a qualified CA. What does the designation CA stand for? What is the name of
the professional body that oversees this profession in South Africa?
5. do you think that the internal auditors should still attempt to examine and perform
tests on almost every document and record of the business? Explain your answer.
6. What commonly used auditing technique should the internal auditors apply in order
to reduce the amount of testing required?
7. due to the rapid growth of the business, the management of Siyanda manufacturers
are concerned that the current internal auditors may now have difficulty in
conducting an effective and efficient internal audit. management has appointed you
as the new chief audit executive and has asked you to:
• Assess the adequacy of the current internal audit resources
• Recommend measures that need to be taken to ensure that internal audit
resources are managed effectively.
Report to management by providing your assessment and recommendations, in point

form, under the following headings:
• Appropriateness of internal audit resources
• Sufficiency of internal audit resources
• Effective deployment of internal audit resources
InTERnAl ConTRol • Chapter 9 245
Acc GR12 LB.indb 245 6/6/13 6:03:58 PM

Chapter 10
Key concepts Inventory systems
• internal control of stock
• perpetual stock system
• periodic stock system By the end of this chapter, you will be able to:
• First-in-first-out (FIFO) • Know the difference between an stock (inventory) administrative system and an
• weighted average stock (inventory) valuation system
• ethics with regards to • Know the difference between the perpetual and periodic stock administrative
stock control • Trading systems
account • Trading Stock • Know how to valuate stock using the FIFO method of stock valuation
account • Purchases • Know how to valuate stock using the weighted average method of stock
account • carriage on valuation
purchases • closing stock • Understand what the specific identification (of cost price per unit) is
• number of unsold units
• Apply GAAP principles with regards to stock
• opening stock • value
of closing stock • cost of
• Apply ethics and internal control and audit processes with regards to stock
sales • number of days’
stock is on hand • stock
turnover rate
I’m processing these invoices but I’m not sure

how to input the information into the computer.
It says here “first-in, first-out”?
Yes, the stock bought first must be

sold first. So you must enter the
stock that is bought first by checking
the date on the invoice.
246 Chapter 10 • I n ve n t o ry syste m s
Acc GR12 LB.indb 246 6/6/13 6:03:58 PM

1. Introduction
In Grades 10 and 11 you learnt that stock is bought so that it can be sold at a profit. stock
The business carefully records stock bought and sold and puts control measures in are the items bought to resell, or bought to
place to ensure that stock is properly accounted for. be used to make a finished product.
inventory
2. Control over trading stock
is the list of all the various stock lists,
e.g. stock, consumable stock, stationery
stocks etc.
INTERNAL
CONTROL
Stock control
• Proper authorisation and approvals is needed for purchasing stock.
• Detailed stock records are maintained and any movements of stock are recorded
correctly and promptly in the appropriate journal.
• These records are validated by a physical stocktaking.
• When stock is delivered, items received are compared with the delivery note or
the purchase invoice and discrepancies are reported immediately.
• Stock is kept safe from theft, pilferage and loss.
• Lost, stolen or damaged items are reported immediately.
• Stock is insured.
• Access to stock is limited and supervised.
• Stock records are kept and administered separately from
physical stocktaking records.
• Only high-level staff audit the stocktaking process.
3. Stock systems
A stock system is an administrative system that monitors, controls and records the
movement of stock through the business, from the time it is bought to the time it
is sold. Any stock system must be able to handle the movement of large quantities
of stock and must be able to reveal the following:
• The number of units on hand
• Cost price per unit
• Total value of units on hand (opening and closing stock)
• Total value of stock sold
A stock system also determines the cost price of stock sold (cost of sales) which
ultimately influences the gross profit of the business.
3.1 Types of stock systems

There are two stock systems: the perpetual stock system and the periodic stock
system. A business will chose their stock system based on the following:
• The perpetual stock system continuously records the value of stock on hand
in the Trading Stock account, as well as the cost price of the goods sold (Cost of
Sales account). This method is used when the business sells large items of high
value and usually has a low stock turnover.
I n ve n t o ry syste m s • C h a p t e r 1 0 247
Acc GR12 LB.indb 247 6/6/13 6:03:59 PM

• The periodic stock system only shows the stock on hand (closing stock) value
once a physical stocktaking has been done. Once the value of closing stock is
determined, the cost of sales can be calculated. This method is used when the
business has a high stock turnover and sells variety of items at a relatively low value.
3.2 Differences between the two systems
Perpetual Periodic
Purchase of When stock is bought the When stock is bought the
stock Trading Stock account is Purchases account is debited.
debited.
Cost of sales Cost price of the goods sold is Cost price of goods sold is
determined at every sale. only calculated at the end of a
particular period once closing
stock is determined.
Closing The balance in the Trading The closing stock amount is
stock Stock account at the end of only determined by doing a
a period is the closing stock physical stocktaking.
amount.
Stock Stock is validated by It is difficult to validate
validation comparing the book value as stock because the physical
in the Trading Stock account stocktaking is taken to be the
and then comparing it to the closing stock value.
physical stocktaking at the end
of a period.
Activity 10.1
The following information was taken from the books of Rare Woods owned by Lisa Wood,
a sole trader. Rare Woods supplies wood to furniture manufacturers. Their rate of stock
turnover for the previous financial year was seven times.
The business uses the perpetual stock system and their financial year ends on the last
day of June each year.
Lisa Wood only posts her subsidiary journals to the General Ledger at the end of the
financial year so the Trading Stock account reflects all transactions with regards to stock
for the financial year 1 July 2012 to 30 June 2013.
General Ledger of Rare Woods

Dr Trading Stock Cr
2012 2013
Jul 01 Balance b/d 192 840 00 Jun 30 Cost of sales CRJ 536 000 00
2013
Jun 30 Creditors control CJ 784 640 00 Cost of sales DJ 264 200 00
Cost of sales DAJ 47 720 00 Trading stock deficit GJ 69 570 00
Balance c/d 155 430 00
1 025 200 00 1 025 200 00
2013
Jul 01 Balance b/d 155 430 00
Acc GR12 LB.indb 248 6/6/13 6:03:59 PM

Required
1. State how often the business turned stock over during the current financial year.
2. Explain how the business can improve their rate of stock turnover.
3. Give two disadvantages of keeping large volumes of stock.
4. Lisa suspects (but cannot prove) that the stock control clerk is ordering stock for his
own use on the business’s account. The clerk orders and receives stock from suppliers
and returns stock to suppliers. What measures can you implement to ensure that this
type of theft is minimised in the future?
5. How could Lisa determine whether stock is going missing?
6. List the internal control measures the owner should put in place to prevent employees
from stealing stock.
7. All the stock is purchased on credit. The balance of Creditors Control on 1 July 2012
was R87 500 and the balance on 30 June 2013 is R62 500. Calculate the average
creditors’ payment period for the year ended 30 June 2013 and comment briefly.
8. After an investigation, Lisa discovers that the stock control clerk has been ordering
stock for his own use. He would order 10 units but only 8 would end up on the
shop floor. The clerk has now asked for your advice. Explain the consequences of his
unethical behaviour to him.
3.3 Determining gross profit

Each stock system also determines how gross profit is calculated in the Trading
account.
Perpetual Periodic
Trading account Trading account

• Cost of sales • Sales (net)* • Opening stock • Sales (net)*
• Profit and loss • Purchases (net)# • Closing stock
(gross profit) • Carriage on purchases
• Custom duty
• Profit and loss
(gross profit)
* Net sales = sales – returns from debtors

# Net purchases = purchases – returns to creditors
4. Validation of stock
Stock validation is the process of counting the stock to confirm that it exists as validation
an asset to the business. When using the perpetual stock system, stock is validated
to prove that something is true or confirm
as follows: its amount and value
Closing balance in the Trading Stock account – physical stock count = trading
stock deficit
The disadvantage of using the periodic stock system is that it is very difficult to
validate stock because there is no amount to compare with the closing stock value.
The only way to validate stock is to calculate the achieved profit mark-up and
compare it with the intended profit mark-up. We will discuss this process later.
Acc GR12 LB.indb 249 6/6/13 6:03:59 PM

Activity 10.2
1. Explain the difference between the perpetual and periodic stock systems. Write a
short sentence under each of the following headings explaining the differences.
• Account debited when stock is purchased
• How cost of sales is determined
• How closing stock is determined
• How stock is validated at the end of a period.
2. The perpetual and periodic stock systems each have advantages and disadvantages.
Explain one advantage and one disadvantage of each system.
3. use the following information to draw up the Trading account and use it to calculate
the gross profit of a business using the perpetual stock system.
Information
• Cash sales of trading stock R140 000
• Credit sales of trading stock R248 150
• debtors returned stock R3 150
• Stock is marked up at 75% on the cost price.
4. use the following information to draw up the Trading account and use it to calculate
the gross profit of a business using the periodic stock system.
Information
• Stock on hand at the beginning of the period R24 500
• Sales for the period R385 000
• Cash purchase of trading stock R120 100
• Credit purchase of trading stock R93 060
• Stock returned to creditors R1 960
• Carriage on purchases R1 500
• Stocktaking revealed the following stock on hand at the end of the period, R17 200
5. use the information in question 4 to calculate cost of sales of the business using the
periodic stock system.
5. Loss of stock
RISK!
The business has to ensure that it protects its stock against theft, loss due to fire
and floods and any other cause of damage. The stock validation process will
determine the value, if any, of the missing stock.
6. Insurance
It is important that the business insures its stock against theft, fire or any other
damage. Because stock is the main profit generator for the business, uninsured
losses will cost the business in potential profits and could cause the business to
lose money. If stock is stolen, an insurance claim could be made and the insurance
company will pay out for the stolen stock at its cost price.
7. Net realisable value

Businesses need to record the cost of their closing stock value at the lower of cost
and NRV, to ensure that the value of the stock on their financial statements is not
overstated. Stock can be valued at either its historical cost or its market value.
Because the market value of an stock is not always available, NRV is sometimes
used as a substitute for this value.
250 Chapter 10 • InVEnToRY SYSTEmS
Acc GR12 LB.indb 250 6/6/13 6:03:59 PM

8. Stock cost calculations
There are three ways in which a business can value their stock through cost
calculations:
• Specific identification: The cost price of each item sold is specifically identified
as it appeared on the purchase invoice. The purchase invoice displays the cost
of each individual item bought.
• First in, first out (FIFO): An assumption is made that stock that is bought first
will be sold first.
• Weighted average: A weighted average cost is calculated based on the available
stock on hand.
These cost calculations are used to determine the value of stock on hand at the
end of a period (closing stock).
8.1 Specific identification

A business that sells items that are easily identifiable, such as a vehicle or jewellery,
will use this method of cost calculation. The business will know exactly what the
item cost according to the purchase invoice and can attribute the cost of the item
directly to the item being sold. It is easy to use this method when single items are
being sold.
Example
Information
• Bought 5 Fiat Palio cars for R62 500 each on credit from Africa Cars. These
cars are imported from Italy and a custom duty fee of R5 100 is charged on
each car. Paid the custom duty by cheque.
• Sold 1 Fiat Palio car to a customer on credit.
Required
Record these transactions in the Trading Stock account.
Solution
Trading Stock
Creditors control (R62 500 × 5) 312 500 Cost of sales (62 500 + 5 100) 67 600
Bank (R5 100 × 5) 25 500 Balance c/d 270 400
338 000 338 000
Balance b/d 270 400
Comment
The cost price of the item sold (cost of sales) is specifically identified because the
business can attribute the cost to the purchase price.
 270
______400
67 600 = 4 So there are 4 Fiat Palio cars on hand.
Acc GR12 LB.indb 251 6/6/13 6:03:59 PM

8.2 First-in, first-out (FIFO)
The principle here is that stock that is bought first will be sold first.
Example
Information
Crown Cycles in Laingsburg sells bicycles and bicycle accessories. The purchases
and sales records of their Rally bicycle for the month of September 2020 are
shown below. Crown Cycles uses the FIFO method of stock valuation.
Required
1. Calculate the number of Rally bicycles on hand (unsold units) on 30
September 2020.
2. Calculate the value of closing stock on 30 September 2020.
Transactions during September 2020

Information Number of Cost per Total value
units unit
Bicycles on hand on 1 September 2020
(Opening stock) 6 R1 000 R6 000
Purchases during the month 27 R37 500
3 September (bought on credit) 12 R1 250 R15 000
25 September (bought for cash) 15 R1 500 R22 500
Bicycles were returned on 18 September
from the purchases made on 3
September 2 R1 250 R2 500
Bicycles sold during the month 18 R2 700 R48 600
(closing stock) ? ?
The above transactions can be shown visually:

Bicycles on hand on 1 September 2020 – 6 @ R1 000
Purchases during the month

Bicycles bought on 3 September – 12 @ R1 250
Bicycles returned on 18 September – 2 @ R1 250
Acc GR12 LB.indb 252 6/6/13 6:03:59 PM

Example continued
Bicycles bought on 25 September – 15 @ R1 500
Sold 18 bicycles during the month at R2 700 each

Key
Represents the bicycles returned
Represents the bicycles sold

The remaining unsold bicycles
6 on hand at beginning of month sold first
The 18 bicycles sold are made us as follows: 10 of the purchases on 3 Sep sold after that
2 of the purchases on 25 Sep sold last
Solution
1. The number of Rally bicycles on hand (unsold units) on 30 September 2020:
Number of units on hand at beginning of period 6
+ Purchases during the month (12 + 15) 27
– Returns (2)
Items bought first will
= Number of units available to be sold 31 be sold first.
– Number of units sold during the period (18) Number of unsold units ×
= Number of unsold units 13 cost per unit = closing stock
13 × R1 500 = R19 500
2. The value of closing stock on 30 September 2020: closing stock
Available Returned Sold On hand

Bicycles on hand on 1 September 2020 6 –6
3 September 12 –2 –10
25 September 15 –2 13
33 –2 –18 13
Acc GR12 LB.indb 253 6/6/13 6:04:00 PM

Activity 10.3
My Bed Store CC sells beds and bedroom accessories. They sell a particular bed, the Supa
Comfort Sleep, which is their best seller. They use the FIFO method of stock valuation for
the Supa Comfort Sleep.
Required
1. Calculate the number of Supa Comfort Sleep beds on hand (unsold units) at the end
of the financial year, 29 February 2020.
2. Calculate the value of Supa Comfort Sleep beds on hand (closing stock) as on 29
February 2020.
Information Number of units Cost per unit

Beds on hand on 1 March 2019 20 R750
Purchases during the financial year 59
March 2019 25 R850
August 2019 13 R900
December 2019 21 R950
Sales for the year 49
Beds on hand on 29 February 2020 ?
Activity 10.4
Complete the following table in your exercise books. This business uses the FIFO method
of stock valuation.
No. of unsold Value of closing

No. Opening stock Purchases Sales
units stock
100 @ R22
1. 85 @ R20 180 @ R45 ? ?
140 @ R25
20 @ R310
2. 30 @ R300 40 @ R320 80 @ R600 ? ?
15 @ R330
19 @ R64
3. _?_ @ R60 30 @ R250 _?_ @ R70 R700
14 @ R70
1 500 @ R14 300 @ R14
4. 3 000 @ R12 _?_ @ R60 ?
1 700 @ R17 1 700 @ R17
Example
Look at the example on pages 252–253 for the number of unsold units on hand
and the value of closing stock for Crown Cycles, as well as other information.
Required
1. Calculate the cost of sales for September 2020 on the Rally bicycle.
2. Use the Trading account to calculate the gross profit at the end of September.
Information Number Cost per Total
of units unit value
Bicycles on hand on 1 September 2020 (opening stock) 6 R1 000 R6 000
25 September (bought cash) 15 R1 500 R22 500
Bicycles were returned on 18 Sep from the
purchases made on 3 Sep 2 R1 250 R2 500
Bicycles on hand on 30 September 2020 (closing stock) 13 R19 500
Acc GR12 LB.indb 254 6/6/13 6:04:00 PM

Example continued
Solution
1. Cost of sales for September 2020 on the Rally bicycle:
Using the perpetual stock system Using the periodic stock system
Calculation of cost of sales Calculation of cost of sales
6 × R1 000 R6 000 Opening stock R6 000
+ 10 × R1 250 R12 500 + Purchases (37 500 – R2 500) R35 000
+ 2 × R1 500 R3 000 + Carriage on purchases –
= Cost of sales R21 500 + Custom duty –
– Closing stock (R19 500)
= Cost of sales R21 500
2. Gross profit in the Trading account if using the perpetual stock system:
Trading account
Cost of sales 21 500 Sales 48 600
Profit and loss (gross profit) 27 100
48 600 48 600
Gross profit in the Trading account if using the periodic stock system:
Trading account
Opening stock 6 000 Sales 48 600
Purchases (37 500 – 2 500) 35 000 Closing stock 19 500
Carriage on purchases –
Custom duty –
Profit and loss (gross profit) 27 100
68 100 68 100
Let’s look at the similarities between the perpetual and periodic stock systems
when FIFO is used.
Observation Perpetual Periodic
How unsold units There is no difference in calculating when calculating
are calculated unsold units; calculated exactly the same when FIFO is
used
How closing stock is There is no difference in calculating closing stock;
calculated calculated exactly the same when FIFO is used
How cost of sales is Can be calculated each Calculated by using a
calculated time stock is sold, attribute formula: (Opening stock
a cost price to each item + Purchases + Carriage on
sold purchases + Custom duty
– Closing stock)
How gross profit is Sales – Cost of sales (Sales + Closing stock)
calculated in the – (Opening stock +
Trading account Purchases + Carriage on
purchases + Custom duty)
Acc GR12 LB.indb 255 6/6/13 6:04:00 PM

Activity 10.5
Sporting Gear sells peak caps to major retail stores. They stock different types of peak
caps and use the FIFO method of valuing their closing stock. All the caps are bought from
a local manufacturer and are purchased in bulk. Sporting Gear uses the perpetual stock
system of stock control.
Required
1. What do the letters FIFO stand for?
2. Complete the table by filling in the missing figures marked with an *.
3. Calculate how many caps are unsold and the cost price of these caps.
4. Calculate the total value of stock on hand (closing stock) on 28 February 2019.
5. Calculate the cost price of the caps sold (cost of sales) for the period.
6. Calculate the gross profit on 28 February 2019.
Information
Number of Unit price Total value
caps per cap
Opening stock on 1 March 2018 1 400 * R49 000
Total purchases * *
April 2 300 R38 *
July 2 600 R40 *
November 1 800 R41 *
Sales for the year * R75 R405 000
Activity 10.6
Techno (Pty) Ltd. sells electronic equipment and uses the periodic stock system of stock
control and the FIFO stock valuation method. The information below refers to the Sing
Bravo TV set for the year ended 28 February 2015.
Required
1. State how many Sing Bravo TV sets were bought during September.
2. Complete the table by filling in the missing figures marked with an *.
3. Calculate the number of unsold TV sets and the cost price of these TV sets.
4. Calculate the total value of stock on hand (closing stock) on 28 February 2015.
5. Calculate the gross profit on 28 February 2014 if the company uses the periodic
stock system.
6. Calculate the cost price of the TV sets sold (cost of sales) for the financial year
28 February 2015.
7. According to a stock count there were 72 Sing Bravo TV sets on hand on
28 February 2015.
a. Calculate the number of missing TV sets.
b. Explain how the TV sets could have gone missing.
8. Mention three control measures that the business can put in place to prevent
stock shortages.
Acc GR12 LB.indb 256 6/6/13 6:04:00 PM

Information
Number of Unit price per Total value
TV sets TV set
Opening stock on 1 March 2014 30 R1 380 R41 400
Total purchases for the year 108 (a)*
April 20 R1 450 R29 000
September (1) R1 480 (b)*
January 43 R1 420 (c)*
Returns of defective stock
bought during January 3 R1 420 R4 260
Sales for the year 59 R3 500 (d)*
Note: A refund on the carriage was offered by the supplier on the return of the defective
stock bought during January.
8.3 Weighted average

Cost of sales calculation is based on the following formula:
 Total value of units
    available to be sold
_______________________________
     = weighted average cost
No. of units available to be sold
Example
Refer back to information in the previous examples on pages 252 and 254.
Required
1. Calculate the number of Rally bicycles on hand (unsold units) on 30
September 2020.
2. Calculate the value of closing stock on 30 September 2020.
3. Calculate the cost of sales for September 2020 on the Rally bicycle.
4. Use the Trading account to calculate the gross profit at the end of September.
Information
Crown Cycles uses the weighted average method of stock valuation and the
periodic stock system of stock control.
Information Number of Cost per Total value
units unit
(opening stock) 6 R1 000 R6 000
25 September (bought cash) 15 R1 500 R22 500
Bicycles were returned on 18 Sep from
the purchases made on 3 Sep 2 R1 250 R2 500
(closing stock) ? ? ?
Solution
1. The number of Rally bicycles on hand (unsold units) on 30 September 2020:
Number of units on hand at beginning of period 6
+ Purchases during the month (12 + 15) 27
– Returns (2)
= Number of units available to be sold 31
– Number of units sold during the period (18)
= Number of unsold units 13
Acc GR12 LB.indb 257 6/6/13 6:04:00 PM

Example continued
2. The value of closing stock on 30 September 2020:
Opening stock + Use the following formulas:
(purchases – returns) + Total value of units available to be sold
 _______________________________
   
     = weighted average cost per unit
carriage on purchases No. of units available to be sold
Weighted average cost per unit × No. of unsold units = closing stock
6 000 + 37 500 – 2 500 = R1 322,58
 __________________
31   
R1 322,58 × 13 = R17 193,55 closing stock
3. The cost of sales for September 2020 on the Rally bicycle:
Weighted average cost per unit × number of units sold = cost of sales
R1 322,58 × 18 = R23 806,45
4. Using the Trading account to calculate the gross profit at the end of
September:
Trading account
Opening stock 6 000,00 Sales 48 600,00
Purchases (37 500 – 2 500) 35 000,00 Closing stock 17 193,55
Custom duty –
Profit and loss (gross profit) 24 793,55
65 793,55 65 793,55
Activity 10.7
My Bed Store CC also sells a special mattress called the Comfy Night which is another best
seller. They use the weighted average method of stock valuation for the Comfy Night and
the periodic stock system of stock control.
Required
1. Calculate the weighted average cost per unit for the Comfy Night mattresses on
29 February 2020.
2. Calculate the value of the Comfy Night mattresses on hand (closing stock) as on
29 February 2020.
Information
Number of Cost per Total value
units unit
Beds on hand on 1 March 2019 20 R750 R15 000
Purchases during the financial year 59 R52 900
March 2019 25 R850 R21 250
August 2019 13 R900 R11 700
December 2019 21 R950 R19 950
Sales for the year 49
Beds on hand on 29 February 2020 30 ? ?
Acc GR12 LB.indb 258 6/6/13 6:04:00 PM

Activity 10.8
The following information relates to Road Runners CC, a business selling running shoes.
The owner, Nick Smit, uses the periodic stock system of stock control. The running shoes
are imported from Redbuck UK. The following information relates to men’s Redbuck
running shoes for the year ended 28 February 2018.
Required
1. Use the weighted average stock valuation method to calculate:
a. the value of closing stock on 28 February 2018
b. the gross profit for the year ended 28 February 2018.
2. If the business were to change their valuation method to FIFO, what would the value
of the closing stock be?
3. Calculate the number of missing pairs of running shoes. According to the stocktaking
there are 67 pairs of running shoes on hand.
4. Calculate the value of the missing running shoes. Use the weighted average cost.
5. Nick Smit is unhappy that his stock is going missing and asks you for advice to prevent
this from happening. He reports to you that he is often not on the shop floor as he has
to do administrative work in the office. He suspects a staff member of stealing.
Information
• There were 65 Redbuck running shoes on hand on 1 March 2017. The total value of
the opening stock was R23 725 which included custom duty.
• Total purchases during the year of 155 units for R56 875 were made up as follows
(excluding custom duties):
April 2017 58 R350

October 2017 57 R375
February 2018 40 R380
• Custom duty during the year was charged at R15 per running shoe by SARS.
• A total of 5 pairs of running shoes were returned during the year. These returns were
made up from the following purchases:
■ 2 from purchases made during April 2017
■ 3 from purchases made during October 2017
■ No refund is allowed on custom duty if goods are returned.
• A selling price of R600 per running shoe was maintained throughout the year.
Total sales amounted to R87 000 (145 units sold).
• According to the accounting records on 28 February 2018 there are 70 Redbuck
running shoes on hand (closing stock).
8.4 How the FIFO and weighted average methods affect the
outcome in the financial statements
Example
Required
Comment on the effect that the different methods of stock valuation will have
on the financial statements with specific reference to:
• Cost of sales
• Closing stock
• Gross profit.
Acc GR12 LB.indb 259 6/6/13 6:04:00 PM

Example continued
Information
A comparison between FIFO and weighted average cost calculations revealed the
following:
FIFO Weighted average
Transaction No. of Value (R) No. of Value
units units
Opening stock @ R1 000 each 6 6 000 6 6 000,00
Purchases @ R1 250 each 12 15 000 12 15 000,00
Purchases @ R1 500 each 15 22 500 15 22 500,00
Returns @ R1 250 2 (2 500) 2 (2 500,00)
Units available to be sold 31 41 000 31 41 000,00
Cost of sales (18) (21 500) (18) (23 806,45)
Closing stock 13 19 500 13 17 194,55
Gross profit 27 100 24 793,55
Can you see that the only difference between the two methods is the way the
value of closing stock and cost of sales is determined? Cost of sales will in turn
affect gross profit.
Solution
1. Cost of sales
FIFO ↓ Weighted average ↑
Cost of sales has a lower value in the Cost of sales has a higher value
Income Statement thereby increasing in the Income Statement thereby
gross profit. decreasing gross profit.
2. Gross profit
FIFO ↑ Weighted average ↓
Gross profit has a higher value in the Gross profit has a lower value in the
Income Statement thereby increasing Income Statement thereby decreasing
net profit. Because net profit is higher, net profit. Because net profit is lower,
more tax will be paid. less tax will be paid.
3. Closing stock
The closing stock amount will appear in Note 4 (Inventory) to the financial
statements.
FIFO ↑ Weighted average ↓
Inventory amount in the Balance Inventory amount in the Balance
Sheet will be higher, revealing a Sheet will be lower, revealing a
higher current asset value. This has a lower current asset value. This has a
positive effect on the current ratio. negative effect on the current ratio.
A higher asset value will be disclosed A lower asset value will be disclosed
which will have a positive effect on which will have a negative effect on
Remember that NAV stands for Net nAV calculation. nAV calculation.
Asset Value.
Activity 10.9
Tim Bruinders, the owner of Bruinders Computers, uses the weighted average method to
value his stock. Tim wants to use the FIFo method of stock valuation because he feels that
it would reveal better results in the financial statements and would like to attract investors
to invest in his business.
260 Chapter 10 • InVEnToRY SYSTEmS
Acc GR12 LB.indb 260 6/6/13 6:04:01 PM

Information
Calculation of gross profit using the weighted average method of stock valuation and the
periodic stock system:
Sales (100 @ R7 600) R760 000

Cost of sales (R336 600)
Opening stock (50 @ R3 200) R160 000
Purchases (45 @ R3 250) + (30 @ R3 400) R248 250
Carriage on purchases (125 × R100) R12 500
Closing stock (25 @ R3 366) (R84 150)
Gross profit R423 400
Required
1. Calculate the value of closing stock using the FIFO method of stock valuation.
2. What would the cost of sales amount be if the FIFO method is used?
3. Calculate the gross profit using the FIFO method of stock valuation.
4. Complete the table by filling in the above amounts. Then answer the questions
that follow.
Weighted average FIFO

Closing stock R84 150 ?
Cost of sales R336 600 ?
Gross profit R423 400 ?
a. Use the values from the table to support Tim’s argument for changing to another
method of stock valuation.
b. As a professional accountant registered with SAICA, would you be able to
encourage Tim to change to another method in order for his financial statements
to reflect positive results? Provide a detailed explanation to support your answer.
8.5 Weighted averaged method and the perpetual stock system

The weighted average method of stock valuation can also apply to a business
using the perpetual stock system of stock control. When using the perpetual
stock system, a new weighted average cost is calculated each time new stock is
purchased.
The same formula applies:
Total value of units
    available to be sold
 _______________________________
     = weighted average cost per unit
No. of units available to be sold
Example
Sunglass Hut sells various brands of sunglasses. The particular brand in the
table below is Oakban, their most popular seller. They use the weighted average
method of stock valuation and the perpetual stock system of stock control.
Information
The following information appears in the books for February 2014
01 Stock on hand (opening stock) 200 sunglasses @ R320
04 Purchases 100 sunglasses @ R340
10 Sales 210 sunglasses @ a selling price of R500
18 Purchases 300 sunglasses @ R312
23 Sales 136 sunglasses @ a selling price of R500
Acc GR12 LB.indb 261 6/6/13 6:04:01 PM

Example continued
Required
1. Calculate the value of closing stock at the end of the period.
2. Calculate the cost of sales value.
3. Calculate the sales amount.
4. Calculate the gross profit.
5. If the business used the periodic stock system, work out the gross profit.
Date Transaction No. of Cost price per unit

units
01 Stock on hand (opening stock) 200 @ R320
Purchases 100 @ R340
04 [(200 × 320) + (100 × 340)] ÷ 300
On hand after purchase 300
= R326,67
Sales 210 Cost of sales (210 × 326,67)
10
On hand after sale 90 @ R326,67
Purchases 300 @ R312
18 [(90 × 326,67) + (300 × 312)] ÷ 390
On hand after purchase 390
= R315,39
Sales 136 Cost of sales (136 × 315,39)
23
On hand after sale (closing stock) 254 @ R315,39
Solution
1. Value of closing stock:
254 × 315,39 = R80 109,06
2. Cost of sales
(210 × R326,67) + (136 × 315,39)
= R111 493,74
3. Sales
210 + 136 = 346 × R500
= R173 000
4. Gross profit
Trading account
Cost of sales 111 493,74 Sales 173 000,00
Profit and loss (gross profit) 61 506,26
173 000,00 173 000,00
5. Gross profit using the periodic stock system

Sales (346 × R500) 173 000,00
Cost of sales (110 490,18)
Opening stock (200 × R320) 64 000,00
No. of units on hand Purchases (100 × R340) + (300 × R312) 127 600,00
(unsold units):
Closing stock (254 × R319,33) (81 109,82)
200 + 100 + 300 – 346 =
254 units Gross profit 62 509,82
Formula to calculate weighted average cost per unit:

64 000 + 127 600
 ______________
  
200 + 100 + 300 
= R319,33
Acc GR12 LB.indb 262 6/6/13 6:04:01 PM

Example continued
No. of units on hand (unsold units)
200 + 100 + 300 – 346 = 254 units
FIFO Weighted average

Perpetual Periodic Perpetual Periodic
Value of closing stock 79 248 79 248 81 109 82 80 109,06
Sales R173 000 R173 000 R173 000 R173 000
Cost of sales 112 352 112 352 110 490,18 111 493,74
Gross profit 60 648 60 648 62 509,82 61 506,26
Comment
Because the way in which closing stock is calculated when the different stock
valuation methods are applied, the outcome of the cost of sales and gross profit
differs. The closing stock calculation has an effect on the cost of sales amount,
particularly when the periodic stock system is used, and the cost of sales amount
directly affects the gross profit.
Activity 10.10
Time Wise (Pty) Ltd. sells ladies’ watches to the public. They use the perpetual stock
system of stock control but are unsure of which method to use in valuing their stock at
the end of the financial year so they’ve asked for your help. Because they purchase the
watches locally the cost price has increased dramatically during the month because of the
manufacturer has experienced an increase in labour costs and petrol.
Required
1. Calculate the value of closing stock at the end of August 2018 if the FIFO method of Rate of stock turnover:
valuing stock is being used.   Cost of sales
____________   
Average stock
2. Calculate the value of closing stock at the end of August 2018 if the weighted average
method of valuing stock is being used. = Times per month/year
3. Advise the owner which method you recommend he uses. Explain your answer with Average stock:
valid reasons with reference to cost of sales, gross profit and average stock turnover
Opening stock + closing
rate. Show calculations to validate your recommendation. stock ÷ 2
Information
No. of Cost price per
Transaction Total value
units unit
Watches on hand on 1 August 400 R150 R60 000
Purchase on 10 August 300 R170 R51 000
Sales: 450 @ R590 = R265 500 (450)
Purchase 18 August 200 R190 R38 000
Sales: 380 @ R620 = R235 600 (380)
Purchase 27 August 150 R220 R33 000
Returns on 29 August (10) R220 (R2 200)
Watches on hand on 31 August 210
Acc GR12 LB.indb 263 6/6/13 6:04:01 PM

The following information was extracted from the accounting records of Carry-on School
Bags CC, a business selling school bags. They only stock one type of bag, the Carry-on
20-litre school bag that sells for R250 each. Their financial year ends on February 2017. The
business is owned by Layla Jacobs.
The business uses the perpetual stock system and the FIFO method of valuing stock.
Required:
1. The selling price of the Carry-on was kept constant throughout the year. Calculate the
number of bags sold during the year. [3]
2. The owner, Layla, is aware that some bags were stolen from the shop floor during
December 2016. No entry has been made of this.
2.1 Calculate the number as well as the value of bags that went missing. [5]
2.2 What double-entry would you make in the books to record this adjustment? [2]
3. Calculate the value of stock on hand (closing stock) at end of the financial year using
the FIFO method of stock valuation. [7]
4. Calculate:
4.1 Cost of sales [4]
4.2 Gross profit on 28 February 2017 [3]
5. Layla does not know how long the remaining stock will last and when she will need
Formula for number of
to purchase more stock. Calculate the number of days the remaining stock will be on
days’ stock is on hand:
hand and advise Layla as to the approximate month during which more stock needs
Average stock ____
   ×  365 
 ____________ to be ordered. [6]
Cost of sales 1
= ____. days
Information
Accounting records showing transaction with regards to the Carry-on bags for the year
ended 28 February 2017:
Details Date No. of Unit Total value

units price
Opening stock 1 March 2017 240 R95 R22 800
Total 575 R62 025
May 2016 210 R100 R21 000
Purchases
July 2016 190 R110 R20 900
December 2016 175 R115 R20 125
Returns (from July’s purchases) August 2016 15 R110 R1 650
December
Bags stolen from shop floor 2016 ? R115 ?
Physical stock according to 28 February
stocktaking 2017 180 ?
Sales for the current financial year ? R250 R150 000
The following information was extracted from the stock records of Amy’s Designer Mugs
for the year ended 28 February 2019. The business is owned by Amy Abrahams. They sell
personalised coffee mugs to retail outlets. Amy uses the periodic stock system of stock
control.
Acc GR12 LB.indb 264 6/6/13 6:04:01 PM

Required
Refer to the information provided and calculate the following:
1. The number of units purchased during october 2018 [4]
2. The value of the closing stock using the weighted-average method [6]
3. Gross profit by drawing up the Trading account [9]
4. Cost of sales [3]
5. mark-up percentage [3]
6. Average stock turnover rate [5]
Information
Units Price per unit Total value
Sales 5 600 R18,50 R103 600
Opening stock 300 R5,20 R1 560
Purchases 5 950 ?
March 2018 3 575 R5,60 R20 020
October 2018 (1.) R5,80 ?
January 2019 1 325 R6,00 R7 950
Carriage on purchases 50c R2 975
Damaged mugs written off 30 R6,00 R180
Closing stock 620 ? ?
Best office Supplies buys and sells office furniture. They use the FIFo method of stock
valuation and the perpetual stock system of stock control. They have the following staff RISK!
members who administer the stock process.
• mary is the order clerk – she orders the stock from the suppliers and captures the
INTERNAL
INTERNAL AUDIT
invoices received. AUDIT
• kavish is the receiving clerk – he receives the delivered items and enters the amount
received on the computerised accounting system. He also compares the invoices with
the delivery notes.
• Sibu is the internal auditor – he oversees the above process and audits kavish and
mary’s work.
• nigel is the store manager – he ensures that the goods are unpacked, marked and put
on the shelves. He also oversees the stocktaking process.
The following report was drawn up by Sibu who presents it to you for comment:
Units
Units Units Number
received by Units sold Units as per
ordered by entered by of units on
Stock item Kavish as on as per sales physical
Mary as on Mary into hand as in
the delivery invoices stocktaking
the invoice the books the books
note
office desks 50 49 49 32 17 18
office chairs 100 100 100 57 41 41
Filing 250 240 250 205 35 35
cabinets
Book shelves 130 130 130 100 30 30
Boardroom 55 60 55 35 25 25
tables
InVEnToRY SYSTEmS • Chapter 10 265
Acc GR12 LB.indb 265 6/6/13 6:04:02 PM

Required
1. Read the job descriptions of each employee. Has the business put enough control
measures in place with regards to division of labour? [4]
Study the report drawn up by Sibu and comment on the following:

2. Any areas of concern stating a reason why it is of concern. Use figures to motivate
your answer. [6]
3. Mention three measures that could be implemented in order to improve on the
situation. [6]
4. Do you think that Sibu is doing his job correctly as the internal auditor? [2]
5. What entry must be made in order to write off the missing stock? Name the
account to be debited and the account to be credited. [2]
Acc GR12 LB.indb 266 6/6/13 6:04:02 PM

Chapter 11
Reconciliations
• Understand the Debtors Control and Creditors Control accounts • debtors • creditors
• Understand the debtors and Creditors Lists • Debtors Control account
• Reconcile the debtors and Creditors Lists with the control accounts • Creditors Control
• Reconcile creditors’ statements with their personal accounts in the account • Debtors Ledger
Creditors Ledger accounts • Creditors
• Analyse and interpret the debtors age analysis Ledger accounts
• Analyse and interpret bank statements and Bank Reconciliation Statements • Debtors List • Creditors
List • debtors age
Thanks Zaida, I should be analysis • mirror image
spending the rest of the afternoon • creditors’ statements
reconciling the creditors’ records. • bank statement • Bank
Please hold my calls.
Reconciliation Statement
• bank overdraft
• favourable bank balance
• stale cheques • post-
Randall, the creditors’ dated cheques
statements are in
your in-tray.
R ec o n ci l iati o n s • C h a p t e r 1 1 267
Acc GR12 LB.indb 267 6/6/13 6:04:02 PM

1. Introduction
In Grade 10 you prepared the Debtors and Creditors Lists and reconciled them
with the Debtors Control and Creditors Control accounts.
In Grade 11 you prepared the Creditors Reconciliation Statement in order to
reconcile statements received from a creditor with their account in the Creditors
Ledger. You also prepared the Bank Reconciliation Statement in order to reconcile
the bank statement received from the bank with the cash journals.
This year you will have to analyse and interpret the bank, debtors and creditors
reconciliations as well as the debtors age analysis.
2. Understanding debtors and creditors accounts

It is important to understand the debtors and creditors accounts of your business.
The debtors clerk or bookkeeper must be able to convey accurate information
to debtors when needed and the creditors clerk or bookkeeper must be able to
interpret creditors’ accounts for reporting purposes.
2.1 Understanding debtors (revision)

A debtor is an important asset to the business as a debtor owes the business money
for stock sold to him on credit. It is vital to properly administer debtors, so you
should always maintain good relations with them and communicate accurate
information. The debtors clerk must be able to answer any questions asked by a
debtor about his account and therefore must be able to interpret the information
quickly. The accountant also needs information from debtors’ records, such as how
often each debtor pays its account, which debts are outstanding and for how long,
who needs to be charged interest on overdue accounts, and so on.
We will study the Debtors Control account as well as the Debtors Ledger in
order to build an understanding of debtors. Next we’ll look at the transaction that
lead to the entry being made in the accounts as well as the journal from which the
entry was posted.
Example
Dr Debtors Control Cr
2015 2015
Apr 01 Balance b/d XXX XX Apr 30 Bank and discount allowed ❺ CRJ XXX XX
30 Sales ❶ DJ XXX XX Debtors allowances ❻ DAJ XX XX
Bank (R/D) ❷ CPJ XX XX Journal credits ❼ GJ X XX
Petty cash ❸ PCJ X XX Balance c/d XX XX
Journal debits ❹ GJ X XX
XXXX XX XXXX XX
2015
May 01 Balance b/d XX XX
Note
The balance brought down on the debit side is the net balance which is the debit
balances minus any credit balances that were obtained from the Debtors Ledger.
Credit balances occur when debtors overpay, when discounts are granted after an
account has been settled, or when an incorrect entry is made in the account.
268 Chapter 11 • R ec o n ci l iati o n s
Acc GR12 LB.indb 268 6/6/13 6:04:02 PM

Example continued
Debtors Ledger
Date Details Fol. Debit (+) Credit(–) Balance
2015 01
Apr Account rendered b/d xxx
05 Invoice ❶ DJ xxx xxx
07 Dishonoured cheque ❷ CPJ xx xxx
09 Petty cash voucher ❸ PCJ xx xxx
12 Journal voucher (interest received,
discount cancelled, asset disposal,
transfer or correction) ❹ GJ xx xxx
17 Receipt ❺ CRJ xxx xx
17 Receipt (discount allowed) ❺ CRJ x xx
21 Credit note ❻ DAJ xx xx
25 Journal voucher (bad debts,
transfer or correction) ❼ GJ xx xx
The following transactions result when the entry is made on the debit
side of debtors’ accounts.
No. Transactions that increase debtors’ accounts Source document Journal
❶ Sold trading stock to debtors on credit. Debtors therefore owe the Invoice Debtors Journal
business more money.
❷ A cheque previously received from a debtor in payment of his Dishonoured cheque Cash Payments Journal
account was dishonoured by the bank. The payment must therefore
be cancelled.
❸ Payments were made from petty cash on behalf of a debtor. An Petty cash voucher Petty cash Journal
example of this could be to pay for the transport of goods on behalf
of the debtor, who will then owe the money to the business.
❹ • Charged a debtor interest on his overdue account (interest received). Journal voucher General Journal
• Cancelled the discount on the dishonoured cheque.
• Sold an asset on credit.
• Transferred the credit balance of a debtor to his account in the
Creditors Ledger.
• Errors made on a debtor’s account are corrected during the month.
The following transactions result when the entry is made on the credit
side of debtors’ accounts.
No. Transactions that increase debtors’ Source Journal
accounts document
❺ Received money and cheques from Receipt Cash Receipts
debtors in part payment or settlement Journal
of accounts and allowed them
discounts for prompt payment.
❻ Debtors returned goods to our store Credit note Debtors
or requested allowances on goods Allowances Journal
previously sold to them.
❼ • Wrote off a debtor’s account as Journal voucher General Journal
uncollectable or bad.
• Transferred the debit balance of a
debtor to his account in the Creditors
Ledger.
• Errors made on a debtor’s account
were corrected during the month.
Acc GR12 LB.indb 269 6/6/13 6:04:02 PM

Activity 11.1
Study the transactions that took place between N Field, a debtor, and TJ’s Computer Store,
a business selling computers and computer accessories. The business allows debtors to pay
within 30 days and allows them a discount of 3% if their accounts are settled promptly.
Information
Summary of transactions in the account N Field:
Transactions for March 2014 Balance
Balance on 1 March 2014 (Amount owing since 1 February 2014) 975
Goods sold on credit on 12 March + 2 550 3 525
Received cash from N Field on 15 March – 975 2 550
N Field returned goods on 20 March – 450 2 100
Dishonoured cheque (insufficient funds) on 21 March + 975 3 075
Required
1. Do you think N Field is conducting his account fairly with TJ’s? Give two reasons for
your answer.
2. Explain why TJ’s did not allow N Field a discount on his payment of R975.
3. Would you have encouraged or discouraged TJ’s from selling the goods to N Field on
12 March? Give reasons for your answer.
4. Give the owner of TJ’s advice regarding N Field’s account.
5. If you were the owner of TJ’s, what would you do to ensure that N Field pays his account?
6. If TJ’s marked their goods up at 70% on the cost price, calculate the cost of sales for
the goods sold to N Field for R2 550.
7. Other than the debtor having insufficient funds in his account, give two other reasons
why the bank would dishonour a cheque.
8. If N Field were to settle his account on 3 April, calculate the discount (if any) that will
be allowed to him.
9. TJ’s will record N Field’s information in the Debtors Ledger. What is the purpose of the
Debtors Ledger?
10. Provide advice to TJ’s on how to better control his debtors accounts.
2.2 Understanding creditors (revision)

The business has a responsibility to its creditors to pay them on time. The
accountant must analyse the creditors’ records to determine whether debt is being
paid on time, the value of outstanding debt, what the value of items returned
were, and so on.
We will study the Creditors Control account as well as the Creditors Ledger in
order to build an understanding of creditors. The transaction that led to the entry
being made in the accounts as well as the journal from which the entry was posted
is given below.
Example
Dr Creditors Control Cr
2015 2015
Apr 30 Bank and discount received ❹ CPJ XXX XX Apr 01 Balance b/d XXX XX
Sundry returns ❺ CAJ XX XX 30 Sundry purchases ❶ CJ XXX XX
Journal debits ❻ GJ XX XX Bank (refund) ❷ CRJ X XX
Balance XX XX Journal credits ❸ GJ XX XX
XXXXX XX XXXXX XX
2015
May 01 Balance b/d XX XX
Acc GR12 LB.indb 270 6/6/13 6:04:02 PM

Example continued
Creditors Ledger
Date Details Fol. Debit (–) Credit (+) Balance
2015 01
Apr Account rendered b/d xxx
08 Invoice ❶ CJ xxx xxx
10 Receipt ❷ CRJ x xxx
14 Journal voucher (interest paid,
transfer and correction) ❸ GJ xx xxx
18 Cheque ❹ CPJ xxx xxx
18 Cheque (discount received) ❹ CPJ x xx
25 Debit note ❺ CAJ xx xx
28 Journal voucher (asset disposal,
transfer and correction) ❻ GJ xx xx
The following transactions result when the entry is made on the credit
side of creditors’ accounts.
No. Transactions that increase creditors’ Source Journal
accounts document
❶ Bought items on credit from suppliers. Invoice Creditors Journal
Items include trading stock, stationery,
equipment, materials, and so on.
Repairs can also be done on credit.
❷ Our account with a creditor was Receipt Cash Receipts
overpaid and therefore the amount was Journal
refunded.
❸ • Interest was charged on our overdue Journal voucher General Journal
account (interest paid).
• Transferred the debit balance on a
creditor’s account to his account in
the Debtors Ledger.
• An error made on a creditor’s account
is corrected during the month.
The following transactions result when the entry is made on the debit
side of the creditors’ accounts.
No. Transactions that increase creditors’ Source Journal
accounts document
❹ Paid cheques to creditors in part Cheque Cash Payments
payment or in settlement of our counterfoil Journal
accounts and received discounts for
prompt payment.
❺ Return of items previously bought on Debit note Creditors
credit. Items include trading stock, Allowances Journal
stationery, equipment, materials, etc.
❻ • A vehicle or equipment is traded in Journal voucher General Journal
(asset disposal).
• Transferred the credit balance on a
creditor’s account to his account in
the Debtors Ledger.
• An error made on a creditor’s account
is corrected during the month.
Acc GR12 LB.indb 271 6/6/13 6:04:03 PM

Activity 11.2
Look at the account below and answer the questions that follow.
Information
2017 2017
Jul 31 Bank and discount received CPJ 76 600 00 Jul 01 Balance b/d 37 600 00
Sundry returns CAJ 6 312 00 30 Sundry purchases CJ 82 655 00
Journal debits GJ 695 00 Journal credits DJ 807 00
121 062 00 121 062 00
Balance b/d 37 455 00
Required
1. Name four possible items that could be included in sundry purchases on the credit side.
2. Explain how drawings could be included in the sundry purchases amount.
3. Name two possible entries that resulted in the entry of R807 on the credit side.
4. The Discount Received column appears in the Cash Payments Journal together with
the Creditors Control column. Provide two reasons why the Discount Received column
is not posted to the Creditors Control account.
5. If a discount of 4% was received on all payments, how much money was paid to
creditors during July 2017?
6. Name the source document used for the debit entry of R6 312.
7. Name an account that would be credited if the sundry returns amount of R6 312 is
debited in the Creditors Control account.
8. How would you ensure that the balance of R37 455 on 31 July 2017 is correct?
9. What type of account is this account?
10. List four control measures that the business can put in place in order to control its
creditors.
Acc GR12 LB.indb 272 6/6/13 6:04:03 PM

3. Internal control over debtors and creditors
There needs to be proper controls over debtors and creditors accounts and the
administrative process of debtors and creditors must ensure that these accounts
are properly controlled.
INTERNAL
CONTROL
Controls over debtors

• There should be adequate segregation (separation) of duties with regards to
debtors’ transactions.
• There should be policies in place that monitor the approval of credit to customers.
• When a customer applies for credit, a background credit check must be done in
order to check on the customer’s past credit track record.
• Credit sales invoices must be issued when a credit sale takes place and the
transaction must be correctly recorded in the proper journal.
• When debtors pay their accounts, a receipt must be issued and the
transaction must be correctly recorded in the proper journal.
• Discount must be given when an account is settled early.
• The debtors clerk must send out regular statements to debtors.
• The debtors clerk must ensure that the balance in the Debtors
Control account balances with the total in the Debtors List at
the end of each month.
• Interest must be charged on overdue accounts.
Acc GR12 LB.indb 273 6/6/13 6:04:03 PM

INTERNAL
CONTROL
Controls over creditors

• There should be adequate segregation (separation) of duties with regards to
creditors’ transactions. For example, the same person ordering the items should
not be the same person receiving the items.
• The clerk receiving the items from creditors must check the delivery note against
the order form to ensure that all items ordered were delivered.
• All invoices received for items purchased must be correctly processed in the
proper journal.
• All payments to creditors must be processed and the transaction must
be entered in the proper journal.
• Creditors must be paid on time in order to receive a discount
and to avoid interest being charged.
Activity 11.3
Saleem, the owner of Cash and Carry Supermarkets, is concerned about the financial
statements that his accountant has recently produced. His concerns are:
• Sales have increased by 60% but his net profit has decreased by 20%.
• His trading stock deficit has increased by 25%.
• Bad debts have increased by 15%.
• The accountant suggests that he increases his provision for bad debts from 5% to 12%
of outstanding debtors.
• The average debtors collection period has increased from 30 days to 50 days.
• His creditors are being paid within 35 days and he receives a 4% discount for early
payment.
• Number of days' stock is on hand increased from 26 days to 43 days.
Saleem asks you to advise him on control measures regarding his stock, debtors and
creditors.
Required
Write a short report advising Saleem on the areas he needs to be concerned about and
suggest which control measures he can put in place to avoid similar financial results in the
next financial year.
Part of the internal control process of an organisation is to monitor its debtors’

and creditors’ accounts. This is done through:
• Reconciling the Debtors List to the Debtors Control account
• Monitoring the debtors age analysis in order to determine which debtors are
not performing according to the credit agreement that they signed
• Reconciling the Creditors List to the Creditors Control account
• Reconciling the statement received from a creditor with his account in the
Creditors Ledger.
Acc GR12 LB.indb 274 6/6/13 6:04:04 PM

4. Reconciling the Debtors List to the Debtors Control
account
You learnt how to do this in Grade 10 but let’s revise the concepts to refresh
your understanding. When a credit transaction takes place it is recorded in the
appropriate journal. The information in the journal is posted to the ledgers.
Let’s follow this process, using examples.
A credit transaction takes place.

Example: Sold goods on to m molope,
R2 020 and to C Christians, R1 900
The transaction is recorded on a specific document.

Example: It will be recorded on the invoice.
The information on the document is entered into The journal is posted to the relevant subsidiary ledger.
the relevant journal. Example: the Debtors Ledger
Example: the Debtors Journal
Debtors Ledger
Debtors Journal M Molope
Details Debtors Control Day Details Fol. Debit Credit Balance
m molope 2 020 Invoice dJ 2 020 2 020
C Christians 1 900
3 920 C Christians
Day Details Fol. Debit Credit Balance
Invoice dJ 1 900 1 900
The journal is also posted to the General ledger.

Example: the Debtors Control account
A list is compiled by adding together the
General Ledger
balances in the subsidiary ledger accounts.
Debtors Control
Example: the debtors list
Sales dJ 3 920
Debtors List
m molope 2 020
C Christians 1 900
debtors Control balance 3 920
At the end of the month, the balance in the control account must equal the
balance in the list. As shown in the example, the balance of R3 920 equalled the
INTERNAL
INTERNAL AUDIT
balance in the Debtors List. The balance in the List is the sum of all the debtors’/ AUDIT
creditors’ individual balances. If the control account does not agree with the list,
the mistakes must be traced and corrected. We therefore say that the control
account and the list must be reconciled.
R E C o n C I l I AT I o n S • C h a p t e r 1 1 275
Acc GR12 LB.indb 275 6/6/13 6:04:05 PM

During the process, the following errors may occur:
Possible mistake How to correct it

An amount was not posted from the journal to the ledgers at all Correct the amount in both the control account and the list.
(omitted).
An amount was incorrectly entered into the journal, for Correct by entering the difference in both the control account
example R2 500 instead of R5 200 (transposed). and the list.
An amount was correctly entered into the journal, but was Correct by entering the difference in the list only.
incorrectly posted to the Debtors/Creditors Ledger, for example
R1 000 instead of R100.
An amount was correctly entered into the journal but was Correct by entering (×2) the amount and enter in the list only.
posted to the wrong side of the Debtors/Creditors Ledger.
The journal was cast incorrectly; that is, too much or too little. If under cast, add and if overcast, subtract the amount by which
(To cast is to add or to total.) it is under or over. Enter in the control account only.
The total of the journal was posted to the wrong side of the Correct by entering (×2) the amount and enter in control
control account. account only.
The journal was correctly totalled but this total was incorrectly Correct by entering the difference in the control account only.
posted to the control account, for example R200 instead of
R2 000.
So by reading the above table we can conclude the following:

• Totals that need to be corrected will affect the control account only.
• Amounts that need to be corrected will affect the list, except when an amount
was omitted or incorrectly entered.
Example
The Debtors Control account and the Debtors List of Westwood Trading
Company does not balance. The debtors clerk was asked to check the source
document, journals and ledgers to find the mistakes and then to reconcile the
Debtors Control account with the Debtors List.
2018 2018
May 01 Balance b/d 10 530 00 May 31 Bank and discount allowed CRJ 16 104 00
31 Sales DJ 17 368 00 Debtors allowances DAJ 150 00
Bank (R/D) CPJ 120 00 Journal credits GJ 70 00
Journal debits GJ 250 00 Balance c/d 11 944 00
28 268 00 28 268 00
2018
June 01 Balance b/d 11 944 00
Debtors Ledger
Debtor Debit Credit
D Anthony 2 270
M Achmat 1 900
T Behardien 100
J Kaoma 8 505
D van der Linde 0
A Shin 0
Total 12 675 100
Acc GR12 LB.indb 276 6/6/13 6:04:06 PM

Example continued
The following errors and omissions discovered upon investigation.
❶ The account of D Anthony in the Debtors Ledger was cast by R200 too much.
❷ The total of the Debtors allowances Journal was under cast by R10.
❸ An invoice issued to D Anthony for R1 054 was correctly entered in the
Debtors Journal but was posted to his account as R1 045.
❹ An invoice for R400 issued to D van der Linde was incorrectly posted to the
account of J Kaoma.
❺ A receipt issued to M Achmat for R830 was correct in the Cash Receipts
Journal but was posted as R380 to his account in the Debtors Ledger.
❻ The account of M Achmat must still be charged with R45 interest.
❼ The bank returned A Shin’s dishonoured cheque marked R/D. This cheque
was for R300 and R30 discount was allowed to him. This entry has not yet
been made.
❽ The credit balance on the account of T Behardien occurred when he paid his
account which had been written off as irrecoverable.
Solution
2018 2018 Bank and discount allowed (16 104 –
May 01 Balance b/d 10 530 00 May 31 100) ❽ CRJ 16 004 00
Debtors allowances
31 Sales DJ 17 368 00 (150 + 10) ❷ DAJ 160 00
❼
Bank (R/D) (120 + 300) CPJ 420 00 Journal credits GJ 70 00
Journal debits
(250 + 45 + 30) ❻ + ❼ GJ 325 00 Balance c/d 12 409 00
28 643 00 28 643 00
2018
June 01 Balance b/d 12 409 00
Debtors Ledger
Debtor Debit Credit
❶ ❸
D Anthony (2 270 – 200 + 9) 2 079
❺ ❻
M Achmat (1 900 – 450 + 45) 1 495
❽
T Behardien (– 100 + 100) 0
❹
J Kaoma (8 505 – 400) 8 105
❹
D van der Linde (0 + 400) 400
❼ ❼
A Shin (0 + 300 + 30) 330
Total 12 409
Acc GR12 LB.indb 277 6/6/13 6:04:06 PM

Activity 11.4
The Debtors Control account and Debtors List below were presented to the financial
manager of Hyper Fitment Centre. He was unhappy as the two balances do not tally, and
asked the debtors clerk to investigate the discrepancies.
2012 2012
Apr 01 Balance b/d 30 200 00 Apr 30 Bank and discount allowed CRJ 62 548 00
30 Sales DJ 59 920 00 Debtors allowances DAJ 2 884 00
Bank (r/d) CPJ 1 500 00 Journal credits GJ 556 00
Journal debits GJ 140 00 Balance c/d 25 772 00
91 760 00 91 760 00
2012
May 01 Balance b/d 25 772 00
Debtors List on 30 April 2012

Debtor Debit Credit
D Kempte 13 025
O Miller 260
T Charamba 7 884
N Naiker 4 233
Total 25 142 260
Required
The following errors were discovered and have to be corrected:
1. A sales invoice for goods sold to D Kempte for R620 was incorrectly recorded in the
Debtors Journal as R6 200.
2. The bank returned O Miller’s cheque of R260, dishonoured due to insufficient funds.
The bookkeeper posted this amount to the credit side of his account by mistake.
3. The Debtors Allowances Journal was overcast by R200.
4. A payment of R2 250 received from N Naiker was not entered into the relevant journal.
The receipt also showed a discount of R250 that was allowed for prompt payment.
5. The account of T Charamba was incorrectly balanced. The balance should be R8 774
and not R7 884.
6. Included in the receipts from debtors is an amount of R320, which was received from
a debtor whose account was previously written off as uncollectable. This amount was
not posted to the Debtors Ledger.
Activity 11.5
After all posting to the ledger had been completed the bookkeeper compared the
balance of the Debtors Control account with the total of the Debtors List and found that
the two do not balance.
Required
Follow the example on the table below and show how the errors and omissions should be
corrected.
Acc GR12 LB.indb 278 6/6/13 6:04:06 PM

The total of the Debtors Control column of the CPJ was not posted to the ledger, R400.
No. Debtors Control account Debtors List

Debit Credit Debit Credit
Example 400
Errors and omissions

1. An amount of R136, received from P Kweleta, was posted to the credit side of the
account of P Kwela.
2. The Debtors List was overcast by R700.
3. The total of the Sales column in the DJ was under cast by R160.
4. A credit invoice for R500 for goods sold to V Vuthela was not entered into the DJ.
5. The credit balance on the account of S Voss is as a result of R200 received from him
after his account had been written off. This amount is included in the Debtors Control
column of the CRJ.
6. A credit invoice of R430 was correctly entered into the DJ, but was posted to the
account of Y Vye as R340.
7. The account of P Prickly was balanced incorrectly. The debit balance of R80 should
be R800.
8. The balance of R50 owed by P Leo was omitted from the Debtors List.
9. A credit note for goods returned by Z Wizmann for R200 was entered in the DAJ twice
and posted as such.
10. A dishonoured cheque for R135 was received together with the bank statement. This
cheque was received from A Adven in settlement of his account of R150. The entries
were not yet made in the journals.
Activity 11.6
Required
Reconcile the Creditors Control account with the Creditors List on 30 April 2013. Individual
balances for creditors are not provided, so simply show the changes in the list by using
the incorrect balance provided. The incorrect balance in the Creditors List on 30 April
2013 is R23 986.
2013 2013
Apr 30 Bank and discount received CPJ 99 120 00 Apr 01 Balance b/d 23 590 00
Sundry returns CAJ 1 540 00 30 Sundry purchases CJ 101 000 00
Journal debits GJ 408 00 Bank (refunds) CRJ 280 00
Balance c/d 23 952 00 Journal credits GJ 150 00
125 020 00 125 020 00
2013
May 01 Balance b/d 23 952 00
Errors and omissions

1. The Creditors Journal was overcast by R240.
2. An amount of R206 in the Creditors Journal was incorrectly posted to a creditor’s
account as R260.
3. Transfer the credit balance of R40 of a debtor in the Debtors Ledger to his account in
the Creditors Ledger.
4. A debtor with a credit balance of R90 was included in the Creditors List by mistake.
5. The Debtors Control column in the Cash Payments Journal was posted to the
Creditors Control account in error, R130 as part of Bank and Discount received.
6. A debit note of R185 was not entered in the Creditors Allowances Journal at all.
Acc GR12 LB.indb 279 6/6/13 6:04:06 PM

Activity 11.7
After the Creditors Control account had been prepared it was closed off and compared
with the balance on the Creditors List. These were the balances:
Creditors Control account R72 150
Creditors List R91 805
Required
Calculate the amended balances after adjustments and corrections are made to the
Creditors Control account and the Creditors List. Use the following format to show your
workings:
Transaction Creditors Control Creditors List

Example
When the Creditors List was added up, a casting error occurred resulting in the total + 700
of the Creditors List being under cast by R700.
Provisional balances at the end of the month 116 910 91 805
1. When the Creditors List was added up a casting error occurred resulting in
the total of the Creditors List being overcast by R1 000.
2. A purchase made from Cyber Computers for R6 200 was not recorded into
the books at all.
3. A return of stock to MyStock Stores, R1 650, was recorded in the Creditors
Allowances Journal but was posted as R6 510 to the account of MyStock
Stores in the Creditors Ledger.
4. The bookkeeper credited the total of the Creditors Control column in the
Cash Payments Journal to the Creditors Control account by mistake, R8 760
5. An amount in the Creditors Control column of the Creditors Journal
was not posted to the account of Big Music Store in the Creditors Ledger,
R3 725
Amended balances after adjustments and corrections
5. Debtors age analysis

A debtors age analysis is drawn up to give the business a global overview of their
debtors’ outstanding amounts – it shows a breakdown of debtors’ outstanding
balances over the schedule’s aging period, usually three months. This schedule is
analysed to find out:
• Which debtor owes what amount and for how long
• Which debtor needs to be given a discount, charged interest or handed over to
the attorneys for collection
• Debtors’ purchasing habits and what portion of their credit limit they have
accessed
• What percentage of the money owing is current and which is overdue.
The age analysis is a good internal control measure to ensure that debtors are
INTERNAL
INTERNAL AUDIT
AUDIT administered properly. The faster the debtors pay the business, the more positive
the effect will be on the cash flow of the business. Quick collection creates an
efficient trading cycle where money can be made available to buy more stock. So
the stock is turned over into profits much quicker.
Acc GR12 LB.indb 280 6/6/13 6:04:06 PM

There are two ways by which debtors can be charged:
1. 30, 60 or 90 days from invoice date; that is, from the day that the items were
purchased
2. 30, 60, or 90 days from statement date. At the end of each month the business
sends its debtors a statement listing all the transactions up to a specific date.
The amount on the statement is due 30, 60 or 90 days after the end of that
particular date. This is the more popular option.
Example
During June the business sells the following to Debtor A: on 5 June for R1 200,
on 12 June for R800 and on 29 June for R500. Debtor A therefore owes the
business R2 500, which appears on the June statement in the current column.
On the July statement the R2 500 will appear in the 30 days column and on the
August statement it will appear in the 60 days column.
5.1 Analysing the debtors age analysis

Example
The credit policies of Clareridge Office Supplies are as follows:
• A customer wanting to buy on credit needs to fill in a credit application form
and their application should undergo a strict credit check and referencing.
• No credit will be given to a potential debtor if they have a bad credit record.
• A credit limit is given to each debtor based on their credit profile.
Terms of the credit agreement:
• Account statements will be sent to debtors at the end of each month and
debtors are given 60 days from statement date in which to settle their debts.
• Debtors settling within 30 days of invoice qualify for 5% discount.
• After 60 days the debtors will be charged interest at 10% p.a.
• After 90 days, debtors will be handed over to the attorneys for collection.
Required
Study the debtors age analysis below drawn up on 30 June 2019. Study the
analysis done on the schedule and familiarise yourself with what you can
determine from the schedule.
Refers to credit sales
Refers to credit sales made
made during June, the
during May; these amounts
current month Refers to credit sales
are still within the credit
made during April; these
agreement period.
amounts should be paid
Debtors age analysis on 30 June 2019 in full by end June.
Debtor Credit Total Current 30 days 60 days 90 days

These amounts
limit balance
are overdue.
owing
M Salujee 15 000 7 200 3 200 4 000
T Abrahams 17 000 17 000 17 000
B Moses 10 000 5 300 5 300
S Marubulela 18 000 8 000 2 000 4 200 1 800
Total 60 000 37 500 10 500 8 200 1 800 17 000
Percentage 100% 28% 21,9% 4,8% 45,3%
Acc GR12 LB.indb 281 6/6/13 6:04:06 PM

Example continued
Analysis
M Salujee
He has a credit limit of R15 000 and to date has only bought for R7 200. He is
not in arrears because his debt of R4 000 is only 30 days old and he has 60 days
in which to settle his debt. He bought for R3 200 during the current month and
bought for R4 000 in the previous month. If he settles his total debt at the end of
June he will qualify for R360 discount.
T Abrahams
She is 30 days overdue because her debt is 90 days old and interest of R141,66
should be charged on this overdue account. This debtor has maximised her credit
limited and the goods were sold to her more than three months ago. This debtor
should have been followed up with regular phone calls and letters. If the debtor
is overdue for more than 90 days then she should be handed over to the attorneys
for collection.
B Moses
He has a credit limit of R10 000 and has bought for R5 300 during June. He could
be a new debtor and is not in arrears because he has 60 days in which to settle the
debt.
S Marubulela
This debtor must be watched. She has only used up R8 000 of her R18 000 limit
but further sales to her should not be allowed unless she settles some her debt.
Although she is technically not overdue, the R1 800 is due at the end of June to
avoid becoming overdue.
General comments
Debtors’ accounts are not being correctly administered because 45,3% of the
total outstanding debt is overdue by more than 60 days. That is nearly half of the
debtors’ book.
Activity 11.8
Luthuli & Son is a building supplies business who only sells its stock on credit. They have
put the following credit policies in place:
• Building contractors wanting to buy on credit need to fill in a credit application form
and their application should undergo a strict credit check and referencing.
• No credit will be given to a potential debtor who if they have a bad credit record.
• A credit limit is given to each debtor based on their credit profile.
Terms of the Credit Agreement signed by the debtor and Luthuli & Son:
• Debtors will be given 60 days after statement date in which to settle their debts.
• Debtors settling within 30 days qualify for 4% discount.
• After 60 days, debtors will be charged interest of 12% p.a.
• After 90 days, debtors will be handed over to the attorneys for collection.
Acc GR12 LB.indb 282 6/6/13 6:04:06 PM

Required
Study the debtors age analysis and answer the questions that follow.
Luthuli & Son Building Supplies

Debtors age analysis on 30 September 2016
Debtor Credit Total Current 30 days 60 days 90 days
limit balance
owing
Javu 10 800 10 800 5 100 5 700
Roofing
Contractors
Mpikanisi 15 700 10 600 10 600
Builders
Masinge 22 300 8 130 8 130
Plumbers
Mothabeng 7 500 7 500 2 000 1 720 3 780
Electricians
Total 56 300 37 030 15 230 7 420 3 780 10 600
Percentage 100% 41,13% 20,03% 10,21% 28,63%
Questions
1. Explain what is meant by the term ‘current’.
2. Explain what is meant by the term ‘90 days’ in the context of this exercise.
3. Which debtors are noT in arrears?
4. Which debtor is not keeping to the terms of the above credit agreement?
5. Calculate the amount of interest that must be charged to the debtor mentioned in
question 4.
6. How much will Javu Roofing have to pay if he settles his debt at the end
of September?
7. do you think that luthuli & Son keeps tight control of their debtors? Explain.
8. What would you do to ensure that all debtors pay their debt on time?
9. Are there debtors who need to be handed over to the attorneys? If so, what does this
mean to the debtor?
10. mothabeng Electricians have applied for more credit. Would you advise the debtors
clerk to allow them more credit? Give reasons.
Activity 11.9
The following debtors age analysis has been drawn up by the bookkeeper of Surray
Pharmacy on 31 July 2013.
Debtors age analysis on 31 July 2013

Debtor Current > 30 days > 60 days > 90 days > means ‘more than’.
T Abrahams 3 600 1 200
M Naidoo 2 150
G Smith 1 100 830 1 890 560
B Mtsi 8 700 2 300
Total 15 550 3 130 1 890 1 760
debtors are given 60 days in which to settle their accounts.
Acc GR12 LB.indb 283 6/6/13 6:04:07 PM

Required
1. Explain the purpose of the debtors age analysis.
2. What important information would this schedule provide the owner of
Surray Pharmacy?
3. Which debtors should the owner be concerned about?
4. Discuss four control measures that the owner can implement in order to improve on
the situation.
5. Which debtors are managing their accounts well?
Activity 11.10
You are provided with the debt collection policy and the debtors age analysis of Sithole
Stores. Study the debtors age analysis and answer the questions that follow.
Information
Debt collection policy
• Debtors who settle within 30 days qualify for 5% discount..
• Interest is charged as follows:
■ 2% on accounts overdue for 31–60 days
■ 4% on accounts overdue for 61–90 days
• Accounts overdue for more that 90 days are handed over to the attorneys
for collection.
Sithole Stores
Debtors age analysis on 31 March 2018
Current 31–60 61–90 >90 Total
D Kempte 3 125 1 050 4 175
O Miller 3 112 3 112
T Charamba 6 816 6 816
C Mobara 1 620 1 620
N Naiker 3 015 210 3 225
Total 9 941 4 065 3 322 1 620 18 948
Questions
1. What can we determine by looking at the debtors age analysis?
2. What was the total amount owed by debtors on 31 March 2018?
3. Which debtor was not in arrears?
4. Since which month was C Mobara overdue?
5. Does this business keep tight control of its debtors? Explain.
6. What percentage of the debt is overdue?
7. What would you do to encourage debtors to pay their accounts on time?
8. N Naiker refuses to pay the R210 outstanding since January as he claims that this is
discount that should have been allowed to him. How would you prove not allowing
his claim?
9. Are there debtors who need to be handed over to the attorneys? If so, what will this
mean to the debtor?
10. If D Kempte were to settle his account on 31 March 2018, what discount would
he receive?
Acc GR12 LB.indb 284 6/6/13 6:04:07 PM

6. Reconciling the creditors’ statements to the
creditors‘ accounts in the Creditors Ledger
At the end of each month, the business will receive a Statement of Account
from each creditor. These statements show all the transactions that took place
between the business and the creditors for a certain period. The statement, which
is an external document, shows our transaction with the creditor from their
point of view. The statement must be compared to the creditor’s account in the
Creditors Ledger to ensure that the details of all invoices, payments, returns and
all other transactions reflected on it are correct. If there are any differences then
these must be reconciled and explained. This process is forms part of internal INTERNAL
control of creditors and the business puts this in place in order to ensure proper CONTROL
administration of creditors’ accounts.
There are various reasons why the balance on the statement received from the
creditor and their account in the Creditors Ledger might differ:
• The creditor may have closed off the statement on a different date to the date
that the business closed off their ledger accounts.
• Invoices, debit notes, cheques, discounts and interest could have been omitted
or entered incorrectly in the ledger account.
• Invoices, receipts, credit notes, discounts and interest could have been omitted
or entered incorrectly on the statement.
RISK!
• A discount could have been deducted on the ledger account but not accepted
by the creditor.
• Allowances and returns could have been deducted on the ledger account but
not allowed by the creditor.
• Posting or recording errors could have occurred.
• Addition or subtraction errors could have occurred.
• Fraud could have been committed.
6.1 Compare the creditor’s account in the Creditors Ledger to

the Statement of Account received
Now that we understand the importance of reconciliations, let’s look at how
to compare the Creditors Ledger account in the books of the business to the
Statement of Account received from the creditor.
Step 1
Compare the credit (+) column of the Creditors Ledger with the debit (+) column
of the statement. The following is important to know:
Creditor Ledger Are compared with Statement received from creditor
Invoices → Invoices
Step 2
Compare the debit (–) column of the Creditors Ledger with the credit (–) column
of the statement. The following is important to know:
Creditor Ledger Are compared with Statement received from creditor
Debit notes → Credit notes
Cheques → Receipts (payments received)
Discounts received → Discount allowed
Acc GR12 LB.indb 285 6/6/13 6:04:07 PM

Step 3
Tick the amounts that appear in both the Creditors Ledger and the statement and
circle the amounts that don’t.
Step 4
Circled amount in the Creditors Ledger must be corrected by the business it in the
Creditors Ledger. This is done by making an entry in the General Journal and then
posting to the Creditors Control account in the General Ledger and the creditors
account in the Creditors Ledger.
Step 5
Circled amounts on the statement received from the creditor must be entered in
the Creditors Reconciliation Statement. This statement is draw up by the business
to reconcile these errors and omissions. The business will notify the creditor of the
errors and omissions and these will be investigated by the creditor and will appear
on the next month’s statement.
Example
The following information shows the accounting records of two businesses: the
business called Lake Stores and their creditor Klip Fisheries.
The following statement was received from our creditor Klip Fisheries:
KLIP FISHERIES
STATEMENT OF ACCOUNT
52 Klip Road Tel: 021 324 7820
Parklands Fax: 086 324 8690
2130 Date: 28 May 2019
Debtor: Lake Stores Acc no. La3269
Date Details Debit (+) Credit (–) Balance
2019
May 01 Balance 12 300
07 Invoice 1024 2 120 14 420
10 Credit note 26 (ref DN 89) 800 15 220
15 Receipt 457 (ref Chq 965) ✔ 11 685 3 535
20 Invoice 1073 ✔ 6 325 9 860
28 Interest on overdue account 65 9 925
This statement includes all transaction up to the 28thof the month
90 days 60 days 30 days This month
615 9 310
Creditor Ledger of Lake Stores

Klip Fisheries
2019
May 01 Account rendered b/d 12 300
07 Invoice no. 1024 CJ 1 220 13 520
10 Debit note no. 89 CAJ ✔ 800 12 720
15 Cheque no. 965 CPJ ✔ 11 685 1 035
Cheque no. 965 (discount received) CPJ 615 420
20 Invoice no. 1073 CJ ✔ 6 325 6 745
23 Debit note no. 97 CAJ 325 6 420
30 Invoice no. 1032 CJ 2 900 9 320
Acc GR12 LB.indb 286 6/6/13 6:04:07 PM

Example continued
Required
An investigation revealed the following differences. Correct them.
1. Invoice no. 1024 was for R2 120. Lake Stores recorded it as R1 220 in their
Creditors Ledger. Correct the error.
2. Klip Fisheries processed credit note no. 26 incorrectly. They will correct the
error on next month’s statement.
3. Klip Fisheries charged our overdue account with interest of R65.
4. Klip Fisheries said that they will only allow R300 early settlement discount as
on 15 May 2019. The full balance did not qualify for a discount.
5. Debit note no. 97 sent to Klip Fisheries was not accepted because the creditor
felt that it was due to the business’s negligence that the goods were damaged.
6. Invoice no. 1032 was received after the statement was closed off so it will
appear on the statement for June.
Solution
Corrections and supplementary entries are made in the Creditors Ledger:
Creditor Ledger of Lake Stores

Klip Fisheries
2019
May 31 Incorrect balance 9 320
Correction of Invoice no. 1024
(2 120 – 1 220) GJ 900 10 220
Interest on overdue account GJ 65 10 285
Discount not received on cheque no. 965
(615 – 300) GJ 315 10 600
Reversal of debit note no. 97 GJ 325 10 925
Corrections and supplementary entries are made in the Creditors Reconciliation

Statement. This statement shows what our creditor will amend in their books in
the next month.
Lake Stores
Creditors’ Reconciliation Statement of Klip Fisheries
Description Debit (+) Credit (–) Balance
Balance as per statement on 28 May 9 925
Correction of credit note 26 (Ref DN 89) 1 600 8 325
Discount not reflected on statement 300 8 025
Invoice no. 1032 not reflected on statement 2 900 10 925
Notes
1. They will credit our account in their books to correct the error they made
on the statement. They debited our account instead of crediting our account
with R800, therefore they must credit with double the amount (reverse the
original entry, then pass a credit).
2. They must still deduct the discount from our account in their books that is
why we are crediting the CRS.
3. An invoice for goods we purchased was not recorded on the statement
because the transaction took place after the statement had been posted.
They will add it to our account and it will appear on the next statement.
Acc GR12 LB.indb 287 6/6/13 6:04:07 PM

Example continued
Alternative method
Reconcile the Creditors Ledger to the Statement of Account
Statement
Corrections and Creditors
received
supplementary Ledger of Reason
from Klip
entries Lake Stores
Fisheries
These balances need to be
Balances 9 320 9 925
reconciled.
The error was made in the CL
Correction of
1. 900 so it must be corrected in the
invoice no. 1024
CL (2 120 – 1 220).
The creditor added R800
to the statement instead of
Correction of credit
2. (1 600) subtracting. To correct the
note no. 26
error subtract double the
amount.
The amount on the
Interest on overdue statement and not in the
3. 65
account CL so it must be entered in
the CL.
Lake Stores subtracted
R615 from their account
Discount not
as a discount but only
4. received on 315
R300 should have been
cheque no. 965
deducted so R315 must
be added back.
Klip Fisheries did not
Discount not subtract the discount yet
reflected on (300) so it must be subtracted. It
statement will appear on next month’s
statement.
The amount was deducted
Reversal of debit in the CL so it must be
5. 325
note no. 97 added back to reverse the
discount.
The invoice was issued after
Invoice not
the statement was sent so it
6. reflected on 2 900
will appear on the statement
statement
for June.
10 925 10 925
Activity 11.11
Lebo’s Boutique buys all their clothing from Milly’s Clothing Wholesalers on credit. They
keep a record of transactions with Milly’s in the Creditors Ledger. Once a month Milly’s
sends them a Statement of Account and the bookkeeper reconciles the records.
Required
1. Compare the statement received from Milly’s Clothing Wholesalers with their account
in the Creditors Ledger of Lebo’s Boutique.
2. Show the account of Milly’s Clothing Wholesalers in the Creditors Ledger of Lebo’s
Boutique and show any corrections and supplementary entries by starting with the
incorrect balance.
3. Draw up the Creditors Reconciliation Statement.
4. Read the scenarios below and answer the questions which follow.
Acc GR12 LB.indb 288 6/6/13 6:04:08 PM

Information
Statement of account received from Milly’s Clothing Wholesalers
MILLY’S CLOTHING WHOLESALERS

95 Main Road Tel: 011 932 8452
Smallville Fax: 086 965 3214
2130 Date: 29 June 2019
Debtor: Lebo’s Boutique Acc no. Le842
Date Details Debit (+) Credit (–) Balance
2019
June 01 Balance 14 550
05 Invoice no. 345 4 290 18 840
07 Credit note no. 109 (ref DN 86) 340 18 500
13 Receipt no. 211 (ref Cheque 211) 9 495 9 005
23 Invoice no. 377 2 995 12 000
27 Invoice no. 396 4 090 16 090
29 Interest on overdue account 12 16 102
This statement includes all transaction up to the 29th of the month
90 days 60 days 30 days This month
5 055 11 047 9 310
Creditors Ledger of Lebo’s Boutique

Milly’s Clothing Wholesalers
2019
June 01 Account rendered b/d 14 550
05 Invoice no. 345 CJ 4 920 19 470
07 Debit note no. 86 CAJ 340 19 130
13 Cheque no. 211 CPJ 9 495 9 635
Cheque no. 211 (discount) CPJ 1 055 8 580
14 Invoice no. 134 CJ 2 887 11 467
23 Invoice no. 377 CJ 2 995 14 462
27 Invoice no. 396 CJ 3 681 18 143
30 Invoice no. 401 CJ 1 886 20 029
On comparing the statement received from Milly’s Clothing Wholesalers with their
account in the Creditors Ledger the following was discovered.
1. Invoice no. 345 on 5 May and was incorrectly recorded as R4 920 in Creditors Ledger.
Correct the error.
2. Lebo’s Boutique qualified for a 10% discount on the payment made on the 13 May, as
they paid within 30 days. Milly apologised and will deduct R1 055 discount which will
appear on the statement for July.
3. Invoice no. 134 for R2 887 was entered into the account of Milly by mistake. It was
discovered that the purchase was made from Mildred Cottons. Correct the error.
4. A trade discount of 10% was approved on invoice no. 396. The bookkeeper of
Milly‘s Clothing Wholesalers did not take it into account when entering the invoice.
Correct the error.
5. Invoice no. 401 does not appear on the statement as it was issued to Lebo’s Boutique
after the statement was sent. It will appear on the statement for July.
Acc GR12 LB.indb 289 6/6/13 6:04:08 PM

INTERNAL Scenario 1
CONTROL
In addition to doing the reconciliation, the bookkeeper places the orders, receives
the goods and makes payments to milly’s Clothing Wholesalers. The owner of lebo’s
Boutique is concerned that the bookkeeper could be defrauding the business
through the creditors’ administrative system.
a. list four internal control procedures that must be applied in the business in order to
maintain control over its creditors.
RISK! Scenario 2
The bookkeeper received an invoice from milly’s indicating that five ladies’ dresses were
ordered. When she checked the box it contained six dresses. She decided to sign the
invoice and only acknowledge that five dresses arrived. She took the extra dress home.
b. do you think that the bookkeeper was acting ethically in taking the dress home?
motivate. What would you have advised the bookkeeper to do?
Activity 11.12
Required
Compare the statement received from BBm Traders with the CRS for June and the account
in the Creditors ledger for July and reconcile the Creditors ledger with the statement.
use the alternative format.
Information
SMS Stores
Creditors’ Reconciliation Statement of BBM Traders
Description Debit Credit Balance
Balance as per statement on 26 June 9 040
Discount allowed to still be recorded 240 8 800
Invoice no. 1235 to still be recorded 3 700 12 500
Statement received from BBM Traders

BBM Traders
72 Beach Road Tel: 021 911 8900
Big Bay Fax: 086 965 3214
7100 Statement date: 27 June to 26 July 2019
Debtor: SMS Stores Acc no. sms205
Date Details Amount
2019
June 27 Balance 9 040
28 Discount allowed on invoice no. 1212 – 240
30 Invoice no. 1235 + 3 700
2019
July 04 Invoice no. 1246 + 3 450
07 Credit note no. 1020 (ref DN 625) – 200
13 Receipt no. 984 (Chq 736) –11 250
Interest on overdue account + 156
20 Invoice no. 1266 + 6 400
23 Credit note no. 1032 – 370
26 Invoice no. 1275 + 3 200
Balance 13 886
290 Chapter 11 • R E C o n C I l I AT I o n S
Acc GR12 LB.indb 290 6/6/13 6:04:09 PM

Creditors Ledger of SMS Stores
BBM Traders
Date Details Fol. Balance
2019
July 01 Account rendered b/d 12 500
04 Invoice no. 1246 CJ + 4 350
07 Debit note no. 625 CAJ – 200
12 Cheque no. 736 CPJ – 11 250
Cheque no. 736 (discount) CPJ – 1 250
14 Invoice no. 1248 CJ + 2 000
20 Invoice no. 1266 CJ + 6 400
23 Invoice no. 1032 CJ + 370
25 Invoice no. 326 CJ + 600
26 Invoice no. 1275 CJ + 4 000
28 Cheque no. 834 CPJ – 5 000
Debit note no. 682 CPJ – 400
Balance 12 120
On comparing the statement received from BBM Traders with their account in the
Creditors Ledger and their CRS the following was discovered.
1. Invoice no. 1246 was incorrectly recorded in the Creditors Ledger.
2. Cheque no. 736 was paid a few days late and therefore no discount was granted to us
by BBM Traders.
3. BBM Traders charged our account with interest.
4. BBM Traders did not record invoice no. 1248 on the statement.
5. Invoice no. 326 was for stationery purchased from BMB Stationers was entered into
the Creditors Ledger account of BBM Traders by mistake.
6. Credit note no. 1032 on 23 July was recorded as invoice no. 1032 by mistake.
7. BBM Traders approved a trade discount of 20% on invoice no. 1275. SMS Stores did
not take this into account.
8. Cheque no. 834 and debit note no. 682 were issued after the statement was closed off.
Activity 11.13
Required
Calculate the correct balance as per the account of Thaver Stores in the Creditors Ledger
of Neutt Suppliers by redrafting the Creditors Reconciliation Statement.
Information
Neutt Suppliers
Creditors Reconciliation Statement of Thaver Stores
Balance as per statement on 29 October received from Thaver Stores 3 650 debit
Invoice no. 234 not reflected on statement 2 150
Discount not reflected on statement 230
Correction of credit note no. 76 (see additional information below) ?
Debit note no. 34 in ledger account but not reflected on statement 120
Payment in ledger account but not reflected on statement 1 120
Balance as per the account of Thaver Stores in the Creditors Ledger of Neutt Suppliers on 31 October ?
The credit note no. 76 for R380 was recorded on the debit side of the statement instead of
the credit side.
Acc GR12 LB.indb 291 6/6/13 6:04:09 PM

GAAP flash 7. Analysing and interpreting bank statements and
Prudence principle: is applied Bank Reconciliation Statements
when doing bank reconciliations.
The process of reconciling the bank statement received from the bank with the
cash journals of the business is a very important internal control process. The bank
statement reflects our transactions with the bank and is an important external
document used to confirm the accuracy of transactions recorded in our cash
journals and the balance in our banking account.
Reconciling the bank’s records with our records results in the business having a
more realistic reflection of its money available and as a result the business can plan
its spending better.
Activity 11.14
Required
1. match the terms in column A with the explanations in column B. Write only the correct
number found in column A next to the correct letter found in column B.
Column A Column B
1. Post-dated cheque A. A statement which contains the amounts which
appear in the CRJ and CPJ but not on the current
bank statement
2. Bank charges B. Permission given to a third party to access
money in the business’s account
3. Outstanding cheque C. Permission given to the business’s bank to pay a
third party
4. Bank Reconciliation D. A statement received from the bank which
Statement details the business’s transaction with them
5. Stale cheque E. Money that is put directly into the business’s
account by someone who owes them money
6. Debit order F. Cheque that was issued but has not yet
presented for payment by the payee
7. Outstanding deposit G. A facility whereby the business can use more
money than they have in their current banking
account
8. Dishonoured cheque H. A cheque dated for a date in the future
9. Stop order I. A deposit that is not on the current bank
statement but appears in the CRJ
10. Direct deposit J. A cheque that is older than six months
11. Bank statement K. A cheque that has been returned to the
business’s bank and which is unpaid
12. Bank overdraft L. Fees charged by the bank for administering the
business’s banking account
2. delete the incorrect word(s) to complete each sentence.

a. A favourable (positive) balance on the bank statement is shown as a debit/credit
balance on the Bank Reconciliation Statement.
b. A favourable balance in the bank account is shown as a debit/credit on the Bank
Reconciliation Statement.
c. An overdrawn (unfavourable) balance on the bank statement is shown as a debit/
credit balance on the Bank Reconciliation Statement.
d. An overdrawn balance in the bank account is shown as a debit/credit on the Bank
Reconciliation Statement.
e. on the bank statement all deposits are debited/credited and all payments are
debited/credited.
f. on the bank account all deposits are debited/credited and all payments are
debited/credited.
292 Chapter 11 • R E C o n C I l I AT I o n S
Acc GR12 LB.indb 292 6/6/13 6:04:09 PM

3. Explain the correct procedure to follow for each of these:
a. A stale cheque
b. A post-dated cheque received
c. A post-dated cheque issued
d. A dishonoured cheque
e. Entries appearing on the bank statement but not in the CRJ
f. Entries appearing on the bank statement but not in the CPJ
g. Entries appearing in the CRJ but not on the bank statement
h. Entries appearing in the CPJ but not on the bank statement
4. Give three reasons why a cheque can be dishonoured by the bank.
5. Why is the bank reconciliation process an important internal control measure?
6. What does the bank reconciliation process determine?
Activity 11.15
Liberty Ltd. received their bank statement on 30 June 2020. You were asked to reconcile the
bank statement with the CRJ and CPJ for June 2020 as well as with the BRS for May 2020.
Required
1. Compare the bank statement received from ABBA Bank with the BRS for May 2020 and
the CRJ and CPJ for June 2020. Tick off amounts that appear on the bank statement
and the CRJ, CPJ for June 2020 or BRS for May 2020.
2. Circle the amounts that were not ticked off.
3. Use the following table to update the CRJ and CPJ for June 2020, starting with the
closing totals in the bank columns of the respective journals. Enter the contra-account
information in the Details columns.
Cash Receipts Journal Cash Payments Journal

Details Amount Details Amount
Total b/d 23 580 Total b/d 24 470
4. Calculate the balance as per the bank account.

5. Prepare the Bank Reconciliation Statement on 30 June 2020.
Information
Liberty Ltd.
Bank Reconciliation Statement on 31 May 2020
Debit Credit
Debit balance as per bank statement 5 000
Credit outstanding deposits 3 960
Debit outstanding cheques:
no. 54 580
no. 126 2 080
no. 127 2 240
no. 130 3 900
Credit balance as per bank account 9 840
13 800 13 800
Acc GR12 LB.indb 293 6/6/13 6:04:09 PM

Cash Receipts Journal of Liberty Ltd. for June 2020
Doc. Day Details Analysis of Bank Debtors Discount Sales Cost of Sundry accounts
No. receipts control allowed sales Amount Details
01 Sales 3 480 3 480 1 260
07 S Williams 3 520 7 000 3 600 80
08 15 T Mbewu 1 420 1 420 Rent income
Sales 3 460 4 880 3 460 1 120
22 Sales 6 500 6 500 3 090
09 T Ramsamy 600 7 100 625 25
30 Sales 4 600 4 600 4 600 1 860
23 580 4 225 105 18 040 7 330 1 420
Cash Payments Journal of Liberty Ltd. for June 2020

Doc. Day Details Bank Trading stock Creditors control Discount Sundry accounts
No. received Amount Details
131 02 PNA Stationers 2 400 2 400 Stationery
132 08 Brook Transport Company 600 600
133 08 Smart Suppliers 13 000 13 000
134 14 Telkom 740 740 Telephone
135 18 Mkefa Wholesalers 2 440 2 500 60
136 22 DJ Suppliers 2 240 2 240
137 28 Cash 400 400 Drawings
138 29 Reliable CC 2 650 2 780 130
24 470 13 600 7 520 190 3 540
Acc GR12 LB.indb 294 6/6/13 6:04:09 PM

ABBA BANK
Liberty Ltd. National Building
18 Brooke Road Johannesburg
Boksburg 5000
2120
For period: 01/06/2020 – 29/06/2020
Bank statement
Current account Account number 1 9550 2364 8
Details Debit Credit Date Balance
Balance 01/06 –5 000,00
Deposit 3 960,00 01/06 –1 040,00
Cheque 127 2 240,00 01/06 –3 280,00
Deposit 7 000,00 02/06 3 720,00
Cheque 131 2 400,00 03/06 1 320,00
Direct deposit –A Brown, settlement of 4 200,00 03/06 5 520,00
account
Cheque 132 600,00 10/06 4 920,00
Deposit 4 880,00 16/06 9 800,00
Cheque 134 740,00 16/06 9 060,00
Interest 19,00 20/06 9 041,00
Deposit 7 100,00 23/06 16 141,00
Cheque 126 2 800,00 23/06 13 341,00
Cheque 136 2 240,00 25/06 11 101,00
Cheque 133 13 000,00 25/06 –1 899,00
Dishonoured cheque – T Mbewu (for rent 1 420,00 25/06 –3 319,00
income)
Debit order – to Sanlam for insurance 850,00 27/06 –4 169,00
premium
Debit order – to Liblife for owners personal 475,00 27/06 –4 644,00
insurance
Interest 24,00 28/06 –4 620,00
Cheque 1835 355,00 28/06 –4 975,00
Stop order – to ABBA Bank for loan repayment 2 500,00 29/06 –7 475,00
Cheque 137 400,00 29/06 –7 875,00
Service fees 180,00 29/06 –8 055,00
Cash handling fee 18,00 29/06 –8 073,00
Interest 10,00 29/06 –8 083,00
Direct deposit – from T Mbewu for the rent 1 420,00 –6 663,00
for June
• Cheque no. 54 was issued to Lilley CC, a creditor, on 15 December 2019. This cheque is
stale and must be cancelled.
• Cheque no. 126 is correct as on the bank statement. The cheque was issued to a
creditor, M Thuys, during May 2020 in settlement of our account.
• Cheque no. 1835 was incorrectly debited to the business’s account. The bank will
correct the error in July.
Acc GR12 LB.indb 295 6/6/13 6:04:09 PM

Activity 11.16
The bookkeeper of Catz CC compared the CRJ, CPJ for May 2013 as well as the Bank
Reconciliation Statement for April 2013 with the bank statement for May 2013.
Required
Prepare the Bank Reconciliation Statement for May 2013. Start with the balance according
to the bank statement.
Note
The bank balance will be the balancing figure.
Information
The following differences were noted during the comparison:
• The bank statement has an unfavourable balance of R4 390 on 31 May 2013.
• An amount of R2 810, deposited on the last day of May, appears in the CRJ for May but
does not appear on the bank statement for May 2013.
• A deposit of R880 made by Catz CC on 26 May 2013 was incorrectly credited onto the
account of Cats Pet Store. The bank will correct the error in June.
• The following cheques do not appear on the bank statement for May 2013:
no. 202 R150
no. 551 R140
no. 661 R312
no. 662 R494
Note
• Cheque no. 202 was issued to Cape Hockey Club as a donation on 27 November 2012.
• Cheque no. 661 is dated 5 June 2013.
• Cheque no. 662 is dated 8 June 2013.
• Cheque no. 78 for R600 appears on the bank statement for May 2013. The bank was
notified and it was discovered that the drawer of the cheque is Caterpillar (Pty) Ltd.
The bank will correct the error in June.
Activity 11.17
The owner of Osizweni Bakery, a small business in Newcastle, was busy with bank
reconciliations and did not know what to do with the differences found below. Although
she can compare the relevant information she did not take Accounting at school. She asks
for your help in identifying what to do with the differences.
Required
1. Read the explanation of the differences found in the table below and indicate by
ticking the appropriate column so that the owner can know what to do with the
information.
2. Explain to the owner why it is important to prepare a Bank Reconciliation Statement
each month.
3. Prepare the Bank Reconciliation Statement for April 2019. The credit balance on the
bank statement for April 2019 is R3 200. You must use the BRS to calculate the balance
as per the bank account.
4. If April 2019 were the end of Osizweni Bakery’s financial year, explain how to deal with
cheque no. 931 dated 10 May 2019.
Information
After comparing the bank statement with the Cash Receipts Journal (CRJ) and Cash
Payments Journal (CPJ) for April 2019, the following differences were found:
Acc GR12 LB.indb 296 6/6/13 6:04:09 PM

Bank Reconciliation
Explanation of the differences found CRJ CPJ Statement
Debit Credit
1. A deposit of R22 100 appeared on the bank
statement on 1 April but not in the CRJ.
2. A deposit of R24 000 appeared in the CRJ on
30 April but not on the bank statement.
3. A direct deposit from a debtor for R1 760 in
payment of her account appeared on the
bank statement only.
4. Bank charges of R260 appeared on the
bank statement only.
5. The bank statement reflected a
dishonoured cheque of R890.
6. Cheque no. 652 n the BRS for March was
issued on 16 October 2018. This cheque is
stale and must be cancelled.
7. Cheque no. 867 which was issued on
18 February 2019 and cheque no. 924
dated 5 April appeared on the bank
statement but not in CPJ.
8. Cheque no. 920 appears on the BRS for
March and not on the bank statement
for April.
9. The following cheques, issued to creditors,
appeared in the CPJ and not on the bank
statement:
• no. 930 for R2 450 dated 13 April 2019
• no. 931 for R860 dated 10 May 2019
Bank Reconciliation Statement of Osizweni Bakery for March 2019

Balance as per bank statement R12 400 Debit
Balance as per Bank account in the General Ledger R6 100 Debit
Outstanding deposit made on 31 March 2019 R22 100
Outstanding cheques: no. 652 dated 16 October 2018 R925
no. 867 dated 18 February 2019 R860
no. 920 dated 24 March 2019 R1 375
no. 924 dated 5 April 2019 R440
Activity 11.18
The following items appeared in the Bank Reconciliation Statement of Stofile

Manufacturers on 28 February 2019, the last day of their financial year.
Debit balance as per the bank statement 6 155
Outstanding deposit 9 820
Outstanding cheques:
no. 212 (dated 12 August 2018) 620
no. 416 (dated 9 January 2019) 230
no. 432 (dated 16 February 2019) 1 390
no. 441 (dated 31 March 2019) 765
Incorrect debit on bank statement 215
Balance as per the Bank account ?
Acc GR12 LB.indb 297 6/6/13 6:04:10 PM

Required
1. Which cheque should not have appeared in the BRS for February 2019? Give a reason
for your choice and explain what should be done to correct the error.
2. Calculate the correct balance as per the Bank account on 28 February 2019.
3. Is the debit balance as per the bank statement a favourable or overdrawn balance?
4. Cheque no. 441 was issued to a creditor on 27 February 2019 but is dated 31 March
2019. How would you treat this cheque in the financial statements?
5. Why would cheque no. 432 and cheque no. 441 not be treated in the same way in the
financial statements? Explain.
6. What type of error could the bank have made with the incorrect entry of R215? Explain.
7. What would you do with cheque 416 if it does not appear on the bank statement for
March 2019?
8. The deposit of R9 820 appears in the CRJ for February 2019. Why does it also appear in
the above BRS?
9. What should happen to the outstanding deposit of R9 820 during March 2019?
10. It was brought to the bookkeeper’s attention that a cheque dated 15 March 2019 was
received from a debtor on 25 February 2019. Why does this cheque not appear in the
BRS?
The Debtors Control account and the Debtors List of Mashoke Traders do not balance.
Upon investigation, you discovered that the new debtors clerk did not know how to draw
up the Debtors Control account and made some posting and adding errors.
Required
Reconcile the Debtors Control account with the Debtors List.
Information
2014 2014
Feb 01 Balance b/d 42 740 00 Feb 01 Balance b/d 1 440 00
28 Sales DJ 65 324 00 28 Bank and discount allowed CRJ 57 120 00
Debtors allowances DAJ 2 000 00 Bank (r/d) CPJ 600 00
Journal debits GJ 1 680 00 Journal credits GJ 1 060 00
00 Balance c/d 51 524 00
111 744 00 111 744 00
2014
Mar 01 Balance b/d 51 524 00
Debtors List on 28 February 2014

Debtors Debit Credit
S Ntshingila 14 988
H Brits 10 760
N Klaver 11 456
D Balfour 9 040
G Shaban 3 870
E Bosch 1 280
M Zwane 1 600
Total 51 714 1 280
Acc GR12 LB.indb 298 6/6/13 6:04:10 PM

The following errors and omissions were discovered:
• The receipt issued to G Shaban for R1 740 was correctly recorded in the CRJ, but was
posted to his account as R1 470.
• The total of the Debtors Allowances column of the DAJ was overcast by R40.
• An amount on R200 for goods returned by M Zwane was correctly recorded in the DAJ
but was posted to the wrong side of his account by mistake.
• E Bosch requested that the credit balance on his account in the Debtors Ledger be
transferred to his account in the Creditors Ledger. No entries have yet been made.
• An amount posted to the credit side of D Balfour’s account was under cast by R800.
• An amount of R360, paid on behalf of N Klaver for the delivery of goods, was entered
in the Petty Cash Journal, but was not posted at all.
• When H Brits paid R2 000 in part payment of his account, he received 10% discount.
The payment and the discount were correctly recorded in the CRJ but the discount
was not posted to his account.
You could work alone or with a partner to complete this report.

You are provided with the debtors and creditors age analyses of Grabouw Manufacturers
for June 2017.
Required
In order for creditors to be paid within 90 days, debtors must pay their debt on time. This
is important for the business if it wants to keep proper control of its cash flow. Study the
two summaries of the age analyses and write a report on the following:
1. Are customers paying their debts before suppliers are paid?
2. Suggest how the situation can be improved upon.
3. Advise the owner of Grabouw Manufacturers on how he could encourage prompt
payment from customers.
4. In your opinion, should the business rely solely on its debtors in order to pay
creditors? Explain your answer, and advise the owner.
5. Write a formal letter to M Tshabalala in which you request him to pay his outstanding
debt. Here are guidelines that you should adhere to:
• The structure of the letter must be formal, that is a formal business like writing
style must be used.
• The letter must be persuasive and must encourage the debtor to pay his or her
account.
• The letter must not contain threatening language.
• It must outline the details of the debt as well as measures to be taken if the debt is
not settled.
• It must be completed on a business letterhead, which you must design.
Information
Debtors collection policy
• Debtors who pay within 30 days qualify for a discount of 6%.
• Interest will be charged for late payment.
Acc GR12 LB.indb 299 6/6/13 6:04:10 PM

Grabouw Manufacturers
Debtors age analysis on 30 June 2017
M Tshabalala 830 9 201 10 031
D Balsamo 3 665 3 665
T Block 1 025 930 1 955
J Pieterson 3 675 300 3 975
Total 1 855 4 595 12 876 300 19 626
Creditors payment policy

• Creditors can be paid within 90 days to qualify for a 3% discount.
• Interest will be charged for late payment.
Grabouw Manufacturers
Creditors age analysis on 30 June 2017
Overberg 3 186 1 920 5 106
Mills
Cape 2 000 1 200 3 200
Suppliers
Storm Ltd. 8 100 8 100
Total 5 186 9 300 1 920 16 406
Your teacher will use the rubric below to assess your answers.
Criteria Inadequate Partial Adequate Satisfactory Meritorious Outstanding Marks
Marks 1 2 3 4 5 6
Interpreting Could not Could partially Could generally Could Very good Excellent
the interpret the interpret the interpret the interpret the interpretation interpretation
information information information information information, of the of the
but lacked information information
detail
Analysing the Could not Could Could Could analyse Could analyse; Could analyse;
information analyse or analyse but analyse; made information made good made excellent,
and making make any suggestions only a few and suggest; suggestions; well-motivated
suggestions. suggestions lacked detail suggestions motivation sound suggestions
lacked detail motivation
Giving advice Could not give Advice given, Advice Could advise; Very good Excellent
to the owner advice but not valid adequate lacked detail advice advice
Stating own Could not Found it hard Tried to express Good, could Very good, Excellent,
opinion express own to express own own opinion; express own opinion shows opinion shows
opinion opinion some were opinion insight much insight
good
The letter Very poor, did Poor, some Good, some Good, most Very good, Excellent, all
not follow guidelines met guidelines met guidelines met most guidelines met
guidelines guidelines met
Total marks /30
Acc GR12 LB.indb 300 6/6/13 6:04:10 PM

Required
Calculate the amended balances in the Creditors Ledger account and the statement
received from creditor, Mfingo Traders. Use the given amounts as your starting balances.
Information
No. Error or omission Reconciliation
Statement:
Incorrect balance on statement on 31 May 2020
35 250
Incorrect balance in ledger account on Ledger account
31 May 2020 3 600
1. Mfingo Traders forgot to record the
discount of R1 650 received for early
payment. This amount appeared in
the ledger account but not on the
statement.
2. An invoice appeared on the
statement but not in the ledger
account. It was discovered that this
invoice for R3 000 was for another
creditor but was charged on our
statement by mistake.
3. A 10% trade discount was given on a
purchase of R25 200. The statement
amount of R22 680 is correct. The
business did not consider the trade
discount and entered the full amount
of R25 200 in the ledger account.
4. A return of R7 800 made to the creditor
was debited on the statement instead
of being credited. The creditor will
correct the entry.
5. An invoice for R3 600 appears in
statement.
6. A cheque for R17 400 appears in
statement.
7. The statement shows an amount of
R120 which is interest on overdue
account charged to us. This amount
does not appear in the ledger account.
Acc GR12 LB.indb 301 6/6/13 6:04:10 PM

The transactions below are from the books of Kenny’s CC after the differences between
the cash journals for July 2015 and the Bank Reconciliation Statement for June 2015 had
been compared with the bank statement for July 2015.
Required
Analyse the given transactions according to the example below.
Example
A deposit of R2 400 appears in the cash journals, but not on the bank statement.
No. Cash journals Bank Reconciliation Statement No entry
CRJ CPJ Debit Credit
2 400
Transactions
1. The bank statement shows an overdrawn balance of R3 640 on 31 July 2015. [3]
2. A deposit of R7 618 appeared in the Bank Reconciliation Statement for June 2015
and on the bank statement for July 2015. [2]
3. Cheque no. 324 for R580 appeared in the Bank Reconciliation Statement for June
2015. It was presented for payment on 6 July 2015. [2]
4. A cheque for R1 672, previously received from a debtor, was returned by the bank
marked R/D. The cheque was dated 2 August 2015 and was deposited by mistake.
Cancel the cheque. [3]
5. The tenant deposited his rent of R1 440 directly in the bank account of the
business. [3]
6. The bank statement correctly shows a cheque as R1 096. The CPJ shows the same
cheque as R960. Correct the error. [3]
7. Cheque no. 322 for R850 was issued on 28 July 2015 to David & Son in settlement
of our account of R900. The entry was not made in the cash journal and the cheque
does not appear in the bank statement for July 2015. [3]
8. Cheque no. 295 for R3 700, issued to Jason Traders on 29 June 2011, was lost in
the post. The cheque must be cancelled and replaced by cheque no. 351. [3]
9. The bank credited the bank statement of the business for interest on current
account, R224, and for interest on fixed deposit, R1 500. [3]
10. The bank statement shows cheque no. 888 for R239. Upon investigation it was
discovered that it belongs to Penny CC. The bank will correct the error. [3]
Acc GR12 LB.indb 302 6/6/13 6:04:10 PM

Chapter 12 Key concepts
• VAT registration
Value-added Tax (VAT) • standard rate • zero-
rated items • exempt
items • output tax • input
By the end of this chapter, you will be able to: tax • VAT payable to
• Calculate the amount payable to or receivable from the South African Revenue SARS • VAT receivable
Services (SARS) from SARS • VAT refund
• Complete the VAT Control ledger account from given information • tax periods • VAT
• Integrate ethical, internal control and internal audit issues relating to VAT returns • VAT 201 return
form • invoice basis
• payments basis • VAT
Nomsa, could I ask you adjustments • VAT Control
a few questions about account • VAT fraud
these creditors?
Sorry, Sally, I just need to complete

this VAT 201 form. I’m just checking
that all the VAT we paid totals to the
input tax, and all the VAT we charged
totals to the output tax. Once I’ve got
the payment done I can help you.
V a l u e - a d d e d Tax ( V AT ) • C h a p t e r 1 2 303
Acc GR12 LB.indb 303 6/6/13 6:04:11 PM

1. Introduction
In Grade 10, we learnt about the basic principles of VAT and introduced several
fundamental concepts relating to VAT. In Grade 11, we built on this knowledge by
looking at the principles of VAT in more detail. We then learnt how to perform
various VAT calculations; we discussed the invoice basis and payments basis of
accounting for VAT and finally we looked at VAT adjustments relating to bad
debts, discounts and goods returned.
This year we will focus on calculating the amount of VAT payable to, or
receivable from, the South African Revenue Services (SARS) and drawing up the
VAT Control account in the General Ledger. However, before we proceed with
these topics, let’s refresh our memory by revising some of the work covered in
previous grades.
2. Revision of fundamental principles of VAT

Value-added tax, commonly known as VAT, is an indirect tax that is charged
whenever goods are sold or services are rendered, by a registered VAT vendor.
Goods and services, on which VAT is not levied, include:
• Salaries and wages
• Hobbies or any private recreational pursuits (unless it becomes a business)
• Private sales of personal or domestic items
• Exempt supplies.
2.1 VAT registration

A registered VAT vendor is a vendor (business) that is registered for VAT. There are
two categories of registration:
• Compulsory registration: Any business whose annual income exceeds
R1 million is required to register as a VAT vendor.
• Voluntary registration: Any business whose annual income is less than
R1 million may voluntarily register as a VAT vendor, provided that the business
has an annual income in excess of R50 000.
2.2 Standard rate, zero-rated items and exempt items

2.2.1 Standard rate
The standard rate is the normal rate at which VAT is charged when goods are sold
or services are rendered by a registered VAT vendor. The standard rate is currently
14%, but the Minister of Finance can adjust this percentage at any time.
2.2.2 Zero-rated items

Zero-rated items are goods or services on which VAT is charged at a rate of 0%.
These items include:
• Basic foodstuffs such as brown bread, maize products, rice, milk, milk powder,
milk blends, fruit, vegetables, lentils, dried beans, legumes, vegetable oil, eggs
and canned pilchards
• Paraffin
• Other items including petrol and diesel (which are subject to fuel levies),
property rates, the export of moveable goods and the international transport of
passengers or goods.
2.2.3 Exempt items

Exempt items are goods or services on which no VAT is charged, either at the
standard rate or zero rate. In other words, these items are exempt from VAT
altogether. Examples of exempt items include:
304 Chapter 12 • V a l u e - a d d e d Tax ( V AT )
Acc GR12 LB.indb 304 6/6/13 6:04:11 PM

• Financial services
• Rental of a private residence
• Transportation of people in South Africa by road or rail
• Educational services when supplied by the State
• Childcare services.
2.3 Output tax, input tax and VAT payable to SARS

2.3.1 Output tax
Output tax is the VAT charged by a vendor when it sells goods or renders services
(“outputs”). The output tax is included in the price that the customer is charged for
the goods or services.
2.3.2 Input tax

Input tax is the VAT charged to or paid by a vendor in acquiring goods or services
(“inputs”) from another VAT vendor. The input tax is included in the cost of the
goods or services. A vendor will be charged input tax when it:
• Purchases trading stock, stationery, packing materials, equipment, etc.
• Receives services such as repairs, legal fees, telephone bills etc.
2.3.3 VAT payable to SARS

The essence of VAT is that tax is collected throughout the production and
distribution chain. In order to avoid double taxation (paying tax twice), any registered
VAT vendor within the chain can claim their input tax against their output tax. In
other words, the vendor will calculate the amount of VAT that must be paid to SARS
by subtracting their input tax from their output tax. In equation form:
VAT payable to SARS = output tax – Input tax
Although we will discuss the calculation of VAT payable to SARS in greater detail
later in this chapter, the following example illustrates the basic approach to this
type of calculation and shows the fundamental difference between input tax and
output tax.
Example
Thandi Ndlovu is the owner of Thandi’s TV & Audio Store, a registered VAT
vendor. The following transactions were recorded during June 2018:
a. Sold 10 flat-screen TVs for R57 000 (including R7 000 VAT)
b. Bought trading stock (5 televisions) for R22 800 (including R2 800 VAT)
c. Sold 8 DStv decoders for R13 680 (including R1 680 VAT)
d. Paid the telephone account, R2 850 (including R350 VAT)
e. Fees received for TV and decoder installations, R9 576 (including R1 176 VAT)
f. Paid for advertising, R2 280 (including R280 VAT)
Required
1. Compile a table showing input tax and output tax from the transactions for
June 2018.
2. Calculate the amount of VAT payable to SARS for June 2018.
V A l u E - A d d E d TA X ( V AT ) • C h a p t e r 1 2 305
Acc GR12 LB.indb 305 6/6/13 6:04:11 PM

Example continued
Solution
1. Table showing input tax and output tax for June 2018:
Transaction Input tax Output tax

a. R7 000
b. R2 800
c. R1 680
d. R350
e. R1 176
f. R280
Total R3 430 R9 856
2. VAT payable to SARS = Output tax – Input tax

= R9 856 – R3 430
= R6 426
Note: If the input tax exceeds the output tax for any period, then the vendor is
entitled to claim the difference as a VAT refund from SARS.
The flow of input tax and output tax
Thandi’s
INPUT: Goods & services acquired TV & Audio Store OUTPUT: Goods sold & services rendered
(trading stock, telephone & advertising) (TV’s, dSTV decoders & installations)
VAT payable to SARS = Output tax – Input tax

(R9 856 – R3 430 = R6 426)
306 Chapter 12 • V A l u E - A d d E d TA X ( V AT )
Acc GR12 LB.indb 306 6/6/13 6:04:11 PM

Activity 12.1
1. What is VAT?
2. match each of the VAT terms in Column A with the appropriate description in Column
B. Write down only the numbers (1.–7.) and the corresponding letters (A.–G.).
Column A Column B
VAT terms Description
1. Compulsory registration A. The normal rate at which VAT is
charged when goods are sold or
services are rendered, by a registered
VAT vendor
2. Voluntary registration B. Goods or services on which VAT is
charged at a rate of 0%
3. Standard rate C. VAT registration by a business whose
annual income exceeds R1 million
4. Zero-rated items D. The VAT charged to or paid by
a vendor in acquiring goods or
services from another VAT vendor
5. Exempt items E. The VAT charged by a vendor when
it sells goods or renders services
6. Output tax F. Goods or services on which no VAT
is charge
7. Input tax G. VAT registration by a business whose
annual income is less than R1 million,
but more than R50 000
3. Give four examples of zero-rated items and two examples of exempt items.
4. Write down an equation used to calculate the amount of VAT payable to SARS.
5. Harry’s Hardware & Restoration Store is a registered VAT vendor. The business sells
general hardware supplies and repairs wooden furniture. The following is a summary
of the business’s transactions for April 2018.
Transactions Amount (including VAT) VAT amount

Total sales R153 330 R18 830
Total purchases of trading stock R73 530 R9 030
Stationery purchased R1 710 R210
Fees received for repair work done R41 268 R5 068
Electricity paid R2 736 R336
Equipment purchased R22 686 R2 786
Accounting fees paid R9 120 R1 120
a. Compile a table showing input tax and output tax from the transactions for
April 2018.
b. Calculate the amount of VAT payable to SARS for April 2018.
6. What is a vendor entitled to do if their input tax exceeds their output tax for a
particular period?
3. Revision of VAT calculations

3.1 Adding VAT to the cost price plus mark-up amount
Here you are given the cost price of a product (or service) and the percentage The selling price inclusive of VAT is
mark-up, before VAT has been added. You are required to calculate the selling price often called the marked price.
inclusive of VAT (incl. VAT). You must first calculate the selling price exclusive of
VAT (excl. VAT). Then there are two methods you can use to calculate the selling
price inclusive of VAT (incl. VAT).
Acc GR12 LB.indb 307 6/6/13 6:04:11 PM

• The two-step approach: here you first calculate the VAT at 14% and then add
it to the price (excl. VAT).
14
Step 1: VAT = Price (excl. VAT) × ___
100
Step 2: Price (incl. VAT) = Price (excl. VAT) + VAT
The advantage of using this method is that amount of VAT included is

determined. This method is also less reliant on mathematical knowledge.
Example
Calculate the selling price of a product inclusive of VAT, given the cost price of
R200 and a mark up of 50% on cost. (Use the two-step approach.)
Solution
50
Price (excl. VAT) = R200 + (R200 × ___
100 ) = R300
VAT = Price (excl. VAT) × ___14 Step 1
100
14
= R300 × ___
100 = R42
Price (incl. VAT) = Price (excl. VAT) + VAT Step 2
= R300 + R42 = R342
• The one-step approach: here you calculate the price (incl. VAT) directly from
the price (excl. VAT), using the following formula:
114
Price (incl. VAT) = Price (excl. VAT) × ____
100
Although this method is quicker, it requires greater mathematical knowledge.
Example
Calculate the selling price of a product inclusive of VAT, given the cost price of
R200 and a mark up of 50% on cost. (Use the one-step approach.)
Solution
Price (excl. VAT) = R200 + (R200 × ___50

100 ) = R300
114
Price (incl. VAT) = Price (excl. VAT) × ___
100
114 = R342
= R300 × ___
100
3.2 Extracting VAT from the VAT-inclusive amount

Here you are given the selling price of a product (or service) including VAT and
are required to calculate the amount of VAT included in this price. Once again
there are two methods you can use.
Acc GR12 LB.indb 308 6/6/13 6:04:12 PM

• The two-step approach: You first calculate the price (excl. VAT) and then
subtract it from the price (incl. VAT) to get the amount of VAT included.
Step 1: 100
Price (excl. VAT) = Price (incl. VAT) × ____
114
Step 2: VAT = Price (incl. VAT) – Price (excl. VAT)
The advantage of using this method is that the price (excl. VAT) is determined.
Example
The selling price of a product inclusive of VAT is R228. Calculate the amount of
VAT included in the price. (Use the two-step approach.)
Solution
100
Price (excl. VAT) = Price (incl. VAT) × ___ Step 1
114
100 = R200
= R228 × ___
114
VAT = Price (incl. VAT) – Price (excl. VAT) Step 2
= R228 – R200 = R28
• The one-step approach: You calculate the amount VAT included directly from
the price (incl. VAT), using the formula below.
14
VAT = Price (incl. VAT) × ____
114
Although this method is quicker, it requires greater mathematical knowledge. It

is very important that you try to understand the logic used in developing these
formulae, rather than just memorising them.
Example
The selling price of a product inclusive of VAT is R228. Calculate the amount of
VAT included in the price. (Use the one-step approach.)
Solution
14
VAT = Price (incl. VAT) × ___
114
= R228 × ___14
114
= R28
14
Note: The fraction ___
114 used in the equations is commonly known as the tax
fraction.
Activity 12.2
1. Calculate the selling price inclusive of VAT for each item.

a. Cost price of R2 300 and a mark up of 50% on cost
b. Cost price of R4 680 and a mark up of 120% on cost
c. Cost price of R9 360 and a mark up of 33__13 % on cost
Acc GR12 LB.indb 309 6/6/13 6:04:12 PM

2. Calculate the amount of VAT included in each of the following (round off to the
nearest cent where necessary):
a. A desk sold for R712,50
b. A dress sold for R395,50
c. A fridge sold for R1 999,95
d. A loaf of brown bread sold for R11,40
3. Tsotsobe Sports Stores is a registered VAT vendor that sells sports equipment.
Tsotsobe Sports Stores buys their cricket merchandise from Caught & Bowled
Wholesalers (also a registered VAT vendor). Caught & Bowled Wholesalers buy their
stock directly from a factory that is not a VAT vendor and pay R220 per cricket bat.
Caught & Bowled Wholesalers use a mark up of 25% on cost, while Tsotsobe Sports
Stores mark up their cricket merchandise by 60%.
a. Calculate the price that Tsotsobe Sports Stores pay Caught & Bowled Wholesalers
for a cricket bat.
b. Calculate the price that Tsotsobe Sports Stores charge a customer for a cricket bat.
c. How much VAT will Tsotsobe Sports Stores have to pay SARS for each cricket bat
that they sell?
Activity 12.3
Copy and complete the following table in your Exercise Books.

No. Cost price % mark up Selling price VAT (at 14%) Selling price
on cost (excl. VAT) (incl. VAT)
1. R375,00 40%
2. R600,00 R900,00
3. 60% R1 472,00
4. R1 350,00 R1 846,80
5. 50% R315,00
4. Revising more principles of VAT

4.1 Tax periods
VAT vendors are required to submit VAT returns and make VAT payments to
SARS according to the VAT tax period category that was allocated to them during
registration. There are six categories of tax periods covering cycles of one, two,
four, six or twelve months.
The standard tax period that is usually allocated requires a VAT return to be submitted
every two months. This standard tax period is split into two categories.
• Category A is a two-month period ending on the last day of January, march, may,
July, September and november.
• Category B is a two-month period ending on the last day of February, April, June,
August, october and december.
Vendors that meet certain specific requirements stipulated by SARS may be allocated
to other tax period categories.
• Category C is a one-month period, generally allocated to vendors with an annual
turnover in excess of R30 million.
• Category D is a six-month period ending on the last day of February and August,
specifically for farmers and farming enterprises with an annual turnover of less
than R1,5 million.
Acc GR12 LB.indb 310 6/6/13 6:04:12 PM

• Category E is a twelve-month period, only allocated to companies or trust funds
that meet very specific requirements.
• Category F is a four-month period ending on the last day of June, october and
February, solely allocated to small businesses with an annual turnover of less than
R1,5 million.
All tax periods end on the last day of a calendar month, except where another fixed
day or date is specifically applied for and approved by SARS.
4.2 Submission of VAT returns and VAT payments

At the end of each tax period, vendors must determine the amount of VAT
payable to SARS for that tax period. As mentioned previously, this is calculated by
deducting the input tax incurred for the tax period from the output tax collected
during the tax period.
Vendors are required to report this information to SARS by completing a VAT
201 return form, like the one shown on page 329. The completed VAT 201 return
form must be submitted to SARS by no later than the 25th day after the end of that
tax period. Vendors must also make VAT payments to SARS by the 25th day after
the end of that tax period.
Alternatively, if the input tax exceeds the output tax for a given tax period, then
vendors may claim a refund from SARS by completing and submitting the VAT
201 return form.
Note RISK!
Vendors who fail to make their VAT payments on time will be:
• liable for a penalty equal to 10% of the amount owing
• Charged interest on the outstanding amount.
Thus this is a business risk which needs to effectively managed and controlled in
order to ensure that VAT is accurately accounted for and paid on time.
4.3 Accounting basis

In South Africa, the standard method used to account for VAT is called the invoice
basis. However, under certain circumstances vendors may be authorised to use an
alternative method known as the payments basis.
4.3.1 Invoice basis

All vendors are required to use the invoice basis to account for VAT, unless they
have been specifically authorised to use the payments basis. In general, the invoice
basis requires vendors to account for VAT based on the tax period in which
invoices are issued or received. In other words:
• Output tax must be accounted for in the tax period in which the invoice is
issued, even if payment is not actually received during that tax period.
• Input tax must be accounted for in the tax period in which the invoice is
received, even if payment is not actually made during that tax period.
However, in the unlikely event that a payment is received (or made) prior to an
invoice being issued (or received), then the vendor must account for VAT at the
time of the payment.
Acc GR12 LB.indb 311 6/6/13 6:04:13 PM

4.3.2 Payments basis
The payments basis of accounting for VAT is generally intended to help small
businesses. These vendors may apply to SARS in writing and request permission
to be registered on the payments basis. According to the payments basis, vendors
are only required to account for VAT when payments are actually received and
payments are actually made. In other words:
• Output tax must be accounted for in the tax period in which the vendor
actually receives the payment, irrespective of when the invoice was issued.
• Input tax must be accounted for in the tax period in which the vendor actually
makes the payment, irrespective of when the invoice was received.
The following table compares the invoice basis with the payments basis.
Invoice basis Payments basis

VAT is accounted for when invoices are issued VAT is accounted for when payments are
Basis
or received received or made
Registration Automatic Upon special application
• VAT on credit purchases can be deducted • VAT on credit sales is only included when
Advantages before payment is made to creditors. payment is received from debtors.
• It is relatively easy to calculate and administer. • It can assist cash flow.
• VAT on credit sales is included before • VAT on credit purchases can only be
payment is received from debtors. deducted after payment is made to creditors.
Disadvantages
• It can lead to cash-flow problems. • It can be more difficult to calculate and
administer.
Also known as Accrual basis Receipts basis or Cash basis
Activity 12.4
Complete the following passage by filling in the missing words or phrases. Write down
only the numbers (1.–7.) and the missing words or phrases.
The standard tax period that is usually allocated to VAT vendors, requires a VAT return
to be submitted every (1.) _________ months. This standard tax period is split into two
categories, namely (2.) _________ and (3.) _________.
At the end of each tax period, vendors must determine the amount of VAT payable to
SARS by deducting the (4.) _________ incurred for the tax period from the (5.) _________
collected during the tax period.
Vendors are required to report this information to SARS by completing a (6.) _________
return form and submitting it to SARS by no later than the (7.) _________ day after the
end of that tax period. Vendors must also make VAT (8.) _________ to SARS by this date.
If the input tax exceeds the output tax for a particular tax period, then vendors may claim
a (9.) _________ from SARS by completing and submitting the same return form.
Vendors who fail to make their VAT payments on time will be liable for a (10.) _________
equal to (11.) _________ of the amount owing and will also be charged (12.) _________
on the outstanding amount.
The standard method used to account for VAT is called the (13.) _________. This method
requires vendors to account for VAT based on the tax period in which (14.) _________ are
issued or received.
Under certain circumstances vendors may be authorised to use an alternative method of

accounting for VAT, known as the (15.) _________. According to this method, vendors are
only required to account for VAT when (16.) _________ are actually received and made.
Acc GR12 LB.indb 312 6/6/13 6:04:13 PM

5. Calculating the amount of VAT payable to or
receivable from SARS
At the end of each tax period, vendors are required to calculate the amount of
VAT that is either payable to SARS or receivable from SARS for that period. In
order to do this, vendors must first determine their total output tax and their total
input tax for the period. A vendor’s output tax will usually be greater than their
input tax for a given period. When this is the case, the vendor will owe VAT to
SARS. VAT owed to SARS by a vendor is commonly referred to as VAT payable to
SARS. The amount of VAT payable to SARS for a particular period is determined
by subtracting the total input tax for that period from the total output tax for that
period. Thus the amount of VAT payable to SARS may be represented by the
following equation:
VAT payable to SARS = Total output tax – Total input tax
Occasionally, a vendor’s input tax may exceed their output tax for a particular
tax period. In this case, the vendor is entitled to claim the difference as a VAT
refund from SARS. In other words, SARS will owe VAT to the vendor. VAT owed
by SARS to a vendor is commonly referred to as VAT receivable from SARS. The
amount of VAT receivable from SARS for a particular period is determined by
subtracting the total output tax for that period from the total input tax for that
period. In equation form:
VAT receivable from SARS = Total input tax – Total output tax
So, before we can calculate the amount of VAT payable to SARS or the amount
of VAT receivable from SARS for a particular period, we first need to be able to
determine the total output tax and the total input tax, for that tax period.
In order to establish the output tax and input tax of a vendor for a particular
period, we need to examine two distinct groups of transactions:
• Transactions involving the supply of goods or services that are subject to
VAT at the standard rate (14%). When these transactions occur, VAT is charged
either by or to the vendor. VAT that is charged by the vendor is accounted for
as output tax, while VAT that is charged to the vendor is accounted for as input
tax. We can say that VAT arises, or originates, when these types of transactions
take place. We will thus refer to these types of business transactions as
transactions that give rise to VAT.
• Transactions which require adjustments to be made to VAT that has already
been recorded by the vendor. Although these transactions do not involve
the supply of goods and services, they have an effect of either increasing
or decreasing VAT that was previously accounted for by the vendor. When
these transactions take place, the vendor needs to account for this effect by
making an adjustment to either output tax or input tax. We will thus refer
to these types of business transactions as transactions that give rise to VAT
adjustments.
5.1 Transactions that give rise to VAT

In this section, we will look at various types of transactions that give rise to VAT.
VAT arises (originates) when these transactions take place and will need to be
accounted for by the vendor as either output tax or input tax.
Acc GR12 LB.indb 313 6/6/13 6:04:14 PM

For the purpose of this section, we will assume that the vendor is registered on
the invoice basis and that all goods and services are subject to VAT at the standard
rate of 14%. For each of the examples provided in this section we will show the
effect that the transaction has on output tax, input tax and the amount of VAT
payable to SARS.
5.1.1 Transactions that give rise to output tax

Transactions that give rise to output tax are generally those transactions on
which the vendor charges VAT when supplying goods or services. When these
transactions occur, the vendor will account for the VAT charged as output tax.
Sales of goods
When a vendor sells goods (either for cash or on credit) the VAT amount included
in the selling price must be accounted for by the vendor as output tax. This VAT
amount will thus increase the amount of VAT payable to SARS by the vendor.
Example
Sold goods on credit to J Jabu for R2 280 (including VAT of R280).
Effect on output tax, input tax and VAT payable to SARS
Output tax Input tax VAT payable to SARS

+ R280 + R280
Services rendered
When a vendor provides a service to a customer (either for cash or on credit) the
VAT amount included in the price charged must be accounted for by the vendor
as output tax. This VAT amount will thus increase the amount of VAT payable to
SARS by the vendor.
Example
Services rendered to a customer, P. Pule, for R570 (including VAT of R70).

+ R70 + R70
Other income items

When a vendor receives income or issues an invoice for income, the VAT amount
included in the income amount charged must be accounted for by the vendor as
output tax. This VAT amount will thus increase the amount of VAT payable to
SARS by the vendor.
Example
Received rent from a tenant, S Sitole, for R11 400 (including VAT of R1 400)

+ R1 400 + R1 400
Acc GR12 LB.indb 314 6/6/13 6:04:14 PM

Note: Remember that interest income is an exempt item and thus no VAT is
charged or received when a vendor earns interest.
Sale of fixed assets
When a vendor sells a fixed asset (either for cash or on credit) the VAT amount
included in the selling price must be accounted for by the vendor as output tax. This
VAT amount will thus increase the amount of VAT payable to SARS by the vendor.
Example
Sold an old computer to I Byte for R3 420 (including VAT of R420)

+ R420 + R420
Bad debts recovered

When a vendor receives a payment from a customer whose debt had previously
been written off as irrecoverable (bad debts recovered), the VAT amount included
in the amount received must be accounted for by the vendor as output tax. This
VAT amount will thus increase the amount of VAT payable to SARS by the vendor.
Example
Received R2 280 (including VAT of R280) from J Jabu, a debtor whose account
had previously been written off as irrecoverable

+ R280 + R280
5.1.2 Transactions that give rise to input tax

Transactions that give rise to input tax are generally those transactions on which
the vendor is charged VAT, when acquiring goods or services from another VAT
vendor. When these transactions occur, the vendor will account for the VAT
charged as input tax.
Purchases of goods
When a vendor buys goods (either for cash or on credit) the VAT amount included
in the purchase price must be accounted for by the vendor as input tax. This VAT
amount will thus decrease the amount of VAT payable to SARS by the vendor.
Example
Bought goods from Nandi Wholesalers for R8 550 (including VAT of R1 050)

+ R1 050 – R1 050
Acc GR12 LB.indb 315 6/6/13 6:04:14 PM

Expense items
When a vendor pays an expense or receives an invoice for an expense, the VAT
amount included in the expense amount charged must be accounted for by the
vendor as input tax. This VAT amount will thus decrease the amount of VAT
payable to SARS by the vendor.
Example
Received the telephone account from Telkom for R1 710 (including VAT
of R210)

+ R210 – R210
Note: Remember that this excludes expense items such as salaries & wages (not
subject to VAT); fuel and property rates (both zero-rated) and interest expense
(exempt).
Purchases of fixed assets
When a vendor buys a fixed asset (either for cash or on credit) the VAT amount
included in the purchase price must be accounted for by the vendor as input tax.
This VAT amount will thus decrease the amount of VAT payable to SARS by
the vendor.
Example
Bought a delivery vehicle from Vusi Vans for R102 600 (including VAT of
R12 600)

+ R12 600 – R12 600
Purchases of consumable stores

When a vendor buys consumable stores (either for cash or on credit) the VAT
amount included in the purchase price must be accounted for by the vendor as
input tax. This VAT amount will thus decrease the amount of VAT payable to
SARS by the vendor.
Example
Bought packing materials from Pack-It Traders for R4 902 (including VAT of
R602)

+ R602 – R602
Acc GR12 LB.indb 316 6/6/13 6:04:14 PM

Petty cash payments
When a vendor pays for an item out of petty cash, the VAT amount included in
the price paid must be accounted for by the vendor as input tax. This VAT amount
will thus decrease the amount of VAT payable to SARS by the vendor.
Example
Paid for postage out of petty cash, R114 (including VAT of R14)

+ R14 – R14
Note: Petty cash is often used to pay for staff refreshments such as tea and coffee.
Although VAT is usually included in the price paid for these refreshments, the
vendor is not entitled to claim this VAT as input tax, because the business is the
end user of the products.
5.1.3 Summary of transactions that give rise to VAT
VAT accounted for as: Effect on VAT payable to SARS

Transaction
Output tax Input tax Increases Decreases
Sales of goods ✔ ✔
Services rendered ✔ ✔
other income items 1
✔ ✔
Sale of fixed assets ✔ ✔
Bad debts recovered ✔ ✔
Purchases of goods ✔ ✔
Expense items 2
✔ ✔
Purchases of fixed assets ✔ ✔
Purchases of consumable stores ✔ ✔
Petty cash payments 3 ✔ ✔
Notes
1. other income items include rent income, but exclude interest income (exempt).
2. Expense items exclude salaries and wages (not subject to VAT); fuel expense and
property rates (both zero-rated); interest expense (exempt); etc.
3. Petty cash payments exclude payments for staff refreshments (vendor is the
end user).
Activity 12.5
Your aunt recently registered her business for VAT and is having difficulty determining
which of the business’s transactions include VAT and whether the VAT should be recorded
as output VAT or input VAT. She has compiled the following list of transactions that took
place in her business during the past month:
Acc GR12 LB.indb 317 6/6/13 6:04:14 PM

Paid for advertising Bought stationery Bought cakes for a staff party Paid salaries
Paid interest on loan Paid wages in cash Paid for repairs out of petty cash Sold equipment
Sold goods on credit Bad debts recovered Bought goods from a non-vendor Paid for petrol
Bought a new computer Paid rent expense Issued invoice for services rendered Paid insurance
Bought goods on credit Sold goods for cash Sold five bottles of milk Paid rates
Required
Draw the following table in your exercise book and use it to help your aunt by entering
each of the transactions listed above under the appropriate column. If you decide that
VAT should not be recorded for a transaction, then provide a reason for your decision. The
first three transactions have already been recorded in the table. (Your table should have
eight rows).
Account for VAT as Account for VAT as No VAT should be recorded for this transaction
output tax input tax Transaction Reason
Sold goods on credit Paid for advertising Paid interest on loan Exempt item
Activity 12.6
Required
For each of the transactions below, calculate the amount of VAT included in the given
amounts and show the effect that each transaction will have on output tax, input tax and
the amount of VAT payable to SARS. You may assume that the vendor, Bongi Traders, is
registered on the invoice basis and that VAT is charged at the standard rate of 14%.
Example: Sold goods for cash, R1 140

No. VAT calculation Output tax Input tax VAT payable to SARS
E.g.   14  = R140
R1 140 × ___ + R140 + R140
114
Transactions
1. Bought stationery from ABC Stationers for R1 710 and paid by cheque.
2. Sold goods on credit to B Ball for R513.
3. Received an invoice for R456 from the Bisho Bulletin for advertising.
4. Received the monthly rental of R4 104 from A Tenant, who rents part of the business
premises.
5. Bought a new cash register on credit from Lock ‘n Safe Manufacturers for R4 326,30.
6. Paid for stamps out of petty cash, R31,35.
7. Received interest on fixed deposit from XYZ Bank, R57.
8. Sold an old filing cabinet for cash, R273,60.
9. Paid the weekly wages, R9 633.
10. Bought goods on credit from Wally’s Warehouse, R7 660,80.
5.2 Transactions that give rise to VAT adjustments

In this section, we will look at various types of transactions that give rise to VAT
adjustments. When these transactions take place, the vendor will need to either
increase or decrease the amount of VAT that has already been recorded by making
an adjustment to either output tax or input tax.
For the purpose of this section, we will assume that the vendor is registered on the
invoice basis and that all goods and services are subject to VAT at the standard rate of
Acc GR12 LB.indb 318 6/6/13 6:04:14 PM

14%. For each of the examples provided in this section we will show the effect that
the transaction has on output tax, input tax and the amount of VAT payable to SARS.
5.2.1 VAT adjustments that decrease VAT payable to SARS

Bad debts
A debt arises when a vendor sells goods on credit to a debtor. When this
transaction take place the vendor will account for the VAT amount included in the
selling price as output tax. This increases the amount of VAT payable to SARS.
If this debt is subsequently written off as irrecoverable, then the vendor will not
actually receive the VAT amount that has already been recorded. The vendor must
thus account for this by making an adjustment that will decrease the amount of
VAT payable to SARS. There are two ways in which the vendor can account for
this adjustment. The vendor can either:
• Set off (subtract) the VAT component of the amount written off against the
output tax; or
• Include (add) the VAT component of the amount written off as input tax.
Example
The account of a debtor, J Jabu, who owed R2 280 (including VAT of R280), was
written off as irrecoverable.
Adjustment Output tax Input tax VAT payable to SARS

VAT set off against – R280 – R280
output tax
VAT included as + R280 – R280
input tax
Note: No matter which method is used to account for this adjustment, the net
effect will be the same, namely, a decrease in the amount of VAT payable to SARS.
Discount allowed
If a vendor allows a debtor a discount for settling their account promptly, then
the vendor will not actually receive the full VAT amount (output tax) that was
recorded when the debt originated. The vendor must thus account for this by
making an adjustment that will decrease the amount of VAT payable to SARS.
There are two ways in which the vendor can account for this adjustment. The
vendor can either:
• Set off the VAT component of the discount amount against the output tax; or
• Include the VAT component of the discount amount as input tax.
Example
Debtor, J Jabu, who owed R2 280 (including VAT of R280), was allowed a 5%
discount for settling his account promptly. The discount amounted to R114
(including VAT of R14).

output tax
VAT included as input + R14 – R14
tax
Acc GR12 LB.indb 319 6/6/13 6:04:15 PM

Goods returned by a customer (debtors allowances)
A vendor will issue a credit note when a debtor returns goods or is granted an
allowance. This not only reduces the debt of the debtor, but also reduces the
amount of VAT that will be collected from the debtor. Thus, the vendor will not
actually receive the full VAT amount (output tax) that was recorded when the debt
originated. The vendor must thus account for this by making an adjustment that
will decrease the amount of VAT payable to SARS. There are two ways in which
the vendor can account for this adjustment. The vendor can either:
• Set off the VAT component of the allowance amount against the output tax; or
• Include the VAT component of the allowance amount as input tax.
Example
Issued a credit note to a debtor, J Jabu, who returned goods, R456

output tax
VAT included as + R56 – R56
input tax
5.2.2 VAT adjustments that increase VAT payable to SARS

Discount received
If a vendor receives a discount from a creditor for settling their account promptly,
then the vendor will not actually pay the full VAT amount (input tax) that was
recorded when the debt originated. The vendor must thus account for this by
making an adjustment that will increase the amount of VAT payable to SARS.
There are two ways in which the vendor can account for this adjustment.
The vendor can either:
• Set off the VAT component of the discount amount against the input tax; or
• Include the VAT component of the discount amount as output tax.
Example
Settled the account with Nandi Wholesalers for R8 550 (including VAT of
R1 050) and received a prompt settlement discount of 4%. The discount
amounted to R342 (including VAT of R42).

VAT set off against – R14 + R14
input tax
VAT included as + R14 + R14
output tax
Acc GR12 LB.indb 320 6/6/13 6:04:15 PM

Note: No matter which method is used to account for this adjustment, the
net effect will be the same, namely, an increase in the amount of VAT payable
to SARS.
Goods returned to a supplier (creditors allowances)
A vendor will issue a debit note to a supplier when returning goods or requesting
an allowance. The vendor then receives a credit note from the supplier to confirm
that the allowance has been granted. This not only reduces the vendor’s debt, but
also reduces the amount of VAT that will be paid over to the supplier. Thus, the
vendor will not actually pay the full VAT amount (input tax) that was recorded
when the debt originated. The vendor must thus account for this by making an
adjustment that will increase the amount of VAT payable to SARS. There are two
ways in which the vendor can account for this adjustment. The vendor can either:
• Set off the VAT component of the allowance amount against the input tax; or
• Include the VAT component of the allowance amount as output tax.
Example
Issued a debit note to Nandi Wholesalers for goods returned, R798

input tax
output tax
effect will be the same, namely, an increase in the amount of VAT payable to SARS.
Drawings of stock
When a vendor takes stock from the business for personal use, the vendor
becomes the end user of that stock and is thus no longer entitled to claim the
VAT (input tax) on that stock. However, the VAT amount included in the original
purchase price of that stock would have already been accounted for and recorded
as input tax when the stock was bought. The vendor must thus account for this by
making an adjustment that will increase the amount of VAT payable to SARS. The
vendor can account for this adjustment by either:
• Setting off the VAT on the stock taken for personal use against the input tax; or
• Including the VAT on the stock taken for personal use as output tax.
Example
Owner took goods for his personal use, R570 (including VAT of R70).

input tax
output tax
Acc GR12 LB.indb 321 6/6/13 6:04:15 PM

Note: No matter which method is used to account for this adjustment, the net effect
will be the same, namely, an increase in the amount of VAT payable to SARS.
Dishonoured cheques (reversal of discount allowed)
As mentioned previously, when a vendor allows a debtor a discount for settling
their account promptly, the vendor will makes an adjustment that will decrease the
amount of VAT payable to SARS. However, if the cheque received from the debtor
is subsequently dishonoured, then the vendor must reverse all the transactions
that took place when the cheque was received. Thus the vendor must reverse not
only the amount received and the discount allowed, but also the VAT adjustment
that was made when the discount was allowed. This adjustment (reversal) will thus
increase the amount of VAT payable to SARS.
• If the original discount allowed adjustment had been made by setting off
the VAT component of the discount amount against the output tax, then the
vendor should reverse this by including the VAT amount as output tax.
• If the original discount allowed adjustment had been made by including the
VAT component of the discount amount as input tax, then the vendor should
reverse this by setting off the VAT amount against the input tax.
Example
The cheque received from a debtor, J Jabu, in settlement of his account was
dishonoured due to insufficient funds. A discount of R114 (including VAT of
R14) had been allowed.

output tax
input tax
effect will be the same, namely, an increase in the amount of VAT payable to SARS.
5.2.3 Summary of transactions that give rise to VAT adjustments

Effect on VAT payable to SARS
Transaction VAT adjustment
Increases Decreases
VAT set off against output tax; or ✔
Bad debts
VAT included as input tax
VAT set off against output tax; or ✔
Discount allowed
VAT included as input tax
Goods returned by a customer VAT set off against output tax; or ✔
(debtors allowances) VAT included as input tax
VAT set off against input tax; or ✔
Discount received
VAT included as output tax
Goods returned to a supplier VAT set off against input tax; or ✔
(creditors allowances) VAT included as output tax
VAT set off against input tax; or ✔
Drawings of stock
VAT included as output tax
Dishonoured cheques (reversal of VAT set off against input tax; or ✔
discount allowed) VAT included as output tax
Acc GR12 LB.indb 322 6/6/13 6:04:15 PM

Activity 12.7
Required
Complete each paragraph by filling in the missing words or phrases. Write down only the
numbering (e.g. 1. a.) and the missing word or phrase, chosen from the following options:
output tax input tax increase decrease
1. When a vendor writes off a debt as irrecoverable, the vendor will not actually receive
all of the (a.) __________ that was accounted for when the debt originated. The
vendor must thus make an adjustment that will (b.) __________ the amount of VAT
payable to SARS. This adjustment can be accounted for either by setting off the VAT
component of the amount written off against the (c.) __________ or by including the
VAT component of the amount written off as (d.) __________.
2. When a vendor receives a credit note from the supplier, the vendor will not actually
pay the full (a.) __________ that was accounted for when the debt originated. The
vendor must thus make an adjustment that will (b.) __________ the amount of VAT
payable to SARS. This adjustment can be accounted for either by setting off the VAT
component of the allowance amount against the (c.) __________ or by including the
VAT component of the allowance amount as (d.) __________.
3. When a vendor allows a debtor a discount for settling their account promptly, the
vendor will not actually receive all of the (a.) __________ that was accounted for
when the debt originated. The vendor must thus make an adjustment that will
(b.) __________ the amount of VAT payable to SARS. This adjustment can be
accounted for either by setting off the VAT component of the discount amount against
the (c.) __________ or by including the VAT component of the discount amount as
(d.) __________.
4. When a vendor takes stock from the business for personal use, the vendor becomes
the end user of that stock and is thus no longer entitled to claim the (a.) __________
on that stock. However, this (b.) __________ would have already been accounted for
and recorded when the stock was bought. The vendor must thus make an adjustment
that will (c.) __________ the amount of VAT payable to SARS. This adjustment can
be accounted for either by setting off the VAT on the stock taken for personal use
against the (d.) __________ or by including the VAT on the stock taken for personal
use as (e.) __________.
Activity 12.8
The transactions listed below were taken from the records of Gio Stores, a VAT vendor
registered on the invoice basis. Where applicable, VAT at 14% is included in all the amounts.
Required
For each of the transactions, calculate the VAT amount that should be recorded and show
the effect that each transaction will have on output tax, input tax and the amount of VAT
payable to SARS.
Example: Cheque received for rent income, R5 700
No. VAT calculation Output tax Input tax VAT payable to SARS
e.g.   14  = R700
R5 700 × ___ + R700 + R700
114
Transactions
1. Sold goods on credit to R Rose for R2 736.
2. Received an invoice for R3 933 from Box-it Traders for packing materials bought on
credit.
Acc GR12 LB.indb 323 6/6/13 6:04:15 PM

3. R Rose settled her debt of R2 736 promptly and was allowed a discount of 5%.
4. The owner of Gio Stores took home packing materials, valued at a cost price of R300 in
the books of the business, for his daughter to use for a school project.
5. Returned damaged packing materials to Box-it Traders and received a credit note from
them for R513.
6. The cheque received from R Rose in settlement of her account was dishonoured due
to insufficient funds and returned by the bank.
7. Settled the account of Box-it Traders and received a discount of 5%.
8. R Rose was declared insolvent and her debt was written off as irrecoverable.
5.3 Performing the calculation of VAT payable to or

receivable from SARS
You should now be able to account for the output tax and the input tax that
arises from:
• Transactions on which VAT is charged by the vendor
• Transactions on which VAT is charged to the vendor
• Transactions which require VAT adjustments to be made.
Once you are able to determine a vendor’s total output tax and total input tax for a
particular period, performing the calculation of VAT payable to or receivable from
SARS is simply achieved by subtracting the total input tax from the total output tax
for that period. We will illustrate this process in the following example.
Example
Pitso Traders is VAT vendor that is registered for VAT on the invoice basis and
with a Category B tax period. All the transactions of the business are subject to
VAT at 14%, where applicable. The following information was taken from the
books of Pitso Traders on 30 April 2018.
Summary of the transactions of Pitso Traders for March and April 2018
Amount (incl. VAT) Amount (excl. VAT)
Total sales of goods R433 200
Total purchases of goods R165 000
Salaries and wages R62 000
Rent income R22 800
Equipment sold R13 680 R12 000
Goods taken by owner for personal use R5 900
Goods return by customers R18 810 R16 500
Goods returned to suppliers R10 032 R8 800
Interest on loan R6 000
Telephone, electricity and insurance R8 664
Discount allowed to debtors R15 390
Discount received from creditors R7 200
Debts written off as irrecoverable R3 762 R3 300
Consumable stores purchased R18 400
Required
Calculate the amount of VAT that Pitso Traders will need to pay to (or can claim
from) SARS for the two-month period ending 30 April 2018.
Acc GR12 LB.indb 324 6/6/13 6:04:15 PM

Example continued
Solution
Calculation of VAT payable to (receivable from) SARS for March and

April 2018:
OUTPUT TAX R60 746
  14  )
Total sales of goods (R433 200 × ___ R53 200
114
14
Rent income (R22 800 ×  ___ ) R2 800
114
Equipment sold (R13 680 – R12 000) R1 680
  14  ) *
Goods taken by owner for personal use (R5 900 × ___ R826
100
Goods returned to suppliers (R10 032 – R8 800) * R1 232
14  ) *
Discount received from creditors (R7 200 ×  ___ R1 008
100
Less: INPUT TAX R31 402
  14  )
Total purchases of goods (R165 000 × ___ R23 100
100
Goods returned by customers (R18 810 – R16 500) # R2 310
Telephone, electricity and insurance (R8 664 × ___  14  ) R1 064

114
14  ) #
Discount allowed to debtors (R15 390 ×  ___ R1 890
114
Debts written off as irrecoverable (R3 762 – R3 300) # R462
14  )
Consumable stores purchased (R18 400 ×  ___ R2 576
100
VAT PAYABLE TO SARS R29 344
Notes
1. The VAT adjustment items included as output tax (indicated by asterisks *),
could have alternatively been set-off against input tax (see alternative solution
below).
2. The VAT adjustment items included as input tax (indicated by hashes #),
could have alternatively been set-off against output tax (see alternative
solution below).
3. If the total input tax was greater than the total output tax, then the VAT
payable to SARS would have been negative. This would mean that VAT is
receivable from SARS.
4. Salaries and wages are not subject to VAT and thus not included in the
calculation.
5. Interest on loan is an exempt item and thus not included in the calculation.
Alternative solution
In the previous solution the VAT adjustment items were accounted for by
including (adding) the VAT amounts as either output tax or input tax. These
adjustments could also be accounted for by setting off (subtracting) the VAT
amount against either output tax or input tax, as illustrated on next page.
Acc GR12 LB.indb 325 6/6/13 6:04:15 PM

Example continued
Calculation of VAT payable to (receivable from) SARS for March and
April 2018:
OUTPUT TAX R53 018
  14  )
Total sales of goods (R433 200 × ___ R53 200
114
14  )
Rent income (R22 800 ×  ___ R2 800
114
Equipment sold (R13 680 – R12 000) R1 680
Goods returned by customers (R18 810 – R16 500) # (R2 310)
  14  ) #
Discount allowed to debtors (R15 390 × ___ (R1 890)
114
Debts written off as irrecoverable (R3 762 – R3 300) # (R462)
Less: INPUT TAX R23 674
  14  )
Total purchases of goods (R165 000 × ___ R23 100
100
  14  ) *
Goods taken by owner for personal use (R5 900 × ___ (R826)
100
Goods returned to suppliers (R10 032 – R8 800) * (R1 232)
Telephone, electricity and insurance (R8 664 × ___   14  ) R1 064

114
14  ) *
Discount received from creditors (R7 200 ×  ___ (R1 008)
100
Consumable stores purchased (R18 400 × ___   14  ) R2 576
100
VAT PAYABLE TO SARS R29 344
Note: It is also possible to perform this calculation using a combination of the

two methods of accounting for VAT adjustments. In other words, some VAT
adjustment items could be accounted for by including the VAT amounts as
either output tax or input tax (as appropriate), while others could be accounted
for by setting off the VAT amount against either output tax or input tax (as
appropriate).
Acc GR12 LB.indb 326 6/6/13 6:04:15 PM

Activity 12.9
Bennie’s Bookstore is a registered VAT vendor that sells a wide range of books to the
general public. The business accounts for VAT on the invoice basis and is registered with a
Category B tax period. All the transactions of the business are subject to VAT at 14%.
Bennie Bennett, the owner of Bennie’s Bookstore, sells books strictly on a cash basis
and buys all of the books for the business on credit. Where possible, Bennie tries to take
advantage of any prompt settlement discounts offered by his suppliers.
Information
The following information relates to the transactions of Bennie’s Bookstore for the two-
month period ending 28 February 2018.
1. Sales and purchases:
• Total sales of books (for cash) R146 604 (incl. VAT)
• Total purchases of books (on credit) R66 400 (excl. VAT)
2. Prompt settlement discounts received from suppliers amounted to R3 192
(inclusive of VAT).
3. Credit notes received from the suppliers, for books returned by Bennie’s Bookstore,
reflected the following:
Total amount excluding VAT R4 550

VAT amount R637
Total amount including VAT R5 187
4. The total amount of VAT charged on expenses amounted to R3 458.

5. Bennie bought a new bookshelf for the business for R9 850 (exclusive of VAT).
6. Bennie loves to read books and regularly takes books home from the bookstore. The
books taken by Bennie for personal use during this period had cost the business R2 622.
Required
Calculate the amount of VAT payable to or receivable from SARS for the two-month period
ending 28 February 2018.
Activity 12.10
Fatima Tahir is the owner of Tahir Traders, a business that sells children’s clothing. Fatima
voluntarily registered her business as a VAT vendor in January 2018. The VAT registration
details of the business are as follows:
• Tax period: Category A
• Accounting basis: Invoice basis
Tahir Traders charges VAT at 14% as required and purchases all of its supplies from
registered VAT vendors.
Acc GR12 LB.indb 327 6/6/13 6:04:15 PM

The following is a summary of the transactions of Tahir Traders for the two-month period
ending 30 September 2018.

Goods sold for cash R28 500
Goods sold on credit R30 438
Credit purchases of goods R34 300
Interest received on fixed deposit R1 800
Discount received from creditors R1 425
Goods return by customers R2 394 R2 100
Goods returned to suppliers R1 350
Bad debts R912 R800
Computer purchased R5 529
Sundry expenses R26 700
• During August 2018, Fatima took clothes with a cost price of R1 750 for her children.
• The sundry expenses amount includes wages of R8 800.
Required
1. Calculate the amount of VAT that Tahir Traders will either need to pay to SARS, or can
claim from SARS, for the two-month period ending 30 September 2018.
2. What is the name of the form that Tahir Traders must submit to SARS in order to report
this information?
3. By what date must Tahir Traders submit this form to SARS?
4. Tahir Traders is voluntarily registered for VAT. What can you deduce about the annual
income of Tahir Trader from this fact?
5. Briefly explain why Tahir Traders would want to register for VAT.
6. Give one reason why Tahir Traders might not want to be registered for VAT.
7. Fatima’s son is in Grade 10 and has just started learning about VAT in Accounting. He
has picked up on the fact that a vendor can get money back from SARS, if their input
tax exceeds their output tax. He suggests to Fatima that she should declare more
input tax on the return submitted to SARS and then SARS will pay her a large refund.
a. What should Fatima tell her son about this suggestion? List three points.
b. Give two possible consequences that could result, if Fatima followed her
son’s advice.
5.4 Completing the VAT 201 return form

As mentioned earlier, once vendors have calculated the amount of VAT payable
to or receivable from SARS for a particular tax period, they need to report this
information to SARS by completing a VAT 201 return form. An example of a
completed VAT 201, using the information from the previous example (relating to
Pitso Traders, on page 325), is provided on the next page.
Acc GR12 LB.indb 328 6/6/13 6:04:16 PM

Acc GR12 LB.indb 329 6/6/13 6:04:16 PM

6. Recording VAT in the accounting records
As is the case with all other business transactions, transactions involving VAT
need to be recorded in the accounting records of the business. As usual, these
transactions must first be recorded in the journals of the business and then posted
to the General Ledger. Although you are not required to draw up entries in the
journals relating to VAT, you are expected to be able to post the VAT information
recorded in the journals to the General Ledger.
6.1 Recording VAT in the General Ledger

The VAT Control account is the name of the General Ledger account that is used
to maintain a record of all the accounting information relating to the VAT of a
business. VAT is recorded in the VAT Control account as follows:
• Output tax is recorded on the credit side of the VAT Control account.
• Input tax is recorded on the debit side of the VAT Control account.
Therefore the VAT Control account may be summarised as follows:
Dr VAT Control Cr
INPUT TAX OUTPUT TAX
The VAT Control account is one of those unusual accounts that can have either a
debit or a credit balance. The balance of the VAT Control account reflects the financial
relationship between the vendor and SARS. This may be explained as follows:
• Since output tax is usually greater than input tax, the VAT Control account will
normally have a credit balance. This balance is determined by subtracting the
input tax recorded on the debit side from the output tax recorded on the credit
side. Remember that we used the same calculation to determine the amount of
VAT payable to SARS. Thus a credit balance in the VAT Control account reflects
the amount of VAT that the vendor owes to SARS. In this case, the VAT Control
account will be recorded as a liability in the books of the vendor.
• Occasionally, input tax may be greater than output tax and the VAT Control
account will then have a debit balance. This balance is determined by
subtracting the output tax recorded on the credit side from the input tax
recorded on the debit side. Remember that we used the same calculation to
determine the amount of VAT receivable from SARS. Thus a debit balance
in the VAT Control account reflects the amount of VAT that SARS owes to the
vendor. In this case, the VAT Control account will be recorded as an asset in the
books of the vendor.
Since VAT owing to or by SARS must be settled in the short term, the VAT Control
account is recorded in the Balance Sheet as either a current liability or a current
asset.
6.2 Posting from the journals to the VAT Control account

You are not expected to be able to record VAT-related transactions in the journals,
but you should be able to post from the journals to VAT Control account in the
General Ledger.
The journals of a VAT vendor are modified to include an additional column
called the VAT Control column. When transactions involving VAT are entered in
the journals, the VAT portion of each transaction is recorded in the VAT Control
column. At the end of each month, the VAT Control columns are totalled and
these totals are then posted to the VAT Control account in the General Ledger.
Acc GR12 LB.indb 330 6/6/13 6:04:16 PM

We will now show how VAT is recorded in each of the journals and explain
how VAT is posted from each of the journals to the VAT Control account.
6.2.1 Cash Receipts Journal (CRJ)

The Cash Receipts Journal is used to record several types of transactions that give
rise to output tax. These transactions include:
• Cash sales of goods
• Cash received for services rendered
• Cash sales of fixed assets
• Income received (e.g. rent income received)
• Bad debts recovered.
The VAT from these transactions is entered in the VAT Control column in the CRJ
and the total of this column is posted to the VAT Control account, as illustrated in
the next example (the Analysis of Receipts column has been omitted).
Example
Cash Receipts Journal of Jumbo Traders for January 2018
Doc. Day Details Bank VAT Sales Cost of sales Debtors Sundry accounts
no. Control Control Amount Details
CRR 1 Sales 114 000 14 000 100 000 50 000
04 8 P. Pop 13 680 1 680 12 000 Services rendered
05 12 T. Toms 5 700 700 5 000 Equipment
06 22 F. Fig 11 400 1 400 10 000 Rent income
07 27 M. Mop 2 280 280 2 000 Bad debts recovered
30 G. Gap 2 600 2 600
149 660 18 060 100 000 50 000 2 600 29 000
Posting from the CRJ to the VAT Control account

The total of the VAT Control column in the CRJ must be accounted for as
output tax and is thus posted to the credit side of the VAT Control account.
Dr VAT Control B1 Cr
2018
Jan 31 Bank CRJ 18 060 00
Note: The R18 060 is included in the total of the Bank column in the CRJ
and will thus be included in the R149 660 that is posted to the debit side of the
Bank account.
6.2.2 Cash Payments Journal (CPJ)

The Cash Payments Journal is used to record several types of transactions that give
rise to input tax. These transactions include:
• Cash purchases of stock
• Cash purchases of consumable stores
• Cash purchases of fixed assets
• Cash payments of expenses (that are subject to VAT).
The VAT from these transactions is entered in the VAT Control column in the CPJ
the following example.
Acc GR12 LB.indb 331 6/6/13 6:04:16 PM

Example
Cash Payments Journal of Jumbo Traders for January 2018
Doc. Day Name of payee Bank VAT Trading Packing Creditors Sundry accounts
no. Control stock material control Amount Details
32 03 GG Suppliers 34 200 4 200 30 000
33 07 Packit CC 6 384 784 5 600
34 11 Frosty Fridges 17 328 2 128 15 200 Equipment
35 14 AB Stationers 4 700 4 700
36 17 Telkom 1 254 154 1 100 Telephone
37 23 Sure Cover 3 306 406 2 900 Insurance
38 27 Cash 7 200 7 200 Wages
74 372 7 672 30 000 5 600 4 700 26 400
Posting from the CPJ to the VAT Control account

The total of the VAT Control column in the CPJ must be accounted for as input
tax and is thus posted to the debit side of the VAT Control account.
2018
Jan 31 Bank CPJ 7 672 00
Note: The R7 672 is included in the total of the Bank column in the CPJ and
will thus form part of the R74 372 that is posted to the credit side of the
Bank account.
6.2.3 Petty Cash Journal (PCJ)

The Petty Cash Journal is used to record several types of transactions that give rise
to input tax. These transactions include:
• Petty cash payments for stock
• Petty cash payments for consumable stores
• Petty cash payments of expenses (that are subject to VAT).
The VAT from these transactions is entered in the VAT Control column in the PCJ
Example
Petty Cash Journal of Jumbo Traders for January 2018
Doc. Day Details Petty VAT Trading Stationery Sundry accounts
no. cash Control stock Amount Details
15 08 Stock 228 28 200
16 16 Stationery 114 14 100
17 20 Postage 57 7 50 Postage
18 28 Tea and coffee 78 78 Refreshments
477 49 200 100 128
Acc GR12 LB.indb 332 6/6/13 6:04:16 PM

Example continued
Posting from the PCJ to the VAT Control account
The total of the VAT Control column in the PCJ must be accounted for as input
2018
Jan 31 Petty cash PCJ 49 00
Note: The R49 is included in the total of the Petty cash column in the PCJ and
will thus form part of the R477 that is posted to the credit side of the Petty Cash
Control account.
6.2.4 Debtors Journal (DJ)

The Debtors Journal is used to record the credit sales of goods by the vendor,
which gives rise to output tax. The VAT charged by the vendor is entered in the
VAT Control column in the DJ and the total of this column is posted to the VAT
Control account, as illustrated in the following example.
Example
Debtors Journal of Jumbo Traders for January 2018
Doc. Day Debtor Debtors VAT Sales Cost of sales
no. control control
27 11 L Louw 4 104 504 3 600 1 800
28 19 P Piet 2 508 308 2 200 1 100
6 612 812 5 800 2 900
Posting from the DJ to the VAT Control account

The total of the VAT Control column in the DJ must be accounted for as output
tax and is thus posted to the credit side of the VAT Control account.
2018
Jan 31 Debtors control DJ 812 00
Note: The R812 is included in the total of the Debtors Control column in the
DJ and will thus form part of the R6 612 that is posted to the debit side of the
Debtors Control account.
6.2.5 Creditors Journal (CJ)

The Creditors Journal is used to record several types of transactions that give rise
to input tax. These transactions include:
• Credit purchases of stock
• Credit purchases of consumable stores
• Credit purchases of fixed assets.
The VAT from these transactions is entered in the VAT Control column in the CJ
Acc GR12 LB.indb 333 6/6/13 6:04:16 PM

Example
Creditors Journal of Jumbo Traders for January 2018
Doc. Day Creditor Creditors VAT Trading Packing Sundry accounts
no. control control stock material Amount Details
124 08 CJ Suppliers 38 304 4 704 33 600
125 15 Packit CC 9 234 1 134 8 100
126 25 Solly’s Safes 11 286 1 386 9 900 Equipment
58 824 7 224 33 600 8 100 9 900
Posting from the CJ to the VAT Control account

The total of the VAT Control column in the CJ must be accounted for as input
2018
Jan 31 Bank CJ 7 224 00
Note: The R7 224 is included in the total of the Creditors Control column in
the CJ and will thus form part of the R58 824 that is posted to the credit side of
the Creditors Control account.
6.2.6 Debtors Allowances Journal (DAJ)

The Debtors Allowances Journal is used to record allowances granted to debtors
by the vendor. When this type of transaction occurs, a VAT adjustment needs to
be made to decrease the amount of VAT payable to SARS. The VAT component
of the allowance amount is entered in the VAT Control column in the DAJ and
the total of this column is posted to the VAT Control account, as illustrated in the
following example.
Example
Debtors Allowances Journal of Jumbo Traders for January 2018
Doc. Day Debtor Debtors VAT Debtors Cost
no. control control allowances of sales
16 15 L. Louw 456 56 400 200
17 22 P. Piet 342 42 300 150
798 98 700 350
Posting from the DAJ to the VAT Control account

The total of the VAT Control column in the DAJ must be accounted for by
making an adjustment to decrease the amount of VAT payable to SARS. As
explained previously, this adjustments can be made by either:
• Setting-off (subtracting) the amount against the output tax; or
• Including (adding) the amount as input tax.
Both of these approaches are achieved by debiting the VAT Control account.
Therefore this amount must posted to the debit side of the VAT Control account.
Acc GR12 LB.indb 334 6/6/13 6:04:17 PM

Example continued
2018
Jan 31 Debtors control DAJ 98 00
Note: The R98 is included in the total of the Debtors Control column in the DAJ
and will thus form part of the R798 that is posted to the credit side of the Debtors
Control account.
6.2.7 Creditors Allowances Journal (CAJ)

The Creditors Allowances Journal is used to record allowances granted by
creditors to the vendor. When this type of transaction occurs, a VAT adjustment
needs to be made to increase the amount of VAT payable to SARS. The VAT
component of the allowance amount is entered in the VAT Control column in the
CAJ and the total of this column is posted to the VAT Control account, as illustrated
in the following example.
Example
Creditors Allowances Journal of Jumbo Traders for January 2018
Doc. Day Creditor Creditors VAT Trading Packing Sundry accounts
no. control control stock material Amount Details
07 16 CJ Suppliers 2 280 280 2 000
08 27 Packit CC 570 70 500
2 850 350 2 000 500
Posting from the CAJ to the VAT Control account

The total of the VAT Control column in the CAJ must be accounted for by
making an adjustment to increase the amount of VAT payable to SARS. As
explained previously, this adjustments can be made by either:
• Setting-off (subtracting) the amount against the input tax; or
• Including (adding) the amount as output tax.
Both of these approaches are achieved by crediting the VAT Control account.
Therefore this amount must be posted to the credit side of the VAT Control account.
2018
Jan 31 Creditors control CAJ 350 00
Note: The R350 is included in the total of the Creditors Control column in the
CAJ and will thus form part of the R2 850 that is posted to the debit side of the
Creditors Control account.
6.2.8 General Journal (GJ)

The General Journal is used to record several types of transactions that give rise to
VAT adjustments. These transactions include:
• Bad debts
• Discount allowed (this VAT adjustment can alternatively be recorded in CRJ)
Acc GR12 LB.indb 335 6/6/13 6:04:17 PM

• Discount received (this VAT adjustment can alternatively be recorded in CPJ)
• Drawings of stock
• Dishonoured cheques (reversal of discount allowed).
The VAT from these transactions is entered in the VAT Control columns (debit
or credit) in the GJ and the totals of these columns are posted to the VAT Control
account, as illustrated in the following example.
Example
General Journal of Jumbo Traders for January 2018
Day Details Debit Credit VAT control Debtors control Creditors control
Debit Credit Debit Credit Debit Credit
05 Bad debts 200
VAT control 28 28
J Jack 228 228
(Debt written off as
irrecoverable)
09 VAT control 21 21
Discount allowed 21
(VAT adjustment for
discount allowed)
14 Discount received 84
VAT control 84 84
(VAT adjustment for
discount received)
17 Drawings 342
Trading stock 300
VAT Control 42 42
(Owner took goods for
personal use)
24 P Peters 285 285
Discount allowed 250
VAT control 35 35
(Reversal of discount & VAT
on R/D cheque)
49 161 285 228
Posting from the GJ to the VAT Control account

The total of the VAT Control debit column is posted to the debit side of the
VAT Control account, while the total of the VAT Control credit column is posted
to the credit side of the VAT Control account.
2018 2018
Jan 31 Journal debits GJ 49 00 Jan 31 Journal credits GJ 161 00
Note: These transactions in the GJ could also have been posted individually to
the VAT Control account.
Acc GR12 LB.indb 336 6/6/13 6:04:17 PM

6.3 Completing the VAT Control account
Now that we have seen how VAT is posted from each of the journals to the VAT
Control account, we can consolidate this information by using the following
example to illustrate how the VAT Control account will appear once all the journals
have been posted.
Example
Jumbo Traders is a registered VAT vendor with a Category A tax period and
accounts for VAT on the invoice basis. On 1 January 2018, the VAT Control
account of Jumbo Traders showed a credit balance of R3 176.
Required
1. Draw up the VAT Control account in the General Ledger of Jumbo Traders for
January 2018 by posting from the journals of Jumbo Traders provided in the
previous examples. Balance the account at the end of the month.
2. What is the amount of VAT payable to or receivable from SARS, on 30
January 2018?
3. Is this VAT amount payable to SARS or receivable from SARS?
4. If Jumbo Traders financial year ended on 30 January 2018, in which section of
the Balance Sheet would the VAT Control account be recorded?
Solution
1.
General Ledger of Jumbo Traders
2018 2018
Jan 31 Bank CPJ 7 672 00 Jan 01 Balance b/d 3 176 00
Petty cash PCJ 49 00 31 Bank CRJ 18 060 00
Creditors control CJ 7 224 00 Debtors control DJ 812 00
Debtors control DAJ 98 00 Creditors control CAJ 350 00
Journal debits GJ 49 00 Journal credits GJ 161 00
22 559 00 22 559 00
2018
Feb 01 Balance b/d 7 467 00
2. R7 467,00
3. The VAT amount is payable to SARS
4. Current liabilities
Activity 12.11
Nkosi Traders is registered for VAT on the invoice basis and with a Category B tax period.
Information
• The VAT Control account of Nkosi Traders had a credit balance of R7 349 on 1 April
2018.
• The following is a summary of the totals of the VAT Control columns in the journals of
Nkosi Traders on 30 April 2018.
Acc GR12 LB.indb 337 6/6/13 6:04:17 PM

Journal VAT Control column totals
Cash Receipts Journal R47 568
Cash Payments Journal R32 512
Petty Cash Journal R 67
Debtors Journal R63 331
Debtors Allowances Journal R7 897
Creditors Journal R41 117
Creditors Allowances Journal R5 002
R533 Debit
General Journal
R715 Credit
Required
1. Use the information provided above to complete the VAT Control account in the
General Ledger of Nkosi Traders for April 2018.
2. Write down the amount of VAT owing for the two-month period ending 30 April 2018
and indicate whether the amount is payable to SARS or receivable from SARS.
Activity 12.12
Fannie Venter is the owner of Fannie Furnishers, a business that sells furniture and office
equipment. The business is registered for VAT on the invoice basis and with a Category
A tax period. Unless otherwise required, Fannie Furnishers charges VAT at 14% on all its
supplies.
Required
Determine the amount of VAT payable to or receivable from SARS on 31 May 2018, by
drawing up the VAT Control account of Fannie Furnishers for May 2018.
Information
Fannie has provided the following information relating to the VAT of the business for
April 2018:
• Total output tax for April 2018 R26 438
• Total input tax for April 2018 R29 121
The totals of the journals of Fannie Furnishers on 31 May 2018 were as follows:
Cash Receipts Journal

Bank VAT control Sales Cost of sales Debtors control Sundries
143 722 14 392 102 800 51 400 26 530 0
Cash Payments Journal

Bank VAT control Trading stock Wages Creditors Sundries
control
120 880 ? 62 500 12 150 16 390 18 500
Petty Cash Journal

Petty cash VAT control Trading stock Postage Stationery Sundries
1 824 224 400 200 700 300
Debtors Journal
Debtors control VAT control Sales Cost of sales
68 400 ? 60 000 30 000
Acc GR12 LB.indb 338 6/6/13 6:04:17 PM

Debtors Allowances Journal
Debtors control VAT control Debtors allowances Cost of sales
4 560 560 4 000 2 000
Creditors Journal
Creditors control VAT control Trading stock Sundries
101 802 12 502 67 100 22 200
Creditors Allowances Journal

4 332 ? ? 0
The General Journal of Fannie Furnishers for May 2018 contained the following entries
pertaining to VAT:
Day Details Debit Credit

14 Drawings 3 705
Trading stock 3 250
VAT Control 455
(Owner took goods for personal use)
25 Bad debts 4 600
VAT Control 644
J Jack / Debtors control 5 244
(Debt written off as irrecoverable)
You should now be able to draw up the VAT Control account by posting from the
journals and you should also be able to use the completed VAT Control account to
determine the amount of VAT payable to or receivable from SARS.
We will look at a final example in which we illustrate how to draw up the VAT
Control account based on information other than the journals.
Example
Bobo Traders is registered for VAT on the invoice basis and with a Category A
tax period.
Information
• The VAT Control account of Bobo Traders had a credit balance of R11 644
on 1 July 2018.
• The following information was taken from the books of Bobo Traders for
July 2018:
Acc GR12 LB.indb 339 6/6/13 6:04:17 PM

Example continued
Amount (incl. VAT) VAT amount

Cash sales of goods R151 848 R18 648
Credit sales of goods R210 444 R25 844
Rent income received R17 100 R2 100
Cash purchases of goods R94 392 R11 592
Credit purchases of goods R129 390 R15 890
Expenses paid R53 694 R6 594
Stationery purchased on credit R7 866 R966
Equipment sold for cash R8 664 R1 064
Goods return by customers R6 954 R854
Goods returned to suppliers R5 928 R728
Discount allowed to debtors R4 902 R602
Discount received from creditors R5 586 R686
Goods taken by owner for personal use R684 R84
Required
Draw up the VAT Control account in the General Ledger of Bobo Traders for July
2018 and use it to determine the amount of VAT payable to or receivable from
SARS for the two months ending 31 July 2018.
Solution
Workings
• Bank (CRJ) = VAT on cash sales + VAT on rent income + VAT on
equipment sold
= R18 648 + R2 100 + R1 064 = R21 812
• Bank (CPJ) = VAT on cash purchases of goods + VAT on expenses paid
= R11 592 + R6 594 = R18 186
• Creditors control (CJ) = VAT on credit purchases of goods + VAT on credit
purchases of stationery
= R15 890 + R966 = R16 856
• Journal debits (GJ) = VAT on discount allowed to debtors = R602
• Journal credits (GJ) = VAT on discount received from creditors + VAT on
drawings of goods
= R686 + R84 = R770
General Ledger of Bobo Traders
2018 2018
Jul 31 Bank CPJ 18 186 00 Jul 01 Balance b/d 11 644 00
Creditors control CJ 16 856 00 31 Bank CRJ 21 812 00
Debtors control DAJ 854 00 Debtors control DJ 25 844 00
Journal debits GJ 602 00 Creditors control CAJ 728 00
Balance c/d 24 300 00 Journal credits GJ 770 00
60 798 00 60 798 00
2018
Aug 01 Balance b/d 24 300 00
The amount of VAT payable to SARS for the two months ending 31 July 2018 is
R24 300.
Acc GR12 LB.indb 340 6/6/13 6:04:18 PM

Activity 12.13
TJ Traders is registered for VAT on the invoice basis and with a Category B tax period.
Use the information provided to determine the amount of VAT payable to or receivable
from SARS on 28 February 2018 by completing the VAT Control account of TJ Traders for
February 2018.
Information
• The VAT Control account of TJ Traders had a credit balance of R7 070 on 1 February
2018.
• The following information was taken from the books of TJ Traders for February 2018:
Amount (incl. VAT) VAT amount

Cash sales of goods R60 192 R7 392
Credit sales of goods R103 968 R12 768
Cash purchases of goods R32 718 R4 018
Expenses paid R39 216 R4 816
Equipment bought for cash R16 644 R2 044
Goods return by customers R6 726 ?
Goods returned to suppliers R7 524 R924
Discount allowed to debtors R2 394 R294
Discount received from creditors R3 192 R392
Bad debts R6 270 ?
Activity 12.14
Ntombi’s Nursery is a business that sells plants and gardening products. Ntombi
Ntombela, the owner of Ntombi’s Nursery, buys all of the plants and gardening products
for the nursery from registered VAT vendors. Ntombi’s Nursery charges VAT at 14% on
all sales. The business is registered as a Category A vendor and accounts for VAT on the
invoice basis.
Information
• On 1 May 2018, Ntombi’s Nursery owed R3 670 to SARS for VAT.
• Information relating to the sales and purchases of Ntombi’s Nursery for May 2018:

Goods sold on credit R49 362 R43 300
Cash purchases of goods R23 000
Goods return by customers R3 900
• The totals in the Petty Cash Journal of Ntombi’s Nursery on 31 May 2018 were
as follows:
Petty cash VAT control Stationery Wages Postage Sundries

768 ? 360 255 90 0
Acc GR12 LB.indb 341 6/6/13 6:04:18 PM

• Ntombi’s Nursery paid the following expenses (including VAT, where applicable)
during May 2018:
■ Telephone R2 394
■ Salaries R18 012
■ Insurance R3 990
■ Interest on loan R4 845
■ Water and electricity R7 638
• During May 2018, prompt settlement discounts allowed to debtors amounted to
R2 223, while Ntombi’s Nursery received discounts totalling R5 016 for paying its
suppliers early.
• During May 2018, Ntombi took plants with a cost price of R2 250 for her garden at home.
• Greg’s Gardening Services, a business that owed Ntombi’s Nursery R6 384, was
liquidated during May 2018. Ntombi’s Nursery received 25 cents in the rand from the
insolvent estate and wrote off the rest of the debt as irrecoverable.
Required
Complete the VAT Control account of Ntombi’s Nursery for May 2018.
Greg Grogin owns Grogin’s Grocery Store, a business that sells groceries and basic
foodstuffs to the general public. The business became a VAT vendor at the beginning of
the current year and is registered on the invoice basis, with a Category B tax period.
Information
The following is a summary of the transactions of Grogin’s Grocery Store for the two-
month period ending 28 February 2018.
Information relating to sales and purchases of goods

• Total sales of standard rated goods R95 760 (incl. VAT)
• Total sales of zero-rated goods R30 780
• Cash purchases of goods R36 800 (excl. VAT)
• Credit purchases of goods R20 400 (excl. VAT)
Zero-rated items account for 25% of all purchases, while one third of all standard-rate
goods are purchased from non-VAT vendors.
Other transactions
• Sundry expenses paid (including wages of R8 400) R22 900 (excl. VAT)
• Computer bought for cash R5 700 (incl. VAT)
• Goods return by customers R1 254 (incl. VAT)
• Goods returned to suppliers R3 200 (excl. VAT)
• Bad debts R4 389 (incl. VAT)
• Drawings of goods (at cost price) R2 500
Greg has recorded the following information on the VAT 201 form of the business for the
two-month period ending 28 February 2018:
Amount (incl. VAT) VAT

CALCULATION OF OUTPUT TAX
Standard rate (excluding capital goods) (sales) R95 760 R11 760
Standard rate (only capital goods) – –
Zero rate R30 780 –
Exempt and non-supplies – –
Adjustments: Change in use (drawings of goods) R2 850 R350
Other (goods returned by customers) R1 254 R154
TOTAL OUTPUT TAX R12 264
Acc GR12 LB.indb 342 6/6/13 6:04:18 PM

CALCULATION OF INPUT TAX
Capital goods or services supplied to you (computer) R5 700 R798
Goods supplied to you (goods purchased) R65 208 R8 008
Other goods or services supplied to you (expenses) R26 106 R3 206
Tax on adjustments: Change in use –
Bad debts R4 389
Other (goods returned to suppliers) R3 648
TOTAL INPUT TAX R12 999
AMOUNT REFUNDABLE R735
Although Greg is quite pleased that the business does not have to pay VAT to SARS
and that he will be able to claim a refund, he is a bit concerned that he may have made
a few mistakes.
Required
1. Greg was about to submit the VAT 201 form to SARS, but decided at the last minute
to ask you to double-check his work. You immediately noticed some mistakes. Help
Greg by redoing the VAT 201 form of Grogin’s Grocery Store for the two-month period
ending 28 February 2018. use the same format as above.
2. When you meet with Greg to show him the correct version of the VAT 201 form, you
begin by saying: “Well Greg, I’ve got good news and I’ve got bad news …”. Explain
firstly the bad news that you have for Greg and then explain the good news.
3. Complete the VAT Control account of Grogin’s Grocery Store for the two-month period
ending 28 February 2018. You may assume the following:
• 20% of the sales were on credit.
• 25% of the standard-rate goods purchased from VAT vendors were purchased
on credit.
An alternative approach to recording VAT (for interest only)

In practice, some vendors prefer to record output tax and input tax in separate ledger
accounts. In this approach, output tax is recorded in an account called the Output VAT
account, while input tax is recorded in an account called the Input VAT account. The
Output VAT and Input VAT accounts are then closed off to the VAT Control account and
the VAT Control account is balanced. It is important to realise that the balance in this
VAT Control account will be exactly the same as the balance that would have resulted
from all VAT entries being made directly in the VAT Control account.
Although we won’t use this approach and we’ll continue to record output tax and
input tax directly in the VAT Control account, it is important for you to be aware of this
method as you may encounter this approach in the future.
7. Ethical issues relating to VAT

VAT is an essential source of government revenue and accounts for about 25% of
the National Budget. The VAT system involves a complex process, which relies
on hundreds of thousands of vendors throughout the country to charge and
collect VAT on behalf of SARS. These vendors are required to pay VAT owing to
SARS in full and on time and are expected to account for VAT in an accurate and
truthful manner. Therefore the VAT system depends heavily on the integrity and
honesty of vendors in order to function effectively. Unfortunately, as is the case
with most other forms of taxation, the VAT system is vulnerable to unethical and
illegal practices such as tax evasion and fraud. Furthermore, with its credit and
refund mechanism, the VAT process offers unique opportunities for abuse and is
particularly susceptible to fraud.
Acc GR12 LB.indb 343 6/6/13 6:04:18 PM

Although VAT fraud can often entail elaborate and intricate schemes, generally
speaking fraudulent, unethical and illegal practices relating to VAT typically
involve the following:
• Exceeding an annual income of R1 million, but not registering as VAT vendor
• Paying SARS less VAT than required
• Claiming VAT refunds on fictitious invoices
• Not charging VAT as required on certain transactions
• Charging VAT without being registered as a VAT vendor and then keeping the
VAT received.
VAT fraud poses a serious risk to national revenue and costs the country tens of
millions of rand each year. SARS is very conscious of this problem and over the
past few years, SARS has stepped up their efforts to combat this crime. SARS
has implemented a number of measures and controls to help identify high-risk
cases and are now checking VAT refund claims more thoroughly. They are also
conducting more regular compliance inspections and VAT audits.
Although the extra measures that SARS has put in place have been beneficial
in preventing and uncovering VAT fraud, the additional verification processes
have also led to delays in the payment of legitimate VAT refunds. This has had
a negative impact on the cash flow of honest vendors and small businesses, in
particular, have suffered.
VAT fraud and VAT evasion are serious offences and any person found guilty
of such acts could be charged additional tax of up to twice the amount of VAT
evaded or fraudulently claimed. Over and above any additional tax charged, a fine
or a term of imprisonment could also be imposed. A further method that SARS
employs against VAT offenders is to publically name and shame vendors who have
transgressed, which often results in irreparable damage to the vendor’s reputation.
8. Internal controls and internal audits of VAT

As you learnt in Grade 11, internal controls are required whenever there are
significant risks associated with a business activity. The purpose of the internal
controls is to protect the business against risk and prevent undesirable events from
occurring. The risk management process and internal control systems are then
evaluated by the internal auditing function, in order to determine whether the
risks are being effectively managed and controlled.
8.1 Risks associated with VAT

There are significant business risks associated with VAT, which include
RISK! the following:
• Risks relating to non-compliance: Vendors need to bear in mind that non-
compliance with VAT regulations, even if unintentional, is punishable by law.
SARS has become increasingly vigilant at ensuring that vendors comply with
VAT regulations. Any vendor found guilty of non-compliance will suffer both
financially and in terms of their reputation in the business community.
• Financial risk: Risk of having to pay penalties and interest due to non-
payment, under-payment or late payment of VAT. Furthermore, errors made
when claiming input tax can result in over-payment of VAT.
• Reputational risk: Risk of having reputation tarnished if the business is linked
to non-compliance, tax evasion or VAT fraud
• Cash-flow risk: Risk of cash flow problems due to ineffective and inefficient
collection of debts (including VAT) from customers
Acc GR12 LB.indb 344 6/6/13 6:04:19 PM

• Fraud risk: Risk of employees using the VAT accounting system to conceal
fraud and theft committed in other parts of the business. This involves
employees misappropriating funds from the business and then using the VAT
Control account to cover their tracks by posting fictitious transactions. Besides
the obvious issue of concealing the internal fraud, this would also result in the
business under-paying VAT.
8.2 Internal control of VAT INTERNAL

CONTROL
Internal control processes are required to address the risks associated with
VAT. The following are some of the internal control procedures that should be
implemented:
• Invoices from vendors (suppliers) should be checked to determine that the invoices
meet all the requirements of a valid tax invoice.
• Invoices from vendors (suppliers) should be checked to determine that the VAT
amounts listed are correct and that the correct VAT rates have been applied
(standard rate, zero-rate or exempt).
• Only valid tax invoices should be issued.
• The VAT amount on tax invoices issued should be accurately calculated and the
correct VAT rates should be applied.
• All transactions involving VAT should be recorded promptly in the VAT accounting
system and VAT control accounts should be maintained and updated regularly.
• All input tax and output tax should be accurately accounted for and applied to the
correct tax period.
• VAT 201 return forms should be completed accurately and submitted timeously.
• VAT payments to SARS should be processed punctually and paid in full.
• VAT refunds claimed from SARS should be monitored and followed up if payment is
not received within 21 days.
• VAT reconciliations should be performed periodically to test the accuracy and
completeness of the output VAT paid and input VAT claimed against the VAT
control accounts.
• Access to the VAT accounting system should be restricted and only properly
authorised personnel should be involved in VAT accounting process.
• Collection of debt should be carefully managed so that output VAT
is received as soon as possible.
• There should be adequate division of duties, so that different
personnel are responsible for administering the VAT accounting
system, completing the VAT returns, making VAT payments and
reconciling VAT accounts.
Acc GR12 LB.indb 345 6/6/13 6:04:19 PM

INTERNAL
INTERNAL AUDIT
8.3 Internal audit of VAT
AUDIT
An internal audit should be performed to evaluate the effectiveness of the risk
management and internal control processes relating to VAT. An internal audit of
VAT may typically involve the following:
INTERNAL AUDIT
INTERNAL AUDIT
• Performing a risk-based assessment of the VAT-related
activities in order to identify the areas of significant risk
INTERNAL AUDIT
INTERNAL AUDIT
• Planning the detail and scope of the work to be
performed during the fieldwork phase, giving priority to
those areas of greatest risk
• Performing fieldwork to investigate the measures taken to control the risks associated with
VAT and to assess whether these risks are being adequately managed and controlled
• Conducting walk-through tests, tracing a small sample of transactions through the VAT
systems, in order to:
■ verify the existence of the documented internal controls.
■ gain a clear understanding of the internal control processes and procedures
• Conducting compliance tests by observing activities, interviewing key personnel and inspecting
a representative sample of documents, records and products, in order to
verify that:
■ VAT invoices received from suppliers are checked for accuracy and validity
■ VAT invoices issued to customers are checked for accuracy and validity
■ all transactions involving VAT are recorded promptly in the VAT accounting system and VAT
control accounts are maintained and updated regularly
■ All input tax and output tax is accurately accounted for and applied to the correct tax period
■ VAT 201 return forms are completed accurately and submitted timeously
■ VAT payments to SARS are processed punctually and paid in full
■ VAT refunds claimed from SARS are monitored and followed up if payment is not received
within 21 days
■ VAT reconciliations are performed periodically
■ access to the VAT accounting system is restricted and that only properly authorised
personnel are involved in the VAT accounting process
■ collection of debt is carefully managed so that output VAT is received as soon as possible
■ different personnel are responsible for administering the VAT accounting system,
completing the VAT returns, making VAT payments and reconciling VAT accounts
• Conducting substantive tests on a representative sample of transactions, documents and
records, by checking information and re-performing tasks, in order to:
■ test the accuracy, validity and completeness of VAT invoices
■ test the accuracy and completeness of the VAT accounting records
■ verify that input tax and output tax are accounted for accurately
■ verify the accuracy and completeness of VAT 201 return forms
■ verify that VAT reconciliations have been performed accurately
and correctly
• Reporting to management on the adequacy of the risk management and
the internal control systems relating to VAT and providing recommendations
for improvement
• Establishing a follow-up process to monitor any corrective action taken
by management.
Acc GR12 LB.indb 346 6/6/13 6:04:20 PM

The information given below was taken from the books of PSL Traders, a business that sells
soccer gear and other general sports products. The business is registered for VAT on the
invoice basis and with a Category A tax period. Striker Ngubeni, the owner of PSL Traders,
purchases all of the business’s merchandise from registered VAT vendors and only buys
stock on credit. Striker also attempts to pay creditors within 30 days in order take advantage
of any early settlement discounts offered. PSL Traders charges VAT at 14% as required.
Required
1. Calculate the amount of VAT that PSL Traders either owes to SARS, or can claim
from SARS, for March 2018. [27]
2. Complete the VAT Control account in the General Ledger of PSL Traders for March 2018. [14]
3. What is the amount of VAT payable to or receivable from SARS for PSL Traders
for the two-month period ending 31 March 2018? [2]
4. The VAT Control account of PSL Traders had a debit balance on 1 March 2018.
Suggest some likely reasons for this. Where possible, use figures from the
information provided below to support your answers. [7]
Information
• On 1 March 2018, the VAT Control account showed a debit balance of R5 370.
• Summary of the transactions relating to purchases and sales for March 2018:
Goods sold on credit R25 550
Goods return by customers R1 200
Discount received from creditors R7 296 R6 400
• The following expenses were paid by cheque during March 2018:

Amount (excl. VAT)
Telephone R3 670
Water and electricity R2 380
Salaries R18 600
Packing materials R3 550
Interest on loan R2 400
Repairs (carried out by a non-VAT vendor) R1 140
Insurance R2 700
• The totals in the Petty Cash Journal of PSL Traders on 31 March 2018 were as follows:
Petty cash VAT control Stationery Stamps Staff refreshments Sundries
462 ? 250 50 120 0
• On 23 March 2018, PSL Traders sold old office equipment on credit for R14 100 (excl.
VAT) and replaced it on the same day with new office equipment bought by cheque
for R25 308 (incl. VAT).
• During March 2018, Striker took home some soccer balls and Bafana Bafana soccer
jerseys for his children. These items were valued in the books at a cost price of R2 250.
• Sprinter Johnson, who owed the business R3 306, could not be traced and his debt
was written off as irrecoverable during March 2018.
Acc GR12 LB.indb 347 6/6/13 6:04:20 PM

Chapter 13
Key concepts Cost accounting and manufacturing
• fixed cost • variable
cost • prime cost • raw businesses
material • work in process
• finished goods • direct
labour • indirect labour By the end of this chapter, you will be able to:
• direct material cost • • Define and explain concepts unique to a manufacturing business
indirect material cost • Prepare a Production Cost Statement with notes for manufacturing costs
• manufacturing cost • Prepare a short-form Income Statement with notes for administration costs and
• administration cost • selling and distribution costs
selling and distribution • Calculate the following:
cost • Production Cost ■ gross profit on finished goods sold
Statement • Income ■ variable and fixed costs
Statement • contribution ■ cost of production using variable and fixed costs
per unit • breakeven point ■ cost per unit
• cost of production • ■ contribution per unit
productivity
■ breakeven point
■ total cost of production
• Integrate ethical issues relating to manufacturing such as: product quality,
product age, productivity, raw materials, support for local products, price fixing,
theft and fraud
In order to break even this month • Integrate internal control and audit processes relating to manufacturing
we need to produce 1 000 units.
We will all have to work very hard
to increase our productivity.
348 Chapter 13 • C o st acc o u n ti n g a n d m a n u fact u ri n g b u si n esses
Acc GR12 LB.indb 348 6/6/13 6:04:20 PM

1. Introduction
We have already dealt with the terminology, calculations and ledger accounts of
a manufacturing business in Grades 10 and 11. We will now look at the financial
statements. Let us first summarise and revise what we already know.
Costs in a manufacturing business can be classified under the following headings:
Manufacturing costs Period costs

Costs incurred from turning raw Costs incurred from running
material into finished product the business
Administration Sales and

Direct material Direct labour Factory overhead
cost distribution cost
cost cost costs
Costs related to Costs related to
The raw material The wages paid Indirect costs
the administration marketing, selling
used to make a to factory workers incurred from
of the business, and distributing
product manufacturing
e.g. telephone, the product, e.g.
the product, e.g.
receptionist’s salary commission paid to
factory rent
sales representative
Information is summarised in the Expenses are deducted from the

Production Cost Statement to gross profit in the Income Statement
calculate the cost of production. in order to calculate the net profit.
It is very important that the accounting system of a manufacturing business makes

provision for determining manufacturing costs and period costs. The reasons why
this should be done are to:
• Determine the cost/value of goods in production as well as to determine or
evaluate finished goods
• Calculate income efficiently and correctly
• Determine whether the business is efficient as well as profitable
• Calculate breakeven point and determine whether the gross profit is sufficient
to cover period expenses
• Set targets and compile budgets
• Compare manufacturing costs with the targets in order to exercise control
• Set up a price list and to provide quotes for potential clients.
2. Types of manufacturing costs

Manufacturing costs are the costs incurred by the manufacturer to produce its
products from raw material to finished goods. Let’s use Wayne Racing Kayaks – a
business manufacturing canoes and oars – to illustrate these costs.
C o S T A C C o u n T I n G A n d m A n u FA C T u R I n G B u S I n E S S E S • C h a p t e r 1 3 349
Acc GR12 LB.indb 349 6/6/13 6:04:21 PM

There are three types of manufacturing costs:
Material costs Labour costs Factory overhead costs

Direct material costs Direct labour The costs involved in manufacturing
Material or raw material consumed Labour directly applied to transform the product, but which are not
directly in the manufacturing of material into a finished product, e.g. directly linked to the product,
a product, e.g. glass fibre, resin, the people building the canoes e.g. electricity, depreciation of
cabling and pedals to make a canoe machinery, indirect material costs
or oar and indirect labour costs
Indirect material costs Indirect labour costs
Costs incurred during the Salaries and wages paid to people
manufacturing process not directly not directly linked to manufacturing
identified in the finished product, the product, e.g. the salary paid to
e.g. the screws, bolts in a canoe and the bookkeeper
the brushes, cloths and moulds to
make it
Indirect material costs are included Indirect labour costs are included with Factory overhead costs therefore include
with Factory overhead costs. Factory overhead costs. all the manufacturing costs, excluding
direct material costs and direct labour
costs.
3. Classification of manufacturing costs

Because indirect material costs and indirect labour costs form part of Factory
overhead costs, manufacturing costs are usually classified under the following
three headings:
Direct
material costs
Direct
labour costs
Factory
overhead costs
Acc GR12 LB.indb 350 6/6/13 6:04:22 PM

4. Calculation of manufacturing costs
When calculating manufacturing costs, the costs involved in manufacturing a
product are divided into two groups:
• Prime cost (direct costs)
• Factory overhead costs (indirect costs).
4.1 Prime cost

Prime cost refers to the total direct costs involved in the manufacturing process.
The prime cost includes the direct material costs and the direct labour costs.
Prime cost = direct material costs + direct labour costs
4.2 Total manufacturing costs

The total manufacturing costs of production are calculated by adding all the costs
incurred in the production process.
Total manufacturing costs = prime cost + Factory overhead costs
4.3 Unit cost

The unit cost of a product is the cost per item/unit.
total manufacturing cost
unit cost of a product = _______________________
number of units produced
Activity 13.1
In June 2014 Wayne’s Racing kayaks manufactured 30 canoes. The costs the business
incurred during the month are provided.
Information
Glass fibre 18 870
Resin 6 000
Cabling 530
Pedals 600
Stickers 1 500
Wages for workers building the canoes 16 000
Cost of moulds for canoes 5 000
Rent for the factory 2 000
Electricity consumption of the factory 500
Salary of factory supervisor 4 500
Other general Factory overhead costs, such as maintenance, insurance, and so on 11 400
Required
use the information above to calculate the following:
1. direct material costs
2. direct labour costs
3. Prime cost
4. Factory overhead costs
5. Total manufacturing costs
6. unit cost per canoe
7. The selling price of a canoe if a profit margin of 70% is applied to the cost price
Acc GR12 LB.indb 351 6/6/13 6:04:22 PM

5. Classification of manufacturing costs according
to behaviour
In addition to classifying manufacturing costs into direct material costs, direct
labour costs and factory overheads, manufacturing costs are often also classified
according to their cost behaviour. The term “cost behaviour” refers to the
behaviour of a specific manufacturing cost in relation to changes in production
levels (number of units produced). Manufacturing costs are classified into the
following four groups according to their cost behaviour:
• Fixed costs
• Variable costs
• Semi-variable costs
• Semi-fixed costs (step costs).
5.1 Fixed costs

Fixed costs are manufacturing costs that do not vary according to changing levels
of production. Even if production is stopped, these costs will still be incurred.
Fixed costs are constant at all levels of production, even if no units are produced.
The behaviour of a fixed cost is represented in the graph in Figure 13.1.
Fixed cost behaviour

Cost
Number of units produced
Figure 13.1 Fixed costs graph
Example
The rent paid for a factory is a fixed cost. The amount paid for rent remains
constant irrespective of the number of units that are produced. Even if no units
are produced the same amount of rent must still be paid.
5.2 Variable costs

Variable costs are manufacturing costs that vary according to the number of units
produced. If production stops, these costs will no longer be incurred. Variable
costs are directly proportional to the level of production. The behaviour of a
variable cost is represented in the graph in Figure 13.2.
Variable cost behaviour

Cost
Figure 13.2 Variable costs graph
Acc GR12 LB.indb 352 6/6/13 6:04:22 PM

Example
Direct material costs and direct labour costs display variable cost behaviour. A
manufacturer who produces canoes pays R30 for a plastic pedal. If 10 canoes are
produced, then the cost for plastic pedals will be R300 (R30 × 10). If no canoes
are produced, then the cost for pedals will be zero.
5.3 Semi-variable costs

Semi-variable costs are manufacturing costs that have both a fixed and variable
component. The fixed component is the minimum cost that will be incurred even if
no units are produced, while the variable component increases as production levels
increase. If production stops, only the fixed component of the cost will be incurred.
The behaviour of a semi-variable cost is represented in the graph in Figure 13.3.
Semi-variable cost behaviour

Cost
Figure 13.3 Semi-variable costs graph
Example
The electricity cost for a factory is a semi-variable cost. There is a fixed monthly
charge that must be paid even if no electricity has been used – the fixed
component. The electricity cost will then increase as production increases, since
the machinery will use more electricity – the variable component.
5.4 Semi-fixed costs (step costs)

Semi-fixed costs are manufacturing costs that are fixed up to a certain level of
production. If production exceeds this level then these costs increase in steps. For
example, a machine has the capacity to produce a maximum of 1 000 units per day.
If more than 1 000 units have to be produced in a day, then a second machine is
required. This behaviour is represented in the following graph in Figure 13.4.
Semi-fixed (step) cost behaviour
Cost of 3 machines
Cost of 2 machines
Cost
Cost of 1 machine
1 000 2 000
Figure 13.4 Semi-fixed costs graph
C o st acc o u n ti n g a n d m a n u fact u ri n g b u si n esses • C h a p t e r 1 3 353
Acc GR12 LB.indb 353 6/6/13 6:04:22 PM

Activity 13.2
The following costs were incurred by Wayne’s Racing kayaks. Classify each one according
to behaviour, choosing from:
Fixed cost Variable cost Semi-variable cost Semi-fixed cost
Cost Cost behaviour

1. Glass fibre for canoe
2. Rent for the factory
3. Resin (glue) used in building the canoe
4. Wages for workers building canoes (paid per unit completed)
5. Cost of a mould per canoe
6. Water and electricity
7. Salary of secretary
5.5 General classification and classification according to behaviour

It is important that the classification of manufacturing costs according to
behaviour is not confused with the general classification (direct material costs,
direct labour costs and factory overhead costs). The same cost may be categorised
using both classifications.
Example
• A raw material used to make a product is a direct material cost as well as a
variable cost.
• Factory rental is a factory overhead as well as a fixed cost.
6. Manufacturing cost calculations using fixed and

variable costs
In Grade 12 we will ignore semi-variable cost and semi-fixed cost behaviour, and
categorise manufacturing costs as either fixed or variable. We can assume most of
the time that:
• Direct material, direct labour and sales and distribution costs are variable.
• Factory overhead costs and administration costs are fixed.
6.1 Total manufacturing cost

The total manufacturing cost of a product may be calculated by adding the
fixed and variable costs involved in the production process. This is shown in the
following equation:
Total manufacturing cost = fixed costs + variable costs
6.2 Unit cost

As mentioned before, the unit cost of a product is calculated by dividing the total
manufacturing cost by the total number of units produced:
Total manufacturing cost

unit cost of a product = _______________________
354 Chapter 13 • C o S T A C C o u n T I n G A n d m A n u FA C T u R I n G B u S I n E S S E S
Acc GR12 LB.indb 354 6/6/13 6:04:22 PM

As the level of production increases, the variable costs will increase proportionally economies of scale
while the fixed costs remain constant. From this it follows that the unit cost of As more units are produced, constant fixed
a product decreases as the number of units produced increases. This concept is costs are shared over a greater number of
called economies of scale. This is illustrated in Activity 13.3. units, decreasing the price per unit.
Activity 13.3
Wayne’s Racing Kayaks provides you with the following information:

• Selling price per canoe: R3 400
• Fixed costs per month: R23 400
• Variable costs per canoe: R1 450
Required
1. Complete the table below in your exercise book and calculate how many canoes
Wayne has to manufacture every month in order to break even.
No. of units Sales income Fixed costs Variable costs Total manufacturing Profit (Loss) Unit cost/ product
costs
5 17 000 23 400 7 250 30 650 (13 650)
8
10
12
14
20 68 000 23 400 29 000 52 400 15 600
2. What conclusion do you draw with regards to the number of units produced and cost
price/unit?
7. Breakeven analysis
Breakeven analysis is used to determine the number of units of a product that
needs to be produced and sold in order for the income generated from the sales to
equal the costs of manufacturing. At this point, the business will neither make a
profit nor suffer a loss and is said to “break even”. This point is therefore known as
the breakeven point.
The following steps must be followed to calculate the breakeven point.
Step 1: Calculate the total fixed costs.

This is the total fixed cost. This amount will not change if more or less units are produced.
Step 2: Calculate the selling price per unit and the variable cost per unit.
This is NOT the total sales and variable cost, but the COST PER UNIT.
Step 3: Calculate the contribution per unit.

This is the amount per unit that is “contributed” towards covering the total fixed cost.
Step 4: Calculate the breakeven point.

Total fixed  
costs
Breakeven point =  __________________
   
Contribution per unit
Acc GR12 LB.indb 355 6/6/13 6:04:23 PM

Example
We are given the following information about the manufacture and sale of
a product:
• Selling price R1 000 per unit
• Fixed costs R10 500
• Variable cost R700 per unit
Required
Calculate how many units need to be produced to break even.
Solution
Step 1: Total fixed costs = R10 500
Step 2: Selling price per unit = R1 000
Variable cost per unit = R700
Step 3: Contribution per unit = selling price per unit – variable cost per unit
= 1 000 – 700
= R300 per unit
Step 4: Breakeven point   Total fixed  
costs
= _________________
   
 10300
500
= ______  
= 35 units
35 units must be produced to break even.
Activity 13.4
Use the information from Activity 13.3 to calculate the breakeven point, by using the four
steps explained in the example.
Activity 13.5
During April 2019, Checkmate Ltd., manufacturers of chess sets, produced and sold
1 285 units. Christiaan du Toit, the owner, provided you with the following information
for April 2019:
Sales R449 750
Variable costs R257 000
Fixed costs R90 000
Required
1. Calculate the selling price per unit and the variable cost per unit.
2. Calculate the contribution per unit.
3. Calculate the breakeven point.
8. Productivity
In manufacturing it is important that the productivity of the business is continually
monitored and controlled. Productivity is mainly the relationship between input
(hours worked) and output (number of units produced).
If an employee usually works 40 hours a week, the business’s productivity can
be measured as follows:
 160
Week 1: 160 units produced: ___ 40 = 4 : 1 → 4 units produced per hour
 200
Week 2: 200 units produced: ___ 40 = 5 : 1 → 5 units produced per hour
Acc GR12 LB.indb 356 6/6/13 6:04:23 PM

The employee’s productivity has thus increased from 4 units per hour to 5 units
per hour.
A manufacturing business that wants to increase profit must strive to increase
the productivity of their employees. There are different ways of increasing
productivity:
• Set targets that employees must achieve, for example, 5 units per hour. INTERNAL
CONTROL
• Reward employees who reach target.
• Provide favourable working conditions.
• Provide well thought-out production lines.
• Adopt an ethical code that encourages integrity, professionalism and a work
ethic among employees.
Activity 13.6
Rheeder Traders produced 16 400 camp chairs for the year ended 30 September 2018.
The following information was extracted from their books.
Information
Total Per unit
Sales 2 296 000 R140
Variable costs 1 066 000 R65
Fixed costs 1 312 000 R80
Required
1. Calculate the breakeven point for the year ended 30 September 2018.
2. Should the business be satisfied with the number of units currently produced?
Explain.
3. Despite the fact that there was no increase in wages during the year, the direct labour
cost per unit increased from R21 to R30. Give a valid reason for the increase.
Activity 13.7
Rainbow Macs is a business that manufactures raincoats.
Information
During May 2013 Rainbows manufactured and sold 1 000 raincoats at R130 each.
The following was recorded (per 1 000 raincoats):

Direct material costs 37 100
Material for raincoats purchased 32 000
Zips, edging 5 100
Indirect material costs
Thread, needles, cord 900
Labour 64 000
Wages of sewing machine operators 60 000
Salary paid to factory security 4 000
Overheads 2 800
Electricity: factory 600
Rent expense: factory 2 000
Maintenance of sewing machines 400
Acc GR12 LB.indb 357 6/6/13 6:04:23 PM

Required
1. Calculate the prime cost involved in manufacturing raincoats for May 2013.
2. Determine the factory overhead costs for May 2013.
3. Calculate the fixed as well as the variable costs for the month of May 2013.
4. Calculate the total manufacturing costs according to:
a. the prime cost method plus factory overhead costs
b. the cost behaviour method.
5. Calculate the breakeven point. How many raincoats does the business have to
manufacture each month to break even?
6. Calculate the cost per unit/raincoats.
7. What is the profit percentage on cost price that the business makes?
Darling Nkewu manufactures candles from her home for home industries and markets as
an extra income, but she is uncertain whether her businesses profitable. She supplied the
following information for June 2015.
Information
Packaging/decorations 90
Candlewicks 180
Candle wax 1 620
Dyes and fragrances 105
Moulds 50
Electricity 120
Depreciation of stove 20
Wages for cleaner 1 050
Darling makes a standard candle of 250 g, which she decorates with different colours,
fragrances and packaging. She sells her candles at R10 each.
During June 2015 she manufactured and sold 400 candles.
Required
1. Calculate:
a. the prime costs for June 2015
b. the total manufacturing costs for June 2015
c. the unit cost per candle
d. the profit percentage she earned per candle.
2. What recommendations can you make to Darling regarding her business? Take into
account that she has not yet paid herself a salary.
Match the cost in column A with the applicable description in column B. You only need to
write down the number and letter, e.g. 1. A.
Column A Column B
1. Direct material cost A. Manufacturing costs that vary according to
the number of units produced
2. Direct labour cost B. Manufacturing costs that do not vary
according to changing levels of production
Acc GR12 LB.indb 358 6/6/13 6:04:23 PM

Column A Column B
3. Factory overhead costs C. Fuel for the delivery vehicle
4. Selling and distribution cost D. Wood used to produce chairs
5. Administration cost E. Wages paid to the factory workers
6. Fixed cost F. Stationery for the office
7. Variable cost G. Depreciation on factory equipment
(7 × 2 = 14)
9. Accounts in the General Ledger
Manufacturing stock accounts

Raw material stock BALANCE SHEET ACCOUNTS
Work-in-process stock
Assets
Finished goods stock
Liabilities
Consumable stores stock
Equity accounts
Accounts organised for factory, selling

NOMINAL ACCOUNTS
and distribution and administration
Income accounts and expense accounts
COST ACCOUNTS
All nominal accounts consolidated
Direct material cost in five cost accounts
Direct labour cost
Factory overhead cost
Sales and distribution cost
Administration cost
FINAL ACCOUNTS
Trading account / Profit and Loss account
9.1 Manufacturing stock accounts

Imagine the stock accounts in a Manufacturing business as three rooms.
The Raw Material Stock room – The Work-in-Process room The Finished Goods room
where the raw material is kept –the factory where the product – where the finished goods
is made are displayed/stored for the
customers to purchase
The raw material is taken

out of the storeroom and The products completed are
taken to the factory. taken out of the factory and
taken to the display room.
Acc GR12 LB.indb 359 6/6/13 6:04:24 PM

9.2 Labour
Salaries and wages are paid to different employees for different reasons. Not all
wages and salaries have anything to do with the production process. Some forms
of labour account for indirect manufacturing costs, which are dealt with as factory
overhead costs. Some salaries represent operating expenditure and are recovered
from gross profit.
Total salaries and wages paid are debited in the General Ledger
Wages paid to Salaries paid Salaries and wages Salaries and wages
factory workers to workers not paid to people paid to people
directly involved directly involved responsible for the responsible for the
in manufacturing in manufacturing, administration and sale, distribution and
– direct labour – but working at the management of marketing of the
are periodically factory, for example, the business, for product, for example,
transferred from the factory security example, the secretary, the representative,
Salaries and Wages – indirect labour are closed off and are closed off and
account to the Direct – are periodically transferred to the transferred to the
Labour Cost account. It transferred to the Administration Costs Sales and Distribution
is a cost account. Factory overhead costs account at the end of account at the end of
From there it is carried account. the financial year. the financial term.
over to the Work-in- These are regarded as These are regarded as
Process account. period costs. period costs.
9.3 Overheads
When costs are incurred they are noted down in the different accounts, for
example the Water and Electricity account is debited. Factory overhead costs are
therefore noted (and accumulated) in the various expenditure accounts as soon
as they are incurred. That part of the costs allocated for manufacturing is then
periodically transferred to the Factory overhead costs account. The factory overhead
costs are then allocated and transferred from the Factory overhead costs account to
the Work-in-Process account.
Water and electricity paid
Electricity for factory Electricity for office

Factory overhead costs account Administration Costs account
Work-in-Process account Profit and Loss account
Example
Manufacturing accounts in the General Ledger
The information below was taken from the accounting records of Wayne’s
Racing Kayaks, for the year ended 29 February 2020.
Information
Wayne’s Racing Kayaks had the following inventory on hand by the end of the
financial year:
Acc GR12 LB.indb 360 6/6/13 6:04:25 PM

Example continued
2019 2020
Raw material stock (glass fibre, resin, and so on) 34 000 36 800
Consumables on hand (indirect materials such as screws, 3 200 2 150
and so on)
Work-in-process account 18 000 20 000
Finished goods stock 47 080 56 300
The following balances appeared in the General Ledger of Wayne’s

Racing Kayaks on 29 February 2020:
Sales 867 000
Wages paid to factory workers 180 000
Salary paid to factory security 40 800
Salaries paid to office workers 102 400
Skills development levy (factory) 18 000
Unemployment Insurance Fund contributions (factory) 9 000
Rent expense 28 000
Rent expense – factory 21 000
Rent expense – office 7 000
Water and electricity – factory 4 000
Water and electricity – office 2 000
Stationery – office 1 140
Insurance 12 000
Insurance – factory 9 000
Insurance – office 3 000
Telephone – office 13 000
Depreciation 24 000
Depreciation – factory equipment 16 000
Depreciation – delivery vehicle 6 000
Depreciation – office equipment 18 210
Advertising 1 100
Bad debts 3 400
Commission paid to marketer 8 000
Delivery vehicle expenses 12 000
Packaging 16 210
• Direct material (raw material) bought on credit during the year
amounts to R270 000 and raw material bought for cash, R60 000.
• Indirect material was bought for R4 500 in cash.
• During the year raw material to the value of R327 200 and indirect
material to the value of R5 550 was transferred to the factory.
• The value of the finished goods transferred from the factory to the
finished product warehouse was R628 550.
• During the year finished goods to the value of R619 330 was
sold (cost price).
Acc GR12 LB.indb 361 6/6/13 6:04:25 PM

Example continued
Solution

Dr Raw Material Stock B11 Cr
2019 2020
Mar 01 Balance b/d 34 000 00 Feb 29 Raw material issued 327 200 00
2020
Feb 29 Bank 60 000 00 Balance c/d 36 800 00
Creditors control 270 000 00
364 000 00 364 000 00
2020
Dr Work-in-Process Stock B12 Cr

2019 2020
Mar 01 Balance b/d 18 000 00 Feb 29 Finished goods stock 628 550 00
2020
Feb 29 Direct material cost 327 200 00 Balance c/d 20 000 00
Direct labour cost 207 000 00 00
Factory overhead cost 96 350 00 00
648 550 00 648 550 00
2020
Dr Finished Goods Stock B13 Cr

2019 2020
Mar 01 Balance b/d 47 080 00 Feb 29 Cost of sales 619 330 00
2020
Feb 29 Work-in-process stock 628 550 00 Balance c/f 56 300 00
675 630 00 675 630 00
2020
Dr Consumables On Hand B14 Cr

2019 2020
Mar 01 Balance b/d 3 200 00 Feb 29 Indirect material 3 200 00
2020
Feb 29 Indirect material 2 150 00
Nominal accounts
Dr Sales N1 Cr
2020 2020
Feb 29 Trading account 867 000 00 Feb 29 Balance b/d 867 000 00
Acc GR12 LB.indb 362 6/6/13 6:04:26 PM

Example continued
Dr Cost of Sales N2 Cr
2020 2020
Feb 29 Finished goods stock 619 330 00 Feb 29 Trading account b/d 619 330 00
Dr Raw Material Issued N3 Cr

2020 2020
Feb 29 Raw material stock 327 200 00 Feb 29 Direct material cost 327 200 00
Dr Indirect Material N4 Cr
2019 2020
Mar 01 Consumables on hand b/d 3 200 00 Feb 29 Factory overhead cost 5 550 00
2020
Feb 29 Bank 4 500 00 Consumables on hand 2 150 00
7 700 00 7 700 00
Dr Salaries and Wages N5 Cr

2020 2020
Feb 29 Balance b/d 350 200 00 Feb 29 Direct labour cost 180 000 00
Factory overhead cost 40 800 00
Administration cost 102 400 00
350 200 00 350 200 00
Dr Skills Development Levy N6 Cr

2020 2020
Dr Unemployment Insurance Fund Contributions N7 Cr

2020 2020
Dr Rent Expense N8 Cr
2020 2020
Feb 29 Balance b/d 28 000 00 Feb 29 Factory overhead cost 21 000 00
28 000 00 28 000 00
Acc GR12 LB.indb 363 6/6/13 6:04:26 PM

Example
Dr Rates and Taxes N9 Cr
2020 2020
6 000 00 6 000 00
Dr Stationery N10 Cr
2020 2020
Feb 29 Balance b/d 1 140 00 Feb 29 Administration cost 1 140 00
Dr Insurance N11 Cr
2020 2020
12 000 00 12 000 00
Dr Telephone N12 Cr
2020 2020
Dr Depreciation N13 Cr
2020 2020
Sales and distribution cost 6 000 00
24 000 00 24 000 00
Dr Advertising N14 Cr
2020 2020
Dr Bad Debts N15 Cr

2020 2020
Feb 29 Balance b/d 3 400 00 Feb 29 Sales and distribution cost 3 400 00
Dr Commission Paid N16 Cr

2020 2020
Acc GR12 LB.indb 364 6/6/13 6:04:26 PM

Example continued
Dr Delivery Vehicle Expenses N17 Cr

2020 2020
Dr Packaging N18 Cr
2020 2020
Cost accounts
Dr Direct Material Cost C1 Cr
2020 2020
Feb 29 Raw material issued 327 200 00 Feb 29 Work-in-process stock 327 200 00
Dr Direct Labour Cost C2 Cr

2020 2020
Feb 29 Sales and salaries 180 000 00 Feb 29 Work-in-process stock 207 000 00
Skills development levy 18 000 00
Unemployment Insurance Fund
contributions 9 000 00
207 000 00 207 000 00
Dr Factory Overhead Cost C3 Cr

2020 2020
Feb 29 Salaries and wages 40 800 00 Feb 29 Work-in-process stock 96 350 00
Rent expense 21 000 00
Rates and taxes 4 000 00
Insurance 9 000 00
Depreciation 16 000 00
Indirect material 5 550 00
96 350 00 96 350 00
Dr Administration Cost C4 Cr
2020 2020
Feb 29 Salaries and wages 102 400 00 Feb 29 Profit and loss account 130 540 00
Rent expense 7 000 00
Rates and taxes 2 000 00
Stationery 1 140 00
Insurance 3 000 00
Telephone 13 000 00
130 540 00 130 540 00
Acc GR12 LB.indb 365 6/6/13 6:04:27 PM

Example
Dr Sales and Distribution Cost C5 Cr
2020 2020
Feb 29 Packaging 16 210 00 Feb 29 Profit and loss account 46 710 00
Advertising 1 100 00
Bad debts 3 400 00
Commission paid 8 000 00
Delivery vehicle expenses 12 000 00
46 710 00 46 710 00
Final accounts
Dr Trading account F1 Cr
2020 2020
Feb 29 Cost of sales 619 330 00 Feb 29 Sales 867 000 00
Profit and loss account 247 670 00
867 000 00 867 000 00
Dr Profit and Loss account F2 Cr

2020 2020
Feb 29 Administration cost 130 540 00 Feb 29 Trading account 247 670 00
Sales and distribution cost 46 710 00
Capital/appropriation account 70 420 00
247 670 00 247 670 00
The Profit and Loss account is closed to the Capital or Appropriation account, as it
depends on the type of business. For example, if the manufacturing business is
a sole trader, the net profit will be closed off to the Capital account. Should the
business be a partnership, a close corporation or a company, the net profit will be
transferred to the Appropriation account.
Flow diagram of manufacturing ledger accounts
Raw material stock
Starting balance of raw material Direct raw material issued to raw material
Acquisition of raw material issued account
Work-in-process
Starting balance of uncompleted work Total cost of finished goods
Direct material placed in factory
Direct labour in the manufacturing process
Overheads allotted to manufacturing
Finished goods stock
Opening balance of finished goods on hand Cost of finished goods sold
Cost of finished goods transferred from factory
Consumables on hand
Indirect material on hand at beginning of year Indirect material on hand at beginning of year
Indirect material on hand at end of year
Acc GR12 LB.indb 366 6/6/13 6:04:27 PM

Nominal accounts
Sales
Closing transfer to trading account Cash and credit sales for the year
Cost of sales
Cost price of finished goods sold Closing transfer to trading account
Raw materials issued
Raw materials issued from raw material stock Raw material used in manufacturing to direct
account material cost account
Indirect material
Indirect material on hand at beginning of year Indirect material on hand at end of year
Indirect material purchased Closing transfer to factory overhead costs
Wages and salaries
Wages and salaries paid during the year Wages of factory workers to direct labour cost
Salaries of office workers to administration cost
Salaries of sales personnel to sales and
distribution cost
Cost accounts
Direct material costs
Raw material issued Raw material used to Work-in-process account
Direct labour costs
Wages and employer benefits of factory Transfer to Work-in-process account
workers
Factory overhead costs
Indirect material used in manufacturing Total factory overhead costs transferred from
Sundry expenses allotted to factory and Work-in-process account
manufacturing process
Administration costs
Sundry administration expenses Account is closed off and transferred to Profit
and loss account
Sales and distribution costs
Sundry sales and distribution expenses Account is closed off and transferred to Profit
and loss account
Final accounts
Trading account
Cost of sales Sales
Profit and Loss account
Administration cost Trading account
Sales and distribution cost
Capital
Activity 13.9
The information below was taken from the accounting records of Creative Gear CC,
manufacturers of children’s clothes for the year ended 28 February 2018.
Required
Complete the accounts below in the General Ledger and close it properly at the end of
the financial year on 28 February 2018 (the number of lines required appear between
brackets).
Acc GR12 LB.indb 367 6/6/13 6:04:27 PM

Information
Raw material stock (6); Work-in-process account (7); Finished goods stock (5);
Consumables on hand (4)
Nominal accounts
The number in brackets indicates
Sales (2); Cost of sales (2); Raw materials issued (2); Indirect material (5); Salaries and
how many lines to leave open for wages (5); Skills development levies (2); unemployment Insurance Fund contributions (2);
each account. Repairs and maintenance (4); Rent expense (4); Rates and taxes (4); Stationery (2);
Insurance (4); Telephone (2); depreciation (5); Advertising (2); Bad debts (2); Commission
paid (2); Fuel (2); Banking charges (2)
Cost accounts
direct material cost (2); direct labour cost (5); Factory overhead cost (12); Administration
cost (7); Sales and distribution cost (7)
Final accounts
Trading account (4); Profit and loss account (6)
Creative Gear CC had the following inventory on hand by the end of the financial year:
2017 2018
Raw material on hand (material, zips, and so on) 32 500 40 000
Consumables on hand (indirect material) 3 120 3 970
Work-in-process stock 12 600 9 750
Finished goods stock 29 600 25 180
The following balances appeared in the General ledger of Creative Gear CC on

28 February 2018:
Sales 1 122 825
Wages paid to factory workers 289 000
Salaries paid to factory security 42 000
Salaries paid to office workers 92 000
Unemployment Insurance Fund contributions (factory) 4 120
Maintenance and reparation cost 13 000
Repairs – sewing machines 11 500
Repairs – delivery vehicle 1 500
Rent expense 28 000
Factory 20 000
Office 8 000
Water and electricity – factory 5 200
Water and electricity – office 2 600
Stationery – office 960
Insurance 12 000
Insurance – factory 9 000
Insurance – office 3 000
Telephone – office 22 000
Acc GR12 LB.indb 368 6/6/13 6:04:27 PM

Depreciation 25 000
Factory equipment 10 000
Delivery vehicle 12 000
Office equipment 3 000
Advertising 1 024
Bad debts 1 230
Commission paid to marketer 7 000
Vehicle expenses: Fuel – delivery vehicle 9 800
Bank charges 14 230
• Raw material bought on credit during the year amounts to R156 000 and raw
material bought in cash amounts to R189 600.
• Indirect material was bought for R10 320 in cash.
• During the year raw material to the value of R338 100 was transferred to the
factory, a well as indirect material worth R9 470.
• The value of the finished goods transferred from the factory to the warehouse
for finished goods was R744 130.
• During the year the business sold finished goods to the value of R748 550
(cost price).
10. Reporting on cost information

The financial statements of a manufacturing business consist of a Production Cost
Statement, Income Statement and Balance Sheet. In Grade 12 we are only going to
look at the Production Cost Statement and the short Income Statement.
The purpose of the Production Cost Statement is to calculate the cost of
production of the finished goods produced during the financial year. The cost price
of these finished goods sold is then calculated and then carried over to the Income
Statement.
The purpose of the Income Statement is then to calculate first the gross profit
by using sales minus Cost of sales, and then to deduct the period costs – the sales
and distribution costs and administration costs – in order to calculate net profit.
Production Cost Statement

Cost of production of finished goods is calculated Income Statement
net profit for the year is calculated
direct material cost

Plus Sales
direct labour cost Less
Plus Cost of finished goods sold
Factory overhead costs Less
Plus Sales and distribution cost
Work in process at beginning of year Less
Less Administration cost:
Work in process at the end of the year
Net profit for the year

Cost of production of finished goods
Acc GR12 LB.indb 369 6/6/13 6:04:28 PM

Name of manufacturer
PRODUCTION COST STATEMENT FOR THE YEAR ENDED MMM YY
Note R All the information in
Direct material cost 1 XXX the Production Cost
Statement can be found
Direct labour cost 2 XXX in the Work-in-Process
Prime cost XXX account.
Factory overhead costs 3 XXX
Total cost of production XXX The value of the goods
ADD: Work-in-process at beginning of year XXX not completed at the
end of the year
XXX
LESS: Work-in-process at end of the year (XXX) The cost price of all the
Cost of production of finished goods XXX goods completed during
the financial year
NOTES TO THE PRODUCTION COST STATEMENT
1. DIRECT (RAW) MATERIAL COST R
This is the same principle
Balance at the beginning of year XXX
as the periodic stock
Purchases XXX system, where we say
Carriage on purchases XXX opening stock plus
purchases minus closing
XXX stock gives you the raw
LESS: Balance end of the year (XXX) materials issued to the
factory (variable costs).
Raw materials issued XXX
2. DIRECT LABOUR COST R

Direct wages XXX This is only for the
Pension, medical & UIF contributions XXX employees who work
directly in the production
XXX process (variable costs).
3. FACTORY OVERHEAD COST R Costs involved in

manufacturing the
Indirect wages XXX product, but which
Pension, medical aid and UIF contributions XXX are not directly linked
(fixed costs)
Factory rent, water & electricity etc. XXX
Depreciation on factory equipment XXX
Indirect material XXX
XXX
MANUFACTURING BUSINESS
INCOME STATEMENT FOR THE YEAR ENDED MMM YY
The manager must make
Note R sure the percentage
Sales XXX gross profit added to
the cost of the product
LESS: Cost of sales 4 (XXX) is enough to cover the
Gross profit XXX selling and distribution
Selling and distribution cost 5 (XXX) and administration cost.
Administration cost 6 (XXX)

Net profit XXX
Acc GR12 LB.indb 370 6/6/13 6:04:28 PM

Notes to the Income Statement
4. COST OF SALES R
Balance of finished goods beginning of year XXX This amount can be
ADD: Cost of production of finished goods XXX found on the Production
LESS: Balance of finished goods at the end of year (XXX) Cost Statement.
Cost of finished goods sold XXX
5. SELLING AND DISTRIBUTION COST R All costs involved in

marketing, selling and
Commission on sales XXX
distributing the product
Advertising XXX (variable cost)
Bad debts XXX
Depreciation on delivery vehicle XXX
… XXX
XXX
6. ADMINISTRATION COST R All costs related to the

administration of the
Office salaries XXX
business (fixed cost)
Pension, medical and UIF contributions XXX
Depreciation on office equipment XXX
Stationery XXX
… XXX
XXX
Example
Required
1. Use the information for Wayne’s Racing Kayaks below to complete the
statements at the end of the financial year.
2. Calculate the gross mark-up on finished goods sold.
Information
Wayne’s Racing Kayaks
PRODUCTION COST STATEMENT FOR THE YEAR ENDED 29 FEBRUARY 2020
Note R
Direct material cost 1 327 200
Direct labour cost 2 207 000
Prime cost 534 200
Total cost of production 630 550
ADD: Work in process at beginning of year 18 000
648 550
LESS: Work in process at end of year (20 000)
Cost of production of finished goods 628 550
Acc GR12 LB.indb 371 6/6/13 6:04:29 PM

Example continued
Solution
Note R
Sales 867 000
Less: Cost of sales (619 330)
Selling and distribution cost 4 (46 710)
Administration cost 5 (130 540)
Net profit 70 420

NOTES TO THE PRODUCTION COST STATEMENT AND INCOME STATEMENT FOR THE
YEAR ENDED 29 FEBRUARY 2020
1. DIRECT (RAW) MATERIALS COST
Purchases (60 000 + 270 000) 330 000
364 000
Less: Balance and the end of the year (36 800)
Direct materials cost 327 200
2. DIRECT LABOUR COST

Factory wages 180 000
Skills development levy 18 000
Unemployment Insurance Fund contributions 9 000
Direct labour cost 207 000
3. FACTORY OVERHEAD COST

Indirect material (3 200 + 4 500 – 2 150) 5 550
Indirect labour 40 800
Rent expense 21 000
Insurance 9 000
Depreciation on factory equipment 16 000
96 350
4. COST OF FINISHED GOODS SOLD

Starting stock: Finished good 47 080
Plus: Cost of finished goods manufactured during the year 628 550
Less: Closing balance of finished goods (56 300)
Cost of finished goods sold 619 330
5. SELLING AND DISTRIBUTION COST

Advertising 1 100
Depreciation: Delivery vehicle 6 000
Bad debts 3 400
Commission 8 000
Vehicle expenses 12 000
30 500
Acc GR12 LB.indb 372 6/6/13 6:04:29 PM

Example continued
6. ADMINISTRATION COST
Rent – office 7 000
Office salaries 102 400
Water and electricity: Office 2 000
Stationery 1 140
Insurance 3 000
Telephone 13 000
Depreciation on office equipment 2 000
130 540
Activity 13.10
Use the information for Creative Gear CC in Activity 13.9 to complete the Production Cost
Statement and Income Statement on 28 February 2018.
Activity 13.11
The information below was taken from the accounting records of Esethu Manufacturers,
manufacturers of ladies’ handbags.
Required
Prepare the Production Cost Statement and notes.
Information
Balances on 1 March 2018
Raw material stock 67 224
Consumables on hand (indirect material) 1 590
Work-in-process account 11 335
Finished goods 39 784
Summary of transactions and other information for the year ending 28 February 2019
Raw materials purchased in cash 389 200
Raw materials purchased on credit 79 332
Raw materials issued for production 496 200
Wages paid: Direct labour 338 780
Consumables purchased for production 70 890
Factory rent paid 48 000
Factory insurance paid 16 000
Factory maintenance paid 32 500
Depreciation on factory 28 600
Cost of sale of finished goods 1 143 220
Sale of finished goods 1 829 152
Cost price of finished goods 1 136 079
Consumables on hand (indirect material), 28 February 2019 1 056
Acc GR12 LB.indb 373 6/6/13 6:04:29 PM

Activity 13.12
Required
Use the information below for Bounce Manufacturers, manufacturers of tennis balls, to
prepare the Production Cost Statement, and Income Statement, as well as the notes for
the year ending 28 February 2017.
Information
Work-in-process account 7 200
Finished goods on hand 16 520
Indirect material 3 700
Summary of transactions for the year ending 28 February 2017

Purchase of raw material/material in cash 252 000
Purchase of raw material/material on credit 159 200
Carriage on purchase of raw material paid by cheque 9 060
Raw material issued for production 409 400
Wages: Direct labour 229 000
Wages: Indirect labour 14 730
Unemployment Insurance Fund Contribution – direct wages 2 290
Salaries: Factory security 48 000
Salaries: Sales and distribution staff 86 000
Salaries: Administrative staff 138 000
Insurance: Factory 8 200
Insurance: Administrative offices 4 800
Printing and stationery: Administration 1 700
Water and electricity: Factory 6 050
Water and electricity: Offices 1 250
Depreciation on factory equipment 15 000
Factory maintenance 10 200
Bad debts 1 200
Commission paid on sales 8 700
Sundry administrative expenses 8 400
Indirect material purchased and paid per cheque 18 240
Rent expense: Factory 36 000
Rent expense: Administrative offices 19 200
Cost of finished goods manufactured during year 796 900
Sales: Finished goods (mark-up of 33 _13 % on cost price) 1 060 000
Year-end inventory on 28 February 2017

Raw material stock ?
Work-in-process account ?
Finished goods on hand ?
Acc GR12 LB.indb 374 6/6/13 6:04:29 PM

Activity 13.13
Required
Use the information on Tshiwula Manufacturers to prepare the Production Cost Statement
and Income Statement, as well as notes, for the year ending 28 February 2018.
Information
Extract from the Balance Sheet on 28 February 2018:
Factory and machinery R400 000
Loan from KL Bank (16% per year) R200 000
Office equipment R25 000

Raw material stock purchased
Cash 500 000
Credit 90 000
Carriage on raw materials purchased
Cash 25 000
Credit 4 500
Salaries
Factory manager 90 000
Administrative staff 196 000
Sales staff 172 000
Skills development levy: Factory workers 3 600
Advertising 18 200
Insurance
Factory 14 800
Administration department 5 200
Stationery 1 440
Depreciation
Factory and machinery 37 000
Office equipment 2 500
Maintenance of factory/machinery 4 600
Bad debts 1 800
Sundry administrative expenses 14 300
Rent expenses 72 000
Sales: Finished goods (mark-up of 50% on cost price) 1 800 000
Direct material/raw materials issued for production 621 500
Finished goods produced during the year 1 216 000
80% of the rented property is occupied by the factory. Rent expense and water and
electricity must be divided between the factory and the administration department
according to the amount of floor space occupied.
Acc GR12 LB.indb 375 6/6/13 6:04:29 PM

The opening balances in the various stock accounts on 1 March 2017 were as follows:
• Raw material stock R64 000
• Work-in-process R16 200
• Finished goods on hand R110 600
11. Analysing financial figures

MANUFACTURING BUSINESS Direct material cost
per unit
PRODUCTION COST STATEMENT FOR THE YEAR ENDED MM YY Direct material cost
=  ___________________
     
Note R
Direct material cost (DMC) 1 XXX Direct labour cost
Direct labour cost (DLC) 2 XXX per unit
Direct cost per unit Direct labour cost
Prime cost XXX =  ___________________
     
Prime cost
=  ____________
  
Number of units Factory overhead cost (FOC) 3 XXX
Total cost of production XXX Factory overhead
costs per unit
PLUS Work-in-process at beginning of year XXX
XXX =  ___________________
  
  
LESS Work-in-process at end of the year (XXX)

Cost of production of finished goods XXX
Cost of finished
goods per unit
Cost of production of finished goods
=  __________________________
      

MANUFACTURING BUSINESS
Selling price per unit
INCOME STATEMENT FOR THE YEAR ENDED MM YYY Sales for the year
= _______________
 Number of units
    
sold
Note R
Sales XXX
Gross profit on finished
LESS Cost of sales 4 (XXX) goods sold
Gross profit XXX Gross profit
=  _________
Cost of sales
 100
× ___1

Selling and distribution cost(SDC) 5 (XXX)
Administration cost (AC) 6 (XXX) Selling and distribution
cost per unit
Net profit XXX
Selling and distribution cost
=  ____________________
  
  
Number of units sold

Administration cost
per unit
Administration cost
=  _______________
  
  
Number of units sold Contribution per unit
= Selling price per unit – Variable cost per unit
Variable cost per unit
= DMC/unit + DLC/unit + SDC/unit
Breakeven point
Total fixed  
costs
=  __________________
  
Total fixed costs
= Factory overhead costs +
Administration costs
Acc GR12 LB.indb 376 6/6/13 6:04:29 PM

11.1 Analysing these figures
Direct material cost per unit indicates the cost for the material of one unit. If
the prices from suppliers increase, this figure will increase. If the cutting of raw
material is carefully planned and there is less cut-off (waste) material, this figure
will decrease.
Direct labour cost per unit indicates whether the manufacturing of the
product is labour-intensive or not. It is also an indication of the productivity
of employees.
Direct cost per unit indicates how efficient the manufacturing process is.
This should not increase too much from one year to the next. A business will first
look at this to determine prices for quotations.
Cost of finished goods per unit will also decrease if the factory is more
productive. This is the total cost per unit.
Factory overhead costs per unit will decrease if the business can manage to
produce more units, as factory overhead costs are a fixed cost.
Percentage gross profit on cost of sales shows how much profit the business
made per item. This should be enough to cover all the other expenses like sales and
distribution costs and administration costs.
Selling price per unit is the average price at which the units were sold during
the year.
Selling and distribution cost per unit should stay the same even if more sales
take place, as this is a variable cost.
Administration cost per unit will decrease if more sales take place, as it is
a fixed cost. This concept is called economies of scale, i.e. as more is produced,
constant administration costs are shared over a greater number of units.
Activity 13.14
Complete the following table.

Cost per unit / Indicator How to calculate How will you comment
on your answer?
Direct material cost per
unit (DMC/unit)
Direct labour cost per unit
(DLC/unit)
Direct cost per unit
Factory overhead costs per
unit (FOC/unit)
Cost of finished goods per
unit
Percentage gross profit on
cost of sales
Selling price per unit
Selling and distribution
cost per unit (SDC/unit)
Administration cost per
unit (AC/unit)
Total fixed cost
Variable cost per unit
Breakeven point
Acc GR12 LB.indb 377 6/6/13 6:04:29 PM

Example
Calculation and interpretation of statements of Wayne’s Racing Kayaks
The selling price per canoe is R3 400. During the financial year 255 canoes were
sold. A total of 260 canoes were manufactured during the year.
Required
Use the information from the statements of Wayne’s Racing Kayaks for the year
ending 29 February 2020 on page 372 to calculate the following:
1. Direct cost of raw material per unit
2. Direct labour cost per unit
3. Total direct cost per unit
4. Factory overhead costs per unit
5. Production cost of finished goods per unit
6. Sales and distribution cost per unit
7. Administration cost per unit
8. Variable cost per unit
9. Fixed cost
10. Contribution per unit
11. Breakeven point
Solution
direct material
1. Direct material cost per unit =  _____________________
   cost
   
327 200
=  ______
260 
= 1 258,46
direct labour
2. Direct labour cost per unit =  _____________________
   cost
   
207 000
=  ______
260 
= 796,15
prime cost
3. Total direct (prime) cost per unit =  _____________________
      
534 200
=  ______
260 
= 2 054,62
4. Factory overhead costs per unit =  _____________________
      
96 350
=  ______
260 
= 370,58
cost of production of finished goods
5. Cost of finished goods per unit = _____________________________
          
628
______550
=   260 
= 2 417,50
sales and distribution
6. Sales and distribution costs per unit =  _____________________
  
  
cost
 
number of units sold
46 710
=  ______
255 
= 183,18
administration
7. Administration cost per unit =  _________________   cost
   
number of units sold
130 540
=  ______
255 
= 511,92
Acc GR12 LB.indb 378 6/6/13 6:04:29 PM

Example continued
= DMC/unit + DLL/unit + SDC/unit

= 1 258,46 + 796,15 + 183,18
= 2 237,79
9. Fixed costs
= Factory overhead costs + administration costs
= 96 350 + 130 540
= 226 890
= selling price per unit less total variable costs per unit
= 3 400 – 2 237,79
= 1 162,21
  total fixed
11. Breakeven point = _________________
   cost
   
contribution per unit
226 890
=  _______
1 162,21 
= 195 units
Activity 13.15
Happy Pets CC is a manufacturing business that manufactures bowls for pets. These bowls
carry enough food to feed a pet for a week. The selling price per unit is R200. During
the year ending 29 February 2012, 12 000 units were sold. A total of 12 307 units were
manufactured during the year.
Required
Use the information taken from the statements of Happy Pets CC for the year ending
29 February 2012 to calculate the following:
1. Direct (raw) material cost per unit. In 2011 the Direct material cost per unit was R65.
Give possible reasons for the change.
2. Direct labour cost per unit. In 2011 the Direct labour cost/unit was R58. What can be
reasons for the change?
3. Total direct cost per unit
4. Factory overhead costs cost per unit
5. Cost of production of finished goods per unit
6. Sales and distribution cost per unit
7. Administration cost per unit
9. Total fixed costs
11. Breakeven point
Acc GR12 LB.indb 379 6/6/13 6:04:29 PM

Information
Happy Pets CC
PRODUCTION COST STATEMENT FOR THE YEAR ENDED 29 FEBRUARY 2012
Note R
Direct material cost 1 763 950
Direct labour cost 2 770 000
Prime cost 1 533 950
Total cost of production 1 600 700
ADD: Work in process at beginning of year 11 200
1 611 900
LESS: Work in process at end of year (11 990)
Cost of production of finished goods 1 599 910

Note R
Sales 2 400 000
LESS: Cost of sales (1 560 000)
Selling and distribution cost 4 (68 900)
Administration cost 5 (330 400)
Net profit 440 700
Activity 13.16
Mokhele Manufacturers manufactures remote-controlled toy cars. The manufacturing

division occupies half the building, while the other half is occupied by administrative and
sales staff.
Required
1. Use the information on the next page to prepare the following on 28 February 2014,
the end of the financial year:
a. Production Cost Statement
b. Income Statement with notes
a. The cost of finished goods per unit if 15 000 cars were manufactured during the
year
b. The variable costs per unit
c. The contribution per unit, presuming the cars were sold for R60 each
d. The total fixed costs
e. the breakeven point.
Acc GR12 LB.indb 380 6/6/13 6:04:30 PM

Information
Office equipment at cost price 18 000
Factory at cost price 210 000
Vehicle at cost price 88 000
Inventory on hand
Work-in-process 17 720
Consumable stores
Indirect raw materials 6 400
Accumulated depreciation on office equipment 8 200
Accumulated depreciation on factory 89 000

Office stationery purchased 2 900
Material/raw materials purchased 272 000
Indirect material purchased 13 280
Carriage on purchase of raw materials 1 300
Customs duties on raw materials 18 100
Sales 900 000
Advertising 9 800
Vehicle maintenance costs 14 860
Direct wages 138 200
Unemployment Insurance Fund contribution: Factory 1 300
Salaries: Factory security 58 900
Sales staff 66 000
Insurance 8 960
Sundry factory expenses 8 260
• Water and electricity must be divided between the factory and the administrative
department at a 3 : 1 ratio.
• Expenses with regards to rates and taxes and insurance must be divided equally
between the factory and the administrative department.
• The vehicle is used to transport raw materials to the factory and to deliver finished
goods to customers. All the expenses have to be divided between the manufacturing
division and the sales division.
• Raw materials costing R1 300 were sent back to the supplier, but the transaction has
not been recorded yet.
• Depreciation must be calculated as follows:
Office equipment at 10% of the cost price
Factory at 20% per year on the adjusted balance
Vehicles at 10% per year on the carrying value
• Inventory on hand on 28 February 2014:
Raw material stock R69 740
Work-in-process R13 740
Finished goods on hand R81 544
Indirect material R3 600
Acc GR12 LB.indb 381 6/6/13 6:04:30 PM

Activity 13.17
The financial year of Jenkins Manufacturers Ltd. ends annually on the last day of February.
Besides the manufacturing department, the business also has a sales and administrative
department.
Required
1. Complete a Production Cost Statement for the period ending 28 February 2015, as
well as the following notes:
Direct labour costs
Cost of finished goods sold
2. Complete the following calculations to the nearest cent:
a. Direct material costs per unit of a finished product
b. In 2014 the DMC/unit was R25. What suggestions will you make to the owner?
c. Total production cost per unit of a finished product
d. Gross profit for the year
e. The mark-up earned on the cost price.
f. What will happen to the profit-margin if the business manages to produce more
units, but the fixed costs stay the same?
Information
Balances 01/03/2014 28/02/2015
Raw material stock 43 890 54 730
Finished goods on hand 60 720 65 136
Consumable stores on hand (indirect material) 5 879 6 229

Credit transactions
Purchases: Raw materials 333 866
Cash payments
Carriage on purchases 11 322
Salaries: Sales staff 175 752
Factory security 86 700
Purchases: Stationery 5 466
Rent paid: Shop 24 510
Factory buildings 76 400
Maintenance: Shop 14 500
Factory 33 870
Sundry expenses: Factory 6 822
Sales costs (excluding salaries) 35 220
Administrative expenses (excluding salaries) 44 500
Cash receipts
Sales of finished goods 1 281 818
Depreciation: office and shop equipment R18 960
Depreciation: factory R22 400
During the year 10 000 units were completed, and 9 952 units were sold.
Acc GR12 LB.indb 382 6/6/13 6:04:30 PM

Activity 13.18
Required
Use the information, notes and adjustments below, as taken from the books of Malan
Manufacturers, to do the following:
1. Prepare a Production Cost Statement for the period ending 29 February 2016,
together with the following notes:
Direct labour costs
Cost of finished goods sold
a. Direct material costs per unit
b. Direct labour costs per unit
c. Cost price of finished goods sold
d. Sales and distribution costs per unit
3. Is the manufactured product labour-intensive or not?
4. Were enough units manufactured for the business to show a net profit, if the selling
price per unit was R12? (Hint: Calculate the breakeven point.)
5. In the previous year 180 000 units were sold and the sales and distribution cost
amounted to R126 000. It is considerably less than this year. Should the owner be
concerned?
Information
Opening balances on 1 March 2018
Work-in-process stock 44 000
Consumable stores stock 1 200
Factory and equipment (cost price) 900 000
Accumulated depreciation on factory and equipment 180 000

Purchase of raw materials 590 000
Carriage on purchase of raw materials 9 000
Purchase of indirect material 17 200
Purchase of cleaning products (administrative) 2 600
Purchase of factory equipment (1 September 2018) 50 000
Production wages 200 000
Unemployment Insurance Fund contribution (factory) 2 000
Salaries: Factory staff 140 000
Salaries: Sales staff 100 000
Sundry expenses: Factory 74 000
Administration costs 31 500
Maintenance costs: Factory 14 880
Total sales and distribution costs 145 200
Total administration costs 320 800
Acc GR12 LB.indb 383 6/6/13 6:04:30 PM

Notes and adjustments
• The balance of consumables on 1 March 2018, included the following:
Consumable stores (administrative) R200
• No entry has been made for R650 with regards to Speedy Transport for the transport
of raw materials to the factory.
• A calculation error was made during the physical stocktaking of raw material that has
not yet been corrected on the inventory statements:
300 units of 5c each were erroneously calculated as having a value of 50c each
(see next bullet).
• Inventory on hand according to physical stocktaking on 28 February 2019:
Raw materials R62 785
Work-in-process R36 000
Consumable stores (administrative) R420
Finished goods R57 000
• The following information appears on the wages statement with regards to
production wages for the last week of February 2019:
Employees
Gross wages R5 800
Deductions
Unemployment Insurance Fund R58
Medical fund R300
PAYE R522
Net wages R4 920
• The employer matches contributions to the Unemployment Insurance Fund on a
rand-for-rand basis.
• The employer contributes 1% of the gross wage to the Skills Development Levy.
• No entry with regards to any of the above was made.
• 85% of all water and electricity was used by the manufacturing division.
• Depreciation on the factory and equipment has to be calculated at 10% per year on
the adjusted balance. Apart from the purchases on 1 September 2018, there were no
other transactions with regard to the factory and equipment during the year.
• During the year 210 000 identical units were manufactured, and 207 615 units were sold.
Happy Hiker is a business that manufactures backpacks for hikers. Their financial year
ends on 28 February. During the financial year ending 28 February 2017, 3 300 backpacks
were manufactured. The owner of Happy Hiker has approached you to help determine
whether his business is operating on an efficient basis.
Required
1. Use the information provided to prepare the following on 28 February 2017, the end
of the financial year:
1.1 Production Cost Statement
1.2 Income Statement, with notes, for the year ending 28 February 2017. [54]
2. Calculate the cost of finished goods per unit if 3 300 backpacks were manufactured
during the year. [3]
3. Calculate the variable costs per unit. [5]
4. Calculate the contribution per unit if the backpacks were sold at R600 each. [3]
5. Calculate the total fixed costs. [3]
Acc GR12 LB.indb 384 6/6/13 6:04:30 PM

6. Calculate the breakeven point. [3]
7. Calculate the profit margin on the cost price per backpack. [3]
8. The following figures with regard to the previous financial year were given.
Give advice to the owner. [6]
2016
Total Per unit
Direct material cost R448 000 R160
Direct labour cost R336 000 R120
Factory overhead costs R338 800 R121
Units produced and sold 2 800
Information
Balance 01/03/2016 28/02/2017
Raw material stock 25 000 ?
Finished goods on hand 67 200 69 600
Consumable stores on hand: indirect material 1 600 1 820
Summary of transactions and other information for the year ending 28 February 2017
Raw material stock purchased 588 000
Indirect material purchased 29 400
Carriage paid: Raw material stock 8 900
Carriage paid: Indirect material 1 350
Customs duties: Raw material stock 12 500
Raw materials issued for production 592 000
Wages paid: Direct labour 360 000
Wages paid: Indirect labour 64 000
Salaries: factory 120 000
Salaries: Sales and distribution staff 110 000
Unemployment Insurance Fund contribution: Direct labour 3 870
Depreciation on factory 46 000
Depreciation on delivery vehicle 4 600
Rent of building 96 000
Insurance 24 000
Stationery 3 400
Advertising 18 400
Sales 1 976 400
• Raw material stock was on hand on 28 February 2017.
• Rent and insurance is calculated according to floor space occupied.
The premises occupy 2 000 m2, and are utilised as follows:
Factor 1 500 m2
Administrative department 200 m2
Sales department 300 m2
• The factory consumes 80% of all water and electricity.
Acc GR12 LB.indb 385 6/6/13 6:04:30 PM

12. Ethical issues relating to manufacturing
12.1 Unethical practices by manufacturers
KING CODE The King Code emphasises the need for businesses to operate in a sustainable
manner, in which economic, environmental and social considerations are
integrated into decision making. This certainly applies to the manufacturing
industry, where sustainable solutions and efficient eco-friendly processes need to
be developed and maintained in order to preserve scarce resources and protect
the environment.
The manufacturing industry can be a very competitive environment in which
profit-maximising behaviour frequently triumphs over ethical and social concerns.
Such behaviour often results in manufacturers making unethical choices in their
attempt to minimise manufacturing costs. Manufacturing costs can be reduced
in an ethical manner by implementing more efficient manufacturing processes,
sourcing cheaper raw materials or establishing tighter internal controls. However,
there are unfortunately still many manufacturers who choose to reduce cost by using
unethical, unsustainable and often illegal practices. Some of these are explained
below.
Unethical labour practices
• Operating or using sweatshops, which are small factories where employees are
made to work very hard, in poor conditions, for very low wages
• Using child labour
• Non-compliance with health and safety regulations in factories
Manufacturing and supplying poor quality finished products:
• Using cheap low-grade raw materials in production in order to reduce
material costs
• Using raw materials that have passed their sell-by date
• Taking short-cuts in the manufacturing processes in order to speed up
production
• Allowing sub-standard finished products to pass through the quality control
process
• Supplying poorly made, aged or out-dated finished products
Practices that have a destructive impact on the environment:
• Non-compliance with environmental regulations
• Obliteration or depletion of scarce resources
• Spillages and leaks of hazardous material
• Illegal disposal of waste
• Various other forms of pollution
Manufacturing of potentially harmful products:
• Producing goods without conducting adequate safety testing
• Producing unsafe goods
• Manufacturing addictive products, for example tobacco (cigarettes)
• Manufacturing weapons
Cruelty to animals:
• Using animals in product testing
• Intensive farming
Acc GR12 LB.indb 386 6/6/13 6:04:30 PM

Other unethical practices relating to the manufacturing sector:
• Price-fixing, when manufacturers of similar products get together and conspire
to sell their products at inflated prices
• Offering bribes to secure contracts or tenders
• Manufacturing for and trading with governments that abuse human rights.
The harsh reality is that usually the moral and ethical way of doing things is often
also the more expensive way. This makes it difficult for honest manufacturers to
compete with unethical manufacturers in terms of price. This will often prejudice
the respectable manufacturer, since retailers look to source their supplies as
cheaply as possible.
12.2 Accountability and transparency

There is a growing demand for retailers to hold the manufacturers with whom
they trade more accountable for their actions. Retailers are now expected to
perform a thorough research into the conduct of their manufacturers and
should insist that they operate in a responsible, ethical and transparent manner.
If a retailer suspects or has knowledge of a manufacturer acting unethically or
unlawfully, then the retailer should cease doing business with that manufacturer
and should report them to the relevant authorities. The media and various
watchdog organisations play a vital role in exposing manufacturers who transgress,
but it is ultimately up to the consumer to apply pressure on these manufacturers
by boycotting their products.
12.3 Unethical behaviour of employees

Due to the nature of their operations, manufacturing businesses are also
particularly vulnerable to unethical and fraudulent behaviour from employees,
such as theft and fraud. It often difficult for a manufacturer to adequately safeguard
and control the raw materials and finished goods that are continually flowing in
and out of production. This creates opportunities for employees working in the
production line and storage areas to steal goods from the manufacturer. These
crimes typically range from the petty theft of raw materials to elaborate fraudulent
schemes in which finished goods worth thousands of rand are stolen.
12.4 Supporting local manufacturers

The manufacturing industry in South Africa plays a vital role in creating jobs for
a vast number of people in our country. This industry also helps our economy to
grow and is a significant source of government revenue. It is therefore extremely
important to support our manufacturers by buying locally produced products
wherever possible. Retailers also have a social duty to attempt to source their
products from local manufacturers before looking overseas.
Acc GR12 LB.indb 387 6/6/13 6:04:30 PM

Activity 13.19
Work in groups of four. Read through the article about the Proudly South African
campaign and then discuss, in groups of 4, why it is important to support local products.
Proudly South African is the “buy local” campaign launched in 2001 by

government, organised business, organised labour and community
organisations (the constituencies represented in the national Economic
development and labour Council – nedlac) to boost job creation and pride in
“local” by promoting South African companies and their ‘home-grown’ products and
services.
Buying South African stimulates an increased demand for locally-produced

products and services. This translates into the safeguarding of existing employment
opportunities, economic growth, and the creation of more quality employment
opportunities in our country.
By buying Proudly South African, both consumers and businesses are making a
personal contribution to nation-building. Consumers get an assurance of quality
because only quality products carry the Proudly South African mark, while members
of the Campaign are furthermore committed to an uplifting ethos and socially
responsible business practices which are reflected in the membership criteria. In this
manner the Campaign represents and stimulates the creation of a virtuous circle
which benefits all.
membership is not restricted to a particular type of business or organisation. Any

business or institution, whether it renders a professional service or is a manufacturing
business; a public entity, sports body, school, tertiary institution, government
department, municipality, nGo, town or city or even an individual, may be eligible
to join the Campaign, provided that they support the Campaign’s overall aims and
objectives and meet the Campaign’s membership criteria.
The qualifying criteria for Proudly SA membership are:

Local Content
At least 50% of the cost of production must be incurred in
South Africa and there must be “substantial transformation” of
any imported materials.
High Quality Product

The product or service must be of a proven high quality.
Fair Labour Practice

The business must comply with labour legislation and adhere
to fair labour practices
Environmental Standards
The business must be environmentally responsible and
adhere to production processes that are environmentally
friendly and acceptable.
Source: Proudlysa.co.za [Accessed march 2012]
Acc GR12 LB.indb 388 6/6/13 6:04:32 PM

Case study 13.1
Read the following article, which appeared on the news24 website, and answer the
questions that follow.
SOLAR – LOCAL IS LEKKER MINISTER SAYS

Parliament – only solar water heater suppliers who "localise" their products will be
able to participate in government's installation programme, Energy minister dipuo
Peters said on Thursday.
opening debate in Parliament on her department's 2012 budget, she said that while
there had been good progress with the solar water heater programme, most of the
systems installed – particularly the low-pressure type – were imported.
"This is clearly unsustainable, and the time has arrived for us to intervene if we are
to create local job opportunities. I have therefore decided that from this year, the
solar water heater programme will work on a different model. only those suppliers
who commit to localise their products will be able to participate in the government
budget subsidy programme," she said.
– SAPA
Source: http://www.news24.com/SciTech/news/Solar-local-is-lekker-minister-says-20120517
Questions
1. What does minister Peters mean by saying suppliers must “localise” their products?
2. Where, according to the article, do most of the solar water heater systems that are
installed in South Africa come from?
3. Why does minister Peters feel that the current situation is unsustainable?
Explain your answer.
4. What benefit is government offering to suppliers who commit to localise their
products (solar water heater)?
5. Why has government established the solar water heater programme?
6. Briefly explain why this programme needs to be included in the government budget.
Case study 13.2
Read the extract from an article from www.compcom.co.za and answer the questions that
follow.
MEDIA RELEASE
10 november 2011
Apollo Tyres settles its price fixing case with a R45 million fine
The Competition Commission has entered into a settlement agreement with Apollo
Tyres South Africa (“Apollo”), formerly dunlop, in which Apollo admits that it took
part in the tyre manufacturers’ cartel. The cartel involved the main tyre manufacturers
in agreeing on pricing and price increases, known among them as “coffee table talks”.
Apollo Tyres has agreed to pay a penalty of R45 million which represents 4,75% of its
2008 total turnover and admits that it was involved in price fixing conduct.
Acc GR12 LB.indb 389 6/6/13 6:04:33 PM

The agreement follows the Commission’s referral on 6 September 2010 of the findings
of its investigation against the South African Tyre manufacturers Conference (Pty) ltd.
(“SATmC”) and four local tyre manufacturers and suppliers namely, Apollo, Goodyear
South Africa (Pty) ltd., Continental Tyre South Africa (Pty) ltd. and Bridgestone
South Africa (Pty) ltd. (“Bridgestone”) to the Competition Tribunal for adjudication.
Bridgestone was granted conditional immunity by the Commission following its
application for corporate leniency and corporation pursuant thereto.
The Commission initiated this case following a complaint lodged by a fleet owner,
alleging that the local tyre manufacturers simultaneously adjusted their prices
around the same time and within the same parameters. This was followed by a search
and seizure operation on the premises of Bridgestone, Apollo and SATmC on 4 April
2008. Subsequently, Bridgestone applied for and was granted conditional immunity
from prosecution.
The Commission’s investigation revealed that the cartel operated during the period
1999 to at least 2007. The tyre manufacturers agreed on price increases, timing of
price increases and implementation thereof.
The cartel concerned the manufacture and supply of passenger tyres, light truck/
commercial tyres, trucks and bus tyres, off the road tyres, agricultural tyres and
earthmover tyres in South Africa. The main customers of these products are tyre dealers
who purchase tyres for resale to consumers, vehicle manufacturers who purchase tyres
for new vehicles models and the government which procures tyres for state owned
vehicles and fleets through a tender process managed by the State Tender Board.
The Commission welcomes the settlement by Apollo, noting the cooperation on
the part of new owners of the business after it was acquired from dunlop in 2006.
Apollo has further agreed to refrain from engaging in this conduct and to develop
and implement a compliance programme to ensure its employees are aware of the
provisions of the Competition Act.
Source: Adapted from article on www.compcom.co.za

Questions
1. What is this unethical behaviour generally called?
2. Explain what happened in one sentence.
3. What was the penalty for this unethical behaviour?
4. Why was an investigation lodged by the Commission?
5. What are the products supplied by the cartel?
6. Who was affected by this increase in price?
13. Internal control and internal auditing

As you learnt in Grade 11, internal controls are established and implemented
to protect a business against risk. The internal auditing function then reviews
the risk management and internal control systems of the business in order to
determine whether risk is being managed and controlled to an acceptable level. So
it makes sense that we first consider the risks associated with the manufacturing
environment, before we discuss the internal controls used to guard against these
risks and the internal audit of a manufacturing business.
13.1 Risks associated with the manufacturing environment

RISK!
The manufacturing industry is extremely diverse, producing a very broad spectrum
of products by using a wide range of manufacturing processes. Since the production
Acc GR12 LB.indb 390 6/6/13 6:04:35 PM

processes used to manufacture motor cars, household detergents, pharmaceuticals,
clothing and furniture are vastly different, it follows that the inherent risks associated
with each of these production processes will differ. Although there are specific
risks associated with each type of production process, we will focus on some of the
general risks that are typically encountered in the manufacturing environment.
Production risks
Production risks include the following:
• Productivity risks: The efficient running of the production process. Such risks
include delays, stoppages or bottlenecks in the production line, shortages of
raw materials, contaminations within the production process, faulty machinery
and work ethics of employees.
• Quality of product: Such risks include production of too many defective
products, producing product of poor quality and producing products that are
not according to order or sample.
• Wastage of raw materials: The cutting of raw material should be planned
very carefully to prevent excess waste. Off-cuts should be minimised.
In the manufacturing industry, it is vital to control these risks as inefficient and
wasteful production can be extremely costly.
Safety risks
These are risks that are associated with the safety and well being of the employees
working in the manufacturing process, as well as the protection of the factory,
machinery and products in the production line. There is not only an ethical
responsibility to ensure that employees work in a safe environment, but also
financial implications involved with employees being injured or becoming ill due
to a lack of health and safety precautions.
Many industries also have specific health and safety regulations that need to
be adhered to and manufacturers could be fined or barred from operating if their
safety measures are found to be inadequate. In addition, damage caused to the
factory, machinery and products due to a preventable disaster, such as a fire, can be
very costly and could even lead to financially ruin.
Fraud, theft and error risks
These inherent business risks are compounded due to the complex nature of
the manufacturing environment. Manufacturing typically involves numerous
employees working simultaneously in the production process. At the same time,
large quantities of raw materials, partially completed goods and finished products
are flowing in and out of production.
This makes the manufacturing environment extremely difficult to control and
exposes the production process to countless risks and opportunities for fraudulent
behaviour. This includes pilfering of raw materials, theft of finished products, fraud
schemes often involving fake orders or fictitious suppliers, production errors, costing
mistakes and unnecessary wastage. To protect against these risks, manufacturers
need to implement tight operational controls, employ physical safeguards and
maintain accurate and detailed records of the resources used in production.
Environmental risks
These are risks that are associated with the harmful impacts that the
manufacturing process could have on the environment. Such risks include various
forms of pollution and depletion of scarce resources. Besides the ethical and moral
responsibility that manufacturers have to guard against these risks, there are also
financial implications. Manufacturers who fail to comply with environmental
regulations may have to pay hefty fines, may be prosecuted or may be publically
exposed, which could result in their reputation being irreparably damaged.
Acc GR12 LB.indb 391 6/6/13 6:04:35 PM

INTERNAL 13.2 Internal control relating to manufacturing
CONTROL
It is essential that manufacturers establish strict internal control processes
and procedures to address the risks associated with manufacturing. Although
the internal control policies, processes and procedures may differ from one
manufacturer to another depending on the complexity, size and nature of the
production process, most manufacturers should adhere to the following basic
internal control procedures:
• Proper authorisation is required before raw materials can be issued from the storage
into production.
• Accurate records of raw materials issued to production are maintained.
• Sufficient quantities of raw materials are kept on hand, so as to prevent stoppages in
production due to shortages of raw materials.
• There is adequate division of duties, for example the same person is not responsible
for ordering, receiving, storing and issuing raw materials.
• The quality of the raw materials is thoroughly checked before entering production.
• Raw materials, work-in-process and finished goods is safeguarded against theft and loss.
• The quality of each employee’s work in the production line is carefully monitored.
• Only authorised and properly trained employees are allowed access to certain parts
of the production line.
• Employees are trained to perform a number of tasks in order to provide cover for
other skilled employees in the production line.
• The production line is closely monitored to avoid any unintended “bottlenecks”, which
may slow down the production process.
• Quality control tests are performed at each stage of the production process.
• A factory supervisor or foreman is employed to oversee the production process.
• The machinery in the factory is well maintained, clean and kept in good working condition.
• Finished goods are checked for any defects and any defective products are set aside.
• Accurate records are maintained of finished goods as they come out of production.
• Finished goods are safely delivered to storage and an accurate record is kept of the
quantity of finished goods entering storage.
• Proper measures are taken to ensure that the hygiene of the employees is
appropriate (this is particularly important in the production of foodstuffs).
• Proper measures are taken to ensure the health and safety of employees.
• Proper measures are taken to protect the factory and machinery from being
damaged and to prevent disasters, such as fire.
• The factory, machinery and stock are adequately insured.
• Proper measures are taken to protect against harmful impacts on
the environment.
• An accurate and complete set of accounts are maintained to
record (and correctly allocate) all the costs involved in the
manufacturing process
Acc GR12 LB.indb 392 6/6/13 6:04:35 PM

13.3 Internal audit of a manufacturing business INTERNAL
INTERNAL AUDIT
AUDIT
As discussed in Grade 11, the establishment and implementation of internal
controls is the first line of defence against risk. However, it is essential that an
internal audit is performed to assess the effectiveness of these internal controls and
to evaluate the risk management of the manufacturing business. An internal audit
of a manufacturing business may typically involve the following:
INTERNAL AUDIT
INTERNAL AUDIT
• Performing fieldwork to investigate the measures
taken to control the risks and to assess whether the
risks are being adequately managed and controlled
• Conducting walk-through tests, tracing a small sample of items through the
production processes and the recordkeeping systems, in order to:
INTERNAL AUDIT
INTERNAL AUDIT
■ verify the existence of the documented internal controls
• Conducting compliance tests by observing activities, interviewing key personnel and
inspecting a representative sample of documents, records and products, in order to verify
compliance with the internal control policies and procedures relating to:
■ authorisation and restriction of access
■ recordkeeping and documentation
■ security and control of raw materials and finished goods
■ division of duties
■ quality control of raw materials and finished goods
■ the efficiency, effectiveness and supervision of the production process
■ health and safety of personnel and products
■ maintenance and safety of machinery
■ insurance
■ environmental issues
• Conducting substantive tests on a representative sample of transactions, documents and
records, by checking information and re-performing tasks, in order to:
■ verify the accuracy and completeness of the inventory records relating to raw materials
■ verify the accuracy and completeness of the inventory records relating to finished goods
■ test the accuracy of the physical stocktaking records for raw materials and
finished goods
■ verify the accuracy and completeness of the manufacturing
accounting records
■ test the accuracy of manufacturing cost calculations
• Reporting to management on the adequacy of the risk management
and the internal control systems of the manufacturing business and
providing recommendations for improvement
• Establishing a follow-up process to monitor any corrective action taken
by management.
Acc GR12 LB.indb 393 6/6/13 6:04:36 PM

Chapter 14
Budgeting
Key concepts By the end of this chapter, you will be able to:
• Projected Income • Analyse, interpret and compare Projected Income Statements for sole traders
Statement • Cash Budget or companies
• Debtors Collection • Analyse, interpret and compare Cash Budgets for sole traders or companies
Schedule • Creditors • Integrate ethical issues relating to budgeting and projections
Payment Schedule • Integrate internal audit and control processes relating to budgets and
• operating budget projections by comparing budget to actual figures
• financial budget
• planning • internal
control • analysis
• interpretation
• comparison
As you can see, according to this budget

plan we will be able to buy textbooks for
every learner in the school this year. We may
even have money left over to repair the pot-
holes in our soccer field. But is there room in the budget
to buy a new goal-keeper for our
soccer team?
394 Chapter 14 • B u d geti n g
Acc GR12 LB.indb 394 6/6/13 6:04:37 PM

1. Introduction
In Grade 10, you were introduced to several basic budgeting concepts and learnt
about various types of budgets. We then expanded on these concepts in Grade 11,
by looking at the various components of a Cash Budget and a Projected Income
Statement. We also learnt how to forecast collections from debtors and payments
to creditors. We then consolidated this knowledge by learning how to prepare and
present a Cash Budget and a Projected Income Statement for a sole trader.
This year our main focus we will be on the analysis, interpretation and
comparison of Cash Budgets and Projected Income Statements, for both sole
traders and companies. However, before we introduce these new topics, it is very
important that you have a good understanding of how to prepare these budgets.
2. Budget period, classification and preparation

Budgeting is an essential tool that is used by the management of most businesses
to plan, monitor and control business activities. A budget is a written financial plan
that is prepared for a future period. Budgets may be prepared for many different
aspects of a business, such as sales, purchases, operating expenses, production,
cash, debtors and creditors. They may also be prepared for a various different
periods of time, covering weeks, months or even several years.
2.1 Budget period

Budgets can be prepared for one month, three months, six months, a year or even
for a number of years, depending on the needs of the business. The period of time
over which the budget is drawn up is called the budget period. Budgets generally
cover one of three periods of time:
• Short-term budgets: usually less than one year
• Medium-term budgets: usually one year (12 months)
• Long-term budgets: usually prepared for a number of years.
2.2 Budget classification

As mentioned, budgets can be prepared for almost any business activity. However,
budgets are generally classified into two main groups namely, the operating budget
and the financial budget.
2.2.1 The operating budget

The operating budget consists of the various budgets which relate to the income
and expenses of a business. These budgets include the sales budget, cost of sales
budget and operating expenses budget. These budgets are used to plan and
forecast the income and expenses for the budget period. The operating budgets are
combined to form the Projected Income Statement.
2.2.2 The financial budget

The financial budget consists of the various budgets which relate to the assets
and liabilities of a business. These budgets include the Cash Budget, the Capital
Budget as well as budgets for debtors, creditors and inventory. These budgets
are used to plan and forecast changes relating to assets and liabilities over the
budget period. A Budgeted Balance Sheet may be prepared using the information
contained in the various financial budgets, together with the projected net profit or
loss shown in the Projected Income Statement.
B u d geti n g • C h a p t e r 1 4 395
Acc GR12 LB.indb 395 6/6/13 6:04:37 PM

2.3 Budget preparation
When preparing a budget, management will attempt to plan and forecast the
business activities that are required to take place in order to attain the objectives
of the business. However, it is very important for the information contained in the
budget to be realistic and the budget should provide an accurate representation
of future expectations. In fact, preparing an unrealistic budget will often be
counter-productive and may have a disastrous effect on the business. Therefore
management will usually use the records of the previous period as a basis for the
budget. Management will then consider various other factors that may influence
the budget, such as:
• The business objectives: For example, the objective of a retail business may
be to increase their profit in the budget period by 50% from the previous
period. They would then need to budget for an increase in sales, which would
in turn influence the forecast amounts for almost every item in their budget.
Their expected purchases and operating expenses would certainly need to be
increased, as would the debtors and creditors forecasts. This would also have a
major impact on the business’s projected cash flow.
• Existing business agreements: For example, by examining the terms of the
business’s lease agreement, management can determine the amount of rent
that is expected to be paid during each month of the budget period. This
information can be used to forecast the rent expense in the Projected Income
Statement and budget for the outflow of cash due to the payment of rent in the
Cash Budget.
• Past, current and seasonal trends: For example, most businesses have quiet
and busy times during the year. A business that sells ice creams will determine
that they need more stock and extra personnel during December and January,
while the opposite would be true for the winter months. This should be taken
into account when preparing a budget.
• Economic climate: For example, when the economy is in a recession,
management will have more conservative expectations and will adjust their
budget accordingly.
• Other external factors: For example, if management knows that the petrol
price or electricity tariff is due to increase during the budget period, they
will account for this in their forecasts. In addition, if the trade union, which
represents the business’s employees, is planning to demand an increase in pay
for all of its members, then management would consider this information
when forecasting salaries and wages.
3. Reasons for budgeting

There are a number of reasons why budgeting is such an important and valuable
business tool and there are several ways in which a business benefits from having
an effective budgeting process. Some of the most important reasons for budgeting
include the following:
3.1 Planning
Planning is arguably the primary purpose of budgeting. When preparing a
budget, management express the future plans of the business in financial terms.
This allows management to assess the feasibility of their strategic plans and to
determine whether those plans are likely to result in the business achieving its
objectives. As is the case with most types of planning, budgets often need be
adjusted and fine-tuned before being finalised. Once the budget is completed, it
should provide the business with a financial plan, which sets the course that needs
to be followed and the actions that need to be taken, in order to achieve its goals.
Acc GR12 LB.indb 396 6/6/13 6:04:37 PM

3.2 Internal control INTERNAL
CONTROL
Another very important reason for creating a budget is that it provides
management with an effective tool that can be used to monitor and control the
activities of the business. Budgets play a vital role in the internal control system of
a business and are used by management to ensure that:
• the plans of the business are followed
• cash-flow problems are avoided
• expenditure is kept under control
• budget targets and business objectives are achieved.
Management will use budgets to monitor business activities by performing regular
comparisons between the actual results and the budgeted figures. From these
comparisons, management can identify potential problem areas. Where there are
significant differences between the actual and budgeted figures, management will
conduct further investigations to establish the reasons for the deviations. Based on
their findings, management will either:
• take corrective action to resolve issues;
• modify business operations; or
• implement control measures to prevent similar problems from happening in
the future.
In some instances, it may be found that the deviations were as a result of the
budgeted figures being unrealistic or due to circumstances having changed. In such
cases, management will make adjustments to correct the budget.
In many businesses, budgets are used in a more direct and rigid way to
control spending by using the budget amounts to set fixed limits on expenditure.
For example, the marketing department may be allocated a fixed budget for a
particular period. They would then have to work within this budget and will
not be able to exceed this amount without first receiving direct approval from
management.
3.3 Communication and co-ordination

The budgeting process also helps to ensure that there is good communication and
co-ordination within a business. This is particularly important in larger businesses,
where budgets are prepared for many departments by several managers within the
business. For example, if a purchases budget is being prepared for the purchasing
department, then the manager who is preparing that budget will need to find out
from the person preparing the sales budget what the projected sales are for the
budget period. Also, the production manager cannot, for example, budget a large
amount for cash purchases, without first checking with the financial manager
whether this fits in with the forecasts in the Cash Budget.
Once the individual departmental budgets have been prepared, the various
departments will come together to prepare a final co-ordinated main budget. Thus
co-operation and communication between various departments is an essential part
of the budgeting process.
Furthermore, budgets allow management to communicate their expectations
and convey the business’s objectives to the various departments and employees
throughout the business.
3.4 Motivation and evaluation

Another important benefit of budgeting is that budgets, and the budgeting process,
can help to motivate employees. This is normally accomplished in two ways:
Acc GR12 LB.indb 397 6/6/13 6:04:37 PM

• Firstly, involvement in the budgeting process helps to motivate employees.
Employees who are involved creating and setting their own budgets will be
more likely to strive to achieve the objectives of those budgets.
• Secondly, budgets may also be used to motivate employees by setting
performance targets based on the budgets. Employees are then offered
incentives, such as bonuses or promotion, for achieving or exceeding those
targets.
Budget targets are also often used by management as a benchmark for evaluating
the performance of its employees.
4. The Projected Income Statement

As you learnt in Grade 11, the Projected Income Statement is used to plan,
monitor and control the profitability of a business. The Projected Income
Statement reflects the estimated income and expenses over the budget period and
is used to forecast and plan the amount of profit a business will generate through
its operation. Thus, when preparing a Projected Income Statement the key word
to keep in mind is profit.
The Projected Income Statement provides management with a forecast of the
expected performance of the business over the budget period. If the Projected
Income Statement forecasts results that are unfavourable, then management is
able to adjust the business plan ahead of time and can develop new strategies to
improve the projected results.
In this section, we will start by briefly revising the preparation and presentation
of the Projected Income Statement. We will then discuss how the information
provided in this budget is analysed, interpreted and compared with actual results.
4.1 Preparation and presentation of the Projected Income

Statement
The Projected Income Statement has the same format as the “normal” Income
Statement, except that here the figures are based on future projections and not
past results. Since the budget period may span several months or even years,
the Projected Income Statement often contains several columns. The Projected
Income Statement is usually prepared based on the previous year’s Income
Statement and taking into account any planned or predicted business activities,
trends and economic conditions. The preparation and presentation of the
Projected Income Statement is illustrated in the following example.
Example
Required
Use the following information to draw up the Projected Income Statement of
Stix Stores for July 2018.
Acc GR12 LB.indb 398 6/6/13 6:04:37 PM

Example continued
Information
Stix Stores
Income Statement for the year ended 30 June 2018
Note R
Sales R750 000
Rent income 60 000

Advertising 22 500
Insurance 14 500
Depreciation 21 600

Interest income 9 000
Interest expense –
Net profit (loss) after tax 163 200
• The average monthly sales are expected to increase by 20% in July 2018.
• Stix Stores uses a fixed profit margin.
• According to the lease agreement, the monthly rental for part of the business
premise rented out will increase by 8% from 1 July 2018.
• Salaries and wages will increase by 10% from July 2018.
• Advertising is budgeted at 3% of sales.
• Water and electricity is expected to increase by 15% in July 2018
• The annual insurance is expected to increase by R2 300.
• The depreciation for the coming year is expected to remain unchanged.
• The interest rate on the fixed deposit of R60 000 will decrease to 12% p.a.
Acc GR12 LB.indb 399 6/6/13 6:04:37 PM

Example continued
Solution
Information
Stix Stores
Projected Income Statement for the month ended 31 July 2018
Note R
Sales (750 000 ÷ 12) × 120% R75 000
Cost of sales (75 000 × 66 _23 %) (50 000)
Gross profit (75 000 × 33 _13 %) 25 000
Rent income (60 000 ÷ 12) × 108% 5 400

Salaries and wages (72 000 ÷ 12) × 110% 6 600
Advertising (75 000 × 3%) 2 250
Water and electricity (25 200 ÷ 12) × 115% 2 415
Insurance (14 500 + 2 300) ÷ 12 1 400
Depreciation (21 600 ÷ 12) 1 800

Interest income (60 000 × 12%) ÷ 12 600
Interest expense –
Net profit (loss) for the month 16 535
 250
Note: The gross profit margin = ______000 ___
100 _1
750 000 ×   1 = 33 3 %
Activity 14.1
Required
Use the given information to prepare the Projected Income Statement of Gadla Traders for
January and February 2019.
Information
Gadla Traders
Income Statement for the year ending 31 December 2018
Turnover for the year 390 000
Rent income 18 000
Discount received 600
Bad debts 720
Insurance 2 400
Advertising 1 800
Other operating expenses 18 000
Acc GR12 LB.indb 400 6/6/13 6:04:37 PM

• Sales are expected to increase by 20% in January 2019 and then increase by an
additional R6 000 in February 2019.
• The mark-up of 50% on cost of sales is maintained.
• The monthly rent will increase by 10% on 1 February 2019.
• Discount received should remain constant.
• Bad debts should increase by R50 per month from 1 February 2019.
• Fire insurance will increase by R1 200 per year from 1 January 2019.
• During January 2019 two advertisements will be placed, and during February 2019
three advertisements will be placed. The cost of one advertisement is R45.
• Services of all temporary workers will be terminated as of 1 February 2019. The
expected monthly saving will be R400.
• Other operating expenses should remain constant.
• Depreciation on office equipment should amount to R2 400 for the financial year.
Activity 14.2
The nominal accounts section of the Trial Balance of Vuvuzela Traders, a sole trader, is
given below.
Required
Prepare the Projected Income Statement of Vuvuzela Traders for March and April 2018.
Information
Vuvuzela Traders
Trial Balance on 28 February 2018
Debit Credit
Sales 480 000
Cost of sales 300 000
Rent income 27 300
Discount received 1 200
Discount allowed 3 600
Stationery 4 800
Bad debts 2 880
Telephone 9 600
Insurance 2 400
The figures above were extracted from the books before the accountant prepared the
Income Statement for the financial year ending 28 February 2018.
• 60% of the sales are cash and the rest is on credit. It is expected that sales will increase
by 20% during March, and by a further 10% from April 2018.
• The mark up is 60% on the cost price, and will be calculated at 50% on turnover
from April.
• Expected additional income for the following two months:
The lessee’s rental contract is renewed annually on 31 March. According to the
agreement rent will increase by 15% from 1 April on an annual basis. (Hint: First
calculate the rent for March 2017.)
Acc GR12 LB.indb 401 6/6/13 6:04:37 PM

• It is expected that the total amount of discount received will increase by 10% during
the new financial year.
• Expected operating expenses:
■ Telkom announced tariff increases and it is expected that the total telephone bill
will increase by 25% in the new financial year.
■ The interest rate on the bond of R80 000 is 18% p.a. An annual payment of R20 000
on the loan is due on 1 April 2018.
■ It is expected that bad debts for March 2018 will amount to R384 and R422 for
April 2018.
■ Discount allowed during the past year accounted for 2½% of the average credit
sales. It is expected that the percentages will remain the same.
■ It is expected that no tangible assets will be bought or sold during the next
financial year. The current carrying value of tangible assets include vehicles to the
value of R120 000 and equipment to the value of R15 000. Depreciation is written
off on the carrying value at 20% per year.
■ Additional insurance with a biannual premium of R1 440 will be taken out on 3
April 2018.
■ It is expected that all remaining expenses will increase by 5% from 1 March 2018.
4.2 Analysis, interpretation and comparison of Projected

Income Statements
The preparation of the Projected Income Statement is an essential part of the
budgeting process. However the real value of the Projected Income Statement
lies in the information that it provides and the way in which management uses
this information to ensure that the business objectives are achieved. Through
effective analysis and interpretation of this information, management can ensure
that the business activities are well planned and by comparing this information to
actual results, management can ensure that those activities are well controlled and
carried out according to plan.
4.2.1 Analysis and interpretation during the planning stage

During the planning stage, management will analyse the information in the
Projected Income Statement and based on their interpretation of this analysis
will decide whether they have made the best possible plans for the business. If
management decide that they are not satisfied with the forecast figures, they will
then re-strategise and look for ways to increase the expected profit by adjusting
their plans.
For example, management may opt for a more conservative strategy and look
at ways to cut expenses. They would then prepare a revised Projected Income
Statement based on the proposed changes and see whether the expected results
would be more favourable.
Alternatively, management may consider a more aggressive approach. They
may decide to look at the prospects of boosting sales by conducting a major
marketing campaign or expanding operation. Although this type of strategy
would result in an increase in projected expenditure, it may lead to a more
profitable forecast if the projected sales increased significantly. Management
would then redraft the Projected Income Statement and analyse the new forecast
results. Through their interpretation of these results, management will assess the
feasibility of such strategies.
By analysing and interpreting the information in the Projected Income Statement,
management can ascertain whether:
• the business is expected be profitable over the budget period
• the projected sales figures are satisfactory
Acc GR12 LB.indb 402 6/6/13 6:04:37 PM

• the planned percentage mark-up is adequate
• expenses need to be cut
• the business can afford to pay bonuses, hire additional staff, run an advertising
campaign, and so on.
Furthermore, if the Projected Income Statement of the business predicts a loss
in a specific month, management can alter their plans to try to prevent this from
actually happening. Once management are satisfied with their planning they will
finalise and approve the Projected Income Statement.
4.2.2 Analysis, interpretation and comparison during the budget period

During the budget period, management will use the information in the Projected
Income Statement to monitor and control the business operations by comparing
the actual figures achieved with the budgeted amounts. The comparative
figures will then be carefully analysed, and based on their interpretation of this
information, management can assess whether:
• the business is performing to expectations
• corrective action needs to be taken
• they need to investigate further in order to identify underlying problems
• control measures need to implemented or improved
• the budget figures were unrealistic and need to be adjusted in the Projected
Income Statement.
When comparing actual figures with the budgeted amounts, management will
often employ a technique known as variance analysis to analyse the data. In
this technique, the differences between the actual and the budgeted amounts are
referred to as variances.
When performing variance analysis, management will usually draw up a table
known as a Variance Analysis Report, which is then used to analyse the data.
The Variance Analysis Report sets out the budgeted and actual figures for each
item in the budget, as well as the variance amount and the variance percentage, as
illustrated below.
Example
Extract from the Variance Analysis Report of Stix Stores for July 2018
Budgeted Variance
Item Actual figure Comment
figure Amount Percentage
Sales R75 000 R76 500 + R1 500 + 2%
Cost of sales R50 000 R51 000 + R1 000 + 2%
Rent income R10 000 R9 000 – R1 000 – 10%
Salaries and wages R6 600 R6 600 0 0%
Advertising R2 250 R900 – R1 350 – 60%
Water and electricity R2 415 R3 381 + R966 + 40%
Notes:
• A plus sign (+) is often used to indicate that the variance is positive, which
means that the actual figure is greater than the budgeted figure. However, this
does not necessarily mean that it is a positive result for the business.
• A minus sign (–) is often used to indicate that the variance is negative, which
means that the actual figure is less than the budgeted figure. However, this
does not necessarily mean that it is a negative result for the business.
• A column is often included at the end of the Variance Analysis Report, which
can be used to enter comments or explanations relating to each item.
BudGETInG • Chapter 14 403
Acc GR12 LB.indb 403 6/6/13 6:04:38 PM

Example continued
The management of Stix Stores may interpret the results shown in the Variance
Analysis Report above, as follows:
• Sales: Slightly more than expected, thus a favourable result.
• Cost of sales: Slightly more than expected, but in proportion to sales; so the
mark-up percentage has been maintained.
• Rent income: Significantly less than expected; will need to be investigated to
establish the reason for this.
• Salaries and wages: As expected; well controlled.
• Advertising: Significantly under budget; although this is positive from a
control point of view, advertising normally has a positive impact on sales
and thus the advertising budget should be fully utilised. This will need to be
investigated further.
• Water and electricity: Significantly over budget; urgent investigation is
required to establish the cause; control measures need major improvement;
check whether electricity tariffs have increased unexpectedly, if so make the
necessary adjustments to the budget.
By comparing actual figures with the budgeted amounts in the Projected Income
Statement, and analysing and interpreting the results, management can establish
whether:
• sales targets have been achieved
• the planned mark-up has been maintained
• the projected income from other sources has been realized (e.g. rent income,
discount received etc.)
• each of the expenses has been well controlled and kept within the budget
(e.g. telephone, consumable stores, electricity, motor vehicle expenses,
bad debts etc.)
• the budget for certain expenses has been adequately utilised (e.g. advertising,
discount allowed, security expenses, repairs and maintenance etc.)
• the overall actual performance (profitability) of the business has matched
expectations
The following example is used to illustrate the type of question that you may be
expected answer in to order to demonstrate:
• your understanding of the Projected Income Statement
• your ability to analyse and interpret the information in the Projected Income
Statement
• your ability to compare actual figures with the budgeted amounts in the
Projected Income Statement and then analyse and interpret the results of those
comparisons.
Example
Meg Flute is the owner of Meg’s Music Store, a business that sells and repairs
musical instruments. You are provided with the Projected Income Statement of
Meg’s Music Store for the months January 2019 to March 2019.
Acc GR12 LB.indb 404 6/6/13 6:04:38 PM

Example continued
Information
Meg’s Music Store
Projected Income Statement for the three months ending 31 March 2019
January 2019 February 2019 March 2019
Sales 64 000 70 000 75 000
Cost of sales (38 400) (42 000) (45 000)
Gross profit 25 600 28 000 30 000
Other operating income 16 000 17 900 18 900
Fee income 10 000 11 000 12 000
Rent income 6 000 6 900 6 900
Gross operating income 41 600 45 900 48 900
Operating expenses (18 985) (20 850) (20 905)
Salaries 7 500 8 100 8 100
Wages 6 000 7 200 7 200
Discount allowed 385 420 450
Telephone 1 500 1 500 1 500
Depreciation 1 280 1 280 1 280
Water and electricity 2 000 2 000 2 000
Bad debts 320 350 375
Operating profit 22 615 25 050 27 995
Interest income (on fixed deposit) 200 350 500
Profit before interest expense 22 815 25 400 28 495
Interest expense (on loan) (2 500) (2 250) (2 000)
Net profit for the month 20 315 23 150 26 495
Required
1. Calculate the mark-up percentage on cost that Meg uses in her business.
2. In terms of the lease agreement, Meg increases the rent of her tenants each
year on 1 February by a fixed percentage. Calculate this percentage.
3. Meg plans to pay each of her employees an additional R600 from February
2019.
a. How many people does Meg employ?
b. Bob Barley, the store manager, is not happy with the proposed increase in
his salary, but Meg disagrees. Give reasons for each of their opinions using
figures and calculations to support your answer.
4. The net profit of Meg’s Music Store for the year ended 31 December 2018
amounted to R223 200. Meg has also informed you that business usually picks
up in the second half of the year. Based on this information and by analysing
the information provided in the Projected Income Statement, do you think
Meg will be satisfied if her business achieves the projected results? Use figures
to support your answer.
5. The Cash Budget is used to forecast the liquidity of a business. However, by
interpreting the information provided in the Projected Income Statement,
do you think that Meg expects to experience cash flow problems during the
budget period?
6. At the beginning of February 2019, Meg compiled a Variance Analysis Report,
which included the following three items:
Acc GR12 LB.indb 405 6/6/13 6:04:38 PM

Example continued
Extract from the Variance Analysis Report of Meg’s Music Store for
January 2019
Variance
Item Budgeted figure Actual figure
Amount Percentage
Telephone R1 500 R2 760 + R1 260 + 84%
Water and electricity R2 000 R1 400 – R600 ?
Bad debts R320 R1 920 ? + 500%
a. Calculate the missing figures in the table above.

b. Meg is not sure how to interpret these result and what actions she should
take. Provide Meg with some advice by commenting on each of the items
in the table above.
Solution
R25 600 × ___
1. Mark-up percentage on cost =  _______ 100 _2 R28 800
_______
R38 400   1 = 66 3 % (or  R42 000 )
 R6 900 – 6  
2. % increase in rent = ____________
R6 000    100
000 × ___
1 = 15%
3. a. 3 people – Salaries will increase by R600 (1 person) and wages will increase
by R1 200 (2 people) in February 2019.
b. Although each employee will receive the same increase, the percentage
increases are different:
R600 ___
Bob’s percentage increase =  ______ 100
R7 500 ×   1 = 8%
R600 ___
Wage earners’ increase =  ______ 100
R3 000 ×   1 = 20%
Meg may argue that an 8% increase is quite generous and above the
inflation rate.
Bob may feel that the wage earners are receiving a very generous increase,
while he is only receiving a fairly moderate increase.
4. The total net profit for the three months = R20 315 + R23 150 + R26 495
= R69 960
Therefore the average net profit per month = R69 960 ÷ 3 = R23 320
The average net profit per month for the previous year = R223 200 ÷ 12
= R18 600
Percentage increase in net profit per month =   R23 320 – 18
______________
  
R18 600    100
600 × ___
1 
= 25,4%
Yes, I think Meg would be very pleased with these results. The average net
profit per month would be R4 720 more than in the previous period, which is
an increase of more than 25%. Also, the Projected Income Statement shows a
positive trend with the net profit increasing each month. Given that business
is expected to be even better in the second half of the year, I think that Meg
would be highly satisfied with these results.
5. No. The Projected Income Statement shows that interest on loan is expected
to decrease over each month of the budget period, which means that Meg
anticipates that she will have sufficient cash resources to enable her to reduce
the loan during the budget period. Furthermore, the interest on fixed deposit
is shown to increase each month, which means that Meg expects to have
surplus cash to invest in the fixed deposit.
Acc GR12 LB.indb 406 6/6/13 6:04:38 PM

Example continued
–R600 ___
6. a. Variance percentage for Water and electricity =  ______ 100
R2 000 ×   1 = –30%
Variance amount for Bad debts = R1 920 – R320 = + R1 600
b. The telephone expense has exceeded the projected figure by R1 260,
which is 84% over budget. This is significantly over budget and should be
investigated urgently. Employees may be using the telephone for lengthy/
international personal calls. Control measures need to be introduced or
tightened.
The water and electricity expense is R600 less that the projected figure,
which is 30% under budget. This expense has been well controlled
especially considering the high cost of electricity.
Bad debts have exceeded the projected figure by R1 600, which is 500%
over budget (or 5 times greater than the budgeted amount). Although this
may be an isolated case, urgent investigation is required to establish the
reason for the bad debts being so high. Meg needs to ensure that there
are adequate controls in place to protect the business against this risk. For
example, she should screen customers before allowing credit, set credit
limits and implement strict collection procedures.
Activity 14.3
You are provided with the Projected Income Statement of Khan Traders for the three
months ending 31 May 2018. The business is owned by Mohammed Khan.
Information
Khan Traders
Projected Income Statement for the three months ending 31 May 2018
March 2018 April 2018 May 2018
Sales 173 600 190 400 224 000
Cost of sales (124 000) (136 000) (160 000)
Gross profit 49 600 54 400 64 000
Discount received 3 580 3 720 4 080
Rent income 12 000 19 620 19 620
Packing materials 500 550 650
Salaries 14 000 14 000 20 000
Advertising 4 000 8 000 8 000
Discount allowed 1 302 1 428 1 680
Telephone 1 200 1 200 1 200
Bad debts 2 604 2 856 3 360
Sundry operating expenses 2 700 2 700 2 700
Interest income (7,5% p.a.) 500 500 0
Interest expense (2 150) (2 150) (1 350)
Net profit for the month 35 474 43 606 47 010
Acc GR12 LB.indb 407 6/6/13 6:04:38 PM

• 70% of all sales will be for cash, while 75% of purchases are on credit.
• Stock is replaced in the same month that it is sold.
• All the business’s creditors offer the same discount rate, which only applies to
payments made with 30 days.
Required
1. List two operating expenses in the Projected Income Statement that are expected to
remain constant during the budget period.
2. List three operating expenses in the Projected Income Statement that are expected to
increase in a similar proportion to sales.
3. List three operating expenses that appear in the Projected Income Statement, which
would not appear in the Cash Budget.
4. Give two examples of items that could appear in the Cash Budget, but would not
appear in the Projected Income Statement.
5. Calculate the mark-up percentage on cost used by Khan Traders.
6. Mohammed prefers to pay his creditors in the month following the purchase in order
to take advantage of the prompt settlement discount offered. Calculate the discount
rate that he receives, if Mohammed expects to pay 80% of his creditors within one
month of the purchase.
7. There are three identical offices that form part of the business premises, which
Mohammed uses to generate rental income for the business. At the beginning of
March, two of the offices were occupied, while the third office was vacant. The annual
rental increase is due at the beginning of April, by which time Mohammed expects to
have found a tenant for the third office. Calculate the percentage by which the rental
is increased annually?
8. Mohammed currently employs two people and pays them each a salary of R7 000. The
Projected Income Statement shows that the salaries expense is expected to increase
in May 2018.
a. Give two possible reasons why Mohammed has budgeted for this increase.
b. Which of the two reasons do you think is more likely? Use figures and calculations
to support your answer.
9. On 1 May 2018, Mohammed plans to withdraw the entire fixed deposit and use the
funds to pay the annual instalment on the loan. Mohammed anticipates that the
funds from the fixed deposit will be just enough to cover the entire annual instalment
amount. Calculate:
a. the instalment amount that will be paid.
b. the interest rate that is charged on the loan.
c. the balance of the loan on 31 May 2018.
Activity 14.4
Denny Denver owns Denny Dealers a business that sells beds and couches. You are
provided with the following extract from the Projected Income Statement of Denny
Dealers for May and June 2018. The actual figures are also provided.
Denny Dealers
Extract from the Projected Income Statement for May and June 2018
May 2018 June 2018
Budget Actual Budget Actual
Depreciation on vehicles 2 250 2 250 2 250 2 250
Motor vehicle expenses 6 600 8 620 6 600 8 880
Insurance 4 500 4 500 4 500 4 500
Interest on loan 1 800 1 800 1 800 1 800
Acc GR12 LB.indb 408 6/6/13 6:04:38 PM

Although Denny was pleased with the overall performance of his business during May
and June 2018, he was concerned about the motor vehicle expenses being significantly
over budget.
• Denny Dealers owns one vehicle, which is an old delivery van that was bought on 1
January 2013.
• At the end of June 2018, after further investigation and analysis of the motor vehicle
expenses of the business, Denny established that:
■the petrol cost for each month amounted to R5 200
■the remainder of the motor vehicle expenses was spent on services and repairs to
the old delivery van.
• Denny is considering replacing the old delivery van with a new delivery van that
would cost R330 000. The new delivery van:
■includes a five-year service plan, which covers all the services and maintenance on
the vehicle for a period of five years.
■is expected to be 15% more fuel-efficient than the old delivery van.
■will increase the business’s insurance cost by 20%.
• A local second-hand car dealer has agreed to purchase the old delivery van at
book value.
• If Denny decides to buy the new delivery van, he plans to use the proceeds from the
sale of the old vehicle to cover part of the cost of the new vehicle. The balance will be
financed by extending the business’s existing loan with Prime Bank.
• Denny Dealers accounts for depreciation on vehicles at 10% p.a. on cost.
Required
1. Comment briefly on the budgeting and control of the motor vehicle expenses over
the budget period. Use figures to support your opinions.
2. Provide two examples of unethical behaviour by the driver of the delivery van that
may have contributed towards the motor vehicles expenses being over budget?
3. How much did Denny Dealers pay for the delivery van on 1 January 2013?
4. Calculate the carrying value of the old delivery van on 30 June 2018.
5. Calculate the interest rate that Prime Bank charges on the loan, if the loan amount was
R180 000 during the budget period.
6. How much additional interest will the business be charged per month, if Denny
decides to buy the new delivery van?
7. Use a table to list and compare the expected monthly costs relating to each of the
vehicles (the old and the new delivery vans). Based on your findings, do you think
that Denny should replace the old delivery van with the new one? Show all your
calculations.
The Projected Income Statement of Josephine Stores for the budget period 1 July 2018 to
30 September 2018 is given below.
Information
Josephine Stores is a clothing store that specialises in woman’s wear. The business is
owned by Josephine Franco. Josephine runs the business according to the following set
policies:
• A fixed mark-up percentage on cost is maintained
• Goods sold are replaced in the same month in order to keep stock level constant
• All goods are bought on credit
• Creditors are paid in the month following the purchase.
Acc GR12 LB.indb 409 6/6/13 6:04:38 PM

The business’s financial year ends on the 30 June.
Josephine Stores
Projected Income Statement for the three months ending 30 September 2018
July 2018 August 2018 September 2018
Sales 375 000 405 000 412 500
Cost of sales (250 000) (270 000) (275 000)
Gross profit 125 000 135 000 137 500
Rent income 6 200 6 200 6 665
Discount received 5 670 6 750 7 290
Salaries 60 000 66 000 52 800
Wages 19 500 21 840 29 120
Discount allowed 1 470 1 500 1 620
Telephone 4 650 4 650 4 650
Insurance 5 200 5 200 5 200
Water and electricity 7 500 7 500 8 580
Advertising 8 000 8 000 8 000
Bad debts 735 750 810
Interest income 1 200 1 500 1 500
Interest expense (15% p.a.) (2 250) (2 250) (2 100)
Net profit for the year 17 715 20 335 28 050
Required
1. Calculate the percentage gross profit on sales that Josephine expects to achieve
during the budget period.
2. Calculate the percentage increase in rent income that is forecast for September 2018.
3. Examine the amounts budgeted for discount received in the Projected Income
Statement.
a. Briefly describe the basic trend that is reflected by these budgeted figures.
b. Explain why discount received is expected to follow this trend over the budget
period (actual sales for June 2018 amounted to R355 000).
4. Josephine currently employs five shop assistants and three casual workers. The shop
assistants each receive the same salary, while the casual workers are paid equal wages.
Josephine increases salaries and wages in August each year.
a. How much will each of the shop assistants earn in July 2018?
b. How much will each of the casual workers earn in July 2018?
c. What percentage increase in salaries has Josephine planned for her shop assistants
in August 2018?
d. What percentage increase in wages has Josephine planned for her casual workers
in August 2018?
e. Do you think that these increases are fair? Give reasons for your opinion.
f. What do you think is likely to happen regarding employment in September 2018?
Use figures/calculations to support your answer.
Acc GR12 LB.indb 410 6/6/13 6:04:39 PM

5. Josephine’s projections for the water and electricity expense were based on the
following information:
• The water cost of the business has been reasonably consistent over the previous
six months and is expected to remain that way over the budget period. Josephine
has budgeted R2 100 per month for water.
• On 23 June 2018, Eskom announced that the electricity tariff would be increased
by a fixed percentage on 1 September 2018.
Calculate the percentage increase in the electricity tariff that was announced by
Eskom on 23 June 2018.
6. Josephine’s friend Nina Turner works as an internal auditor. At the beginning of August
INTERNAL
INTERNAL AUDIT
2018, Josephine asked Nina to help her compare the projected figures with the actual AUDIT
figures for July 2018. Nina compiled a Variance Analysis Report and drew Josephine’s
attention to the following three items:
Extract from the Variance Analysis Report of Josephine Stores for July 2018
Variance
Item Budgeted figure Actual figure
Amount Percentage
Sales R375 000 R330 000 – R45 000 – 12%
Telephone R4 650 R8 370 + R3 720 ?
Advertising R8 000 ? – R6 800 – 85%
a. Calculate the missing figures in the table above.

b. What advice and recommendations do you think Nina would have given
Josephine regarding these items?
7. At the end of September, Josephine compared the actual and budgeted figures for
August and September 2018. She showed the following results to Nina:
August 2018 September 2018
Item
Sales R405 000 R403 500 R412 500 R421 300
Telephone R4 650 R4 750 R4 650 R4 280
Advertising R8 000 R8 000 R8 000 R8 000
Based on these results, do you think that Josephine followed Nina’s advice and managed
to implement the Nina’s recommendations successfully? Explain your answer.
8. Josephine Stores has a loan with ZZ Bank and Josephine invests the business’s surplus
funds in a fixed deposit at R&B Bank. The interest income amount in the Projected
Income Statement relates only to this fixed deposit, while the projected interest
expense is due to the loan with ZZ Bank.
a. The annual instalment on the loan is due on 31 August. Calculate the instalment
amount, if the interest rate on the loan remains unchanged.
b. Calculate the interest rate received on the fixed deposit from R&B Bank, if
Josephine plans to invest a further R40 000 in the fixed deposit on 1 August 2018.
c. Calculate the total of the loan and the total of the fixed deposit on 31 July 2018.
9. Josephine is concerned that she may not be handling the finances of the business in
the most efficient manner. What advice would you give her with regard to the loan
and the fixed deposit? Use figures to support your answer.
Activity 14.6
Africa Home Grown Ltd. was established in 2010. The company sells a wide variety
of indigenous hand-made products to large retailers, both locally and overseas. The
company’s financial year ends on 28 February. You are provided with the following extract
from the Projected Income Statement of Africa Home Grown Ltd. for two years ending 28
February 2019. The actual figures for the year ending 28 February 2018 are also provided.
Acc GR12 LB.indb 411 6/6/13 6:04:39 PM

Information
Africa Home Grown Ltd.
Extract from the Projected Income Statement for two years ending 28 February 2019
Year ending Year ending
28 February 2018 28 February 2019
Budget Actual Budget
Sales 25 000 000 27 500 000 33 000 000
Cost of sales 20 000 000 22 000 000 26 400 000
Directors fees 700 000 700 000 763 000
Salaries 1 720 000 1 720 000 1 935 000
Audit fees 37 400 72 930 41 140
Profit before tax 1 795 000 2 200 000 2 865 000
Profit after tax 1 292 400 1 584 000 2 005 500
• Although Africa Home Grown Ltd. strives to make a profit, and has been very
successful, the company’s main objective is to help underprivileged craftsmen and
craftswomen in South Africa to make a better living. The company buys all of its
products from these craftsmen and craftswomen, and also assists them by providing
interest-free short-term financing to help them to expand their production. The
company is very concerned about the environment and has a strict policy of only
buying products that are made using sustainable practices.
• At the annual general meeting (AGM) held in April 2018, the shareholders of Africa
Home Grown Ltd. were very pleased with all aspects of the company’s performance
and praised the directors for their excellent work.
Required
1. Based on their business strategy and for ethical reasons, the directors of Africa Home
Grown Ltd. have always used a relatively low fixed percentage mark-up on cost.
a. Calculate the fixed percentage mark-up on cost that is used by the company.
b. Why do you think the directors decided to use a relatively low fixed percentage mark-
up on cost? Provide reasons relating business strategy and ethics in your answer.
2. The internal audit function in the company is performed by two internal auditors.
INTERNAL
INTERNAL AUDIT
AUDIT Which item in the extract above includes the amount paid to the internal auditors?
Explain your answer.
3. The directors were not happy with the amount charged by the external auditing firm
for the year ended 28 February 2018. The same firm had taken approximately the
same amount of time to audit the previous year’s financial statement and had only
charged R34 000.
a. How do you think the budget amount for audit fees for the year ended
28 February 2018 was calculated?
b. By what percentage does the amount charged by the external auditing firm for the
year ended 28 February 2018, exceed the budget amount for that period?
c. The directors are considering reporting the external auditing firm to a professional
body. Which professional body are they likely to lodge a complaint with?
d. What punitive measures that might the professional body impose on the external
auditing firm, if it finds the firm to be guilty of misconduct (excessive charging)?
4. At the AGM in April 2018, the proposed increase in directors’ fees for the year ending
28 February 2019 was voted on by the shareholders.
a. What percentage increase in directors’ fees is being proposed?
b. Do you think that the shareholders will vote in favour of the proposed increase in
directors’ fees for the year ending 28 February 2019? Provide three reasons for your
opinion and use figures to support your answer.
412 Chapter 14 • Budgeting
Chapter 14 (12).indd 412 6/9/13 4:28:14 PM

c. Which legislation governing companies requires shareholders to approve the KING CODE
remuneration that a company pays its directors?
d. Quote a fundamental principle of King III which addresses the manner in which a
company remunerates its directors.
5. What is the company tax rate expected to be for the year ending 28 February 2019?
6. Why would the shareholders be pleased with all aspects of the company’s
performance?
Sipho Hlope owns Hlope Hardware Traders, which sells building supplies and general
hardware items. The business also generates additional income by providing general
carpentry services. You are provided with the following Projected Income Statement of
Hlope Hardware Traders for March and April 2018. The actual figures are also provided.
The financial year of Hlope Hardware Traders ends on 28 February.
Information
Hlope Hardware Traders
Projected Income Statement for March and April 2018
March 2018 April 2018
Sales 330 000 290 400 396 000 414 000
Cost of sales (165 000) (145 200) (220 000) (230 000)
Gross profit 165 000 145 200 176 000 184 000
Other operating income 27 640 23 880 28 520 31 880
Fee income 20 000 16 500 20 000 23 200
Rent income 5 000 5 000 5 000 5 000
Discount received 2 640 2 380 3 520 3 680
Gross operating income 192 640 169 080 204 520 215 880
Operating expenses (157 600) (163 460) (166 000) (173 450)
Salaries and wages - general 94 000 94 000 94 000 94 000
Salary - security guard 5 500 0 5 500 5 500
Depreciation 7 750 7 750 7 750 7 750
Motor vehicle expenses 4 000 7 600 4 500 6 780
Discount allowed 3 300 1 230 3 960 4 180
Trading stock deficit 300 9 200 300 450
Bad debts 2 200 7 640 2 640 5 130
Telephone 3 200 5 600 4 000 4 320
Insurance 3 850 3 850 3 850 3 850
Water and electricity 7 000 6 740 7 000 6 820
Advertising 12 000 5 000 18 000 20 000
Sundry operating expenses 14 500 14 850 14 500 14 670
Operating profit 35 040 5 620 38 520 42 430
Interest income 2 000 2 000 2 000 2 000
Profit before interest expense 37 040 7 620 40 520 44 430
Net profit for the year 37 040 7 620 40 520 44 430
Acc GR12 LB.indb 413 6/6/13 6:04:39 PM

Sipho was not satisfied with the overall performance of his business in March 2018. At the
end of March 2018, Sipho compared the actual results for March 2018 with the budgeted
figures in the Projected Income Statement. At the beginning of April 2018, Sipho decided
to make some strategic changes in an effort to improve the results of his business. At
the same time, Sipho also adjusted the Projected Income Statement for April 2018 in
accordance with his new plans.
Required
1. Give two reasons why is it important to compare actual figures achieved with
budgeted figures in the Projected Income Statement.
2. During his comparison and analysis, Sipho looked closely at the budgeted and actual
sales figures for March 2018.
a. What percentage mark-up on cost did Sipho use in his budget for March 2018?
b. Did Sipho actually achieve this mark-up during March 2018?
c. By what percentage were the sales for March 2018 under budget? Comment on
this result.
d. What were the two main strategic changes that Sipho made in order to boost the
sales in April 2018? Briefly explain why Sipho decided to make these changes.
e. Do you think that these changes were successful? Explain your answer.
f. Which other area of the business, other than sales, also benefited from these
changes? Explain why this may have occurred.
3. The security guard, who had worked at Hlope Hardware Traders for over five years,
retired at the end of February 2018. Sipho was very busy at the end of February and
the beginning of March and didn’t get around to hiring a replacement for March 2018.
At that time, he also thought that it may not really be necessary to employ a new
security guard, since there had hardly been any security problems during the previous
few years.
a. Why do you think Sipho was so busy at the end of February and beginning of
March?
b. Do you think that Sipho made a mistake by not employing a new security guard
during March 2018? Explain using figures to support your answer.
c. What action did Sipho take to correct this problem during April 2018?
d. Provide evidence from the Projected Income Statement to show that Sipho’s
action improved the security in the business during April 2018.
INTERNAL 4. Sipho was also concerned that the business had not been effective in collecting from
CONTROL debtors during March 2018. Sipho implemented internal control measures to improve
this during April 2018.
a. Provide two sets of comparative figures from the Projected Income Statement that
support Sipho’s concern.
b. What internal control measures do you think Sipho would have implemented to
improve the business’s collections?
c. Do you think that the collections from debtors improved in April 2018? Quote
figures from the Projected Income Statement to justify your answer.
d. What major impact on the business, which is not evident in the Projected Income
Statement, may result from poor collections from debtors?
5. The actual telephone expense was 75% over budget in March 2018.
a. How much per cent over budget was the telephone expense in April 2018?
b. Provide two reasons for this considerable improvement. Explain your answer by
quoting figures from the Projected Income Statement.
6. Briefly comment on the budget and control of the:
a. motor vehicle expenses
b. water and electricity expense.
7. The actual insurance expense for both March and April 2018 was exactly as budgeted.
Give a likely reason for this.
Acc GR12 LB.indb 414 6/6/13 6:04:39 PM

5. The Cash Budget
The Cash Budget is used to plan, monitor and control the liquidity of a business.
The Cash Budget reflects the inflow and outflow of cash over the budget period
and is used to forecast and plan the cash flow of the business. Thus, when
preparing the Cash Budget the most important word to keep in mind is cash.
The Cash Budget is arguably the most important part of the budgeting process,
since failure to plan a business’s cash flow properly can lead to considerable
financial difficulties. The Cash Budget enables management to anticipate cash
shortfalls and this gives them time to organise adequate overdraft facilities with
the bank or to arrange alternative short-term financing. Management can also use
the Cash Budget to determine when surplus funds are likely to become available,
which allows management time to decide on the best way to utilise those funds.
In this section, we will start by briefly revising the preparation and presentation
of the Debtors Collection Schedule, the Creditors Payment Schedule and the Cash
Budget. We will then discuss how the information provided in the Cash Budget is
analysed, interpreted and compared with actual results.
5.1 The Debtors Collection Schedule and Creditors Payments

Schedule
As you learnt in Grade 11, the Debtors Collection Schedule and the Creditors
Payment Schedule are normally drawn up before the Cash Budget is prepared.
The Debtors Collection Schedule is used to determine the amount of cash that
is expected to be collected from debtors during the budget period, while the
Creditors Payment Schedule sets out the amount of cash that is expected to be
paid to creditors during the budget period. The preparation of these two schedules
is illustrated in the following example.
Example
Required
Use the following information to prepare the Debtors Collection Schedule and
Creditors Payment Schedule of Buffalo Traders for the period 1 March 2018 to
30 April 2018.
Information
• The actual and budgeted credit sales and total purchases of Buffalo Traders
are as follows:
Credit sales Total purchases
Actual Budgeted Actual Budgeted
January 2018 R72 000 R60 000
February 2018 R78 000 R64 000
March 2018 R86 000 R76 000
April 2018 R91 000 R80 000
• Trade debtors are normally collected as follows:

50% within the month in which the sales took place.
■
25% in the following month.

■
20% in the second month after the sale.

■
5% is written off as irrecoverable in the third month.

■
• 80% of the total purchases of trading stock are on credit.

• Creditors are paid in the month after the purchases were made, in order to
take advantage of the 5% discount offered for prompt settlement.
Acc GR12 LB.indb 415 6/6/13 6:04:39 PM

Example continued
Solution
Buffalo Traders
Debtors Collection Schedule for the period 1 March 2018 to 30 April 2018
Collections Bad debts Outstanding
Month Credit sales debts
Mar 2018 Apr 2018
January 2018 R72 000 (× 20%) R14 400
(× 5%) R3 600
February 2018 R78 000 (× 25%) R19 500
(× 20%) R15 600
(× 5%) R3 900
March 2018 R86 000 (× 50%) R43 000
(× 25%) R21 500
(× 25%) R21 500
April 2018 R91 000 (× 50%) R45 500
(× 50%) R45 500
R76 900 R82 600 R7 500 R67 000
Buffalo Traders
Creditors Payment Schedule for the period 1 March 2018 to 30 April 2018
Feb 2018 Mar 2018
Total purchases 64 000 76 000
Cash purchases (20%) 12 800 15 200
Credit purchases (80%) 51 200 60 800
Payments
Month Credit purchases
Mar 2018 Apr 2018
February 2018 R51 200 (× 95%) 48 640
March 2018 R60 800 (× 95%) 57 760
48 640 57 760
Activity 14.8
The information given below was taken from the books of Boland Traders Ltd.
INTERNAL Required
CONTROL 1. Prepare the Debtors Collection Schedule of Boland Traders Ltd. for the three months
2. Prepare the Creditors Payment Schedule of Boland Traders Ltd. for the three months
3. Does the company have a good credit policy with regards to debtors? Suggest some
control measures that could be taken to improve their collections from debtors.
4. What are the advantages to the company in the way that creditors get paid?
Acc GR12 LB.indb 416 6/6/13 6:04:40 PM

Information
Actual figures Budgeted figures
Sep 2017 Oct 2017 Nov 2017 Dec 2017 Jan 2018 Feb 2018
Cash sales 21 000 18 700 25 600 55 800 10 800 22 200
Credit sales 16 400 14 600 22 400 68 400 9 600 15 600
Cash purchases 5 200 10 800 29 000 5 400 3 600 4 400
Credit purchases 14 600 18 000 45 400 6 600 4 900 6 000
It is expected that debtors will pay their accounts as follows:
• 30% in the same month as the sale, a discount of 5% is allowed.
• 50% in the following month.
• 15% in the second month following sale.
• 5% will probably not be collected and will be written off as irrecoverable at the end of
the second month following sale.
• 60% of creditors are paid after two months and 40% in the third month following
purchases.
Activity 14.9
Required
Prepare the following, based on the data, projections and additional information supplied
by Moerat Traders:
1. The Debtors Collection Schedule for the period of 1 December 2017 to 28 February
2018. Indicate which amounts are considered uncollectable, as well as the total
amount owed by debtors on 28 February 2018.
2. Calculate the amount payable to creditors during January 2018.
Information
Actual information
Oct 2017 Nov 2017
Credit sales 120 000 131 400
Cash sales 60 000 66 600
Trading stock withdrawn 3 000 3 000
Projections
Dec 2017 Jan 2018 Feb 2018
Credit sales 186 000 168 000 114 000
Cash sales 90 000 72 000 48 000
Trading stock withdrawn 4 000 4 000 4 000
• Debts are usually collected as follows:
30% during the month of transaction. A discount of 5% is allowed.
■
50% after 30 days

■
17% after 60 days

■
The remaining debts are written off as irrecoverable at the end of the second
■
month following the transaction.

• All trade goods are sold at cost price plus 50% mark-up.
• Trading stock is maintained at a constant level (purchases replace goods sold during
the same month).
• Trade goods purchased on credit usually amount to 75% of all purchases.
• Purchases on credit are paid two months after the date of the transaction.
Acc GR12 LB.indb 417 6/6/13 6:04:40 PM

5.2 Preparation and presentation of the Cash Budget
As you learnt in Grade 11, only future cash transactions are considered when
drawing up a Cash Budget. The expected cash inflows for the budget period
are recorded in the receipts section of the Cash Budget, while the expected
cash outflows for the budget period are recorded in the payments section of the
Cash Budget.
The cash surplus or deficit for each month is determined by subtracting the
total expected payments for the month from the total expected receipts for the
month. The surplus or deficit is then added to the cash balance at beginning of
period in order to determine the expected amount of cash on hand at end of
period. The preparation and presentation of the Cash Budget is illustrated in the
following example.
Example
Required
Use the following information to prepare the Cash Budget of Khumba Traders
for August and September 2018. The totals column is not required.
Information
• On 31 July 2018, the bank account of Khumba Traders showed an overdraft
of R12 780.
• Total actual and budgeted sales:
Total sales
Actual sales: June 2018 R135 000
July 2018 R120 000
Budgeted sales: August 2018 R144 000
September 2018 R150 000
• 40% of the total sales are on credit, while the rest is for cash.
• The debts of trade debtors are normally collected as follows:
■ 50% in the month of the sale
■ 40% after 30 days
■ 8% after 60 days
■ 2% is written off as irrecoverable
• The business maintains constant stock levels and uses a fixed mark-up of
50% on cost.
• 25% of purchases are for cash and the remainder is on credit.
• Creditors are paid in the month after the purchase of the stock in order to
receive the 4% discount offered for prompt settlement.
• On 1 September 2018, the rent income of R7 500 per month will be
increased by 8%.
• Mrs Khumba, the owner of Khumba Traders, is planning a new advertising
campaign for the beginning of August 2018. She will pay R3 500 to place five
advertisements in the local newspaper during August 2018 and then expects
to place a further eight advertisements in September 2018.
• The total amount paid for salaries to the two shop assistants in July 2018
was R17 200. Mrs Khumba plans to hire another shop assistant on 1 August
2018 at the same rate. The two current shop assistants are due for an annual
increase of 10% at the beginning of September 2018.
• Mrs Khumba intends to buy new equipment for the business costing R8 800
and will pay it off over four months starting in September 2018.
• Mrs Khumba will continue to draw R3 500 cash from the business each month.
Acc GR12 LB.indb 418 6/6/13 6:04:40 PM

Example continued
• Bank charges are usually budgeted for at 0,5% of total sales per month.
• Other operating expenses amount to R12 800 per month and are paid
by cheque.
Solution
Khumba Traders
Cash Budget for August and September 2018
August 2018 September 2018
RECEIPTS
Cash sales 86 400 90 000
Cash from debtors 52 320 56 880
June (54 000 × 8%) 4 320
July (48 000 × 40%) (48 000 × 8%) 19 200 3 840
August (57 600 × 50%) (57 600 × 40%) 28 800 23 040
September (60 000 × 50%) 30 000
Rent income (7 500 × 108%) 7 500 8 100
TOTAL RECEIPTS 146 220 154 980
PAYMENTS
Cash purchases 24 000 25 000
Payments to creditors (60 000 × 96%) (72 000 × 96%) 57 600 69 120
Advertising (3 500 ÷ 5) × 8 3 500 5 600
Salaries [(17 200 ÷ 2) × 3] (25 800 + 1 720) 25 800 27 520
Equipment (8 800 ÷ 4) – 2 200
Drawings 3 500 3 500
Bank charges (144 000 × 0,5%) (150 000 × 0,5%) 720 750
Other operating expenses 12 800 12 800
TOTAL PAYMENTS 127 920 146 490
CASH SURPLUS/DEFICIT 18 300 8 490

BALANCE AT BEGINNING OF PERIOD (12 780) 5 520
CASH ON HAND AT END OF PERIOD 5 520 14 010
Calculations
Jun 2018 Jul 2018 Aug 2018 Sep 2018
Total sales 135 000 120 000 144 000 150 000
Cash sales (60%) 81 000 72 000 86 400 90 000
Credit sales (40%) 54 000 48 000 57 600 60 000
Total purchases (Total sales ÷ 150%) 90 000 80 000 96 000 100 000
Cash purchases (25%) 22 500 20 000 24 000 25 000
Credit purchases (75%) 67 500 60 000 72 000 75 000
Acc GR12 LB.indb 419 6/6/13 6:04:40 PM

Activity 14.10
Required
1. Use the information below to prepare the Cash Budget of Delta Stores for July and
August 2018.
2. In June 2018, the business moved to new premises and made other substantial
changes. This has caused cash flow problems and has led to the business being
heavily overdrawn at the end of June 2018. Does the owner have a reason to be
optimistic about the business’s future, or were the changes a big mistake?
Information
• The current account was overdrawn by R83 878 on 30 June 2018.
• Actual and budgeted sales information:
Sales Actual Budgeted

May 2018 160 000
June 2018 210 000
July 2018 380 000
August 2018 250 000
• Credit sales amount to 60% of total sales. Gross mark-up is 40% on turnover.
• Debts are collected as follows:
■ 30% in the month of the transaction. A discount of 5% is allowed.
■ 50% after 30 days.
■ 15% after 60 days.
■ 5% is written off as bad debts.
• 80% of purchases of trading stock are on credit. Creditors are paid two months after
purchases are made. Trading stock on hand must be maintained by means of monthly
purchases. (Hint: See amounts of cost of sales, as well as withdrawal of trading stock.)
• The drawings during the budget period are expected to amount to R4 500 per
month. The owner will be taking trading stock for own use to the value of R1 500 on a
monthly basis from July 2018.
• The company borrowed R50 000 from Standard Bank at an interest rate of 18% per
year on 1 January 2017. Interest must be paid quarterly on 1 January, 1 April, 1 July
and 1 October. The loan is repaid in ten equal payments on 1 July of every year.
• It is expected that a vehicle will be sold for cash during August 2018 at a loss of
R2 800. The vehicle was originally bought for R25 000 and the accumulated
depreciation on the vehicle is expected to be R11 200 on the date of sale.
• Packaging material amounts to 1% of total turnover and is paid in cash.
• Offices have been let since 1 August 2017. The rental agreement states the following:
■ Rent for the first year amounts to R27 600.
■ Rent must be paid monthly.
■ An annual escalation of 10% in the rent amount applies on 1 August every year.
• Other budgeted information:
July 2018 August 2018

Salaries 12 800 12 800
Bad debts 4 800 6 300
Depreciation 7 200 7 200
Operating expenses (to be paid by cheque) 9 900 10 230
Acc GR12 LB.indb 420 6/6/13 6:04:40 PM

5.3 Analysis, interpretation and comparison of Cash Budgets
As is the case with the Projected Income Statement, the preparation of the Cash
Budget is an essential part of the budgeting process. However, much of the benefit
of the Cash Budget stems from management’s ability to analyse and interpret the
information it provides, in order to make effective decisions regarding the cash
flow of the business. Furthermore, during the budget period management should
use the Cash Budget to monitor and control the cash flow of the business, by
comparing the actual figures with the budgeted amounts.
5.3.1 Analysis and interpretation during the planning stage

During the planning stage, management will prepare a Cash Budget based on their
plans and forecasts. They will then analyse the information in the Cash Budget and
based on their interpretation of this analysis, will decide whether the business will
have sufficient cash resources during the budget period to carry out their intended
strategy. If management decide that they are not satisfied with the forecast figures,
they will then re-strategise and look for ways to improve the expected cash flow by
adjusting their plans.
For example, management may simply look to increase the business’s bank
overdraft limit or make arrangements to secure short-term financing to cover a
particular part of the budget period. Alternatively, management may consider various
other strategies to improve the projected cash flow. They may, for example, look
at plans which involve improving their collections from debtors by offering more
encouraging early settlement discounts, while at the same time increasing their credit
purchases and negotiating more favourable payment terms with their creditors.
Management would then redraft the Cash Budget based on the proposed
changes and analyse the new projections. Through their interpretation of these
projections, management will assess whether the new plans would have the
desired effect on the projected cash flow of the business.
It is important to realise that budgets cannot be performed in isolation and that
when one type of budget is modified invariably another budget is affected. When
management considers the merits of various plans to improve the projected cash
flow, they will also need to analyse the impact of those plans on the Projected
Income Statement. From the examples above, a plan to improve cash flow by
increasing borrowing would require the forecast for interest expense to be
increased in the Projected Income Statement, while the second strategy will affect
the forecasts of other items in the Projected Income Statement, such as discount
allowed, bad debts, discount received and even possibly cost of sales.
By analysing and interpreting the information in the Cash Budget, management can
ascertain whether the business will have enough cash during the budget period to:
• meet its short-term commitments such as paying trade creditors and
repaying loans
• purchase stock
• pay operating expenses
• purchase additional fixed assets.
Furthermore, if the Cash Budget of the business predicts a cash shortfall in a
specific month, management can make arrangements with the bank or make
alternative plans in advance. Once management are satisfied with their planning
they will finalise and approve the Cash Budget.
5.3.2 Analysis, interpretation and comparison during the budget period

During the budget period, management will use the information in the Cash
Budget to monitor and control the cash flow of the business by comparing the
Acc GR12 LB.indb 421 6/6/13 6:04:40 PM

actual figures achieved with the budgeted amounts. The comparative figures will
then be carefully analysed, and based on their interpretation of this information,
management can assess whether:
• the business is managing its cash flow as expected
• corrective action needs to be taken to improve liquidity
• they need to investigate further in order to identify underlying cash-flow problems
• control measures need to implemented or improved
• the budget figures were unrealistic and need to be adjusted in the Cash Budget.
As is the case with comparisons involving the Projected Income Statement,
management will often use variance analysis to analyse data when comparing actual
figures with the budgeted amounts in the Cash Budget. However, it is important
to remember that here management are comparing cash flows (cash receipts and
cash payments) and not income and expenses. We will illustrate this difference by
discussing how the management of Khumba Traders are likely to interpret the
results shown in the following extract from their Variance Analysis Report.
Example
Extract from the Variance Analysis Report of Khumba Traders for August 2018
Budgeted Actual Variance
Item Comment
figure figure Amount Percentage
Cash sales R86 400 R103 680 + R17 280 + 20%
Cash from debtors R52 320 R44 472 – R7 848 – 15%
Rent income R7 500 R0 – R7 500 – 100%
Payments to creditors R57 600 R59 328 + R1 728 + 3%
Salaries and wages R25 800 R25 800 0 0%
Advertising R3 500 R4 900 + R1 400 + 40%
The management of Khumba Traders might interpret the above results, as follows:
• Cash sales: Received considerably more than expected; this had a very
positive impact on cash flow; need to establish the reasons for this in order to
try to achieve similar results in the future. May need to adjust the budget.
• Cash from debtors: Received significantly less than expected; this had a
negative impact on cash flow; requires urgent investigation; need to establish
if collections are being poorly controlled; if so control measures need
major improvement; may simply be as a result of credit sales being less than
expected in previous periods. May need to adjust the budget.
• Rent income: No rent was received; this had a negative impact on cash flow;
however management are aware that the tenant had been granted special
permission to pay the rent at the beginning of September 2018; should ensure
that this doesn’t become an ongoing problem, else may need to look for a
new tenant.
• Payments to creditors: Paid slightly more than expected; this had a minor
negative impact on cash flow; may have been due to credit purchases
being more than expected in previous periods or taking advantage of early
settlement discounts offered.
• Salaries and wages: As expected; payment well controlled.
• Advertising: Percentage variance indicates that payments for advertising
were significantly over budget; however the variances amount is relatively low
and thus only had a minor negative impact on cash flow; should investigate
to ensure that there are no problems with control; may find that advertising
was paid in advance in order to receive a reduced rate. May need to allow for
more spending on advertising in the budget.
Acc GR12 LB.indb 422 6/6/13 6:04:40 PM

By comparing actual figures with the budgeted amounts in the Cash Budget, and
analysing and interpreting the results, management can establish whether the
business is:
• collecting debts from debtors as planned
• receiving other cash income as expected (e.g. rent income)
• paying its creditors as planned
• over-spending on any expense items (e.g. telephone)
• under-spending on any expense items (e.g. advertising).
The following example is used to illustrate the type of question that you may be
expected answer in to order to demonstrate:
• your understanding of the Cash Budget
• your ability to analyse and interpret the information in the Cash Budget
• your ability to compare actual figures with the budgeted amounts in the
Cash Budget and then analyse and interpret the results of those comparisons.
Example
You are provided with the following partially completed Cash Budget and other
information relating to Cosmic Traders. The business, which sells cell phones
and cell phone accessories, is owned by Mickey Costa.
Information
Cosmic Traders
Cash Budget for June and July 2018
June 2018 July 2018
RECEIPTS
Cash sales A 187 000
Cash from debtors B 31 041
Loan - 30 000
Rent income ? ?
PAYMENTS
Cash purchases 31 500 C
Payments to creditors 118 656 D
Interest on loan (15%) 1 500 1 500
Salary – manager 15 000 15 450
Salary – sales assistant 7 000 8 050
Deposit – purchase of vehicle 25 000 -
Instalment payment – vehicle (3 equal instalments) - 14 200
Rent expense 8 200 9 184
Packing materials 1 050 1 100
Telephone 2 000 2 000
Advertising 3 500 4 500
Other cash expenses ? ?
CASH SURPLUS/DEFICIT (8 141) 34 947
BALANCE AT BEGINNING OF PERIOD 3 560 ?
CASH ON HAND AT END OF PERIOD (4 581) E
Acc GR12 LB.indb 423 6/6/13 6:04:40 PM

Example continued
• Actual and budgeted sales figures:
Actual Budgeted
April 2018 May 2018 June 2018 July 2018
Total sales R190 000 R206 000 R210 000 R220 000
■ A gross profit margin of 25% on turnover is maintained.

■ 15% of total sales are sold on credit each month.
■ A fixed level of trading stock on hand is maintained throughout the year
through replacement on a monthly basis.
■ 80% of all stock is bought on credit.
• Debtors are expected to pay their accounts as follows:
■ 75% in the month following the month of sale
■ 24% in two months following the month of sale
■ 1% to be written off in the third month following the month of sale
• Creditors are paid in the month after the purchase in order to receive a
4% discount.
Required
1. Calculate the figures labelled A to E in the Cash Budget.
2. Explain what transaction is expected to take place with regard to the loan
in July 2018. On what date is this transaction expected to take place? Give a
reason for your answer.
3. Mickey plans to purchase a second-hand vehicle during the budget period.
Use the information in the Cash Budget to calculate the total expected cost
price of this vehicle.
4. The manager has complained to Mickey about her proposed salary increase in
July 2018. Explain why she is unhappy, using figures to support your answer.
5. At the end of June 2018, Mickey was concerned that the total actual sales for
the month was only R198 000. He compared the actual figures with the Cash
Budget figures and prepared a report which included the following items:
June Variance
Budgeted Actual Amount Percentage
Packing materials R1 050 ? – R42 – 4%
Telephone R2 000 R3 600 ? + 80%
Advertising R3 500 R1 050 – R2 450 ?
a. Complete the report by calculating the missing figures.

b. What advice would you give to Mickey regarding each of these items?
Solution
1. A. Cash sales ( June 2018) = R210 000 × 85% = R178 500
B. Cash from debtors ( June 2018)
= (R190 000 × 15% × 24%) + (R206 000 × 15% × 75%)
= R6 840 + R23 175 = R30 015
C. Cash purchases of trading stock ( July 2018)
= R220 000 × 75% × 20% = R33 000
D. Payments to creditors ( July 2018)
= R210 000 × 75% × 80% × 96% = R120 960
E. Cash on hand at 31 July 2018 = R34 947 – R4 581 = R30 366
Acc GR12 LB.indb 424 6/6/13 6:04:41 PM

Example continued
2. The loan will be increased by R30 000 in July 2018 (more money will be
borrowed). This is only expected to take place on 31 July 2018 (at the end of
the month), because the interest on loan amount for July 2018 is the same as
the amount for June 2018 in the Cash Budget.
3. Cost of the vehicle = R25 000 + (R14 200 × 3) = R67 600
R15 450 – 15
4. Percentage increase of manager’s salary =  ______________
  
   100
000 × ___
R15 000 1 = 3%
R8 050 – 7  000 ___
Percentage increase of sales assistant’s salary =  ____________ 100
R7 000 ×   1 = 15%
The manager’s salary will only increase by 3%, which is fairly low (below the
inflation rate), while at the same time the shop assistant is due to receive a
15% increase in salary.
5. a. Actual amount for packing materials = R1 050 – R42 = R1 008
Variance amount for telephone = R3 600 – R2 000 = + R1 600
R2 450 × ___
Variance percentage for advertising = –  ______ 100
R3 000   1 = –70%
June Variance
Budgeted Actual Amount Percentage
Packing materials R1 050 R1 008 – R42 – 4%
Telephone R2 000 R3 600 + R1 600 + 80%
Advertising R3 500 R1 050 – R2 450 – 70%
b. Advice to Mickey:
• Packing materials was slightly under budget (4% less than the budgeted
amount). This was most probably largely due to the sales being lower
than expected. However, this also indicates that this item was fairly
well planned and adequately controlled.
• Telephone was significantly over budget (80% more than the
budgeted amount). This indicates that the telephone usage was poorly
controlled. Employees may have been using the business phone for
lengthy private calls or international calls. This needs to be addressed
and measures should be taken to improve the controls relating to
telephone usage. The budget should also be inspected to see whether it
is realistic.
• Advertising was significantly under budget (70% less than the budgeted
amount). This probably had a negative impact on sales and would have
contributed to the budgeted sales targets not being achieved. Mickey
should analyse this further by examining the impact that advertising
has had on sales in previous months. In general, it is good practice to
advertise continuously throughout the year.
Acc GR12 LB.indb 425 6/6/13 6:04:41 PM

Activity 14.11
Seaside Café is a sole trader, located near the beach in the Strand. The owner, Lindsay
Jenkins, prepared the budget below.
Information
Seaside Café
Cash Budget for the three months ending 28 February 2018
December 2017 January 2018 February 2018
RECEIPTS
Cash sales 338 800 280 000 140 000
Loan – 180 000 –
Total receipts 338 800 460 000 140 000
PAYMENTS
Cash purchases of stock 169 400 140 000 70 000
Payments to creditors (after 60 days) 33 600 78 140 72 600
Salaries and wages 12 000 12 000 9 000
Rent expenses 7 800 8 580 8 580
Advertising 2 000 2 000 –
Other overheads 12 400 11 200 8 230
Vehicle – – 68 000
Construction of restaurant section – – 150 000
Interest on loan 1 400 1 400 3 500
Repayment of loan 1 200 1 200 3 000
Total payments 239 800 254 520 392 910
Cash surplus 99 000 205 480 ?

Bank account opening balance (21 100) ? ?
Bank account closing balance ? ? ?
Required
1. Rent increases annually on 1 January. What is the percentage increase that will be
applicable from 1 January 2018?
2. Give a possible explanation for the increased budgeted sales for December and
January, when compared to the figures for February.
3. Lindsay, the owner, has applied to increase her loan from R120 000 to R300 000.
She expects it to be approved, and for the money to be available in February 2018.
Calculate the interest rate on the loan.
4. What is the mark-up percentage on cost price, assuming that creditors are paid after
60 days, and assuming that 30% of all stock purchases are on credit? (Stock is replaced
in the same month.)
5. Wages and salaries for December and January are higher than usual, because the
owner hired two students for the two months. What did each of them earn, and was it
a good decision?
6. What will the cash surplus (or deficit) be in February 2018 and to what can it be
attributed?
7. What will the bank balance be on 28 February 2018?
8. Why should Lindsay be very careful with the surplus cash on hand on 28 February
2018?
Acc GR12 LB.indb 426 6/6/13 6:04:41 PM

Activity 14.12
The partially completed Cash Budget of Dreyer Ltd. for the period 1 March 2017 to 31 May
2017 is supplied below. Dreyer Ltd. has an authorised share capital of 120 000 shares at
R7,50 each. The financial year ends on 28 February.
Information
Cash Budget of Dreyer Ltd. for the three months ended 31 May 2017
RECEIPTS
Cash sales 165 600 194 400 134 640
Rent income 14 400 13 200 13 200
Interest on fixed deposit 2 400 – –
Total receipts 182 400 207 600 147 840
PAYMENTS
Cash purchases of stock A 32 400 26 400
Payments to creditors 59 850 61 180 B
Wages to employees (12 employees) 51 600 55 212 55 212
Directors fees (2 directors) 26 000 35 100 35 100
Sundry operating expenditure 18 900 19 845 19 845
Shareholders for dividends 10 500 – –
SARS (income tax) – – 24 100
Audit fees – 4 700 –
Legal fees ? ? ?
Total payments 195 680 211 997 234 657
CASH SURPLUS/DEFICIT (13 280) (4 397) C

BALANCE AT BEGINNING OF PERIOD 30 250 ? D
CASH ON HAND AT END OF PERIOD 16 970 ? E
• The business has a strict cash policy with regards to sales. Sales take place at a profit
mark-up of 80% on cost price. As the competition has increased quite substantially
in recent months, the business plans to hold a sale during May 2017. All goods sold
during May 2017 will be discounted by a fixed percentage.
• The company’s policy regarding purchases of merchandise is as follows:
70% of purchases are on credit and the rest is paid for in cash.
■
Stock is replaced in the month of sale in order to maintain a constant stock level.
■
Creditors are paid within 30 days to benefit from the 5% discount for early
■
payment.
• The company charges rent at a fixed rate per square metre. The tenant currently rents
an office that is 48 m2, but will move to a smaller office in the building on 1 April 2017.
The company increases rent by 10% annually at the beginning of April.
• Interest on fixed deposit is received quarterly at the end of March, June, September
and December.
• Sundry operating expenditure will increase on 1 April 2017 according to the inflation
rate on 28 February 2017.
• The directors declared a final dividend of 15 cents per share at the end of the financial
period, 28 February 2017. This amount will be paid to the shareholders on 30 March
2017.
Acc GR12 LB.indb 427 6/6/13 6:04:41 PM

Required
1. Complete the Cash Budget of Dreyer Ltd. for the three months ended 31 May 2017
by calculating the figures labelled A to E in the Cash Budget.
2. Calculate the percentage discount that will be applied to all goods sold during
May 2017.
3. Calculate the rental per square metre that will be charged in March 2017.
4. What is the size of the smaller office that the tenant will be occupying from
1 April 2017?
5. How many shares had been issued by 28 February 2017?
6. What was the inflation rate on 28 February 2017?
7. In April 2017, the directors of Dreyer Ltd. received a letter from their employees. In
the letter, the employees complain that they are feeling exploited and they notify the
directors that they are planning to strike for two days during May 2017. The directors
want to know whether you think the employees’ complaints are valid. Supply one
reason in favour of a strike and one reason against it. Quote relevant figures from the
budget to support your answer.
8. Give four options that the directors of Dreyer Ltd. can consider in order to manage the
cash flow problems that are expected to occur in May 2017.
Vuyiseka Quambela, a sole trader, owns Vuyiseka Boutique. She is satisfied with the results
achieved by her business. However, during the next three months, she will be moving her
business to new premises in the local shopping mall and she has to make a payment of
R60 000 towards her loan. Vuyiseka is optimistic, and she does not foresee any difficulties
in meeting these financial obligations. The reasons for her optimism are as follows:
• At present, she has R11 200 in the bank, and the profit for the next three months
should add to this balance.
• Her creditors allow a period of 60 days for payment; however Vuyiseka prefers to pay
them much earlier, in order to gain a good reputation.
• She allows her debtors a period of 30 days to pay, but at this stage collection of these
debts is very slow. She believes that she can rectify the problem.
• She plans on carrying two to three months’ worth of inventory to enable her to cater
for the needs of her clients.
Vuyiseka wants your opinion as to whether her optimism is justified. She provides you
with the information below.
Information
Vuyiseka Boutique
Extract from financial statements for the period ending 28 February 2019
2019 2018
Sales (50% on credit) 1 152 000
Expectations and projections for the next three months ending 31 May 2019:
• The 50% mark-up on cost price of items will be maintained.
• Thanks to the location of the new premises, Vuyiseka expects sales to increase in
March and April 2019, and then increase by a further R3 840 in May 2019. Cash sales
are still expected to account for 50% of total sales.
Acc GR12 LB.indb 428 6/6/13 6:04:41 PM

• Vuyiseka will attempt to have her debtors pay their debts earlier, but she does not
expect immediate success. She will award 5% cash discount to customers who pay
their debts in the month in which the transaction takes place. She expects 50% of
the debtors to make use of this offer. 45% should pay in the month following the
transaction, and it is expected that she will write off 5% as bad debts in the next
month.
• 80% of all stock is purchased on credit. Stock sold is replaced in the same month as it
is sold.
• Vuyiseka plans to pay all trade creditors in the month following the purchase of stock.
• Partially completed Cash Budget for the period 1 March 2019 to 31 May 2019:

RECEIPTS
Cash sales 57 600 60 480 ?
Cash from debtors 57 360 82 848 ?
Outstanding debts on 28 February 2019 30 000 28 200 –
March 27 360 25 920 ?
April – 28 728 ?
May – – ?
TOTAL RECEIPTS 114 960 143 328 ?
PAYMENTS
Cash purchases of inventory 15 360 16 128 ?
Payments to creditors 75 800 61 440 ?
Drawings 10 000 10 000 10 000
Loan repayment – – 60 000
Interest on loan (15% p.a.) 1 625 1 625 875
Relocation costs 30 000 – –
TOTAL PAYMENTS 147 285 103 693 ?
CASH SURPLUS/DEFICIT (32 325) 39 635 ?

BALANCE AT BEGINNING OF PERIOD 11 200 (21 125) ?
CASH ON HAND AT END OF PERIOD (21 125) 18 510 ?
Required
1. Calculate the following on 28 February 2019 and comment on the suitability of these
terms for Vuyiseka’s business:
a. Number of days’ stock on hand.
b. Average amount of time needed to collect debts.
c. Average creditors payment terms.
2. Complete the Cash Budget of Vuyiseka Boutique for 1 March 2019 to 31 May 2019.
3. a. Will Vuyiseka’s business be experiencing cash flow problems in the next three
months? Explain the main reasons for your answer. (Refer to the Cash Budget.)
b. What advice can you offer Vuyiseka regarding her cash flow?
4. Calculate the percentage increase that Vuyiseka used to determine:
a. the forecast sales figure for March 2019 (based on the previous year’s average sales)
b. the forecast sales figure for April 2019 (based on the expected sales for March 2019).
5. Describe Vuyiseka’s forecast with regards to the collection of the outstanding debts of
the trade debtors on 28 February 2019.
6. On what date will the loan repayment be made? Use figures to explain your answer.
7. At the end of April 2019, Vuyiseka was very pleased because the total actual sales for
the March 2019 and April 2019 had exceeded the budgeted amounts by 20%.
Acc GR12 LB.indb 429 6/6/13 6:04:41 PM

As planned, 50% of these sales were on credit. She was also satisfied with her
collections from debtors, which were only marginally under budget. However, she
was concerned about the payments to creditors for April 2019, which was more than
expected. She prepared the following table of comparative figures:
March 2019 April 2019

Budgeted Actual Budgeted Actual
Cash sales 57 600 69 120 60 480 72 576
Cash from debtors 57 360 55 160 82 848 81 750
Payments to creditors 75 800 75 800 61 440 73 680
Analyse the information in the table above and provide Vuyiseka with advice regarding
each of the items.
Activity 14.14
George Hlazo plans to start a business called Hlazo Traders.
Information
• George intends to use a mark-up of 100% on the cost price in his business.
• George expects the total sales for the first three months of trading to be as follows:
■ February 2018 R348 000
■ March 2018 R369 600
■ April 2018 R374 400
• Stock will be replaced on a monthly basis.
• George prepared the following Cash Budget of Hlazo Traders for the first three months
of trading, ending 30 April 2018.
Hlazo Traders
Cash Budget for the period February to April 2018
February 2018 March 2018 April 2018
RECEIPTS
Capital contribution 200 000 0 0
Cash sales 261 000 277 200 280 800
Collection of debts 0 43 500 89 700
Loan at 16% p.a. 153 600 0 0
Total receipts 614 600 320 700 370 500
PAYMENTS
Cash purchases of stock 87 000 92 400 93 600
Payments to creditors 0 82 650 87 780
Land and buildings 200 000 20 000 20 000
Equipment 40 000 20 000 15 000
Advertisement 25 000 0 0
Withdrawals 20 000 20 000 20 000
Interest on loan 0 2 048 2 048
Floor manager salary 10 000 10 000 10 000
Wages: Three shop assistants 9 900 9 900 9 900
Sundry expenses 74 500 51 000 47 000
Total payments 466 400 307 998 305 328
Cash surplus 148 200 12 702 65 172

Bank opening balance 0 148 200 160 902
Bank closing balance 148 200 160 902 226 074
Acc GR12 LB.indb 430 6/6/13 6:04:41 PM

Required
1. Study the budgeted amount for cost of advertising for Hlazo Traders. Do you agree
with George’s advertising plans? Comment.
2. George feels that the budgeted amount of R20 000 per month for withdrawals is not
adequate. He wants to increase withdrawals by 50%. Do you think it is a valid option
for George?
3. What percentage of his sales will be on credit?
4. George plans to pay his creditors after 30 days. Calculate the percentage discount he
expects to receive from creditors in March 2018 for settling his account promptly.
5. No settlement discount will be allowed to debtors. Calculate the percentage of
debtors who are likely to pay their debts after one month. Do you feel collection of
debts is acceptable?
6. At the end of April 2018, George calculated the actual figures for the three months of
trading and compared some of them to the budgeted figures as follows:
Budgeted figures Actual figures Percentage

increase/decrease
Total sales 1 092 000 1 255 800 +15%
Purchases 546 000 529 620 –3%
Salary: floor manager 30 000 33 600 +12%
Wages: shop assistants 29 700 29 700 0%
Sundry expenses 172 500 188 025 +9%
George was reasonably happy with these results and was especially pleased that the
actual sales were well above the budgeted amount. However, this information also
indicates that George may encounter some problems in his business if he is not careful.
Identify two potential problems and offer suggestions for solving each of the problems.
6. Ethical challenges relating to budgeting

One of the important benefits of budgeting is that budgets, and the budgeting
process, can help to motivate employees. Budgets are often used as a tool by
management to motivate employees by:
• involving them in the budget process; and
• rewarding employees who achieve their budget targets.
Unfortunately, this often creates a conflict of interests for employees, which
can sometimes promote unethical behaviour and can even lead to employees
becoming counterproductive.
For example, a departmental budget may be used to set income and
expenditure targets that the employees involved in a particular department are
expected to achieve. However, those same employees are often requested to
participate in the budget process. Those employees may see this as an opportunity
to protect their own interests and may try to create some “breathing room” for
themselves by undervaluing expected sales and inflating expected expenditure. By
doing this, the budget targets may be comfortably attained and the employees are
likely to receive a positive performance appraisal and be rewarded. However, this is
unethical, dishonest and not in the best interests of the business.
Furthermore, once the budget targets for sales have been achieved in a
particular period, the employees may deliberately attempt to slow down sales in
order to prevent sales budget targets escalating in subsequent periods. Similarly, if
the actual expenditure is lower than the budgeted amount, employees may look to
spend more merely to prevent expenditure targets being reduce in future budgets.
Once again, such practices are morally wrong and counterproductive.
Acc GR12 LB.indb 431 6/6/13 6:04:41 PM

Other problems may be encountered if management creates budgets that are
unattainable, unsustainable and unrealistic. This may result in employees feeling
that the budget targets are impossible to achieve and may lead to poor morale
and frustration. Under such conditions employees will become less productive
and their performance will deteriorate. In some instances, this can even lead
to fraudulent behaviour, where the employees deliberately falsify records in an
attempt to conceal their poor performance.
Even though there are certain ethical challenges associated with budgeting, it still
remains an essential business tool. In order to overcome these ethical challenges,
management should ensure that:
• Employees involved in the budget process adhere to a high level of integrity,
objectivity and professionalism.
• They guard against the dangers of relying too heavily on budget targets to
evaluate performance.
• They strive to create budgets that are realistic and attainable.
• Employees adhere to the principles of ethics and professional conduct and thus
resist any temptation to protect their own interests when creating or working
to a budget.
7. Internal control and internal auditing

As mentioned earlier in this chapter, budgeting plays a valuable role in the
internal control system of a business by helping management to monitor
and control business activities. Budgets also enable management to assess the
feasibility of their plans before they are implemented and thus help management
to avoid making decisions that could put the business at risk. Furthermore,
budgets help to protect the business by anticipating potential future risks such
as cash flow problems.
Budgeting is a business activity and as is the case with all other business
activities, there are risks associated with the budgeting process. These risks should
be managed and internal control procedures should be implemented to protect the
business against these risks. The effectiveness of the risk management and internal
control should then be evaluated during the internal audit.
However, before we discuss the internal control and the internal audit of
the budgeting process, we will first consider the risks associated with the
budgeting process.
7.1 Risks associated with the budgeting process

RISK!
The risks associated with the budgeting process may be summaries as follows:
• Risks of budgets not being prepared properly: If the accuracy, integrity and
reliability of the information contained in the budget is questionable, then
the whole process is flawed. It would be like following a map to the wrong
destination – even if you followed it correctly, you would end up in the wrong
place. Thus it is critical that budgets are accurate and realistic and that they are
prepared in accordance with established standards and policies.
• Risks of budgets not being implemented properly: If the budgeting policies
and procedures to be followed are not carefully drafted, well communicated
and clearly understood by the relevant employees, then even a perfectly
prepared budget will be of little value. It would be like having a perfect map to
the correct destination, but not knowing how to read it. Thus it is crucial that
budgets are properly implemented with clear and comprehensive budgeting
policies and procedures for employees to follow.
432 Chapter 14 • BudGETInG
Acc GR12 LB.indb 432 6/6/13 6:04:42 PM

• Risks of budgets not being complied with: A budget might be prepared
and implemented perfectly, but if the relevant employees do not adhere to
the budgeting policies and procedures, then the whole process is worthless.
It would be like having a perfect map to the correct destination and knowing
how to read it, but then not using it. So it is imperative that employees comply
strictly with budgeting policies and procedures.
7.2 Internal control of the budgeting process INTERNAL

CONTROL
In order for the budgeting process to be successful, the risks associated with the
budgeting process should be addressed and strict internal control procedures
should be established. Although the internal control policies and procedures
relating to budgeting may differ from one business to another, most businesses
should adhere to the following basic internal control procedures:
• Written policies and procedures are established and maintained for budgeting.
• Budgets are prepared (and revised) in accordance with these policies and
procedures.
• Only specifically authorised personnel are involved in budget preparation.
• Measures are taken to ensure the accuracy, integrity and reliability of the budget
information.
• Measures are taken to ensure that budgets are prepared timeously.
• Budgets should receive final approval from an appropriately high level of
management.
• Budgets are implemented according to established policies and procedures.
• Appropriate budget information is distributed and communicated to the managers
responsible for meeting the budgetary objectives, and to employees responsible
for monitoring budget performance.
• Actual performance is periodically compared to budgets in order to identify
any variances.
• Variances are dealt with according to established policies and procedures and the
appropriate corrective action is carried out timeously.
• Measures are taken to ensure that employees comply strictly with budgeting
policies and procedures.
• Measures are taken to ensure that all personnel involved in the
budget process carry out their duties in an ethical and
professional manner.
• There is adequate division of duties, so that the same person is
not responsible for preparing the budget, approving the budget,
monitoring budget performance and implementing corrective action.
Acc GR12 LB.indb 433 6/6/13 6:04:42 PM

INTERNAL
INTERNAL AUDIT
7.3 Internal audit of the budgeting process
AUDIT
The establishment and implementation of internal controls is the first line of
defence against risk. However, it is essential that an internal audit is performed
to assess the effectiveness of these internal controls and to evaluate the risk
management relating to the budgeting process. An internal audit of the budgeting
process may typically involve the following:
INTERNAL AUDIT
INTERNAL AUDIT
INTERNAL AUDIT
INTERNAL AUDIT •
•
Performing a risk-based assessment of the budget-
related activities in order to identify the areas of
significant risk
Planning the detail and scope of the work to be
performed during the fieldwork phase, giving priority to
those areas of greatest risk
• Performing fieldwork to investigate the measures taken to control the risks
associated with budgeting and to assess whether these risks are being adequately
managed and controlled
• Conducting walk-through tests, tracing a small sample of budget items through the
budgeting process, in order to:
■ verify the existence of the documented internal controls
• Conducting compliance tests by observing activities, interviewing key personnel and
inspecting a representative sample of documents and records, in order to verify that:
■ budgets are being prepared according to set policies and procedures
■ only specifically authorised personnel are involved in budget preparation
■ budgets are prepared timeously
■ budgets are approved by an appropriately high level of management
■ budgets are implemented according to established policies and procedures
■ appropriate budget information is distributed and communicated to the managers
responsible for meeting the budgetary objectives
■ appropriate budget information is distributed and communicated to employees
responsible for monitoring budget performance
■ actual performance is periodically compared to budgets in order to identify any variances
■ variances are dealt with according to established policies and procedures and the
appropriate corrective action is carried out timeously
■ employees comply strictly with budgeting policies and procedures
■ employees involved in the budget process carry out their duties in an ethical and
professional manner
■ the same person is not responsible for preparing the budget, approving the budget,
monitoring budget performance and implementing corrective action
• Conducting substantive tests on a representative sample of transactions, documents
and records, by checking information and re-performing tasks, in order to:
■ test the accuracy, integrity and reliability of the budget information
■ verify that comparisons between actual performance and budgets
have been performed accurately and completely
■ verify that variances between actual performance and budgets have
been indentify correctly and completely
• Reporting to management on the adequacy of the risk management and
the internal control systems relating to VAT and providing
recommendations for improvement
• Establishing a follow-up process to monitor any corrective action
taken by management.

You are provided with the Cash Budget for SA Sports Ltd. for the period 1 March 2018
to 31 May 2018. SA Sports Ltd. trades in sportswear and has an authorised share capital
of 300 000 shares at R4 each. 200 000 shares had been issued by 28 February 2018. The
financial year ends on 28 February.
Acc GR12 LB.indb 434 6/6/13 6:04:43 PM

Information
SA Sports Ltd.
Cash Budget for the three months ending 31 May 2018
RECEIPTS
Cash sales 230 000 234 600 239 292
Received from debtors 124 000 126 420 128 440
Rent income 10 000 10 500 10 500
Yield from shares issued 210 000 – –
Total receipts 574 000 371 520 378 232
PAYMENTS
Cash purchases from stock 138 000 140 760 143 575
Payments to creditors 63 000 64 300 65 100
Salaries and wages 54 000 54 000 59 400
Advertising – 3 000 –
Audit fees 7 500 – –
Directors fees 18 000 18 000 18 000
Sundry administration costs 50 000 51 000 52 020
Interest on loan 1 000 1 000 750
Repayment of loan – – 20 000
Income tax – 49 280 –
Dividends – 54 000 –
Total payments 331 500 435 340 359 025
Cash surplus 242 500 (63 820) 19 207

Bank account opening balance (26 100) 216 400 152 580
Bank account closing balance 216 400 152 580 171 787
Required
1. Salaries and wages will increase from 1 May 2018. Calculate the percentage of
the increase. [3]
2. According to the rental contract the rent increases by 5% per year. On which day
does the rental amount increase? [1]
3. Depreciation amounts to R4 600 per month, but does not appear in the Cash Budget.
Is this a mistake? [2]
4. How many shares will be issued in March 2018? [3]
5. Dividends declared at the end of the financial year will be paid on 1 April 2018.
How much is the dividend per share? [3]
6. Comment on the pattern of sundry administration costs. [4]
7. Interest on the loan is 15% per year. R20 000 will be paid back on the loan on
1 May 2018. What will the balance of the loan account be after this payment has
been made? [4]
8. SA Sports Ltd. plan to extend and improve their building for an amount of R300 000
in June 2018. Provide two suggestions as to how they can finance this venture. [4]
9. At the end of March 2018, the directors compared actual figures with budgeted
figures and were concerned about the following items:
Budgeted figures for March 2018 Actual figures for March 2018
Cash sales 230 000 221 000
Collection of debts 124 000 96 000
Sundry administration costs 50 000 68 130
Comment on these findings and provide one point of advice in each case. [6]
Acc GR12 LB.indb 435 6/6/13 6:04:43 PM

Chapter 15
Revision activities
By the end of this chapter, you will be able to:
• Companies: Bookkeeping and concepts unique to companies
• Companies: General Ledger and closing transfers at year-end
• Companies: Financial statements (Income Statement, Statement of Financial
Position (Balance Sheet) and Cash Flow Statement) and analysis and
interpretation of statements
• Audit reports, professional bodies and King Code
• Fixed assets and asset disposal
• Stock systems and valuation
• Bank, Debtors and Creditors Reconciliations
• VAT
• Cost calculations and manufacturing businesses
• Budgets
This is a revision chapter that reinforces all the work done in the previous chapters.
You can use this chapter as extra practice before tests and examinations. Ask your
teacher to either mark your work once you have completed a question or to make
the answers available to you.
All the activities in this chapter are challenge activities.
436 Chapter 15 • R evisi o n activities
Acc GR12 LB.indb 436 6/6/13 6:04:44 PM

Activity 15.1 Companies: General Ledger
Required
Use the financial information from Matrix Ltd. to create the following accounts in the
General Ledger of Matrix Ltd. for the period 1 March 2019 to 29 February 2020. Balance
the accounts on 29 February 2020.
1. SARS (income tax)
2. Shareholders for dividends
3. Income tax
4. Dividends on ordinary shares
5. Appropriation account
Information
Matrix Ltd. started doing business on 1 March 2018, with an authorised and issued share
capital of 100 000 shares.
On 28 February 2019 the company’s net income after tax for the year amounted to
R80 000. However, no dividends were declared during the first year.
On 31 August 2019, after six months of trading in the second financial year, the
company paid R52 000 to SARS for provisional income tax.
On 30 September 2019 the directors of the company declared and paid an interim
dividend of 18 cents per share.
On 29 February 2020, the last day of the second financial year:

• The total net profit for the year ended 29 February 2020 amounted to R232 000
• The total amount for income tax payable for the whole financial year is 30% of the
total net profit for the year
• The directors declared a final dividend of 35 cents per share.
Activity 15.2 Company bookkeeping
Ngwenya Ltd. has an authorised share capital of 500 000 shares.
Required
Show the following accounts in the General Ledger of Ngwenya Ltd. for the year
1 March 2011 to 29 February 2012 (balance or close off all accounts).
1. Ordinary share capital
2. Loan: AB Bank
3. SARS (income tax)
4. Dividends on ordinary shares
5. Appropriation account
Information
Balances on 1 March 2011
Debit Credit
Loan: AB Bank 120 000
Transactions during the financial year 1 March 2011 to 29 February 2012

2011
21 Mar Paid the amount owing to shareholders for dividends declared in the previous
financial year
R evisi o n activities • C h a p t e r 1 5 437
Acc GR12 LB.indb 437 6/6/13 6:04:44 PM

31 Aug Paid provisional income tax to SARS, R43 100
2 Sep Paid an interim dividend of 12 cents per share
31 Oct Bought back 30 000 shares at R2 each
2012
27 Feb Paid provisional income tax to SARS, R79 200
28 Feb Received a loan statement from AB Bank indicating the following:
Interest on loan capitalised ?
Payment made on loan during the year (31 200)
Balance on 28 February 2012 (102 000)
29 Feb The net profit calculated in the Profit and Loss account amounts to R423 900.
The income tax for the financial year is calculated at R135 648.
Declare a final dividend of R105 000.
Activity 15.3 Companies and asset disposal
You are provided with information relating to Sinazo Ltd. for the financial year ended
28 February 2011.
Background information and opening balances

• The company started in 2004 with an authorised share capital of 600 000 ordinary
shares.
• By 28 February 2010, the end of the previous financial year, the company had issued
350 000 of these shares.
• On 1 March 2010, the SARS (Income Tax) account showed a credit balance of R9 870
and Shareholders for Dividends showed a credit balance of R45 000, which was for
income tax and dividends for the previous financial year still payable.
• On 1 March 2010 the following balances appeared, among others, in the books of
Sinazo Ltd.:
Share capital R1 081 400

1. One of the vehicles, cost price R80 000, was sold on credit for R42 000 on
30 November 2010. The vehicle was purchased on 1 September 2007 and
depreciation was calculated at 20% p.a. on the diminished balance.
2. Pay SARS the amount still owing for income tax of the previous year.
3. Pay the shareholders the amount still owing with regards to dividends of the previous
financial year.
4. Provisional tax payments totalling R78 900 were made to SARS.
5. Interim dividends of 8 cents per share were paid to the shareholders.
6. Further 130 000 shares were issued at R3,70 per share.
7. The tax assessment for the year amounted to R297 900.
8. A final dividend of R172 800 was declared.
Required
1. Analyse the transactions numbered 1 to 8 for the current financial year by showing
the account debited and the account credited, using the following table.
General Ledger
No. Amount
Account debited Account credited
Acc GR12 LB.indb 438 6/6/13 6:04:44 PM

2. Prepare the Appropriation account of Sinazo Ltd. for the year ended 28 February 2011,
if the net profit for the accounting period was R662 000.
3. Complete the note for share capital as it would appear in the notes to the Balance
Sheet on 28 February 2011.
Activity 15.4 Company ledger accounts and asset disposal
The authorised share capital of Beyers Ltd. comprised 5 000 000 ordinary shares.
Their financial year ends on 28/29 February.
Required
1. Calculate the proceeds from shares issued on 1 September 2019.
2. Calculate the retained income on 29 February 2020. (Tip: Use the NAV per share.)
3. Reconstruct the following accounts in the General Ledger of Beyers Ltd. Folios are not
required but all accounts must be properly balanced / closed-off on 29 February:
a. SARS: Income tax
b. Depreciation (include depreciation on equipment)
c. Asset disposal (showing disposal of vehicle)
d. Appropriation account
4. Complete the notes to the Balance Sheet for Tangible/fixed assets. Note: The total
column is not required and certain figures have been entered for you.
5. Beyers Ltd’s profit decreased during the past year but their cash increased. Give two
reasons to explain how this situation could have occurred.
6. N Kaden, a shareholder in Beyers Ltd., owns 40 000 shares in the company which she
purchased on the JSE. She bought 30 000 of the shares on 1 October 2018 and the rest
on 1 September 2019. Calculate the total amount earned by N Kaden for dividends
from Beyers Ltd. during the year ended 29 February 2020.
Information
The following information was obtained from the Notes to the Financial Statements of
Beyers Limited on 29 February.
Notes to the financial statements for the year ended 29 February 2020
Tangible / Fixed assets Vehicles Equipment
Carrying value on 01/03/2019 636 000
Cost 1 020 000 672 000
MOVEMENTS
Additions at cost
Disposal at carrying value
Depreciation for the year (114 300)
Carrying value on 29/02/2020 407 220
Cost
2020 2019
Ordinary share capital ? 12 480 000
Retained income ? 8 400
SARS (Income tax) (Dr) 50 400 (Cr) 42 000
Shareholders for dividends ? 252 000
Non-current liabilities 9 000 000 5 760 000
Acc GR12 LB.indb 439 6/6/13 6:04:44 PM

Transactions and additional Information
• 4 000 000 shares were in issue on 28 February 2019.
• On 1 September 2019 Beyers Ltd. issued a further 800 000 shares at R3,40 per share.
• On 29 February 2020 the following were calculated:
Net asset value (NAV) per share on 29 February 2020, 319 cents
Final dividends per share declared on 29 February 2020, 4 cents
• The amount owing to SARS and the shareholders was paid on 15 March 2019.
• On 1 July 2019 a vehicle costing R140 000 was traded-in for R74 000 on a new vehicle
costing R216 000. The accumulated depreciation on the vehicle sold was R59 360 on
1 March 2019. Vehicles are depreciated by 20% p.a. on the diminished balance. No
entries have been made to record this transaction or this year's depreciation.
• On 1 September 2019 they bought new equipment. This has already been recorded.
No equipment was sold during the year. This year's depreciation on equipment has
been correctly recorded.
• On 31 August 2019 the company paid provisional tax of R168 000. On the same day
they paid shareholders an interim dividend of R210 000 (5,25 cents per share).
• On 26 February 2020 the company made a second provisional tax payment of
R280 800 and the directors recommended a final dividend of 4 cents to be paid to
all shareholders.
Activity 15.5 Companies: Financial statements
Kota Traders Ltd. is registered with 120 000 ordinary shares, of which 80 000 ordinary
shares have been issued. Their accounting period ends on 28/29 February every year.
The company’s Pre-adjustment Trial Balance is given, as well as adjustments and

additional information on 29 February 2020.
Required
1. Draw up the Income Statement for the year ended 29 February 2020.
2. Draw up the following notes to the Balance Sheet:
• Retained income
• Trade and other payables
3. The directors are worried because the condition of the vehicles and computers is
deteriorating at a rapid pace. They suspect that the employees take these assets for
personal use over weekends. Make a suggestion how they could deal with the situation.
Pre-adjustment Trial Balance of Kota Traders Ltd. on 29 February 2020

Balance Sheet accounts Debit Credit
Ordinary share capital 400 000
Vehicles 170 000
Equipment 36 800
Bank 64 722
Change 600
Mortgage bond at 16% 60 000
Acc GR12 LB.indb 440 6/6/13 6:04:44 PM

Nominal accounts
Sales 1 363 200
Insurance 6 744
Telephone 7 572
Salaries 284 000
Bad debts 846
Interest on mortgage bond 9 600
Bank charges 1 970
Audit fees 3 980
2 140 153 2 140 153
Adjustments and additional Information

• The water and electricity account for February 2020 has been received, but not yet
paid, R516.
• An amount owed by a debtor, M Hlaheng, R234, has to be written off as a bad debt.
• The provision for bad debts must be adjusted to 2% of outstanding debt.
• Depreciation must be written off as follows:
On vehicles at 20% per year on the cost price (an additional vehicle was purchased
■
on 30 November 2019, at a total cost of R80 000)

On equipment at 10% per year according to the diminished balance method.
■
• One of the directors was overseas during February 2020 and his remuneration of
R9 000 for February has not been paid yet.
• Used equipment that originally cost R3 000, was traded in by Bushula Traders
on 29 February 2020 for R2 100, for new equipment to the value of R10 000. The
accumulated depreciation of this equipment shows the date of sale amounted to
R1 080. These transactions must still be recorded.
• The mortgage bond is paid annually on 30 November, in instalments of R10 000.
Make provision for outstanding interest.
• Stock is valued at cost price on a first-in first-out basis. A physical stocktaking shows
that the trading stock amounts to R77 890.
• The income tax for the accounting period still owed amounts to R6 578.
• A final dividend of 52,5 cents per share is declared.
Activity 15.6 Companies: Financial statements
You are provided with information relating to Nkewu Ltd. for the financial year ended
30 June 2016.
Required
1. Prepare the Appropriation account in the General Ledger of Nkewu Ltd.
2. Prepare the following notes to the Balance Sheet for 30 June 2016:
a. Ordinary share capital
b. Trade and other payables
3. Prepare the Statement of Financial Position (Balance Sheet) on 30 June 2016.
Where notes are not required, show workings in brackets to earn partial marks.
Acc GR12 LB.indb 441 6/6/13 6:04:44 PM

Information
The following balances appeared in the General Ledger on 30 June 2015:
Retained income (01/07/2014) 320 000
Fixed deposit: LK Bank 30 000
Long-term loan: WS Bank ?
Fixed assets at carrying value on 30/06/2011 3 462 830
Provision for bad debts ?
SARS (income tax – provisional tax payments) 105 000
Bank (favourable balance) 34 200
SARS (PAYE) (cr) 4 480
Pension fund (cr) 1 090
Nominal accounts
One third of the fixed deposit matures on 31 December 2015.

Interest on the loan is capitalised. The loan statement received from WS Bank on
30 June 2015 reflects the following:
WS BANK
LOAN STATEMENT ON 30 JUNE 2011
Monthly payments in terms of the loan agreement. These monthly payments include interest 122 600
and capital repayments of the loan.
The monthly capital repayments on the loan will remain constant until the loan is fully repaid on
30 June 2023
• The authorised share capital comprises 900 000 ordinary shares. On 1 February 2015,
80 000 additional ordinary shares were issued to the public at R4,20 each. This has
been properly recorded and is included in the figures above.
• The following adjustments must still be considered:
■ The directors declared a final dividend of 14 cents per share on 30 June 2015.
■ The assessment received from SARS reflects income tax of R112 600 for the
financial year.
• The net profit of R406 800 was arrived at after the following items were taken
into account:
• Stationery on hand on 30 June 2015, R1 090
• Provision for bad debts on 4% of outstanding debtors
• Advertisements prepaid, R1 300
• Expenses payable is water and electricity of R798 and telephone of R442
• An adjustment to the Rent Income account. The total on the Rent Income account
was R34 500 which included rent for July 2015. Rent was increased by 10% on
1 December 2014.
Acc GR12 LB.indb 442 6/6/13 6:04:44 PM

Activity 15.7 Cash Flow Statements and their interpretation
The information below and on the next page was taken from the books of Jabu
Investments Ltd.
Required
1. Draw up a Cash Flow Statement together with notes to the year ended 30 June 2019.
2. Calculate the creditors payment period for the year ended 30 June 2019 and comment
briefly on your findings.
3. Calculate the debt equity ratio for the year ended 30 June 2019.
4. Calculate the return on average capital employed for the year ended 30 June 2019.
(Average capital employed for the year ended 30 June 2019 is R478 107.)
5. Will the bank be willing to grant this business a loan? Comment briefly. Refer to
questions 3 and 4 in your answer. Take into consideration that the interest rate on a
loan is 16% p.a.
6. Give one reason why trade unions and employees will be interested in the financial
statements of the business.
7. What would a person who owns 4 000 shares receive in respect of dividends for the
year ended 30 June 2019?
Information
• The creditors payment period for the year ended 30 June 2018 is 40 days.
• Credit purchases for the year ended 30 June 2019 is R704 450.
• Debtors collection period for the year ended 30 June 2019 is 30 days.
Dr Appropriation account Cr
2019 2019
Jun 30 Income tax 80 037 00 Jun 30 Profit and loss 188 750 00
Dividends on ordinary shares 71 250 00 Retained income 19 375 00
Retained income 56 838 00
208 125 00 208 125 00
Acc GR12 LB.indb 443 6/6/13 6:04:44 PM

Jabu Investments Ltd.
BALANCE SHEET AT 30 JUNE 2019
Note R R
ASSETS 2019 2018
NON-CURRENT ASSETS

Inventories 4 155 801 254 600
TOTAL ASSETS 656 028 555 625

CAPITAL AND RESERVES 431 838 319 375
Dividends on ordinary shares 7 375 000 300 000
Mortgage bond: ABSA Bank 80 000 125 000
CURRENT LIABILITIES
Additional Information
1. FIXED/TANGIBLE ASSETS
Cost 150 000 30 000 52 500

Cost 250 000 55 000 44 500
• A vehicle was bought on 1 April 2019 on credit from Kathy Motors.

• No vehicles were sold during the year.
• No equipment was bought during the accounting period. On 30 June 2019
used equipment was sold to M Morris, a member of staff, at carrying value.
The accumulated depreciation on this equipment on 30 June 2019 was R5 570.
Acc GR12 LB.indb 444 6/6/13 6:04:44 PM

2019 2018
Income accrued (receivable) 2 450 970
SARS (income tax) 1 460 –
53 500 26 205

2019 2018
SARS (PAYE) 2 870 4 350
144 190 111 250
• Interest on the mortgage bond for the year amounts to R18 450.
• Jabu Investments Ltd. is registered with an authorised share capital of 100 000
ordinary shares.
• On 30 June 2018, 60 000 shares were in issue and on 30 June 2018, 75 000 shares
were in issue.
Activity 15.8 Companies
The authorised share capital of Mazerata Ltd. consists of 5 000 000 ordinary shares.
The financial year ends on30 June each year. On 30 June 2012 the company had 400 000
shares in issue.
1. Reconstruct the accounts below in the ledger of Mazerata Ltd.
Balance/close off all the accounts on 30 June 2012.
a. SARS (income tax)
b. Depreciation
c. Asset disposal
2. Complete the note for Tangible assets.
3. Complete the following in the Cash Flow Statement:
a. Dividends paid note
b. Cash generated from financing activities section
4. a. Calculate the retained income on 30 June 2012. (Tip: Use NAV per share.)
b. Calculate the net profit before tax as it appeared in the Income Statement for the
year ended 30 June 2012. (Hint: Reconstruct the Appropriation account in order to
find this amount.)
c. Mazerata Ltd’s profit decreased during the past financial year yet their cash
increased. Explain, quoting figures from the financial information below, what the
possible reasons could be.
d. V Baatjies owns 40 000 shares in Mazerata Ltd., which she purchased directly
from the company. She bought 30 000 shares on 1 January 2011 and the other
10 000 share on 1 January 2012. How much dividends did V Baatjies earn from
her investment in the company for the financial year 1 July 2011 to 30 June 2012?
e. Would you advise shareholder V Baatjies to buy more shares in this company? The
current price on the JSE is 325 cents per share. Quote figures when advising her to
buy shares more or not to buy more shares.
Acc GR12 LB.indb 445 6/6/13 6:04:45 PM

Information
The following information was obtained from the financial statements of Mazerata Ltd.:
Mazerata Ltd.
NOTES TO THE FINANCIAL STATEMENTS AT 30 JUNE 2012
FIXED / TANGIBLE ASSETS
Vehicles Equipment
Carrying value at beginning of year 530 000
Cost 850 000 560 000
Movements
Additions
Depreciation (95 250)
Carrying value at end of year 339 350
Cost
Extract from the Balance Sheet on 30 June

2012 2011
Ordinary share capital 1 200 000 900 000
Retained income ? 52 000
SARS (income tax) (Dr) 42 000 (Cr) 35 000
Shareholders for dividends ? 210 000
Non-current liabilities 750 000 480 000
Transactions and additional Information

• The amount owing to SARS and the shareholders was paid on15 July 2011.
• On 1 November 2011 a vehicle costing R140 000 was traded in for R74 000 on a new
vehicle costing R216 000. The accumulated depreciation as on 1 July 2011 on the
vehicle sold was R59 360.
• Vehicles are depreciated by 20% p.a. on the diminished balance.
No entries have been made to record this transaction or this year’s depreciation.
• On 31 December 2011 the company paid provisional tax of R140 000. On the same
day they paid shareholders an interim dividend of R150 000.
• On 1 January 2012 Mazerata Ltd. issued further 100 000 shares at R3 each.
• On 1 January 2012 the company bought new equipment. This has already been
recorded. No equipment was sold during the year.
This year’s depreciation on equipment has been correctly recorded.

• On 28 June 2012 the company made a second provisional tax payment of R234 000.
• On 30 June 2012 the following were calculated:
■ Net asset value (NAV) per share 319 cents
■ Final dividends per share declared 45 cents
Acc GR12 LB.indb 446 6/6/13 6:04:45 PM

Activity 15.9 Companies
MegaChoice Ltd. is a public company with an authorised share capital consisting of

120 000 ordinary shares. Their financial year ends on 28/29 February.
Required
1. Prepare the following notes to the Cash Flow Statement for the year ended
29 February 2016:
a. Reconciliation between net profit before taxation and cash generated from
operations
b. Dividends paid
c. Income tax paid
2. Prepare the following sections to the Cash Flow Statement for the year ended
29 February 2016:
a. Cash flow from financing activities
b. Cash flow from investing activities
3. a. The net asset value (NAV) per share for the year ended 28 February 2015 was
534 cents per share. Calculate the net asset value per share for the year ended
29 February 2016 and comment briefly.
b. Calculate the earnings per share (EPS) for the year ended 29 February 2016 and
comment briefly.
c. As a shareholder in the company, you are offered R5,50 per share by a prospective
buyer of your shares. State two possible reasons for the prospective buyer’s
willingness to offer you R5,50 per share.
d. The debt equity ratio for the year ended 28 February 2015 was 0,31 : 1. Calculate
the debt equity ratio for the year ended 29 February 2016 and comment briefly.
e. The bank offered a further loan of R200 000 at an interest rate of 9%. Would you
advise the directors to take up the offer from the bank? Motivate your answer.
Information
Extract from the Income Statement
2016 2015
Sales 824 400 801 800
Deprecation (on equipment) 76 000 59 000
Net profit before tax 458 000 422 000
Acc GR12 LB.indb 447 6/6/13 6:04:45 PM

MegaChoice Limited
BALANCE SHEET AT 28/29 FEBRUARY
R R
ASSETS 2016 2015
NON-CURRENT ASSETS
Fixed/tangible assets 1 820 000 1 350 000
CURRENT ASSETS 1 345 000 1 601 600

Inventories 885 000 851 000
TOTAL ASSETS 3 165 000 2 951 600

SHAREHOLDERS’ EQUITY ? 1 601 000
Share capital ? 1 200 000
NON-CURRENT LIABILITIES 350 000 500 000

TOTAL EQUITY AND LIABILITIES ? 2 951 600
• The income tax for the year ended 2016 was accurately calculated at 30% of the net
profit before tax.
• 100 000 additional shares were sold to the public on 1 March 2015 at R4 each.
• On 29 February 2016, 400 000 shares were in issue.
• The following dividends were paid and declared during the current financial year:
Paid on 10 March 2015 75 000
Paid on 31 August 2015 136 600
Declared on 20 February 2016 60 000
Tangible assets
2016 2015
Land and buildings at cost 1 386 000 800 000
Equipment at carrying value 434 000 550 000
1 820 000 1 350 000
Note
No additional equipment was purchased during the financial year, but equipment was
sold at carrying value.
Trade and other payables

2016 2015
SARS (income tax) 48 000 29 000
Acc GR12 LB.indb 448 6/6/13 6:04:45 PM

Activity 15.10 Cash flow and interpretation
Sylco Ltd. is a public company listed on the JSE South Africa. They have an authorised
share capital of 200 000 ordinary shares.
Required
1. Draw up the Cash Flow Statement for the year ended 30 June 2018. Where notes are
not required, show workings in brackets.
2. Calculate the following financial indicators for 2018:
• Return on average shareholders’ equity
• Earnings per share
• Rate of stock turnover
3. The directors decided to reduce the mark-up percentage. In your opinion, was this a
good strategy? Explain briefly.
4. The number of directors and employees remained the same for the past two years.
However, the employees feel that they are now working much harder and are
therefore dissatisfied. In your opinion, have they been treated fairly or not? Explain
briefly, supporting your answer by quoting specific figures from the financial
statements and/or financial indicators.
5. In your opinion, has the company controlled its working capital (current assets and
current liabilities) well, and is it in a good liquidity position? Explain briefly, quoting
specific figures from the financial statements and/or financial indicators.
6. As a shareholder, you are satisfied with the return, earnings, dividends and the share
price of the company. Write a brief letter to the Managing Director/Chief Executive
Officer (CEO), explaining why you are happy with the performance of the company.
Quote specific figures from the financial statements and/or financial indicators to
support your opinions.
7. Explain why it is essential for you, as a shareholder, to inspect the audit report and
attend the annual general meeting (AGM) of the company.
Information
Information extracted from the Income Statement for the past two years:
2018 2017
Rm Rm
Sales 2 784 000 1 800 000
Cost of sales (1 740 000) (1 000 000)
Gross profit 1 044 000 800 000
Other operating income (444 000) (400 000)
Salaries and wages (30 employees) 210 000 195 000
Directors fees (three directors) 66 000 50 000
Depreciation 78 900 69 100
Other operating expenses 89 100 85 900
Operating profit (loss) 600 000 400 000

Interest income 37 125 45 000
Profit (loss) before income expense 637 125 445 000
Interest expense (on mortgage loan) (50 960) (63 000)
Net profit before tax 586 165 382 000
Income tax (176 095) (114 600)
Net profit after tax 410 070 267 400
Acc GR12 LB.indb 449 6/6/13 6:04:45 PM

Information extracted from the Balance Sheet for the past two years:
2018 2017
Rm Rm
Non-current assets 1 848 120 1 833 000
Tangible assets 1 578 120 1 383 000
Financial assets (investments 10% p.a.) 270 000 450 000
Current assets 267 000 252 000
Inventories (all trading stock) 90 000 187 500
Ordinary shareholders’ equity 1 828 170 1 485 000
Ordinary share capital 1 635 000 1 320 000
Non-current liability (mortgage loan, 14% p.a.) 150 000 450 000
Current liabilities 136 950 150 000
Trade and other payables consist of the following:

2018 2017
Rm Rm
Accrued expenses (interest on mortgage loan) 3 000 9 000
SARS (income tax) 6 450 4 500
• 22 500 new shares were issued on the first day of the financial year.
• 142 500 shares were issued on 30 June 2018.
• Tangible assets were sold at the carrying value of R274 980m.
• New tangible assets were purchased during the year.
• The total dividends amounted to R381 900 for the year ended 30 June 2018.
• The market value of the shares on the JSE on 30 June 2018 is R11,90.
This represents a 15% improvement from the previous year.
The following financial indicators were calculated for the past two years:
2018 2017
% increase in sales 54% 2%
% mark-up on cost 60% 80%
% operating expenses on sales 15,9% 22,2%
% operating profit on sales ? 22,2%
% net profit on sales 14,7% 14,8%
% return on average shareholders’ equity ? 18%
% return on total average capital employed 32,5% 26,8%
Net asset value per share ? 1 238 cents
Dividends per share 268 cents 120 cents
Earnings per share ? 223 cents
Debt equity ratio 0,1 : 1 0,3 : 1
Current ratio 1,9 : 1 1,7 : 1
Acid test ratio 1,3 : 1 0,4 : 1
Rate of stock turnover ? 7 times
Acc GR12 LB.indb 450 6/6/13 6:04:45 PM

Activity 15.11 Audit report
The following audit report was issued by the auditors of nkewu ltd.:
INDEPENDENT AUDITORS REPORT
We conducted our audit in accordance with International Standards on Auditing.

Those standards require that we plan and perform the audit to obtain reasonable
assurance that the financial statements are free of material misstatement. These
financial statements are the responsibility of the company’s directors. our responsibility
is to express an opinion on these financial statements based on our audit.
Audit opinion – To the shareholders

In our opinion, the financial statements fairly present, in all material respects, the
financial position of the company and the group at 30 June 2011 and the results of
their operations and cash flows for the year ended, in accordance with International
Financial Reporting Standards, and in the manner required by the Companies Act in
South Africa.
Theron Du Plessis
Port Elizabeth 12 August 2011
Answer the following questions.

1. Who is responsible for ensuring that the financial statements are prepared?
2. Who is the main group of people the auditors are addressing the auditor’s report to
and why is the report addressed to this group?
3. Why does the Companies Act make it a requirement for public companies to
be audited?
4. Explain why you would be satisfied with this report.
5. Why is it important for an external auditor of a public company to be a member of a
professional body, such as SAICA?
6. An audit includes, examining on a test basis, evidence supporting amounts in the
financial statements. Give one example of “evidence” an auditor would use.
7. The auditor’s report refers to the International Financial Reporting Standards (IFRS).
Explain why auditors have to take IFRS into account when expressing their opinion.
8. Steven Theron, the audit partner, who worked on the audit job of nkewu ltd.
previously, will marry michelle, the financial director of nkewu ltd. on 8 november
2012. Will this affect the audit of nkewu ltd. in any way? Give a reason for your answer.
What advice would you give Steven and michelle?
Activity 15.12 Audit report
You are provided with an extract from the audit report of the independent auditors of
Wilmot ltd.
EXTRACT FROM THE REPORT OF THE INDEPENDENT AUDITORS

We have audited the financial statements of Wilmot ltd, set out on pages 34 to 65 of
the report, for the year ended 28 February 2019. These financial statements are the
responsibility of the company’s directors. our responsibility is to express an opinion
on these financial statements based on our audit.
REVISIon AC TIVITIES • Chapter 15 451
Acc GR12 LB.indb 451 6/6/13 6:04:46 PM

The audit was conducted in accordance with International Financial Reporting
Standards (IFRS) and the Companies Act in South Africa, which require that we
perform the audit to obtain reasonable assurance that the financial statements are
free of misstatement.
Audit opinion
In our opinion, the financial statements fairly represent the financial position of the
company at 28 February 2019, except for the donation expense in the Income Statement
which could not be verified, as no documentation existed for this expenditure.
Human & De Villiers

31 March 2019
Answer the following questions.

1. Briefly explain the role of an independent auditor and why the Companies Act makes
it a requirement for public companies to be audited by an independent auditor.
2. did Wilmot ltd. have a qualified or unqualified report? Give a reason for your answer.
3. Explain why the auditors found it necessary to stipulate the numbers (that is 34 to 65)
in this report.
4. on further investigation it was discovered that the donations expenses in the Income
Statement included R50 000 for a vehicle of the company that the CEo gave to his
son. The CEo told the bookkeeper to debit Donations with R50 000 (the carrying value
of the vehicle) and he asked the independent auditor to ignore this as it had been
recorded in the financial statements.
a. The independent auditor feels that he will not be doing his job properly if he
agrees to the CEo’s request. Why does he feel this way?
b. State two possible consequences for the independent auditor, should he agree to
this request.
5. What actions would Human & de Villiers have to perform to verify the Tangible Assets
figure in the Balance Sheet? Provide three points.
KING CODE 6. In South Africa good corporate governance is promoted and the King Code is used
as an example of this. The king Code stipulates that a company should reflect in their
annual reports their influence on economic, social and environmental issues.
The influence on economic, social and environmental issues is often referred to
as the ________________________ .
7. Give an example of a South African company that has been complying with this
aspect of the king Code. Briefly explain the contribution that this company is making
to the community with regards to social or environmental issues.
8. What criminal offence took place in each of the following cases?
The SEC alleges that Tom Paulse, the owner of Insight Research,
traded in stocks of klJ ltd. based on inside information he received
Case 1
from a close relative employed there. law enforcement officers arrested
Paulse on Tuesday.
Hein klein, former head trader at hedge fund kl Capital agreed to pay
R2 million to settle civil allegations by the JSE, the regulator said in a
Case 2 release monday. The JSE alleged that he tried to artificially move futures
prices near the very end of daily trading in a manoeuvre called “banging
the close”, which involves inundating the market with trading orders.
A South African shipping company, GH ltd., has been sentenced
Case 3 R2 million in court for violating the Act to Prevent Pollution from Ships
and making false statements to inspectors.
452 Chapter 15 • REVISIon ACTIVITIES
Acc GR12 LB.indb 452 6/6/13 6:04:47 PM

Activity 15.13 Fixed assets, depreciation and asset disposal
The following information relates to the trading activities of Ralgiant Traders for the
financial year ended 29 February 2020. The business is owned by Mr KL Schoombe.
Information
Ralgiant Traders is considering trading in an old vehicle (Toyota) for a new one on
29 February 2020, the financial year-end. A new vehicle that will meet the needs of the
business will cost R180 000. A car dealer has offered a trade-in value of R35 000 for the
Toyota. The following information appeared in the fixed asset register:
FIXED ASSET REGISTER RALGIANT TRADERS

Page 22
Type of asset: Vehicle
Registration: CJ 55699 Date purchased: 1 September 2017
Dealer: Toyota Depreciation: 20% on diminished balance
MOVEMENTS
Cost price Depreciation Accumulated Carrying value
depreciation
01 Sep 2017 R100 000 100 000
28 Feb 2018 R100 000 10 000 10 000 90 000
28 Feb 2019 R100 000 18 000 28 000 72 000
29 Feb 2020 R100 000 ? ? ?
The following balances appeared in the books of Ralgiant Traders on 1 March 2019:
Vehicles R320 000
Accumulated depreciation on vehicles R88 900
Required
1. Calculate the total accumulated depreciation on the asset sold (Toyota).
2. Draw up an Asset Disposal account and calculate whether the asset will be traded in
for a profit or a loss.
3. Let’s suppose the business has agreed to trade in the vehicle. Show this by drawing up
the Movements section of the Fixed asset note for the year ended 29 February 2020.
4. Mr Schoombe wants to appoint a new bookkeeper who should also be responsible for
control over fixed assets. Name three duties and skills the person appointed as fixed
asset manager should possess.
Activity 15.14 Managing resources: Inventory and fixed assets
You are the external auditor of Michausdal High School. After auditing the school’s
financials for the year ended 28 February 2014 the principal, Mr K Abrahams, asked you
some questions.
Required
1. As the auditor, you did a test on fixed assets by comparing the asset registers of
the computers and printers in the school with the physical printers and computers
in the classrooms and offices. According to the school’s financials and asset registers
there should be 112 computers and 11 printers in the school building. After the
physical stocktaking was done, you discovered that there are only 104 computers
and 9 printers in the building.
The principal has asked what the possible reasons could be for the difference in
figures. State two reasons.
Acc GR12 LB.indb 453 6/6/13 6:04:47 PM

2. Mr Abrahams suspects that the lady responsible for the school library is ordering
books and magazines for personal use on the school’s account. How can he check if
his suspicions are true and if so, what control measure would you suggest to prevent
this from happening again in the future?
3. The printers in the school are currently applied as follows:
Number of pages How often the
Where printer is Cost of one
Printer type printed from one cartridge is
used cartridge
cartridge replaced in a year
Principal’s office Canon MG5100 R700 900 3
Secretary’s office Canon MG5100 R700 900 5
Finance office Canon MG5100 R700 900 5
Deputy head’s office HP LaserJet 1010 R600 800 3
HP LaserJet 1010 R600 800 8
Teachers’ media room HP LaserJet 1010 R600 800 8
HP LaserJet 1010 R600 800 8
Computer room 1 HP LaserJet 1200 series R800 1 100 6
Computer room 2 HP LaserJet 1200 series R800 1 100 6
The principle is considering getting rid of the three printers in the teachers’ media
room as well as the printer in the deputy head’s office as it often gives problems.
He wants to replace these four printers with a network printer that can also make
photocopies. The computers in the teachers’ media room and the one in the Deputy
Head’s office will then be linked to the network printer. All the teachers will also be
able to print to the network printer from their classrooms.
Cost of network printer R 6 400
Cost of HP LaserJet 1010 printer R 960
The ink cartridge of the network printer cost R1 550 and it has a lifecycle of
3 500 pages.
a. Calculate the annual amount spent on cartridges for the three computers in the
teachers’ media room and the Deputy Head’s office.
b. Calculate the annual amount that would be spent on ink cartridges for the
network printer if the principal decides to replace the four aforementioned
printers with a network printer.
c. State two advantages and one disadvantage of changing to a network system.
Activity 15.15 Fixed assets
1. The manager of Cia Stores asked the bookkeeper to prepare a report on the
equipment of the business for the last accounting period. The bookkeeper is a friend
of yours and she has asked for your help.
Required
Write the report referring to the following:
a. The cost price of equipment at the beginning of the year
b. The accumulated depreciation of the equipment at the beginning of the year
c. The carrying value at the beginning of the year
d. Details of equipment bought and sold
e. Calculations for depreciation for the year
f. Details at the end of the year.
Acc GR12 LB.indb 454 6/6/13 6:04:47 PM

Information
The manager sent you the following information:
Extract from the financial statements at 28 February 2018

EQUIPMENT
Cost price 81 000
Accumulated depreciation (38 400)
Carrying value on last day of previous year 42 600
Movements
Additions at cost 30 000
Asset disposal at carrying value (4050)
Depreciation for the year (8 250)
Carrying value on last day of current year 60 300
Cost price 84 000
Accumulated depreciation (23 700)
Carrying value on last of current year 60 300
Comments
The manager asked for full details of the equipment bought and traded in on 31 August
2017. I know that the equipment was traded in at a profit of R4 950. Depreciation on
equipment is calculated at 10% per annum on cost price. Please include your calculations
to help me understand the report.
2. The accountant had been offered a price for the old equipment, which would have
resulted in the business making a profit of R5 000. However, the owner took the
equipment for his own use. The accountant is unhappy that this decision was not the
best for the business and has come to you for advice.
Required
Comment on the sale under the following headings:
a. Why do you think the accountant is unhappy?
b. What difference would it have made to the finances if the equipment had been sold to
the accountant’s contact? Discuss two benefits.
c. Do you believe it is unethical that the owner has taken over the equipment at the
price that he did? Give reasons.
Activity 15.16 Stock valuations
First Tech CC uses the perpetual stock system and the weighted average costing method.
Required
Complete the table on the next page in your Exercise Book. Show your calculations and
round off to two decimal places.
Acc GR12 LB.indb 455 6/6/13 6:04:47 PM

Date Purchases Sales Cost of sales Price per unit Stock on hand
Sep On hand 175 × R90,00
2011 175 × R90,00
Oct 300 × R92,00 (175 × R90,00) + (300 × R92,00)
____________________ 475 × R91,26
     
  
(175 + 300)
43 350 
=  _____
475
R91,26
= _____
   
unit
Dec 420 420 × R91,26 55 × R91,26
= R38 329,20
Feb 400 × R97,50
2012
Mar 436
Apr 441 × R95,00
Jun 402
Aug 442 × R96,75
Calculate the gross profit on 31 August 2012. Sales amounted to R442 660.
Activity 15.17 Stock valuation and control
SECTION A: STOCK VALUATION

Einstein Traders sells one type of laptop to major retailers around South Africa. They make
use of the FIFO method for stock valuation and use the perpetual stock system.
Required
1. What do the letters FIFO stand for?
2. Calculate the value per laptop on hand on 1 March 2017.
3. Calculate the value of the closing stock on 28 February 2018 according to the FIFO
method.
4. Calculate the cost of sales on 28 February 2018.
5. Calculate the gross profit on 28 February 2018.
Information
The information below appeared in the records of Einstein Traders for the year ended
28 February 2018. The business used a fixed selling price of R5 400 per laptop.
Information on stock Number of laptops Value per laptop Total value
Laptops on hand on 1 March 2017 65 ? R188 500
Laptops bought during the year 625 R2 072 000
May 2017 245 R 3 040 R744 800
September 2017 210 R3 600 R756 000
January 2017 170 R3 360 R571 200
Laptops returned from September purchases 6 R3 600 R21 600

Laptops sold during the year 454 R5 400 R2 451 600
Laptops on hand on 28 February 2018 230 ? ?
Acc GR12 LB.indb 456 6/6/13 6:04:47 PM

SECTION B: PROBLEM SOLVING AND CONTROL OVER STOCK
Simanga Traders sells one type of bicycle. The owner, Zandile Simanga, has three
branches operating in Michausdal, Seaview and Blue Mountains. The three branches are
managed by Rukhsar, Thabo and Peter, respectively.
Zandile has obtained the annual figures from the three branches for the financial period
ending 30 June 2012.
Required
Identify one problem in relation to each branch, quoting figures to support your answer.
In each case, offer Zandile advice on how to solve the problem.
Information
MICHAUSDAL SEAVIEW BLUE MOUNTAINS
(Rukhsar) (Thabo) (Peter)
Number of bicycles available 1 170 2 100 3 290
for sale
Number of scooters sold 1 170 525 2 980
during the year
Physical count on 30 June Nil 1 575 212
2012
Cost price per bicycle R1 050 R1 050 R1 050
Selling price per bicycle R1 890 R1 890 R1 890
Other operating expenses for R200 000 R202 000 R201 000
the year
Advertising per year R50 000 R32 000 R16 000
Salary of manager R20 000 per month R20 000 per month R20 000 per month
Activity 15.18 Stock valuation and profits
Klara Swart is the owner of a business, Surf’s Up, which sells surf boards. She uses the
periodic stock system and the FIFO method of stock valuation.
This is a summary of the purchases and sales of a certain brand Ripcurl surf boards for
February 2013:
Information
Number of surf Unit price Total
boards
Stock on hand on 1 February 2013 25 R1 340 33 500
Purchases on 9 February 2013 23 R1 380 31 740
Sales on 15 February 2013 28 R2 200 61 600
Purchases on 21 February 2013 15 R1 400 21 000
Sales on 26 February 2013 17 R2 200 37 400
Required
1. Calculate the value of the closing stock according to the periodic FIFO method.
2. Calculate the gross profit that Surf’s Up made on the Ripcurl surf boards during
February 2013 using the periodic FIFO method.
3. Klara’s bookkeeper suggested using the perpetual weighted average method for this
financial year.
a. Calculate the balance of the trading stock for the Ripcurl surf boards using the
perpetual weighted average method, by completing the table.
Acc GR12 LB.indb 457 6/6/13 6:04:47 PM

Date Details Units sold Units purchased Units on hand
01 Feb
05 Feb
10 Feb
18 Feb
26 Feb
Balance of trading stock
OR
b. Calculate the gross profit on the Ripcurl surf boards for February 2013 according to
the perpetual weighted average method.
Activity 15.19 Stock valuation and ethics
You are provided with information relating to Vee’s Traders for the year ended 28 February
2021. The business sells only DStv decoders. The periodic stock system and the weighted
average stock valuation method are in operation. They buy all their stock from one supplier.
Required
1. Explain one main difference between the periodic and perpetual stock systems. Give
an advantage of each one.
2. Use the weighted average stock valuation method to calculate the following:
a. Value of closing stock on 28 February 2021
b. Gross profit for the year ended 28 February 2021
3. In order to secure a loan the owner, Dean Frost, wants to change the stock valuation
method to the FIFO method on 28 February 2021.
a. Calculate the value of closing stock using the FIFO method.
b. Calculate the gross profit for the year ended 28 February 2021 by using the FIFO
stock valuation method.
4. In your opinion, will it be ethical for Mr Frost to change the method of stock valuation?
Give one reason for your answer.
Information
• Stock on 1 March 2020 (100 decoders) R55 600 (includes carriage on purchases)
• Purchases during the year, 1 150 units for R747 500, were as follows:
May 2020 250 units at R630 each R157 500
October 2020 800 units at R650 each R520 000
January 2021 100 units at R700 each R70 000
• Carriage on purchases during the year was charged at R25 per decoder by the
supplier.
• Returned 10 defective decoders purchased during January 2021 to the supplier.
The supplier granted a full refund including carriage.
• A selling price of R1 095 was maintained throughout the year. Sales amounted to
R1 215 450.
• On 28 February 2021, physical stocktaking revealed stock of 130 decoders on hand.
Acc GR12 LB.indb 458 6/6/13 6:04:48 PM

Activity 15.20 Stock valuation and control
Trevor & Co, owner Tamzyn Trevor, buys and sells household appliances. They use the
periodic stock system and the weighted average method for stock valuation. The financial
year ends 28 February.
The following information with regards to the kettles they sell was given:
Information
Inventory
The stock was valued as follows at the beginning and end of the financial year:
Price per unit
Date Number of units Total value
(include carriage)
01/03/2013 52 R140 R7 280
28/02/2014 31 ? ?
Purchases
During the financial year the following purchases took place:
Date Number of units Price per unit Total value
01/04/2013 44 R140 R6 160
01/07/2013 51 R146 R7 446
01/11/2013 32 R150 R4 800
01/01/2013 25 R160 R4 000
Totals 152 R22 406
Carriage on purchases
During the year the business paid a total of R1 322 to transport the kettles to the shop.
Sales
Date No. of units sold Selling price per unit Total
31/08/2012 96 R224 R21 504
28/02/2013 77 R240 R18 480
Financial indicators
2014 2013
Mark-up on cost ? 60%
Stock turnover rate ? 3,5 times
Required
Round off to two decimal places if necessary.
1. Use the relevant information to calculate the value of the closing stock.
2. Calculate the cost of sales.
3. Calculate the gross profit.
4. Calculate the mark-up on cost for 2014.
5. Calculate the rate of stock turnover for 2014.
6. From your calculations in question 4. you would have gathered that Trevor & Co did
not achieve their profit mark-up on the kettles. Tamzyn reckons that the kettles were
not shoplifted, as it is a fairly big item. What could be other reasons for them not
achieving the profit mark-up and what advice would you give her to improve control
over stock?
7. Tamzyn is not sure if she should continue selling this range of kettle. What advice
would you give her? Quote figures to support your answer.
Acc GR12 LB.indb 459 6/6/13 6:04:48 PM

Activity 15.21 Creditors reconciliations and internal control
The information below relates to Gary’s Super Store. You are provided with the incorrect
Creditors Control account, as well as an incorrect Creditors List.
Required
1. Use the information to complete the Creditors Control account and prepare the correct
Creditors List on 30 June 2020. Ensure that the total of the list agrees with the balance
on the Creditors Control account.
2. Is the business maintaining good a track record with its creditors? Give three reasons
for your answer, using figures to motivate.
3. What could have lead to the R1 010 being refunded by a creditor?
Information
2020 2020
Jun 01 Balance b/d 430 00 Jun 01 Balance b/d 46 352 00
30 Sundry returns CAJ 940 00 30 Sundry purchases CJ 34 020 00
Bank (Creditors control column) CPJ 31 104 00 Bank (refunds) CRJ 1 010 00
Discount received CPJ 864 00 Journal credits GJ 126 00
Journal debits GJ 234 00
81 508 00 81 508 00
2020
Jul 01 Balance b/d 47 936 00
The Creditors List on 30 June 2020 reflects the following balances before corrections:
Creditors Debit Credit
Osman’s Wholesalers 36
BP Stores 26 852
Steve West Traders 12 374
Highland Ltd. 4 080
MJ Motors 5 500
36 48 806
The information below was not taken into account when the journals were prepared.
All the journals were totalled before taking the additional information into account.
• The debit balance of R36 on the account of creditor, Osman’s Wholesalers, must be
transferred to his account in the Debtors Ledger.
• A credit invoice received from BP Stores for R2 720 on 26 June 2020 was not recorded.
• There was an adding error on the account of Steve West Traders in the Creditors
Ledger. His balance was cast by R130 too little.
• An amount of R50 in the Creditors Allowances Journal was posted to the wrong side
of creditor Highland Ltd’s account.
• A discount received from MJ Motors for R170 was recorded in the CPJ as R150 and
posted as such.
Acc GR12 LB.indb 460 6/6/13 6:04:48 PM

Activity 15.22 Creditors’ reconciliations
The Creditors Ledger account of Adam Dealers below was extracted from the books
of Joseph Stores. On comparing the statement of account from Adam Dealers, the
bookkeeper of Joseph Stores discovers that some figures do not correspond. He
investigates and finds the differences listed.
Required
1. Correct the errors that the bookkeeper of Joseph Stores made in the account of
Adam Dealers in the Creditors Ledger.
2. Prepare the Creditors Reconciliation Statement to be sent to Adam Dealers on
31 March 2015.
Information
Creditors Ledger of Joseph Stores
Adam Dealers AD001
Date Details / Document no. Fol. Debit Credit Balance
2015
March 01 Account rendered 15 240
03 Invoice no. 411 CJ 6 779
05 Debit note no. 26 CAJ 450
11 Cheque no. 7891 CPJ 2 250
Cheque no. 7891 (discount) CPJ 250
24 Invoice no. 478 CJ 2 128
25 Invoice no. 12268 CJ 490
31 Cheque no. 7929 CPJ 3 500 18 187
Adam Dealers
3 Island Road; Paarl; 7646
Joseph Stores Date: 28 March 2015
23 Church Road
Wellington
Acc no. AD001
Date Transaction Debit Credit
2015
Feb 27 Balance 8 910
28 Invoice no. 332 6 540
2015
Mar 01 Discount omitted in February 210
03 Invoice no. 411 6 779
05 Credit note no. 112 50
11 Receipt no. 207 2 250
24 Invoice no. 478 1 228
28 Interest on overdue balance 97
Balance owing R 21 044
Acc GR12 LB.indb 461 6/6/13 6:04:48 PM

Creditors Reconciliation Statement of Adam Dealers on 28 February 2015
Debit Credit
Balance according to statement of account 8 910
Credit purchases after 26 February 2015 6 540
Debit discount omitted 210
Balance according to Creditors Ledger 15 240
15 450 15 450
The following errors and omissions were made by the bookkeeper of Joseph Stores
and Adam Dealers:
• Credit note no. 112 was incorrectly recorded by Adam Dealers as R50, instead of R450.
• Adam Dealers did not record the discount on 11 March 2015.
• Invoice no. 478 on 24 March 2015 was incorrectly recorded as R2 128, instead of
R1 228.
• Invoice no. 12268 on 25 March 2015 was stationery purchased from Adam Wholesales,
not from Adam Dealers.
• Adam Dealers charged R97 interest on Joseph Stores overdue account.
• The statement of account was sent to Joseph Stores on 29 March 2015.
Activity 15.23 Bank reconciliations
The transactions below are from the books of Buffalo CC and are the differences after the
cash journals for September 2021 and the Bank Reconciliation Statement for August 2021
had been compared with the bank statement for September 2021.
Required
Analyse the given transactions according to the following example:
Example
A tenant deposited his rent of R2 000 directly into the bank account of a business.
No. Cash Journals Bank Reconciliation Statement No entry
CRJ CPJ Debit Credit
2 000
Transactions
1. An amount of R100 for bank charges appeared on the bank statement for
September 2021.
2. Cheque no. 301 for R675, which appeared on the Bank Reconciliation Statement for
August 2021, appears on the bank statement for September 2021.
3. A direct deposit of R350 which is on the bank statement for September 2021 is for
interest on the fixed deposit.
4. The bank incorrectly credited the account of Buffalo CC with a deposit of R6 450. They
will correct it on 1 September 2021.
5. The monthly stop order for the insurance premium of R1 650 to Allsure appears on the
bank statement.
6. Cheque no. 324, which appeared on the Bank Reconciliation Statement for August
2021, was presented for payment. It was discovered that the cheque was entered in
the CPJ as R700 instead of R770.
7. The bank statement for September 2021 reflects a dishonoured cheque for R432. This
cheque was received from a debtor in settlement of his account of R450.
Acc GR12 LB.indb 462 6/6/13 6:04:48 PM

8. Cheque no. 345, issued to a creditor in settlement of our debt of R4 500, is post-dated
for 15 October 2021.
9. A debit entry of R125 which appears on the bank statement for September 2021 is for
the interest on the overdrawn account.
10. Cheque no. 319 for R750 appears on the Bank Reconciliation Statement for
August 2021. This cheque has been lost and must be cancelled. It was decided
to issue cheque no. 348 in its place.
Activity 15.24 Bank reconciliations and internal control
Malan Traders employed George Faults to do the business ‘s books, do the bank deposits
and issue cheques. You are required to assist as internal auditor.
Required
1. Why does the business prepare a Bank Reconciliation Statement each month?
2. Calculate the correct totals in the Cash Receipts Journal (CRJ) and the Cash Payments
Journal (CPJ) for August 2012.
3. Prepare the Bank Reconciliation Statement on 31 August 2012.
4. It appears that the business will lose a lot of money due to the fraudulent activities
of George Faults. If you were the owner of the business, what steps would you take
against George Faults? Provide two steps.
5. Explain what was wrong with the procedure in the accounting department which led
to this type of fraudulent activity.
Information
At the end of the previous month, 31 July 2012, the following items appeared on the Bank
Reconciliation Statement:
Credit balance as per bank statement 12 350
Outstanding deposits:
• Dated 30 July 2012 24 000
• Dated 31 July 2012 8 970
Outstanding cheques:
• No. 678 (dated 3 February 2012) 2 100
• No. 754 (dated 12 July 2012) 11 976
• No. 762 (dated 29 July 2012) 4 300
Debit balance according to Bank account 26 944
• The bank statement showed a favourable balance of R21 136 on 31 August 2012.
• The provisional totals in the journals for August 2012 before reconciling to the bank
statement are:
CRJ R412 300
CPJ R376 900
• From the bank reconciliation for July 2012 only the outstanding deposit of R8 970
and cheque no. 762 appeared on the August 2012 bank statement. The R24 000,
that appeared in the CRJ on 30 July 2012, was never deposited into the bank account
by George Faults. He cannot account for the whereabouts of the cash. The owner
decided to apply the prudence principle by assuming that the business will not be
able to retrieve this money – it is thus a loss for the business. No entry has been
made about this.
• The bank statement for August 2012 reflected bank charges of R967 and interest on
the favourable balance of R117.
Acc GR12 LB.indb 463 6/6/13 6:04:48 PM

• A dishonoured cheque was reflected on the bank statement, R1 094. This was
originally received from a debtor in payment of his account.
• A direct deposit of R4 100 from a tenant was reflected on the bank statement.
• As internal auditor you also detected that cheque no. 799 for R13 000 appeared on the
bank statement, but not in the CPJ. The bookkeeper, George Faults, signed the cheque
himself (he and the owner have signing rights) and used the funds for personal
benefit.
• Cheque no. 768 was reflected in the CPJ as R3 480, but on the bank statement it was
reflected as R4 380. The amount on the bank statement is correct.
• The following items appeared in the August 2012 CRJ and CPJ, but not on the bank
statement:
■ No. 801 – R4 260 (dated 10 September 2012)
■ No. 803 – R2 300
■ A deposit R26 100 made on 31 August 2012
Activity 15.25 Debtors reconciliations, debtors age analysis and

internal control
The inexperienced bookkeeper of Dreyer Traders compiled the Debtors List with an age
analysis and the Debtors Control account for March 2018, but it does not balance at all.
Help her to correct the mistakes that were made and to take all given information into
consideration.
Required
1. Prepare the correct Debtors Control account.
2. Prepare the correct Debtors List and debtors age analysis (changes to the Debtors List
should be done in the Current column).
3. Identify problem areas at the debtors. Give reasons.
4. Make suggestions to Dreyer Traders on how to address the problem areas concerning
debtors.
5. Journal credits consist of bad debts of R9 800. Comment on this.
2018 2018
March 01 Balance b/d 74 200 00 March 31 Bank and discount allowed CRJ 30 890 00
31 Sales DJ 43 372 00 Bank CPJ 880 00
Debtors allowances DAJ 2 450 00 Journal credits GJ 9800 00
Journal debits GJ 268 00 Balance c/f 78 720 00
120 290 00 120 290 00
2018
April 01 Balance b/d 78 720 00
Debtors age analysis on 31 March 2018

Debtors Current > 30 Days > 60 Days > 90 Days Total Debt
A Bestbier 4 600 1 500 6 100
I Gaidien 9 000 11 500 3 000 7 200 30 700
M Theron 12 700 21 000 33 700
S Muller 5 380 5 380
Totals 31 680 13 000 3 000 28 200 75 880
Acc GR12 LB.indb 464 6/6/13 6:04:48 PM

Errors and omissions:
• The sales column in the DJ was under cast with R500 (too little).
• A credit note issued to A Bestbier for R560, was entered in the Debtors Allowance
Journal as R650.
• Returns from debtor A Bestbier during March 2018 were entered incorrectly in the
account of S Muller as returns, R430.
• No entry was made of interest of R630 on the account of M Theron during March 2018.
• An invoice of R890 issued to I Gaidien during March 2018 was recorded correctly in
the journal but posted to her account as R690.
Activity 15.26 Reconciliations, age analysis and internal control
Bee Happy is a business that sells honey and other home made products. Bee Happy
offers account facilities to credit worthy customers who purchase in store.
Marisa Franken, the owner, is concerned about some issues she discovered, by looking at
the financial information, namely:
• The debtors age analysis shows that the credit policy may need to be reviewed.
• The debtors collection period last year was calculated to be 45 days. The current
debtors collection policy (credit policy) is:
• Credit limit: R3 000
• Credit terms: 30 days
• Debtors who settle their accounts within 30 days receive a 5% discount.
• Interest of 2% p.a. will be charged on accounts that are over 60 days.
• There is a possibility that cash is being stolen from the business.
• The person responsible for preparing the Bank Reconciliation Statement has gone on
leave and a temporary bookkeeper has been employed.
Required
Use the information provided to answer the questions.
1. Give two reasons why preparing a debtors age analysis is a useful tool in managing
debtors.
2. What percentage of debtors is not meeting the credit terms?
3. What percentage of debtors should be a great concern to Bee Happy?
4. What is the percentage provision for bad debts being applied in 2012? Provide a
calculation.
5. Calculate the debtors collection period for 2012. Use the following:
Average debtors ____
______________
    
    ×  365 
Credit sales 1
6. Is Bee Happy experiencing similar concerns to those expressed in the media article?
Explain whether you feel the percentage provision for bad debts is adequate and
whether they need to relook their credit policy. Explain by providing specific evidence
from the question to support your opinion.
7. List three strategies you would advise regarding the evidence in the age analysis of
debtors.
8. Explain why Marisa might think that cash is being stolen from the business.
9. What will you do, if you suspect that the bookkeeper on leave was stealing money?
Information
Extract from the Income Statement of Bee Happy for the years ended 28 February
29 February 2012 28 February 2011
Total sales 108 540 110 550
Cash sales 45 800 49 226
Credit sales 62 740 61 324
Cost of sales 55 720 56 572
Acc GR12 LB.indb 465 6/6/13 6:04:48 PM

Extract from the notes to the Balance Sheet for the years ended 28 February
Trade and other receivables 29 February 2012 28 February 2011
Provision for bad debts (878) (394)
Prepaid expenses 1 430 1 660
18 112 9 146
Cash and cash equivalents 29 February 2012 28 February 2011

Bank – 34 120
Petty cash 300 1 200
300 35 320
Trade and other payables 29 February 2012 28 February 2011

Creditors 30 690 28 443
40 993 30 313
Age analysis of debtors as at 29 February 2012

Customer name Total Current (up 31–60 days 61–90 days Over 90 days
Balance to 30 days)
S Godlo 1 423 1 275 – 148 –
N Qoba 567 330 140 97 –
Louw & Co. 2 210 2 000 – 210
Passerini’s 4 453 1 034 1 997 532 890
R Pienaar 557 510 47 – –
L Dale 3 157 – – 1 840 1 317
E Witbooi 639 468 171 – –
* 6 new debtors 4 554 4 554 – – –
Totals 17 560 8 171 4 355 2 617 2 417
Percentage 100% 46,5% 24,8% 14,9% 13,8%
* These debtors all have current balances (up to 30 days) only as they are new account holders.
Bank Reconciliation Statement on 29 February 2012

Debit Credit
Dr balance as per bank statement 29 556
Credit outstanding deposit (10 January 2012) 16 780
Credit outstanding deposit (28 February 2012) 11 230
Debit outstanding cheques:
No. 1245 (3 January 2012) 2 445
No. 1267 (16 February 2012) 1 089
No. 1271 (10 March 2012) 3 173
Cr balance as per Bank account 8 253
36 263 36 263
Acc GR12 LB.indb 466 6/6/13 6:04:49 PM

Media article
SHOPTALK
Credit Crunch
The Foschini Group, Woolworths and mr Price this week warned that they had
begun to feel the effects of a consumer slowdown. Woolworths CEo was particularly
concerned by the Group’s exposure to bad debt and the rising levels of bad debt.
The Group had experienced an almost 80% increase in bad debts; if it is true for
Woolworths then it must be the same for most other credit retailers. Have South
Africans over spent and will they be able to service the debt that they have incurred
and what will the effect be on retailers? We will have to wait and see but it certainly
looks like it will be a tough few months ahead for credit retailers.
Source: Adapted from: http://www.fastmoving.co.za
Activity 15.27 VAT and ethics
You are provided with information relating to Trevor & Co. Trevor & Co uses the periodic
stock system and is a registered VAT vendor. They fall in Category A tax period, which
means they have to pay VAT over to SARS every second month.
Required
1. How would Trevor & Co calculate the amount payable to SARS every second month?
2. What is the form they need to complete when paying the VAT to SARS called?
3. one of the partners suggested that they do not include VAT for quotations in order to
get more clients. How to you feel about that?
4. Analyse the transactions for the months April and may 2013 in a table, showing the
account debited, the account credited and the amount.
Example
Received a tax invoice from Burger Wholesalers for trading stock purchased, R10 545
(VAT incl.)
Account debited Account credited Amount

e.g. Trading stock Creditors control 9 250
VAT control (input) Creditors control 1 295
Information
Transactions for the months April and May 2013
1. Purchased stationery from mbekwa Stationers and received their invoice, R319,20
(VAT incl.).
2. Sold goods on credit to debtor J Jumaats. The selling price exclusive of VAT was
R3 800.
3. m Goliath paid her outstanding debt of R1 100 in full. The business allowed R114
discount for early payment.
4. A malan’s outstanding debt of R684 was written off as a bad debt.
5. Paid SARS the VAT for April and may 2013. The total input tax was R23 866 and the
total output tax was R78 965.
Acc GR12 LB.indb 467 6/6/13 6:04:49 PM

Activity 15.28 VAT
LK Traders is a registered VAT vendor who buys its goods from other registered VAT
vendors. VAT calculations are done according to the invoice basis. LK Traders use the
perpetual stock system.
Required
For each of the following transactions, show which account is debited and which is
credited in the General Ledger.
Transactions
1. Buy trading stock on credit from Kwagga Traders, R20 292 (VAT inclusive).
2. Cash sales of trading stock amounts R7 866 (VAT inclusive). The business uses a profit
mark-up of 50% on the cost price.
3. A debtor, K Malan, settled her account of R5 700 and the business allowed discount
of 10%.
Activity 15.29 VAT
Mafutha Stationers is a business that sells stationery, magazines and other sundry items
to the general public. The business is registered for VAT with a Category A tax period and
accounts for VAT on the invoice basis. Mavis Mafutha, the owner of Mafutha Stationers,
purchases all the business’s stock and other supplies from registered VAT vendors. The
business does not sell any zero-rated items and thus charges VAT at 14% on all of its sales.
Mafutha Stationers used a fixed mark-up of 50% on cost at all times.
Information
• At the end of August 2018, the VAT Control account in the General Ledger of Mafutha
Stationers had a debit balance of R1 831.
• The following is a summary of the totals of the VAT Control columns in the cash
journals of Mafutha Stationers on 30 September 2018:
Journal VAT Control column totals
Cash Receipts Journal R11 232
Cash Payments Journal R4 907
Petty Cash Journal R53
• The totals of other journals of Mafutha Stationers on 30 September 2018 were

as follows:
Debtors Journal
Debtors control VAT control Sales Cost of sales
? ? ? 12 000
Creditors Journal
28 956 ? 22 300 3 100
Debtors Allowances Journal

Debtors control VAT control Debtors allowances Cost of sales
? ? 1 200 800
Acc GR12 LB.indb 468 6/6/13 6:04:49 PM

Creditors Allowances Journal
1 539 ? ? 0
• The General Journal of mafutha Stationers for September 2018 includes entries for the
following two transactions relating to VAT:
debts written of as irrecoverable, R1 938
drawings of trading stock at cost, R650
Required
Complete the VAT Control account of mafutha Stationers for September 2018 and use it to
determine the amount of VAT payable to or receivable from SARS on 30 September 2018.
Activity 15.30 Manufacturing enterprises
You work for an accounting firm that does the books of Bergh manufacturers. The firm
received a letter from the owner of Bergh manufacturers and the letter is handed to you.
Required
Read the letter and comply with the request contained in it.
Bergh manufacturers
23 Factory Street
Caledon
12 march 2022
dear Sir/madam
Determining the production costs of finished goods

I hereby request that a statement be drawn up as in previous years to indicate clearly
what the production costs of finished goods amount to. I should also like to know
whether it is possible to calculate my gross profit for the year.
during the accounting period ending 28 February I purchased raw material at a cost
of R189 720 in cash, and paid the freight on the purchase of raw material in cash,
amounting to R5 678.
The following cash purchases also pertain to the accounting period ending 28
February 2022:
Wages: direct 165 000
indirect 11 963
Electricity: Factory 28 960
Shop 11 756
Shop 3 840
Maintenance: Factory 10 887
Consumable stock (indirect material) purchased 9 520
Acc GR12 LB.indb 469 6/6/13 6:04:50 PM

I calculated the depreciation on the factory in the way you showed me last year, and
it amounts to R39 410.
I am also proud to be able to tell you that the sales of finished products for the
accounting period amount to R874 460.
on 1 march 2021 and on 28 February 2022 I did a thorough stock take.
It is summarised as follows:
01 March 2021 28 February 2022
Raw material stock 32 645 33 412
Work in progress 6 540 5 780
Finished goods 29 875 26 774
Consumable stock (indirect material) 6 472 7 985
Thank you so much for your time and the trouble you have taken. Please contact me
if you have any further questions.
Your faithfully
P Bergh
Activity 15.31 Cost calculations
Required
use the information out the accounting records of omega manufacturers to calculate the
following:
• Total fixed costs
• Variable costs per unit sold
• net profit per unit sold
• Breakeven point
Show all relevant calculations.
Information
The following information was taken from the records of omega manufacturers for the
year ended 28 February 2013:
Direct material costs 200 000
Direct labour cost 360 000
Factory overheads 268 000
Sales en distribution costs 184 000
Administration costs 321 600
Sales 1 664 000
• omega manufacturers and sells a single product, namely wallets.

• There is no opening stock or closing stock with regards to work in process of raw
material.
• 100 000 units were manufactured during the year.
• 80 000 units were sold during the year.
470 Chapter 15 • REVISIon ACTIVITIES
Acc GR12 LB.indb 470 6/6/13 6:04:51 PM

Activity 15.32 Budgets
Palesa Mokhele wants to start her own business packing and selling different kinds of
nuts. She wants to call her business The Nutty Nut. However, she needs your help as
the bank will only lend her money if she can provide a complete business plan with a
Projected Income Statement for the first month of trade. Palesa has R20 000 to contribute
as capital, but the rest she will have to borrow from the bank. The best interest the bank
offers is 13% a year.
Information
Palesa has already done her research, and supplies the following information:
• She can rent a shop at R3 500 per month.
• She will have to install display shelves and will have to purchase other equipment that
will cost approximately R12 000. She suggests that depreciation on this equipment is
written off at 10% p.a. on the cost price.
• Sundry expenses, such as telephone, water and electricity and stationery, will amount
to R1 680 a month.
• Palesa’s father has recommended that she take out insurance and this will cost R440
per month.
• She has found a supplier who will supply her with nuts and pack them in
100 g packets for R7 each.
• Palesa expects to sell approximately 2 000 packets of nuts in her first month of business.
• Research has shown that most of her competitors charge between R10 and R20 for
100 g packets.
Required
1. Palesa expects that she will be able to sell a further 1 000 packets of nuts if she could
deliver them to school and business cafeterias.
However, her petrol account will than amount to approximately R600 per month and
she will not be able to sell the nuts for more than R10 as the cafeterias also have to
add a profit. Would you recommend that she follows this course of action?
2. Write down your argument to Palesa concerning the price she ought to charge for her
packets of nuts.
3. Palesa’s supplier has made her the following offer: She can buy the packets at R6 per
packet if she buys more than as 3 500 packets in the first month. Should Palesa accept
this offer? Name three factors that she should take into account.
4. Palesa has calculated that she will be able to spend approximately R2 100 on
marketing during the first three months, in order to introduce her business to possible
clients. However, she is not sure whether she should spend everything in the first
month or rather spread the expenses over a few months.
a. Provide factors that she should take into account when making the decision.
b. Explain briefly how her Projected Income Statement will be affected if she spends
this money on marketing.
5. Palesa will need someone to deliver the nuts to schools and businesses and to do the
marketing at these institutions as she will be too busy in the shop. She can pay this
person R4 000 per month. He or she will also be responsible for fetching the products
from the supplier as well.
a. Explain briefly how her Projected Income Statement and expenses will be affected
if she appoints an assistant.
b. How should she compile the assistant’s salary in order to encourage him or her to
work more effectively?
6. Use all your decisions to draw up a Projected Income Statement for The Nutty Nut for
the first month.
Acc GR12 LB.indb 471 6/6/13 6:04:51 PM

Robyn Collett owns a business called Framed. She sells a wide range of wooden frames.
Use the information provided to answer the following questions.
Required
1. Complete and total the Debtors Collection Schedule for March and April 2018.
2. Robyn plans to give her employees a raise during April 2018. Calculate the planned
percentage increase in wages and salaries. Should her employees be satisfied with
their increase?
3. On 31 March 2018 the business will repay R20 000 on the loan of R150 000. Calculate
the percentage interest per annum the business pays on the loan.
4. Compare the budgeted figures to the actual figures for February 2018. Comment on
each of the following (make an observation/comparison and state the problem/give
advice):
a. Credit/cash sales
b. Debtors collection
c. Purchase of trading stock
d. Advertising
e. Repairs and maintenance
Information
Debtors Collection Schedule for Framed for the period ending April 2018
Credit sales
Month Debtors collection
R
Feb 2018 Mar 2018 Apr 2018
R R
December 280 000 50 400
January 430 000 258 000
February 360 000 69 120
March 330 000
April 330 000
Totals 377 520
Expected collection from debtors:

• 70% of all sales are expected to be on credit.
• 20% of debtors settle their accounts during the transaction month to benefit from a
4% discount for prompt payment.
• 60% of debtors settle accounts in the month following the transaction month.
• 18% settle accounts during the second month after the transaction month.
• 2% is written off as irrecoverable after 90 days.
Extract from budget for the period ending April 2018
Cash payments February March April
2018 2018 2018
Repayment of loan – 20 000 –
Interest on loan 1 375 1 375 1 192
Wages 14 400 14 400 15 408
Salaries 32 000 32 000 36 800
Acc GR12 LB.indb 472 6/6/13 6:04:52 PM

Budgeted and actual figures
At the end of February 2018 the following actual figures were identified and compared to
the budgeted figures:
From the Projected Income Statement Feb 2018 Feb 2018
Budget Budget
R R
Total sales 480 000 540 000
Cash sales 120 000 58 000
Credit sales 360 000 482 000
From the Cash Budget Feb 2018 Feb 2018

Budget Budget
R R
Collection from debtors 377 520 226 512
Purchase of trading stock 221 000 389 600
Advertising 10 000 28 000
Repairs and maintenance 17 000 2 300
You are provided with an extract from the Cash Budget of Nici Boutique. The business is
owned by Nicolene Karsten. She uses a mark-up of 60% on cost and tries to replace stock
in the same month it is sold.
Required
1. Complete the debtors collection schedule for the period July to September 2019 if
Nicolene plans to collect debtors as follows:
• 50% collected in the month of sales
• 4% discount for early payment
• 30% collected in the month after sales
• 18% collected two months after sales
2. What percentage of debtors does Nicolene expect to write off as bad debts?
3. Nicolene expects the water and electricity to be higher in the winter months when it
is colder. What percentage decrease does she expect from August to September with
regards to water and electricity?
4. The workers union expect an increase in wages from Nicolene of at least 5% from
August. Is she planning to comply with this legislation?
5. The fixed deposit matures on 30 September 2019. Calculate the annual interest rate
Nicolene receive on the fixed deposit.
6. Compare the actual figures of the budget period to the budgeted figures. Comment
on the difference as well as a possible problem you identify with each item:
a. Sales
b. Collection from debtors
c. Purchases of trading stock
d. Telephone
Acc GR12 LB.indb 473 6/6/13 6:04:52 PM

Information
Extract from the Cash Budget for July 2019 to September 2019
July August September Total
RECEIPTS
Cash from debtors ? ? ? 234 000
Fixed deposit matures 20 000 20 000
Interest on fixed deposit 100 100 100 300
PAYMENTS
Purchase of trading stock 120 000 123 000 135 000 378 000
Water and electricity 1 900 1 900 1 786 5 586
Wages 14 800 15 984 15 984 46 768
Telephone 500 500 500 1 500
Information relating to credit sales of previous months

May 2019 June 2019
Actual credit sales 70 000 78 000
Extract from Projected Income Statement

July 2018 August 2018 September Total
2018
Total sales 192 000 196 800 216 000 604 800
Cash sales 112 000 114 800 126 000 352 800
Credit sales 80 000 82 000 90 000 252 000
Actual figures for the three months ended 30 September 2019

Total sales 612 000
Cash sales 224 100
Credit sales 387 900
Cash from debtors 190 000
Purchase of trading stock 200 000
Telephone 2 700
Acc GR12 LB.indb 474 6/6/13 6:04:52 PM

Glossary
Accountability is the acknowledgement and assumption of responsibility for your

actions, duties and decisions. Someone who is accountable should be able to justify
and explain his/her decisions and actions.
Accrued expenses are expenses incurred in the current financial year that will only
be paid in the next financial year.
Accrued income is income earned in the current financial year that will only be
received in the next financial year.
Administration cost is cost of administering a manufacturing business, e.g.

telephone, receptionist’s salary.
Alternative dispute resolution (ADR) is the term used to describe methods of

resolving disputes, which do not involve conventional legal action through the courts.
Analysis is the further investigation and processing of information.
Analytical review is an audit procedure which involves the examination of financial

and operating information by performing ratio analysis, trend analysis and
comparisons in order to identify any unusual items or unexpected fluctuations that
require further investigation.
Annual General Meeting (AGM) is a formal meeting that is held once a year.
Annual Report is a report on the company’s performance which is drawn up once

a year.
Appropriation account is a final account that is used to record the distribution

of profit.
Arbitration is a way of resolving disputes with the assistance of a third party called an
arbitrator, who acts as a private judge and imposes a decision that is legally binding
to both parties.
Asset is a resource managed by the business, because of transactions from the past,
out of which economic advantages will flow into the business in the future.
Asset disposal means to sell or dispose of an asset owned by the business.
Attest function is the duties an accountant performs when conducting an audit.
Audit evidence is the information gathered during the course of an audit, which the
internal auditors use to support their opinions and conclusions.
Audit fees are the remuneration of auditors.
Audit procedures are the various methods, techniques and tests performed by
internal auditors to gather audit evidence.
Audit report is a report drawn up by an independent external auditor, which reflects

whether or not the shareholders of a company can rely on the company’s financial
statements.
Audit sample is the set of items selected from the entire population that will actually
be tested.
G l o ssary 475
Acc GR12 LB.indb 475 6/6/13 6:04:52 PM

Audit sample size is the total number of items in the audit sample.
Audit sampling is the application of audit procedures to less than 100% of

the population to enable the auditor to evaluate audit evidence about some
characteristic of the items selected to form or assist in forming a conclusion
concerning the population.
Auditor is a person that is appointed and authorised to examine the accounting

records of a company.
Authorised shares are the maximum number of shares a company’s Memorandum of

Incorporation permits it to issue.
Bad debts occur when a debtor becomes insolvent or cannot be traced, and the
business decides to write off the debt as irrecoverable.
Bad debts recovered occur when a debt that was previously written off as
irrecoverable, is subsequently received by the business.
Balance Sheet is a statement that reflects the financial position of a business on a

specific date.
Bank reconciliation involve the process of comparing the Cash Journals of the
business with the bank statement in order to check that they both contain the same
transactions, and to account for any differences that may be found.
Breakeven analysis is used to determine the number of units of a product that need
to be produced and sold in order for the income generated from the sales to equal
the costs of manufacturing.
Breakeven point is the point when the cost the number of units of a product
produced equals the total sales of that product sold, with no loss or profit to the
business.
Business entity concept is a fundamental GAAP principle, which provides that a

business functions as a separate financial entity from its owners, or from any other
business or organisation.
Business rescue is the process of attempting to rescue a potentially viable company

that is experiencing financial difficulties and thereby prevent it from going into
liquidation.
Buying back shares means a company buys back its own shares on the stock
exchange.
Cash Budget is a forecast of the cash position of a business over a future period and
sets out the expected cash receipts and cash payments over the budget period.
Cash Flow Statement is a statement that expresses the company’s results in terms of
cash in and out of the business. It shows the receipts and payments that changed the
cash account during a specific accounting period.
Chief Audit Executive (CAE) is the person who holds the most senior position within
the internal auditing function.
Chief Executive Officer (CEO) is the managing director who controls the work of the
other directors.
CIMA is the abbreviation for the Chartered Institute of Management Accountants.
476 G l o ssary
Acc GR12 LB.indb 476 6/6/13 6:04:52 PM

Close Corporation (CC) is a form of business ownership with 1 to 10 members. A CC
is a legal entity that is simpler and less expensive to administer than a company.
Closing stock is the total value of stock on hand at the end of a period.
Code of ethics is a written set of rules and guidelines which outline the moral
standards and ethical principles to be followed by an organisation and all of its
members.
Companies Act 71 of 2008 regulates all matters pertaining to companies in South

Africa.
Compliance tests (tests of control) are used to determine whether internal controls
are working as intended and to verify that control procedures are being adhered to
and applied correctly.
Confirmation (or corroboration) involves the verification of internal information by

obtaining confirmation or corroborative evidence from an independent source.
Consumable stores are items that are used up (consumed) during the financial year,
such as stationery, packaging and cleaning materials.
Consumable stores on hand are the consumable stores that have not been used and
are still in stock at the end of the financial year.
Contribution per unit is the difference between the selling price per unit and the
variable cost per unit.
Corporate governance refers to the way in which corporations (companies) are

managed.
Creditors Payment Schedule is used to determine the amount of cash that is

expected to be paid to creditors during each month of the budget period.
Creditors reconciliation involve the process of comparing a creditor’s account in

the Creditors Ledger of the business with the statement of account received from
the creditor, in order to check that they are in agreement and to account for any
differences that may be found.
Current assets are assets that are mainly used for trading purposes, which fluctuate
over the short term, such as cash, debtors and inventory.
Current liabilities are liabilities that are payable within 12 months, such as creditors,
bank overdraft and accrued expenses.
Debtors Age Analysis is a summary of outstanding amounts owed by debtors over a

period of time, which details the length of time that amounts have been overdue.
Debtors Collection Schedule is used to determine the amount of cash that is

expected to be received from debtors during each month of the budget period.
Depreciation is the amount by which the carrying value of an asset is reduced

because of wear and tear, use and aging.
Designation is the letters that appear after a person’s name, indicating that person’s
professional qualification
Direct labour costs are the salaries and wages paid to the employees who are
directly involved in the manufacture of a product.
G l o ssary 477
Acc GR12 LB.indb 477 6/6/13 6:04:52 PM

Direct material costs are the costs of all the raw materials that are used directly in the
manufacture of a product.
Directors are the members of the board that governs and controls a company.
Directors’ fees are the remuneration of directors.
Directors’ report is a written report by the directors which outlines the state of
affairs, the operations and performance of the company.
Dividends are the part of the profit that is paid out to shareholders.
Dividends per share is the value of the dividends earned for each issued share.
Earnings are the amount of profit a company produces during a financial year.
Earnings per share provides an indication of a company’s profitability.
Ethics are the moral values and principles that set the standards of good and proper
conduct for people and organisations.
Exempt items are goods or services on which no VAT is charged, either at the
standard rate or the zero rate.
Expenses are cost incurred by a business in the course of carrying out its business
activities that leads to a decrease in profit, such as telephone, wages, rent expense, etc.
Expenses prepaid are expenses that have already been paid in the current financial
year, but that apply in the following year.
Factory overhead cost is indirect costs incurred from manufacturing the product,
e.g. factory rent.
Fiduciary duty is the duty (of directors) to act in good faith and in the best interest of
the company.
FIFO (First-in-first-out) is a method used to determine the value of an item of stock

based on the assumption that stock that is bought first will be sold first.
Final dividends are the dividends declared at the end of the financial year.
Financial budget consists of the various budgets which relate to the assets and
liabilities of a business.
Financial leverage (debt) ratios indicate how a company is financed, if they will be
able to meet long-term obligations, and the risk factor.
Fixed asset register is a book in which all fixed assets owned by the business are
recorded.
Fixed assets are assets that are purchased for long-term use and are not likely to be
sold in the short-term, such as land, buildings and equipment.
Fixed costs are manufacturing costs that do not vary according to changing levels of
production.
Founding Statement is document prepared at the start-up of a Close Corporation

expressing the particulars of the Close Corporation.
Generally Accepted Accounting Practice (GAAP) is a collection of published

principles, rules, procedures and guidelines that govern how the financial events of a
business are recognised, measured and reported.
478 G l o ssary
Acc GR12 LB.indb 478 6/6/13 6:04:52 PM

Going concern concept is a fundamental GAAP principle, which provides that the
financial statements of a business should be prepared based on the assumption that
the business will continue to operate for the foreseeable future.
Historical cost concept is a fundamental GAAP principle, which provides that assets
should be valued at historical cost; this is the amount that was originally paid for
them.
IFRS (the International Financial Reporting Standards) is a single set of high-quality

financial reporting standards that is fast becoming the global standard for the
preparation of public company financial statements.
IIA SA is the abbreviation for the Institute of Internal Auditors South Africa.
Income is the money that a business earns from its business activities that leads to an
increase in profit, such as sales, services rendered, rent income, interest income, etc.
Income received in advance / deferred is income that was received during the
current financial year, but will only be taken into account for calculating profit in the
next financial year.
Income Statement is a statement that shows the result of the business activities for a
specific accounting period.
Income tax is a tax that is levied by the government on the income of a company.
Indirect labour costs are the salaries and wages paid to the employees who are not
directly involved in the manufacture of a product.
Indirect material costs are the cost of the raw materials used in the manufacturing
process, which are either not directly identifiable in the finished product or are a
relatively insignificant part of the finished product.
Input tax is the VAT charged to or paid by a vendor in acquiring goods or services
from another VAT vendor.
Inquiry involves internal auditors asking questions in order to obtain information

from people both inside and outside the business. Inquiries may range from formal
written requests to informal oral discussions and may be conducted through the use
of surveys or questionnaires.
Inspection involves the physical examination of documents, records, reconciliations

and assets by internal auditors in order to ascertain whether the internal control
procedures are being carried out correctly and are operating efficiently.
Integrated reporting is reporting on not only the financial performance of the

business, but also on the business’s social performance and the impact that the
business has had on the environment.
Interest capitalised is when the interest on a loan/investment is added to the

original amount loaned/invested.
Interim dividends are the dividends paid to shareholders during the financial year.
Interim reports are reports that are made during the course of the audit.
Internal audit is the process used to evaluate and assess the effectiveness of
the risk management and internal control systems of the business, and provide
recommendations for improvement.
G l o ssary 479
Acc GR12 LB.indb 479 6/6/13 6:04:52 PM

Internal audit resources are the people or objects that are required to perform an
internal audit.
Internal auditing is an independent, objective assurance and consulting activity

designed to add value and improve an organisation’s operations. It helps an
organisation accomplish its objectives by bringing a systematic, disciplined
approach to evaluate and improve the effectiveness of risk management, control and
governance processes.
Internal auditors are the people who perform an internal audit, and are generally
employed by the company and only audit that company’s books.
Internal auditors’ report is the report that internal auditors provide to senior
management or the board of directors, in which they present the audit findings,
express their opinions and provide recommendations for improvement.
Internal controls are the systems, policies and procedures that are implemented to
protect a business against risks in order to help ensure that the business achieves its
objectives.
International Financial Reporting Standards (IFRS) is a single set of high-quality

financial reporting standards, developed by the International Accounting Standards
Board (IASB), which is fast becoming the global standard for the preparation of public
company financial statements.
Interpretation is finding reasons for the situation and stating possible results this
may create in the future.
Invoice basis is the standard method used to account for VAT, which requires vendors
to account for VAT based on the tax period in which invoices are issued or received.
IRBA is the abbreviation for the Independent Regulatory Board for Auditors.
Issue price is the price at which issued shares are sold.
Issued shares are the number of shares the company has actually sold.
Johannesburg Stock Exchange (JSE) is a place where shareholders can buy and sell
shares according to certain rules.
King Code is a report drawn up by a South African committee chaired by former High
Court judge, Mervyn King, which sets out the principles and guidelines relating to
good and ethical corporate governance. King Code III is the report currently in action.
Legal entity is an entity that has the legal capacity to enter into agreements or
contracts, assume obligations, incur and pay debts, sue and be sued in its own right,
and be held responsible for its actions.
Liability is a current obligation, because of transactions from the past and the
settlement of this obligation will lead to an outflow of resources from the business.
Limited liability is the concept whereby a person’s financial liability is limited to the
amount invested in the company. The investor is not personally responsible for the
debts and obligations of the company.
Liquidity is an indication of a business’s ability to settle short term obligations such

as creditors, short-term loans, shareholders for dividends and SARS.
Manufacturing cost is cost incurred in turning raw material into a finished product.
480 G l o ssary
Acc GR12 LB.indb 480 6/6/13 6:04:52 PM

Manufacturing overheads are all the costs of the manufacturing process which are
not directly identifiable with a specific product.
Market value of a share is the price at which a share is sold on the JSE.
Matching concept is a fundamental GAAP principle, which provides that income and
expenses are recognised and recorded in the correct time period.
Materiality concept is a fundamental GAAP principle, which provides that

information is material when its omission or misstatement can influence the
economic decisions of users who rely on the financial statements.
Mediation is a way of resolving disputes with the assistance of a third party called
a mediator, who facilitates the resolution process, but does not impose a binding
decision on the parties.
Memorandum of Incorporation (MoI) is a document that sets out rights, duties

and responsibilities of shareholders, directors and others within and relation to a
company.
Mortgage bond is a loan taken out at a commercial bank in order to buy property,
which is repaid over a long period (usually 20 years) and is classified as a non-current
liability.
Net asset value per share (book value per share) shows how much a share is worth.
Net realisable value of an asset is the value received for an asset sold less expenses
incurred in selling that asset.
Non-binding advisory vote is a vote that is merely used to indicate the shareholders’
opinion on a matter (it is not enforceable).
Non-current assets comprise of fixed assets (such as equipment) and financial assets
(such as investments).
Non-current liabilities are long-term loans; loans that are not payable within 12
months.
Non-statistical sampling (judgemental sampling) involves a subjective audit

sampling approach that is not mathematically or statistically based, in which audit
samples are selected based judgement and are not intended to be representative of
the entire population.
Non-tangible asset is an asset that you cannot physically touch, such as a fixed
deposit.
Notice of AGM is an invitation to shareholders to a formal meeting that is held once

a year.
Notice of Incorporation (Certificate of Incorporation) is a formal announcement to

the public, indicating the formation of a new legal entity.
Observation involves internal auditors observing employees carrying out specific

processes and procedures, in order to determine whether control procedures are
being complied with and to gauge the effectiveness of the processes.
Opening stock is the total value of stock on hand at the beginning of a period.
Operating budget consists of the various budgets which relate to the income and
expenses of a business.
G l o ssary 481
Acc GR12 LB.indb 481 6/6/13 6:04:52 PM

Output tax is the VAT charged by a vendor when it sells goods or renders services.
Payments basis of accounting for VAT requires vendors to account for VAT only when
payments are actually received and payments are actually made.
Periodic stock system is a system used to account for inventory in which the value of
the stock on hand is determined periodically by performing a physical count of stock
at the end of a period.
Perpetual stock system is a system used to account for inventory in which the value
of the stock on hand is continuously updated by maintaining a continuous record of
the movements of items in and out of stock.
Population is the entire set of items that are being considered for testing.
Population size is the total number of items in the population.
Post adjustment Trial Balance is the Trial Balance at the end of the financial year after
the year-end adjustments have been done, but before closing transfers.
Post closing Trial Balance is the Trial Balance at the end of the financial year after the
closing transfers have been done and consists of only Balance sheet accounts.
Pre-adjustment Trial Balance is the Trial Balance at the end of the financial year,
before the year-end adjustments have been done.
Private company is a company whose MoI prevents it from offering securities to the
public and restricts the transferability of securities.
Production cost statement is a statement used by a manufacturing business that

shows the cost of production for a financial year.
Productivity is measure of a manufacturing business’s ability to produce its products

and quantifies the relationship between input (hours worked) and output (number of
units produced).
Profit and Loss account is a final account that is used to calculate net profit.
Profitability refers to a business’s ability of to generate profit and is a measure of how

well a business has performed.
Projected Income Statement is used to predict the amount of profit that a business
will generate over a certain period and sets out the expected income to be generated
and expenses to be incurred for the budget period.
Promoters are the initial group of people who decided to start a company.
Prospectus is a document describing the main features of a business for prospective

buyers.
Provision for bad debts is an end-of-year adjustment that the business makes to
account for the portion of the amount owed by debtors at the end of the financial
year, which the business estimates will not be collected from debtors.
Provisional income tax is a system that allows companies to provide for their final
tax liability by paying at least two instalments during the year of assessment.
Prudence principle is a fundamental GAAP principle, which provides that when

uncertain results are estimated it is important to ensure that assets and income are
not overstated and liabilities and expenses are not understated.
482 G l o ssary
Acc GR12 LB.indb 482 6/6/13 6:04:52 PM

Public company is a company which invites the public to buy its shares and these
shares can be transferred freely.
Published financial statements are financial statements which are made available in
newspapers, the internet and other places, which are easily accessible by interested
parties.
Reconciliations involve the process of comparing two similar sets of records in

order to check that they are in agreement and to account for any differences that
may be found.
Registrar of Companies exercises the powers and perform the duties assigned to the
Registrar by the Companies Act.
Registration certificate is a certificate that is issued to a company to state that it can

commence with business.
Re-performance involves internal auditors re-performing tasks that have already

been performed in order to test and evaluate the accuracy, correctness and
completeness of the information processed through various control systems.
Retained income is the part of the profit that is not distributed to the shareholders.
Return on capital employed shows the profit generated from the investment by
shareholders and loans.
Return on shareholders’ equity shows how effectively the shareholders’ investment

has been managed.
Risks are uncertain future events that may have a negative impact on business
operations and a detrimental effect on the business achieving its objectives.
SAICA is the abbreviation for the South African Institute for Chartered Accountants.
SAIPA is the abbreviation for the South African Institute of Professional Accountants.
Sales and distribution cost is cost of marketing, selling and distributing the product,
e.g. commission paid to sales representative.
Sample selection is the process that is used to select the audit sample.
Sampling techniques are the methods that are used to select audit samples.
Separation of ownership from control means that one group of people, the
directors, are responsible for managing the money contributed by another group of
people, the shareholders.
Shareholder is someone who owns shares in a company.
Shares are units of ownership that are issued to the shareholders of a company.
Shares register is a record that is kept of every shareholder and the number of shares
he/she owns.
Solvency shows the relations between total assets and total liabilities, and provides
an indication of a business’s ability to pay all of its debts.
Special resolution is a binding decision requiring the support of at least 75% of

the votes.
Specific identification is a method used to determine the value of an item of stock

by identifying the actual cost price of the item by examining the purchase invoice for
that item.
G l o ssary 483
Acc GR12 LB.indb 483 6/6/13 6:04:52 PM

Stakeholders are any group affected by and affecting a company‘s operations
(King III).
Standard rate is the normal rate at which VAT is charged (currently 14%).
Statistical sampling involves an objective scientific audit sampling approach, which

uses mathematics as a basis for selecting an audit sample that represents the entire
population.
Substantive tests (tests of detail) involve testing, checking and verifying the
completeness, validity and accuracy of the financial and operating information.
Sustainability is the ability to maintain economic, social and environmental

resources, by operating in a manner that does not jeopardise our current and future
social, environmental and economic well being.
Sustainable development is development that meets the needs of the present

without compromising the ability of future generations to meet their own needs.
Tax assessment form is a form that SARS sends to the company to state the amount
of income tax that is due.
Tax return form is the form that must be completed in order to file income taxes with
SARS every year.
Trading account is a final account used to calculate gross profit.
Trading stock deficit occurs when the value of physical stock take count is less than
the amount of trading stock according to the General Ledger.
Trading stock surplus occurs when the value of physical stock take count is more
than the amount of trading stock according to the General Ledger.
Transparency is an open and honest way of doing things that allows other people to
know exactly what you are doing and does not seek to hide the truth.
Triple bottom-line accounting means reporting on and disclosing information about

the economic, social and environmental performance of the business. The triple
bottom-line is also often referred to as “people, planet, profit”.
Validation of stock is the process of counting the stock in a business to confirm the
amount and value of stock on hand on a particular day.
Value-added tax (VAT) is the indirect tax that is charged whenever goods are sold or
services are rendered, by a registered VAT vendor.
Variable costs are manufacturing costs that vary according to the number of units
produced.
Variance analysis is a technique used to analyse data when comparing actual figures
with the budgeted amounts.
Weighted average is a method used to determine the value of an item of stock by

dividing the total value of the units of stock on hand by the number of units available
to be sold.
Work-in-process is the partially completed products that are still in the process of
being manufactured.
Zero-rated items are goods or services on which VAT is charged at a rate of 0%.
484 G l o ssary
Acc GR12 LB.indb 484 6/6/13 6:04:52 PM

Study & Master
Grade
Study & Master
12
12
Accounting
Accounting
Accounting Learner’s Book

Study & Master Accounting Grade 12 has been especially
developed by an experienced author team according to the
Curriculum and Assessment Policy Statement (CAPS). This new
and easy-to-use course helps learners to master essential
content and skills in Accounting.
The comprehensive Learner’s Book includes:
case studies which deal with issues related to the real world,
and move learners beyond the confines of the classroom
margin notes to assist learners with new concepts –
especially GAAP flashes, that give learners guidance on
General Accepted Accounting Practice
CAPS
examples with solutions after the introduction of each
new concept.
The Teacher’s Guide includes:
a daily teaching plan, divided into the four terms, that
guides the teacher on what to teach per day and per week
moderation templates to assist teachers with assessment
solutions to all the activities in the Learner’s Book.
CAPS
Study & Master
Elsabé Conradie, a 2012 runner up for the National Teaching Awards for
Excellence in Secondary Teaching in the Western Cape, had her successes as an
educator highlighted when five of her Grade 12 learners were amongst the
WCED top 10 Accounting learners. Mandy Moyce is an experienced Accounting
teacher and subject head for Accounting and is currently the deputy principal at
the school where she teaches. Derek Kirsch taught Accounting, Business Studies
and Computer Studies before starting his own business developing educational
software. He is responsible for the innovative PowerPoint® presentation included
with this material.
Grade
12
Grade
12
Learner’s Book
www.cup.co.za
I S B N 978-1-107-66690-0

9 781107 666900
SM_Accounting_12_LB_CAPS_ENG_A4_cvr4.indd 1-3 2013/06/12 8:47 AM

Study & Master Accounting Grade - by (Author) Elsabe Conradie, de

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Study & Master Accounting Grade - by (Author) Elsabe Conradie, de

Uploaded by

Copyright:

Available Formats

Study & Master

Accounting Learner’s Book

Study & Master

Elsabé Conradie • Derek Kirsch • Mandy Moyce

SM_Accounting_12_LB_CAPS_ENG_A4_cvr4.indd 1-3 2013/06/12 8:47 AM

Elsabé Conradie • Derek Kirsch • Mandy Moyce

Cambridge, New York, Melbourne, Madrid, Cape Town,

Cambridge University Press

© Cambridge University Press 2013

This publication is in copyright. Subject to statutory exception

First published 2013

Editor: Christine de Nobrega

Gallo Images: p.7

Acc GR12 LB.indb 2 6/6/13 6:02:58 PM

How to use this book iv

Chapter 1 F inancial accounting of companies – concepts, unique

Chapter 2 Financial accounting of companies – Final accounts,

Chapter 3 Financial accounting of companies – Financial statements 73

Chapter 4 Financial accounting of companies – analysis and interpretation

Chapter 5 Financial accounting of companies – analysis of published

Chapter 6 Ethics 182

Chapter 7 Interpretation and reporting on the movement of fixed assets 205

Chapter 8 Financial accounting of close corporations 218

Chapter 9 Internal control 230

Chapter 10 Inventory systems 246

Chapter 11 Reconciliations  267

Chapter 12 Value-added Tax (VAT) 303

Chapter 13 Cost Accounting and manufacturing businesses 348

Chapter 14 Budgeting 394

Chapter 15 Revision activities 436

Acc GR12 LB.indb 3 6/6/13 6:02:58 PM

i See an example of an audit

A company's earnings are

Risk! warnings highlight potential problems

The internal audit icon shows where

Acc GR12 LB.indb 4 6/6/13 6:02:59 PM

• audit fees • interest

Do you have our

F i n a n cia l acc o u n ti n g o f c o m pa n ies – c o n cepts , u n i q u e l e d ger acc o u n ts a n d b o o k k eepi n g • C h a p t e r 1 1

Acc GR12 LB.indb 1 6/6/13 6:02:59 PM

Sole proprietor Partnership Company

2.1 Advantages (benefits) of a company

2 Chapter 1 • F i n a n cia l acc o u n ti n g o f c o m pa n ies – c o n cepts , u n i q u e l e d ger acc o u n ts a n d b o o k k eepi n g

Acc GR12 LB.indb 2 6/6/13 6:02:59 PM

3.1 Registrar of Companies

3.2 Types of companies

Acc GR12 LB.indb 3 6/6/13 6:03:00 PM

3.5 Board of Directors

4 Chapter 1 • F i n a n cia l acc o u n ti n g o f c o m pa n ies – c o n cepts , u n i q u e l e d ger acc o u n ts a n d b o o k k eepi n g

Acc GR12 LB.indb 4 6/6/13 6:03:00 PM

3.6 Management of the company

3.7 Independent auditors

3.8 Audit and Risk Committee

Acc GR12 LB.indb 5 6/6/13 6:03:00 PM

3.9 Social and Ethics Committee

6 Chapter 1 • F i n a n cia l acc o u n ti n g o f c o m pa n ies – c o n cepts , u n i q u e l e d ger acc o u n ts a n d b o o k k eepi n g

Acc GR12 LB.indb 6 6/6/13 6:03:00 PM

4. Separation of ownership from control

5. Johannesburg Stock Exchange Limited (JSE)

Acc GR12 LB.indb 7 6/6/13 6:03:01 PM

Column A: Person / Institution Column B: Description

8 Chapter 1 • F i n a n cia l acc o u n ti n g o f c o m pa n ies – c o n cepts , u n i q u e l e d ger acc o u n ts a n d b o o k k eepi n g

Acc GR12 LB.indb 8 6/6/13 6:03:01 PM

How to use this book iv

Chapter 1 F inancial accounting of companies – concepts, unique

Chapter 2 Financial accounting of companies – Final accounts,

Chapter 3 Financial accounting of companies – Financial statements 73

Chapter 4 Financial accounting of companies – analysis and interpretation

Chapter 5 Financial accounting of companies – analysis of published

Chapter 6 Ethics 182

Chapter 7 Interpretation and reporting on the movement of fixed assets 205

Chapter 8 Financial accounting of close corporations 218

Chapter 9 Internal control 230

Chapter 10 Inventory systems 246

Chapter 11 Reconciliations 267

Chapter 12 Value-added Tax (VAT) 303

Chapter 13 Cost Accounting and manufacturing businesses 348

Chapter 14 Budgeting 394

Chapter 15 Revision activities 436

R60 000 × ___20  

Marks: 24 Time: 12 minutes