Study & Master Accounting Grade 11 Learners Book

Grade
Study & Master Study & Master

11 11
Accounting
Accounting
Study & Master Accounting Grade 11 has been especially
Accounting Learner’s Book

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: CAPS

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
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
The CD-Rom with a PowerPoint® presentation includes:
interactive examples to explain new concepts
links to all solutions to activities and assessments in
the Learner’s Book
Study & Master

a colourful, exciting and dynamic interface with
numerous graphics and tables designed to enhance
the learning experience.
Learner’s Book Grade
11
www.cup.co.za
I S B N 978-1-107-63494-7
Elsabé Conradie • Derek Kirsch • Mandy Moyce
9 781107 634947
SM_Accounting_11_LB_CAPS_ENG.indd 2-3 2012/08/07 3:40 PM

Study & Master
Accounting
Grade 11
Learner’s Book
SM Accounting_G11_LB_TP.indd 1 2012/08/07 3:33 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 2012
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 2012
ISBN 978-1-107-38096-7
Editor: Christine de Nobrega

Typesetter: Brink Publishing & Design
Illustrators: Sue Beattie, Claudia Eckhard, Dedré Fouquet
………………………………………………......……………………………………………………………
If the book contains factual information within examples or exercises (such as URLs, prices or
train timetables):
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
Photographs: pp 5 and 6 – Africa Media Online
Text and other materials: p 13 – “SAICA’s commitment to sustainability”, SAICA; p 10 –

“Five steps to a culture of ethics”, Finweek; p 12 – “Beware of the 419-letter scam”,Die Burger;
p 34 – “Weak controls in recession aid staff fraud”, Business Day; p 46 – checklist on how to
prevent cheque fraud, Nedbank; p 387 – “Business finds green production brings efficiency
gains”, Business Day; p 544 – “VAT fraudster to spend ten years behind bars”, Die Burger
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 Gr 11 Book.indb 2 8/7/12 10:49:42 AM

Contents
How to use this book iv
Chapter 1 Ethics 1
Chapter 2 Internal controls and audit processes 13
Chapter 3 Reconciliations – Bank reconciliations 37
Chapter 4 Reconciliations – Creditors reconciliations 101
Chapter 5 Fixed assets 121
Chapter 6 Partnerships – Accounting concepts and final accounts 165
Chapter 7 Partnerships – Financial statements 227
Chapter 8 Partnerships – Interpretation of financial statements 259
Chapter 9 Financial accounting of non-profit organisations – Clubs 289
Chapter 10 Cost Accounting 337
Chapter 11 Budgeting 393
Chapter 12 Inventory systems 427
Chapter 13 Value-added Tax (VAT) 461
Chapter 14 Revision activities 501
Examination 535
Glossary 545

HOW TO uSE THIS BOOK
This book follows the Curriculum and Assessment Policy Statement
(CAPS) for Grade 11 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:
fixed deposit Definitions are provided for new or difficult

Money placed in a special bank words that appear for the first time.
account at a higher interest rate,
and where you need to give
i The business makes use of a

60% profit mark-up on the
Info boxes provide additional information
to the topic being discussed.
cost price.
Transactions on discount Notes in the margin remind you of

allowed and discount received important points.
are included in this chapter to serve
as re-enforcement.
GAAP flash GAAP flashes appear where GAAP

Prudence principle: When a principles are being applied. You learn about
debtor’s debt cannot be collected, it these principles in Chapter 2.
can no longer be shown as an asset
in the business’s books.
Risk! warnings highlight potential problems

RISK! that business may face. You learn about
these risks in Chapter 2.
Clipboards appear throughout the textbook

to remind you which controls to apply in
certain situations. You learn about these
Controls for debtors controls in Chapter 2.
• There is a policy for credit approval. 
Internal audit checklists provide lists of

internal audit controls that help you to
reduce risk in certain business functions.
INTE
INTERNAL AUDIT

Chapter 1
Ethics
By the end of this chapter, you will be able to:
• identify and analyse ethical behaviour that applies to financial
environments, with reference to:
■accountability
■transparency
■sustainability.
Key concepts
• ethics • code of ethics • King Code • accountability • transparency • sustainability
Hey Siya, can I

borrow R200 from the
till? I promise to pay it
back on Friday.
Sorry, Sally, but that would

be unethical. I’m responsible
for the safekeeping of the
cash in the till and if any
money is short, I will be
held accountable.
E t h ic s • c h a p t e r 1 1

1. Introduction
Ethics is about knowing the difference between what is right and wrong,
distinguishing between acceptable and unacceptable behaviour and then
applying this knowledge to make choices that are morally correct. Ethical
conduct also involves being considerate of others and taking into account
the effects your decisions will have on others.
In Grade 10 you learnt that most businesses operate according to a
code of ethics. Remember that a code of ethics is a written set of rules
and guidelines which outline the moral standards and ethical principles to
be followed by a business and all of its employees. This code sets out the
principles of ethical and professional behaviour that should be adhered
to, such as integrity, objectivity, professional competence and proper
care, confidentiality, respect of human rights and honesty. It should also
address the business’s responsibility towards the community and the
environment and should help to promote a moral culture in the business.
You can find out more about Accountants working in South Africa are required to observe a
the Code of Professional code of ethics compiled by the South African Institute for Chartered
Conduct for Chartered Accountants Accountants (SAICA). This code of ethics, which is called the Code
at the following web link: of Professional Conduct for Chartered Accountants, provides ethical
https://www.saica.co.za/ guidance for accountants and aims to ensure that accountants comply
TechnicalInformation/Ethics/ with regulations and standards. If an accountant is reported to have acted
tabid/2069/language/en-ZA/
in contravention of this code, he/she may face disciplinary action, which
Default.aspx
could lead to an official caution, a fine or even being suspended from
being able to work as an accountant.
2. The King Code

In Grade 10, we discussed that good and ethical leadership can go a long
way to ensuring a culture of moral and ethical conduct within a business.
This was emphasised in a ground-breaking report drawn up by a South
African committee chaired by former High Court judge, Mervyn King and
released in 1994. The report, known as the King Code, sets out principles
and guidelines relating to good and ethical corporate governance. The third
revised King Code (King III) came into effect in March 2010.
In Grade 12 you will study the King Code is greater detail, so we
will limit our discussion to three of the fundamental aspects of King III,
namely accountability, transparency and sustainability.
2 chapter 1 • EThICs

2.1 Accountability
Accountability is defined as acknowledging and assuming responsibility
for your actions, duties and decisions. It is the obligation to account your
its activities and to be held responsible and answerable for the quality and
accuracy of the results.
Example: A principal of a school, who is employed by the Department
of Education, is responsible for the effective management and
well being of the school. If the school has a very low pass rate
in the Matric examinations, the principal may need to explain
and justify these results to the Department of Education. In
other words, the principal will need to account for these results
and will be accountable.
In the financial environment, accountability relates to employees,
management and directors performing their duties in a professional
manner, and being held responsible for the results of these activities.
Examples: • A bookkeeper has to maintain records of the day-to-day
business transactions and is accountable for their accuracy.
• The accountant is expected to prepare financial statements
that are accurate, fair and in accordance with the principles
of GAAP and is accountable for their integrity.
• Directors are accountable to the shareholders for the well
being of the company. These directors must thus be able
to account for, explain and justify their actions.
The business environment requires behaviour in accordance with good
practice, ethics and integrity. It expects tasks to be carried out accurately,
efficiently and timeously. If these expectations are not met, then it will
demand accountability and call for explanations, reasons and answers.
Accountability also extends to individuals being held responsible for the
protection of assets and financial information of a business.
2.2 Transparency
In general terms, transparency is defined as an honest way of doing
things that allows other people to know exactly what you are doing.
Same as a glass window, transparency refers to an action or process that
“can be seen through” and “does not hide anything”.
Example: A school awards a prize for the top Accounting learner in
Grade 11. The criteria for determining who should be awarded
this prize should be transparent. In other words, everyone
should know the rules for deciding the winner of this prize.

Is it judged on the performance throughout the year? Is it just
based on the results achieved in the final examination?
In the financial environment, transparency is essentially about conducting
business activities in an open manner without withholding information
or having any hidden agendas. This also means that financial statements
should be prepared in a transparent manner, so all material information
should be fully disclosed and this information should be true, accurate
and complete. This is particularly important in the case of companies
where the various stakeholders (management, shareholders, etc.) make
financial decisions based on the data in the financial statements. They
would rely on the accuracy and integrity of this information.
One way in which all businesses can provide a certain degree of
transparency is to maintain an accurate, reliable and complete set of
accounting records, supported by suitable source documents. The
accounting records will help to present a clear representation of the
business’s activities. The source documents help to provide confirmation
of transactions that took place.
If you conduct business in an open and transparent manner, it
can help avoid conflict and misunderstanding and create a fair and
harmonious business environment. It can also play a key role in
preventing and detecting accounting errors or financial fraud.
2.3 Sustainability
In general terms, sustainability may be defined simply as the ability to
maintain economic, social and environmental resources. Sustainability
and sustainable development has also been described as “development
that meets the needs of the present without compromising the ability of
future generations to meet their own needs”.
Example: The concept of sustainability may be applied to the manner in

which you take care of your school textbooks.
From an economic perspective, it costs your school a lot of
money to keep replacing textbooks each year. This is why
it is important that you look after your textbooks very well,
so that they can be used for several years. It is certainly not
economically sustainable to buy new textbooks for every
learner every year.
From a social point of view, you should remember that other
learners will be using these textbooks in future years. You thus
have a responsibility to ”sustain” your textbooks, by keeping
them in good condition.
4 c h a p t e r 1 • et h ic s

With regards to the environment, we all know that trees
are used to make paper and the sustainability of trees and
forests is critical to the well being of our planet. So when we
destroy, lose or ruin our textbooks, it also has an impact on the
environment. In addition, once textbooks have reached a stage
where they can no longer be used, these textbooks should be
recycled in an appropriate manner.
In the financial environment, sustainability refers to businesses
operating in a manner that does not jeopardise our current and future
social, environmental and economic well being. The importance of
this is emphasised in the latest King Code (King III), which states that
“sustainability is the primary moral and economic issue for the 21st
century”. It is therefore critical that today’s leaders integrate economic,
environmental and social considerations into their decision making.
In King III there is an increased focus on sustainability and integrated
reporting, which requires companies to broaden their accountability
beyond simply reporting on financial performance. They also have to
report on their social performance and their impact on the environment.
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 term
“bottom line” refers to the last line of the Income Statement, which
lists the net income or net profit of the business. “Triple bottom line”
accounting implies that companies should disclose information not
only about their economic performance, but also about their social and
environmental performance. The triple bottom line is thus made up of
the “social, environmental and economic” components and is also often
referred to as “people, planet, profit”.
Bottom line Economic performance Profit
Social performance People
Triple bottom line Environmental performance Planet
Economic performance Profit

Practically speaking, businesses should strive to balance economic gain
with social and environmental impacts. They should therefore move
away from the unethical and immoral trend of generating short-term
profit at the expense of sustainability. Business operations and strategies
need to be re-evaluated with regard to their impact on the environment
and new eco-friendly methods and policies need to be implemented.
It follows that responsible management and good ethical leadership is
required to ensure that business activities are conducted in a sustainable
and socially acceptable manner, and with care and regard for the
interests of all stakeholders. These stakeholders are increasingly holding
businesses accountable for their actions and are demanding greater
transparency in their reporting.
Example
Ubuntu (for enrichment only)
The concept of Ubuntu is referred to in King III, which states that
effective and ethical leadership should be “characterised by the ethical
values of responsibility, accountability, fairness and transparency and
based on moral duties that find expression in the concept of Ubuntu”.
Ubuntu is a traditional southern African concept or philosophy and
is encapsulated in the Zulu proverb “umuntu ngumuntu ngabantu”.
In simple terms, Ubuntu means
“humanity”, “humanness” or “humaneness”
to others.
In 2008, Archbishop Desmond Tutu
described Ubuntu as follows:
“Ubuntu is the essence of being human.
Ubuntu speaks particularly about the fact that
you can’t exist as a human being in isolation.
It speaks about our interconnectedness.
You can’t be human all by yourself, and
when you have this quality – Ubuntu – you are known for your
generosity. We think of ourselves far too frequently as just
individuals, separated from one another, whereas you are connected
and what you do affects the whole world. When you do well, it spreads
out; it is for the whole of humanity.”

Example continued
Nelson Mandela explained Ubuntu
as follows:
“A traveller through a country would
stop at a village and he didn’t have to ask
for food or for water. Once he stops, the
people give him food, entertain him.
That is one aspect of Ubuntu, but it will
have various aspects. Ubuntu does not
mean that people should not enrich
themselves. The question therefore is:
Are you going to do so in order to enable the community around you
to be able to improve?”
A business that adheres to the ethical principles of Ubuntu will
consider the rights, needs and well being of others in their decision
making. They will conduct business in a responsible and sustainable
manner with due regard and care for society and the environment.
Activity 1.1
1. What is a code of ethics?

2. List some measures that could be taken against an accountant who is found
guilty of acting in contravention of the South African Institute for Chartered
Accountants’ code of ethics.
3. What is the King Code?
4. Briefly explain the following terms:
a. accountability
b. transparency
c. sustainability
5. Explain what is meant by the term “integrated reporting”.
6. Describe the difference between “bottom line” accounting and “triple
bottom line” accounting.

Activity 1.2
The following headlines appeared in the Ethics Times newspaper (a fictitious

newspaper) concerning Bafana Bafana (the South African soccer team).
1.
2.
3.
Use your knowledge of the terms accountability, transparency and

sustainability to explain the meaning of each of these headlines.
Activity 1.3
The following headlines appeared in the newspapers in various countries

around the world.
1.
2.
3.
4.

5.
6.
Use your knowledge of the terms accountability, transparency and

sustainability to explain the meaning of each of these headlines.
Case study 1.1
Read the following passage, which appeared on the SAICA website, and
answer the questions that follow.
SAICA’s commitment dynamic role. Accordingly, the Board and

management of SAICA believe that every
to sustainability organisation should entrench sustainability
T
he Board and management of SAICA objectives into their strategies and operations,
believe that the future of humankind and all organisations should report to their
is seriously threatened by the impact stakeholders on sustainability issues, both
of global warming and climate change. They positive and negative.
believe the only way for humankind to avoid Furthermore, the Board and management
disaster is to follow a strategy of sustainable of SAICA believe that companies that are
development, where economic development sustainability-focused will also be more
is achieved in harmony with environmental effective and profitable in the long run.
priorities and social upliftment together with Accordingly, SAICA will work with its
the eradication of poverty. members, trainees and students, as well
To achieve these objectives, all countries as its other stakeholders to achieve global
and organisations need to play an active and sustainability.
Source: https://www.saica.co.za
Questions
1. What does the abbreviation SAICA stand for?
2. List the two environmental issues that SAICA believes are a “serious threat to
the future of humankind”.
3. Briefly outline the “strategy of sustainable development” that SAICA
suggests should be followed in order to avoid disaster.
4. What two actions does SAICA believe all organisations should take in order
to promote sustainable development?
5. Give two possible reasons why SAICA suggests that “companies that are
sustainability-focused will also be more effective and profitable in the
long run”.

Case study 1.2
Read through the article below. Then answer the questions that follow.
Five steps to a culture The next step is to assess the company’s

values and vulnerabilities by conducting an
of ethics ethics audit. “In order to manage ethics you
Building a total need to know what you’re managing,” says
EthicsSA’s Willem Landman.
management programme
An ethics surveyor audit will effectively
S
ince ethical behaviour may not always be involve conducting interviews with senior
embedded in the everyday practices of management, as well as hosting focus groups
people operating within an organisation, with other internal stakeholders of the
companies can benefit from implementing a company, to ascertain the degree of ethical or
“total ethics management programme”. unethical behaviour currently prevalent.
The Ethics Institute of SA (Eisa) says Landman says that EthicsSA has developed
that building and managing an ethical an effective survey instrument to test business
company requires certain steps and how ethics that gauges the level of ethical behaviour
they’re introduced depends in turn on several within a company. “Not only does that allow you
variables, such as the ethical culture that to get an idea of the perceptions and culture
already exists, the level of development of its within a company but also serves as a useful
ethics infrastructure and the company’s nature benchmark for future comparison.”
and size. The third aspect of an ethics management
The first step was to obtain the programme is to develop a code of ethics that
commitment of the company’s senior sets out both the company’s value statement
management. “You can’t start building an and code of conduct. To achieve that Landman
ethics programme without the buy-in of senior recommends setting up a code-writing
management,” says EthicsSA’s William Punt. “An committee. “Ethics don’t develop by themselves
ethics management programme only works if – especially in South Africa, where we have very
you have the resources to work with and you different cultures living and working alongside
need senior management support in order to each other.”
obtain the resources.” Punt says that once a code-writing
Obtaining senior management buy-in committee has been established, its first
allows you to determine the company’s ethical task should be to work with any existing
goals and milestones and also enables you to documentation concerning ethics. From that
assign senior people to specific roles, such as a skeletal code document can be produced for
that of ethics officer. Punt says: “Appointing an circulation within the company to obtain input
ethics officer and sending an employee on an and recommendations. That process continues
ethics officer programme are the flagship way of until at least two drafts have been developed
demonstrating your commitment to building an and circulated.
ethical organisation.”

Says Punt: “It’s thus a very interactive The fifth and final step of instituting a
process that allows you to avoid both the pitfalls total ethics management programme involves
of being too autocratic as well as those of being the integration of ethical behaviour into the
overly democratic – where in the end nothing culture of the company by using the ethics
gets done.” infrastructure put in place and creating a
The fourth point is to set up an common sense of ethics within the business.
organisational ethics infrastructure. That That can be achieved through the constant
involves education and training as well as training and education of the workforce to
communicating with employees to determine keep them up to speed with the ethics code. It
what’s required of them in terms of the should also involve rewards for those who have
ethics code. adhered to ethical behaviour or have reported
Landman also strongly recommends breaches of the code, while disciplinary action
setting up an ethics hotline, which can should be taken against those who violate the
afford employees the opportunity to report agreed code of ethical behaviour.
misconduct anonymously without fear of Interestingly, Punt says that the possibility
censure or reprisal. of prosecution doesn’t always act as a deterrent.
Another form of monitoring ethics within “The white collar criminal doesn’t think about
a company would be to repeat an ethics what he’s going to tell his lawyer.”
audit or survey from time to time to gauge Punt says that research has shown that the
improvements or setbacks. “The assessment three key deterrents to unethical behaviour are
and grading of your ethics infrastructure is (in order of strength): societal censure, company
becoming increasingly important within the censure and fear of prosecution. In other words,
ethics management programme,” says Punt. fears of community and workplace punishment are
greater than the fear of prosecution by the State.
Source Finweek, 9 February by William Punt of Eisa
Questions
1. Explain, in your own words, what ethics in business are and why they are
so important.
2. What does “EthicsSA” stand for?
3. Which variables will determine how a business builds and manages ethical
behaviour in a company?
4. Name the three key deterrents to unethical behaviour. To what conclusion
does the writer of the article come regarding these deterrents?
5. You are a consultant of EthicsSA and need to do a presentation on the five
steps to a culture of ethics to a business. Design a chart, transparency table,
or something similar, to illustrate and describe these five steps in your
presentation.

Case study 1.3
Read through the article below. Then answer the question that follows.
Beware of the 419-letter As soon as the victim shows interest in the

transaction, he or she is instructed to forward
scam! a certain amount of paper work – usually
T
he so-called Nigerian letter scam, better including signed letterheads with no writing on
known as the 419-scam, is nothing but them (except for the signature), uncompleted
money lending fraud. This is usually run invoices, telephone and fax numbers and
by a member of a syndicate. Although scams especially bank account details.
like these originated in Nigeria, syndicates The victim is required to give permission
from other countries in Africa have also become to use his or her account and to arrange for
involved in the scam. transfer of the money into the account.
The scam begins when the fraudster Now the syndicate is able to rob its victim
contacts a targeted company, business or person, of a substantial amount of money in a number
either by means of a fax, by mail or by e-mail. of ways:
A business transaction is proposed in the • The fraudster asks the victim to pay money
letter. The fraudster says that he is in possession into a specific bank account to help cover
of a large amount of money, which has been the costs of the transaction.
“over-budgeted”, usually in American dollar. • As soon as the original amount to “cover
The proposal involves transferring the over- costs” has been paid in, “complications”
budgeted money to a bank account outside of suddenly arise, requiring the victim to
the country where the scam originated (usually transfer more money.
an account within the country of the targeted • The victim’s banking details are then used
company or person). on official letterheads to withdraw money
A perfectly acceptable explanation, which from the account and transfer it to another
also sounds worthwhile, is usually given for the account.
money transfer. • As soon as the money has been transferred,
The person who receives the letter is the victim is contacted by an “official”,
usually promised an amount of between 20% under the pretext that he will help him
and 35% of the money, as commission for the or her to retrieve the lost money. This, of
use of his or her account. course, entails further costs.
Source: translated from Die Burger of 23 April 2005
Question
You are the financial manager of a small company. You are contacted by
someone with a similar proposal to the one in the article above. As financial
manager, will you either:
• refuse, and report the crime to the police; or
• make the account available, and maybe make a lot of money in the process?
Write a report to supply reasons for your decision, with reference to ethical
code, and specifically to accountability and transparency.

Chapter 2
Internal controls and audit processes
• demonstrate knowledge of the division of duties,
■
internal audit process documentation, physical

• define and explain what is controls, authorisation and
meant by internal audit reconciliations
• demonstrate knowledge of: • identify internal audit
■the difference between procedures relating to:
internal control and an handling cash
■
internal audit buying and selling on credit

■
■the role of the internal stock / inventory

■
auditor debtors
■
creditors.
■
Key concepts
• types of control • risk management • internal control • division of duties • documentation
• authorisation • physical controls • reconciliations • internal audit • internal auditor
• the role of the internal auditor • internal audit process • walkthrough tests • compliance
tests • substantive tests • sampling • inspection • observation • enquiry • re-performance
• internal audit procedures
Randall, would you mind
explaining the internal control
process you follow when ordering
an item for a customer?
Well, Nomsa, a customer requested a

size of a certain dress today, but we are
out of stock. So I fill in this purchase
requisition document and pass it on
to my supervisor for authorisation. She
signs and sends it to the Purchases
department, who then prepare a
purchase order document. The PO
document is then approved and signed
by a purchasing officer, before being
sent to our supplier.
I nternal c o ntr o l s and audit pr o ce s s e s • c h a p t e r 2 13

1. Introduction
In our daily lives we are surrounded by controls, whether we realise it or
not. There are road safety controls (such as road signs), security controls
(such as locks on doors), physiological controls (such as our immune
system) and electrical controls (such as a thermostat switching off a
boiling kettle). Controls have become a vital part of everyday life; they
help prevent disaster or detect potential disaster.
1.1 Types of control

In general, controls may be classified into four types:
• Preventive controls: used to deter or prevent an undesirable event
from occurring, for example, when burglar bars are used to prevent
burglars from breaking into a building
• Detective controls: used to detect undesirable events that have
occurred, for example, where a burglar alarm is used to detect when
someone has broken into a building
• Corrective controls: used to correct the effects of undesirable events,
for example, when a burglar alarm is linked to a security company
that responds in time to stop burglars from stealing anything
• Directive controls: used to discourage an undesirable event from
occurring or to encourage a desirable event to occur, for example,
where a sign warning that a building is protected by a burglar alarm is
used to discourage burglars from attempting to break in.
1.2 Control in the business environment

An effective system of control is essential to all businesses and helps to
prevent, manage and control risk so that the business objectives can be
achieved. Before a control system can be implemented, the objectives
of the business must be defined and the business operations required
to achieve these objectives need to be established. The primary aim
of most businesses is to make a profit. However, recently there is a
greater awareness for the need to include social and environmental
considerations in the business objectives.
Once a business has established its objectives, it needs to implement
the procedures and activities required to achieve these objectives,
commonly known as the business operations. Business operations include
activities such as handling of cash, buying and selling on credit and the
administration of stock (inventory), debtors, creditors, fixed assets and
the payroll. These activities often entail complex procedures, involving
several personnel and numerous transactions and are thus particularly
vulnerable to risks such as error, fraud and theft. In order to guard against
these risks, businesses need to establish an effective risk management and
control system, which should comprise of the following components:
14 c h a p t e r 2 • I nternal c o ntr o l s and audit pr o ce s s e s

• A risk management function
• A system of internal control
• An internal audit function.
2. Risk management RISK!

Risk management may be broadly defined as the process of identifying,
assessing and managing risk. Risks may be defined as uncertain future
events that may have a negative impact on business operations and thus a
detrimental effect on the business achieving its objectives. Although risks
are an unavoidable part of the business process, good risk management
can go a long way to protecting the business and preventing risks from
materialising. The risk management function of a business should be
responsible the following activities:
• Establishing the risk management policy and strategy of the business
• Analysing the business operations and procedures to identify risks
• Evaluating and assessing the potential impact of the risks identified
• Deciding on the appropriate action to be taken in response to each of
the risks identified
• Developing and implementing appropriate internal control processes
to combat the risks
• Continual reviewing of the risk management process and strategy.
So, one of the key responsibilities of the risk management function is to
decide on the most appropriate action to be taken in response to each of
the various risks identified. Generally, the risk management function will
address a risk by adopting one of the following responses:
This is likely to be the response if the risk is significant and either cannot be contained
or is too costly to control.
Avoid the
Example: The risk of a business losing money by investing excess funds in the stock
risk
market is significant and cannot be contained. so the business may decide to avoid the
risk by choosing a safer investment option for the excess funds, such as a fixed deposit.
This is normally the response if the risk is significant, but can be cost-effectively controlled.
Control the
Example: The risk of cash being stolen is significant, but can be cost-effectively
risk
controlled by buying a safe and using it to store cash.
This is likely to be the response if the risk is significant, but unlikely to occur.
Transfer the Example: The risk of the business premises being damaged in a fire is significant, but
risk unlikely to occur, so the risk will be transferred to an insurance company by insuring
the business premises against fire.
A risk may be tolerated (i.e. no specific action is taken) if it is found that the risk is
Tolerate the unlikely to occur and that it would have little impact even if it did occur.
risk Example: The risk of teabags being stolen from the staff canteen will be tolerated, as it
is unlikely to occur and would have little impact even if it did occur.
INTERNAL CoNTRoLs AND AUDIT PRoCEssEs • chapter 2 15

Ultimately, all businesses are exposed to risks, and without adequate and
appropriate risk management, these risks are more likely to materialise.
This can be extremely costly and may even lead to financial ruin. Simply
put, risk management follows the common principle that “prevention is
better than cure”. This point was emphasised in a speech by James Lam, a
renowned author in the field of risk management, where Lam concluded
by saying: “Let me leave you with a final thought. Over the longer term,
the only alternative to risk management is crisis management, and crisis
management is much more embarrassing, expensive and time consuming.”
Source: Speech by James Lam at the IQPC Enterprise Risk Management Conference,
25 March 1999
Activity 2.1
Match each of the terms in Column A with the most appropriate description in
Column B. Write down only the numbers (1 to 8) and the corresponding letters
(for example 1. A.).
Column A Column B
1. Transfer the risk A. Response to a significant risk that can be cost-effectively controlled
2. Directive control B. Response to a significant risk that either cannot be contained or is
too costly to control
3. Control the risk C. Response to a significant risk that is unlikely to occur
4. Corrective control D. Response to a risk that is unlikely to occur and would have little
impact even if it did occur
5. Avoid the risk E. A control used to deter or prevent an undesirable event from occurring
6. Preventive control F. A control used to detect an undesirable event that has occurred
7. Tolerate the risk G. A control used to discourage an undesirable event from occurring or
encourage a desirable event to occur
8. Detective control H. A control used to correct the effects of an undesirable events
3. Internal controls
Once the risk management function has identified the risks that need
to be controlled, the appropriate internal control processes needed to
combat these risks must be developed and implemented. As you learnt in
Grade 10, internal control processes are systems, policies and procedures
implemented to protect a business against risks in order to help ensure
that the goals and objectives of the business are achieved. These internal
control processes are essential for all types of businesses and should be
specifically designed for the particular risks encountered by each business.
Proper internal control processes should be effective in preventing,
managing and controlling risk and thus protecting the business against
error, fraud and theft. They should be embedded in the day-to-day
activities and procedures of the business.

3.1 Purpose of internal controls of a business
The purpose of the internal controls of a business is to control risks
in order to help ensure that business objectives are accomplished. An
effective system of internal controls should ensure that:
• the financial and operational information of the business is reliable
and accurate
• employees comply with the policies, procedures and rules of
the business
• employees adhere to the code of ethics of the business
• the assets of the business are safeguarded
• the resources of the business are used economically and efficiently.
3.2 Purpose of internal controls in accounting

Internal accounting controls form part of the system of internal
controls of a business. They are implemented not only to ensure that the
transactions of the business are recorded accurately, but also to protect
the business against the risk of financial loss due to fraud or error. The
purpose of the internal accounting controls is to control risks in order to
help ensure that the accounting objectives of the business are achieved.
An effective system of internal accounting controls should ensure that:
• accounting records are accurate and reliable
• income is received and correctly recorded in the accounting records
• expenses are properly authorised and entered in the accounting records
• assets are safeguarded and properly recorded in the accounting records
• liabilities are paid timeously and are properly recorded in the
accounting records
• errors and irregularities in processing information are detected.
3.3 Fundamental elements of internal control

Internal control systems, policies and procedures may differ from one
business to another depending on the complexity, size and nature of the
business. Since each business operation is exposed to a unique set of
risks, internal control processes need to be specifically designed to cater
for the risks associated with each particular business operation. In Grade
10, you learnt about internal control processes and procedures specifically
designed for controlling cash receipts, cash payments, petty cash, debtors,
creditors, payroll, fixed assets and inventory. Although the specific
details of each of these internal control processes are different, they all
incorporate the following fundamental elements of internal control:
• Division of duties (segregation of duties): This is one of the
primary means of control and involves the separation of those
responsibilities or duties that would, if combined, enable one

individual to record and process a complete transaction. This would
provide that person with the opportunity to commit fraud by
manipulating the transaction irregularly. The primary objective of
division of duties is to reduce the risk of fraud and errors by limiting
opportunities and increasing the element of checking. Functions
that should be separated include those of authorisation, execution,
custody and record keeping. For example, one person should prepare
deposit slips and another person should take the deposits to the bank.
• Proper documentation: This requires that proper and accurate
documentation is maintained and used to support all transactions.
The information relating to each transaction should be recorded
accurately and in full detail on the relevant source document. The
source documents should be pre-numbered and consecutive and
should be prepared timeously. After the source document has been
used to record the transaction in the appropriate subsidiary journal,
it should be safely filed so that, if required, it can later be used to
provide evidence of the transaction.
• Authorisation of transactions: This requires that transactions should
only be approved and carried out by personnel acting within the
scope of their authority. Authorisation policies and procedures should
clearly identify which personnel have the authority to approve each
of the various types of transactions. Restriction of authority is an
essential control used to reduce the risk of fraudulent transactions
being processed. For example, a cheque that is signed using an
unauthorised signature should not be paid by the bank.
• Physical controls: These are controls that are used to physically
safeguard assets and records, such as safes, secure storage, cash
registers, fire-proof filing cabinets and password-protected computer
programs. These controls are designed to ensure that access to
assets and records is restricted to authorised personnel only. Physical
controls are used to reduce the risk of theft of business property or
fraudulent tampering with the business records.
• Reconciliations: Reconciliations involve the process of comparing
two sets of records in order to check that they are in agreement. If
it is found that the records are different, then the differences must
be accounted for and the necessary adjustments must be processed.
Where there are differences that cannot be simply accounted for,
further investigation needs to take place and this frequently results
in the detection of legitimate errors. In some instances, however,
this investigation can lead to the discovery of fraudulent transactions
and even expose complex fraud schemes. Thus reconciliations are an
extremely valuable form of internal control used to reduce the risk of
errors and fraud.

Activity 2.2
Shoemaker’s Shoe Shop is a small business that sells footwear to the general
public. The business is owned and managed by Michael Shoemaker. Five
business practices employed by Shoemaker’s Shoe Shop are described below.
For each of the business practices:

1. Identify the main risk(s) to the business.
2. State the fundamental element of internal control that is lacking.
3. Briefly describe the internal control procedures that Michael should implement.
A. Michael Shoemaker employs three full-time assistants. The business uses
an old cash register, which doesn’t lock properly. When the cash register
gets too full, Michael removes the R200 and R100 notes and stores them
in a shoe box in an unlocked cupboard under the shop counter.
B. Shoemaker’s Shoe Shop has a relatively small storage area, which can
only hold a limited amount of stock. Thus Michael attempts to maintain
a perpetual inventory system, so that he can replenish stock on a weekly
basis. Unfortunately, Michael and the assistants do not keep proper sales
records. Instead, Michael and the assistants meet at the end of every
week and try to draw up a list of the items that were sold that week
from memory. This process isn’t very effective and regularly results in
incorrect and insufficient stock being ordered.
C. Michael has put one of the assistants, I. Steele, in charge of receipts and
banking. She is responsible for counting the cash receipts at the end of
each day, preparing the deposit slips and making the deposits at the bank.
D. Michael, who studied Accounting at school, prepares the accounting
records of the business, including the Cash Receipts and Cash Payments
Journals. Every month Michael receives the bank statement for the
business in the post. Michael recognises the envelope and puts it
unopened in a shoe box labelled “bank statements”.
E. Shoemaker’s Shoe Shop buys its stock on credit from the Footwear Factory.
In an effort to keep the purchasing process as simple as possible, Michael
has arranged the following ordering procedure with the Footwear Factory:
• Purchase orders are hand written on the business letterhead and
faxed to the Footwear Factory.
• The purchase orders only list the description and quantity of each
item ordered and do not need to be signed (Michael often asks his
assistants to process the order).
4. Internal audit
In simple terms, an internal audit may be described as an independent
assessment of the effectiveness of the risk management and internal
control of a business, in order to identify strengths and weaknesses in
the management and control of risk. The information that results from

this assessment enables management to improve the risk management
and internal control of the business, and in so doing helps ensure that the
business achieves its objectives.
The most commonly used definition of internal auditing is provided
by the Institute of Internal Auditors, which describes internal auditing
as follows:
“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.”
For more, go to the website http://www.theiia.org/guidance/standards-and-guidance/ippf/definition-

of-internal-auditing/
In this definition, internal auditing is described as both an “assurance”

and a “consulting” activity, thus indicating that the purpose of an internal
audit is twofold. This may be explained as follows:
• For the areas of the business where risk management and internal
control are found to be effective, the internal audit provides
“assurance” that risk is being managed and controlled adequately.
• For the areas of the business where risk management or internal
control are found to be inadequate, the internal audit performs a
“consulting” role by providing recommendations for improving the
management and control of risk.
By performing these functions, the internal audit “adds value” to the
business by helping to “improve the effectiveness of risk management,
control, and governance processes”, which ultimately helps the business
“accomplish its objectives”.
An alternative and more concise definition of internal auditing,
provided by David M. Griffiths who is an author in the field of internal
auditing, is as follows:
“Internal auditing provides an independent and objective opinion to an organisation’s management as to

whether its risks are being managed to acceptable levels.”
For more, go to the website http://www.internalaudit.biz
The key difference in this definition is the use of the word “opinion”,
which makes it easier to understand that the internal audit may provide
both positive and negative feedback regarding the effectiveness of the risk
management and internal control of the business.
The internal audit is performed by internal auditors, who report their
findings to senior management, the board of directors or the audit

committee. In their report, the internal auditors will provide an opinion
as to whether the risk management and internal control systems are
functioning effectively and managing risks to an acceptable level. They
will also propose recommendations for improvement in those areas
where control deficiencies or opportunities for fraudulent conduct are
identified. Based on the information provided by the internal auditors,
management may decide to take corrective action to improve the risk
management and internal control systems of the business.
4.1 The internal auditing function

The internal auditing function is normally performed by a team of
internal auditors who are usually employees of the business. However,
this function can also be contracted out to specialist internal auditing
firms. Due to the nature of their activities, internal auditors need to
operate independently, be objective in their work and possess strong
ethical values such as integrity and professionalism. In order for the
internal auditing function to operate successfully, it is essential that other
individuals or groups within the business are not able to influence the
internal auditors in any way. Although internal auditors do not need to
be accountants, they should have a broad range of skills and expertise in
both financial and operational areas, as well as an in-depth understanding
of the business culture, systems and processes.
4.2 The role of the internal auditor

As mentioned previously, the primary role of the internal auditor is
to evaluate the effectiveness of the risk management and internal
control systems of the business and to report their findings, opinions
and recommendations to management. Although the specific duties
performed by internal auditors may vary from one business to the next, the
responsibilities of the internal auditor may typically include the following:
• Evaluating the adequacy and effectiveness of risk management in
order to identify both current risk issues and anticipate potential
future areas of concern
• Evaluating the adequacy and effectiveness of the internal controls
in order to identify deficiencies and provide recommendations
for improvement
• Reviewing and analysing the business operations in order to gain a
clear understanding of the various processes and the role they play in
achieving the business objectives
• Reviewing systems, operations and procedures in order to determine
whether the business and its employees are in compliance with
policies, procedures, laws, codes of practice and regulations
• Examining and evaluating the reliability and integrity of financial and
operating information

• Examining and evaluating the effective and efficient use of the
business’s resources
• Reviewing the means used to safeguard assets and verifying the
existence of those assets
• Providing management with analyses, appraisals, recommendations
and information concerning the activities reviewed in order to assist
them in the management of risk.
Although internal auditors play a key role in ensuring that risk is
managed and controlled effectively, it is very important to realise that
the responsibility for risk management and internal control remains with
management. In other words, while the internal auditor is responsible for
providing opinions and recommendations, it is the duty of management
to decide on, and implement, any changes to the risk management and
control systems of the business.
4.3 D
ifferences between internal control and an
internal audit
As you know, internal control relates to the systems, processes and
measures implemented by management to protect the business against risk
and thus help to ensure that the business objectives are met. In comparison,
an internal audit is a function (usually) performed by employees of
the business, which is used to evaluate and assess the effectiveness and
adequacy of the internal control systems of the business.
So, in many ways an internal audit could be seen as an all-
encompassing “control measure” that is “implemented” by management
to protect the business against the risk of having an inadequate or
ineffective internal control system.
The relationship between the risk management, internal control and the
internal audit functions is summarised as follows:
The achievement of …
BUSINESS OBJECTIVES
is threatened by …
RISKS
that are identified and evaluated by …
RISK MANAGEMENT INTERNAL AUDIT FUNCTION

evaluates the effectiveness of
which develops and implements …
RISK MANAGEMENT and
INTERNAL CONTROLS INTERNAL CONTROL
in order to manage the risks.

4.4 The internal audit process
It is important to realise that internal audits may be performed in many
different ways, using a variety of approaches. They are usually specifically
designed to cater for the particular requirements of the business being
audited. The process that is followed when performing an internal audit
may also vary considerably depending on the nature, size and activities of
the business under review.
The modern trend in internal auditing is to adopt a risk-based
approach to the internal audit, which involves identifying and focusing
on the areas of greatest risk to the business. A risk-based approach aims
to maximise the impact of the internal audit by ensuring that internal
audit resources are allocated to the areas that matter most. This approach
is also recommended in the King Code III, which advises that an “internal
audit should follow a risk based approach to its plan”.
In general, an internal audit process involves four phases or stages:
Planning Fieldwork Reporting Following up
Although it is not possible to provide a “one size fits all” explanation
of the internal audit process, we will discuss some of the steps that are
commonly followed in a typical risk-based internal audit.
4.4.1 Planning phase

The planning phase begins after management has defined the general
objectives and scope of the audit. This phase involves a risk-based
assessment of the business activities under review in order to identify the
areas of significant risk that will require and receive the most attention
during the audit.
The internal auditors gather information to gain a thorough understanding of the

business activities under review. They will do this by:
• reviewing documented • having discussions • analysing business

policies and procedures with management operations.
They then define the objectives of the area being audited.
The risks (or threats) to achieving these objectives will be identified and analysed, in
order to identify the areas of significant risk.
The internal auditors finally plan the detail and scope of the work to be performed
during the fieldwork phase, giving priority to those areas of greatest risk.

4.4.2 Fieldwork phase
In the fieldwork phase, the internal auditors focus their attention on the
areas of significant risk that were identified in the planning phase. They
will investigate the measures that management have taken to control
these risks and assess whether these risks are being adequately managed
and controlled. For each of the significant risks identified, the internal
auditors will ask the following questions:
• Is the risk being managed at all? In other words, has management
addressed the risk and implemented internal controls to manage the risk?
• Is the risk being managed appropriately? In other words, has
management addressed the risk adequately and are the internal
control processes suitably designed to manage the risk?
• Is the risk being controlled effectively? In other words, are the
internal control processes and procedures being applied properly and
operating effectively, so as to manage the risk to an acceptable level?
The bulk of the internal audit takes place in the fieldwork phase. During
this phase, the internal auditors perform a number of tests:
• Walkthrough tests: This involves tracing a small sample of
transactions through the existing systems from the beginning to the
end of the process being assessed. These tests are performed for two
main reasons: first, to determine whether the documented internal
controls have actually been implemented; and second, to enable the
internal auditors to gain a better understanding of the various control
processes of the business.
• Compliance tests: This involves reviewing the internal control
processes to determine whether the internal controls are working as
intended. Compliance tests, also known as “tests of control”, are used
to verify that control procedures are being adhered to and applied
correctly, or to uncover non-compliance and unclear procedures.
• Substantive tests: This involves testing, checking and verifying the
completeness, validity and accuracy of the financial and operating
information. These tests are used to uncover any material errors,
irregularities or inaccuracies and thus determine whether the
objectives of the control processes are being achieved.

In carrying out these tests and investigations, internal auditors will use
various auditing techniques:
This technique is used extensively in this phase of the audit. Due to cost
and time implications, it is obviously not viable for auditors to test and
check every document and record of the business. Instead, auditors will
Sampling select a representative sample from each business process to test. This
sample should be large enough to provide the auditors with an accurate
account of the business process, yet small enough to be completed in a
short period of time.
This involves the investigation of documents, records and reconciliations
in order to ascertain whether the internal control procedures are being
carried out correctly and are operating efficiently. For example, internal
Inspection auditors may inspect the records for a sample of transactions to verify the
journal entries against the supporting source documents; check that the
posting to the General Ledger accounts was performed correctly and then
trace the amounts through to the Trial Balance.
This involves internal auditors observing employees carrying out specific
processes and procedures. By monitoring activities being performed,
Observation
internal auditors can determine whether the internal control procedures
are being complied with and can gauge the effectiveness of the processes.
This involves internal auditors interviewing employees and asking them
questions relating to the performance of their duties. Through these
interviews, internal auditors can obtain useful information regarding the
Enquiry
control environment and can determine the employees’ understanding
of the control objectives. This helps the internal auditors to identify
deficiencies or potential weaknesses in the internal control systems.
This involves re-performing tasks that have already been performed in
order to test for accuracy, correctness and completeness. This testing
technique involves re-checking calculations, reconciliations and
Re-performance
recordkeeping procedures and enables the internal auditors to evaluate
the accuracy and reliability of the information processed through various
control systems.
The information gathered and results obtained from the internal audit
tests and investigations, are commonly referred to as audit evidence.
Once the fieldwork phase of the audit is complete, the internal auditors
will use the audit evidence to support their opinion on the adequacy of
the risk management and internal control of the business.

4.4.3 Reporting phase
The primary aim of the internal auditors report is to provide
management with an opinion as to whether the risk management and the
internal control systems are functioning effectively and managing risks to
an acceptable level. The report should provide assurance on the areas of
significant risk that are being effectively managed and controlled, while
at the same time document any significant shortcomings or weaknesses
identified. The report should also provide recommendations for
improvement in those areas of significant risks where the management
and control of risk was found to be inadequate.
4.4.4 Follow-up phase

Based on the opinions, findings and recommendations set out in the
internal auditors report, management may decide to make changes to
the existing risk management and internal control system in order to
address the weaknesses identified. The internal auditing function should
establish a follow-up process to monitor any corrective action taken
by management. This will help to ensure that those actions have been
effectively implemented and are managing the associated risks to an
acceptable level.
4.5 Internal audit procedures

In Grade 10 you learnt about the internal control processes used to
manage the risks associated with various business activities. Here
we will discuss some of the procedures that internal auditors use to
determine whether the risks relating to those business activities are
being managed to an acceptable level. We will assume that a risk-based
assessment has been performed and will thus focus on the procedures
used in the fieldwork phase. Although the specific procedures used may
vary from one business to another, we will look at some of the internal
audit procedures that are commonly performed for each of the various
business activities.
4.5.1 Internal audit procedures relating to the handling of cash

The following are some of the internal audit procedures that may
typically be used to evaluate the management and control of risks
relating to the handling of cash:

INTE
INTERNAL AUDIT
• Conduct walkthrough tests and trace a sample of
transactions through the cash systems to:
■ verify the existence of the documented
internal controls
■ gain a clear understanding of the internal control processes and
INTE
procedures.
INTERNAL
INTERNAL AUDIT
INTE AUDIT
• Inspect the control measures used to physically safeguard cash, observe whether
these measures are being adhered to and assess the adequacy of these measures.
• Observe and verify that:
■ access to cash is restricted to authorised employees only
■ the bookkeeper is restricted from handling cash.
• Observe the cash receiving and depositing process to verify that:
■ someone other than the bookkeeper opens the mail and prepares a list of cash
receipts as soon as they are received
■ one person prepares deposit slips and another person, who doesn’t have access to
deposit slips, takes the deposit to the bank
■ receipts are deposited as soon as possible (preferably daily)
■ deposits are made intact with no amounts withdrawn to pay expenses
■ the cash receiving function is separate from the cash disbursing function
■ listings of cash receipts are compared with the Cash Receipts Journal and
deposit slips.
• Inspect a sample of records, observe activities and interview key personnel to verify that:
■ bank reconciliations are performed monthly by someone other than the person who
takes the deposits to the bank or the person authorised to sign the cheques
■ all cash transactions are supported with appropriate pre-numbered source
documents and entered promptly in the Cash Journals
■ no payments, other than petty cash payments, are made using actual cash
■ petty cash is kept separate from the cash float
■ regular unannounced counts of petty cash are performed by someone other than the
custodian
■ all authorisation and documentation procedures relating to cash receipts, cash
payments and petty cash payments are being adhered to.
• Conduct substantive tests on a representative sample of transactions, documents and
records, by checking information and re-performing tasks, to:
■ agree deposit slips to listings of cash receipts, the Cash Receipts Journal
and the bank statements
■ verify that bank reconciliations have been performed accurately and correctly
■ verify the accuracy and completeness of the source documents used
to support the cash transactions
■ verify the accuracy and completeness of the recording process, by tracing
source documents to the Cash Journals, through to the Ledgers and on
to the Trial Balance.
■ verify cash balances by counting cash on hand and confirming account
balances directly with the bank
■ verify the petty cash by counting the petty cash and reconciling
with the petty cash vouchers.

4.5.2 I nternal audit procedures relating to buying on credit
(credit purchases)
relating to buying on credit:
INTE
INTERNAL AUDIT
transactions through the credit purchases system, in
order to:
■ verify the existence of the documented internal controls
■ gain a clear understanding of the internal control processes and procedures.
INTE
• Test for compliance with supplier selection policy, by observing activities, interviewing
INTERNAL AUDIT
key personnel and inspecting records, to verify that:
■ the process used to evaluate and approve suppliers is being adhered to
■ goods are only ordered from suitably approved suppliers
■ the necessary steps have been taken to negotiate favourable credit terms
■ the set policy used to select the most suitable supplier is being followed
■ where required, quotations are requested from suppliers and the policy used to select
the most favourable quote is being adhered to.
• Test for compliance with the ordering process by observing activities, interviewing key
personnel and inspecting records to verify that:
all purchases are initiated using purchase requisition documents prepared,
purchase requisition
■
approved and authorised according to set guidelines

purchase orders are prepared only on receipt of properly authorised purchase
A purchase requisition is an internal
■
INTE
requisition documents
INTERNAL AUDIT
document used to notify the ■ purchase orders are prepared by authorised personnel according to set guidelines,
purchasing department of items it are pre-numbered and are signed by an authorised purchasing officer.
needs to order. • Test for compliance with the receiving process by observing activities, interviewing key
■ goods received are inspected for damage and checked for quantity, quality and
purchase orders description against the purchase order and supplier’s invoice
■ goods received notes are prepared by authorised personnel, according to set
A purchase order is a document guidelines and signed by an authorised supervisor
■ damaged goods or incorrect supplies are reported immediately and returned without
used to order items from a supplier. delay to the supplier, together with a properly prepared and authorised debit note
■ invoices are checked for accuracy of prices and VAT and verified against purchase
orders and goods received notes for quantity, description and price
goods received notes ■ once checked, invoices are stamped as checked, signed by authorised personnel
(independent of the ordering function) and forwarded to the accounts payable
A goods received note is an internal department for further processing
document used to keep a record of ■ all invoices are entered in the Creditors Journals and posted to the Creditors Ledger
promptly.
goods that have been received.
records, by checking information and re-performing tasks, in order to:
■ test purchase requisition documents, purchase orders and goods received notes for
accuracy and completeness
■ verify that purchase orders were accurately checked against supporting purchase
requisition documents
■ test invoices for accuracy of quantity, description, price and VAT

continues ...
■ test records relating to damaged goods and incorrect supplies received for
accuracy and completeness
■ verify that the records relating to damaged goods and incorrect supplies
received were accurately checked against debit notes
■ test debit notes for accuracy and completeness
■ verify that invoices were accurately checked against purchase
orders and goods received notes
■ verify that invoices were accurately recorded in the Creditors
Journal and correctly posted to the Creditors Ledger.
I’ve got so much time to read now. Hmmm, I wonder if the plot gets any better ...
I think these financial statements might be bit too transparent.

4.5.3 I nternal audit procedures relating to selling on credit
(credit sales)
relating to selling on credit:
INTE
INTERNAL AUDIT
transactions through the credit sales system, in
INTE
order to:
INTERNAL AUDIT
■ gain a clear understanding of the internal control processes
and procedures.
• Test for compliance with customer approval and credit control policy, by observing
activities, interviewing key personnel and inspecting records, to verify that:
■ the process used to evaluate the creditworthiness of new customers is being
adhered to
■ credit is only granted to customers who have been suitably approved according
to set policy
■ appropriate credit terms are stipulated for credit sales transactions
■ appropriate credit limits are applied and adhered to
■ regular credit checks are performed by the credit control department according
to set policy.
• Test for compliance with the credit sales process by observing activities, interviewing key
purchase orders received from customers are recorded on pre-numbered sales order
sales order
■
documents according to set guidelines and are properly authorised

sales orders are checked against customer’s purchase orders for quantity and description
A sales order is an internal
■
■ dispatch notes are prepared only on receipt of properly authorised sales orders
document used to authorise ■ dispatch notes are prepared by authorised personnel according to set guidelines, are
the sale of items requested on a pre-numbered and are signed by an authorised despatching officer
■ no goods are dispatched without a properly authorised dispatch note
customer’s purchase order. ■ sales invoices are pre-numbered and prepared for all despatches by authorised
personnel according to set guidelines
■ sales invoices are checked for accuracy of quantity, description, price and VAT
■ sales invoices are verified against customer orders and dispatch notes, by someone
other than the person who prepared the invoice
dispatch notes ■ regular checks are made to ensure that all dispatches are invoiced
■ all invoices are entered in the Debtors Journals and posted to the Debtors
A dispatch note is a document sent Ledger promptly.
to a customer that lists the details • Conduct substantive tests on a representative sample of transactions, documents
of the items that have been sent and records, by checking information and re-performing tasks, in order to:
test sales orders for accuracy and completeness
to them.
■
■ verify that sales orders were accurately checked against customer’s

purchase orders
■ test dispatch notes for accuracy and completeness
■ test sales invoices for accuracy of quantity, description, price and VAT
■ verify that sales invoices were accurately checked against customer
orders and dispatch notes
■ verify that sales invoices were accurately recorded in the Debtors
Journal and correctly posted to the Debtors Ledger.

4.5.4 Internal audit procedures relating to creditors
relating to creditors:
INTE
INTERNAL AUDIT
transactions through the creditors system, to:
internal controls
INTE
■ gain a clear understanding of the internal control processes
INTERNAL AUDIT
and procedures.
• Perform compliance tests by observing activities, interviewing key personnel and
inspecting a representative sample of documents and records, to verify that:
■ creditors (suppliers) are approved and selected according to set policy
■ appropriate credit terms are negotiated with creditors
■ invoices received from creditors are checked for accuracy of price and VAT
■ invoices are checked against the purchase orders and the goods received notes for
quantity, description and price
■ credit notes are checked for accuracy of price and VAT
■ credit notes received from creditors are checked against the corresponding debit
notes for quantity, description and price
■ all available discounts are taken
■ creditors are paid as late as possible without incurring interest charges
■ the authorisation policies regarding payments to creditors are strictly adhered to
■ different personnel are responsible for processing purchase orders, receiving goods,
checking invoices, processing payments and bookkeeping
■ all transactions involving creditors are entered in the appropriate Journals and posted
to the Creditors Ledger promptly
■ the balance of the Creditors Control account in the General Ledger is reconciled
monthly with the Creditors List from the Creditors Ledger.
■ proper authorisation is required before any adjustments can be made to the
Creditors Ledger or the Creditors Control account in the General Ledger.
■ statements from suppliers are checked against their accounts in the
Creditors Ledger.
• Conduct substantive tests on a representative sample of transactions, documents
and records, by checking information and re-performing tasks, in order to:
■ test invoices received from creditors for accuracy of quantity, description,
price and VAT
■ verify that invoices received from creditors were accurately checked against the
purchase orders and the goods received notes
■ test credit notes received from creditors for accuracy of quantity, description,
price and VAT
■ verify that credit notes received from creditors were accurately
checked against the debit notes issued
■ verify that transactions involving creditors were accurately recorded
in the Journals and correctly posted to the Creditors Ledger
■ check the accuracy and completeness of the recording process
by tracing transactions from selected source documents (invoices,
debit notes and cheque counterfoils) to the Journals, Ledgers
and Trial Balance
■ verify that creditors’ reconciliations have been performed
accurately and correctly.

4.5.5 Internal audit procedures relating to debtors
The following are some of the internal audit procedures that may typically be
used to evaluate the management and control of risks relating to debtors:
INTE
INTERNAL AUDIT • Conduct walkthrough tests and trace a sample of
transactions through the debtors system, to:
■ verify the existence of the documented internal
controls
■ gain a clear understanding of the internal control
processes and procedures.
INTE
INTERNAL AUDIT
■ suitable credit checks are performed before new customers are allowed to buy on credit
■ appropriate credit terms are stipulated for credit sales transactions
INTE
■ appropriate credit limits are imposed for all debtors in accordance with set policy
INTERNAL AUDIT
■ regular credit checks are performed by the credit control department
■ sales invoices are pre-numbered and prepared by authorised personnel according to
set guidelines
■ sales invoices are checked for accuracy of quantity, description, price and VAT
■ sales invoices are verified against customer orders and dispatch notes, by someone
other than the person who prepared the invoice
■ goods returned by debtors are properly checked for damage and a record is made of
the quantity, description and price of the goods returned
■ credit notes issued to debtors are checked against the corresponding sales invoices
and records of goods returned for quantity, description and price
■ credit notes are checked for accuracy of quantity, description, price and VAT
■ discounts are offered to encourage debtors to settle their accounts promptly
■ interest is charged on overdue accounts
■ suitable measures are taken to follow up on overdue accounts, such as issuing final
demand notices and where appropriate taking legal action
■ proper authorisation is required in order for a debt to be written off as irrecoverable
(bad debts)
■ different personnel are responsible for processing sales orders, despatching goods,
processing invoices, authorising credit notes, receiving payments and bookkeeping
■ all transactions involving debtors are entered in the appropriate Journals and posted
to the Debtors Ledger promptly
■ the balance of the Debtors Control account in the General Ledger is reconciled monthly
with the Debtors List from the Debtors Ledger
■ proper authorisation is required before any adjustments can be made to the Debtors
Ledger or the Debtors Control account in the General Ledger.
■ monthly customer statements are prepared, reviewed and mailed to debtors by
someone other than the bookkeeper.
■ test sales invoices for accuracy of quantity, description, price and VAT
■ verify that sales invoices were accurately checked against customer orders and
dispatch notes
■ test credit notes issued to debtors for accuracy of quantity, description, price and VAT
■ verify that credit notes were accurately checked against the sales invoices
and records of goods returned
■ verify that transactions involving debtors were accurately recorded in
the Journals and correctly posted to the Debtors Ledger
■ check the accuracy and completeness of the recording process by
tracing transactions from selected source documents (invoices,
credit notes and receipts) to the Journals, Ledgers and Trial Balance
■ verify that debtors’ reconciliations have been performed accurately
and correctly.
■ test the accuracy of discount and interest calculations.

4.5.6 Internal audit procedures relating to inventory
relating to inventory:
INTE
INTERNAL AUDIT
INTE
INTERNAL AUDIT • Conduct walkthrough tests and trace a sample of
transactions through the inventory system, to:
internal controls
■ gain a clear understanding of the internal
control processes and procedures.
■ inventory is stored in a secure location
■ access to the inventory and the storage is restricted to authorised personnel only
■ the measures taken to safeguard inventory against theft, pilferage and damage are
being adhered to
■ goods delivered from suppliers are checked when received, recorded on goods
received notes and then consigned to storage without delay
■ inventory is issued only on receipt of properly authorised requisition forms
■ receipts and issues of inventory are recorded on inventory cards and checked
against the appropriate goods received notes or requisition forms
■ movements of inventory are recorded promptly in the appropriate journal
■ physical inventory levels are periodically checked against the perpetual inventory
records, by a person independent of the inventory storage function, and material
differences investigated
■ a full inventory count is performed at least once a year
■ inventory records are kept separate from physical inventory
■ maximum and minimum inventory levels, and re-order quantities, are pre-determined
and are regularly reviewed for adequacy
■ inventory is regularly checked for damaged, obsolete or slow moving items and any
write-offs are properly authorised
■ inventory is adequately insured.
• Conduct substantive tests on a representative sample of transactions, documents
and records, by checking information and re-performing tasks, in order to:
■ test goods received notes for accuracy and completeness
■ test inventory card records for accuracy and completeness
■ verify that inventory card records were accurately checked against goods
received notes and requisition forms
■ verify that inventory movements were recorded accurately in the journals
■ verify the reconciliations of the physical inventory counts against the
perpetual inventory records for accuracy and completeness
■ test the physical inventory count records for accuracy
and completeness
■ check the accuracy of physical inventory count, by re-performing
inventory counts on a sample of items.
Activity 2.3
Based on your answers to Activity 2.2, briefly outline the internal auditing
procedures that should be performed in order to evaluate the effectiveness of
each of the internal control procedures that you advised Michael to implement.

Activity 2.4
Compile a list of internal audit procedures that may typically be used to

evaluate the management and control of risks relating to fixed assets.
Case study 2.1
Read the following article. Then answer the questions that follow.
Weak controls in Mr Loxton said the global economic

recession had placed increasing pressure on
recession “aid staff employees and directors to commit fraud.
fraud” It tended to be easier to commit
an undetected economic crime, such as
E
mployees committed undetected procurement fraud, during a recession because
economic crimes, such as procurement companies, in an effort to cut costs, often
fraud, during recessions because weakened their own internal controls through
companies inadvertently weakened their injudiciously targeted retrenchment.
internal controls, warned a forensic specialist He said this was ill-advised as it removed
last week. the segregation of duties, which was a crucial
White-collar crime, including fraud is element of good internal control.
estimated to cost the South African economy Among the many varieties of white-collar
billions of rand annually. According to a recent fraud prevalent in South Africa, the three most
study carried out among KPMG’s top 100 common were theft, financial statement fraud,
clients in Africa, about 30% of businesses said and bribery and corruption.
employee fraud had the highest effect on their Mr Loxton said it was unlikely that
business. corporate crime would ever be completely
According to recent South African Police stamped out. However, companies could take
Service crime statistics, 84 842 cases of steps to manage and minimise the risks. These
commercial crime were reported from April included streamlining payment systems. Also,
2009 to March last year, a 51,8% rise since 2003. they could ensure that employees’ duties were
US companies are also losing about 7% segregated, he said.
of their annual revenue to procurement fraud Companies also needed to carry out regular
each year, according to international studies checks to ensure that all internal controls were
conducted recently. in good working order.
Dave Loxton, a forensic specialist and Steven Powell, a director for forensics
director at Werksmans Attorneys, said at corporate law advisers Edward Nathan
procurement fraud was one of the most costly Sonnenberg, said executives needed to be able
types of economic crime and tended to go to identify “red flags” in their own organisations
unnoticed. in order to combat corruption and fraud.
Procurement fraud affected businesses Some of the factors that might indicate
across a broad range of industries. It usually bribery and corruption included receiving lavish
involved price fixing, mischarges of goods and gifts from suppliers, driving expensive vehicles
bid rigging. and living in luxury homes not commensurate
with the suspect’s income, he said.
Source: Business Day, article by Sanchia Temkin, 5 July 2011

Questions
1. According to the article, why do “employees committed undetected
economic crimes during recessions”?
2. Briefly explain the meaning of the term “white-collar crime”.
3. According to Mr Loxton, what “crucial element of good internal control” is
often removed as a result of retrenchments? Briefly explain why this occurs.
4. Name the three most common types of white-collar crime in South Africa.
5. Mr Loxton suggests that “companies could take steps to manage and
minimise the risks”.
a. Which business function should be responsible for performing this task?
b. What term is used to describe the systems, policies and procedures that this
function would implement in order to “manage and minimise the risks”?
6. Mr Loxton further recommends that “companies also needed to carry out
regular checks to ensure that all internal controls were in good working
order”. Which business function should be responsible for this task?
7. Steven Powell advises that “executives needed to be able to identify ‘red
flags’ in their own organisations in order to combat corruption and fraud”.
Briefly explain the meaning of the term “red flag”.
8. List three factors that might indicate that employees are involved in bribery
and corruption.
Group assessment 2.1: Written report/presentation
Marks: 25 Time: 2 hours
Sarah January has a small business called Rise and Shine Rusks. She bakes and
supplies rusks for home industries, small chain stores and cafés. Four women
assist Sarah with the following tasks:
• In the kitchen, they help with the baking process.
• In the office, they take orders, help with sales directly from the business, and
help with the purchases and also with credit purchases and deliveries.
• There is also a man who works for her – he delivers to all the outlets, shops
and cafés.
Sarah’s business is doing well, but she has been rather concerned for the past three
months, as she thinks that some cash, as well as stock, has been disappearing.
Required
Divide into groups of four. Each member of the group must take on a certain
role. One person must lead the discussion, someone else must make notes of
everything said, someone must represent the group and report to the class and
one person will be responsible for collating the written report and making sure
that it is neatly presented when handed in.
• Provide a front page for the report. This should include or consist of an
advertisement for Sarah’s rusks. Attach a photocopy of the assessment
rubric to the front page.

• The written report must include the following:
■ Proposals to Sarah as to how she could put control measures in place to
protect her cash as well as her stock
■ A list of internal auditing processes she could undertake to ensure that
the control measures are effective
■ A list of all the role players, indicating what each person has done in
the group.
Rubric for assessing questionNaire and presentations

Criteria 1 2 3 4 5 6 7
Not achieved Elementary Moderate Adequate Substantial Meritorious Excellent
0–29% 30–39% 40–49% 50–59% 60–69% 70–79% 80–100%
The report Could not Needed help Some of the Some of the Information Information Information
itself present the to present information information in correct in correct presented in
information information presented, in correct order and order and detail and
properly, even and make but not order and reasonably accurately accurately
with help; no suggestions. in detail; reasonably accurately presented; and in the
suggestions suggestions accurately presented; includes correct order;
included. not always presented; includes a quite a includes a
relevant. includes few practical number of variety of
one or two suggestions. practical excellent
practical suggestions. and practical
suggestions. suggestions.
1–2 3 4 5 6 7–8 9–10
Interaction as No effort Tasks not Shared some Shared some Some tasks Most tasks Shared tasks
a group made to share shared; some of the tasks; of the tasks; shared; shared; equally;
tasks or work interaction interaction interaction interaction interaction interaction
together as a between as a group: as a group: as a group: as a group: as a group:
group. group not too reasonably satisfactory. good. productive.
members. good. good, but
some of
the group
members
did not
cooperate,
or are not
involved
at all.
1–2 3 4 5 6 7–8 9–10
Cover page Hardly an Untidy Made some Neat and Made Made an An excellent
effort worth appearance. effort – very reasonably an effort effort – cover page
mentioning. Neither neat, but not interesting. – neat, creative, – creative,
Hasty and interesting particularly reasonably neat, original,
sloppy. nor original. attractive or original. original, interesting
Unacceptable. Hasty and interesting. interesting and
sloppy work. and attractive.
attractive. Very neat.
½ 1 2 3 3½ 4 5
Total /25

Chapter 3
Reconciliations – Bank reconciliations
• reconcile the bank statements to Cash Journals
• prepare a Bank Reconciliation Statement
• integrate the following concepts into the bank reconciliation process:
■outstanding cheques
■cheques not yet presented for payment
■deposits not yet shown on the bank statement
■stop orders and debit orders
■direct transfers and deposits
■bank charges
■interest received or charged
■correction of errors or omissions
■cheques referred to drawer (R/D) or cancelled
■post-dated cheques received or issued.
Key concepts
• bank statements • bank reconciliation • mirror image • interest on current account
• interest on overdraft • direct deposits • Electronic Funds Transfer (EFT) • ATM withdrawal
slips • bank charges • stop order • debit order • dishonoured cheque • cancelled cheque
• post-dated cheque • stale cheque • favourable bank balance • unfavourable bank balance
What do I do with this

bank statement that
has just arrived?
File it in the file marked

‘For reconciliation’ so that Randall,
our bookkeeper, can check it against
the Cash Journals at the end of
the month.
R ec o nciliati o n s – B ank rec o nciliati o n s • c h a p t e r 3 37

1. Introduction
Bank reconciliation takes place when the business compares its records
(CRJ and CPJ) to the bank’s records (bank statement). The business
should do a bank reconciliation every month to make sure that they are
aware of all deposits into and withdrawals from their banking account.
1.1 What are bank reconciliations?

Bank reconciliation involves comparing the business’s record of
transactions and balances to the bank’s record of transactions and
balances. The bookkeeper must meticulously go through every
transaction in their CRJ and CPJ to make sure their transactions and
the bank’s transactions agree.
Some items, such as outstanding cheques, will not show up on
the statement because if they are not yet presented for payment, the
bank won’t know that they were issued. Likewise, there may have
been electronic payments and transfers at the bank of which you were
unaware. The bank reconciliation process will expose all of these
discrepancies.
1.2 Why are bank reconciliations important?

RISK!
It’s important to go through the process of bank reconciliation. If it is not
done, the business may be exposed to a several risks.
People or employees may be stealing from their bank account. If each
transaction is not reconciled, the business will never know about it. The
bank might have made a mistake on your account. With regular bank
reconciliation, problems can be picked up quickly and mistakes corrected.
Activity 3.1 (Case study)
Pule’s service Centre, owned by Pule George, has been servicing cars for
ATM: Automated teller
machine three months. Pule is a qualified mechanic and knows very little about proper
accounting practice. Although he has not been keeping proper records of his
Machine from which you can:
withdraw cash, find out an account transactions, he has kept all his bank deposit slips, cheque counterfoils, ATM
balance, transfer funds, make withdrawal slips and bank statements.
cash and cheque deposits, get Pule receives a bank statement from his bank every month which shows
provisional statements and pay all deposits into and withdrawals from the business’s account. It has become
certain accounts.
a habit for him to check the deposit slips, cheque counterfoils and ATM
withdrawal slips against the bank statement. This process of checking, among
others, is called bank reconciliation. Let us look at how Pule will reconcile his
account with the statement received from the bank at the end June 2019, the
first month of business.
38 c h a p t e r 3 • R E C o N C I L I AT I o N s – B A N K R E C o N C I L I AT I o N s

Pule deposited his capital contribution on 1 June 2019, the first day of
business. He only deposits money once a week thereafter.
Look at the following source documents recording Pule’s transactions
before answering the questions that follow on page 42.
Deposit slip R c
Depositostrokie Notes/Note
First Bank Limited, Reg no 1985/336547/07
Credit Coins/Munte
Krediteer Sub-total/Subtotaal
Y J Y J M M D D Branch name/clearing code
Date/Datum: Taknaam/klaringskode
Name (PRINT)
Naam (DRUK)
Signature Total/Totaal R
Handtekening
Acc No/Rek No
Tel ( )
Dep ref/Dep verw
Deposit slip R c
Credit Coins/Munte
Name (PRINT)
Naam (DRUK)
Handtekening
Acc No/Rek No
Tel ( )
Dep ref/Dep verw
Deposit slip R c
Credit Coins/Munte
Name (PRINT)
Naam (DRUK)
Handtekening
Acc No/Rek No
Tel ( )
Dep ref/Dep verw

Deposit slip R c
Credit
Coins/Munte
Name (PRINT)
Naam (DRUK)
Handtekening
Acc No/Rek No
Tel ( )
Dep ref/Dep verw
Deposit slip R c
Credit
Coins/Munte
Name (PRINT)
Naam (DRUK)
Handtekening
Acc No/Rek No
Tel ( )
Dep ref/Dep verw
The following ATM withdrawals were made during June 2019:
TRANSACTION RECORD TRANSACTION RECORD TRANSACTION RECORD
TRANSACTION RECORD TRANSACTION RECORD
40 c h a p t e r 3 • R ec o nciliati o n s – B ank rec o nciliati o n s

The following business cheques were issued during June 2019:
Date: 02/06/2019 Date: 02/06/2019 Date: 06/06/2019
To: Unicity To: City Spares To: Star Equipment
For: Trading licence For: Spare parts For: Workshop tools
Bal Bal 78 500,00 Bal 69 300,00
Dep 80 000,00 Dep Dep
Withdraw Withdraw Withdraw 750,00

This chq 1 500,00 This chq 9 200,00 This chq 17 750,00
Bal 78 500,00 Bal 69 300,00 Bal 49 800,00
001 002 003
Date: 12/06/2019 Date: 16/06/2019 Date: 25/06/2019
To: City Spares To: Unicity Council To: Telkom
For: Spare parts For: Water & Rates For: Telephone bill
Bal 49 800,00 Bal 49 360,14 Bal 54 538,75
Dep 3 437,12 Dep 6 184,88 Dep 3 085,62
Withdraw 1 000,00 Withdraw 680,00 Withdraw 1 200,00
This chq 2 876,98 This chq 326,27 This chq 782,19
Bal 49 360,14 Bal 54 538,75 Bal 55 642,18
004 005 006
Date: 30/06/2019
To: City Spares
For: Spare parts
Bal 55 642,18
Dep 5 874,75
Withdraw 2 300,00
This chq 5 643,91
Bal 53 573,02
007
R E C o N C I L I AT I o N s – B A N K R E C o N C I L I AT I o N s • c h a p t e r 3 41

Pule’s Service Centre 1 Main Street, FIRST BANK
28 Howe Street, Rosebank, 8100
Observatory, 8000 For period: 01/06/2019–28/06/2019
Current Account Account Number 03 5469545 3 Bank Statement
Details Debit Credit Date Balance
Deposit 80 000 00 01/06 80 000 00
Cheque book fee 27 50 01/06 79 972 50
Cheque 02 9 200 00 04/06 70 772 50
Cheque 01 1 500 00 04/06 69 272 50
ATM 6250 750 00 06/06 68 522 50
Deposit 3 437 12 07/06 71 959 62
Cheque 03 18 750 00 08/06 53 209 62
ATM 9650 1 000 00 08/06 52 209 62
ATM 3126 680 00 14/06 51 529 62
Deposit 6 184 88 14/06 57 714 50
Cheque 04 2 876 98 15/06 54 837 52
Cheque 05 326 27 17/06 54 511 25
Dishonoured cheque – T Moise 129 62 18/06 54 381 63
Deposit 3 085 62 21/06 57 467 25
ATM 6250 1 200 00 22/06 56 267 25
Debit order – to AM Garage for rent for June 1 900 00 27/06 54 367 25
Service fees 92 12 28/06 54 275 13
Cash handling fee 29 13 28/06 54 246 00
Interest 265 00 28/06 54 511 00
Questions
Compare the source documents with the bank statement. Tick the bank
statement if the document amount appears on the bank statement.
Now answer the following questions on your own.

1. With which column on the bank statement did you compare the
deposit slips?
2. With which column on the bank statement did you compare the ATM
withdrawal slips and cheques counterfoils?
3. List the additional items on the bank statement that were not ticked (✓).
4. Which cheques and ATM withdrawal slips were not on the bank statement?

5. Are all the deposits accounted for on the bank statement?
6. What is the final balance on the bank statement?
7. What is the final balance according to Pule’s records? Refer to cheque
counterfoil no. 007.
Discuss the following with a partner.

8. Why is there a difference between the balance according to Pule’s records
and the bank statement?
9. In your opinion, is Pule keeping proper control of his money? What advice
would you give him?
2. Internal control of money

The business’s current bank account is probably the most frequently used
account. This is because money is deposited, withdrawn and transferred
on a daily basis, and errors might occur. It is necessary to keep a check to
ensure that all the money is accounted for.
In order to comply with proper accounting controls, a business
must record all its cash receipts and cash payments. Pule kept all the
documentation of his transactions with the bank but failed to formally
record these transactions.
In addition to recording transactions, Pule should do the following in
order to comply with accounting control procedures:
• Ensure that all money received is supported by a source document.
• Check that money and cheques received agree with the deposit slip.
• Require cheques to be signed by at least two authorised signatories.
• Prefer to make all payments by cheque or EFT.
2.1 Accounting procedure for recording money received

When money is received, the business will issue a receipt, cash invoice
or till slip. The source document is then recorded in the Cash Receipts
Journal. At the end of the day, all the amounts in the Analysis of receipts
column in the CRJ are added together. This amount represents all the
money received on that particular day and will be entered into the Bank
column. The amount in the Bank column is deposited. This amount must
appear on the deposit slip.
Cash Receipts Journal of Pule’s Service Centre for June 2019 CRJ1
Doc. Day Details Fol. Analysis of Bank Current Sundry accounts
no. receipts income Amount Details
01 07 P George 80 000 00 80 000 00 80 000 00 Capital

The total received by Pule’s Service Centre on 1 June 2019 is R80 000.
A deposit slip, shown below, will be completed and the money deposited
into the current banking account.
Deposit slip R c
Credit Coins/Munte
Name (PRINT)
Naam (DRUK)
Handtekening
Acc No/Rek No
Tel ( )
Dep ref/Dep verw
2.2 Accounting procedure for recording money paid

When a payment is made it will be recorded in the Cash Payments Journal.
Some businesses might only make cheque payments and two people will
have to sign the cheque. In small businesses, where there is only one owner,
cheques and other methods of payment could be used. This is because the
owner takes full responsibility for the money of the business.
Credit and debit card payments are also common. These methods of
payment have to be very strictly controlled by the owner, bookkeeper or
accountant. Payments via the Internet (EFTs) are also commonly used
by many businesses, and in this case, only one person will be given the
authority to make such payments. A password is given to one person only
in order for him to gain access to the bank’s Internet site.
In all of the above cases, source documents will be used in order to
record the transactions in the Cash Payments Journal.

2.3 Payments by means of cheque
A cheque is a negotiable document and is legal tender; in other words, it
represents the money you have in your bank account. When the cheque
is filled in correctly it becomes legal tender and will be exchanged for the
amount of money written on it. A cheque is valid for six months from
the date on the cheque and will be termed as a “stale cheque” if it is not
cashed within the six months.
Pule’s Service Centre made cheque payments on 2 June 2019. The
cheque counterfoils below remained in the cheque book and are the source
documents used to record the transactions in the Cash Payments Journal.
Date: 02/06/2019 Date: 02/06/2019
To: Unicity Council To: City Spares
For: Trading licence For: Spare parts
Bal Bal 78 500,00

Dep 80 000,00 Dep
Withdraw Withdraw
This chq 1 500,00 This chq 9 200,00
Bal 78 500,00 Bal 69 300,00
001 002
Cash Payments Journal of Pule’s Service Centre for June 2019 CPJ1
Doc. Day Name of Payee Fol. Bank Materials Wages Stationery Sundry accounts
no. Details
01 02 Unicity Council 1 500 00 1 500 00 Trading licence
02 City Spares 9 200 00 9 200 00
2.4 Cheque fraud

Bank reconciliations are an essential part of a business’s system of
internal control and play an important role in not only identifying
bank errors, but also in preventing and detecting fraud. Cheques are
commonly used as a means for committing such fraud and cheque fraud
is a major threat to most businesses. We have learnt that cheques are used
extensively in business for making and receiving payments, and although
they are very useful, they are also particularly vulnerable to unethical and
fraudulent behaviour. Thus it is critical that businesses perform regular
bank reconciliations and implement adequate control processes in order
to protect against the risk of cheque fraud. RISK!

Below are guidelines that could help to prevent and safeguard against
cheque fraud:
When writing out the cheque:

• Leave no space in front of the name of the payee and the amount in
figures. Unused spaces must be cancelled by drawing lines through them.
• Payee details should appear in full, such as South African Revenue
Services instead of SARS.
• Write the amount in figures as closely as possible to the 'R' (rand) sign.
Other guidelines:
• Keep your cheque book in a safe place.
• Advise your bank as soon as you suspect fraud on your account or have
lost your cheque book.
• Never sign a blank cheque ahead of time; fraudsters can simply
complete the details to suit themselves.
• Keep returned cheques in a safe place, preferably under lock and key.
• Punch returned cheques through the magnetic strip to prevent them
from being re-used.
• Reconcile bank statements regularly.
• Long-outstanding cheques and used cheques must be examined for
unauthorised or unusual endorsements.
• Report lost, stolen or missing cheques immediately.
When accepting a cheque as a means of payment ensure that:
• there is no variation in the handwriting.
• the same pen is used to complete the cheque.
• there are no visible alterations.
• you are alert to co-incidences, for example, a cheque bearing the words
'SAR Steyn' could be a cleverly amended SARS cheque.
Crossed cheques:
• Always mark crossed cheques “not transferable”.
• Crossing cheques help to prevent fraud, since it is possible to trace the
person to whom the cheque was paid.
• If a cheque is not crossed, the person can receive payment in
cash over the counter.
• A cheque crossed “not transferable” must be paid into
a bank account and to a specific person or organisation.
• Avoid issuing cash cheques.
Source: http://www.nedbank.co.za/website/content/crimeawareness/chequefraud.asp

3. Services offered by a commercial bank
Commercial banks offer the business two main services:
• They look after the business’s money.
• They lend money to the business.
3.1 Looking after the business’s money

The business makes deposits into the banking account:
• The owner of the business opens an account at the commercial bank
in which to store money.
• Money received by the business is deposited into the current bank
account.
• The business makes payments against the banking account:
■When the business needs to make payments, they can withdraw
money as cash either by going into a branch of their bank, by
doing an EFT (Internet payment), by withdrawing money from an
ATM machine, or by writing out a cheque.
■The bank may give the business a plastic card called a debit card.
When the debit card is used to make a payment, the money is
deducted directly from the bank account.
■The business can also arrange for their bank to pay accounts and
regular sums of money by debit order or stop order. This means
that the business gives the bank permission to make a number of
payments on their behalf in the future without the business having
to authorise each payment. Many businesses, such as cell phone
and insurance companies, prefer this form of payment.
■Some businesses might opt for cell phone banking as an option. By
using a pin code, the business owners can access the bank account
via their cell phones. They can find out what their daily balance is
on a particular account or activate payments from their cell phone.
• The business pays for these services offered by commercial banks:
■The term “bank charge” refers to all charges made by banks to bank charges
their customers. The business will pay for every transaction made, The amount paid to the bank for
whether a deposit, withdrawal or payment. The bank will also services they render to a business
charge for generating a bank statement every month and when
the business makes a balance enquiry. This is the price that the
business will pay to have the bank look after their money.
■The bank is a business and generates its income by charging the
business bank charges on transactions. Bank charges will vary from
bank to bank and some businesses can opt to pay a flat fee per
month. These packages will allow the business to make a certain
number of deposits, withdrawals, debit/stop orders, balance
enquiries and drawing of bank statements every month.

4. Bank reconciliation
An essential control, which needs to be applied every month, is to
compare the business’s records of cash transactions (CRJ and CPJ) with
those of the bank. At the end of each month, the business will receive the
bank statement from its bank. The bank statement is a reflection of the
bank’s transactions with the business. As shown in the earlier case study,
Pule had not accounted for certain items that the bank had recorded on
the bank statement, and the bank had not accounted for certain items
that Pule had. Bank reconciliation reveals these discrepancies, and in the
end the business can keep track of its money.
4.1 The reconciliation process

Example
The bookkeeper of Shu-biz Stores received this bank statement from
First Bank on 31 August 2019.
Part 1: Starting the bank reconciliation process

Required
• Compare the credit column of the bank statement with the Bank
column of the CRJ.
• Compare the debit column of the bank statement with the Bank
column of the CPJ.
• Tick off items which appear in both the bank statement and
the journals.
• Circle all the items that have not been ticked off.

Example continued
Cash Receipts Journal of Shu-biz Stores for August 2019

Doc. Day Details Fol. Analysis of Bank Sales Cost of sales Sundry accounts
no. receipts Amount Details
01 01 S Nquay 50 000 00 50 000 00
Sales 19 876 00 19 876 00 10 280 00
02 M Morris 1 350 00 ✓71 226 00 1 350 00
07 Sales 5 250 00 ✓5 250 00 5 250 00 1 200 00
14 Sales 3 410 00 ✓3 410 00 3 410 00 828 00
21 Sales 7 220 00 ✓7 220 00 7 220 00 3 176 00
03 28 S Nquay 5 000 00 5 000 00
Sales 4 340 00 9 340 00 4 340 00 972 00
96 446 00 40 096 00 16 456 00 56 350 00
Cash Payments Journal of Shu-biz Stores for August 2019

Doc. Day Name of payee Fol. Bank Trading Wages Stationery Sundry accounts
no. Stock Amount Details
01 01 Mondew Stores ✓ 21 950 00 21 950 00
02 Bailey Stationers 1 250 00 1 250 00
03 Cash ✓ 500 00 500 00 Cash float
04 City Council ✓ 3 500 00 3 500 00 Trading licence
05 03 Mondew Stores 10 820 00 10 820 00
06 07 Cash ✓ 750 00 750 00
07 09 Zebra Motors ✓ 25 000 00 25 000 00 Vehicles
08 14 Cash ✓ 750 00 750 00
09 15 Cash ✓ 1 000 00 1 000 00 Drawings
10 21 Cash ✓ 750 00 750 00
11 22 ABC Stores 6 450 00 6 100 00 350 00
12 27 Cash ✓ 750 00 750 00
13 31 Telkom 765 00 765 00 Telephone
14 City Council 265 00 265 00 Water and lights
74 500 00 38 870 00 3 000 00 1 600 00 31 030 00

Example continued
FIRST BANK
Shu-biz Stores 1 Main Street
9 Waterloo Street Rosebank
Middletown 8100
6500
For period: 01/08/2019–27/08/2019
Bank Statement
Current Account Account Number 51 287 636 1
Deposit ✓ 71 226 00 02/08 71 226 00
Cheque 01 ✓ 21 950 00 03/08 49 276 00
Cheque 04 ✓ 3 500 00 03/08 45 776 00
Cheque 03 ✓ 500 00 04/08 45 276 00
Dishonoured cheque: M Morris for rent 1 350 00 06/08 43 926 00
Cheque 06 ✓ 750 00 08/08 43 176 00
Deposit ✓ 5 250 00 08/08 48 426 00
Cheque 08 ✓ 750 00 14/08 47 676 00
Deposit ✓ 3 410 00 15/08 51 086 00
Debit order: to NTM for cell phone contract 75 00 15/08 51 011 00
Cheque 09 ✓ 1 000 00 15/08 50 011 00
Cheque 10 ✓ 750 00 21/08 49 261 00
Deposit ✓ 7 220 00 22/08 56 481 00
Cheque 07 ✓ 25 000 00 25/08 31 481 00
Service fees 63 60 27/08 31 417 40
Interest 240 00 27/08 31 657 40
Cheque 12 ✓ 750 00 27/08 30 890 00
Stop order: to African Eagle for insurance premium 635 00 27/08 30 255 00
Direct deposit: from M Morris for rent for Aug and Sep 2 700 00 27/08 32 955 00

Example continued
Why did we circle some amounts?
1. The circled amounts in the Bank column of the CRJ could be for
the following:
• The outstanding deposit of R9 340 in the CRJ was deposited into
the banking account. Why does the deposit not appear on the
bank statement? The bank closed off their books on 27 August.
The deposit was made 28 August. The deposit will appear on the
bank statement for September.
2. The circled amounts in the Bank column of the CPJ could be for
the following:
• Cheques issued during August but not yet presented to the
bank for payment. A cheque is valid for six months therefore
the payee has this amount of time in which to request payment.
The outstanding cheques in the example could be presented for
payment in September.
3. The circled amounts in the debit column of the bank statement
could be for the following:
• Bank charges: The fees for administering the bank account of
the business. These charges include:
Monthly service fee: a monthly payment for the management of
the account. This includes payment for the monthly statements
and any other correspondence received from the bank.
Cheque book fee: for printing a new cheque book
Cash handling fee: for over-the-counter cash deposits which are
labour intensive and carry a risk to the bank
Transaction charges: which include the deposit and withdrawal of
cash, credit and debit card purchase fees
• Stop orders: An instruction given to the bank to pay funds
across to a third party, at a fixed amount on a regular basis
• Debit-orders: An agreement between the business and a third
party in which business allows them to take money out of the
bank account. Debit orders may be fixed or variable amount.
• Interest on overdraft: When the business has an overdrawn
balance, it will pay interest on the amount that is overdrawn for
the period of time that it is overdrawn.
• Dishonoured cheques: Reasons why the bank will dishonour
cheques received are:
No money in the drawers account; the drawer is deceased
or insolvent; there is a problem on the cheque like signature
discrepancies or amounts in words not matching amounts in
figures, etc.

Example continued
4. The circled amounts in the credit column of the bank statement
could be for the following reasons:
• Direct deposits: Money can be directly deposited into the
business’s bank account by anyone owing money to the
business.
• Interest on current account: When the business has a
favourable bank balance, it will earn interest on the favourable
balance for the period of time that it is favourable.
Part 2: Completing the bank reconciliation process

(Do steps 1 to 4)
1. Enter the totals from the Bank column into the CRJ and CPJ.
2. Circled amounts in the credit (+) column of the bank statement
must be entered into the CRJ.
3. Circled amounts in the debit (–) column of the bank statement
must be entered into the CPJ.
4. Total the bank columns of the CRJ and CPJ and post these totals to
the Bank account.
Cash Receipts Journal of Shu-biz Stores for August 2019

Doc. Day Details Fol. Bank Sundry accounts
no. Amount Details
31 Totals b/d 96 446 00 56 350 00
b/s First Bank 240 00 240 00 Interest on current account
M Morris 2 700 00 2 700 00 Rent income
99 386 00
B6
Cash Payments Journal of Shu-biz Stores for August 2019

Doc. Day Name of payee Fol. Bank Sundry accounts
no. Amount Details
31 Totals b/d 74 500 00 31 030 00
b/s M Morris 1 350 00 1 350 00 Rent income
NTM 75 00 75 00 Cell phone contract
First Bank 81 00 81 00 Bank charges *
African Eagle 635 00 635 00 Insurance
76 641 00
B6
* Add the R63,60 + R17,40 to get R81,00.

Example continued
General Ledger of Shu-biz Stores

Balance Sheet account
Dr Bank Cr
Date Details Fol. Amount Date Details Fol. Amount
2019 2019
Aug 31 Total receipts CRJ 99 386 00 Aug 31 Total payments CPJ 76 641 00
Balance c/d 22 745 00
99 386 00 99 386 00
2019
Sep 01 Balance b/d 22 745 00
Part 3: Drawing up the Bank Reconciliation Statement

(Do steps 5 to 8)
The business cannot add entries onto the bank statement, so it will
reconcile the differences between the bank statement and the Cash
Journals in the Bank Reconciliation Statement. The BRS is found in
the books of the business and is a statement that reconciles amounts
that appear in the Cash Journals but not on the bank statement.
5. Enter the closing balance on the bank statement into the BRS.
6. Circled amounts in the CRJ must be entered into the credit column
of the BRS.
7. Circled amounts in the CPJ must be entered into the debit column
of the BRS.
8. Enter the closing balance in the bank account into the BRS.
Shu-Biz Stores
Bank Reconciliation Statement on 31 August 2019
Debit Credit
Credit balance as per bank statement 32 955 00
Credit outstanding deposits 9 340 00
Debit outstanding cheques: no. 02 1 250 00
no. 05 10 820 00
no. 11 6 450 00
no. 13 765 00
no. 14 265 00
Debit balance as per Bank account 22 745 00
42 295 00 42 295 00

Example continued
Alternative method
Shu-Biz Stores
Balance according to bank statement (credit) 32 955 00
Outstanding deposits 9 340 00
Outstanding cheques: no. 02 (1 250 00)
no. 05 (10 820 00)
no. 11 (6 450 00)
no. 13 (765 00)
no. 14 (265 00)
Balance according to Bank account (debit) 22 745 00
Notes
• A credit balance according to the bank statement is a favourable
balance, which means that we have money in the bank account. This
amount must not be placed in brackets.
• A debit balance according to the bank statement will be placed in
brackets because it is unfavourable (overdrawn) which means that
we owe the bank money.
• Outstanding deposits are never in brackets and must always be
added.
• Outstanding cheques are always in brackets and must always be
subtracted.
• A debit balance according to the bank account is favourable, which
means that we have money in the bank account. This amount must
not be placed in brackets.
• A credit balance according to the bank account is unfavourable
(overdrawn) which means that we owe the bank money. This
amount must be placed in brackets.
We will deal with unfavourable (overdrawn) balances later.
Activity 3.2
Natasha Rose opened a fashion store in Port Elizabeth on 1 August 2019.

She deposited all money received into a current bank account held with
Southern Bank and made all payments by issuing cheques. She uses Cash
Journals as the book of first entry. After a month of trading, she received the
bank statement from the bank. Natasha asks for your help in completing the
Bank Reconciliation Statement.

Required
Make sure you do the following before completing the BRS:
1. Compare the bank statement with the Cash Journals and make
supplementary entries in the CRJ and CPJ.
2. Post the CRJ and CPJ to the Bank account in the General Ledger.
3. Draw up the Bank Reconciliation Statement on 31 August 2019.
Information
Cash Receipts Journal of Natasha Rose Designs for August 2019
Doc. Day Details Analysis of Bank Debtors Discount Sales Cost of Sundry accounts
no. receipts control allowed sales Amount Details
01 01 N Rose 150 000 00 150 000 00 150 000 00 Capital
✓ 05 Sales 9 784 00 9 784 00 9 784 00 3 126 00
02 08 H Govender 1 000 00 1 000 00 Rent income
✓ Sales 4 643 00 5 643 00 4 643 00 875 00
✓ 15 Sales 2 705 00 2 705 00 2 705 00 650 00
03 21 H Damons 674 00 674 00 700 00 26 00
✓ 30 Sales 8 210 00 8 210 00 2 784 00
04 C Jacobs 841 00 9 051 00 850 00 9 00
177 857 00 1 550 00 35 00 25 342 00 7 435 00 151 000 00
Cash Payments Journal of Natasha Rose Designs for August 2019

Doc. Day Name of payee Bank Trading stock Creditors Discount Stationery Sundry accounts
no. control received Amount Details
01 02 SA Manufacturers 10 263 00 10 263 00
02 Unicity council 600 00 600 00 Trading licence
03 03 Sanders and Co 325 00 325 00
04 Compu-place 1 950 00 1 950 00 Equipment
05 07 Cash 850 00 850 00 Drawings
06 15 SA Manufacturers 4 120 00 4 120 00
08 30 Africa Fashions 6 150 00 6 300 00 150 00
25 058 00 14 383 00 6 300 00 150 00 325 00 4 200 00

SOUTHERN BANK
Natasha Rose Designs 24 Rickett Road
18 Mercury Road Port Elizabeth
Port Elizabeth 5600
5300
For period: 01/08/2019–28/08/2019
Bank Statement
Current Account Account Number 38 000 8721
Deposit 150 000 00 02/08 150 000 00
Cheque 01 10 263 00 05/08 139 737 00
Cheque 02 600 00 05/08 139 137 00
Deposit 9 784 00 06/08 148 921 00
Stop order: to InSure for the insurance premium 475 00 06/08 148 446 00
Cheque 04 1 950 00 07/08 146 496 00
Cheque 05 850 00 07/08 145 646 00
Deposit 5 643 00 09/08 151 289 00
Cheque 03 325 00 13/08 150 964 00
Dishonoured cheque: H Govender for rent 1 000 00 15/08 149 964 00
Service fees 31 20 16/08 149 907 00
Deposit 2 705 00 16/08 152 612 00
Deposit 674 00 22/08 153 286 00
Cheque book fee 18 00 24/08 153 268 40
Interest 375 00 27/08 153 643 40
Direct deposit: from H Govender for rent 1 000 00 27/08 154 643 00
Activity 3.3
The owner of Joe’s Wholesale Store, Joe Rwela, asks you to help him draw up his
Bank Reconciliation Statement on 30 September 2019. He provides you with his
bank statement received from Western Bank, as well as his Cash Journals.
Required
2. Post the CRJ and CPJ to the bank account in the General Ledger.
3. Draw up the Bank Reconciliation Statement on 30 September 2019.

Information
The opening balance in the bank account on 1 september 2019 is R64 185.
Cash Receipts Journal of Joe’s Wholesale Stores for September 2019

✓ 03 Sales 17 120 00 17 120 00 17 120 00 9 365 00
51 06 T Dlamini 1 650 00 1 650 00
✓ Sales 5 363 00 7 013 00 5 363 00 1 360 00
52 12 G Buntu 5 670 00 6 000 00 330 00
✓ Sales 9 672 00 15 342 00 9 672 00 3 836 00
✓ 22 Sales 8 435 00 8 435 00 8 435 00 3 121 00
✓ 26 Sales 7 551 00 7 551 00 7 551 00 2 866 00
53 30 M Naidoo 3 168 00 3 300 00 132 00
✓ Sales 4 026 00 7 194 00 4 026 00 989 00
62 655 00 10 950 00 462 00 52 167 00 21 537 00
Cash Payments Journal of Joe’s Wholesale Stores for September 2019

Doc. Day Name of payee Bank Trading Creditors Discount Stationery Sundry accounts
no. stock control received Amount Details
112 01 Cash 1 640 00 1 640 00 Drawings
113 05 Enviro-stuff Traders 16 872 00 16 872 00
114 09 Maxi-mum Stores 3 125 00 3 475 00 350 00
115 11 Unicity Municipality 1 103 00 1 103 00 Water and lights
116 13 Cash 2 660 00 2 660 00 Drawings
D/N 18 M Z Hunda (I/F) 1 615 00 1 615 00
117 25 Z Stofile 7 120 00 7 120 00 Creditors for salaries
34 970 00 16 872 00 3 475 00 350 00 1 615 00 13 358 00
i I/F written on a dishonoured

cheque or in the CPJ, for
example, stands for “Insufficient
Funds”. R/D (Refer to Drawer) could
also appear on these cheques/entries.

WESTERN BANK
Joe’s Wholesale Store 54 Oldale Road
Mew Way Goodwood
Langa 2000
2100
For period: 01/09/2019–28/09/2019
Bank Statement
Balance 01/09 64 185 00
Cheque book fee 32 50 01/09 64 152 50
Cheque 112 1 640 00 01/09 62 512 00
Debit order: to Sanlam for insurance premium 645 00 02/09 61 867 50
Deposit 17 120 00 04/09 78 987 50
Cheque 113 16 872 00 06/09 62 115 50
Deposit 7 013 00 07/09 69 128 50
Cheque 115 1 103 00 13/09 68 025 50
Cheque 116 2 660 00 13/09 65 365 50
Deposit 15 342 00 13/09 80 707 50
Debit note: MZ Hunda (I/F) 1 615 00 18/09 79 092 50
Service fees 62 20 19/09 79 030 30
Deposit 8 435 00 23/09 87 653 30
Interest 175 00 25/09 87 640 30
Deposit 7 551 00 27/09 95 191 30
Cash handling fees 16 30 27/09 95 175 00
Dishonoured cheque: T Dlamini (debtor) 1 650 00 28/09 93 525 00
Cheque 118 835 00 28/09 92 690 00
4.2 Overdrawn bank balance

The bank allows businesses a facility where they can overdraw their
current bank account. This means that they are allowed to withdraw
more money than they have deposited. When this happens, the business
will owe the bank money and the bank will be a liability to the business.
Interest will be charged on the amount that is overdrawn. This interest is
known as interest on overdraft and is an expense to the business. The bank
will charge this interest directly to the business’s account and the amount
charged will appear on the bank statement at the end of the month.

The business’s point of view The business’s point of view
General Ledger of Shu-Biz Stores General Ledger of First Bank
– Bank (Liability) + + Shu-Biz Stores (Asset) –
All deposits will decrease the All withdrawals will increase the All withdrawals increase what the All deposits will decrease what the
overdraft. overdraft. business owes the bank. business owes the bank.
The bank account has a credit balance in the books of the business and the
bank shows the business’s bank overdraft as a debit balance in their books.
Activity 3.4
You are provided with the bank statement of Mega Shoe Stores.
Information
oval BANK
Mega Shoe Stores 9 Morris Street
Rachel Road Kimberley
Kimberley 9800
9800
For period: 01/07/2019–29/07/2019
Bank Statement
Balance 01/07 – 3 168 00
Cheque book fee 19 60 01/07
Cheque 36 1 125 00 01/07
Debit order: to Secure for insurance premium 395 00 02/07
Deposit 5 123 00 04/07
Cheque 38 910 00 06/07
Deposit 3 916 00 07/07
Cheque 37 2 187 00 13/07
Cheque 35 852 00 13/07
Deposit 1 254 00 13/07
Service fees 15 20 19/07
Direct deposit: from M Stofile for rent 650 00 23/07
Interest 52 20 25/07
Deposit 1 502 00 27/07
Cash handling fees 16 00 27/07
Dishonoured cheque: T Miles 1 500 00 28/07
Cheque 40 3 781 00 29/07

Required
1. Recreate the bank statement in your Exercise Book.
2. Calculate the balance at the end of each entry on the bank statement. Bear
in mind that the business has an overdrawn (debit) balance of R3 168 at the
beginning of the month.
3. a. Will a debit entry on the bank statement increase or decrease the
bank overdraft?
b. Will a credit entry on the bank statement increase or decrease the
bank overdraft?
c. Why would there be an interest debit (see 25/07) and an interest
credit (see 28/07) on the bank statement?
d. The dishonoured cheque, received from debtor T Miles, had a negative
effect on the bank overdraft. What would you advise Mega Shoe Stores
do about this?
e. What advice would you give Mega Shoe Stores in order for them to
decrease their overdraft?

Activity 3.5
The information below was extracted from the records of Martin’s Bakery
Supply Store.
Required
3. Draw up the Bank Reconciliation Statement on 31 March 2019.
Information
The bank account in 1 March 2019 has an overdrawn (credit) balance of R21 863.
Cash Receipts Journal of Martin’s Bakery Supply Store for March 2019
✓ 01 Sales 6 545 00 6 545 00 6 545 00 2 633 00
16 05 N Desai 1 302 00 1 400 00 98 00
✓ Sales 5 124 00 6 426 00 5 124 00 1 912 00
17 09 I West 3 127 00 3 127 00 3 400 00 273 00
✓ 15 Sales 8 819 00 8 819 00 8 819 00 3 654 00
✓ 17 Sales 6 126 00 6 126 00 6 126 00 2 330 00
✓ 20 Sales 4 331 00 4 331 00 4 331 00 1 038 00
18 24 P Wallace 808 00 808 00 850 00 42 00
✓ 28 Sales 7 880 00 7 880 00 7 880 00 2 917 00
44 062 00 5 650 00 413 00 38 825 00 14 484 00
Cash Payments Journal of Martin’s Bakery Supply Store for March 2019
Doc. Day Name of payee Bank Trading Creditors Discount Debtors Sundry accounts
no. stock control received control Amount Details
20 01 Mkatsane Suppliers 7 633 00 7 633 00
21 05 D Mogatle 4 893 00 5 000 00 107 00
22 07 Cash 3 125 00 3 125 00
23 14 Sun Stationers 551 00 551 00
D/N 16 M Mbalu (I/F) 856 00 856 00
24 22 Cash 1 226 00 1 226 00
25 29 Snowflake Stores 15 162 00 15 162 00
33 446 00 22 795 00 5 000 00 107 00 856 00 4 902 00

east BANK
Martin’s Bakery Supply Store 15A Mondew Park
2 Inland Road Attwood Hill
Wetton 6421
6125
For period: 01/03/2019–28/03/2019
Bank Statement
Balance 01/03 –21 863 00
Cheque 20 7 633 00 02/03 –29 496 00
Deposit 6 545 00 03/03 –22 951 00
Deposit 6 426 00 06/03 –16 525 00
Cheque 22 3 125 00 07/03 –19 650 00
Cash handling fees 17 00 07/03 –19 667 00
Deposit 3 127 00 10/03 –16 540 00
Cheque 23 551 00 16/03 –17 091 00
Service fees 8 00 16/03 –17 099 00
Deposit 8 819 00 16/03 –8 280 00
Debit note: M Mbalu (I/F) 856 00 17/03 –9 136 00
Cheque 21 4 893 00 18/03 –14 029 00
Deposit 6 126 00 18/03 –7 903 00
Debit order: to Surance for insurance 344 00 18/03 –8 247 00
Deposit 4 331 00 21/03 –3 916 00
Cheque 24 1 226 00 22/03 –5 142 00
Cheque book fee 24 00 25/03 –5 166 00
Deposit 808 00 25/03 –4 358 00
Dishonoured cheque: N Desai (debtor) 1 302 00 28/03 –5 660 00
Interest 102 00 28/03 –5 762 00

4.3 C
omparing the bank statement with the previous
month’s Bank Reconciliation Statement
In the months that follow, the business will have to compare not only
its current CRJ and CPJ with the bank statement received in that
particular month, but also with the previous month’s Bank Reconciliation
Statement. This is because the deposits on the previous month’s BRS
will appear on the current bank statement, and the outstanding cheques
might also have been presented for payment and will also appear on the
current bank statement.
4.4 Cancelled cheques

• If the business does not want a payment to go through, it can stop
payment on cheques issued. This must be done at the bank by signing
the necessary documentation.
• Cheques are valid for six months from date of issue. After the six
months they expire (become stale). A stale cheque must be cancelled stale cheque
in the books and the bank needs not be notified as the payee will not A cheque that has expired because it
be able to present this cheque for payment. was issue more than 6 months ago
• When a new cheque is issued in place of the cancelled cheque, then
the new cheque must be entered into the CPJ and the BRS.
Example
Required
1. Compare the bank statement (the books of Stereo Stores) with the
Bank Reconciliation Statement on 31 May 2019, the Cash Journals
for June 2019 and make supplementary entries in the CRJ and CPJ.
3. Draw up the Bank Reconciliation Statement on 30 June 2019.
Information
Stereo Stores
Bank Reconciliation Statement on 31 May 2019
Debit Credit
Debit balance as per bank statement 5 000 00
Credit outstanding deposits ✓3 960 00
Debit outstanding cheques:
no. 126 ✓2 800 00
no. 127 ✓2 240 00
no. 130 3 900 00
Credit balance as per Bank account 9 980 00
13 940 00 13 940 00

Example continued
Cash Receipts Journal of Stereo Stores for June 2019

01 Sales 3 480 00 3 480 00 1 260 00
07 N Baqwa 3 520 00 ✓ 7 000 00 3 600 00 80 00
08 15 K Kitz 1 420 00 1 420 00
Sales 3 460 00 ✓ 4 880 00 3 460 00 1 120 00
22 Sales 6 500 00 6 500 00 3 090 00
09 M Mkefa 600 00 ✓ 7 100 00 625 00 25 00
30 Sales 4 600 00 4 600 00 4 600 00 1 860 00
23 580 00 5 645 00 105 00 18 040 00 7 330 00
Cash Payments Journal of Stereo Stores for June 2019

Doc. Day Name of payee Bank Trading stock Creditors Discount Sundry accounts
no. control received Amount Details
131 02 Walton’s Stationery ✓ 2 400 00 2 400 00 Stationery
132 08 Oscar’s Transport ✓ 600 00 600 00
133 08 BB Suppliers ✓ 13 000 00 13 000 00
134 14 Telkom ✓ 740 00 740 00 Telephone
135 18 M Omar 2 440 00 2 500 00 60 00
136 22 M Tswala ✓ 2 240 00 2 240 00
137 28 Cash ✓ 400 00 400 00 Drawings
138 29 D Onthong 2 650 00 2 780 00 130 00
24 470 00 13 600 00 7 520 00 190 00 3 540 00

Example continued
WEST BANK
Shu-biz Stores 1 Main Street
9 Waterloo Street Rosebank
Middletown 8100
6500
For period: 01/08/2019–27/08/2019
Bank Statement

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: from A Brown, settlement of account 4 200 00 03/06 –5 520 00
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: K Kitz (debtor) 1 420 00 25/06 –3 319 00
Debit order: to Insure for insurance premium 850 00 27/06 –4 169 00
Debit order: to Lifegro for owner’s personal insurance 475 00 27/06 –4 644 00
Interest 24 00 28/06 –4 620 00
Stop order: to West Bank for loan repayment 2 500 00 29/06 –7 120 00
Cheque 137 ✓ 400 00 29/06 –7 520 00
Service fees 180 00 29/06 –7 700 00
Cash handling fees 28 00 29/06 –7 728 00
Direct deposit: from K Kitz, settlement account 1 420 00 29/06 –6 308 00

Example continued
Solution
Cash Receipts Journal of Stereo Stores for June 2019

Doc. Day Details Fol. Bank Debtors Sundry accounts
no. control Amount Details
30 Totals b/d 23 580 00
b/s A Brown 4 200 00 4 200 00
West Bank 24 00 24 00 Interest on current account
K Kitz 1 420 00 1 420 00
29 224 00
Cash Payments Journal of Stereo Stores for June 2019

Doc. Day Name of payee Fol. Bank Debtors Sundry accounts
30 Total b/d 24 470 00
b/s West Bank 19 00 19 00 Interest on overdraft
K Kitz 1 420 00 1 420 00
Insure 850 00 850 00 Insurance
Lifegro 475 00 475 00 Drawings
West Bank 2 500 00 2 500 00 Loan: West Bank
West Bank 208 00 208 00 Bank charges
29 942 00
General Ledger of Stereo Stores

Dr Bank Cr
2019 2019
Jun 30 Total receipts CRJ 29 224 00 Jun 01 Balance b/d 9 980 00
Balance c/d 10 698 00 30 Total payments CPJ 29 942 00
39 922 00 39 922 00
2019
Jul 01 Balance b/d 10 698 00

Example continued
Stereo Stores
Bank Reconciliation Statement on 30 June 2019
Debit Credit
Debit balance as per the bank statement 6 308 00
Credit outstanding deposits 4 600 00
Debit outstanding cheques: no. 130 3 900 00
no. 135 2 440 00
no. 138 2 650 00
Credit balance as per the Bank account 10 698 00
15 298 00 15 298 00
Comments
• Cheque no. 130 for R3 900 which appears in the Bank Reconciliation
Statement for May must be re-entered in the BRS for June because it
is still outstanding.
• The credit balance as per the Bank account of R9 980 on the Bank
Reconciliation Statement as on 31 May 2019, is used as the opening
balance for the Bank account for June 2019.
Activity 3.6
The information that follows was extracted from the books of Allied Traders for
November 2019.
Required
1. Compare the bank statement, received from Eastern Bank for November
2019, with the Bank Reconciliation Statement on 31 October 2019 and with
the extracts from the Cash Receipts Journal and Cash Payments Journal for
November 2019. Make the supplementary entries in both journals.
2. Prepare the Bank Reconciliation Statement on 30 November 2019.

Information
Allied Traders
Bank Reconciliation Statement on 31 October 2019
Debit Credit
Debit balance according to the bank statement 3 246 07
Credit outstanding deposit 2 780 65
Debit cheques not yet presented for payment: no. 1721 524 42
no. 1724 99 40
no. 1725 58 26
Credit balance according to the Bank account 1 147 50
3 928 15 3 928 15
Totals for deposit slips from Cash Receipts Journal for November 2019
November
03 4 560 72
08 3 420 18
11 3 740 50
18 5 822 77
25 7 073 39
30 4 860 20
29 477 76
Cheques entered in the Cash Payments Journal for November 2019

Number
1730 268 50
1731 178 37
1732 220 80
1733 2 949 00
1734 368 68
1735 325 00
1736 724 42
1737 400 00
1738 17 352 95
1739 2 000 00
1740 54 35
1741 6 870 00
31 712 07

EASTERN BANK
Allied Traders Faulty Towers
345 Hanbury Road Pietermaritzburg
Pietermaritzburg 3000
3000
For period: 01/11/2019–29/11/2019
Bank Statement

Balance 01/11 –3 246 07
Deposit 2 780 65 02/11 –465 42
Cheque 1721 524 42 02/11 –989 84
Cheque 1725 58 26 02/11 –1 048 10
Cheque 1730 268 50 03/11 –1 316 60
Deposit 4 560 72 03/11 3 244 12
Dishonoured cheque: F Stein (debtor) 175 60 04/11 3 068 52
Cheque 1732 220 80 04/11 2 847 72
Interest 16 70 05/11 2 831 02
Deposit 3 420 18 08/11 6 251 20
Cheque 1733 2 949 00 09/11 3 302 20
Cheque book fee 20 00 09/11 3 282 20
Cheque 1735 325 00 09/11 2 957 20
Deposit 3 740 50 11/11 6 697 70
Service fees 26 30 13/11 6 671 40
Cheque 1736 724 42 13/11 5 946 98
Cheque 1737 400 00 14/11 5 546 98
Direct deposit: from B Hunter for rent 1 000 00 15/11 6 546 98
Cheque 1731 178 37 16/11 6 368 61
Deposit 5 822 77 18/11 12 191 38
Cash handling fees 1 60 19/11 12 189 89
Stop order: to Anti-crime for insurance 450 00 23/11 11 739 78
Deposit 7 073 39 25/11 18 813 17
Cheque 1738 17 352 95 26/11 1 460 22
Cheque 1739 2 000 00 29/11 –539 78
Cheque 1740 54 35 29/11 –594 13

Additional information
• Cheque no. 1724 for R99,40, issued to BMW Cars for repairs, was lost in the
post. The cheque was stopped at the bank but must still be cancelled.
• Cheque no. 1742 was issued to BMW Cars for R99,40 after the CPJ was
totalled. This cheque must still be entered in the books.
4.5 Errors on the bank statement and in journals

This happens when money belonging to other businesses or individuals is
incorrectly debited (deducted) from or credited (added) to your account.
When this happens, your bank will correct the error. In order to reconcile
your Cash Journals with the bank statement, you will have to make an
entry in the Bank Reconciliation Statement. You will credit the incorrect
debit as on the bank statement and debit the incorrect credit as on the
bank statement. This entry will cancel with the bank statement in the
next month because the bank would have corrected the error by then.
4.5 Errors on the bank statement and in journals

• An incorrect entry made in the CRJ. This happens when the
bookkeeper incorrectly enters an amount in the CRJ. The amount
must be corrected as follows:
■ If R500 received is entered in error as R50 in the CRJ, then R450
must be entered into the CRJ to correct the error.
Incorrect + Correction = Correct

R50 + R450 = R500
■ If R500 received is entered in error as R5 000 in the CRJ, then

R4 500 must be entered into the CPJ to correct the error.
Incorrect – Correction = Correct

Remember R5 000 – R4 500 = R500
If too little is entered in error,
correct in same journal. If too • An incorrect entry made in the CPJ
much is entered in error, correct in If a cheque issued for R300 is entered in error as R30 in the CPJ,
opposite journal.
then R290 must be entered in the CPJ to correct the error.

Incorrect + Correction = Correct
30 – R290 = R300
If a cheque issued for R300 is entered in error as R3 000 in the CPJ,

then R2 700 must be entered in the CRJ to correct the error.
Incorrect – Correction = Correct

R3 000 – R2 700 = R300
Activity 3.7
Information from the books of Africa Traders is provided.
Required
1. Compare the bank statement for April 2019 with the BRS as on 31 March
2019 and the CRJ and CPJ for April 2019. Make supplementary entries in the
CRJ and CPJ.
3. Prepare the Bank Reconciliation Statement on 30 April 2019.

Information
Africa Traders
Bank Reconciliation Statement on 31 March 2019
Debit Credit
Credit balance as per the bank statement 3 030 30
Debit outstanding cheques: no. 226 205 00
no. 413 844 80
no. 418 765 65
Debit balance as per the Bank account 7 935 45
9 750 90 9 750 90
Extract from Cash Receipts Journal of Africa Traders for April 2019
Day Details Bank
02 Deposit ......... 6 651 30
09 Deposit ......... 6 140 50
16 Deposit ......... 6 230 40
23 Deposit ......... 7 155 80
30 Deposit ......... 7 878 78
34 056 78
Extract from Cash Payments Journal of Africa Traders for April 2019
Doc. Day Name of payee Bank
no.
419 01 Earthcoat Stores 320 30
420 04 Murray & Company 5 400 00
421 06 Mad-Dog Stores 4 850 50
422 09 Buzzy Best 2 002 00
423 12 Hyperspace Suppliers 5 150 80
424 14 Suban Motors 760 60
425 16 Ntuli Wholesalers 1 600 00
426 20 Cash and Carry 2 300 00
427 24 PCP Ltd 450 00
428 29 Coty CC 3 850 00
429 30 Dube Manufacturers 4 440 00
31 124 20

QUAZI BANK
Africa Traders Reagan Way
Prime Business Park Cape Town
Cape Town 8000
8000
For period: 01/04/2019–29/04/2019
Bank Statement

Balance 01/04 3 030 30
Deposit 6 720 60 01/04
Cheque 413 844 80 02/04
Cheque 419 320 30 03/04
Deposit 6 651 30 03/04
Cheque 420 5 400 00 03/04
Service fees 115 70 06/04
Cheque 1765 660 00 07/04
Debit order: to City Municipality for water and rates 223 80 08/04
Deposit 6 140 50 09/04
Dishonoured cheque: R Majiet (debtor) 110 20 10/04
Cheque 422 2 200 00 10/04
Cheque 421 4 850 50 11/04
Cheque 423 5 150 80 11/04
Cheque 424 760 60 15/04
Cheque 425 1 600 00 16/04
Deposit 6 230 40 16/04
Cheque 426 2 300 00 20/04
Deposit 7 115 80 23/04
Dishonoured cheque: H Saunders (debtor) 249 40 25/04
Transaction charges 17 00 27/04
Debit order: to Multi Insurers for insurance premium 220 00 28/04
Direct deposit: from Safety Day Care for rent 1 500 00 29/04
Cash handling fees 68 30 29/04
Service fees 19 70 29/04 12 340 00

• Cheque no. 226 for R205 was issued to City Press in February 2019 for
advertisement which was not placed. Payment of the cheque was stopped
on 30 April 2019 and the cheque cancelled.
• Cheque no. 1765 for R660 belongs to North Africa Traders. It was incorrectly
debited to our account by the bank. The bookkeeper notified the bank and
the error will be corrected by them. This correction will only appear on the
bank statement for May.
• The deposit on the 23rd is correct on the bank statement. It was entered
as R7 155,80 in the CRJ instead of R7 115,80 and was for sales for the day.
Correct the error.
• Cheque no. 422 issued to Buzzy Best for Equipment on the 9th for R2 200
was entered into the CPJ as R2 002 instead of R2 200. The amount as on the
bank statement is correct. Correct the error.
4.7 C
omparing the Salaries Journal with the bank
statement
If the business makes payments to employees by means of a cheque,
then the Salaries Journal must also be compared with the bank statement.
Employees will present their cheques for payment at the bank or deposit
these cheques into their bank accounts. In this case, there might be a time
delays between the business issuing the cheque and the bank actually
making the payment. All outstanding salary cheques must be entered
into the BRS as ordinary outstanding cheques.
Activity 3.8 (challenge)
The following information was taken from the books of Nieuwoudt Traders.
Required
1. Complete the Cash Receipts Journal and Cash Payments Journal for
April 2015. Start off by bringing down the totals of the bank column only.
Then make the additional entries.
2. Draw up the Bank account (properly balanced) for April 2015.
3. Draw up the Bank Reconciliation Statement on 30 April 2015.

Information
Nieuwoudt Traders
Bank Reconciliation Statement on 31 March 2015
Debit Credit
Debit balance according to bank statement 28 970 00
Debit cheques not yet cashed: no. 624 500 00
no. 835 7 140 00
no. 842 1 840 00
no. 843 330 00
no. 844 1 664 00
Credit according to the Bank account 17 344 00
40 444 00 40 444 00
Extract from Cash Receipts Journal of Nieuwoudt Traders for April 2015 CRJ4
Doc. Day Details Analysis of Bank Sundry accounts
344 04 T Munro 680 00
CRR 05 Sales 11 740 00
345 C van der Merwe 1 100 00 13 520 00 1 100 00 Rent income
346 12 L Nortier 220 00 220 00 Bad debts collected
347 13 N van der Spuy 532 00
CRR Sales 8 972 00 9 724 00
348 21 J Basson 784 00
CRR Sales 3 466 00 4 230 00
349 30 M Nieuwoudt 20 000 00 20 000 00 Capital
CRR Sales 14 221 00 34 221 00
61 695 00

Extract from Cash Payments Journal of Nieuwoudt Traders for April 2015 CPJ4
Doc. Day Name of payee Bank Trading Sundry accounts
no. stock Amount Details
845 01 Cash 14 700 00 14 700 00 Creditors for wages
846 06 Nel Suppliers 6 442 00 6 442 00
847 08 SARS 2 041 00 2 041 00 SARS (PAYE)
848 10 AS Suppliers 8 772 00 8 772 00
850 25 M Nieuwoudt 1 100 00 1 100 00 Drawings
851 26 Marais Traders 1 440 00
852 27 Waltons 368 00 368 00 Stationery
853– 30 Employees 16 666 00 16 666 00 Creditors for salaries
855
856 Hugo Ltd 2 556 00
68 785 00
Note
Compare the Net Salary column with the debit column of the
bank statement.
Salaries Journal of Nieuwoudt Traders for April 2015 SJ4

Employer’s
Gross Deductions
contribution
Employee Salary PAYE Pension Medical Total Net salary Cheque Medical
fund fund fund
J McKay 7 740 00 1 142 00 890 00 520 00 2 552 00 5 188 00 853 520 00
F Olivier 8 630 00 1 522 00 910 00 520 00 2 952 00 5 678 00 854 520 00
J Maartens 9 040 00 1 640 00 1 000 00 600 00 3 240 00 5 800 00 855 600 00
25 410 00 4 304 00 2 800 00 1 640 00 8 744 00 16 666 00 1 640 00

ABC Bank
Bank Statement of Nieuwoudt Traders for April 2015
Details of transaction Amount Date Balance
Opening balance – 28 970
Debit order: Allsure Insurance (for owner) – 500 2019-04-01
Deposit + 23 100 2019-04-01
Cheque 845 – 14 700 2019-04-02
Cheque dishonoured: P Malherbe (debtor) – 1 520 2019-04-03
Cheque 842 – 1 930 2019-04-03
Deposit + 13 520 2019-04-05
Cheque 847 – 2 014 2019-04-10
Cheque 835 – 7 140 2019-04-11
Cheque 843 – 330 2019-04-11
Cheque 846 – 6 442 2019-04-11
Cheque 848 – 8 772 2019-04-12
Debit order: Getogether Insurance (for insurance) – 600 2019-04-12
Deposit + 9 724 2019-04-13
Service fees – 435 2019-04-14
Cash handling fee – 114 2019-04-14
Deposit + 4 230 2019-04-21
Cheque 849 – 14 700 2019-04-22
Debit order: Paarl Primary School
(owner’s daughter’s school fees) – 480 2019-04-22
Direct deposit: from A Bester (debtor) + 350 2019-04-23
Cheque 852 – 368 2019-04-29
Cheque 855 – 5 800 2019-04-30
Cheque 853 – 5 188 2019-04-30
Interest charged on debit balance – 247 2019-04-30
Cheque book fees – 35 2019-04-30
Stop order: Telkom for business telephone – 524 2019-04-30
Cheque 851 – 1 440 2019-04-30
Cheque 103 – 998 2019-04-30
Direct deposit: XY Bank + 12 640 2019-04-30 – 39 683
• Where there are differences between the amounts in the bank statement
and the subsidiary books, the amounts on the bank statement are correct.
Cheque no. 842 was issued to Jooste Wholesalers for packing material, R500,

and trading stock, R1 430. The amounts were entered in the respective
columns as packing material, R500, and trading stock, R1 340.
• Cheque no. 624 was issued to the Paarl Cycling Club and dated 2 October
2014. The cheque has expired and must be cancelled. Cheque no. 857 was
already issued to replace it, but no entries have been made.
• The deposit on 30 April 2015 is for an investment made for eight months at
XY Bank, which has now expired together with R640 interest.
• Cheque no. 858 for the payment of the PP Medical Fund for April 2015 has
been issued, but not yet recorded. The amount owed to the medical fund,
according to the Wages Journal, is R1 090.
• The cheque on 30 April 2015 of R998 has been incorrectly deducted from
the business’s account. It was a cheque from Nieuwoudt Stores.
4.8 Post-dated cheques

Post-dated cheques refer to cheques which have been issued and
signed by the drawer for a date in the future. For example, a cheque is
issued and signed on 12 September 2019 but the date on the cheque is
20 October 2019.
When a post-dated cheque is issued, the entry must be made in
the CPJ on the day that it is issued, for example 12 September 2019. The
payee (person receiving the cheque) will only be able to present this
cheque on the day that it is dated (20 October 2019) as the cheque only
becomes legal tender on that date. The bank will not “cash” a post-dated
cheque. The cheque is valid for six months after the 20 October 2019.
When a post-dated cheque is received from a debtor, the post-dated
cheque will not be entered in the CRJ on the day that it was received.
For example, a cheque is received on 20 September 2019 but is dated for
30 September. This cheque will be written up in the Post-dated Cheques
Register and will only be entered in the CRJ when it becomes legal tender
on 30 September 2019. The reason for this is that all receipts in the CRJ
must be deposited and a post-dated cheque cannot be deposited until the
day that it is dated.
5. Completing the bank reconciliation when

comparisons are already done
Sometimes you will be asked to complete the bank reconciliation process
from information where the comparisons between the CRJ, CPJ and
bank statement have already been done. In this case, only the errors
and omissions are given. All you have to do is make the supplementary
entries in the CRJ and CPJ, draw up the Bank account and prepare the
Bank Reconciliation Statement.

Example
The inexperienced bookkeeper of Gimme Traders totalled the Cash
Journals before the bank statement had been received.
Required
Use the information below to complete the following:
1. The Cash Journals for June 2019 and total only the Bank columns
2. The Bank account and balance it on 30 June 2019
3. The Bank Reconciliation Statement on 30 June 2019.
Note: It is the business’s policy to correct mistakes and omissions that
occur in the Cash Journals by means of an entry in the Cash Journals
if possible.
Information
Extract from the Bank Reconciliation Statement as on 31 May 2019:
Outstanding cheques: no. 382 (12 January 2019) 350 00
no. 488 (31 May 2019) 5 432 00
no. 500 (15 August 2019) 3 600 00
The Bank account shows a favourable (debit) balance on 1 June 2019

of R1 450.
The following totals appeared in the bank column of the:
• Cash Receipts Journal R25 600
• Cash Payments Journal R33 650
A comparison with the bank statement for June 2019 received from
Africa Bank and the Salaries Journal, Cash Receipts Journal, Cash
Payments Journal for June 2019 as well as the Bank Reconciliation
Statement for May 2019, revealed the following differences:
• The bank statement shows an overdrawn (debit) balance of R9 381
on 30 June 2019.
• Cheque no. 382 was issued to the Sunshine Club on 12 January as a
donation. The cheque is stale and must be cancelled. Management
will not be issuing a replacement cheque.
• Cheque no. 488 appears correctly on the bank statement as R2 345.
This cheque was issued on 31 May for equipment bought from All
Equipment but was recorded in the CPJ as R5 432 in error. Correct
the error.
• Cheque no. 500 dated 15 August 2019 does not appear on the bank
statement.
• The following charges appear on the bank statement only:
Interest on overdraft
■ R144
Credit card charges
■ R46
Service fees
■ R89

Example continued
• A debit order to Africa Bank for R4 180 to pay the instalment on
the loan of R3 800 as well as interest of R380 appears on the bank
statement only.
• A stop order in favour of Alsure Insurers for R650, for the owner’s
personal insurance premium, appears on the bank statement only.
• A cheque for R1 200 previously received from debtor N Nasie was
dishonoured by the bank because it had not been signed. This
cheque must be cancelled.
• A cheque previously received from debtor J Justis for R475 was
dishonoured by the bank because the drawer had insufficient funds
in his account. This cheque must be cancelled.
• A deposit of R6 784 made on 30 June 2019 appears in the CRJ but
not on the bank statement.
• Cheque no. 502 for R2 150 (dated 20 July) was issued to S Sollie a
creditor on the 29 June but this post-dated cheque was not entered
in the CPJ.
• J Justis apologised for his cheque being dishonoured. He issued
another cheque for R495 (dated 10 July) in settlement of his
account. His post-dated cheque was placed in the Post-dated
Cheque Register.
• The following cheques appear in the CPJ only:
No. 504 for R1 800 (dated 28 June)
■
No. 506 for R1 950 (dated 10 September)

■
Solution
Cash Receipts Journal of Gimme Traders for June 2019 CRJ6

no. Amount Details
30 Totals b/d 25 600 00
Sunshine Club 350 00 350 00 Donations
B/S All Equipment 3 087 00 3 087 00 Equipment
29 037 00

Example continued
Cash Payments Journal of Gimme Traders for June 2019 CPJ6

Doc. Day Name of payee Fol. Bank Sundry accounts
no. Amount Details
30 Totals b/d 33 650 00
B/S Africa Bank 144 00 144 00 Interest on overdraft
Africa Bank 135 00 135 00 Bank charges
Africa Bank 4 180 00 3 800 00 Loan: AA Bank
380 00 Interest on loan
Alsure Insurers 650 00 650 00 Drawings
N Nasie 1 200 00 1 200 00 Debtors control
502 S Sollie 2 150 00 2 150 00 Creditors control
J Justis 475 00 475 00 Debtors control
42 504 00
General Ledger of Gimme Traders

Dr Bank Cr
2019 2019
Jun 01 Balance b/d 1 450 00 Jun 30 Total payment CPJ6 42 584 00
30 Total receipts CRJ6 29 037 00
42 584 00 42 584 00
2019
Jul 01 Balance b/d 12 097 00
Gimme Traders
Bank Reconciliation Statement on 30 June 2019
Debit Credit
Overdrawn balance according to bank statement 9 381 00
Debit uncashed cheques: no. 500 (15 August) 3 600 00
no. 502 (20 July) 2 150 00
no. 504 (28 June) 1 800 00
no. 506 (10 September) 1 950 00
Credit balance according to Bank account 12 097 00
18 881 00 18 881 00

Activity 3.9
Use the information provided to do the following in the books of Freddie Stores.
Required
1. Complete the Cash Receipts Journal for June 2019. Use analysis columns
for Bank and Sundry accounts, with sub-totals of R67 407,00 and R5 393,00
respectively.
2. Complete the Cash Payments Journal for June 2019. Use analysis columns
for Bank and Sundry accounts, with sub-totals of R65 215,50 and R8 005,60
respectively.
3. Prepare the Bank account and balance it.
4. Prepare the Bank Reconciliation Statement on 30 June 2019.
Information
Freddie Stores
Bank Reconciliation Statement on 31 May 2019
Debit Credit
Debit balance according to bank statement 10 316 90
Deposit not yet credited 9 428 38
Cheques not yet presented for payment:
no. 6150 (dated 27 Dec 2019) 1 350 00
no. 6384 (dated 24 May 2019) 2 867 40
no. 6391 (dated 27 May 2019) 1 854 00
no. 6402 (dated 15 Jun 2019) 899 00
Credit balance according to Bank account 7 858 92
17 287 30 17 287 30
Note: Cheque no. 6150 was issued in favour of Boda Sports Club as a donation.
The cheque is stale and the cheque must be cancelled.
• The bank statement for June was received on 30 June 2019 and showed a
debit balance of R11 082,50.
• A comparison of the bank statement for June with the Bank Reconciliation
Statement on 31 May and with the Cash Receipts and Cash Payments
Journals for June indicated the following differences:
■ Entries on the bank statement not appearing in the CRJ for June 2019.
– Deposit, R9 428,38 (dated 29 June 2019)
– Direct deposit, R4 784,40 (This amount was deposited by the tenant,
E Prins, into the current account.)
– Correction of error: interest on overdraft, R71 (the bank calculated
the interest on overdraft at an incorrect rate the previous month).

■ Entries on the BS not appearing in the CPJ:
– Unpaid cheque, R1 122,00 (This cheque was received from R Beach
in payment of his account of R1 170,00 received and deposited on
26 June. The cheque was dishonoured due to insufficient funds.)
– Stop order, R818,10 (This stop order is in favour of CA Insurance
Company for an insurance premium.)
– Unpaid cheque, R471,00 (This cheque was not signed by the drawer,
L Bell.)
– Cheque no. 6391, R1 854,00
– Cheque no. 6402, R999,00 (Cheque no. 6402 was issued on 26 May
2019 in favour of Basson Motors, in payment of repairs. The amount
on the bank statement is correct.)
– Tax levy, R41,40
– Service fees, R265,80
– Interest on overdraft, R145,98
■ Entries in the CRJ not appearing on the bank statement:
– Deposit, R14 563,80
■ Entries in the CPJ not appearing on the bank statement:
– Cheque no. 6440, R2 166,00 (dated 27 June 2019)
– Cheque no. 6433, R874,00 (dated 10 July 2019)
Activity 3.10
Use the information given to complete the following in the books of

Indaba Traders.
Required
1. Complete the Cash Receipts Journal and the Cash Payments Journal for
October 2019. Total the Bank column only. Start the journals with the
following totals (inter alia):
Cash Receipts Journal Cash Payments Journal

Bank 28 919 Bank 40 882
Debtors control 7 920 Debtors control 330
Sundry accounts 3 795 Sundry accounts 8 135
2. Draw up the Bank account and balance the account on 31 October 2019.
3. Prepare the Bank Reconciliation Statement on 31 October 2019.

Information
From the Bank Reconciliation Statement on 30 September 2019:
Debit balance according to bank statement 5 350
Deposits not yet credited by the bank 10 335
Cheques not yet cashed: no. 2415 (13 July 2019) 475
no. 2427 (9 August 2019) 1 071
no. 2468 (27 September 2019) 1 142
no. 2486 (29 September 2019) 1 564
Debit balance according to Bank account 733
Note: Cheque no. 2468 was issued in favour of Els Sports on 27 September
2019. The cheque appears to be lost in the post and they have requested that
another cheque be issued in its place. The manager instructed that cheque no.
2468 be cancelled but that the new cheque should not be issued yet.
• The bank statement for October was received on 31 October 2019 and
showed an overdraft of R4 886.
• Entries on the bank statement for October which did not appear in the Cash
Journals for October:
■ Deposit, R10 335
■ Cheque no. 2415, R475
■ Cheque no. 2486, R1 546 (This cheque was issued in favour of OW
Suppliers on 29 September 2019 for advertising: the amount on the
bank statement is correct.)
■ Dishonoured cheque, R1 254 (This cheque, received from Gibbs in
settlement of his account, R1 320 and deposited on 15 October 2019,
was dishonoured on account of insufficient funds.)
■ Stop order, R1 056 (This stop order, in favour of Africa Motors, is for the
instalment on the delivery scooter purchased during January 2019.)
■ Debit order, R618 (This debit order gives the City Council the right to
withdraw the amount due for water and electricity on a monthly basis
from our account.)
■ Direct deposit, R12 996 (This amount represented a fixed deposit of
R11 400 at KM Bank that matured, plus a year’s interest.)
■ Dishonoured cheque, R808 (This cheque was not signed by drawer
Smith. The cheque should be cancelled.)
■ Cash handling fee, R41
■ Cheque book fee, R27
■ Service charges, R109
■ Interest on overdraft, R95

• Entries in the Cash Journals for October which did not appear on the bank
statement for October:
■ Cheque no. 2987, R812 (dated 23 October 2019)
■ Cheque no. 2990, R1 639 (dated 15 November 2019)
■ Deposit R7 326
• A post-dated cheque for R980 (dated 10 November) was received from
M Green a debtor. No entry has been made.
6. E
ntering information directly into the
Bank account
Often reconciliation is done directly into the Bank account in the General
Ledger. This is done if the CRJ and CPJ are already closed off. Entries will
be made directly into the Bank account and the double-entry principle
is applied.
Activity 3.11
Use the information provided to do the following in the books of Southern

Cross Stores.
Required
1. Complete the Bank account in the General Ledger by making the necessary
entries directly into the bank account. Balance the account.
2. Prepare the Bank Reconciliation Statement on 31 May 2019.
Information
• Debit bank balance in General Ledger on 31 May 2019, R500. The bank
statement shows a debit balance of R18 726 on the same date.
Southern Cross Stores compared their bank statement for May with the Cash
Journals for May and found the following differences.
• J Jupiter’s cheque for R1 800 deposited on 3 May 2019, was returned,
marked I/F. This cheque must be cancelled.
• A deposit of R19 560 made on 31 May 2019 does not appear on the
bank statement.
• A deposit of R17 082 appears on the bank statement. It was incorrectly
recorded in the Cash Receipts Journal as R18 702. This was for credit card
sales. Correct the error.
• Debtor V Venus deposited a cheque for R3 000 directly into the bank
account of Southern Cross Stores.
• Annual debit order payment for the short-term insurance premiums on
behalf of:
■ the business, R3 206
■ the owner, R1 654
appears on the bank statement.

• The following cheques have not yet been paid in at the bank:
■ No. 3749, R1 820 (dated 16 November 2018; issued to Mars Recreation
club as a donation)
■ No. 3869, R474 (dated 23 May 2019)
■ No. 3881, R4 260 (dated 12 June 2019)
• The following appear on the bank statement: service fees, R163, cash
handling fee, R89 and interest on debit balance, R168.
• A deposit of R100 on the bank statement. It was discovered that the money
was accidently deposited into the wrong account. The bank will correct the
error on the next bank statement.
• Cheque no. 3852 in payment for the purchase of equipment for R9 590
appears correctly on the bank statement but was entered in the Cash
Payments Journal as R7 970.
• A deposit of R4 468 on the bank statement was added in the deposit book
as R3 468; the bank showed the correct amount on the bank statement on
26 May.
• A cheque for R1 243 from P Pointer was received for rent income, and dated
2 June 2019, but has not yet been recorded.
Activity 3.12
The following information was taken from the books of Shuttle Stores. Mark
Shuttle posted his Cash Journals to the Ledger before the bank statement
for February was received. He balanced the Bank account and it shows an
overdrawn balance of R2 547.
Required
1. Show any additional entries directly in the Bank account. Your entry should
show the correct contra account. Balance the Bank account.
2. Draw up a Bank Reconciliation Statement as on 29 February 2012.
Information
Shuttle Stores
Bank Reconciliation Statement on 31 January 2012
Debit Credit
Credit balance according to bank statement 4 560 00
Debit outstanding cheques no. 145 (15 July 2011) 267 00
no. 371 (20 January 2012) 869 00
no. 376 (29 February 2012) 250 00
Debit balance according to Bank account 5 159 00
6 545 00 6 545 00

Additional information with regard the above Bank Reconciliation Statement
• Cheque no. 145 was issued to the Southern Sports Club as a donation. It has
to be cancelled.
• Cheque no. 371 was issued to Packmar for packing material bought. It
appears on the bank statement for February as R689. After investigating
the matter, the amount on the bank statement was found to be correct.
Entries in the Cash Payments Journal that do not appear on the bank
statement for February 2012
• Cheque no. 412 for R340. This cheque was issued to Die Burger for
an advertisement.
• Cheque no. 465 for R750. This cheque was dated for 10 March as part
payment of Shuttle Stores’ loan from AB Bank.
Entries in the Cash Receipts Journal which did not appear on the bank
statement for February 2012
• A deposit of R3 150 made on 28 February, does not appear on the bank
statement.
7. Effect on the financial statements

The bank reconciliation process reconciles the balance in the Bank
account of the business with the balance on the bank statement. If a post-
dated cheque is issued to a creditor, the entry is made in the CPJ and the
Bank account is decreased, so we can say that the business has less money
in their banking account. The Creditors account is also decreased, showing
that we owe them less. This cheque is, however, post-dated and cannot
be presented for payment so the money will remain in the Bank account
and we still owe the creditor that amount. This payment is called a future
payment because it was intended for the next financial year.
Because the business wants to show accurate information in their
financial reports, we will reverse that entry for financial statement
purpose so as to show the correct amount in the Bank account and the
correct amount owed to the creditor.
The procedure will be to add back the amount of the cheque to the
favourable balance in Bank account and to add back the amount to the
Creditors Control account. In the case of a bank overdraft, the amount
must be added to the negative amount in order to decrease it.

Example
A post-dated cheque for R10 000 was issued to Monopoly Stores a
creditor and was credited to the Bank account and debited to the
Creditors Control account. At the end of the financial year, the Bank
account had a debit balance of R96 000 and Creditors Control a credit
balance of R51 200.
Solution
Procedure: Bank account R96 000 + 10 000
= R106 000
Creditors Control account R51 200 + 10 000
= R61 200
If the bank account has an overdraft of R12 300, then the procedure is
as follows:
Procedure: Bank account – R12 300 + R10 000
= – R2 300 (overdraft is less)
Activity 3.13
You are presented with the Bank Reconciliation Statement of Onthong Traders
on 28 February 2019. Their financial year ends on this date.
Required
Study the BRS provided and answer the questions below.
1. Calculate the balance as per the Bank account in the ledger of Onthong
Traders on 28 February 2019.
2. Explain what should have happened to cheque no. 241 and why it should
not appear in the BRS on 28 February 2019.
3. How will you treat cheque no. 269 which was issued to Parrot Products, a
creditor, when preparing the financial statements?
4. Show the balance in the Bank account after Question 3 was considered.
5. A post-dated cheque was received from Molly Smith, a debtor. Why does it
not appear in the BRS?
6. Why should businesses prepare monthly Bank Reconciliation Statements?

Information
Debit balance according to bank statement from MyBank R13 260 00
Outstanding deposit 19 320 00
Outstanding cheques: no. 241 (dated 21 August 2018) 975 00
no. 269 (dated 31 March 2019) 2 300 00
no. 274 (dated 23 February 2019) 1 820 00
Balance as per Bank account in the General Ledger of Onthong Traders ?
Entries in the bank statement which did not appear in the Cash Journals for
February 2019
• Deposit, R1 985
• Service fees, R268
Cash deposit fee, R56
Interest on credit balance, R38
• Dishonoured cheque, R300. It was received from a debtor, D Daniels, in
payment of his account of R320. The cheque was dishonoured and marked
“account closed”.
• Dishonoured cheque, R260. The cheque was received from a debtor, P Pauls,
in payment of his account. The cheque was dishonoured because it was
dated for 10 March 2019. This cheque must be cancelled.
• Deposit, R2 500 (deposited by the tenant in payment of his outstanding rent
for January)
• Stop order in favour of S.A. Insurance Co., R540. It is for insurance of the
business, (R400), and for an educational policy for Mark Shuttle’s son, (R140).
• Stop order in favour of the municipality, R287, in payment of the electricity
account for February.
• Unfortunately the bookkeeper spilt his coffee all over the bank statement.
The balance is impossible to read. You have to calculate the balance
according to the bank statement.

7.1 Summary of where to record transactions involved in bank reconciliations
Bank Reconciliation
No
Transaction CRJ CPJ Statement
entry
Dr Cr
Direct deposit into bank account (on BS) ✓
Interest on favourable bank balance (on BS) ✓
Cancelled cheques (stale, stop payment, stolen or

✓
altered cheques)
Error in the CPJ: where the amount in the CPJ is
✓
more than the original cheque
Error in the CRJ: where the amount in the CRJ is
✓
less than the original receipt
Debit orders, stop orders, electronic payments
✓
(on BS)
Bank charges, interest on overdraft (on BS) ✓
Dishonoured cheques (on BS) ✓
Error in the CPJ: where the amount in the CPJ is

✓
less than the original cheque
Error in the CRJ: where that amount in the CRJ is
✓
more than the original receipt
Cheques issued, but not appearing on BS ✓
Cheques outstanding on previous BRS and still

✓
not appearing on current BS
Post-dated cheques issued ✓
Amount incorrectly credited on BS ✓
Outstanding deposits ✓
Amount incorrectly debited on BS ✓
Cheques outstanding on previous BRS, but

✓
appearing on current BS
Deposit outstanding on previous BRS, but
✓
appearing on current BS
Post-dated cheques received ✓

Activity 3.14
The information below was taken from the books of Smart and Casual on
31 August 2019.
Required
Use the information provided and complete the columns according to the
given transaction.
Example
Transaction
The bank statement was debited with interest on overdraft, R50.
No. Bank account Bank Reconciliation No entry
Statement
Contra/Details Debit Credit Debit Credit
e.g. Interest on overdraft R50
Transactions (31 August 2019)

1. Cheque no. 186 for R75 appears on the bank statement. This cheque
was issued on 27 July to Wrap ‘n Carry for packing material, but was
accidentally entered as R57 in the Cash Journal. The bank statement
is correct.
2. The dishonoured cheque from P Zuma, a debtor, was received with
the bank statement, R250. Investigation confirmed that the year was
accidentally entered as 2020 on the cheque. Cancel the cheque.
3. A cheque no. 828 for R1 600 appears in the bank statement. Upon
investigation, it was determined that the cheque was issued by Grand
and Smart. The bank accidently debited our account and will correct the
error in September.
4. The total bank charges amounted to R60 and do not appear in the
Cash Journal.
5. A deposit of R3 425, made on 30 August 2019, appears in the Cash
Journal but not on the bank statement.
6. A stop order for R950 in favour of Super Bank appears on the bank
statement. This stop order is in payment of the monthly instalment on
the personal loan of the owner.
7. A cheque for R650 was received from V Solly in payment of her account
of R700. The cheque was dated 2 September 2019. No entry was made
for this cheque.
8. Interest earned on the credit bank balance amounts to R95 and has not
yet been entered in the Cash Journal.
9. No entry was made of cheque no. 299 for R425, post-dated for
8 September 2019, and issued to Quipco Ltd in payment of their
account of R445.

10. A cheque for R850 from a debtor, B Zulu, in payment of his account was
dishonoured. It appears on the bank statement only.
11. A cheque for R960 issued to Malan Repairs for repairs done to
equipment, appears in the CPJ only.
12. The tenant paid the rent of R5 000 for August directly into the bank
account. It appears in the bank statement only.
13. A cheque for R630 issued to the local newspaper for an advertisement
was lost. This cheque must be cancelled and replaced with a new cheque
for the same amount.
Informal assessment 3.1
Marks: 45 Time: 30 minutes
The information provided was taken from the books of Hugo Traders.
Required
1. Complete the Cash Receipts and Cash Payments Journals for March 2019,
after comparing the journals with the Bank Reconciliation Statement of
the previous month and the bank statement of the current month. Start
by bringing down the totals of the Bank column only, and then do the
additional entries. [26]
2. Draw up the Bank account (properly balanced) for March 2019. [8]
3. Draw up the Bank Reconciliation Statement on 31 March 2019. [11]
Information
Hugo Traders
Bank Reconciliation Statement on 28 February 2019
Favourable balance on the bank statement 3 244 00
Outstanding deposit 1 790 00
Outstanding cheques no. 1810 280 00
no. 1905 380 00
no. 1917 460 00
no. 1959 220 00
Balance in the Bank account ?

Extract from Cash Receipts Journal of Hugo Traders for March 2019 CRJ3
Doc. Day Details Fol. Analysis of Bank Sundry accounts
03 Sales 5 181 00
214 C Christiaansen 1 000 00 6 181 00
07 Sales 4 600 00
215 R de Jager 62 00 4 662 00 62 00 Bad debts recovered
12 Sales 2 184 00 2 184 00
216 17 H Ferreira 550 00 550 00
17 Sales 1 453 00 1 453 00
30 Sales 4 200 00 4 200 00
19 230 00
Extract from Cash Payments Journal of Hugo Traders for March 2019 CPJ3
Doc. Day Name of payee Fol. Bank Trading Sundry accounts
no. stock Amount Details
1961 06 D Dakar 120 00 120 00 Creditors control
1962 06 R Muller 500 00 500 00
1963 10 Rio Wholesalers 480 00 480 00 Creditors control
1964 16 Alfie Stores 8 400 00 8 400 00
1965 16 Cloete Ltd 600 00 600 00 Creditors control
1966 21 Cash 300 00 300 00 Stationery
1968 – 1970 30 Employees 3 090 00 3 090 00 Creditors for salaries
1971 30 Nietbegin Pension Fund 600 00 600 00 Pension fund
1972 SARS 700 00 700 00 SA Revenue Services: PAYE
15 990 00

XAT Bank
Bank Statement of Hugo Traders for March 2019
Details of transaction Amount Date Balance
Opening balance 3 244
Deposit + 1 790 2019-03-01
Deposit + 6 181 2019-03-03
Handling fees –4 2019-03-03
1917 – 460 2019-03-03
1959 – 220 2019-03-03
1961 – 120 2019-03-07
Deposit + 4 662 2019-03-07
Handling fees – 10 2019-03-07
Cheque dishonoured: T Survivor (debtor) – 450 2019-03-07
1963 – 480 2019-03-14
Stop order: B Sure Insurers for owner’s insurance – 87 2019-03-14
Deposit + 2 184 2019-03-14
1964 – 4 800 2019-03-17
Deposit + 550 2019-03-17
Cheque unpaid: P Henna (debtor) – 109 2019-03-17
Deposit + 1 453 2019-03-17
1967 – 1 200 2019-03-27
1966 – 300 2019-03-27
Stop order: to Unicity Computers for instalment on
computers – 452 2019-03-30
1968 – 840 2019-03-30
1969 – 1 250 2019-03-30
Interest + 121 2019-03-30
Service fees – 62 2019-03-30
Sundry debits (levy) –9 2019-03-30 9 332
• Cheque no. 1810 for R280 was issued in favour of PEN Stationery for
stationery purchased. The cheque was lost in the mail and has to be
cancelled.
• The Salaries Journal showed the following cheques owing to employees:
■ Cheque no. 1968: W Miljien for R840
■ Cheque no. 1969: I Louw for R1 250
■ Cheque no. 1970: S Genadendal for R1 000
• Cheque no. 1964 is correctly shown in the bank statement.

Use the information provided to do the following in the books of Singh Traders.
1. Complete the Cash Receipts and Cash Payments Journal for December
2019. Add only the bank column total in each Cash Journal. Start the Cash
Journals with the following sub-totals on 31 December 2019:
Cash Receipts Journal

Bank R52 900
Sundry accounts R12 400
Cash Payments Journal

Bank R74 840
Sundry accounts R14 360 [26]
2. Draw up the Bank account on and balance the account on

31 December 2019. [8]
3. Draw up the Bank Reconciliation Statement on 31 December 2019. [11]
Information
Singh Traders
Bank Reconciliation Statement on 30 November 2019
Debit Credit
Overdrawn balance as per bank statement 13 420 00
Debit outstanding cheques: no. 2468 865 00
no. 2572 1 340 00
no. 2631 2 080 00
no. 2645 2 880 00
no. 2652 1 000 00
Credit balance as per Bank account 2 085 00
21 585 00 21 585 00
Additional information with regard to the Bank Reconciliation Statement for

November 2019:
• Cheque no. 2468 was issued in favour of Dino Sports Club as donation
(dated 2 June 2019).
• Cheque no. 2572 was issued to CNA for stationery purchased. The cheque
was lost in the mail, and they have requested for another cheque to be
issued in place of the one that was lost. The cheque should be replaced on
31 December 2019 with cheque no. 2760.

The bank statement for December 2019 was received on 31 December and
showed a debit balance of R17 880.
While comparing the Cash Journals for December 2019 and the Bank
Reconciliation Statement for November 2019 with the bank statement of
December 2019, the following discrepancies were found:
• Entries in the bank statement for December 2019 not appearing in the Cash
Journals for December:
■ Deposit R19 500
■ Cheque no. 2631, R2 080
■ Cheque no. 2645, in favour of Mermaid Advertisers for advertisements,
was correctly made out for R2 680
■ Unpaid cheque, R2 800 (This cheque came from G Gamede in payment
of his account of R2 950 and deposited on 15 December 2019. The
cheque was dishonoured due to insufficient funds.)
■ Deposit, R17 250 (This amount represents a fixed deposit at KZN Bank,
which has expired, plus a year’s interest at 15% per annum. The amount
was deposited directly in Singh Traders’ current bank account.)
■ A stop order in favour of Durbs Auto, as an instalment on a vehicle,
R1 500. The vehicle was bought on credit.
■ A cheque cashed by Vijay Singh, the owner, appears in the bank
statement, R500.
■ Other items in the bank statement:
– Cash handling fee R60
– Tax levy R32
– Service fees R218
– Interest on overdraft R250
• Entries in the Cash Journals that do not appear on the bank statement:
■ Cheque no. 2758 R1 540 (dated 24 November 2019)
■ Cheque no. 2759 R2 810 (dated 30 November 2019)
■ Deposit R13 500

Informal assessment 3.3 (challenge)
Required
Analyse the following transactions of Thames Stores under the column
headings as below. Show the procedure (if any) to be followed for each
transaction to reconcile the cash journals with the bank statement that was
received from the bank on 31 March 2019.
Example
1. An amount of R50 for bank charges appears only on the bank
statement.
2. A cheque for R200 appears in the Cash Payments Journal, but not on
the bank statement.
3. A deposit of R900 made on the last day of the previous month and
recorded in the previous month’s Bank Reconciliation Statement,
appears on the bank statement of the current month.
No. Details of entry in the journal General Ledger Bank Bank Reconciliation No entry
account Statement
Name of Name of account in the Amount Account Account Debit Credit
journal General Journal/ Ledger Debit Credit
1. CPJ Bank charges 50 50
2. 200
3. 900
Transactions
1. The bank statement shows a deposit of R1 000 for rent. The tenant,
K Donald, deposited this amount directly into the bank account.
2. Information from the Salaries Journal:
Name of employee Gross salary Net salary Cheque no.

A Mlongo R6 000 R4 000 223
B Diamini R9 000 R5 500 224
C Ndlovu R5 000 R3 500 225
Notes
• Show the payment of the salaries.
• Only cheque no. 225 was not presented for payment.
3. A Mlaba’s cheque received in payment of his account, R600, was

dishonoured by the bank due to insufficient funds.
4. A cheque for R500, issued as a donation to the local soccer club, is stale.
Cancel the cheque.

5. A debit order for insurance, R400, appears on the bank statement, but
not in the relevant journal.
6. Cheque no. 243 for R1 150, issued to ES Wholesale for goods purchased,
was correctly shown on the bank statement, but appears in the Cash
Journal as R151. Correct the error.
7. Received a cheque from debtor A Nel for R420 in payment of his
account. The cheque is dated 15 April 2019.
8. A cheque for R1 760 was deposited into our account on 25 March 2019.
Upon investigation it was discovered that the cheque was intended for
Thames Services. The bank will correct the error.
Bank reconciliations transactions summary

This is a summary of all the bank reconciliation transactions you have
dealt with so far. Use this as a reference point when you do the next
few activities.
Items appearing in the Why? What should you do?

1. debit column of the bank
statement but not in the CPJ
Interest on overdraft The bank calculates these These are entered in the
Interest on loan amounts and debits our CPJ.
Bank charges account automatically. We
only become aware of these
amounts when we receive
the bank statement.
Debit orders These are direct authorised
Stop orders payments debited to our
banking account.
Dishonoured cheques These are cheques that were
not honoured by the bank
because the debtor had no
money in their account. The
bank therefore debits our
account.

Items appearing in the Why? What should you do?
credit column of the
2.
Bank Statement but not
in the CRJ
Interest on current account The bank calculates these These are entered in the
Interest on fixed deposit amounts and credits our CRJ.
account automatically. We
only become aware of the
amounts when we receive
the bank statement.
Direct deposit from a tenant Deposits are made into our
for Rent income banking account and the
Direct deposit from a debtor bank credits these to our
banking account.
Late deposits Deposits that were made the No entry because this
end of the previous month, deposit would have
after the previous bank appeared in the previous
statement was closed off. month’s CRJ and BRS.
Items appearing in the CPJ Why? What should you do?

3. but not in the debit column
of the Bank statement.
Outstanding cheques These cheques were issued Enter outstanding cheques
(including salary cheques) but were not yet presented in the debit column of the
for payment at the bank. BRS.
Items appearing in the CRJ Why? What should you do?

4. but not in the credit column
of the Bank statement.
Outstanding deposits Deposits that were made the Enter outstanding deposits
end of the current month in the credit column of the
after the bank statement was BRS.
closed off.

5. Additional items Why? What should you do
Errors made by the business A mistake was made and Make the correction in the
where the correct amount where the wrong amount journal:
will appear on the Bank was entered in the CPJ. If too little entered in CPJ
statement. enter difference in CPJ.
If too much entered in CPJ
enter difference in CRJ.
Cancelled cheques and Cheques issued by the Cancel a cheque issued in
stale cheques (older than six business have become lost, the CRJ.
months) stolen or have expired. If a new cheque must be
issued in its place, an entry
must be made in the CPJ
and then entered into the
BRS until it is presented for
payment.
Post-dated cheques issued These cheques are issued Enter these cheques in the
and dated for a date in the BRS.
future. These cheques are
not legal tender yet.
Post-dated cheques received These cheques are received NO ENTRY
and are dated for a date in
the future. These cheques
cannot be deposited.

Chapter 4
Reconciliations – Creditors
reconciliations
• reconcile the statements received from creditors with accounts in the
Creditors Ledger
• prepare the Creditors Reconciliation Statement
• integrate the following concepts into the creditors reconciliation
process:
■ outstanding invoices or credit notes
■ outstanding payments
■ discounts not recorded
■ corrections and omissions
Key concepts
• Creditors Reconciliation Statement • mirror image • creditors statement
• Creditors Ledger • Creditors List • invoice • debit note • credit note • cheque • receipts
• interest on overdue account • discount allowed • discount received
They called this morning

and said the statement
will be e-mailed
later today.
Andrea, did you receive the

statement from Minor Tees yet?
I want to reconcile it to their
account in the Creditors Ledger.
R ec o nciliati o n s – C redit o r s rec o nciliati o n s • c h a p t e r 4 101

1. Creditors reconciliations
At the end of each month, the business will receive a statement of
account from its creditors. 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 and other transactions reflected on it
are correct.
1.1 Control over creditors

It is important that the business maintains good control over their
creditors at all times. In doing so the business can ensure that:
• The creditors clerk does his job efficiently in order to prevent errors
from occurring.
• The procurement policy is being adhered, in that purchases are
authorised.
• The correct amount of items that were ordered from creditors are
received and are in a good condition.
• Creditors are paid on time so that the business qualifies for the
necessary discounts.
• Full use is made of the credit terms (60–90 days) in order to maintain
good cash flow.
• There is division of duties among employees so that one person can
check another person’s work.
• The balance in the Creditors Control account is reconciled to the total
Creditors List to ensure that records are accurately updated.
• The statement received from individual creditors is reconciled with
their accounts in the Creditors Ledger.
• Internal audits to are conducted in order to minimise the possibility of
fraud or error.
1.2 The Creditors Control account and Creditors List

Before we can discuss the creditors reconciliation process, we need to
revise some concepts and formats you learnt in Grade 10.
Creditors are suppliers of goods and services on credit to the business.
A creditor is a liability because they are owed money by the business.
When a purchase is made from a creditor, the liability is credited to show
that the business owes the creditor more and when a payment is made
the liability is debited. Let’s first look at the Creditors Control account.
102 c h a p t e r 4 • R ec o nciliati o n s – C redit o r s rec o nciliati o n s

1.2.1 Creditors Control account format
General Ledger of Mango Clothing Store

Dr – Creditors Control + B11 Cr
2015 2015
Jan 31 Bank and discount received 4 CPJ 54 000 00 Jan 01 Balance (opening) b/d 30 000 00
Total returns 5 CAJ 3 100 00 31 Total purchases 1 CJ 62 000 00
Bank (refund, cancelled cheque
Journal debits 6 GJ 80 00 or R/D cheque) 2 CRJ 250 00
Balance (closing) c/d 35 230 00 Journal credits 3 GJ 160 00
92 410 00 92 410 00
2015 Opening balance (closing
Feb 01 balance of previous month) b/d 35 230 00
The Creditors Control account increases on the CREDIT side and

decreases on the DEBIT side. It is the sum of all the individual
transactions between the business and its creditors. This account serves
as a “control measure” to ensure proper administration of the individual
creditor’s transactions.
1.2.2 Individual creditor’s account format in the Creditors Ledger
Creditors Ledger of Mango Clothing Store

Mbasa’s Manufacturers M001
Date Payee Fol. Debit – Credit + Balance
2015
Jan 01 Balance (opening balance) b/d 8 000 00
03 Interest charged 3 GJ 90 00 8 090 00
05 Cheque no. 224 4 CPJ 8 190 00 (100 00)
Receipt no. 105
08 (refund for overpayment) 2 CRJ 100 00 – –
09 Invoice no. 93 1 CJ 15 300 00 15 300 00
28 Cheque no. 239 4 CPJ 7 450 00 7 850 00
Discount received 4 CPJ 200 00 7 650 00
31 Debit note no. 23 5 CAJ 620 00 7 030 00
Closing balance of
The Creditors Ledger increases on the CREDIT side and decreases on the individual
the DEBIT side. It reflects the individual creditor’s transactions with the creditor’s account
business. Each creditor has a separate account in the Creditors Ledger.

1.2.3 Explanation of entries in the Ledger accounts
No. Explanation of entry Journal Source document
1 Bought items on credit from a creditor Creditors Journal Invoice
2 A cheque previously issued to a creditor was either Cash Receipts Receipt
dishonoured or needs to be cancelled. The creditor Journal
could have also refunded the business because of
an overpayment.
3 The creditor charged the business interest on an General Journal Voucher
overdue/arrear account.
4 Payments made to creditors in part-payment or Cash Payments Cheque counterfoil
in settlement of our accounts as well as discounts Journal
received for early payment
5 The business returned items to the creditor that Creditors Debit note
were previously bought on credit. Allowances Journal
6 Correction of error or transfers between accounts General Journal Voucher
1.3 The Creditors List

The Creditors List is a summary of all individual creditors’ balances in
the Creditors Ledger. The total of the Creditors List must be equal to the
closing balance in the Creditors Control account.
Closing balance in
the Creditors Ledger
Creditors List of Mango Clothing Store on 31 January 2015 (see p. 103)
Ambrose Wholesalers 8 200 00
Mbasa’s Manufacturers 7 030 00
Harry Hatters 7 300 00
This total must equal
Mvuyo’s Suits 12 700 00 the closing balance in
Balance in Creditors Control account 35 230 00 the Creditors Control
account (see p. 103)
A comparison between the Creditors List and the Creditors Control

account will reveal any bookkeeping errors made during the current
month. If the balance of the Creditors List does not equal the balance
in the Creditors Control account, an error occurred and the error must be
systematically tracked and corrected.

2. R
econciling creditors’ statements received to
Creditors Ledger accounts
2.1 Defining creditors and debtors
In any supplier–customer relationship, one party is the creditor and the
other is the debtor. The following illustration explains this:
Example
Transaction 1
On 1 October 2019, Mango Clothing Store bought stock from Mbasa’s
Manufacturers on credit for R10 000.
Mango Clothing Store Mbasa’s Manufacturers
Transaction 2
On 24 October, Mango Clothing Store paid Mbasa’s Manufacturers R7 500
in part payment of their account.
• From Mango’s point of view, Mbasa is their creditor because they
bought on credit from her and owe her money.
• From Mbasa’s point of view, Mango is her debtor because she sold to
Mango on credit and therefore they owe her money.
The same mirror image concept we dealt with when we did bank Mirror image
reconciliations applies here. The transactions which take place between Mirror image in Accounting means
the businesses are therefor written in converse order. that if an account is debited in our
books with a particular amount, the
same amount will be credited in the
creditor’s books.

Example
Mbasa’s Manufacturers (L)
Date Details / document no. Fol. Debit (–) Credit (+)
2019
Oct 01 Invoice no. 2110 10 000 00
24 Cheque 7 500 00
27 Debit note 500 00
Debtors Ledger of Mbasa’s Manufacturers

Mango Clothing Store (A)
Date Details / document no. Fol. Debit (+) Credit (–)
2019
Oct 01 Invoice no. 2110 10 000 00
24 Receipt 7 500 00
Credit note 500 00
2.2 using the external documents to reconcile accounts

in the Creditors Ledger
Because the creditor, in this case Mbasa, makes identical entries in her
books to what Mango Clothing Store makes in their books, the creditor’s
statement can be used as the external document of control. The
statement is compared to the individual account in the Creditors Ledger
and mistakes or omissions are revealed.
2.3 Possible mistakes and omissions

RISK!
• The creditor may have closed off the statement on a different date to
the date that the business closed off their Creditors Ledger account.
• Invoices, credit notes, cheques, discounts, interest could have been
omitted or entered incorrectly in the Creditors Ledger account.
• Invoices, receipts, debit notes, discounts, interest could have been
omitted or entered incorrectly on the statement.
• Posting errors could have occurred.
• Addition or subtraction errors could have occurred.
• Fraud could have been committed.
106 c h a p t e r 4 • R E C o N C I L I AT I o N s – C R E D I T o R s R E C o N C I L I AT I o N s

These are the reasons why we reconcile the accounts in the books of
the business and the statements received from its various creditors.
Reconciliation is part of the internal control measures that a business
puts in place in order to ensure proper administration of debtors’ and
creditors’ accounts.
2.4 C
omparing the Creditors Ledger to the Statement
of Account
Now that we understand the importance of reconciliations, let’s compare
the Creditors Ledger account in Mango Clothing Store’s books to the
Statement of Account received from Mbasa’s Manufacturers.
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 Statement received from creditor

Invoices are compared with 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 Statement received from

creditor
Debit notes are compared with Credit notes
Cheques are compared with Receipts
Discount received is compared with Discount allowed
Step 3
Tick the amounts that appear in both the Creditors Ledger and the
statement and circle the amounts that don’t.
Step 4
If there are any errors or omissions in the Creditors Ledger, the business
must correct it in the Creditors Ledger.
Step 5
If there are any errors or omissions on the statement, the business must
notify the creditor so that they can correct it on the next statement. In
the mean time, a Creditors Reconciliation Statement is draw up by the
business to reconcile these errors and omissions.

Example
The business, Mango Clothing Store, keeps strict record of its
transactions with its creditors in the Creditors Ledger. Once a month
their creditor, Mbasa’s Manufacturers, will send the business a statement
which is a reflection of their administration of our account with them.
A graphic explanation will look like this:
Extract from the Creditors Ledger account of Mbasa’s Manufacturers
in the books of Mango Clothing Store
Date Details / document no. Fol. Debit (–) Credit (+) Balance
2020
Jan 01 Balance b/d 1 780 00
16 Invoice no. 186 3 640 00 5 420 00
20 Debit note no. 87 ✓520 00 4 900 00
26 Cheque no. 142 ✓1 780 00 3 120 00
Cheque no. 142 (discount) 120 00 3 000 00
28 Invoice no. 203 4 790 00 7 790 00
30 Cheque no. 158 1 730 00 6 060 00
Extract from the Debtors Ledger account of Mango Clothing Store

in the books of Mbasa’s Manufacturers
12 Merrylane Drive, Ottery, 7800
Tel: 021 967 5000
www.mbasam.co.za
Debtor: Mango Clothing Store Account no.: MCS005
12 Mystery Drive Date: 27 January 2020
Cape Town
8000
Date Fol. Debit (+) Credit (–)
2020
Jan 01 Opening balance 1780 00
16 Invoice no. 186 3 460 00
18 Invoice no. 188 2 120 00
20 Credit note no. 381 ✓520 00
26 Receipt no. 54 ✓1 780 00
27 Closing balance 5 060 00

Example continued
• Invoice no. 186 appears correctly in the Creditors Ledger. Mbasa will
correct the error.
• Mbasa forgot to deduct the discount allowed by them on the 26th.
They will reflect this amount on next month’s statement.
• It was discovered that invoice no. 188 on 18 January was actually
issued to Manga Suppliers. Mbasa Manufacturers were notified and
will correct the error.
Results of comparison
• The invoice on the 16th was incorrectly recorded on the statement.
• Invoice no. 188 dated 18 January was not issued to the Mango and
must be corrected by Mbasa during February.
• The discount received from Mbasa on the 26th was not recorded on
the statement.
• The transactions on 28 and 30 January in Creditors Ledger do
not appear on the statement and will only be reflected in the next
statement received from Mbasa.
• The closing balances differ because books or Mango Clothing and
Mbasa are closed off on different dates. Mango Clothing closed off
its books on the 31st, while Mbasa closed her books off on the 27th.
Preparing the Creditors Reconciliation Statement

Once the comparisons are done and the amounts are ticked and circled,
a Creditors Reconciliation Statement is drawn up. This statement
reconciles errors and missing amounts and is checked against next
month’s statement received from the creditor. In this statement, the
business will show all entries and corrections that the creditor still has
to show in their books.
Standard format
Mango Clothing Store
Creditors Reconciliation Statement for Mbasa’s Manufacturers on 31 January 2020
Debit Credit
Debit balance as per creditor’s statement on 27 January 5 060 00
Invoice no. 186 incorrectly recorded on statement (3 640 – 3 460) 180 00
Incorrect debit on statement 2 120 00
Discount not recorded on statement 120 00
Invoice no. 203 not on statement 4 790 00
Payment not on statement 1 730 00 This amount must
Credit balance as per Creditors Ledger account 6 060 00 equal the closing
balance in the Creditors
10 030 00 10 030 00 Ledger account.

Tip Example continued
On the Creditors Reconciliation Alternative format
Statement, you must debit/add
Mango Clothing Store
all invoices and incorrect credits
Creditors Reconciliation Statement for Mbasa’s Manufacturers on 31 January 2020
and credit/subtract all payments,
discounts returns and incorrect Debit balance as per creditor’s statement on 27 January 5 060 00
debits. Invoice no. 186 incorrectly recorded on statement (3 640 – 3 460) 180 00
Incorrect debit on statement (2 120 00)
Discount not on statement (120 00)
Payment not on statement (1 730 00)
Balance as per Creditors Ledger account 6 060 00
Activity 4.1
Required
Use the alternative format to calculate the correct balance as per the Creditors
Ledger account in the books of Campwell Cleaners.
Campwell Cleaners
Creditors Reconciliation Statement on 30 June 2016
Balance as per creditors statement on 28 June 2016 19 512 00
Incorrect debit on statement 3 120 00
Payment not on statement 14 657 00
Returns not on statement 3 100 00
Balance as per Creditors Ledger account ?

Activity 4.2
Required
Reconcile the account of Tru Blu Perfumes in the Creditors Ledger of Fragrance
Boutique with the statement received from Tru Blu Perfumes.
Draw up the Creditors Reconciliation Statement (standard format) and start
the reconciliation process by using the closing balance of R4 065 as on the
statement received from Tru Blue Perfumes.
Creditors Ledger of Fragrance Boutique

Tru Blu Perfumes
Date Details / document no. Fol. Debit Credit Balance
2014
May 01 Balance b/d 4 700 00
02 Invoice no. 137 1 580 00
03 Cheque no. 378 3 000 00
03 Discount received 300 00
10 Invoice no. 152 2 850 00
15 Debit note no. 112 400 00
27 Cheque no. 399 500 00
Discount received 25 00
31 Debit note no. 125 210 00 4 695 00
Statement received from Tru Blu Perfumes
Tru Blu Perfumes

3 Knockout Drive, Bronx, 2100
Tel: 065 3100
Debtor: Fragrance Boutique Account no.: 4390
Shop 92 Date: 1–24 May 2014
Cavendish Square
7300
Date Fol. Debit Credit
2014
May 01 Opening balance 4 700 00
02 Invoice no. 137 1 580 00
03 Receipt no. 92 3 000 00
Invoice no. 152 2 850 00
15 Credit note no. 96 400 00
23 Receipt no. 103 1 665 00

Tru Blu acknowledged the following errors and omissions:
• They omitted to enter the discount of R300 onto their statement.
• Receipt no. 103 on 23 May was issued to Fragrance Ltd but was an
incorrectly credited to the statement of Fragrance Boutique.
3. Errors and omissions in the Creditors Ledger

Errors and omissions don’t only occur on the statement received the
business can also make mistakes and leave out entries in the Creditors
Ledger. If the error or omission occurred in the books of the business,
the Creditors Ledger, then it must be corrected in the Creditors Ledger.
4. Summary of errors and omissions and

their corrections
No. Error or omission How to correct them
1. Invoices recorded in the Creditors Ledger but Enter in the debit (+) column of the Creditors
not on the creditor’s statement Reconciliation Statement (CRS)
2. Payments, discounts and debit notes Enter in the credit (–) column of the Creditors
recorded in the Creditors Ledger but not on the Reconciliation Statement (CRS)
creditor’s statement
3. Invoices recorded on the creditor’s statement Enter in the credit (+) column of the Creditors
but not in the Creditors Ledger Ledger
4. Receipts, discounts and credit notes Enter in the debit (–) column of the Creditors
recorded on the creditor’s statement but not in Ledger
the Creditors Ledger
5. An incorrect debit on the creditor’s statement Enter in the credit column of the Creditors
Reconciliation Statement
6. An incorrect credit on the creditor’s statement Enter in the debit column of the Creditors
Reconciliation Statement
7. If an error is made and too much is entered in The correction must be made in the opposite
the debit or credit column column
8. If an error is made and too little is entered in The correction must be made in the same
the debit or credit column column

Activity 4.3
Required
Complete the following table by entering the correct amount in the correct
column to indicate how the error will be reconciled when doing the creditors
reconciliation process.
Creditors
Creditors Ledger Reconciliation
No. Error / omission
Statement
Debit Credit Debit Credit
1. A cheque for R6 250 appears in the Creditors
Ledger but not on the creditor’s statement.
2. Interest of R160 charged by the creditor
appeared on the statement but not in the
Creditors Ledger.
3. An invoice was incorrectly entered in the
Creditors Ledger as R2 300 instead of R3 200.
4. The creditor’s statement showed a credit note
that was entered as R550 instead of R350.
5. An invoice for R1 500 was entered as a receipt
on the creditor’s statement.
6. A credit note for R240 appears on the creditor’s
statement but not in the Creditors Ledger.
7. The Creditors Ledger showed a discount
received of R610 but the creditor did not allow
the discount because the payment was late.
Example
Murray’s Cycle Store trades in new and second-hand bicycles as well
as cycling accessories. A statement received on 28 June 2016 from one
of their creditors, Raleigh Bicycles, reflects that Murray owes them
R34 260. According to Murray, the amount outstanding is only R22 090.
Required
1. Make additional entries in the account of Raleigh Bicycles in the
Creditors Ledger of Murray’s Cycle Store.
2. Prepare a Creditors Reconciliation Statement on 30 June 2016.
Information
The following statement was received from Raleigh Bicycles on
26 June 2016:

Example continued
ACCOUNT STATEMENT 25 June 2016

Raleigh Bicycles
Pedal Road
Epping
7410
Debtor: Murray‘s Cycle Store
10 Paddington Road
N’dabeni
3120
June 01 Opening balance 13 650 00
08 Invoice no. 187 ✓22 000 00
12 Receipt no. 96 25 600 00
20 Invoice no. 193 ✓8 700 00
24 Invoice no. 205 16 100 00
Creditors Ledger of Murray’s Cycle Store

Raleigh Bicycles C5
Date Fol. Debit Credit Credit
June 01 Opening balance 13 650 00
08 Invoice no. 187 ✓22 000 00 35 650 00
12 Cheque no. 362 26 500 00 9 150 00
Discount received 820 00 8 330 00
20 Invoice no. 193 ✓8 700 00 17 030 00
23 Debit note no. 82 790 00 16 240 00
24 Invoice no. 205 16 900 00 33 140 00
27 Invoice no. 212 5 600 00 38 740 00
29 Cheque no. 376 16 000 00 22 740 00

Example continued
• The cheque issued on 12 June was incorrectly recorded by Raleigh
Bicycles as R25 600. The correct amount on the cheque is R26 500.
• Raleigh Bicycles did not enter the discount allowed of R820 on
12 June.
• Murray appealed for an allowance of R790 on a bicycle that had
scratches on it. Raleigh Bicycles only agreed on an allowance
of R590.
• The invoice on 24 June was incorrectly recorded by Murray’s as
R16 900. The correct amount on the invoice is R16 100.
• The statement was posted on 25 May 2016.
Solution
Creditors Ledger of Murray’s Cycle Store
Raleigh Bicycles C5
Date Fol. Debit Credit Credit
June 31 Closing balance 22 090 00
Debit note – adjustment
(790 – 590) 200 00
Invoice – correction of error
(16 900 – 16 100) 800 00 21 490 00
Murray’s Cycle Store

Creditors Reconciliation Statement Raleigh Bicycles on 30 June 2016
Debit Credit
Debit balance according to creditor’s statement on 25 June 34 260 00
Incorrect amount on receipt on statement (26 500 – 25 600) 900 00
Discount not on statement 820 00
Invoice not on statement 5 600 00
Cheque not on statement 16 000 00
Discount not on statement 650 00
Credit balance as per Creditors Ledger account 21 490 00
39 860 00 39 860 00
Comments
• Since the cheque of R26 500 was incorrectly recorded by Raleigh
Bicycles, the correction must be made in the CRS. Too little was
entered in the credit column of the statement, so an additional
R900 must be entered in the credit column.

Example continued
• If a discount is not on the statement, the amount of the discount
must be entered in the credit column of the CRS.
• Murray entered R790 in the debit column of the Creditor Ledger
instead of R590, so the difference of R200 must be entered in the
credit column to subtract it.
• Murray entered R16 900 in the credit column of the Creditors
Ledger instead of R16 100, so the difference must be entered in the
debit column.
Activity 4.4
The Happy Hiker buys and sells camping equipment. A statement received on
26 May 2016 from one of their creditors, Camping Gear Wholesalers, reflects
that The Happy Hiker owes them R15 750. According to The Happy Hiker, the
amount outstanding is only R9 290.
Required
1. Show the additional entries in the account of Camping Gear Wholesalers in
the Creditors Ledger of The Happy Hiker.
2. Prepare a Creditors Reconciliation Statement on 31 May 2016.
Information
The following statement was received from Camping Gear Wholesalers on
26 May 2016:
CAMPING GEAR WHOLESALERS

ACCOUNT STATEMENT 25 May 2016
To: The Happy Hiker
211 Main Road
Malmesbury
04 Invoice no. 334 5 400 00
09 Receipt no. 221 2 500 00
14 Invoice no. 339 3 980 00
24 Invoice no. 365 5 440 00

Creditors Ledger of The Happy Hiker
Camping Gear Wholesalers C1
Date Fol. Debit Credit Balance
2016
04 Invoice no. 334 4 500 00 8 330 00
09 Cheque no. 1556 2 500 00 5 830 00
14 Invoice no. 339 3 980 00 9 560 00
16 Debit note no. 75 500 00 9 060 00
24 Invoice no. 365 5 440 00 14 500 00
30 Invoice no. 369 1 390 00 15 890 00
31 Cheque no. 1567 6 000 00 9 890 00
• Invoice no. 334 issued on 4 May was incorrectly recorded by
The Happy Hiker. The correct amount is R5 400.
• Camping Gear Wholesalers did not enter the discount allowed for
R250 on 9 May 2016.
• The Happy Hiker appealed for an allowance of R500 on goods that was not
according to sample. Camping Gear Wholesalers, however, only agreed on
an allowance of R400.
• The statement was posted on 25 May 2016.
Activity 4.5
Required
1. The owner of CASS Traders is concerned that the bookkeeper could be
defrauding the business through the creditors system.
List TWO of the internal control procedures that must be applied in a
business in order to maintain control over creditors.
2. Compare the statement received from the creditor, Vries Stores, with the
account in the Creditors Ledger of CASS Traders.
a. Show the Creditors Ledger account of Vries Stores and show the
changes / corrections by starting with the incorrect balance of R12 120.
b. Complete a Creditors Reconciliation Statement. Use R13 886 as you
starting balance.

Information
Statement of Account received from the creditor
VRIES STORES
STATEMENT OF ACCOUNT
P O Box 6348 Tel: (021) 931 4470
Parow Date of statement: 27-06-2018
7501
CASS TRADERS Account no. CASS 237
Date Details Fol. Debit Credit
2018
Jun 01 Balance 12 500 00
04 Invoice no. 123 3 450 00
17 Receipt no. 152 11 250 00
Interest on overdue account 156 00
20 Invoice no. 166 6 400 00
27 Invoice no. 191 3 200 00
Balance 13 886 00
Creditors Ledger of CASS Traders

Vries Stores V001
Date Details Fol. Debit Credit Balance
2018
Jun 01 Account rendered 12 500 00
04 Invoice no. 123 CJ 4 350 00 16 850 00
07 Debit note no. 86 CAJ 200 00 16 650 00
12 Cheque no. 201 CPJ 11 250 00 5 400 00
Cheque no. 201 (discount received) CPJ 1 250 00 4 150 00
14 Invoice no. 134 CJ 2 000 00 6 150 00
20 Invoice no. 166 CJ 6 400 00 12 550 00
23 Invoice no. 133 CJ 370 00 12 920 00
25 Invoice no. 189 CJ 600 00 13 520 00
27 Invoice no. 191 CJ 4 000 00 17 520 00
28 Cheque no. 288 CPJ 5 000 00 12 520 00
30 Debit note no. 91 CPJ 400 00 12 120 00

On comparing the statement from Vries Stores with the Creditors Ledger
account of CASS Traders, the following errors and omissions were discovered:
• Invoice no. 123 issued on 4 June for R3 450 was recorded incorrectly as
R4 350 in the Creditors Ledger.
• Cheque no. 201 was paid a few days late, which meant no discount was
granted by Vries Stores.
• Vries Stores then charged the CASS Traders R156 interest on its
overdue account.
• Invoice no. 134 was left off the statement received from Vries Stores.
• Invoice no. 189 was for stationery purchased from Max Stores and this
was entered into Creditors Ledger account of Vries Stores by mistake.
• Credit note no. 133 for R370 received from Vries Stores was incorrectly
recorded as invoice no. 133 in the Creditors Ledger.
• A 20% discount was approved on the purchases for R4 000 made
on 27 June. This was not taken into account by CASS Traders
(invoice no. 191).
• Vries Stores closed off their statement on 27 June.
A statement received from a creditor, MacMillan Suppliers, on 29 September

2018, reflects that Jo-Jo Traders owes them R16 091. According to Jo-Jo Traders,
the amount outstanding is only R10 991.
Required
Complete the following table to show the differences that were discovered
when comparing the account in the Creditors Ledger to the statement received
from MacMillan Suppliers.
Write only the amounts in the appropriate column and a plus (+) or minus (–)
to indicate an increase or decrease in the balance. Calculate the correct balance
at the end.
Creditors Ledger of Jo-Jo Traders Creditors Reconciliation Statement of

MacMillan Suppliers
Balance 10 991 16 091
1.
2.
3.
4.
5.
6.
Balance

Information
On investigation the following was found:
1. A cheque was issued to Macmillan Suppliers during August 2018 for R3 000
and Jo-Jo Traders assumed that R300 discount will be allowed and entered
it in the books. MacMillan Suppliers, however, did not allow the discount
as they only received the cheque much later. Jo-Jo Traders should correct
the error.
2. An invoice received from MacMillan Suppliers for R6 280 was correctly
entered in the books of Jo-Jo Traders. However, in the statement received
from MacMillan Suppliers it was recorded incorrectly as R6 820.
3. A cheque for R5 000 issued by Jo-Jo Traders has not yet been recorded in
the statement received from MacMillan Suppliers.
4. Returns recorded as R890 in the Creditors Ledger of Jo-Jo Trader were
recorded as R960 in the statement received from MacMillan Suppliers.
Jo-Jo Traders had miscalculated the cost of goods returned.
5. An invoice for R2 000 received from MacMillan Suppliers was incorrectly
recorded as a debit note in the Creditors Ledger of Jo-Jo Traders.
6. Goods were purchased for R4 670 on 30 September 2018, after the
statement received from MacMillan Suppliers was closed off.

Chapter 5
Fixed assets
• understand the concept of the fixed asset register
• record the acquisition of fixed assets
• calculate and record depreciation using one of the following methods:
■ on cost price (straight-line method)
■ diminishing balance method
• understand how to record fixed assets that are fully depreciated
• record the disposal of fixed assets (cash, credit, trade in):
■ at the beginning of the financial year
■ during the financial year
■ at the end of the financial year
• relate to issues of internal control measures over fixed assets
• relate to ethical issues regarding fixed assets
• integrate issues pertaining to the responsible use of fixed assets.
Key concepts
• fixed assets • fixed asset register • depreciation • accumulated depreciation • carrying value
• straight-line method / cost-price method • diminishing balance method • asset disposal
• loss on sale of asset • profit on sale of asset • trade in • fixed asset manager • capital budget
“Nomsa, I am a little
concerned that the
delivery van may be “I check it at the end of every
misused by staff. When week, Mrs Patel. I haven’t
last did you check the found anything suspicious
van’s log book?” yet. What has aroused your
suspicion?”
F ixed a s s et s • c h a p t e r 5 121

1. Definition of fixed assets
Of the most valuable assets that a business can own are its fixed or
tangible assets. These assets have a reasonably long lifespan and are not
purchased with the intention of reselling them, but rather to produce an
income for the business. The three accounts for fixed assets owned by a
business are:
• Land and Buildings, also known as Property and Plant
• Vehicles
• Equipment (this will include furniture and fittings).
Business owners must keep an accurate record of the purchase price and
carrying value of their fixed assets. These records are kept in the fixed
asset register. They have to keep these records:
• for financial statement purposes
• to assist in the tax return process
• as record if the business wants to sell the asset at a later stage
• for proper internal control purposes.
2. Fixed asset management and the role of the

fixed asset manager
Fixed Asset Management is the accounting process of keeping track of
all the business’s fixed assets. The management process is essential for the
following reasons:
• For financial accounting purposes: Financial accounting includes
the correct book entries for the purchase and sale of the fixed asset,
recording depreciation and carrying the asset at the correct value in
the books of the business.
• To determine the maintenance cycle of an asset: Fixed asset stock
needs to be maintained regularly and on time in order to extend
the lifespan and to ensure the efficient use of the asset in order to
generate maximum profits.
• To prevent the theft and misuse of the asset: Fixed assets need to be
looked after and must be used responsibly by employees. The business
must ensure that the fixed asset is being used for the purpose for
which it was bought and the employees who mismanage or abuse the
fixed asset must be disciplined. Management must formulate policies
to ensure that fixed assets are used responsibly by all of its employees
and must put control measures in place to ensure its responsible use.
122 c h a p t e r 5 • F ixed a s s et s

The following job advertisement was placed by a recruitment agency
looking for a Fixed Asset Accountant for a large organisation.
THE DAILY NEWS

www.dailynews.com THE WORLD’S FAVOURITE NEWSPAPER • since 1879 •
CLASSIFIED
Job Information • Assist with the auditing

Title: Fixed Assets – procedure of fixed
Accountant assets.
Location: Johannesburg, • Maintain fixed asset
South Africa information accurately
Job Type: Permanent throughout the financial
Compensation: R360 000 accounting process.
per annum • Draw up maintenance
Reference Code: WQG reports and ensure that
fixed assets are kept in
Fixed Assets Accountant – working order.
primary duties: • Monitor the use of
• Maintain the fixed asset fixed assets and draw up
register by processing policies to prevent theft
asset purchases, disposals and abuse by employees.
and transfers.
• Analyse and explain Qualifications
significant changes in • 1–3 years’ experience
annual depreciation • Bachelor’s Degree
entries. • Public Accounting
• Prepare a Capital experience a plus
Budget, forecasting the • PeopleSoft knowledge
expenditure on fixed a plus
assets for the coming year.
• Prepare various reports To apply please e-mail
for financial reports pack your CV to:
for the manager to review. astuterecruit@vibesa.co.za
FIXED AssETs • chapter 5 123

i A Capital Budget is 3. Acquisition of fixed assets
a forecast of the future Fixed assets can be purchased in one of three ways:
expenditure on fixed assets. Planning
is an important aspect of any
• for cash
business. It sets out the expected • on credit
expenditure for purchasing, extending • as a trade-in (vehicles and equipment only).
and improving fixed asset over the Fixed assets such as land and buildings (property) and vehicles are, in
budgeted period under review. most cases, purchased on credit.
When property is purchased on credit, the business will secure a loan,
referred to as a mortgage bond. This type of loan is usually repaid within
mortgage bond 20 years and interest is accrued to this loan on a monthly basis for as
a loan taken out at a commercial long as the bond is being repaid. The title deed, which proves ownership
bank in order to buy property; repaid of the property, will be kept at the bank for as long as the bond is being
over a long period, usually 20 years; repaid and will only be handed over to the client after the final payment
classified as a non-current liability
has been made.
Vehicles purchased on credit are, in most cases, subject to vehicle
finance. All banks have a vehicle finance division and the car dealer will
arrange this finance on the client’s behalf. The bank will pay the car
dealer the full purchase price and the client will repay the bank, including
interest. The loan on a vehicle is repaid within five years.
4. The fixed asset register

This register contains all the relevant information pertaining to every
tangible (fixed) asset owned by the business. The acquisition of each asset
will be entered into this register. Each asset will be recorded on a separate
page in the fixed asset register and updates will take place regularly.
4.1 Recording the purchase of an asset in the fixed

GAAP flash
asset register
Historical cost principle: All
assets are recorded in the books at It is important that the relevant information relating to the purchase of
their original cost price. the asset is recorded in the asset register. This information will help with
the business’s internal control of fixed assets.
cost price
Extract from the fixed asset register
the price at which the asset was
purchased FIXED ASSET REGISTER OF ...
Make: Cost price:
Model: Depreciation:
Date of purchase: Date of sale:
Purchased from:
124 chapter 5 • FIXED AssETs

4.2 updating the fixed asset register with depreciation GAAP flash
and accumulated depreciation Matching principle: Expenses
In Grade 10 you learnt that depreciation is the cost of using the are matched to the period in which
they were incurred.
asset. Because the asset adds economic benefit to the business by
way of generating a profit, there is a cost involved in using the asset.
Depreciation is calculated at the end of the financial year and is written
off against the asset as an expense. This expense is not physically paid but
is an imputed expense. imputed expense
There are two methods of depreciating assets: to attribute a part of the cost of
• Straight-line method: where a certain percentage of the cost price is an asset as an expense for that
depreciated every year particular year
• Diminishing balance method: where a certain percentage of the
carrying value is depreciated every year.
carrying value
the cost price less all depreciation
Example accumulated to date
Recording and depreciating an asset using straight-line method
Donovan owns a successful roofing business, D & M Roofing Cost price – Accumulated
Contractors. On 1 March 2013, he purchased a second vehicle, a Nissan depreciation = Carrying value
4×4 2.7 diesel van, on credit from Africa Cars for R167 500. He put
down a deposit of R15 000 and the remainder was financed by West
Bank vehicle finance. The vehicle is depreciated at 10% per annum on
the cost price. The financial year ends on 28 February.
Solution
Fixed Asset Register of D & M Roofing Contractors Folio 2
Make: Nissan 4×4 2.7 Diesel (CA 857 325)
Model: 2012
Date of purchase: 1 March 2013
Purchased from: Africa Cars
Cost: R167 500
Depreciation: 10% p.a. on the cost price
Date Depreciation Accumulated Carrying value
depreciation
28 February 2014 R16 750 R16 750 R150 750
28 February 2015 R16 750 R33 500 R134 000
29 February 2016 R16 750 R50 250 R117 250

Example continued
Calculation
R167 500 × ___ 10  = R16 750
 100
The vehicle will be depreciated at R16 750 every year because the
calculation is based on the cost price.
The bookkeeper will continue to write off depreciation on assets and
record it in the fixed asset register until the asset has reached a carrying
value of R1. This concept is discussed on page 130.
Activity 5.1
Redraw the following fixed asset register in your Exercise Books and complete
the Depreciation, Accumulated depreciation and Carrying value columns.
Fixed Asset Register of Kuyper Traders Folio 4

Make: Toyota truck (MB 234 GP)
Model: 2015
Date of purchase: 1 January 2016
Purchased from: JS Motors
Cost: R800 000
depreciation
30 June 2016
30 June 2017
30 June 2018
30 June 2019

Example
Recording and depreciating an asset using diminishing balance
method
D & M Roofing Contractors also owns tools and machines, known
as equipment. Among these tools are five Makita drills, which cost
R14 000 when they were bought on 1 March 2013. The equipment is
depreciated at 20% on the diminishing balance (carrying value).
Solution
Fixed Asset Register of D & M Roofing Contractors Folio 3
Make: Makita drills (5)
Purchased from: Hyper Tools
Cost: R14 000
Depreciation: 20% p.a. on the diminishing balance
depreciation
28 February 2014 R2 800 R2 800 R11 200
28 February 2015 R2 240 R5 040 R8 960
29 February 2016 R1 792 R6 832 R7 168
Calculations
R14 000 × ___ 20  = R2 800
 100
R11 200 × ___ 20  = R2 240
 100
R8 960 × ___20  = R1 792
 100
Every year the amount of depreciation becomes less and less because
the calculation for depreciation is based on the carrying value.
The bookkeeper will continue to write off depreciation on assets and
record it in the asset register until the asset has reached a carrying
value of R1. This concept is discussed on page 130.

Activity 5.2
Redraw the following fixed asset register in your Exercise Books and complete
the Depreciation, Accumulated Depreciation and Carrying Value columns.
Fixed asset Register of Kuyper Traders Folio 10

Make: Pentium 4 Mecer computer serial no. 55329
Purchased from: Computron
Cost: R5 000
depreciation
29 February 2016
28 February 2017
28 February 2018
28 February 2019
5. Recording asset acquisition and depreciation

in the books of the business
In Grade 10, you found out that an asset could be bought for one of
many reasons. The business might be expanding and would need to buy
more assets, or technology might have improved, forcing the business
to buy a more advanced model to improve business operations. When
an asset needs to be purchased, the asset manager needs to properly
authorise the person or department wanting to buy the asset. The
acquisition of assets needs to be budgeted for in the Capital Budget and
need to be followed the correct procedures. At least three quotes must be
obtained and the best quote accepted.
When an asset is purchased, the asset account is debited. The method
of purchase, cash (Bank) or credit (Creditors Control) is credited.
Activity 5.3 (Baseline assessment)
The financial year of Wayne Brothers ends on 28 February each year.
Required
Complete the following accounts in the books of Wayne Brothers for the
financial year 1 March 2015 to 29 February 2016.
• Vehicles (4 lines)
• Accumulated depreciation on vehicles (4 lines)
• Depreciation (2 lines)

Information
The following balances appeared among others in the General Ledger of Wayne
Brothers on 1 March 2015, the first day of the financial year:
Vehicles R72 500
Accumulated depreciation on vehicles R12 125
Transaction:
On 31 December 2015, a vehicle with a cost price of R55 000 was purchased
from Range Motors on credit.
Adjustment:
On 29 February 2016, depreciation must be calculated at 15% p.a. on the cost
price of vehicles.
Activity 5.4 (Baseline assessment)
The financial year of West Discount Store ends on 30 June each year.
Required
Complete the following accounts in the books of West Discount Store for the
financial year 1 July 2015 to 30 June 2016.
• Equipment (4 lines)
• Accumulated depreciation on equipment (4 lines)
Information
The following balances appeared among others in the General Ledger of West
Discount Store on 1 July 2015, the first day of the financial year:
Equipment R41 400
Accumulated depreciation on equipment R14 900
Transaction:
On 1 January 2016, equipment to the value of R10 000 was purchased for cash
from Multi Suppliers.
Adjustment:
On 30 June 2016, depreciation must be calculated at 20% p.a. on the
diminishing balance (carrying value) of equipment.

Activity 5.5
Pallo is the owner of a successful business called Pallo’s Computer Shop. He

has been trading for some time now and has acquired some fixed assets since
starting his business on 1 March 2015. The financial year for the business is
1 March to 28 February.
Required
1. Calculate the balance in the Accumulated Depreciation on Vehicles account
as on 1 March 2017.
2. Calculate the amounts to be written off as depreciation on vehicles and
equipment for the current financial year, 1 March 2017 to 28 February 2018.
3. What amount will be closed off to the Profit and Loss account for
depreciation on the last day of the financial year, 28 February 2018?
4. What will the balance in the Accumulated Depreciation on Vehicles and
Accumulated Depreciation on Equipment accounts be on 28 February 2018?
5. What type of account is Depreciation?
6. What type of account is Accumulated Depreciation on Vehicles?
Information
The following information concerning fixed assets is relevant to the business:
• Pallo’s Computer Shop owns three vehicles:
■ Toyota Tazz, purchased on 1 March 2015 for R130 000 cash
■ Opel Corsa, purchased on 31 December 2015 for R150 000 on credit
■ Nissan One Tonner, purchased on 1 July 2016 for R165 000 cash
• All equipment owned up to 1 March 2017 was bought when the business
opened on 1 March 2015 for R82 800. Accumulated depreciation on
equipment as on 1 March 2017, the first day of the financial year, amounted
to R29 800.
• On 1 September 2017, equipment to the value of R7 500 was purchased on
credit from Southern Equipment.
• Depreciation is written off as follows:
■ Vehicles at 15% p.a. at cost price
■ Equipment at 20% p.a. according to the diminishing balance method
• No new vehicles were purchased during the current financial year.
5.1 Recording fully depreciated fixed assets

It sometimes happens that a business keeps an asset even though it
has exceeded its expected lifespan and has been fully depreciated. The
business will continue to use this asset for various reasons.
According to the historical cost concept, an asset has to be recorded
in the books at its original cost price for as long as the business owns the
asset. So the asset has to retain a carrying value in the books.

Example
John Baker owns a machine that is still productive and economically
viable for him to operate. He bought the machine for R160 000 ten
years ago and has depreciated it at 10% p.a. on cost price. This means
that he wrote off R16 000 per annum for 9 years:
R16 000 × 9 = R144 000
He has written off R144 000 on this asset and the carrying value
in the books is currently R16 000. During the tenth year he will only
be allowed to write off R15 999 on the machine as it has to retain a
carrying value of R1 in the books.
So the cost price of the machine will remain at R160 000 in the
Equipment account and the accumulated depreciation on the machine
will be R159 999 for as long as they own it.
This machine will no longer be depreciated at the end of the
financial year.
Activity 5.6
Required
Use the balances from the Pre-adjustment Trial Balance as well as the
transactions and adjustments provided to complete the Note to Fixed
Assets in the notes to the financial statements of Monkey Valley Resort.
Information
The balances below appeared, among others, in the General Ledger of
Monkey Valley Resort on 1 July 2016, the first day of the financial year.
Land and buildings R840 000
Vehicles R314 800
Equipment R75 000
The following transactions affecting fixed assets took place during the current
financial year:
2016
01 Jul An additional delivery van was purchased on credit from Motorcade
Ltd, R60 000.
2017
30 Apr Purchased a cash register for R4 800 and paid by cheque.
01 May The business had the guest rooms renovated at a cost of R120 000.
A building contractor was hired and the renovations were completed
on 15 June 2017.

Adjustment:
30 June At the end of the financial year depreciation must be calculated as
follows:
• Vehicles – 20% p.a. on diminished balance
• Equipment – 15% p.a. on the cost price
6. Disposal of fixed assets

When a fixed asset is no longer needed by the business or needs to be
replaced, the business will dispose of (sell) it. 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 and replace them with new ones.
asset disposal This process is called asset disposal.
to sell or dispose of an asset owned
The book of first entry for the sale of a fixed asset is the General
by the business Journal. All transactions, except for the cash amount received for the sale
of the asset, are recorded in the General Journal. The cash received for
the sale of the asset is recorded in the Cash Receipts Journal.
When a fixed asset is sold, it must be removed from the records of the
selling price business. The price the business receives for that asset is the selling price.
the price at which the asset is sold There are a few steps that the bookkeeper needs to follow when entering
the asset disposal transaction into the books of the business.
6.1 Asset disposal on the first day of the financial year

Example
Donovan, the owner of D & M Roofing Contractors, decided that the
Nissan 4×4 2.7 Diesel van needed to be sold because it could not meet
the needs of the business. He decided to sell it to his brother, K Murray,
on 1 March 2017 at an agreed price of R90 000 cash.
Information
The following information appeared, among others, in the asset register
of D & M Roofing Contractors on 1 March 2017, the first day of the
financial year:

Example continued
Fixed Asset Register of D&M Roofing Contractors Folio 2

Make: Nissan 4 × 4 2.7 Diesel (CA 857 325)
Model: 2012
Date of purchase: 1 March 2013 Date sold: 1 March 2017
Purchased from: Africa Cars
Cost: R167 500
depreciation
28 February 2014 R16 750 R16 750 R150 750
28 February 2015 R16 750 R33 500 R134 000
29 February 2016 R16 750 R50 250 R117 250
28 February 2017 R16 750 R67 000 R100 500
The following balances appeared, among others, in the General Ledger

of D & M Roofing Contractors on 1 March 2017:
Vehicles R325 500
Solution
Follow the four steps as indicated in the T-accounts that follow.
Step 1
Remove the cost price of the vehicle being sold from the Vehicles account.
Debit: Asset Disposal
Credit: Vehicles
Vehicles
Balance b/d 325 500 Asset disposal 167 500
Asset Disposal
Vehicles b/d 167 500
Step 2
Remove the accumulated depreciation to date of sale of the vehicle being
sold from the Accumulated Depreciation on Vehicles account.
Debit: Accumulated Depreciation on Vehicles
Credit: Asset Disposal

Example continued
Accumulated Depreciation of Vehicles

Asset disposal 67 000 Balance b/d 98 600
Asset Disposal
Accumulated depreciation 67 000
on vehicles
Step 3
Enter the selling price into the Asset Disposal account.
Debit: If cash: Bank
If on credit: Debtors Control
If trade in: Creditors Control
Asset Disposal
Bank 90 000
Step 4
Calculate the profit or loss on the sale of the asset.
If profit is made: Debit: Asset Disposal
Credit: Profit on Sale of Asset
If loss is made: Debit: Loss on Sale of Asset
How to calculate whether the asset was sold for a profit or loss:
Cost price – Accumulated depreciation = Carrying value
R167 500 – R67 000 = R100 500
Selling price – Carrying value = Profit or (loss) on sale of asset
R90 000 – R100 500 = –R10 500
In this example the business made a loss on the sale of the vehicle.
Loss on Sale of Asset

Asset disposal 10 500

Example continued
Asset Disposal
Loss on sale of asset 10 500
Recording the asset disposal on the first day of the financial year in • If selling price is less
the books of the business than carrying value,
a loss is made.
General Journal of D & M Roofing Contractors for March 2017 GJ1 • If selling price is more
Day Details Fol. Debit Credit than carrying value,
a profit is made.
Step 1 01 Asset disposal 167 500 00
Vehicles 167 500 00 1
(Transfer the cost price to asset disposal)

Step 2 Accumulated depreciation on vehicles 67 000 00
Asset disposal 67 000 00 2
(Transfer the accumulated depreciation)

Step 4 Loss on sale of asset 10 500 00
(Loss made on sale of the asset)
Cash Receipts Journal of D & M Roofing Contractors for March 2017 CRJ1
Doc. Day Details Fol. Analysis of Bank Sundry accounts
R988 01 K Murray 90 000 00 90 000 00 90 000 00 Asset disposal
General Ledger of D & M Roofing Contractors

Balance Sheet accounts
Dr Vehicles Cr
2017 2017
Mar 01 Balance b/d 325 500 00 Mar 01 Asset disposal 1 GJ 167 500 00
325 500 00 325 500 00
2017
Apr 01 Balance b/d 158 000 00

Example continued
Dr Accumulated Depreciation on Vehicles Cr

2017 2017
Mar 01 Asset disposal 2 GJ 67 000 00 Mar 01 Balance b/d 98 600 00
98 600 00 98 600 00
2017
Apr 01 Balance b/d 31 600 00
Nominal accounts
Dr Asset Disposal Cr
2017 2017 Accumulated depreciation
Mar 01 Vehicles 1 GJ 167 500 00 Mar 01 on vehicles 2 GJ 67 000 00
Bank 3 CRJ 90 000 00
Loss on sale of asset 4 GJ 10 500 00
167 500 00 167 500 00

2017
Mar 01 Asset disposal 4 GJ 10 500 00
Effect on the accounting equation

No. Assets Owner’s equity Liabilities
Effect Reason Effect Reason Effect Reason
– 100 500 * Carrying value of – 10 500 Loss on sale of asset
vehicles decreases – expense
+ 90 000 Bank increases
* Carrying value is calculated as follows:

R167 500 – R67 000 = R100 500

Activity 5.7
Required
Use the information to complete the following in the books of Thandi’s Boutique.
1. The General Journal and the Cash Receipts Journal for March 2017
2. The following General Ledger accounts:
• Asset disposal (4 lines)
• Profit or loss on sale of asset (2 lines)
3. Analyse the transaction on the accounting equation.
Information
On 1 March 2017, the first day of the financial year, Thandi sold the Toyota Hilux
van to Buddy Motors for R75 000 cash.
Extract from the fixed asset register of Thandi’s Boutique
Fixed Asset Register of Thandi’s Boutique Folio 12

Make: Delivery vehicle: Toyota Hilux
Model: 2012
Date of purchase: 1 September 2013 Date sold: 1 March 2017
Purchased from: Best Vehicles
Cost: R160 000
depreciation
28 February 2014 R16 000 R16 000 R144 000
28 February 2015 R28 800 R44 800 R115 200
29 February 2016 R23 040 R67 840 R92 160
28 February 2017 R18 432 R86 272 R73 728
The following balances appeared, among others, in the General Ledger of

Thandi’s Boutique on 1 March 2017:
Vehicles R280 000

Activity 5.8
Boots Traders is a business owned by F du Preez. The financial year of the

business ends on 30 June each year.
Required
1. show how the transaction below would appear in the General Journal for
July 2018 (exclude narrations).
2. Complete the following accounts in the General Ledger:
• Profit or loss on sale of asset (2 lines).
3. Analyse the transaction on the accounting equation.
Information
The following balances appeared, amongst others, in the books of Boots Traders
on 30 June 2018, the last day of the previous financial year:
Vehicles at cost R325 000
Transaction:
i When an asset is sold on credit,
the Debtors Control account is on 1 July 2018, the first day of the financial year, Boots Traders sold one of their
debited and the entry is made in the vehicles with a cost price of R72 800 and accumulated depreciation of R60 800
General Journal. to J Johns, an employee, for R14 000 on credit.
Activity 5.9
Tito Dlamini owns a minibus taxi service called Dlamini’s Taxis.
Required
1. Use the information provided to complete the General Journal for January
2018 (exclude narrations).
• Asset disposal (4 lines).
3. Analyse the transactions on the accounting equation.
Information
on 1 January 2018, the first day of the financial year, the following balances,
among others, appeared in the General Ledger of Dlamini’s Taxis:
Vehicles R450 000
Depreciation is calculated at a rate of 20% per year on the cost price.

Transactions: Hint
on 1 January 2018, T Dlamini gave his son one of the minibus taxis that If the owner takes anything from
belonged to the business as a present. This minibus taxi was bought on his business for own use, such as
1 July 2015 for R150 000 and was disposed of at the carrying value. a present for his son, it is known
as drawings.
Activity 5.10
on 28 February 2018 this information appeared in the fixed asset register of

LK Brick and Block Traders. Their financial year ends in February.
Required
Complete the following accounts in the books of LK Brick and Block Traders:
1. The General Journal for March 2018 (exclude narrations)
2. The Creditors Journal for March 2018
3. The following General Ledger accounts:
• Creditors control (2 lines)
Information
Information extracted from the fixed asset register on 1 March 2018, the first
day of the financial year:
Vehicle Date of Cost price Accumulated Carrying value

registration purchase depreciation
CA 9876
CA 4567
01-03-2015
01-03-2016
R150 000
R220 000
R73 200
R79 200
R76 800
R140 800
i The trade-in is entered in
the General Journal, and the
Creditors Control account is debited
Depreciation is calculated at 20% per annum on the diminished balance method. with the selling price of the asset
being sold. The cost price of the
Transactions: new asset is credited to the Creditors
Control account and is entered in the
on 1 March 2018, CA 9876 was traded in at Thorp Motors for R75 000 on a new
Creditors Journal.
vehicle costing R210 000.
6.2 Asset disposal on the last day of the financial year

Example
Sibusizwe owns a furniture manufacturing business called Woodcraft.
He is in the process of expanding his business and has decided to sell
an old bench saw on 28 February 2017, so that he can buy a bigger one.
The bench saw was sold for R2 500 on credit to Peter’s Wood Works.
The following information appeared, among others, in the fixed
asset register of Woodcraft on 1 March 2016, the first day of the current
financial year. Try to complete the information for 28 February 2017.

Example continued
Fixed Asset Register of Woodcraft Folio 7

Description: Makita bench saw
Date of purchase: 1 March 2014 Date sold: 28 February 2017
Purchased from: Tools for Africa
Cost: R3 000
depreciation
28 February 2015 R300 R300 R2 700
29 February 2016 R270 R570 R2 430
28 February 2017 ? ? ?

of Woodcraft on 1 March 2016:
Equipment R13 750
Solution
Follow the steps as indicated in the T-accounts that follow.
Step 1
Remove the cost price of the equipment being sold from the Equipment
account.
Credit: Equipment
Step 2
Calculate depreciation on the asset being sold from the beginning of
the year to date of sale:
R2 430 × 10% = R243
Step 3
Add the amount as calculated in Step 2 to the accumulated depreciation
on the asset being sold as on the first day of the financial year. Remove
this amount from the Accumulated Depreciation on Equipment account.
R570 + 243 = R813
Debit: Accumulated Depreciation on Equipment

Example continued
Step 4
Debit: Debtors Control
Step 5
Step 6
Calculate depreciation at the end of the financial year.
This step does not form part of the asset disposal process, but at the
end of the year the business must calculate depreciation on all the assets
that it had for the year.
Because the equipment was only sold at the end of the year, the
business will include it in its calculation for depreciation. This is done
after all transactions with regards to asset disposal have been calculated
and recorded.
Cost price as on the first day of the financial year: R13 750
Accumulated depreciation as on the first day of
the financial year: R3 160
R13 750 – 3 160 = R10 590 × 10% = R1 059
Therefore depreciation for the current year amounts to R1 059.
Vehicles Accumulated Depreciation on Equipment

Balance b/d 13 750 Asset 3 000 Asset 813 Balance b/d 3 160
disposal 1 disposal Depreciation 6 1 059
2 + 3
Asset Disposal
Equipment 1 3 000 Accumulated depreciation 813
on equipment 2 + 3
Profit on sale of asset 5 313 Debtors control 4 2 500
Profit on Sale of Asset

Depreciation
Accumulated depreciation 6 1 059
on equipment

Example
Recording asset disposal at the end of the year in the books of
the business
General Journal of Woodcraft for February 2017 GJ2
Day Details Fol. Debit Credit Debtors control
Debit Credit
28 Asset disposal 3 000 00
Equipment 3 000 00 1
(Transfer of cost price to asset disposal)

Accumulated depreciation on equipment 813 00
Asset disposal 813 00 2 + 3
(Transfer of accumulated depreciation to asset disposal)

Peter’s Wood Works 2 500 00 2 500 00
(Asset sold on credit)

Profit on sale of asset 313 00 5
(Profit on asset disposal)

Depreciation 1 059 00
Accumulated depreciation on equipment 1 059 00 6
(Depreciation on equipment calculated at 10% p.a. on the

diminishing balance)
General Ledger of Woodcraft

Dr Equipment Cr
2016 2017
Mar 01 Balance b/d 13 750 00 Feb 28 Asset disposal GJ 3 000 00
13 750 00 13 750 00
2017
Mar 01 Balance b/d 10 750 00
Dr Accumulated Depreciation on Equipment Cr

2017 2016
Feb 28 Asset disposal GJ 813 00 Mar 01 Balance b/d 3 160 00
2017
Balance c/d 3 406 00 Feb 28 Depreciation GJ 1 059 00
4 219 00 4 219 00
2017

Example continued
Nominal accounts
2017 2017 Accumulated depreciation on
Feb 28 Equipment GJ 3 000 00 Feb 28 equipment GJ 813 00
Profit on sale of asset GJ 313 00 Debtors control GJ 2 500 00
3 313 00 3 313 00
Dr Depreciation Cr
2017 Accumulated depreciation on 2017
Feb 28 equipment GJ 1 059 00 Feb 28 Profit and loss GJ 1 059 00
Dr Profit on Sale of Asset Cr

2017 2017
Feb 28 Profit and loss GJ 313 00 Feb 28 Asset disposal GJ 313 00

– 2 187 * Carrying value + 313 Profit on sale of
of equipment asset – income
decreases
+ 2 500 Debtors increase

R3 000 – R813 = R2 187
Activity 5.11
The owner of Mandy’s Tuckshop decided that the old cash register had to be
sold in order for her to buy a new one. The old cash register was sold to Cash
Converters for R300 cash on 30 September 2018, the last day of the financial
year. Mandy bought a new cash register from Makro on the same day for R3 200
cash. She depreciates her equipment at 20% on the cost price.

Information
The following information with regards to the cash register appeared in the
fixed asset register of Mandy’s Tuckshop.
Fixed Asset Register of Mandy’s Tuckshop Folio 3

Description: Canon cash register
Date of purchase: 1 April 2014 Date sold: 30 September 2018
Purchased from: Makro Dealers
Cost: R1 500
Depreciation: 20% p.a. on cost price
depreciation
30 September 2014 150 150 1 350
30 September 2015 300 450 1 050
30 September 2016 300 750 750
30 September 2017 300 1 050 450
30 September 2018 ? ? ?
The following opening balances appeared, among others, in the General Ledger
of Mandy’s Tuckshop on 1 October 2017, the first day of the financial year:
Equipment R8 620
Required
1. Complete the General Journal for Mandy’s Tuckshop for September 2018
(exclude narrations).
2. Complete the CPJ for September 2018.
3. Post the General Journal to the following accounts in the General Ledger:
• Depreciation (2 lines).
4. Show how the transaction affects the accounting equation.
Activity 5.12
Zomba Transport Company owns two vehicles:

• Nissan 2.4 Hardbody, bought on 1 August 2015 for R189 000
• KIA 2.8 Diesel, bought on 1 March 2016 for R252 000.
Required
1. Copy the incomplete asset register that follows, into your Exercise Book and
complete it for the KIA 2.8 Diesel, from the date of purchase to the date of sale.

2. Complete the transactions in the following financial records:
a. General Journal (exclude narrations)
b. Cash Receipts Journal
Fixed Asset Register of Zomba Transport Company Folio 2

Make: …………………
Model: 2016
Date of purchase: ………………… Date sold: …………………
Purchased from: Craig’s Motors
Cost: …………………
Depreciation: 20% p.a. on the carrying value
depreciation
Information
The following balances appeared, among others, in the General Ledger of
Zomba Transport Company on 1 March 2017, the first day of the financial year:
Vehicles R441 000
Transaction:
On 28 February 2018, the end of the financial year, the management of Zomba
Transport Company decided that it was no longer feasible for them to keep the
KIA 2.8 Diesel and decided to sell it to Salie’s Builders for R160 000 cash.
Activity 5.13
Model Stores traded in their only vehicle for a new one. Use the information
provided relating to the vehicle sold to complete the following on 30 June 2019:
1. General Journal (exclude narrations)
2. Creditors Journal
3. The following accounts in the General Ledger:
• Creditors control (2 lines)

Information
Cost price as on 1 July 2014 R25 000
Accumulated depreciation on 1 July 2018 R20 000
Trade-in price R11 500
Rate of annual depreciation 20% p.a. on cost price
The old vehicle was traded in at Dyson Motors for a new vehicle costing
R84 000 on 30 June 2019.
6.3 A
sset disposal during the financial year using the
cost price method for depreciation
Example
Jamie owns a bakery called Quality Bake in Main Street, Robertson.
His bakery has two delivery vehicles which were purchased when he
opened his business on 1 March 2014. Jamie has decided to sell one
of the delivery vehicles so that he could replace it at a later stage. The
vehicle was sold on 1 September 2017 to A Moola for R40 000 cash.
The financial year ends on 28 February.
The following information appeared, among others, in the asset
register of Quality Bake on 1 March 2017, the first day of the current
financial year:
Fixed Asset Register of Quality Bake Folio 2

Make: Isuzu Delivery Truck
Date of purchase: 1 March 2014 Date sold: 1 September 2017
Purchased from: Robertson’s Motors (second-hand)
Cost: R60 000
depreciation
28 February 2015 R6 000 R6 000 R54 000
29 February 2016 R6 000 R12 000 R48 000
28 February 2017 R6 000 R18 000 R42 000
01 September 2017 ? ? ?

Example continued
of Quality Bank on 1 March 2017:
Vehicles R200 000
Solution
Follow the steps as shown in the T-accounts that follow.
Step 1
Remove the cost price of the vehicle being sold from the Vehicles
account.
Credit: Vehicles
Step 2
Calculate the depreciation on the asset being sold from the beginning
of the year to date of sale:
R60 000 × 10% × __ 6  = R3 000
 12
Debit: Depreciation
Credit: Accumulated Depreciation on Vehicles
Step 3
on the vehicles being sold as on the first day of the financial year.
Remove this amount from the Accumulated Depreciation on Vehicles
account.
R18 000 + 3 000 = R21 000
Debit: Accumulated Depreciation on Vehicles
Step 4
Debit: Bank
Step 5

Example continued
Step 6
Calculate the depreciation on all remaining assets as at the end of the
financial year. Because the vehicle was sold during the year, it would
have been in the business’s possession from the beginning of the year
to the date of sale. The amount of depreciation for that portion of the
year would have already been calculated in Step 2. The calculation of
depreciation on remaining assets is:
R200 000 – 60 000 = R140 000 × 10% = R14 000
The following T-accounts show how the steps will affect the
General Ledger:

Balance b/d 200 000 Asset 60 000 Asset 21 000 Balance b/d 49 500
disposal 1 disposal 1
Asset Disposal
Vehicles 1 60 000 Accumulated depreciation 21 000
on vehicles 3
Profit on sale of asset 5 1 000 Bank 4 40 000
Profit on Sale of Asset

Asset disposal 5 1 000
Depreciation
on vehicles 2
on vehicles 6

Example continued
Recording asset disposal during the year in the books of the business
General Journal of Quality Bake for September 2017 GJ7

Day Details Fol Debit Credit
01 Asset disposal 60 000 00
Vehicles 60 000 00 1
(Transfer of cost price to asset disposal)

Accumulated depreciation on vehicles 3 000 00 2
(Depreciation taken into account at 10% p.a. on the

cost price)
Accumulated depreciation on vehicles 21 000 00
(Transfer of accumulated depreciation to asset disposal)

Profit on sale of asset 1 000 00 5
(Profit made on sale of asset)

Accumulated depreciation on vehicles 14 000 00 6
(Depreciation taken into account at 10% p.a. on the

cost price)
General Ledger of Quality Bake

Dr Vehicles Cr
2017 2017
Mar 01 Balance b/d 200 000 00 Sep 01 Asset disposal GJ 60 000 00
30 Balance c/d 140 000 00
200 000 00 200 000 00
2017
Oct 01 Balance b/d 140 000 00

Example continued

2017 Asset disposal 2017
Sep 01 (18 000 + 3 000) GJ 21 000 00 Mar 01 Balance b/d 49 500 00
2017
30 Balance c/d 31 500 00 Sep 01 Depreciation GJ 3 000 00
52 500 00 52 500 00
2017
2018 2018
Feb 28 Balance c/d 45 000 00 Feb 28 Depreciation GJ 14 000 00
45 000 00 45 000 00
Nominal accounts
2017 2017 Accumulated depreciation on
Sep 01 Vehicles GJ 60 000 00 Sep 01 vehicles GJ 21 000 00
Profit on sale of asset 1 000 00 Bank CRJ 40 000 00
61 000 00 61 000 00
Dr Depreciation Cr
Sep 01 vehicles GJ 3 000 00 Feb 28 Profit and loss GJ 17 000 00
2018 Accumulated depreciation on
Feb 28 vehicles GJ 14 000 00
17 000 00 17 000 00
Dr Profit on Sale of Asset Cr

2018 2017
Feb 28 Profit and loss GJ 1 000 00 Sep 01 Asset disposal GJ 1 000 00

Example continued
– 39 000 * Carrying value of + 1 000 Profit on sale of
vehicle decreases asset – income
+ 40 000 Cash increases

R60 000 – R21 000 = R39 000
Activity 5.14
Fast Printers, owned by Y Emeran, wants to upgrade their printing machines

and decided to sell off one of the machines.
Required
Use the information below, extracted from the books of Fast Printers for the
year 1 February 2017 to 31 January 2018, to complete the following:
1. The General Journal, showing the transaction for the disposal of the asset.
2. The General Ledger accounts for:
3. Show the effect of the asset disposal transaction on the accounting
equation.
Information
Depreciation on equipment is calculated at 10% p.a. on the cost price.
Balances on 1 February 2017:

Equipment R114 000
Transactions:
2017
31 Oct Sold one of the printing machines on credit to LithoPrint for
R6 300. This machine cost R14 000 and the accumulated depreciation
as on 1 February 2017 amounted to R6 400.
2018
31 Jan Depreciation on all remaining equipment must be written off.

Activity 5.15
The accounting period of Phillip Traders ends annually on 31 December. The

business writes off depreciation on equipment at 15% p.a. on cost price.
Required
Record the transactions given below in the following ledger accounts:
Information
on 1 January 2018 the following balances appeared, among others, in the
General Ledger:
Equipment R17 100
Transactions:
2018
01 Mar Purchased new equipment on credit from Maldro Wholesalers for
R14 500. Quick Fitters installed the new equipment for R3 500 and
this amount was paid by cheque.
When equipment is installed, 30 Apr sold some old equipment for cash to Bunga supply store for R945.
the cost of the installation The cost price of the equipment was R2 100 and the accumulated
increases the cost price of the depreciation on 1 January 2018 was R960.
equipment purchased.
6.4 Asset disposal during the financial year using the
diminishing balance method for depreciation
Example
The calculation for accumulated depreciation to date of sale
and depreciation at the end of the financial year will differ if the
diminishing balance method is used. Let’s use the same information as
in the example on page 146 but assume that the diminishing balance
method (carrying value) is used:

Example continued
Fixed Asset Register of Quality Bake Folio 2

Make: Isuzu Delivery Truck
Date of purchase: 1 March 2014 Date sold: 1 September 2017
Purchased from: Robertson’s Motors (Second-hand)
Cost: R60 000
depreciation
28 February 2015 R6 000 R6 000 R54 000
29 February 2016 R5 400 R11 400 R48 600
28 February 2017 R4 860 R16 260 R43 740
1 September 2017 ? ? ?
All the other steps remain the same except for the following steps:
Step 2
Calculate the depreciation on the asset being sold from the beginning
of the year to date of sale:
R60 000 – 16 260 = R43 740 × ___ 10  × __
 100 6  = R2 187
 12
Debit: Depreciation
Credit: Accumulated Depreciation on Vehicles
Step 3
on the vehicles being sold as on the first day of the financial year.
Remove this amount from the Accumulated Depreciation on Vehicles
account.
R16 260 + 2 187 = R18 447
Step 6
Calculate the depreciation on all remaining assets as at the end of the
financial year.
Cost price: R200 000 – 60 000 = R140 000
Accumulated depreciation: R49 500 + 2 187 – 18 447 = R33 240
Carrying value: R140 000 – 33 240 = R106 760 × ___ 10  × __
 100 12 = R10 676
 12

Example
The T-accounts below show how the steps will affect the
General Ledger:
Balance b/d 200 000 Asset disposal 1 60 000 Asset disposal 3 18 447 Balance b/d 49 500
Balance c/d 140 000 Balance c/d 33 240 Depreciation 2 2 187
200 000 200 000 51 687 51 687
Balance b/d 140 000 Balance b/d 33 240
Balance c/d 43 916 Depreciation 6 10 676
43 916 43 916
Asset Disposal
Vehicles 1 60 000 Accumulated depreciation 18 447
on vehicles 3
Bank 4 40 000
Loss on sale of asset 5 1 553
Loss on Sale of Asset

Depreciation
on vehicles 2
on vehicles 6
Activity 5.16
The following information was extracted from the books of Xoseka Investments
for the year 1 March 2017 to 28 February 2018.
Required
Use the information to complete the following:
1. The General Journal, showing the transaction for the disposal of the asset
2. The General Ledger accounts for:

3. Show the effect of the asset disposal transaction on the accounting equation.
Information
Depreciation on vehicles is calculated at 20% p.a. on the diminished balance.
Balances on 1 March 2017:

Vehicles R240 000
Transactions:
2017
31 Aug Traded in an old vehicle for R30 000 for a new one costing
R110 000 on credit from Reliable Motors. The cost price of the old
vehicle was R80 000 and the accumulated depreciation on 1 March
2017 was R48 000.
2018
28 Feb Depreciation on all remaining vehicles must be written off.
Activity 5.17
Trendy Outfitters moved to bigger premises in the city centre. They removed all
their old shop equipment from the old building and decided to replace them
with new ones.
Required
Refer to the information that follows. Show the following accounts in the
General Ledger:
Information
The following balances appeared, amongst others, in the books of Trendy
Outfitters on 1 January 2017, the first day of the financial year:
Equipment R160 000,00
Accumulated depreciation on equipment R86 125,50
Depreciation on equipment is calculated at 15% p.a. on the diminishing

balance method.

Transactions:
2017
31 Aug The old shop equipment was sold to Economy Building Supplies for
R15 000 cash. The shop equipment was originally bought on credit
on 31 March 2015 when a deposit of R8 000 was paid. The remainder
was paid in 12 instalments of R1 000 per month.
01 Nov Renovations were completed and the new shop equipment was
installed. A deposit of 10% of the cost price was paid to Mondi
Cabinet Makers and the rest is paid in six instalments of R6 000
per month.
31 Dec Depreciation on all remaining equipment must be written off.
Activity 5.18
Study the information in the ledger accounts of West Bargain Store given below
and answer the questions that follow.
Use the following information to calculate the following:

1. The carrying value of the vehicle sold on 1 September 2017.
2. The selling price of the vehicle sold on 1 September 2017.
(Hint: Reconstruct the Asset Disposal account.)
3. The total amount of depreciation on vehicles to be transferred to the Profit
and Loss account on 28 February 2018.
4. The carrying value of the remaining vehicles on 28 February 2018.
Show all your calculations.
Information
General Ledger of West Bargain Store
Dr Vehicles Cr
2016 2017
Mar 01 Bank CPJ 100 000 00 Feb 28 Balance c/d 160 000 00
Sep 01 Creditors control CJ 60 000 00
160 000 00 160 000 00
2017 2017
Mar 01 Balance b/d 160 000 00 Sep 01 Asset disposal GJ 60 000 00
Sep 2018
01 Bank CPJ 100 000 00 Feb 28 Balance c/d 200 000 00
260 000 00 260 000 00
2018

2017 2017
Sep 01 Asset disposal GJ ? Feb 28 Depreciation GJ 26 000 00
Sep 01 Depreciation GJ ?
2018
Feb 28 Depreciation GJ ?
Nominal account
Dr Loss on Sale of Asset Cr
2017
Sep 01 Asset disposal GJ 1 600 00
• The financial year ends on 28 February 2018.
• The vehicle purchased on 1 September 2016 was sold on 1 September 2017.
• Depreciation is provided for at 20% per annum using the straight-line method.
Activity 5.19 (optimal activity)
Required
As a group you will use the information given to complete the following
accounts in the books of Madladlana Traders.
1. Vehicles (5 lines)
2. Equipment (5 lines)
3. Accumulated depreciation on vehicles (7 lines)
4. Accumulated depreciation on equipment (7 lines)
5. Depreciation (6 lines)
6. Asset disposal (8 lines)
7. Profit on sale of asset (2 lines)
8. Loss on sale of asset (2 lines)
Each group will only complete one set of accounts. Read the information
and follow the instructions below in order to complete the above General
Ledger accounts.
Information
Balances on 1 July 2018:
Vehicles R450 000
Equipment R39 000
Accumulated depreciation on equipment ?

• Depreciation is calculated on vehicles at 15% p.a. on the diminishing
balance and on equipment at 10% p.a. using the straight line method.
• The accounting period of Madladlana Traders ends on 30 June.
Transactions from 1 July 2018 to 30 June 2019:
2018
01 Jul Bought a new computer from Office Suppliers for R3 100 cash.
31 Dec Sold the old computer for R2 000 cash. The computer originally cost
R3 200 and the accumulated depreciation on 1 July 2018 amounted
to R480.
Bought a delivery van from Celio Motors for R163 000 on credit.
2019
30 Apr Sold the old delivery van to an employee, P Katz for R75 000 on
credit. The delivery van was purchased on 1 July 2017 for R100 000.
30 Jun Depreciation on vehicles and equipment must be written off.
Instructions to group
1. Each group will consist of four members.
2. Each member will be numbered and answer the question
according to his or her number.
3. Each member of the group must answer a separate question.
4. The group leader will collate the answers and hand in one answer
sheet to the teacher.
5. The teacher will mark the work.
Questions
Member 1
• Calculate the balance on the Accumulated Depreciation on Equipment
account on 1 July 2018. (Give your answer to this question to Member 2.)
• Calculate the balance in the Equipment account in 30 June 2019.
• Calculate the balance in the Vehicles account on 30 June 2019.
Member 2
• Calculate the depreciation to be written off on the equipment sold on
31 December 2018.
• Calculate the accumulated depreciation to date of sale on the equipment
being sold on 31 December 2018.
• Calculate the balance in the Accumulated Depreciation on Equipment
account on 31 December 2018.

Member 3
• Calculate the depreciation to be written off on the vehicle sold on
30 April 2019.
• Calculate the accumulated depreciation to date of sale on the vehicle being
sold on 30 April 2019.
• Calculate the balance in the Accumulated Depreciation on Vehicles account
on 30 April 2019.
Member 4 (Group leader)

• Collate the information and complete the General Ledger accounts.
• Calculate depreciation on all remaining assets on 30 June 2019.
Dysan Ltd was in the process of renovating their building and decided to
replace some of the old office furniture for more modem ones.
Required
Show the following accounts in the General Ledger:
• Equipment (5 lines) [7]
• Accumulated depreciation on equipment (6 lines) [10]
• Asset disposal (4 lines) [9]
• Profit or loss on sale of asset (2 lines) [3]
• Depreciation (4 lines) [6]
Information
The following balances appeared, among others, in the books of Dysan Ltd
on 1 January 2017, the first day of the financial year:
Equipment R108 690
Depreciation on equipment is calculated at 10% p.a. on the cost price.
Transactions:
2017
01 Jul The old office furniture was sold to Roman Builders for R14 986 cash.
This office furniture was originally bought on credit for
R17 600 on 1 January 2015.
01 Oct Renovations were completed and the new office furniture was
bought on credit from Modfurn for R16 000.
31 Dec Depreciation on all remaining equipment must be written off.

7. Completing the note for fixed assets in the
financial statements
Example
Required
Complete the note to the financial statements for fixed assets, using the
information below.
Information
The following balances appeared in the books of Thandi Fashion Outlet
on 1 September 2017, the first day of the financial year:
Property R240 000
Vehicles R125 000
Equipment R11 400
Transactions:
2017
01 Sep Thandi Fashion Outlet sold their old cash register to Mpho Corner
Shop for R650. The cost price of the cash register was R1 400
and the accumulated depreciation on 31 August 2017 was R780.
A new cash register was bought on credit from Office Supply Store
for R2 300.
01 Mar A new vehicle was bought on credit from Sizwe Motors for
R62 500.
30 Apr Renovations to the property, which cost R60 000, was completed
and a cheque for the amount was handed over to the building
contractor.
2018
31 Aug Depreciation on vehicles amounted to R22 250 and on equipment
to R1 230.

Example continued
Solution
3.
FIXED / tangible assets Land and Vehicles Equipment Total
buildings
Carrying value at beginning of year 240 000 80 000 7 980 327 980
Cost 240 000 125 000 11 400 376 400
Accumulated depreciation – (45 000) (3 420) (48 420)
Movements
Additions 60 000 62 500 2 300 124 800
Disposals at carrying value
(1 400 – 780) – – (620) (620)
Depreciation – (22 250) (1 230) (23 480)
Carrying value at end of year 300 000 120 250 8 430 428 680
Cost 300 000 187 500 12 300 499 800
Activity 5.20
Required
Use the following information to complete the Note for Fixed Assets
(on the following page) in the financial statements of Gamma Stores on
28 February 2018, the last day of the financial year.
Information
Balances, among others, on 1 March 2017:
Vehicles R240 000
Transactions:
2017
01 Mar The owner took over an old vehicle for his own use at carrying value.
This vehicle had originally been purchased for R80 000 and the
accumulated depreciation on 28 February 2017 amounted to
R33 920.
30 Apr Purchased a new vehicle for R120 000 from Modern Cars Ltd.
Paid a deposit of 15%. The balance is to be paid off over a period of
24 months.
2018
28 Feb Depreciation on vehicles amounted to R14 180.

FIXED / tangible assets Land and Vehicles Equipment Total
buildings
Carrying value on 28/02/2017
Cost 180 000 55 000
Accumulated depreciation (18 640)
Movements
Additions 40 000 6 700
Disposals at carrying value
Depreciation (12 760)
Carrying value on 28/02/2018
Cost
Accumulated depreciation
Activity 5.21
Required
Use the information given to complete the note for fixed assets in the
financial statements of Super Sport Store on 30 June 2018, the last day of
the financial year.
Information
Balances on 1 July 2017:
Vehicles R75 000
Equipment R19 000
Accumulated depreciation on Vehicles R15 500
Accumulated depreciation on Equipment R2 800
Transactions from 1 July 2017 to 30 June 2018:

2017
31 Oct Bought new equipment on credit from LTD Traders for R6 200.

2018
01 Jan Bought a delivery van on credit from Cleo’s Cars for R65 000.
28 Feb The extensions to the building was completed and a cheque for
R50 000 was handed over to the building contractor.
30 Jun Sold old office equipment for R3 000. The office equipment
originally cost R5 100 and accumulated depreciation on 01 July 2017
amounted to R1 230.
Depreciation is calculated on vehicles at 20% p.a on carrying value and on

equipment at 15% p.a. on the cost price.
Required
Use the information given to complete the note for fixed assets in the financial
statements of Data Furniture Store on 28 February 2018, the last day of the
financial year.
Information
Balances on 1 March 2017:
Vehicles R100 000
Equipment R78 000
Transactions from 1 March 2017 to 28 February 2018:

2017
01 Apr Renovations were done to the building to the value of R100 000.
A cheque for this amount was handed over to the architect on this day.
01 Dec A new vehicle was purchased for R135 000 on credit from Value Cars.
Bought new equipment for R6 400 cash.
2018
28 Feb Equipment, which cost R4 000 was sold for R3 000. The accumulated
depreciation on the equipment as on 1 March 2017 amounted to R760.
Depreciation on vehicles is calculated at 10% p.a. on the straight-line method

and on equipment at 20% p.a. on the diminished balance.

You are provided with the note to fixed assets in the financial statements of
Tswala Holdings. The financial year for the business is from 1 May to 30 April.
Required
Use this note to reconstruct General Ledger accounts for the financial year
ended 30 April 2019:
Information
Carrying value at beginning of year 240 000

Cost 450 000
Accumulated depreciation (210 000)
Movements
Additions 240 000
Disposals at carrying value (?)
Depreciation (?)
Carrying value at end of year ?
Cost 540 000
Accumulated depreciation (?)
• On 31 January 2019, a vehicle was traded in for R55 000 on a new vehicle.
The accumulated depreciation on the vehicle traded in as at 1 May 2018
was R88 560. No other vehicles were bought or sold.
• Depreciation on vehicles is calculated at 20% p.a. using the diminished
balance method.

Chapter 6
Partnerships – Accounting concepts
and final accounts
By the end of this chapter, you ■ trading stock deficit/surplus
will be able to: ■ consumable stores on hand
• define and explain accounting
■ depreciation
concepts for a partnership:
■ bad debts
■ partnership agreements
■ correction of errors
■ capital accounts
■ accrued income and income
■ current accounts received in advance
■ interest on capital
■ accrued expenses and
■ salaries to partners expenses prepaid
■ bonuses to partners • complete final accounts for:
■ division of profit and losses
■ Trading account
• do the bookkeeping of a
■ Profit and Loss account
partnership, with regards to:
■ Appropriation account
■ documents and journals • reverse year-end adjustments
■ the General Ledger • apply the perpetual stock system
■ the Trial Balance • identify and analyse ethical
• the accounting equation behaviour in business
• do year-end adjustments for: • apply internal control
■ interest capitalised measures.
Key concepts
• Capital account • Current account • interest on capital • salaries • drawings • bonus to
partner • interest capitalised • Trading account • Profit and Loss account • Appropriation
account • trading stock deficit/surplus • consumables on hand • depreciation • bad debts
• accrued income and expenses • income received in advance • prepaid expenses •
partnership agreement
Why do we
make provision
for bad debts?
We are applying
the prudence
principle for GAAP.
Partner s h ip s – A cc o unting c o ncept s and final acc o unt s • c h a p t e r 6 165

1. Introduction
The accounting you have done until now applied to a sole trader only –
that is, a business with only one owner. In this unit we will discuss the
books – accounting records – of a partnership.
The general day-to-day transactions of a partnership are exactly the
same as those of a sole trader. So how do these businesses differ from
each other?
As a sole trader, the net profit generated by the business belongs to
the owner, and therefore it is transferred or carried over (posted) from the
Profit and Loss account to the owner’s Capital account.
A partnership involves more than one owner, so the net profit is
first posted to an Appropriation account, where it is shared or divided
according to the partnership agreement (this is discussed later in this
chapter). The net profit is calculated by closing off all income and
expense accounts to the Trading account and the Profit and Loss account.
This is exactly as it is done for a sole trader, but immediately afterwards it
is transferred to the Appropriation account.
In the financial statements, a note must be added for both the Capital
account and the Current account – these notes replace the notes to the
Owner’s Equity account in the books of a sole trader.
Ledger accounts for

a partnership:
Trading
Ledger accounts for a sole trader: Profit and Loss
Profit and Loss Appropriation
Capital Capital
Owner’s Equity Current
The ledger accounts for a sole trader differ to those of a partnership.
166 c h a p t e r 6 • Partner s h ip s – A cc o unting c o ncept s and final acc o unt s

1.1 Entity forms
An entity is any business that does transactions and runs a business. They
can buy and sell goods or deliver services. Their aim can either be to
make a profit or to serve the community and not make a profit. Some of
the more common entity forms are:
A business with only one owner; no strict laws

Sole trader on how the accounting records should be
presented. The business is run by the owner.
Very similar to a sole trader except that there
is more than one owner. Profits and losses are
Partnership
shared according to a partnership agreement.
The business is run by the partners.
A CC is regulated by the law on Close
Corporations. A CC has members, and profits
Close Corporation (CC) are distributed to members as profit sharing.
A CC is a legal entity and can be run by its
members.
A company has strict regulations on how
financial statements should be presented
according to the Companies Act. According
to law, a company should be audited annually
Company by an external auditor. A company is a
legal entity. A company can be public (Ltd)
or private (Pty Ltd). The shareholders of a
company receive dividends. The business is
run by directors.
Clubs are not-for-profit organisations. They
Not-for-profit provide facilities and enable members to take
organisations part in sport or other community recreation
activities.

1.2 Differences between a sole trader and a partnership
Sole trader Partnership
One owner Minimum of two partners
One Capital account A Capital account for each partner
One Drawings account A Drawings account for each
partner
A Current account for each partner
The net profit is posted from the The net profit is posted from the
Profit and Loss account to the Profit and Loss account to the
Capital account. Appropriation account, where it is
shared among partners according
to the partnership agreement.
The Drawings account is closed off The Drawings account is closed
to the Capital account at the end off to the Current account of each
of the financial year. partner at the end of the financial
year.
The Capital account balance will The balance of the Capital account
vary each year, as the net profit is will only vary or change if a
added and drawings deducted. partner increases or decreases
their capital.
2. What is a partnership?
It often happens that two or more people want to start a business
together. One may have the knowledge, skills and expertise, while the
other has the capital. These two people then form a partnership.
But why not form a CC or company? Partnerships are usually formed
by professionals, such as doctors, lawyers or architects, who offer their
own services without the help of the other partners, but share common
costs such as a receptionist, bookkeeper, assistants and offices. They
often also complement each other, for example a dietician, a doctor and a
physiotherapist may share offices and refer their patients to one another
depending on the treatment they need.

2.1 Partnership agreement partnership agreement
A partnership is a legal relationship, arising from an agreement between an agreement between two or more
two or more people. The agreement between partners can be verbal, partners in a business, which lists
their liabilities, share of profits, aim
but should preferably be in written form, known as the partnership
of the business, etc.
agreement. The partnership agreement will differ from one partnership
to the next but should at least contain the following:
• The names of the partnership and partners involved
• The aim of the business, and the product or service provided
• The amount of capital, work or labour, knowledge and/or skills or
goodwill each partner will contribute to the business
• Each partner’s portfolio; in other words, a specific job description for
each partner
• To which extent the partners will be liable for debts or losses
• The ratio according to which the net profit is shared among partners
• Any other stipulations with regards to changes in capital, drawings,
retirement or withdrawal from the partnership.
The following is an example of a partnership agreement:
Partnership agreement for Daniël Conradie and Conrad Kriel:
Name of business: DCK Engineering
Aim of business: The aim of the business is to make a profit by installing

and servicing cooling systems for factories and businesses trading in
perishable goods.
Capital contribution: Each partner will make an initial capital contribution

of R400 000 each.
Portfolios: Daniël Conradie has a degree in Chemical Engineering and will

be responsible for installing and servicing the systems, and to keep up to
date with the latest trends and opportunities.
Conrad Kriel has a B.Comm degree and will be responsible for the
business’s books, marketing, internal control over assets, human relations
and resources.
Liability: Partners are jointly and severally liable for debts and losses.
Distribution of net profit:

The net profit will be distributed by the partners as follows:
• Partners earn 15% interest on capital per annum.
• Partners will each receive a salary of R240 000 per annum.
• Remaining profit and losses will be shared equally between
the partners.

Drawings: Partners will receive a salary of R20 000 each, which will be
debited to their Drawings accounts. Partners are allowed to withdraw a
further amount of R60 000 maximum during the year.
Withdrawal/retirement of a partner: If a partner wants to withdraw from

the partnership, his equity in the business will be valued and credited to his
Capital account. The equity of the retiring partner will be carried over to a
loan account and repaid over a period of five years.
Death of partner: Should one of the partners pass away, his equity in the
business will be valued and paid out to his family by means of an insurance
policy taken out by the business in the partner’s name.
2.2 Liability of partners

A partnership is not a legal entity: the partners are jointly and severally
liable for debts and losses of the partnership. This means that should a
partnership become insolvent, the partners will have to use their personal
funds to settle the debts of the business, even if it means those partners
need to sell some of their personal possessions to do so. A partnership
unlimited liability thus has unlimited liability, which means the liability of the partners is
the partner, owner or member of
not limited to the amount of capital invested in the partnership.
a business type is liable for an
unlimited amount of debt incurred 2.3 Ethical considerations relating to partnerships
by the business; there is no limit to
the amount that person would have
Since both partners have invested a lot of capital and time in the
to pay to settle the debts of partnership, it is very important that they have a trusting relationship. It is
the business therefore very important that they have a partnership agreement and that
they adhere to this agreement.
Partners should have the best interest of the partnership at heart, so a
partner is not entitled to enrich himself at the cost of the partnership. A
partner can bind the business contractually, so communication between
partners is very important as all the partners need to know what their
potential liabilities are.

3. Types of partnerships
3.1 Active partner
• Makes a contribution in the form of capital, labour or skills
• Physically works for the partnership
• Is known to the public
• Is fully liable for debts and/or losses.
3.2 Sleeping partner

• No longer physically works for the business – often a retired person
3.3 Anonymous partner

• Does not physically work for the business
• Is not known to the public
3.4 Commanditarian partner

• Makes a contribution in the form of capital
• Liability is limited to the amount invested by the partner.
3.5 Limited partner

• Makes a contribution in the form of capital
• Physically works for the business
3.6 Quasi-partner
• Has provided capital to the business in the form of a loan, on which
the business pays interest at a rate that varies according to the net
profit generated

4. Advantages and disadvantages of a
partnership
4.1 Advantages
• A partnership is relatively easy to form.
• A bigger capital amount – two or more people are able to generate
more money than one person.
• More talent – skills, expertise and knowledge of different people in
various fields are combined.
• Competition is limited.
• Continuation of the business could be ensured – should a partner
wish to retire or leave the business, a son or daughter or any other
person could take over from the partner.
4.2 Disadvantages
• Partners are jointly and severally liable for all debts or losses. This
means that the private assets of partners could be used to pay debts
incurred by the business.
• The death or retirement of a partner could cause many problems.
Should a partner pass away, a certain amount must be paid out to his
or her family members: insurance policies will prevent such a setback.
The partnership will have to be dissolved upon the death of a partner.
• The behaviour and attitude of one partner could negatively influence
the entire business.
• Each partner has the power to bind the business contractually. The
partnership as a whole is liable for any contracts signed.
• Arguments could affect the trust relationship and smooth running of
the business.
Activity 6.1
1. Name four differences between a sole trader and a partnership.

2. Name the qualities/characteristics of a sleeping partner.
3. Name the characteristics of a quasi-partner.
4. List the advantages and disadvantages of a partnership.
5. What does the term “unlimited liability” mean?
5. Accounting concepts unique to partnerships

The day-to-day transactions, source documents, journals and accounts of
a partnership will be the same as for sole traders. However, the accounts
with regards to owner’s equity are different.

5.1 Capital accounts
With a sole trader, the Capital account is used when the owner makes
a capital contribution. At the end of each financial year, this account is
credited with the net profit for the year. The Drawings account is closed
off to the debit side (deducted) of the Capital account.
Let’s look at a typical Capital account of a sole trader.
Example
Capital account of a sole trader
Dr Capital B1 Cr
2018 2017
Feb 28 Drawings GJ 90 000 00 Mar 01 Balance b/d 300 000 00
2018 Profit and Loss
Balance c/d 322 900 00 Feb 28 (net profit) GJ 112 900 00
412 900 00 412 900 00
2018
The balance of capital at the beginning of the financial year was

R300 000. The business made a net profit of R112 900, which increased
the owner’s equity and the owner withdrew R90 000 during the financial
year. At the end of the financial year, his owner’s equity is R322 900.
From this ledger account you will notice that the balance changes,
depending on the profits and drawings. If the owner decides to retain
income – in other words, net profit exceeds drawings – the balance will
increase. However, if the drawings are more than the net profit, the
balance will decrease.
With a partnership, each partner has their own Capital account, for the
following reasons:
• The amount of capital contributed by each partner could have an
effect on profit sharing.
• Partners will therefore not be able to change their capital
contributions at will – the partnership agreement will stipulate the
capital provided by each partner.
• If the partners want to increase or decrease their capital contribution,
the partnership agreement will be redrafted.
• It is therefore not possible to close off the net profit and drawings to
the Capital accounts as is the case of a sole trader – for a partnership
we use another account, the Current account, to close off net profit
and drawings.

Let’s look at an example of the Capital accounts of a partnership.
Example
Capital accounts of a partnership
Partners A Abel and B Beck started a partnership, AB Bicycle Shop, in
2016. A Abel contributed R100 000 and B Beck R180 000.
On 31 October 2019, the partners decided that they should have an
equal contribution. A Abel increased his capital by R50 000 while
B Beck decreased his capital by R30 000.
Dr Capital: A Abel B1 Cr
2019 2019
Oct 31 Balance c/d 150 000 00 Mar 01 Balance b/d 100 000 00
Oct 31 Bank CRJ 50 000 00
150 000 00 150 000 00
2019
Nov 01 Balance b/d 150 000 00
The source document used for the increase in capital will be the
duplicate receipt or bank statement. The transaction will be entered in
the Cash Receipts Journal.
Dr Capital: B Beck B1 Cr
2019 2019
Oct 31 Bank CPJ 30 000 00 Mar 01 Balance b/d 180 000 00
180 000 00 180 000 00
Nov 01 Balance b/d 180 000 00
The source document used for the decrease in capital will be the
cheque counterfoil or the bank statement. The transaction will be
entered in the Cash Payments Journal.
5.2 Drawings accounts

As in the case of the Capital accounts, each partner has their own
Drawings account. The partnership agreement will usually stipulate the
amount and frequency of drawings allowed by the partners. The net
profit is only calculated at the end of the financial year and distributed
between the partners, but the partners need to meet their living expenses.
They often work in the partnership and therefore they need to be able to
withdraw amounts during the year.

It is extremely important to take note of all money, stock or any other
items taken by a partner during a year. These transactions have to be
debited against the partner’s Drawings account. If a partner is working for
the business, he should earn a monthly salary. However, this monthly salary
is not entered in the Salaries account as an operating expense, but is posted
to the Drawings account. We will discuss this in more detail later.
Partners should act ethically and responsibly towards the amount
they withdraw from the business each month, as it can lead to cash flow
problems if a partner withdraws too much.
Example
Partner A Abel works in the business every day, doing purchases, sales
and running the business. A Abel withdraws R12 000 every month to
meet his living expenses. He also took trading stock with a cost price of
R4 500 on 15 April 2019 and trading stock with a cost price of R23 600
on 12 December 2019. On 1 January 2020 he withdrew R25 000 cash.
His Drawings account will be as follows:
Dr Drawings: A Abel B3 Cr
2019 2020 Current account:
Mar 31 Bank CPJ 12 000 00 Feb 29 A Abel GJ 197 100 00
Apr 15 Trading stock GJ 4 500 00
30 Bank CPJ 12 000 00
May 31 Bank CPJ 12 000 00
Jun 30 Bank CPJ 12 000 00
Jul 31 Bank CPJ 12 000 00
Aug 31 Bank CPJ 12 000 00
Sep 30 Bank CPJ 12 000 00
Oct 31 Bank CPJ 12 000 00
Nov 30 Bank CPJ 12 000 00
Dec 12 Trading stock GJ 23 600 00
31 Bank CPJ 12 000 00
2020
Jan 01 Bank CPJ 25 000 00
31 Bank CPJ 12 000 00
Feb 29 Bank CPJ 12 000 00
197 100 00 197 100 00

Example continued
B Beck is retired, but he still does the business’s books.
B Beck has withdrawn the following during the financial period ending
29 February 2020:
• R21 000 each time on 31 March 2019, 30 June 2019, 30 September
2019 and 31 December 2019.
• He also took stationery to the value of R900 for personal use on
24 January 2020.
B Beck’s Drawings account would be as follows:
Dr Drawings: B Beck B4 Cr
2019 2020 Current account:
Mar 31 Bank CPJ 21 000 00 Feb 29 B Beck GJ 84 900 00
Dec 31 Bank GJ 21 600 00
2020
Jan 14 Stationery GJ 900 00
84 900 00 84 900 00
5.3 Salary accounts of partners

In order to compensate partners for services rendered to the business, the
partnership agreement usually makes provision for the allocation of a
salary to such a partner, in addition to his share in the profit.
Salaries of partners is not As already mentioned, all money paid out to partners during the
an operating expense, but is financial year are entered in the Drawings account of the partner involved,
regarded as profits shared. even though it is his “salary” that he takes on a monthly basis to cover
his living expenses. The salary earned by each partner forms part of the
appropriation of profits, and this Salary account is a convenience account
– this means it will only be opened and used at the end of the financial
period, when the profit sharing is calculated and entered in the books.
Because the partner’s salaries are seen as profits shared, Salary accounts
of partners will not be closed off to the Profit and Loss account as an
operating expense, but rather to the Appropriation account.
At the end of the financial year, the full amount of partners’ salaries
according to the partnership agreement is entered in their individual
Salary accounts, whether the partner has drawn the money or not.
176 c h a p t e r 6 • PA R T N E R s h I P s – A C C o U N T I N G C o N C E P T s A N D F I N A L A C C o U N T s

Example
Partner A Abel works in the business every day, doing purchases, sales
and running the business. The partnership agreement stipulates that
he should be allocated a salary of R120 000 per annum for services
rendered to the business.
Partner B Beck is retired and does the business books on a monthly
basis. As he is spending less hours rendering a service to the
partnership, he is allocated R48 000 per annum for services rendered to
the business.
Their respective Salary accounts will be as follows:
Dr Salary: A Abel N20 Cr
2020 Current account: 2020
Feb 29 A Abel GJ 120 000 00 Feb 29 Appropriation account GJ 120 000 00
120 000 00 120 000 00
Dr Salary: B Beck N21 Cr

Feb 29 B Beck GJ 48 000 00 Feb 29 Appropriation account GJ 48 000 00
48 000 00 48 000 00
Note
Both partners are allocated the full amount according to the
partnership agreement, whether they have taken these salaries or not.
All it implies is that it will have an effect on the retained profit by
each partner – if he has withdrawn more than the salary allocated to
him, his retained profit will be less and therefore his owner’s equity also.
If a partner has withdrawn less than the salary allocated, his retained
profit will be more and therefore his owner’s equity will increase.
5.4 Bonus to a partner

The partnership often makes provision for a bonus to the partner
managing the business. It usually is a percentage of the net profit. These
calculations are also done at the end of the financial year, when the
closing transfers are done.

Example
Besides managing the business, partner A Abel is a very good
cyclist and people come to the shop because he is known in the
cycling community. He therefore adds goodwill to the business. The
partnership agreement therefore stipulates that partner A Abel should
be allocated a bonus of 10% of the net profit of the business for a year.
Dr Bonus to partner: A Abel N22 Cr
29 640 00 29 640 00
Net profit is R296 400.

Bonus calculation:
R296 400 × ___ 10  = R29 640
 100
5.5 Interest on capital

To compensate a partner for investing more capital in the business than
another partner, it is custom to first calculate interest on capital before
appropriating the remaining profit. The interest rate will be stipulated in
the partnership agreement. This is also regarded as profit shared and will be
done at the end of the financial period. It is closed off to the Appropriation
account and should be indicated in the partner’s Current account.
Example
Partners are entitled to 12% interest on capital invested, according to
the partnership agreement. Note that partner A Abel increased his
capital by R50 000 and partner B Beck decreased his capital by R30 000
on 31 October 2019.
Calculations
Interest: A Abel
R100 000 × ___ 12  × __
 100 8  = R8 000
 12
R150 000 × ___ 12  × __
 100 4  = R6 000
 12
R8 000 + 6 000 = R14 000
Interest: B Beck
R180 000 × ___ 12  × __
 100 8  = R14 400
 12
R150 000 × ___ 12  × __
 100 4  = R6 000
 12
R14 400 + 6 000 = R20 400

Example continued
Dr Interest on Capital N23 Cr

Current account:
B Beck GJ 20 400 00
34 400 00 34 400 00
5.6 Appropriation account

As in the case of a sole trader, the gross profit is calculated in the Trading
account and the net profit in the Profit and Loss account. In the case of the
partnership, however, the net profit is then closed to a third final account,
the Appropriation account. In this account the profit is distributed between
the partners according to the partnership agreement.
The distribution of the net profit is done in two steps, namely the
primary distribution and the final distribution.
5.6.1 Primary distribution

• Partners earn a salary according to the obligations they carry and
services rendered to the business.
• Partners earn interest on the capital invested by them – therefore
partners who have invested more capital will earn a greater share with
regards to interest on capital.
• Bonus are paid to partners.
Final/secondary distribution
The remaining profit is distributed according to the ratio determined by
the partnership agreement. The remaining profit is the net profit minus
the primary distribution.
Example
The net profit for the year ended 29 February 2020, calculated in the
Profit and Loss account, is R296 400.
The partnership agreement stipulates the following:
• Partner A Abel earns a salary of R120 000 p.a. and partner B Beck
earns a salary of R48 000 p.a.
• Partner A Abel receives a bonus of 10% of the net profit for the year.
• Partners earn interest of 12% p.a. on the capital invested.
• Remaining profits are to be shared equally between the partners.

Example continued
Dr Appropriation account F3 Cr
2020 2020
Feb 29 Salary: A Abel GJ 120 000 00 Feb 29 Profit and Loss account GJ 296 400 00
Salary: B Beck GJ 48 000 00
Bonus to partner GJ 29 640 00
Interest on capital GJ 34 400 00
Current account: A Abel GJ 32 180 00
Current account: B Beck GJ 32 180 00
296 400 00 296 400 00
Primary distribution:
R120 000 + 48 000 + 29 640 + 34 400 = R232 040
Final distribution:
Remaining profit = R296 400 – 232 040 = R64 360
Remaining profit should be shared equally according to the
partnership agreement:
R64 360 = R32 180
_______
2
5.7 Current accounts

As mentioned before, the balance of the Capital accounts needs to be
maintained at constant levels. The distribution of the net profit can
therefore not be entered in the Capital accounts. The Current account
is where the amount earned by each partner for the financial year is
entered. Together, the Capital and Current accounts form the partner’s
owner’s equity accounts.
The Capital account is The distribution of net profit is posted to the credit side of the
used to show the investment partner’s Current account. The amount withdrawn during the course of
made by a partner on a relative the year is closed off to the debit side of the Current account (deducted).
permanent basis. The balance of the Current account therefore indicates whatever profit
The Current account is used along the partner has not withdrawn from the business (retained profits).
with the Capital account to show the However, it sometimes happens that a partner withdraws more than his
retained profit.
share – then his Current account will indicate a debit balance (a decrease
in owner’s equity).

Example
Current account balances on 1 March 2019:
Current account: A Abel R890 (cr)
Current account: B Beck R1 667 (cr)
Dr Current account: A Abel B5 Cr
2020 2019
Feb 29 Drawings: A Abel GJ 197 100 00 Mar 01 Balance b/d 890 00
2020
Feb 29 Salary: A Abel GJ 120 000 00
Appropriation account GJ 32 180 00
Balance c/d 390 00
197 100 00 197 100 00
2020
Mar 01 Balance b/d 390 00
Dr Current account: B Beck B6 Cr

2020 2019
Feb 29 Drawings: B Beck GJ 84 900 00 Mar 01 Balance b/d 1 667 00
2020
Balance c/d 17 347 00 Feb 29 Salary: B Beck GJ 48 000 00
102 247 00 102 247 00
2020
The partners’ owner’s equity at the end of the financial year

29 February 2020 will be as follows:
• Owner’s equity: A Abel
Capital balance – Current account balance = R150 000 – 390 = R149 610
• Owner’s equity: B Beck
Capital balance + Current account balance = R150 000 + 17 347 = R167 347
• B Beck retained R17 347 in the business, which increased his
owner’s equity.

Example
Below is an extract from the Post-adjustment Trial Balance of Asterix
Traders on 28 February 2019, the end of the financial year. Show the
sharing of profit and the closing transfers with regards to the partners
on 28 February 2019.
Extract from Post-adjustment Trial Balance of Asterix Traders

as at 28 February 2019
Balance Sheet accounts Fol. Debit Credit
Capital: Aster B1 200 000 00
Capital: Rix B2 300 000 00
Drawings: Aster B3 112 000 00
Drawings: Rix B4 141 000 00
Current accounts: Aster B5 1 256 00
Current accounts: Rix B6 2 224 00
Information
1. The net profit for the year ended 28 February 2019, as calculated in
the Profit and Loss account, amounts to R266 000.
2. Partners earn interest on capital at 12% per year. Partner Rix
increased his capital by R100 000 on 1 September 2018.
3. Partners each earn a salary of R8 000 per month. They are paid
on a monthly basis and it has been correctly accounted for in their
Drawings accounts.
4. Partner Aster was rewarded with a bonus of R10 000 for services
rendered.
5. Remaining profits and losses are shared according to the ratio of
capital as at the end of the financial year.
Solution
General Ledger of Asterix Traders
Dr Capital: Aster B1 Cr
2018

Example continued
Dr Capital: Rix B2 Cr
2018
Sep 01 Bank CRJ 100 000 00
300 000 00
Dr Drawings: Aster B3 Cr
2019 2019
Feb 28 Balance b/d 112 000 00 Feb 28 Current account: Aster GJ 112 000 00
112 000 00 112 000 00
Dr Drawings: Rix B4 Cr
2019 2019
Feb 28 Balance b/d 109 000 00 Feb 28 Current account: Rix GJ 109 000 00
109 000 00 109 000 00
Dr Current account: Aster B5 Cr

2019 2018
Feb 28 Drawings: Aster GJ 112 000 00 Mar 01 Balance b/d 1 256 00
2019
Balance c/d 23 256 00 Feb 28 Interest on capital GJ 24 000 00
Salary: Aster GJ 96 000 00
135 256 00 135 256 00
2019

Example continued
Dr Current account: Rix B6 Cr

2019 2018
Feb 28 Drawings: Rix GJ 141 000 00 Mar 01 Balance b/d 2 224 00
2019
Feb 28 Interest on capital GJ 30 000 00
Salary: Rix GJ 96 000 00
141 000 00 141 000 00
2019
Nominal accounts
Dr Interest on Capital N21 Cr
2019 2019
Feb 28 Current account: Aster GJ 24 000 00 Feb 28 Appropriation account GJ 54 000 00
Current account: Rix GJ 30 000 00
54 000 00 54 000 00
Dr Salary: Aster N22 Cr

2019 2019
96 000 00 96 000 00
Dr Salary: Rix N23 Cr

2019 2019
Feb 28 Current account: Rix GJ 96 000 00 Feb 28 Appropriation account GJ 96 000 00
96 000 00 96 000 00

Example continued
Dr Bonus to Partner N24 Cr

2019 2019
10 000 00 10 000 00
Final account
Dr Appropriation account F3 Cr
2019 2019
Feb 28 Salary: Aster 96 000 00 Feb 28 Profit and Loss account GJ 266 000 00
Salary: Rix 96 000 00
Interest on capital 54 000 00
Bonus to partner 10 000 00
Current account: Aster 4 000 00
Current account: Rix 6 000 00
266 000 00 266 000 00
Calculations
Interest on capital: Aster R200 000 × ___12  = R24 000
 100
Interest on capital: Rix R200 000 × ___12  × __
 100 6  = R12 000
 12
R300 000 × ___12  × __
 100 6  = R18 000/ R30 000
 12
Salaries R8 000 × 12 = R96 000
Remaining profit R266 000 – 24 000 – 30 000 – 96 000 – 96 000 – 10 000 = R10 000
Capital: Aster Capital: Rix R200 000 : 300 000 = 2 : 3
 52 = R4 000
Sharing remaining profit: Aster R10 000 × __
Sharing remaining profit: Rix  53 = R6 000
R10 000 × __

Example continued
General Journal of Asterix Traders for February 2019
Day Details Fol. Debit Credit
28 Interest on capital N21 54 000 00
Current account: Aster B5 24 000 00
Current account: Rix B6 30 000 00
(Interest of 12% p.a. on capital)
Salary: Aster N22 96 000 00
(Salary of R8 000 per month for 12 months)
Salary: Rix N23 96 000 00
(Salary of R8 000 per month for 12 months)
Bonus to partners N23 10 000 00
(Bonus paid to Aster)
Appropriation account F3 256 000 00
Interest on capital N21 54 000 00
Salary: Aster N22 96 000 00
Salary: Rix N23 96 000 00
Bonus to partners N24 10 000 00
(Closing transfers)
Appropriation account F3 10 000 00
(Sharing of remaining profit according to capital
ratio 2 : 3)
Drawings: Aster B3 112 000 00
(Closing transfer)
Drawings: Rix B4 141 000 00
(Closing transfer)
Activity 6.2
An extract is provided from the Post-adjustment Trial Balance of Backmin

Traders, with partners K Back and Y Minitzer on 28 February 2015, which is the
end of their financial year.
Required
1. Show the following accounts in the General Ledger for the period March
2014 to February 2015:

Capital: Back (4 lines) Capital: Minitzer (2 lines)
Drawings: Back (3 lines) Drawings: Minitzer (3 lines)
Current account: Back (7 lines) Current account: Minitzer (8 lines)
Interest on Capital (4 lines) Salary: Back (3 lines)
Salary: Minitzer (3 lines) Bonus to partners (3 lines)
Appropriation account (8 lines)
2. Use the General Journal to show the transactions at the end of the financial
year in order to perform the stipulations of the partnership agreement.
Extract from Post-Adjustment Trial Balance of Backmin Traders

Capital: Back B1 200 000 00
Capital: Minitzer B2 250 000 00
Drawings: Back B3 103 600 00
Drawings: Minitzer B4 113 400 00
Current account: Back B5 1 022 00
Current account: Minitzer B6 2 147 00
Information
• The net profit for the year ended 28 February 2015, as calculated in the
Profit and Loss account, amounts to R284 900.
• Partners earn interest on capital at 15% per year. Partner Back increased his
capital by R50 000 on 1 July 2014.
• Partner Back earns a salary of R8 200 per month, and partner Minitzer a
monthly salary of R7 500. They have withdrawn these amounts during the year,
and these payments have been correctly debited to the Drawings accounts.
• Partner Minitzer should receive a bonus of R18 000 for services rendered.
• Remaining profits and losses have been shared according to the ratio of
capital as at the end of the financial year.
Activity 6.3
An extract is provided from the Post-adjustment Trial Balance of Coleman

Brothers, with partners Richard Coleman and Peter Coleman, on 30 June 2017,
which is the end of their financial year.
Required
1. Show the following accounts in the General Ledger for the period
1 July 2016 to 30 June 2017.
Capital: Richard (5 lines) Capital: Peter (4 lines)
Drawings: Richard (3 lines) Drawings: Peter (3 lines)
Current account: Richard (7 lines) Current account: Peter (7 lines)
Interest on Capital (4 lines) Salary: Richard (3 lines)
Salary: Peter (3 lines) Appropriation account (7 lines)

2. Show in the General Journal the transactions at the end of the financial year
in order to perform the stipulations of the partnership agreement.
Extract from the Post-adjustment Trial Balance of Coleman Brothers as at

30 June 2017
Capital: Richard B1 200 000 00
Capital: Peter B2 200 000 00
Drawings: Richard B3 135 900 00
Drawings: Peter B4 124 700 00
Current account: Richard B5 2 553 00
Current account: Peter B6 1 556 00
Information
• Partners are entitled to interest on capital at 10% per year. In order to have
equal capital, Richard decreased his capital by R50 000 on 31 December
2016, and Peter increased his capital by R50 000 on 1 January 2017.
• Richard is entitled to a salary of R9 600 per month and Peter is entitled
to a monthly salary of R8 100. Peter has taken an advance on his salary for
July 2017, and this has been correctly recorded.
• Profits and losses are shared equally.
• The net profit is R253 600, according to the Profit and Loss account.
Activity 6.4
The following information was taken from the accounting records of the
partnership Bellsonn, with A. Bell and B. Sonn as partners, on 30 June 2019, the
end of the business’s accounting period.
Required
Take the given information into consideration and draw up the following
accounts in the General ledger for the year 1 July 2018 to 30 June 2019:
Current account: Bell (7 lines) Current account: Sonn (8 lines)
Interest on capital (4 lines) Bonus to partners (3 lines)
Salary: Bell (3 lines) Salary: Sonn (3 lines)
Information
• Net profit for the year ended 30 June 2019 was R632 000.
• Balances on 1 July 2018:
Current account: Bell R4 300 (dr)
Current account: Sonn R7 680 (cr)
• Totals and balances on 30 June 2019:
Capital: Bell R400 000
Capital: Sonn R500 000

Drawings: Bell R295 000
Drawings: Sonn R338 000
• The partnership agreement stipulates the following:

■ Interest on capital must be calculated at 15% per annum. Take note that
partner Sonn increased his capital by R50 000 on 1 March 2019.
■ Partner Bell is entitled to a special bonus of 7,5% of the net profit before
any appropriation.
■ The partners are entitled to the following monthly salary allowances:
A Bell R12 600
B Sonn R16 000
■ After all the appropriation, the remaining profit must be shared between
Bell and Sonn in the ratio 2 : 3.
Activity 6.5
The following are some of the balances and totals in the partnership of Steyn
& Co. with partners P Steyn and S Roux, as on 29 February 2020.
Required
Draw up the following accounts in the General Ledger and show the closing
transfers and profits shared as on 29 February 2020:
• Current account: P Steyn (6 lines)
• Current account: S Roux (7 lines)
• Appropriation account (8 lines)
Extract from the Post-adjustment Trial Balance of Steyn & Co.

Capital: P Steyn B1 250 000 00
Capital: S Roux B2 250 000 00
Drawings: P Steyn B3 70 000 00
Drawings: S Roux B4 71 400 00
Current account: P Steyn (1 March 2019) B5 11 800 00
Current account: S Roux (1 March 2019) B6 1 820 00
Profit and loss (profit) B7 190 000 00
Information
• Partners earn 12% interest p.a. on their capital. Take into account that
S Roux increased his capital on 1 September 2019 by R30 000.
• P Steyn earns a salary of R6 000/month and S Roux earns R5 800/month.
(P Steyn only drew 11 months’ salary.)
• The remaining profit or loss must be divided equally between the partners.

Activity 6.6
You have been provided with information of Woody Traders, with partners Ted
Woodward and Melony Dyer. The financial year ends on 30 June 2017.
Required
Draw up the following Ledger accounts:
• Drawings: M Dyer (4 lines)
• Current account: T Woodward (7 lines)
• Current account: M Dyer (6 lines)
• Appropriation account (7 lines)
Information
The Post-adjustment Trial Balance as at 30 June 2017 shows the following
balances:
Capital: T Woodward R150 000
Capital: M Dyer R135 000
Current account: T Woodward R1 250 (Cr)
Current account: M Dyer R2 114 (Dr)
Drawings: T Woodward R101 300
Drawings: M Dyer R110 600
The accountant has calculated the net profit to be R232 310 for the year ended
on 30 June 2017, before taking the following into account:
• T. Woodward increased his capital contribution on 1 January 2017 by
transferring land valued at R80 000 to the business’s name. This was
recorded in the books.
• A donation of R8 000 was made by M Dyer to the Help Our Children project
on behalf of the business. This has been recorded as follows:
Debit: Drawings: Dyer
Credit: Bank
The partnership agreement makes provision for the following:

• Salary to T Woodward of R7 700 per month
• Salary to M Dyer of R8 400 per month
• Interest on capital at 12% per year
• Any remaining profits or losses are shared according to the ratio of the
capital balances at the end of the year.
The information below was taken from the books of Macadam Stores with
partners A Mac and C Adam. Their financial year ends on 28 February 2019.

Required
Complete the following accounts in the General Ledger:
• Current account: A Mac (8 lines) [11]
• Current account: C Adam (6 lines) [12]
• Interest on capital (4 lines) [8]
• Appropriation account (8 lines) [14]
Information
The following balances appear among others in the books of Macadam stores
on 28 February 2019:
Capital: A Mac R200 000
Capital: C Adam R100 000
Current account: A Mac R6 300 (Cr)
Current account: C Adam R1 400 (Dr)
Drawings: A Mac R132 600
Drawings: C Adam ?
The net profit as calculated in the Profit and Loss account on 28 February 2019
amounts to R252 000.
The partnership agreement stipulates the following:

• Partners will receive the following salaries:
A Mac R80 000 per year
C Adam R102 000 per year
• A Mac should receive a bonus of R16 000 for services rendered.
• The partners must receive 15% interest p.a. on their capital. A Mac
increased his capital by R40 000 on 1 December 2018.
• Profits and losses are shared according to the ratio of the capital balances as
at the end of the financial year.
• C Adam withdrew the following during the year:
■ A cheque at the end of each month for his salary, according to the
partnership agreement
■ Cash, R4 670
■ Trading stock with a cost price of R8 790 for personal use.
Activity 6.7
Backmin Traders is a partnership that sells computers and other equipment.
Required
1. Enter the transactions below in the supplementary journals for August 2019. The number in brackets
a. Cash Payments Journal with columns for Bank and sundry accounts (6) indicates how many lines to
b. Cash Receipts Journal with columns for Analysis of receipts, Bank and leave open for each account.
sundry accounts (2)
c. General Journal (include narrations) (7)
2. Enter, with reasons, the influence of the transactions on the accounting
equation.
PA R T N E R s h I P s – A C C o U N T I N G C o N C E P T s A N D F I N A L A C C o U N T s • c h a p t e r 6 191

Transactions
2019
Aug
01 Partner Back increased his capital by issuing a cheque for R20 000
(issued receipt no. 78).
02 Partner Minitzer took trading stock with a cost price of R4 500 for his
personal use.
03 Partner Minitzer decreased his capital contribution by R30 000.
Cheque no. 398 issued to him.
04 Partner Back took stationery of R56 for his son who is at school.
25 Partner Minitzer cashed cheque no. 401 for R600 for private use.
31 Issued cheques 411 and 412 to the partners Back and Minitzer for their
salaries of R7 600 and R8 100 respectively.
Activity 6.8
Coleman Brothers are a partnership with partners Richard Coleman and

Peter Coleman.
Required
Analyse the following transactions of Coleman Brothers, according to the
following table:
General Ledger Accounting equation
No. Source document Supplementary Account debited Account credited Amount A O L
journal
Transactions
1. Pay partner Richard’s telephone account with a business cheque, R520.
2. Peter takes trading stock with a cost price of R3 200 for personal use.
3. Peter gives a second-hand vehicle, valued at R30 000, to the partnership
to use for deliveries. It should be regarded as a capital contribution.
4. Richard increases his capital by depositing a cheque for R50 000 directly
into the bank account.
5. Pay Richard’s salary of R8 900.
Activity 6.9
AMA Traders is a partnership, with partners Amore Bezuidenhout and Mare

Goliath. They use the perpetual inventory system and sell their goods at a mark-
up of 60% on the cost price.
Required
Show the effect of the following transactions on the accounting equation.

Transactions
1. Partner Bezuidenhout increased her capital contribution with 20% to
R420 000, by depositing the amount in the business account.
2. Partner Goliath gave a second-hand vehicle to the business to use for
deliveries. It should be regarded as a capital contribution and the carrying
value of the vehicle is R60 000.
3. Issued an invoice for R1 792 to debtor, M Burger, for credit sales.
4. Purchased trading stock marked R5 400 from De Ridder Distributors and
International Financial
received 20% trade discount.
Reporting Standards
5. Issued a cheque for R3 496 to creditor Stofberg Suppliers after 5% (IFRS) are standards based on
discount was allowed. It is in settlement of the account. principles, along with interpretations
6. Partner Bezuidenhout withdrew trading stock with a cost price of R3 100 and the framework adopted by the
for personal use. International Accounting Standards
7. Issued a cheque for R12 000 to partner Goliath for her monthly Board (IASB).
allowance (salary). Many of the standards forming
part of IFRS are known by the
older name of International
6. Generally Accepted Accounting Practice (GAAP) Accounting Standards (IAS).
The IAS were issued between
The GAAP principles arose from the need for reliable and comparable 1973 and 2001 by the Board of the
financial statements that reports on the financial position and International Accounting Standards
performance of an entity. In South Africa, GAAP is issued by the Committee (IASC). On 1 April 2001
the new IASB took over from the
“Accounting Practices Committee” and harmonised with the IASC the responsibility for setting
“International Financial Reporting Standards” (IFRS). International Accounting Standards.
Applying GAAP principles does not imply that all businesses will During its first meeting, the new
judge and report on financial activities exactly the same. No business Board adopted existing IAS and
is exactly the same as the next and therefore GAAP is only a general Standing Interpretations Committee
standards (SICs). The IASB has
framework to report on financial activities. A degree of variety is still
continued to develop standards,
possible within the framework of the GAAP principles, depending on the calling the new standards IFRS.
type of business.
GAAP principle Description Example

Entity rule The financial affairs of the partners The business has its own bank
should be kept separate from account and the partners each
those of the business – they are have their own bank accounts.
two separate entities.
Historical cost concept Assets should be entered at its Land and buildings purchased for
historical cost; this is the amount R500 000 will be entered at that
that was originally paid for them. amount in the books, even if the
business can received a lot more
for it after a couple of years.

Going concern concept The financial statements of a If a business had stationery printed
business are prepared with the in the name of the business to the
assumption that the business value of R5 000 and it is unused
will continue operating in the at the end the financial period, it
foreseeable future. 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
accounted for in the correct time February 2015 must be taken into
period (the one in which they were account for the financial period
incurred). ending 28 February 2015, even
though the account will only be
paid in March 2015.
Prudence concept Financial results are reflected in a If the business expects to make
conservative manner. a profit of R100 000 on the sale
of part of the building, it will not
be entered in the books until
the transfer of the land has been
concluded.
Concept of materiality Material items must be shown in Interest on overdraft must be
the financial statements, but the shown in a specific account, while
immaterial items need not be consumables may be included in
highlighted. the Sundry Expenses account as it is
material to know what the finance
cost on the overdraft is.
7. Accounting period
As we already mentioned in Grade 10, the financial period of a business
is usually 12 months. It is always a predetermined time of the year, for
example from 1 March to 28 February, or from 1 July to 30 June; in other
words, 12 consecutive months.
A business will not only want to calculate the net profit for a certain
period, but would also want to compare the current financial year with
the previous financial year.

8. Accounting cycle
The accounting cycle in a partnership is set out below.
SOURCE DOCUMENTS
Receipt, cash register roll, deposit slip, cheque counterfoil, duplicate and original
invoice, petty cash slip, debit note, credit note
Supplementary journals
CRJ, CPJ, DJ, CJ, PCJ, DAJ, CAJ, GJ
POSTING TO LEDGERS
General Ledger, Debtors Ledger, Creditors Ledger
PRE-ADJUSTMENT TRIAL BALANCE
End-of-year adjustments
POST-ADJUSTMENT TRIAL BALANCE
CLOSING TRANSFERS AND FINAL ACCOUNTS

Trading account, Profit and Loss account, Appropriation account
POST-CLOSING TRIAL BALANCE
FINANCIAL STATEMENTS
Income Statement, Balance Sheet, Notes to the financial statements

9. Revision of adjustments dealt with in Grade 10
9.1 Depreciation
There are two methods of calculating depreciation, namely the fixed
amount method and the diminishing balance method.
9.1.1 Fixed amount method (on cost price)

According to the fixed amount method, a certain percentage of the cost
price is written off annually. The life expectancy or expected durability
of the asset is predetermined by SARS (South African Revenue Services).
Therefore the percentage depreciation by which it is written off can be
determined. The amount depreciated is therefore the same each year.
For example, a vehicle was bought for R70 000 on 1 March 2017
and depreciation is calculated at 15% per year on the cost price. The
calculations are as follows:
Date Calculations Annual Accumulated Carrying value

depreciation depreciation
01/03/2017 Cost price: R70 000 R70 000
28/02/2018 70 000 × 15% R10 500 R10 500 59 500
28/02/2019 70 000 × 15% 10 500 21 000 49 000
29/02/2020 70 000 × 15% 10 500 31 500 38 500
• The annual depreciation is the expense for the financial year.

• The accumulated depreciation is the total depreciation already written
off against the asset (total of all the previous years’ depreciation).
• The carrying value is the amount at which the asset can be valued
(i.e. how much it is worth) calculated as cost price minus accumulated
depreciation.
9.1.2 Diminishing balance method (on carrying value)

carrying value = cost According to this method, depreciation is calculated on the diminishing
price less accumulated balance or carrying value, where carrying value equals cost price less
depreciation accumulated depreciation.
Using this method, the depreciation annually written off will
therefore initially be a substantial amount of money, but will decrease
each year.
For example, equipment for R20 000 was bought on 1 March 2016 and
depreciation is written off at 10% per year on the diminishing balance.
The calculations are as follows:

Date Calculations Annual Accumulated Carrying value
depreciation depreciation
01/03/2016 Cost price: R20 000 R20 000
28/02/2017 20 000 × 10% R2 000 R2 000 18 000
28/02/2018 18 000 × 10% 1 800 3 800 16 200
28/02/2019 16 200 × 10% 1 620 5 420 14 580
Depreciation, together with other information, is recorded in the

assets register:
Recording the transaction

Journal Account debited Account credited
General Journal Depreciation Accumulated depreciation on vehicle
General Journal Depreciation Accumulated depreciation on equipment
28/02/2018 18 000 × 10% 1 800
28/02/2019 16 200 × 10% 1 620

Assets Owner’s equity
Effect Reason Effect Reason
– Carrying value of asset – Depreciation is an imputed
decreased expense
9.2 Prepaid and accrued expenses

A prepaid expense is an amount that has already been paid in the current
financial year, but the expense relates to the next financial year; in other
words, an expense that is paid in advance.
An accrued expense is an amount that relates to the current financial
year, but will only be paid in the next financial year. To show the expense
in the correct (current) financial year, the expense is accrued using a
journal entry. This entry is reversed in the next financial year when the
expense is actually paid.
General Journal Expense account adjusted Accrued expenses
General Journal Prepaid expenses Expense account adjusted

Assets Owner’s equity Liabilities
No. Effect Reason Effect Reason Effect Reason
1. – Expense increased + Create liability:
Accrued expenses
2. + Create asset: + Expense decreased
Prepaid expenses

9.3 Accrued income and income received in advance
Accrued income is an amount that was earned in the current financial
year, but that has not yet been received. To show this income in the
correct (current) financial year, the income is accrued using a journal
entry. This entry is then reversed in the next financial year when the
income is actually received.
Income received in advance is an amount that has already been
received during the current financial year, but relates to an income that is
only going to be earned during the next financial year.
General Journal Income account adjustment Income received in advance
General Journal Accrued income Income account adjustment

No. Effect Reason Effect Reason Effect Reason
1. – Income decreased + Create liability:
Income received in
advance
2. + Create asset: + Income increased
Accrued income
9.4 Trading stock deficit and consumable stores on hand

Trading stock deficit is the difference between the book value of stock
in the Trading Stock account and the physical value of stock in the shop.
The physical value is determined by doing a stock take.
Consumable stores on hand is the physical value counted during a
stock take. This is the value of stock left over or unused at the end of the
financial year.
General Journal Trading stock deficit Trading stock
General Journal Consumable stores on hand Expense account adjustment

Assets Owner’s equity
Effect Reason Effect Reason
– Value of trading stock decreased – Trading stock deficit is a loss/
expense
+ Create asset: Consumable stores + Expense decreased
on hand

Example
The financial year for DQ Stores ends on 30 June 2019.
Required
Show the journal entries of the adjustments on 30 June 2019.
Narrations may be omitted.
Extract from the Pre-adjustment Trial Balance of DQ Stores as at 30 June 2019

Vehicles B3 120 000 00
Equipment B4 26 400 00
Accumulated depreciation on vehicles B5 48 200 00
Accumulated depreciation on equipment B6 8 300 00
Trading stock B7 34 756 00
Fixed deposit: AB Bank (4% p.a.) B8 30 000 00
Nominal accounts
Rent income N3 17 550 00
Interest on fixed deposit N4 1 000 00
Water and electricity N5 6 220 00
Advertising N6 3 214 00
Stationery N7 2 447 00
Information
• According to the stock take, the following was on hand on
30 June 2018:
Trading stock R33 102
Stationery R143
• The business rents out a portion of their premises to a tenant at
R1 350 per month. Her rent has been paid one month in advance.
• Interest on the fixed deposit for May and June is still receivable.
• The water and electricity account of R412 for June 2019 is still
payable.
• Advertising includes R1 000 which has been prepaid.
• Depreciation must be written off as follows:
on vehicles R14 360
on equipment R2 640

Example
Solution
General Journal of DQ Stores for June 2019

Date Details Fol. Debit Credit Explanation
2019 Trading stock deficit is an expense
Jun 30 Trading stock deficit N8 1 654 00 and is therefore debited.
Trading stock is credited with the
Trading stock (34 756 – 33 102) B7 1 654 00 stock take amount.
Consumable stores on hand is an
Consumable stores on hand B11 143 00 asset which is debited.
Stationery, the expense account
is credited with the stock take
Stationery N7 143 00 amount.
Rent income is an income and is
debited with the amount that is
received in advance.
Income received in advance is a
Income received in advance B12 1 350 00 liability which is credited.
1 200
30 000 × 4% =  ___ 12
× 2 = R200
1 000
___
Or   10 = 100 × 2 = R200
The interest on fixed deposit
Accrued income B13 200 00 was only received for 10 months
because 2 months is still receivable.
Accrued income is an asset which
is debited with the amount
receivable.
Interest on fixed deposit N4 200 00 Interest on fixed deposit is credited.
Accrued expenses is a liability
Water and electricity N5 143 00 which is credited.
Water and electricity account is an
Accrued expenses B14 143 00 expense which is debited.
Prepaid expenses is an asset and
Prepaid expenses B15 1 000 00 is debited.
Advertising is an expense which is
Advertising N6 1 000 00 credited with the prepaid amount.
Depreciation 17 000 00 Depreciation is an imputed
expense and is debited, while the
accumulated depreciation accounts
Accumulated depreciation on equipment 2 640 00 are credited.

Activity 6.10
The financial year of Clorette Traders ends on 28 February 2019.
Required
Show the journal entries of the adjustments on 28 February 2019. Narrations
may be omitted.
Extract from the Pre-adjustment Trial Balance of Clorette Traders

Vehicles B3 90 000 00
Equipment B4 25 000 00
Accumulated depreciation on vehicles B5 33 500 00
Accumulated depreciation on equipment B6 10 480 00
Trading stock B7 23 200 00
Fixed deposit: Good Bank (5% p.a.) B8 26 000 00
Nominal accounts
Interest on fixed deposit N4 975 00
Telephone N6 6 885 00
Packaging N8 3 446 00
Information
• The following accounts have been received, but have not yet been paid:
Water and electricity R533
Telephone R497
• Interest on the fixed deposit is calculated at 5% per annum and has only
been received for nine months. Take into account the interest for the last
three months.
• A part of the building has been let since the beginning of the financial year.
The tenant has already paid the rent for March and April 2019 because she is
going on holiday.
• An advertising contract with a radio station has been signed for six months
from 1 January 2019 and the full amount of R720 has been paid.
• Depreciation must be taken into account as follows:
on vehicles at 20% per annum on the diminished balance
on equipment at 10% per annum on the cost price

• The stock take done on 28 February 2019 shows the following on hand:
Packaging R976
stationery R144.
10. Additional end-of-year adjustments:

Provision for bad debts
10.1 Provision for bad debts
GAAP flash You learnt that a business, according to the GAAP principles, should
have its books in as accurate an order as possible at the end of a financial
Prudence principle: Financial
statements are reflected in a period. This is, for example, the reason why depreciation is written off –
conservative manner. The business so that the assets can be shown at what they are worth.
therefore makes provision for During the year, debtors are written off as a bad debt (already dealt
debtors that who may not pay with in Grade 10). The full amount owed by debtors at the end of the
their accounts. financial year will not be collected from debtors – businesses know this
from experience – and a percentage of money owed by debtors will be
bad debt written off as bad debts in the following financial year.
money owed that has little chance, These expected bad debts must be provided for at the end of the
if any, of being paid to the business financial year. The reasons for this are:
• The business wishes to show the debtors amount on the Balance
Sheet as accurately as possible, therefore the expected bad debts must
be deducted
• These bad debts are a loss to the business and should thus be
accounted for during the current financial period.
The percentage of debtors that will be written off as a bad debt depends
on the business and will be based on previous years’ trends.
In the business’s first financial year, the Provision for Bad Debts account
is created. From the next financial year, the account balance brought over
from the previous financial year is merely adjusted. The adjustment is
calculated so that the balance always remains at a constant percentage
(for example 5%) of outstanding debtors in the current financial year.
Provision for bad debts is a negative asset, because it decreases the value
of an asset (debtors).
The contra-account for Provision for Bad Debts is Provision for Bad
Debts Adjustment. This could be an income or an expense, depending on
whether the provision for bad debts had to decrease or increase. This
adjustment is recorded in the General Journal.

The following examples will help you better understand provision for
bad debts.
Example
Provision for bad debts – creating an account
Cunningham Traders started trading on 1 March 2016, and their first
financial year therefore ends on 28 February 2017.
Extract from Pre-adjustment Trial Balance of Cunningham Traders as at

28 February 2017
Balance Sheet account Fol. Debit Credit
Debtors control B8 16 000 00
Adjustment on 28 February 2017

Provision for bad debts must be adjusted to 5% of outstanding debtors
Required
1. Show the journal entries for the adjustment and post to the accounts
in the General Ledger.
2. Show the effect, with reasons, on the accounting equation.
Solution
Calculations
R16 000 × 5% = R800
1. General Journal of Cunningham Traders for February 2017

28 Provision for Bad Debts Adjustment N21 800 00
Provision for Bad Debts 800 00
(Create the account to make provision for bad debts on
5% of debtors)
General Ledger of Cunningham Traders

Dr Provision for Bad Debts B9 Cr
2017 Provision for bad debts
Feb 28 Adjustment GJ 800 00

Example continued
Nominal account
Dr Provision for Bad Debts Adjustment B3 Cr
2017 2017
Feb 28 Provision for bad debts GJ 800 00 Feb 28 Profit and loss GJ 800 00
2. Effect on the accounting equation

Date Effect Reason Effect Reason Effect Reason
28 – 800 Negative asset: – 800 Provision for
bad debts adjustment is
increased an expense
Activity 6.11
Binchy Stores started trading on 1 July 2011 and their first financial year ends
on 30 June 2012.
Required
1. Enter the adjustment below in the General Journal.
2. Show the related entries in the General Ledger.
Extract from Pre-adjustment Trial Balance of Binchy Stores as at 30 June 2012

Adjustment on 30 June 2012

Provision for bad debts must be adjusted to 5% of outstanding debtors on
30 June 2012.
In the example on pages 203 and 204, the Provision for Bad Debts account
was created for the first time. In the following examples, a Provision for Bad
Debts account already exists, and is carried over from the previous financial
year. In these examples, the Provision for Bad Debts account is adjusted.

Example
Provision for Bad Debts adjustment as an expense
The financial year of Cunningham Traders ends on 28 February.
The business has already been trading for two years.
Extract from Pre-adjustment Trial Balance of Cunningham Traders

Provision for bad debts B9 800 00

in the General Ledger (balance and close off accounts at the end of
the financial year).
2. Indicate the effect, with reasons, on the accounting equation.
Solution
Calculations
R17 200 × 5% = R860 ∴ R860 – 800 = R60 adjustment
1. General Journal of Cunningham Traders for February 2019

28 Provision for Bad Debts Adjustment N21 60 00
Provision for Bad Debts B9 60 00
(Adjust provision for bad debts on 5% of debtors)

2017
2018 Provision for bad debts
Feb 28 adjustment GJ 60 00
860 00

Example continued
Dr Provision for Bad Debts Adjustment N21 Cr

2018 2018
Feb 28 Provision for bad debts GJ 60 00 Feb 28 Profit and Loss account GJ 60 00
60 00 60 00
• Provision for bad debts is a negative asset (decreases the value of

debtors), so it has a credit balance. This balance is brought forward
from the previous financial year (that is why the date of the balance
b/d is 1 March 2017). The outstanding debtors in the current
financial year differ from the previous financial year and therefore
the amount must be adjusted.
• Provision for bad debts (PBD) must be adjusted to R860, which
is 5% of the current financial year’s outstanding debtors
(R17 200 × 5% = R860). Therefore R60 must be added to the
current balance (PBD is credited).
• Provision for bad debts adjustment (PBDA) is debited (contra-entry).
Because PBDA has a debit entry, it is an expense and is closed off as
an expense to the Profit and Loss account.
28 – 60 Negative asset: – 60 Provision for
bad debts adjustment –
increased expense
Activity 6.12
Binchy Stores has already been trading for two years and their financial year
ends on 30 June.
Required
2. Show the entries in the General Ledger that relate to this adjustment
(balance and close off accounts properly).
3. Indicate the effect, with reason, on the accounting equation.

Adjustment on 30 June 2013

Adjust provision for bad debts to 5% of debtors outstanding on 30 June 2013.
Example
Provision for bad debts adjustment as an income
The financial year of Cunningham Traders ends on 28 February.
The business has already been trading for three years.
Required
in the General Ledger (balance and close off accounts at the end of
the financial year).
2. Indicate the effect, with reasons, on the accounting equation.
Extract from Pre-adjustment Trial Balance of Cunningham Traders as at

28 February 2019
Provision for bad debts B9 860 00

Solution
Calculations
R14 300 × 5% = R715 ∴ R860 – 715 = R145 adjustment
1. General Journal of Cunningham Traders for February 2019 GJ12
28 Provision for Bad Debts B9 145 00
Provision for Bad Debts Adjustment N21 145 00
(Adjust provision for bad debts on 5% of debtors)

Example continued

2019 Provision for bad debts 2018
Feb 28 adjustment GJ 145 00 Mar 01 Balance b/d 860 00
Balance c/d 715 00
860 00 860 00
2019
Dr Provision for Bad Debts Adjustment N21 Cr

2019 2018
Feb 28 Profit and Loss account GJ 145 00 Feb 28 Provision for bad debts GJ 145 00
145 00 145 00
• The R860 balance for provision for bad debts is carried over from the
previous financial year and must be decreased by R145.
• The new balance for provision for bad debts is therefore now R715,
which is 5% of the current year’s debtors.
• The contra-entry for the adjustment is Provision for Bad Debts
Adjustment (PBDA) is a credit and is therefore an income.
• The Provision for Bad Debts Adjustment account will therefore be
closed off as an income to the Profit and Loss account.
Should an adjustment for Assets Owner’s equity Liabilities
bad debts be made before Date Effect Reason Effect Reason Effect Reason
the provision has been made, the 28 + 145 Negative asset: + 145 Provision for
bad debts must first be deducted Provision for bad debts
from debtors before the percentage bad debts adjustment –
provision is calculated. decreased income

Activity 6.13
Binchy Stores has already been trading for three years and their financial year
ends on 30 June.
Required
2. Show the entries in the General Ledger with regards to this adjustment
(balance and close off accounts properly).
3. Indicate the effect, with reason, on the accounting equation.

Nominal account
Bad Debts N4 1 386 00
Adjustments on 30 June 2014

• Write off debtor T Block’s debt of R440 as a bad debt.
• Adjust provision for bad debts to 5% of outstanding debtors on 30 June 2014.
Activity 6.14
The end of the financial year in the books of Vanessa & Mandy’s Coffee Shop is
29 February 2020.
Required
Journalise the following adjustments (narrations may be omitted).
Some balances from the Pre-adjustment Trial Balance on 28 February 2020

Debtors control R12 050
Provision for bad debts R380
Fixed deposit: AB bank (8% p.a.) R10 000
Adjustments on 29 February 2020

• The physical stock take on 29 February 2020 shows the following stock
on hand:
Stationery R210
• The rent of R2 400 for March 2019 was paid in advance during February.
• The following accounts were still outstanding at the end of February 2020:
Telephone R542

• Interest on the fixed deposit for the last three months is still outstanding at
8% interest p.a.
• Depreciation for the year should be taken into account as follows:
On vehicles R8 900
On equipment R2 870
• Write off debtor K Malan’s debt of R150 as a bad debt.
• Make provision for bad debts at 4% on outstanding debtors.
10.2 Interest capitalised

What is interest? Interest can be the cost of borrowed money (interest on
loan) or the earnings on an investment (interest on fixed deposit).
There are different ways to calculate interest.
10.2.1 Simple interest

Simple interest is calculated on the original amount only. Accumulated
interest is not used in calculations.
The formula for simple interest is:
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
10.2.2 Compound interest

With compound interest, interest is calculated on the total of the
principal (original) amount plus interest accumulated during past periods.
So we say interest is earned on interest (interest is compounded).
The formula for compound interest is:
A = P(1 + i)n
Example
R3 000 is invested in a fixed deposit account at a bank for four years.
The interest is 12% p.a.
Required
Show the value of the investment at the end of the four years if:
1. Simple interest is used
2. Compound interest is calculated on a annual basis.
Note that 12% = ___ 12  = 0,12
 100

Example continued
Solution
1. Simple interest 2. Compound interest
The interest is 12% on R3 000 At the end of each year, the
each year for 4 years. The interest interest raised previously is
received is the same every year. added to the principal (original)
amount, and 12% interest is then
calculated on the total amount.
End of first year: End of first year:
R3 000 + (0,12)(R3 000) R3 000 + (0,12)(R3 000)
= R3 360 = R3 360
End of second year: End of second year:
R3 360 + (0,12)(R3 000) R3 360 + (0,12)(R3 360)
= R3 720 = R3 763,20
End of third year: End of third year:
R3 720 + (0,12)(R3 000) R3 763,20 + (0,12)(R3 763,20)
= R4 080 = R4 214,78 (to the nearest cent)
End of fourth year: End of fourth year:
R4 080 + (0,12)(R3 000) R4 214,78 + (0,12)(R4 214,78)
= R4 440 = R4 720,56 (to the nearest cent)
By using the formula for each it is much faster:
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 mathematical. How will the GAAP flash
bookkeeper now enter this information in the business books?
Matching principle: Income
The bookkeeper needs to apply the matching principle of GAAP. The and expenses are recognised and
interest earned in a financial period, must be taken into consideration recorded in the time period in
for that financial period as an income, even though the business will which they took place.
only receive the amount when the fixed deposit matures after four years.
The bank will send the business a statement at the end of each period to
indicate the amount of interest earned.

Let us use the same example as the calculations above:
Example
On 1 March 2015, Joanne’s Boutique invested R3 000 in a fixed deposit
account at AB Bank for four years.
Required
Interest must be capitalised and calculated at 12% compound interest
per annum.
Solution
At the end of Year 1, 29 February 2016, the business received the
following statement from the bank:
Balance of fixed deposit on 1 March 2015 R3 000 00

Interest earned for the year R360 00
Balance of fixed deposit on 29 February 2016 R3 360 00
The bookkeeper made the following entries in the business books:
Cash Payments Journal of Joanne’s Boutique for March 2015 CPJ

no. Amount Details
BS 01 AB Bank 3 000 00 3 000 00 Fixed deposit: AB Bank
General Journal of Joanne’s Boutique for February 2016 GJ

Doc. Day Details Fol. Debit Credit
no.
JV 29 Fixed deposit: AB Bank 360 00
Interest on fixed deposit 360 00
(Adjustment for interest on fixed deposit capitalised)
General Ledger of Joanne’s Boutique

Dr Fixed Deposit: AB Bank Cr
2015
Mar 01 Bank CPJ 3 000 00
2016
Feb 29 Interest on fixed deposit GJ 360 00
3 360 00

Example continued
Nominal account
Dr Interest on Fixed Deposit Cr
2016 2016
Feb 29 Profit and loss GJ 360 00 Feb 29 Fixed deposit: AB Bank GJ 360 00
The Interest on Fixed Deposit account will then be closed off to the Profit
and Loss account as it is an income earned for that financial period.
Accounting equation
2015 – 3 000 Cash in bank
1 Mar decreases
+3 000 Fixed deposit
increases
2016 +360 Fixed deposit +360 Interest on fixed
29 Feb increases deposit – income
At the end of Year 2, 28 February 2017, the business received the

following statement from the bank:
Balance of fixed deposit on 1 March 2016 R3 360 00

Interest earned for the year R403 20
Balance of fixed deposit on 28 February 2017 R3 763 20
The bookkeeper would have made the following entries in the business
books:

no.
JV 28 Fixed deposit: AB Bank 403 20
(Adjustment for interest on fixed deposit capitalised)

Example continued

Dr Fixed Deposit: AB Bank Cr
2016
2017
Feb 28 Interest on fixed deposit GJ 403 20
3 763 20
Nominal account
Dr Interest on Fixed Deposit Cr
2017 2017
Feb 28 Profit and loss GJ 403 20 Feb 28 Fixed deposit: AB Bank GJ 403 20
The same principles apply when interest on a loan is capitalised.

Lending institutions usually capitalise interest on loans. This means the
interest is charged directly to the Loan account. Interest on Loan will be
debited and the Loan account will be credited. This entry can thus not be
made in the CPJ, and must therefore be done in the General Journal.
The procedure with regards to loans and interest capitalised will be
as follows:
An application is The loan is approved by AB Bank An instalment of R1 000 will be paid

made for a loan of and paid to the business. to AB Bank monthly. The instalment
R100 000. The entry is made in the CRJ: includes capital repayments as well as
AB Bank processes Debit: Bank interest which is calculated by the bank.
the 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

The interest on loan is recorded in needs to know what the finance cost (interest)
the General Journal: was with regards to the loan. AB Bank would
Debit: Interest on loan have sent them a loan statement periodically,
Credit: Loan: AB Bank reflecting this information.

Example
On 1 March 2017, Joanne’s Boutique applied for a loan of R100 000
from AB Bank. The application was successful and the proceeds of the
loan were paid into the bank account of Joanne’s Boutique.
The loan agreement stipulates the following:
• Interest on loan is capitalised.
• The loan instalment amounts to R1 000 and is payable on the 28th
of every month starting 28 March 2017.
On 28 February 2018, the loan statement reflected the following:
• Interest paid for the year, R9 200
• Capital paid on loan for the year, R2 800
The following entries are made into the books of the business:
Cash Receipts Journal of Joanne’s Boutique for March 2017 CRJ
no. Amount Details
BS 01 AB Bank 100 000 00 100 000 00 Loan: AB Bank
Cash Payments Journal of Joanne’s Boutique for the year ended

February 2018 CPJ
Doc. Date Details Fol. Bank Sundry accounts
no. Amount Details
BS 28 Mar 2017 AB Bank 1 000 00 1 000 00 Loan: AB Bank
BS 28 Apr 2017 AB Bank 1 000 00 1 000 00 Loan: AB Bank
BS 28 May 2017 AB Bank 1 000 00 1 000 00 Loan: AB Bank
BS 28 Jun 2017 AB Bank 1 000 00 1 000 00 Loan: AB Bank
BS 28 Jul 2017 AB Bank 1 000 00 1 000 00 Loan: AB Bank
BS 28 Aug 2017 AB Bank 1 000 00 1 000 00 Loan: AB Bank
BS 28 Sep 2017 AB Bank 1 000 00 1 000 00 Loan: AB Bank
BS 28 Oct 2017 AB Bank 1 000 00 1 000 00 Loan: AB Bank
BS 28 Nov 2017 AB Bank 1 000 00 1 000 00 Loan: AB Bank
BS 28 Dec 2017 AB Bank 1 000 00 1 000 00 Loan: AB Bank
BS 28 Jan 2018 AB Bank 1 000 00 1 000 00 Loan: AB Bank
BS 28 Feb 2018 AB Bank 1 000 00 1 000 00 Loan: AB Bank

Example continued

no.
JV 28 Interest on loan 9 200 00
Loan: AB Bank 9 200 00
(Adjustment for interest on loan for the year)

Dr Loan: AB Bank Cr
2017 2017
Mar 28 Bank CPJ 1 000 00 Mar 01 Bank CRJ 100 000 00
2018
Apr 28 Bank CPJ 1 000 00 Feb 28 Interest on loan GJ 9 200 00
May 28 Bank CPJ 1 000 00
Aug 28 Bank CPJ 1 000 00
Oct 28 Bank CPJ 1 000 00
Nov 28 Bank CPJ 1 000 00
Dec 28 Bank CPJ 1 000 00
2018
Jan 28 Bank CPJ 1 000 00
Feb 28 Bank CPJ 1 000 00
109 200 00 109 200 00
2018
Nominal account
Dr Interest on Loan Cr
2018 2018
Feb 28 Loan: AB Bank GJ 9 200 00 Feb 28 Profit and loss GJ 9 200 00

Example continued
The Interest on Loan account is then 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.
Accounting equation
Transaction Effect Reason Effect Reason Effect Reason
Payments on – 12 000 Cash in bank – 12 000 Loan decreases
loan during decreases
the year
(R1 000 × 12)
28 Feb 2018: – 9 200 Interest on loan + 9 200 Loan increases
Interest – expense
capitalised
Activity 6.15
The business of Dan the Handyman received the following statement from
Conbank on 30 June 2017, the end of their financial year. Interest on loan was
capitalised.
CONBANK
Loan statement on 30 June 2017
Balance on 1 July 2016 166 400 00
Interest charged ?
Monthly payments to Conbank in terms of loan agreement (12 × R2 150) 25 800 00
Balance on 30 June 2017 163 000 00
The interest expense for the year has not yet been entered in the books.
Required
1. Show the entry for interest on loan in the General Ledger of Dan the
Handyman on 30 June 2017.
2. Prepare the following accounts in the General Ledger of Dan the Handyman:
• Loan: Conbank (5 lines)
• Interest on loan (2 lines)
3. Show the effect of these transactions on the accounting equation.

11. Final accounts and closing transfers
Closing transfers
Profit and Loss Appropriation

Trading account account account
Sales less Cost of Gross profit plus Appropriation
sales equals Gross other income less of net profit to
profit Expenses equal partners according
Net profit to agreement
The following steps take place during the closing transfers of a trading
business at the end of the financial year:
Close off the Debtors Allowances account to the Sales account.
Close off the Sales and Cost of Sales accounts to the Trading account.
Calculate the gross profit in the Trading account.
Transfer the gross profit from the Trading account to the Profit and Loss account.
Close off all income to the credit side of the Profit and Loss account.
Close off all expenses to the debit side of the Profit and Loss account.

Calculate the net profit in the Profit and Loss account.
Transfer the net profit from the Profit and Loss account to the Appropriation account.
Appropriation of net profit according to the partnership agreement takes place in the
Appropriation account.
Close off the Drawings accounts to the Current accounts.
After the closing transfers have taken place, a Post-closing Trial Balance is
drawn up. The Post-closing Trial Balance only consists of Balance Sheet
accounts, as all nominal accounts have been closed off.
Activity 6.16
Xoseka & Co. is a partnership with partners, O Xoseka and L Yawa.

Their financial year ends on 29 February 2020.
Required
1. Show the following accounts in the General Ledger:
Current account: Xoseka (8 lines) Current account: Yawa (8 lines)
Trading account (4 lines) Profit and Loss account (13 lines)
2. Draw up the Post-closing Trial Balance as at 29 February 2020.

Pre-adjustment Trial Balance of Xoseka & Co. as at 29 February 2020
Capital: Xoseka 220 000 00
Capital: Yawa 240 000 00
Drawings: Xoseka 106 200 00
Drawings: Yawa 119 120 00
Current account: Xoseka 10 833 00
Current account: Yawa 6 035 00
Land and buildings 400 000 00
Vehicles 60 000 00
Equipment 24 200 00
Accumulated depreciation on equipment 10 800 00
Trading stock 23 410 00
Debtors control 10 560 00
Provision for bad debts 610 00
Bank 5 641 00
Cash float 1 000 00
Creditors control 18 992 00
Nominal accounts
Sales 933 010 00
Costs of sales 620 400 00
Debtors’ allowances 2 410 00
Rent income 14 950 00
Interest on current account 870 00
Bank charges 2 532 00
Discount received 1 464 00
Discount allowed 1 054 00
Stationery 1 685 00
Wages and salaries 86 800 00
Insurance 7 240 00
Bad debts 589 00
Telephone 5 379 00
Water and electricity 4 944 00
1 483 164 00 1 483 164 00

Adjustments
• The physical stock take done on 29 February 2020 shows the following stock
on hand:
stationery R112
• It was decided to write off T Roux’s debt of R120 as a bad debt.
• Make provision for bad debts by calculating 5% of outstanding debtors.
• Rent for 13 months was received.
• The following accounts for February 2020 were received, but have not
been paid:
Telephone R521
• An annual insurance premium of R2 640 was paid on 1 october 2019.
• Depreciation should be taken into account as follows:
on vehicles at 15% per year on the diminishing balance
on equipment at 10% per year on the cost price
Partners earn 10% interest on capital.
Each partner earns a salary of R5 500 per month.
Partner Xoseka receives a bonus of R8 400.
Remaining profits of losses are shared equally between the partners.
GAAP flash
12. Reversal of adjustments
Prudence principle: When a
You know that the matching principle should be applied at all times. This debtor’s debt cannot be collected, it
is why reversal of adjustments should be done on the first day of the next can no longer be shown as an asset
accounting period. Look at the following example. in the business’s books.
Example
Required
Record all the adjustments provided below on 29 February 2016, the
end of the financial period, into the following books:
1. General Journal
2. General Ledger
Information
At the end of the accounting period on 29 February 2016, the following
balances appeared in the financial records of HC Traders:

Example continued
Pre-adjustment Trial Balance of HC Traders as at 29 February 2016

Nominal accounts

• According to a physical count, stationery to the value of R360 was
not used during the financial period.
• The business received one month’s rent of R1 250 in advance from
the tenant.
Solution
The above adjustments would have been entered in the business books
as follows:
General Journal of HC Traders for February 2016

no.
JV 34 29 Consumable stores on hand B20 360 00
Stationery N13 360 00
(Adjustment)
JV 35 Rent income B21 1 250 00
Income received in advance N14 1 250 00
(Adjustment)
General Ledger of HC Traders

Dr Consumable Stores on Hand B20 Cr
2016
Feb 29 Stationery GJ 360 00
Dr Income received in advance B21 Cr

2016
Feb 29 Rent income GJ 1 250 00

Example continued
Nominal accounts
Dr Stationery N13 Cr
2016 2016
Feb 29 Balance b/d 3 470 00 Feb 29 Consumable stores on hand GJ 360 00
Profit and loss GJ 3 110 00
3 470 00 3 470 00
Dr Rent Income N14 Cr

2016 2016
Feb 29 Income received in advance GJ 1 250 00 Feb 29 Balance b/d 16 250 00
Profit and loss 15 000 00
16 250 00 16 250 00
In the previous example, the stationery that was not used in the current
financial period is deducted, because it will only be used in the next
financial period. Therefore it is important that we write it back on the
first day of next financial period.
Stationery purchased R3 110 01/03/2015 29/02/2016
Write back R360

01/03/2015 29/02/2016
Stationery purchased R3 470
The same applies to the Rent Income account. The business received
rent income of R16 250 during the financial year. However, R1 250
of that is rent for March 2017 – this falls in the next financial period.
The R1 250 should therefore be deducted from the current financial
period and written back to the next financial period.

Rent income earned R15 01/03/2016 28/02/2017
01/03/2015 28/02/2016 Write back R1 250
Rent income received is R16 250
Example
Reversal of adjustments
At the end of the accounting period on 29 February 2016, the following
balances appeared in the financial records of HC Traders.
Required
Do the reversal of the adjustment on 1 March 2016, the first day of the
next financial period.
Post-adjustment Trial Balance for HC Traders as at 29 February 2016

Consumable stores on hand B20 360 00
Income received in advance B21 1 250 00
Information
The consumable stores consist of stationery that was not used in the
previous financial period and income received in advance is rent income
received in advance during the previous financial period for the rent of
March 2016.
Solution
These adjustments will be reversed (written back) on the first day of the
next financial period in order to apply the matching principle.
General Journal of HC Traders for March 2016

no.
JV 36 29 Stationery N13 360 00
Consumable stores on hand B20 360 00
(Reversal of adjustment)
JV 37 Income received in advance B21 1 250 00
(Reversal of adjustment)

Example continued
General Ledger of HC Traders

Dr Consumable Stores on Hand B20 Cr
2016 2016
Feb 29 Balance b/d 360 00 Mar 01 Stationery GJ 360 00
Dr Income Received in Advance B21 Cr

2016 2016
Mar 01 Rent income GJ 1 250 00 Feb 29 Balance b/d 1 250 00
Nominal accounts
2016
Mar 01 Consumable stores on hand GJ 360 00
Dr Rent Income N14 Cr

2016
Mar 01 Income received in advance GJ 1 250 00
Activity 6.17
Batts Traders’ financial year ends on 28 February.
Required
1. Complete the adjustments provided on 28 February 2018, the end of the Tip
financial period, in the General Ledger and General Journal. Write the adjustments and the
2. Reverse these adjustments on 1 March 2018, the first day of the next reversal of adjustments in different
financial period. colours in your book.
The information for Batt’s Traders appears on the following page.

Information
Post-adjustment Trial Balance for Batts Traders as at 29 February 2016
Nominal accounts Fol. Debit Credit

• Rent income includes the rent for March 2018, as the rent agreement
stipulates that rent should be paid one month in advance.
• The water and electricity bill for February 2018, R778, will only be paid in
March 2018.
• Unused stationery according to the physical stock take on 28 February 2018
amounts to R390.
• R6 600 was paid for an advertising contract with the local newspaper. It
consists of 24 weekly advertisements from 1 January 2018 to 30 June 2018.

Chapter 7
Partnerships – Financial statements
• do year-end adjustments
• apply GAAP principles
• prepare an Income Statement and Balance Sheet of a partnership
• calculate and record depreciation and asset disposal
• understand the perpetual inventory system
• identify and analyse ethical behaviour applicable to the business
environment
• apply internal control measures
Key concepts
• partnership • Income Statement • gross profit • net profit • Balance Sheet • assets
• owner’s equity • liabilities • GAAP • partnership agreement • notes to the financial
statements • Statement of Owner’s Equity
Nomsa, can you help

me please? I just can’t
get this Balance Sheet
to balance.
Any time, come in and

sit down, so we can see
where the problem lies.
Partner s h ip s – F inancial s tatement s • c h a p t e r 7 227

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.
2. Qualitative properties of financial statements

The qualitative properties of the financial statements make it useful to
the different parties using it:
• 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 one year to the next. Similar entities should also be able to
compare statements in order to evaluate their performance.
3. Users of financial information

The financial statements are used by different parties for various reasons:
• The partners will use the financial statements to see how the business
has fared and what the status of the business is.
• Credit providers and the bank will use the financial statements to
see whether the business will be able to repay a loan, or whether it is
creditworthy in order to grant overdraft facilities.
• SARS will use it for tax purposes.
• An auditor must audit the financial statements to make sure that
sound and generally accepted accounting practices are applied.
(However, this does not really apply to a partnership – usually only
companies have to be audited.)
• A possible buyer will want to see the statements to determine
whether it is a good buy, and to find out whether the selling price
is justified.
228 c h a p t e r 7 • Partner s h ip s – F inancial s tatement s

4. Components of financial statements
4.1 Income Statement
The Income Statement of a partnership is exactly the same as that of a sole Income Statement
trader. The Income Statement shows the results of the business activities result of business activities
for a specific accounting period. All the nominal accounts appear in the
Income Statement and it shows the same information as the Trading and
Profit and Loss accounts – therefore the final net profit for the year.
4.2 Balance Sheet (Statement of Financial Position)

The financial position of the business is disclosed in the Balance Sheet. Balance Sheet
The Balance Sheet is similar to that of the sole trader, except for the financial position of the business
owner’s equity note shown on the Balance Sheet. The note for owner’s
equity of a sole trader is replaced by two notes, Capital accounts and
Current accounts, where the sharing of the net profit is shown.
4.3 Statement of Change in Owner’s Equity

For a partnership the change in owner’s equity is reflected in the notes
for Capital and Current accounts. The Statement of Change in Owner’s
Equity is a reconciliation of the equity at the beginning of the financial
year with the equity at the end of the financial year.
5. Elements of the financial statements

5.1 Assets
An 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.
An asset can be tangible or non-tangible. Assets can be divided in tangible asset
two main categories: something that you can see physically,
• Non-current assets: land and buildings, vehicles, equipment, financial e.g. a computer
assets such as investments
• Current assets: cash and cash equivalents, debtors, inventory
non-tangible asset
something you cannot touch
5.2 Liabilities physically, but is still an asset, e.g.
A liability is a current obligation, because transactions from the past and fixed deposit
the settlement of this obligation will lead to an outflow of resources
from the business.
Liabilities can be divided in two main groups:
• Non-current liabilities: long-term loans
• Current liabilities: creditors, bank overdraft, accrued expenses –
these liabilities are all payable within 12 months.

5.3 Equity
Equity = Assets – Liabilities
Equity can be sub-divided into four categories:
• Capital: cash or other assets the owner contributes towards the
business – capital increases the owner’s equity.
• Drawings: cash or other assets the owner withdraws from the
business – drawings will decrease the owner’s equity.
• Income: sales, services rendered, rent income, etc. – any transaction
that will lead to a increase in profit is regarded as an income and will
increase the owner’s equity.
• Expenses: telephone, water and electricity, etc. – any transaction
that will lead to a decrease in profit is regarded as an expense and will
decrease the owner’s equity.
Example
Financial statements of a partnership
The Post-adjustment Trial Balance of CA Clothing, with partners
B Cunningham and T Adams, is provided on 28 February 2019.
Required
1. Draw up the Income Statement for the year ended 28 February
2019.
2. Draw up the Balance Sheet, with complete and extensive notes,
as at 28 February 2019.
Post-adjustment Trial Balance of CA Clothing as at 28 February 2019

Capital: B Cunningham 200 000 00
Capital: T Adams 150 000 00
Drawings: B Cunningham 144 200 00
Drawings: T Adams 138 690 00
Current account: B Cunningham 10 576 00
Current account: T Adams 1 047 00
Vehicles 90 000 00
Equipment 36 000 00
Fixed deposit: AB Bank 20 000 00

Example continued
Post-adjustment Trial Balance of CA Clothing as at 28 February 2019 cont...

Balance Sheet accounts (cont.) Fol. Debit Credit
Bank 9 733 00
Cash float 900 00
Loan: XYZ Bank 180 000 00
Consumable stores on hand 1 645 00
Accrued expenses 1 023 00
Income received in advance 1 500 00
Accrued income 250 00
Prepaid expenses 1 200 00
Nominal accounts
Sales 1 150 920 00
Cost of sales 654 000 00
Debtors allowances 4 520 00
Interest on fixed deposit 1 000 00
Bad debts 624 00
Telephone 9 360 00
Insurance 7 200 00
Stationery 1 870 00
Interest on loan 27 000 00
Provision for bad debts adjustment 63 00
Trading stock deficit 1 335 00
1 785 912 00 1 785 912 00

Example continued
Information
• The depreciation for the year was taken into account as follows:
On vehicles R13 500
On equipment R3 600
New equipment of R5 000 was bought on 1 January 2019 and
correctly recorded/accounted for.
• The loan is repaid annually on 30 June in instalments of R20 000.
Interest on capital is earned at 10% per year. Note that partner
Cunningham increased his capital by R50 000 on 1 September, while
partner Adams decreased his capital on the same date by R20 000.
Remaining profits/losses are shared according to the ratio of 3 : 2
between Cunningham : Adams.
Partner Cunningham earns a salary of R8 000 per month and
partner Adams earns a salary of R9 500 per month.
Partner Cunningham receives a bonus of R18 000 for the
financial year.

Example continued
Solution
B Cunningham and T Adams
Trading as CA Clothing
Income Statement for the year ended 28 February 2019
Note R
Sales (1 150 920 – 4 520) 1 146 400 00
Cost of sales (654 000 00)
Gross profit 492 400 00
Other operating income 20 467 00
Gross operating income 512 867 00

Operating expenses (202 867 00)
Bad debts 624 00
Telephone 9 360 00
Salaries and wages 155 200 00
Insurance 7 200 00
Stationery 1 870 00
Provision for bad debts adjustment 63 00
Trading stock deficit 1 335 00
Operating profit (loss) 310 000 00

Interest income 1 1 000 00
Profit (loss) before interest expense 311 000 00
Interest expense 2 (27 000 00)
Net profit (loss) for the year 284 000 00

Example continued
Balance Sheet at 28 February 2019
Note R
ASSETS
NON-CURRENT ASSETS 491 800 00
Fixed / tangible assets 3 471 800 00
Financial assets – –
Fixed deposit: AB Bank 20 000 00
CURRENT ASSETS 67 106 00

Inventories 4 45 875 00
Trade and other receivables 5 10 598 00
Cash and cash equivalents 6 10 633 00
TOTAL ASSETS 558 906 00
EQUITY AND LIABILITIES

OWNER’S EQUITY 360 639 00
Capital 7 350 000 00
Current accounts 8 10 639 00
NON-CURRENT LIABILITIES 160 000 00

Loan from XYZ Bank (180 000 – 20 000) 160 000 00
CURRENT LIABILITIES 38 267 00

Trade and other payables 9 18 267 00
Bank overdraft – –
Short-term loans 20 000 00
TOTAL EQUITY AND LIABILITIES 558 906 00

NOTES TO THE FINANCIAL STATEMENTS AT 28 FEBRUARY 2019
1. Interest Income
On investment 1 000 00
On current account – –
Interest received – –
On savings account – –
1 000 00

Example continued
2. INTEREST EXPENSE
On loan from XYZ Bank 27 000 00
On overdraft – –
Interest paid – –
27 000 00
3. FIXED / TANGIBLE ASSETS

Land and Vehicles Equipment Total
buildings
Carrying value at beginning of year 400 000 67 100 16 800 483 900
Cost 400 000 90 000 31 000 521 000
Movements – – – –
Additions – – 5 000 5 000
Disposals at carrying value – – – –
Depreciation – (13 500) (3 600) (17 100)
Carrying value at end of year 400 000 53 600 18 200 471 800
Cost 400 000 90 000 36 000 526 000
4. INVENTORIES
Consumable stores on hand 1 645 00
45 875 00
5. TRADE AND OTHER RECEIVABLES

Trade debtors 9 630 00
Provision for bad debts (482 00)
Net trade debtors 9 148 00
Expenses prepaid 1 200 00
Income accrued (receivable) 250 00
10 598 00

Example continued
6. CASH AND CASH EQUIVALENTS

Fixed deposits (maturing within 12 months) – –
Savings account – –
Bank 9 733 00
Cash float 900 00
Petty cash – –
10 633 00
7. Capital
Cunningham Adams Total
Balance on last day of previous year 150 000 00 170 000 00 320 000 00
Additional capital contributed 50 000 00 – – 50 000 00
200 000 00 170 000 00 370 000 00
Decreasing of capital – – (20 000 00) (50 000 00)
Balance on last day of current year 200 000 00 150 000 00 350 000 00
8. CURRENT ACCOUNTS
Balance at beginning of year 10 576 00 (1 047 00) 9 529 00
Net profit as per Income Statement 145 000 00 139 000 00 284 000 00
Partners’ salaries 96 000 00 114 000 00 210 000 00
Interest on capital 17 500 00 16 000 00 33 500 00
Partners’ bonuses 18 000 00 – – 18 000 00
Primary distribution of profit 131 500 00 130 000 00 261 500 00
Final distribution of profit 13 500 00 9 000 00 22 500 00
Drawings for the year (144 200 00) (138 690 00) (292 690 00)
Undrawn profits (retained income) for the year 800 00 310 00 1 110 00
Balance at end of year 11 376 00 (737 00) 10 639 00
Calculations
Interest on capital: Cunningham R150 000 × 10% × __ 6  = R7 500
 12
R200 000 × 10% × __ 6  = R10 000
 12
= R17 500
Interest on capital: Adams R170 000 × 10% × __ 6  = R8 500

 12
R150 000 × 10% × __ 6  = R7 500
 12
= R16 000

Example continued
 53 = R13 500
Remaining profit: Cunningham R22 500 × __
Remaining profit: Adams  52 = R9 000
R22 500 × __
9. TRADE AND OTHER PAYABLES

Trade creditors 15 744 00
Expenses accrued (payable) 1 023 00
Income received in advance (deferred) 1 500 00
Creditors for salaries – –
Pension fund – –
SARS – –
18 267 00
Activity 7.1
Sanet Ackerman and Jahne Steenkamp have a partnership called Sanjah

Clothing. Their financial year ends 30 June.
Required
1. Prepare the Income Statement for the year ended 30 June 2016.
2. Prepare the Balance Sheet, with notes, at 30 June 2016.

Information
Pre-adjustment Trial Balance for Sanjah Clothing as at 30 June 2016
Capital: S Ackerman 300 000
Capital: J Steenkamp 200 000
Drawings: S Ackerman 176 000
Drawings: J Steenkamp 157 000
Current account: S Ackerman 4 220
Current Account: J Steenkamp 1 021
Land and buildings 670 000
Equipment 60 000
Loan: AB Bank 264 000
Trading stock 54 890
Debtors control 18 600
Provision for bad debts 867
Bank 16 891
Cash float 2 500
Creditors control 21 770
Nominal accounts
Sale 1 621 778
Cost of sales 966 250
Debtors allowances 5 778
Salaries and wages 210 000
Consumable stores 5 680
Advertising 12 340
Bad debts 1 430
Rent income 13 650
Insurance 7 680
Water and electricity 10 976
Telephone 11 320
Sundry expenses 18 665
Interest on loan ?

Information and adjustments
• According to a physical stock take on 30 June 2016, the following were
on hand:
Consumable stores R870
• The rent for July 2016 was received in advance.
• Provide for depreciation on equipment at 15% p.a. on the diminishing
balance.
• Adjust the provision for bad debts to 4% of the outstanding debtors.
• Advertisements prepaid, R800.
• Water and electricity payable on 30 June 2016, R643.
• Interest on the mortgage loan is capitalised. The loan statement received
from AB Bank on 30 June 2016 reflects the following:
AB BANK
Loan Statement on 30 June 2016
Balance on 1 July 2015 R300 000
Interest capitalised R33 000
Monthly payments in terms of the loan agreement: these monthly payments include
interest and capital repayments of the loan. R69 000
Balance on 30 June 2016 R264 000
• The capital repayments on the loan will remain constant at R36 000 per
annum until the loan is fully repaid.
■ Partner Ackerman receives a salary of R120 000 per annum and partner
Steenkamp receives a salary of R132 000 per annum.
■ Partner Ackerman receives a bonus of 2% of the net profit for the year.
■ Interest on capital is 10% of the partners’ opening balances.
■ The remaining profit must be shared in the ratio 3 : 2 for
Ackerman : Steenkamp.

Activity 7.2
M Tshaba and S Zika are partners in the business Halala Stores. The Pre-
adjustment Trial Balance below was drawn up on 31 December 2020, the end of
the accounting period.
Required
Draw up the Income Statement for the year ended 31 December 2020 and the
Balance Sheet on 31 December 2020 with notes.
Pre-adjustment Trial Balance of Halala Stores as at 31 December 2020

Capital: Tshaba 230 000
Capital: Zika 220 000
Drawings: Tshaba 86 500
Drawings: Zika 78 600
Current account: Tshaba 2 760
Current account: Zika 1 084
Vehicles 90 000
Equipment 64 860
Accumulated depreciation on vehicles 36 000
Fixed deposit: AR Bank (10% p.a.) 37 000
Bank 15 230
Cash float 1 000
SARS (PAYE) 1 980
Pension fund 2 540

Nominal accounts
Sales 994 317
Costs of sales 600 000
Bad debts 540
Telephone 6 480
Wages 49 920
Salaries 96 000
Stationery 2 410
Insurance 8 740
Bank charges 2 147
Rent income 16 120
Pension fund contribution 998
Discount allowed 343
Discount received 694
1 546 958 1 546 958

• Stock on hand on 31 December 2020 is as follows:
Stationery R632
• It was decided to write off N Negene’s debt of R160 as a bad debt.
• Adjust the provision for bad debts to 4% of the balance of the Debtors
Control account.
• Insurance paid in advance, R450
• Calculate depreciation as follows:
On vehicles at 20% per year on the diminishing balance
On equipment at 15% per year on the cost price
• Rent was received for 13 months.
• The telephone account of R536 of December 2020 must still be paid.
• The fixed deposit account in the General Ledger is as follows
(partial interest at 10% per year must still be taken into account):

Dr Fixed deposit: AR Bank Cr
2020
• The partnership agreement stipulates that:

Partner Tshaba is entitled to a salary of R5 800 per month.
Partner Zika is entitled to a salary of R6 000 per month.
Partner Tshaba receives a bonus of R4 800 for the year.
Each partner is entitled to interest on capital at 12% per year.
Take into account that partner Tshaba has increased her capital by R30 000
on 1 July 2020.
The remaining income must be shared equally between the partners.
Activity 7.3
The Statement of Owner’s The financial year of Aljo Traders, with partners Alta and Johan, ends on
Equity consists of the notes for 28 February.
the Capital and Current accounts.
Required
show the statement of owner’s Equity as it will appear in the financial
statements for the year ended 28 February 2017.
Some balances and totals on 28 February 2017

Fol. Debit Credit
Capital: Alta 200 840
Capital: Johan
Drawings: Alta 129 400
Drawings: Johan 115 600
Current account: Alta (1 March 2016) 2 456
Current account: Johan (1 March 2016) 1 602
Profit and loss 245 665
Information
• Partner Alta decreased her capital on 1 June 2016 by R50 000.
Partner Johan increased his capital by R50 000 on 1 December 2016.
• Interest on capital is earned at 10% per year.
• Partner Alta earn a salary of R8 000 per month and partner Johan R7 000 per
month. Partner Alta has not taken her salary for February 2017.
• Partner Johan receives a bonus of R12 000 for the financial period.
242 c h a p t e r 7 • PA R T N E R s h I P s – F I N A N C I A L s TAT E M E N T s

• Remaining profits/losses are shared in the ratio of capital as at the end of
the year.
• The net profit for the year as calculated in the Income Statement amounts
to R245 665.
Activity 7.4
The following information was taken from the books of Macadam Stores, a
partnership with partners M Mac and A Adam, on 29 February 2020.
Required
1. Show the Debtors Control and Provision for Bad Debts accounts in the
General Ledger.
2. Draw up the Income Statement for the year ended 29 February 2020 and
the Balance Sheet with notes on 29 February 2020.
Pre-adjustment Trial Balance of Macadam Stores as at 29 February 2020

Capital: Mac (01/03/2019) 90 000
Capital: Adam (01/03/2019) 60 000
Current account: Mac (01/03/2019) 15 412
Current account: Adam (01/03/2019) 4 800
Drawings: Mac (01/03/2019) 88 600
Drawings: Adam (01/03/2019) 86 100
Mortgage loan: FBS 125 000
Vehicles 85 000
Equipment 63 000
Bank 20 570
Cash float 1 000
Petty cash 250

Nominal accounts
Sales 683 600
Property rates 8 000
Municipal services 1 570
Advertising 12 700
Bad debts 585
Packaging 4 130
Insurance 7 300
Rent income 7 700
Bank charges 1 050
Interest on overdraft 2 670
Interest on loan ?
Stationery 3 120
Sundry expenses 21 902
1 093 937 1 093 937

• A client bought goods with a selling price of R 4 200 (cost price R2 900) on
credit, but asked for the goods to only be delivered on 15 March 2020. The
transaction was correctly recorded and posted in the books, but was not
taken into account during the physical stock take (see third bullet).
• A credit note of R336 (cost price R240) made out to debtor K Marais was not
recorded in the books at all.
• The physical stock take done on 29 February 2020 showed the following:
Packaging R940
from FBS Bank on 29 February 2020 reflects the following:
FBS BANK
Loan Statement on 29 February 2020
Balance on 1 March 2019 R145 000 00
Interest capitalised ?
Monthly payments in terms of the loan agreement. These monthly payments include
interest and capital repayments of the loan. 44 300 00
Balance on 29 February 2020 125 000 00

The capital repayments on the loan will remain constant at R20 000 per annum
until the loan is fully repaid.
• Insurance included a premium of R3 600 for the period 1 November 2019 to
31 October 2020.
• On 25 February 2020 M Mac took office stationery of R90, for personal use.
No entry was made of the transaction.
• The monthly rent for February 2020 has not been received yet.
• It was found that an amount of R300 received from debtor B Mason on
20 February 2020, previously written off as a bad debt, was incorrectly
posted to the Debtors Control account.
• The account of a debtor, S Skelm, who owes R274, must be written off as a
bad debt.
• The Provision for Bad Debts account must be adjusted to 5% of the debtors’
balances.
• Provide for depreciation as follows:
R10 950 on equipment
R10 880 on vehicles
■ Each partner is entitled to a salary of R 7 000 per month.
■ The partners receive interest at 10% p.a. on the capital invested in the
business. M Mac increased his capital increases by depositing a further
R30 000 in Macadam Stores’ account on 1 September 2019.
■ Remaining profits/losses must be shared according to the ratio of the
closing balances of the partners’ Capital accounts.
Activity 7.5
The accounting period for King Traders, with partners Jenny King and Graham
King, ends annually on the last day of February. The given information appeared
in their books on 28 February 2018.
Required
1. Draw up King Traders’ Income Statement for the year ended
28 February 2018.
2. Draw up King Traders’ Balance Sheet on 28 February 2018, with notes.

Pre-adjustment Trial Balance of King Traders as at 28 February 2018
Capital: Jenny 216 000
Capital: Graham 180 000
Drawings: Jenny 80 120
Drawings: Graham 90 520
Current account: Jenny 4 201
Current account: Graham 4 504
Vehicles 72 000
Equipment 50 000
Bank 22 210
Fixed deposit: AB Bank 17 000
Nominal accounts
Sales 1 001 500
Rates and taxes 2 808
Stationery 1 962
Rent income 15 400
Bad debts 206
Repairs 1 386
Telephone 5 120
Bad debts recovered 2 246
Insurance 4 772
Wages 47 520
Bank charges 1 841
Salaries 172 000
1 477 931 1 477 931

• Partner Jenny took goods with a cost price of R1 200 for personal use before
the stock take. The transaction has not been recorded yet.
• Trading stock was sold to R Viljoen on 27 February 2018 for R1 080 (cost
price R940). All the necessary documentation has been completed and
recorded. The goods have not been collected by R Viljoen and the sale was
not taken into account during the stock take.
• Stock on hand on 28 February 2018:
Stationery R101
• Debtor T Clift is insolvent and his debt of R465 must be written off as a
bad debt.
• The provision for bad debts must be adjusted to 5% of trade debtors.
• An invoice was received from H&H Motors for the repair of a vehicle, R670.
The necessary entries must still be done.
Dr Fixed Deposit: AR Bank Cr

2017 2018
Mar 01 Balance b/d 30 000 00 Feb 28 Bank 30 000 00
2018
Jan 01 Bank 17 000 00
Interest at 9% p.a. was applicable to both fixed deposits.

• Included with the amount for insurance is an annual premium of R2 640 on
a policy renewed on 1 May 2017.
• Part of the building has been rented out since 1 May 2017. The rent for
March 2018 has already been received and recorded.
• Depreciation should be taken into account as follows:
On vehicles at 10% per year on the diminishing balance
On equipment at 15% per year on the cost price.
Take into account that new equipment of R12 000 was bought on
1 December 2017 and correctly recorded.
• The telephone account for February 2018 was received but not yet paid, R508.
Sharing of profit
• The partners are entitled to interest on capital at 15% per year.
• Each partner is entitled to a salary of R7 800 per month.
• Partner Jenny receives a bonus of R4 000.
• The remaining profit/loss must be equally shared between the partners.

Activity 7.6
The following information was taken from the books of Island Traders, with
partners E Palmer and J Harker.
Required
Draw up the Income Statement and Balance Sheet for the year ended
28 February 2019.
Pre-adjustment Trial Balance of Island Traders as at 28 February 2019

Capital: E Palmer 310 000
Capital: J Harker 310 000
Current account: E Palmer 3 200
Current account: J Harker 4 400
Drawings: E Palmer 129 974
Drawings: J Harker 106 800
Equipment 95 600
Mortgage loan: HJ Building Society (20% p.a.) 130 000
Fixed deposit: SP Bank (15% p.a.) 25 000
Bank 32 650
Cash float 1 000
Petty cash 150
SA Revenue Services (PAYE) 5 400
Pension fund 2 400

Nominal accounts
Sales 1 428 200
Interest on fixed deposit ?
Interest on mortgage loan 13 500
Salaries 177 300
Bank charges 1 760
Discount allowed 2 522
Consumable goods 1 650
Pension fund contribution 5 146
Advertising 18 000
Donations 12 850
Bad debts 1 800
Bad debts recovered 600
Insurance 10 560
Stationery 2 930
Rent income 24 000
2 258 832 2 258 832

• Partner J Harker donated trading stock, selling price of R1 200, to the local
high school on behalf of the business. Trading stock is sold at a profit mark-
up of 50 % on the cost price. No entry was made.
• According to the physical stock take, the following items were on hand on
28 February 2019, the end of the accounting period:
Stationery R230
• No entries were made of the following that appeared on the bank statement
for February 2019:
In the debit column of the bank statement:
Cash handling fee R58
Service fees R62
A stop order for insurance R460
A returned cheque from debtor K Laubscher, R190, received in adjustment
of his account of R200. Management recommends that his account be
written off.

In the credit column of the bank statement:
A direct deposit by means of stop order, to pay for the rent for March 2019,
R2 000.
• The provision for bad debts must be adjusted up to 5% of the amount owed
by trade debtors.
• An employee’s salary does not appear in the Salaries Journal and no cheque
has been paid out. This salary will be paid on 5 March 2019, along with SARS
and Largo Pension Fund payments. The details were as follows, and must be
taken into account:
Gross salary R7 800
SARS (PAYE) R1 950
Pension fund R340
The business contributes 50 cents for each rand from the employee to the
pension fund.
• Consumable goods to the amount of R720 have been destroyed by fire.
The goods were not insured. No entry has been made yet.
• On 1 September 2018, HJ Building Society increased the interest on the
mortgage loan by 2% to 20% p.a. The loan is repaid annually on the same
date by means of instalments of R20 000.
• An advertising contract for R18 000 has been signed with a television
channel for twelve advertisements – one per month. The contract was
signed on 5 October 2018, and the full amount has been paid. The first
advertisement appeared in the same month.
• Provide for depreciation on equipment for the year at 15% on the cost price
method. Old equipment, with a cost price R25 000 and an accumulated
depreciation of R1 870 on 1 March 2018, was sold for R4 000 cash on
31 December 2018. No entry was made.
• A storeroom was built during the year and recorded, R40 000.
• Interest on the fixed deposit was capitalised. A statement received from
SP Bank showed the following:
Balance of fixed deposit on 1 March 2018 R21 250
Interest capitalised R3 750
Balance of fixed deposit on 28 February 2019 R25 000
■ Partners are entitled to 8% interest on their capital invested. J Harker
increased his capital by R60 000 on 1 September 2018.
■ Partners are entitled to the following annual salaries:
E Palmer R98 400
J Harker R102 000
■ J Harker receives a bonus of R6 000 p.a.
■ Profits or losses are shared according to the ratio of capital as at the end
of the financial year.

Activity 7.7
D Collett and P Cole are partners in the business CC Stores. The following
stipulations, among others, are in the partnership agreement:
• Interest on capital invested must be taken into account at 10% per annum.
• Each partner is paid an annual salary of R85 000 which he can withdraw at
his own discretion.
• The remaining profits or losses are shared between Collett and Cole
according to the ratio 4 : 3.
The accounting period of CC Stores ends annually on 30 June.

A list of balances in the business’s Pre-adjustment Trial Balance on 30 June 2013
and the adjustments taken into account on this date are provided.
The net profit as calculated in the Profit and Loss account is R216 444.
Required
1. Draw up the Trading Stock account in the General Ledger.
2. Draw up the Balance Sheet, with extensive notes, as at 30 June 2013.
List of balances on 30 June 2013 (before adjustments)

Capital: Collett R160 000
Capital: Cole 200 000
Current account: Collett (cr) 1 246
Current account: Cole (cr) 2 522
Drawings: Collett 90 230
Drawings: Cole 85 043
Equipment 130 000
Bank (dr) 3 558
Cash float 1 000
Creditors for wages (dr) 1 275
Sales 1 297 540
Wages 160 200
Telephone 6 442

Stationery 5 148
Bad debts 1 874
Rent income 19 250
Insurance 12 540
Rates and taxes 3 410
Discount allowed 1 470
Repairs 4 537
Bank charges 2 983
Unemployment Insurance Fund contribution 1 600
Adjustments
1. The following mistakes should still be corrected:
• Partner Collett approved a donation of trading stock on 10 June 2013
(selling price = cost price + 50% = R2 250) to the local orphanage.
The accountant, however, journalised and posted the transaction as
Drawings: Collett, R2 250.
• The total of the following supplementary book was posted to the
accounts involved in the General Ledger as R1 828:
Creditors Allowances Journal – June 2013
Creditors control Trading stock
R1 282 R1 282
• An invoice received from Dempers Builders has been recorded in the
books as an increase of R32 000 under Land and Buildings. However, the
invoice shows the following information:
Building a storeroom R22 000
Repairs to existing buildings R8 000
Repairs to private residence of P Cole R2 000
R32 000
2. Stock on hand on 30 June 2013 according to the physical stock take was
as follows:
Stationery R310
3. A cheque for R865 was received from T Jasmin on 4 June 2013 in settlement
of his account of R900. On 11 June this cheque was returned by the bank,
dishonoured due to insufficient funds. It has been correctly recorded. Since
then it was decided to write off his account as a bad debt, although this
entry has not been written up.

4. The Provision for Bad Debts account must be adjusted to 4% of the amount
owed by trade debtors.
5. The details for the week ended 30 June 2013 of an employee who was
appointed on 23 June 2013 have not been entered into the Wages Journal.
The following details apply:
Gross wage R1 400
PAYE deduction R115
Unemployment Insurance Fund R10
The employer contributes on a rand for a rand basis to the Unemployment
Insurance Fund.
The net wage was paid on 30 June 2013 pay, after the employee made
enquiries but no other payments have been made.
6. A block of offices has been rented to a real estate agent since 1 March 2012.
The rental agreed upon was R16 800 for the first year and an increase of 15%
for the second year.
7. An annual insurance policy was paid on 1 April 2013, R2 160.
8. The telephone account for June 2013 was received but not yet paid, R580.
9. Depreciation must be calculated at 20% per year on the diminishing
balance. New equipment was purchased on 1 October 2012 at R16 000
and correctly recorded.
The financial year of Sunshine Coast Traders, with partners P Joubert and
M Bosman, ends on 28 February 2018.
Required
1. Show the Equity and Liabilities section of the Balance Sheet on
28 February 2018. [11]
2. Show the following notes to the financial statements on
28 February 2018:
a. Capital [9]
b. Current accounts [25]
c. Trade and other payables [5]

Balances from the Post-adjustment Trial Balance on 28 February 2018
Capital: P Joubert R300 000
Capital: M Bosman R200 000
Current account: P Joubert (01/03/2017) R2 567 (cr)
Current account: M Bosman (01/03/2017) R1 965 (cr)
Drawings: P Joubert R165 420
Drawings: M Bosman R189 300
Mortgage loan: XY Bank R200 000
Creditors control R23 675
Accrued expenses R1 340
Income received in advance R1 600
SA Revenue Services (PAYE) R5 890 (cr)
Pension fund R2 680
Information
■ Partners earn salaries as follows: P Joubert R12 000 per month and
M Bosman R13 175 per month.
■ Partners earn interest on capital at 12% per year. Note that the capital
changed during the year.
■ Partner M Bosman receives a bonus of 1% of the net profit for the year.
■ Remaining profits/losses are shared according to the ratio of capital as at
the end of the financial year.
• Partner P Joubert increased his capital by R50 000 on 1 June, while partner
M Bosman decreased her capital on 1 September by R100 000.
• The mortgage loan is paid back in monthly instalments of R2 000 per
month.
• The net profit for the year, as calculated in the Income Statement, amounts
to R391 000.

S Mlata and A Festus are partners in a business, Fessim Stores. The financial year
of the partnership ends annually on 28 February.
Required
Take all the necessary information into account and answer the following
questions. Show all calculations, as partial marks will be allocated.
1. The partnership agreement stipulates, among others, that partners are
entitled to interest on capital at a fixed rate for both partners. Calculate the
rate of interest on capital. (Tip: use a mathematical equation with interest
rate = x. )
2. What is the amount of the primary distribution that partner A Festus is
entitled to?
3. The final profit must be shared between the partners equally. Calculate
the share of the remaining net profit that partner Festus will receive.
4. Calculate the balance in the Current account of partner Festus on
28 February 2021.
5. Prepare the Income Statement of Fessim Traders for the year ended
28 February 2021.
6. Prepare the note to the Balance Sheet on 28 February 2021 for Trade and
other payables.
7. Prepare only the Equity and Liabilities section of the Balance Sheet on
28 February 2021.
General Ledger of Fessim Stores

Dr Capital: S Mlata Cr
2020
Sep 01 Bank 100 000 00
300 000 00
Dr Capital: A Festus Cr
2020 2020
Dec 01 Bank 100 000 00 Mar 01 Balance b/d 300 000 00
2021
Feb 28 Balance c/d 200 000 00
300 000 00 300 000 00
2021

Dr Current account: S Mlata Cr
2021 2020
Feb 28 Drawings: S Mlata 96 000 00 Mar 01 Balance b/d 150 680 00
2021
Balance c/d 147 505 00 Feb 28 Interest on capital 40 000 00
Salary: S Mlata 45 000 00
Appropriation account 7 825 00
243 505 00 243 505 00
Dr Current account: A Festus Cr

2020
Mar 01 Balance b/d ?
2021
Feb 28 Interest on capital ?
Salary: A Festus 45 000 00
Pre-adjustment Trial Balance of Fessim Stores as at 28 February 2021

Capital: S Mlata 300 000 00
Capital: A Festus 200 000 00
Current account: S Mlata 150 680 00
Current account: A Festus 168 100 00
Drawings: S Mlata 96 000 00
Drawings: A Festus 110 000 00
Vehicles 180 000 00
Equipment 72 000 00
Loan: SB Bank 100 000 00
Fixed deposit: WP Bank 30 000 00
Provision for bad debts 1 650 00
Bank 1 000 00

Nominal accounts
Sales 878 550 00
Stationery 4 810 00
Repairs 4 300 00
Bad debts 1 000 00
Pension fund contribution 5 000 00
Telephone 1 900 00
Interest on loan ?
Insurance 6 250 00
Salaries 88 100 00

• A credit invoice received from Adonis Suppliers has not been recorded in
the books.
The following detail appeared on the invoice:
Trading stock R 4 000 00
Less: 10% trade discount (400 00)
R3 600 00
Carriage on purchases 300 00
R3 900 00
The trading stock was received and added in during the physical stock take.
• A debtor, W Heachcote, returned unsuitable goods with a selling price of
R6 000 on 27 February 2021. These goods profit mark-up was 25% on cost
price. No entries were made for this transaction.
• A physical stock take on 28 February showed the following stock on hand:
Stationery R1 020
• Write off the debt of debtor, S Nel, R170.
• The provision for bad debts must be decreased with R262.

• The details of an employee who was employed on 1 February 2021 were
omitted from the Salaries Journal for February by mistake. The following
details were applicable:
Gross salary R5 600
PAYE deduction R1 100
Pension fund R300
For every R1 that the employer contributes to the pension fund, the
employer contributes R1,50.
from SB Bank on 28 February 2021 reflects the following:
SB BANK
Loan Statement on 28 February 2021
Balance on 1 March 2020 R120 000 00
Interest capitalised 20 700 00
Monthly payments in terms of the loan agreement. These monthly payments include
interest and capital repayments of the loan. 40 700 00
Balance on 28 February 2021 100 000 00
The capital repayments on the loan will remain constant at R20 000 per annum
until the loan is fully repaid.
• A part of the building has been let since 1 August 2020 at R3 325 per month.
• Interest on fixed deposit is R4 500 per year. The investment was made on
31 August 2010.
• Insurance includes a premium of R2 400 which was paid for the period
1 January 2021 to 30 June 2021.
• Telephone account still due, R100.
• Depreciation must be calculated as follows:
On vehicles at 20% on the cost price. Take into account that their vehicles
are old.
On equipment at 12% on the diminished balance method. Take into account
that new equipment of R10 000 was purchased on 1 December 2020.

Chapter 8
Partnerships – Interpretation of
financial statements
By the end of this chapter, you • calculate the following new
will be able to: concepts:
• analyse and interpret the ■ stock turnover rate
financial statements and notes ■ stock holding period
of a partnership ■ average debtors collection
• calculate the following period
previously learnt concepts: ■ average creditors payment
■ gross profit on sales period
■ gross profit on cost of sales ■ debt equity ratio (gearing)
■ net profit on sales ■ partners’ earnings
■ operating profit on sales ■ return on partners’ equity
■ operating expenses on sales • identify and analyse ethical
■ solvency ratio behaviour applicable to the
■ current ratio business environment
■ acid test ratio • apply internal control
measures.
Key concepts
• partnership • Income Statement • gross profit • net profit • Balance Sheet • assets
• owner’s equity • liabilities • GAAP • stock turnover rate • stock holding period
• average debtors collection period • average creditors payment period • debt equity ratio
• partners’ earnings • return on partners’ earnings
Will we be able
to pay creditors
Let’s calculate the acid
under abnormal
test ratio to determine
circumstances?
whether we will be able
to do that.
Partner s h ip s – I nterpretati o n o f financial s tatement s • c h a p t e r 8 259

1. Introduction
Financial reporting focuses mainly on aspects 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 with 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 kept in mind 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. Users of financial statements

The information in the financial statements is mainly used by two groups:
external users and internal users.
2.1 External users

• Investors are interested in the profitability and financial position and
stability of the business.
• Short-term credit providers are interested in the liquidity of the
business; in other words, their ability to settle short-term obligations.
• Long-term credit providers will be interested in the solvability;
in other words, whether the business is financially healthy and has
enough security.
2.2 Internal users

• Management will analyse and interpret financial statements in order
to determine if all sections were run effectively. They will also use
these figures for future planning.
• Internal financial analysts provide information to management for
decision-making purposes.
3. Analysis and interpretation

The analysis of financial information includes the further investigation
and processing of this information in order to provide specific
information to a decision maker.
260 c h a p t e r 8 • Partner s h ip s – I nterpretati o n o f financial s tatement s

For example: the purchases manager will want to know the amount
of stock on hand and the turnover rate for stock.
The interpretation of information includes determining the reasons
for the financial situation and the results it might imply in the future.
For example: the purchases manager will investigate why the rate of
stock turnover decreased and the effect it will have on the business’s cash-
flow situation.
4. Comparable measuring standards i Ratios dealt with in

Grade 10:
In order to judge or measure if the financial results were satisfactory, • gross profit on sales
the business should use measuring standards to compare the current • gross profit on cost of sales
results with other results. There are four basic measuring standards that • net profit on sales
• operating expenses on sales
can be used:
• current ratio
• A target, pre-calculated standard or budget • acid test ratio
• Historical information of the business: current figures can be
New ratios explained in Grade 11:
compared to those of previous years • stock turnover rate
• Figures from similar businesses or businesses in the same • stock holding period
business sector • average debtors collection period
• Empiric accepted standards: these include the experience and • average creditors payment period
background of the analyst himself. • debt equity (gearing)
• partners’ earnings
• return on partners’ equity
5. Ratio analysis
In Grade 10, you dealt with a number of ratios. These all appear in the
table on the next few pages. In Grade 11 we add some more ratios to
those you have already learnt about. Let’s look at each of these new
ratios in more detail.
5.1 Stock turnover rate/stock on hand

Cost of sales
_________________
Average trading stock
This ratio is used to determine how often stock is replenished or
purchased. It will be compared to previous year‘s figures as well as to
some of the business’s objectives.
An increase in stock turnover rate will have a positive effect on the
liquidity of the business.
It also helps to check the following:
• the stock-control policy
• on operating efficiency
• on sales volume moving out of the business.
PA R T N E R s h I P s – 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 8 261

5.2 Stock holding period
_________________ Average stock
___________
       × 365 OR    × 12
Cost of sales Cost of sales
The number of days‘/months‘ stock on hand will vary from one business
to the next, depending on the type of business and products they sell.
A business must be careful of having the following:
• Too much stock on hand can lead to over-investment in stock, which
has a negative effect on the liquidity of the business. A business should
also be careful of stock becoming obsolete or old.
• Too little stock on hand can have a negative effect on sales, when
customers rather purchase from competitors because their stock is
more readily available.
5.3 Average debtors collection period

Average debtors
_____________
      × 365
Credit sales
• This figure will be compared to the previous financial year and
roughly shows how often debtors are turned into cash – in other
words, how long debtors take to settle their debt.
• An decrease in the debtors collection period generally shows better
credit control.
• A business should try to collect debtors within 30 days.
• They could improve the collection of debtors by screening new
debtors, charging interest and setting credit limits.
5.4 Average creditors payment period

Average creditors
 ______________
   × 365
Credit purchases
• This ratio shows how long it takes the business to pay creditors.
• A business should negotiate a 60–90 day payment period with creditors.
• However, they should ensure that creditors are paid on time to
prevent interest charged on overdue accounts.
• An increase in the amount of days a business takes to pay creditors
could indicate that the business has liquidity problems.
5.5 Debt : equity ratio (gearing)

Non-current assets : Owner‘s equity OR Long-term liablities : Owner‘s equity
• This ratio gives an indication of how the business is financed.

• Capital provided by the partners = own capital.
• Funds borrowed from other institutions = foreign capital.

• A business that relies mainly on own capital is often seen as a low-risk
business and would more easily obtain a loan.
• One can assume that a business with a debt:equity ratio under 0,5 : 1
is low-geared and credit worthy, while business with a ratio above 1 : 1
is high-geared.
5.6 Partners‘ earnings

Total earnings by partner
__________________________
     
    × 100
Partner’s average owner’s equity
Salary + Interest on capital + Remaining profit
_________________________________________________
      
       × 100
0,5(Capital and Current accounts‘ opening plus closing balances)
Note: If the Current account has a debit balance, it is subtracted in the
calculation.
• This ratio indicates how much return the partner personally earned
on his investment.
• This figure might seem high in comparison to alternative investments,
as it includes the salary earned by the partners.
• It should be compared to previous years‘ figures.
5.7 Return on partners‘ equity

Net profit
___________________
        × 100
Average owner‘s equity
Where average owner‘s equity = __ 12 (Owner‘s equity beginning of the year
+ owner‘s equity end of the year)
• This percentage gives an indication of how much return the owners

earned on the capital they invested in the business.
• It allows the owners to compare the rate of return in the business
with the rate of return on alternative investments, such as a fixed
deposit.
• There are several factors that could influence this ratio, such as how
long the business has been running, the current economic climate and
whether the owner increased his or her capital during the year.
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 reasons could be for the increase or decrease.
• Reach a conclusion on the company’s performance: its liquidity,
profitability, solvency, gearing or return on investment.

Summary of ratios used in the analysis and interpretation of financial statements
Questions Financial Ratios Possible comments
answered indicators
Profitability % gross profit
Gross profit 100
• The percentage is compared with that of previous
Did the business on cost of  _______× ___   years.
Cost of sales 1
achieve their profit sales • If it is below the expected profit margin, reasons
margin? % gross could be:
profit on sales Discount was allowed on sales to increase
■
(turnover) turnover.
Mistakes were made calculating prices in the
■
source documents or entries in the books.

Gross profit 100
 _______×  ___ Strong competition pushed the selling price
1
■
Sales
down.
Suppliers increased their prices, thereby
■
increasing the cost price.

Normal stock losses were incurred, including
■
theft of stock (periodic stock system).

Efficiency % operating • This percentage tests the cost control of the
indicator profit on sales business; that is, the business control over
How well does the (turnover) Operating profit ___
__________ 100 operating expenses.
  ×  
business control Sales 1 • It will be compared to the previous years’ figures.
its overheads and • A decrease in this percentage indicates the
expenses? business was less efficient in controlling expenses.
% net profit • This percentage is very much the same as the
on sales previous one, but is after interest expense was
(turnover) taken into account.
• A comparison of operating profit on sales with this
figure will show the effect finance costs had on
Net profit ___
______
  ×  100 the business.
Sales 1
• For example, a percentage of 5% would indicate
that for every R1 in sales, 5% profit went to the
owner.
• A decrease in this percentage indicates the
business was less efficient in controlling expenses.
% operating • This percentage indicates what percentage of sales
expenses is spent on operating expenses.
on sales • This also tests the cost control of the business and
(turnover) will be compared to previous years’ figures.
Operating expenses 100
 ____________× ___   • A decrease in this percentage indicates the
Sales 1
business was more efficient in controlling
expenses.
• If this percentage is too high, the business should
look at ways to cut overhead costs.

answered indicators
Liquidity current ratio Current assets : Current liabilities • Both these ratios test if the business has enough
Will the business acid test ratio (Current assets – Inventory): Current liabilities current (liquid) assets to pay creditors, bank
be able to pay overdraft, short-term loans etc.
short-term OR • A good indication for the current ratio is that there
obligations (debt), should be at least TWO current assets for every
such as bank (Trade and other receivables + Cash): Current liabilities ONE current liability.
overdraft, creditors Take note: • The acid test ratio tests the ability of the
and short-term Inventory = Trading stock + Consumables on hand business to settle current debts under abnormal
loan? How well circumstances, such as during bad economic
did the business climates.
manage their • It is sometimes difficult to convert stock into cash
working capital? and this ratio tests if the business has enough
liquid assets to do so, without taking stock into
consideration.
• The current assets which can be readily liquidated
(debtors and cash) should be at least equal to the
current liabilities and not less; in other words 1 : 1.
• If it is less than this ratio, the business might
struggle to meet its short-term obligations.
• A possible way to improve the acid test ratio is to
sell off excess stock and to collect debts sooner.
• 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.
rate of stock Cost of sales
 _____________  
• The number of days’/months’ stock on hand will
turnover Average trading stock vary from one business to the next, depending on
number of Average trading stock the type of business and products they sell.
 ___________ × 365
days’/months’ Cost of sales • The more effective a business can increase their
stock on rate of stock turnover, the more profit they can
OR
hand make.
___________ • It is compared to previous years’ figures and some
  Cost of sales × 12 objectives the business has set for itself.
debtors • A business should try to collect debtors within 30 days.
collection Average debtors
________
  Credit sales × 365
• They could improve the collection of debtors by
period screening of new debtors, charging interest and
setting credit limits.
creditors • A business should negotiate a 60–90 day
payment payment period with creditors.
period • However, they should make sure they pay
Average creditors creditors on time to prevent being interest charged
 _________
Credit purchases
× 365
on overdue accounts.
• An increase in the amount of days a business takes
to pay its creditors can indicate that the business
has liquidity problems.

answered indicators
Solvability total assets : Total asset : Total liabilities • This indicates whether a business will be able to
Do the assets total liabilities settle all its obligations.
exceed the • This should be at least 1 : 1 for a business to be
liabilities? solvent.
• It is however more acceptable if it is 2 : 1, as that
would indicate there are TWO assets for every ONE
liability.
Risk indicator debt : equity Non-current assets : Owner’s equity • This ratio gives an indication how the business is
By what means ratio OR financed.
is the business Long-term liabilities : Owner’s equity • Capital provided by the partners = own capital.
financed? Is • Funds borrowed from other institutions = foreign
the business capital.
creditworthy/low • A business that relies mainly on own capital is
geared? Will the often seen as a low-risk business and would more
bank grant the easily obtain a loan.
business a loan? • Usually a business with a debt equity ratio under
0,5 : 1 is considered low geared and credit worthy,
while business with a ratio above 1 : 1 is highly
geared.
Return return on Net profit
 ____________ × 100
• This percentage gives an indication of how much
Does the business/ owner’s Average owner’s equity return the owners earned on the capital invested
partner earn a equity in the business.
Where average owner equity = _ 12 (owner’s equity
good return on the
beginning of the year + owner’s equity end of
• The rate of return in the business can be compared
capital invested in to the rate of alternative investments, such as a
the year)
the business? fixed deposit.
• There are a couple of factors that could have an
influence on this ratio, for example, how long the
business has been running, the current economic
climate and whether the owner increased his
capital during the year.
% earnings Total earning by partner
 ________________     × 100
• This indicates how much return the partner
by partner Partners’ average owner’s equity personally earned on his investment.
Salary + Interest on capital + Remaining profit • This figure might seem high in comparison to
 ____________________________
   × 100
   
0,5 (Capital and Current account’s opening + closing bal) alternative investments, as it includes the salary
earned by the partners.
Take note: If the Current account has a debit balance, it is • It should be compared to previous years’ figures.
subtracted.

Example
Analysis and interpretation of statements
Use the financial statements of CA Clothing for 2018 and 2019 to
answer these questions.
1. Calculate the percentage gross profit on sales/turnover for 2018
and 2019.
2. Calculate the percentage profit mark-up (gross profit) on cost of
sales for 2018 and 2019.
3. Did the business achieve their profit margin in 2019? Refer to
questions 1 and 2.
4. Calculate the percentage net profit on sales for 2018 and 2019.
5. Calculate the percentage operating expenses on sales for 2018
and 2019.
6. Calculate the percentage operating profit on sales for 2018
and 2019.
7. Comment on the operating efficiency of the business. Do they
have good control over expenses? Refer to questions 4, 5 and 6.
8. Calculate the current ratio for 2018 and 2019.
9. Calculate the acid test ratio for 2018 and 2019.
10. Comment on the liquidity of the business, referring to questions
8 and 9.
11. Calculate the stock turnover rate for 2019. Comment on the stock
turnover rate if the stock turnover rate for 2018 was 12,4 times
per year.
12. Calculate the stock holding period for 2019 (number of months’
stock on hand).
13. Calculate the average debtors collection period for 2019.
Comment on this if the average debtors collection period in 2018
was 42 days.
14. Calculate the average creditors payment period for 2019.
Comment on this if the average creditors payment period in 2018
was 36 days.
15. Calculate the solvency ratio for 2018 and 2019. Comment on this.
16. Calculate the debt : equity ratio for 2018 and 2019. Comment on
the credit worthiness of the business. Will the business be able to
secure a long-term loan?
17. Calculate the return on owner’s equity (partner’s equity) for 2019.
18. Calculate the percentage earnings of each partner for 2019.
19. Is there a good return on investment by the business (question 18)?
20. Comment on each partner’s percentage earnings (question 19).
Should they feel satisfied?

Example continued
Extract from the Income Statement of CA Clothing

for the years ended 28 February 2018 and 2019
2019 2018
Turnover/Sales 1 146 400 00 950 400 00
Cost of sales 654 000 00 528 000 00
Gross profit 492 400 00 422 400 00
Operating expenses 181 400 00 202 320 00
Operating profit 311 000 00 220 080 00
Interest expense 27 000 00 30 000 00
Net profit for the year 284 000 00 190 080 00
B Cunningham and T Adams – Trading as CA Clothing

Balance Sheet (Statement of Financial Position) as at 28 February 2019
Note R R
ASSETS
NON-CURRENT ASSETS 791 800 00 794 725 00
Fixed / tangible assets 771 800 00 774 725 00
Financial assets 20 000 00 20 000 00
CURRENT ASSETS 67 106 00 57 414 00

Inventories 45 875 00 42 565 00
Trade and other receivables 5 10 598 00 9 613 00
Cash and cash equivalents 10 633 00 5 236 00
TOTAL ASSETS 858 906 00 852 139 00

OWNER’S EQUITY 660 639 00 629 529 00
Capital 7 650 000 00 620 000 00
Current accounts 8 10 639 00 9 529 00
NON-CURRENT LIABILITIES 160 000 00 180 000 00

Loan from AB Bank 160 000 00 180 000 00
CURRENT LIABILITIES 38 267 00 42 610 00

Trade and other payables 9 18 267 00 22 610 00
Current portion of loan 20 000 00 20 000 00
TOTAL EQUITY AND LIABILITIES 858 906 00 852 139 00

Example continued
5. trade and other receivables

2019 2018
Trade debtors 9 630 00 8 224 00
Provision for bad debts (482 00) (411 00)
Net trade debtors 9 148 00 7 813 00
Expenses prepaid 1 200 00 1 500 00
Income accrued (receivable) 250 00 300 00
10 598 00 9 613 00
7. Capital
Balance at beginning of year 300 000 00 320 000 00 620 000 00
350 000 00 320 000 00 670 000 00
Decreasing of capital – – (20 000 00) (20 000 00)
Balance at end of year 350 000 00 300 000 00 650 000 00
8. CURRENT ACCOUNTS
Final distribution of profit 13 500 00 9 000 00 22 500 00
Undrawn profits (retained income) for the year 800 00 310 00 1 110 00
Balance at end of year 11 376 00 (737 00) 10 639 00

2019 2018
Trade creditors 15 744 00 19 887 00
Expenses accrued (payable) 1 023 00 1 523 00
Income received in advance (deferred) 1 500 00 1 200 00
18 267 00 22 610 00

Example continued
Information
• The credit sales for 2019 were R92 500.
• The credit purchases for 2019 were R179 580.
Solution
Gross profit 100
1. Percentage gross profit on sales/turnover = _________
  Sales ×  ___
1 
2019 2018
 ________ 100
492 400 × ___ 100
422 400 × ___
______
1 146 400    1   950 400   1 
= 42,9% = 44,4%
Gross profit 100
 Cost of sales × ___
2. Percentage profit mark-up on cost = _________   1 
2019 2018
 ______ 100
492 400 × ___ 100
422 400 × ___
______
654 000    1   528 000    1 
= 75,3% = 80%
3. Did the business achieve their profit margin in 2019?
• The percentage gross profit on sales decreased from 44,4% in
2018 to 42,9% in 2019.
• The percentage gross profit on cost of sales decreased from
80% in 2018 to 75,3% in 2019.
• Both ratios thus indicate that in 2019 the business operated
below the profit margin of the previous year.
• The reasons could be one of the following and the business
should investigate this:
■Regular sales at discount prices took place to increase
the rate of stock turnover or because of competitors in
the market.
■Cost of sales could have increased due to an increase in
prices from suppliers.
■Mistakes could have been made in calculating prices, on
source documents or in the journals.
■In the case of the periodic inventory system it can be due to
normal stock losses, like theft or damage.
Net profit 100
  Sales × ___
4. Percentage net profit on sales = _______   1 
2019 2018
 ________ 100
284 000 × ___ 100
190 080 × ___
______
1 146 400    1   950 400    1 
= 24,8% = 20%

Example continued
Operating expenses ___
100
5. Percentage operating expenses on sales =  ______________
Sales
   ×   1 
2019 2018
 ________ 100
181 400 × ___ 100
202 320 × ___
______
1 146 400    1   950 400    1 
= 15,8% = 21,3%
Operating profit ___
100
6. Percentage operating profit on sales = ____________
  Sales
   ×   1 
2019 2018
 ________ 100
311 000 × ___ 100
220 080 × ___
______
1 146 400    1   950 400    1 
= 27,1% = 23,2%
7. Comment on the operating efficiency of the business:
• The percentage net profit on sales increased from 20% in 2018 to
24,8% in 2019.
• The percentage operating profit on sales increased from 23,2%
in 2018 to 27,1% in 2019.
• An increase in both these ratios is positive – it indicates that the
business operated more efficient in 2019.
• The percentage operating expenses on sales decreased from
21,3% in 2018 to 15,8% in 2019.
• This is very good. It indicates that the business had better
control over expenses and was more productive.
• The business will investigate if they can reduce expenses further
in the future.
• Good planning and staying within the budget can improve these
figures further.
8. Current ratio = Current assets : Current liabilities
2019 2018
67 106 : 38 267 57 414 : 42 610
= 1,8 : 1 = 1,4 : 1
9. Acid test ratio
= (Current assets – Stock) : Current liabilities
OR
= (Trade and other receivables + Cash and cash equivalents) :
Current liabilities
2019 2018
(67 106 – 45 875) : 38 267 (57 414 – 42 565) : 42 610
OR (10 598 + 10 633) : 38 267 OR (9 613 + 5 236) : 42 610
= 21 231 : 38 267 = 14 849 : 42 610
= 0,6 : 1 = 0,4 : 1

Example continued
10. Comment on the liquidity of the business:
• The current ratio improved from 1,4 : 1 in 2018 to 1,8 : 1 in 2019.
• It is relatively low and the business should try to improve it
further, so that there are at least TWO current assets for every
ONE current liability.
• The acid test ratio improved from 0,4 : 1 in 2018 to 0,6 : 1 in 2019.
• Although there is an improvement it is also relatively low.
They should try to improve this ratio to at least 1 : 1.
• These ratios indicate that the business could have a hard time
meeting short-term obligations. They should continue to try
and improve these ratios.
Cost of sales
11. Stock turnover rate for 2019 =  __________
Average stock
= times per year
654 000   
 _______________
1   (45 875 + 42
__ 565)
2
 654
= ______ 000
44 220 
= 14,8 times per year
Comments
• The rate of stock turnover increased from 12,4 times per year in
2018 to 14,8 times per year in 2019.
• This is probably a reason for the improvement in liquidity.
Average stock
12. Stock holding period =  __________
Cost of sales
× 12
 __21 (45 875 + 42 565)/654 000 × 12
= ______ 44 220  × 12
 654 000
= 0,8 months
OR
Average stock
 ___________ × 365
Cost of sales
1   (45 875 + 42 565)
__
2
 _______________
654 000  
 × 365
44 220 ×
=  ______
654 000  365
= 25 days Average debtors ___
13. Average debtors collection period =  _____________
    ×  365
1 
1   (9 630 + 8 224) Credit sales
__
2
 _____________
92 500  
 × 365
8 927 ×
=  ______
92 500  365
= 35,2 days

Example continued
Comments
• The average debtors collection period improved from 42 days in
2018 to 35,2 days in 2019.
• This could be one of reasons there is an improvement in liquidity.
• The credit control is however still not very good – they should try
to collect debts within 30 days.
• Ways to improve debt collection can be:
■Charge overdue accounts with interest.
■Allow discount for early payments.
■Apply credit limits – a customer first need to settle his account
before further purchases can be made.
Average creditors
14. Average creditors payment period =  ____________
  × 365
  
Credit purchases
1   (15 744 + 19 887)
__
2
 _______________
179 580  
 × 365
17 815,5 ×
=  _______
179 580  365
= 36,2 days
Comments
• The average creditors payment period stayed constant on 36 days
from 2018 to 2019.
• The business should negotiate with creditors for a longer payment
period between 60–90 days.
• They should still make sure to pay creditors on time to avoid
paying interest on overdue accounts and to make use of discount.
15. Solvency ratio = Total assets : Total liabilities
2019 2018
858 906 : (160 000 + 38 267) 852 139 : (180 000 + 42 610)
= 858 906 : 198 267 = 852 139 : 222 610
= 4,3 : 1 = 3,8 : 1
Comments
• The solvency ratio improved from 3,8 : 1 in 2018 to 4,3 : 1 in 2019.
• The solvability is good. For every ONE liability there are 4,3 assets.
• Assets exceed liabilities.
16. Debt : Equity ratio = Long-term liabilities : Owner’s equity
2019 2018
160 000 : 660 639 180 000 : 629 529
= 0,2 : 1 = 0,3 : 1

Example continued
Comments
• The debt : equity ratio improved from 0,3 : 1 in 2018 to 0,2 : 1
in 2019.
• The business is low geared and creditworthy – the financial risk
is low.
• Own capital is more than foreign capital.
• They will be able to apply for an additional loan – however, they
should keep in mind that the current portion of an additional loan
might have an influence on the liquidity of the business, which is
not so good.
 AverageNet
17. Return on owner’s equity = ________________ Profit
     × ___
owner’s equity
 100
1 
284    100
000   × ___
 _________________  
 2 (660 639 + 629 529) 1
1
_
100
284 000 × ___
=  ______
645 084    1 
= 44%
Total earning of partner ___
100
18. Percentage earnings of partner =  _________________    ×   1 
Average partner’s equity
Partner Cunningham
104 000 + 17 500
1   (300 000 + 350   
+ 10 000 + 13 500
    × ___
 _______________________________  100
 
__
2 000 + 10 576 + 11 376) 1
100
145 000 × ___
=  ______
335 976    1 
= 43,2%
Partner Adams
114 000    
+    
16 000 + 9 000
 ___________________________
1   (300 000 + 320  100
 × ___1 
__ 000 – 1 047 – 737)
2
100
139 000 × ___
=  ______
309 108    1 
= 45%
19. Comment on return on investment:
• The business made a return of 44%. It is high.
• Both partners should feel satisfied with their return on their
investment. It is worth the effort and risk.
• Compared with alternative forms of investment, it is a very
good percentage.

Activity 8.1
Use the financial statements of MacAdam Stores, with partners M Mac and
A Adam for 2018 and 2019 to calculate and comment on these questions.
1. Calculate the percentage gross profit on sales/turnover for 2018 and 2019.
2. Calculate the percentage profit mark-up (gross profit) on cost of sales for
2018 and 2019.
3. Did the business achieve their profit margin in 2019? Refer to questions 1 and 2.
4. Calculate the percentage net profit on sales for 2018 and 2019.
5. Calculate the percentage operating expenses on sales for 2018 and 2019.
6. Calculate the percentage operating profit on sales for 2018 and 2019.
7. Comment on the operating efficiency of the business. Do they have good
control over expenses? Refer to questions 4, 5 and 6.
8. Calculate the current ratio for 2018 and 2019.
9. Calculate the acid test ratio for 2018 and 2019.
10. Comment on the liquidity of the business, referring to questions 8 and 9.
11. Calculate the stock turnover rate for 2019. Comment on the stock turnover
rate if the stock turnover rate for 2018 was 12,4 times per year.
12. Calculate the stock holding period for 2019 (number of month’s stock on hand).
13. Calculate the average debtors collection period for 2019. Comment on this
if the average debtors collection period in 2018 was 42 days.
14. Calculate the average creditors payment period for 2019. Comment on this
if the average creditors payment period in 2018 was 36 days.
15. Calculate the solvency ratio for 2018 and 2019. Comment on this.
16. Calculate the debt : equity ratio for 2018 and 2019. Comment on the
credit worthiness of the business. Will the business be able to secure a
long-term loan?
17. Calculate the return on owner’s equity (partner’s equity) for 2019.
18. Calculate the percentage earnings of each partner for 2019.
19. Comment on each partner’s percentage earnings (question 18)? Should
they feel satisfied?
Extract from the income statement of MacAdam Stores

for the years ended 28 February 2018 and 2019
2019 2018
Turnover/sales 665 034 00 667 034 00
Cost of sales 276 180 00 266 800 00
Gross profit 388 854 00 400 200 00
Operating expenses 214 244 00 238 782 00
Interest expense 26 970 00 28 000 00
Net profit for the year 168 640 00 153 418 00

M Mac and A Adam
Trading as MacAdam Stores
Balance Sheet (Statement of Financial Position) as at 28 February 2019
Note R R
ASSETS
CURRENT ASSETS 101 537 00 60 536 00

Inventories 55 710 00 28 252 00
Trade and other receivables 5 44 577 00 26 650 00
TOTAL ASSETS 735 207 00 716 036 00

OWNER’S EQUITY 554 462 00 530 612 00
Capital 7 550 000 00 520 000 00
Current accounts 8 4 462 00 10 612 00

Loan from XY Bank 105 000 00 125 000 00

Trade and other payables 9 35 175 00 40 424 00
Bank overdraft 20 570 00 – –
Current portion of loan 20 000 00 20 000 00

2019 2018
Trade debtors 43 660 00 25 210 00
Provision for bad debts (2 183 00) (1 260 00)
Net trade debtors 41 477 00 23 950 00
Expenses prepaid 2 400 00 1 800 00
Income accrued (receivable) 700 00 900 00
44 577 00 26 650 00
7. Capital
Mac Adams Total
Balance at beginning of year 260 000 00 260 000 00 520 000 00
Balance at end of year 290 000 00 260 000 00 550 000 00

8. CURRENT ACCOUNTS
Final distribution of profit (7 716 00) (5 144 00) (12 860 00)
Undrawn profits (retained income) for the year (4 906 00) (1 244 00) (6 150 00)
Balance at end of year 10 506 00 (6 044 00) 4 462 00

2019 2018
Trade creditors 25 000 00 32 100 00
Expenses accrued (payable) 10 175 00 8 324 00
35 175 00 40 424 00
Information
• The credit sales for 2019 were R354 130.
• The credit purchases for 2019 were R212 472.
Activity 8.2
Use the given information for Baldu Traders to answer the following questions:
1. Calculate the current ratio on 30 June 2019. The ratio for the previous
financial year was 2,4 : 1. Make comments.
2. Calculate the stock value on 30 June 2019 if the acid test ratio on that date
is 1,3 : 1.
3. In the course of the current financial year, partner Balsamo withdrew
R50 600 and partner Du Toit withdrew R29 800. Calculate each partner’s
total earnings for the year ended 30 June 2019.
4. Calculate partner Balsamo’s percentage earnings on average owner’s equity.
Should she be satisfied with this?
5. Will the business easily obtain an additional loan of R180 000? Motivate
your answer with calculations.

Extract from financial statements as at 30 June 2019
2019 2018
Capital: Balsamo 180 000 00 180 000 00
Capital: Du Toit 108 000 00 108 000 00
Current account: Balsamo (cr) 2 490 00 (cr) 5 820 00
Current account: Du Toit (cr) 1 160 00 (dr) 1 810 00
Long-term loans 20 000 00 50 000 00
Tangible assets (carrying value) 238 600 00 223 500 00
Investments – – 6 000 00
Current assets 135 551 00 108 510 00
Current liabilities 62 500 00 45 000 00
Activity 8.3
The following information was taken from the accounting records of Du Toit
Traders, a partnership with Hanno du Toit and Michael du Toit as partners.
Study the information and answer the questions that follow. The appropriate
financial indicators should be quoted in answers.
Information
Financial indicators 2014 2013
Gross profit on sales 78,1% 79,2%
Net profit on sales 31,2% 26,4%
Current ratio 4,6 : 1 2,3 : 1
Acid test ratio 1,9 : 1 1,1 : 1
Rate of stock turnover 7,4 time 5,6 time
Debt: equity ratio 0,06 : 1 0,3 : 1
Return on total capital employed 29% 24%
Other information
Current account: Hanno du Toit’s balance 9 923 (cr) 1 223 (cr)
Total earnings for the year: Hanno du Toit 188 900
Drawings for the year: Hanno du Toit 180 200
Current account: Michael du Toit’s balance 6 070 (dr) 1 090 (cr)
Total earnings for year: Michael du Toit 176 200
Drawings for the year: Michael du Toit ?
Capital: Hanno du Toit 500 000 500 000
Capital: Michael du Toit 500 000 500 000
Trade debtors 8 920 9 960

Questions
1. The financial manager recommended at the end of 2013 that the business
should cut its overhead costs to improve its costs control. Did they manage
to do this? Provide a reason for your answer.
2. Does the partnership have a liquidity problem? Explain briefly. Refer to the
liquidity ratios, as well as to the turnover rate of stock.
3. The partners consider applying for an additional mortgage loan of R120 000
at an interest of 17%. Will they manage to secure such a loan quite easily,
and would you recommend this or not? Provide reasons.
4. Should Hanno du Toit feel satisfied with the percentage earnings he receives
on the money he has invested in the business? Motivate your answer by
means of calculations.
5. Hanno is unhappy about the amount withdrawn by Michael during the year.
Calculate Michael’s drawings for the year and comment on whether Hanno
has any reason to be unhappy.
6. Calculate the business’s average debtors collection period, if the credit sales
for 2014 amounts to R91 250. Mention two ways in which the business
could improve debtors collections.
Activity 8.4
You are provided with information relating to NL Electronics. The business is

owned by two partners, Thabo Nkewu and Veronica Laing.
Required
Study the information and answer the questions which follow. In support of
your answer you must quote figures and/or actual financial indicators (ratios/
percentages) where appropriate.
Information
The following information was extracted from the General Ledger on
28 February 2017:
General Ledger of NL Electronics
Dr Capital: Laing Cr
2017
Aug 31 Bank 700 000 00
1 500 000 00

Dr Current account: Laing Cr
2017 2016
Feb 28 Drawings: Laing 75 000 00 Mar 01 Balance b/d 41 200 00
2017
Balance c/d 90 200 00 Feb 28 Salary: Laing 70 000 00
Interest on capital 46 000 00
Appropriation account 8 000 00
165 200 00 165 200 00
2017
The following figures were extracted from the Balance Sheet

on 28 February 2017
2017 2016
Fixed assets 2 987 000 00 2 120 000 00
Financial assets 120 000 00 150 000 00
Current assets 740 000 00 620 000 00
TOTAL ASSETS 3 847 000 00 2 890 000 00
Owner’s equity 2 513 700 00 2 111 700 00

Long-term liabilities (non-current liabilities) 1 000 000 00 600 000 00
TOTAL EQUITY AND LIABILITIES 3 847 000 00 2 890 000 00
Amounts obtained from the financial statements:

2017 2016
Sales (40% on credit) 2 595 000 00 3 920 400 00
Cost of sales 1 730 000 00 2 420 000 00
Net profit 252 000 00 460 000 00
Capital: Nkewu 950 000 00 1 250 000 00
Capital: Laing 1 500 000 00 800 000 00
Current account: Nkewu (26 500 00) 20 500 00
Current account: Laing 90 200 00 41 200 00
Trading stock 170 000 00 326 000 00
Trade debtors 395 000 00 236 000 00
Trade creditors 232 000 00 182 000 00

Financial indicators calculated from the financial statements
2014 2013
Operating profit as a percentage of sales 13,3 % 14,6%
Net profit as a percentage of sales 9,7% 11,7 %
Current ratio 2,2 : 1 3,5 : 1
Acid test ratio 1,7 : 1 1,6 : 1
Turnover rate of stock 6,9 7,4
Debtors collection period ? 55 days
Creditors payment period 23 days 26 days
Solvency ratio ? 3,7 : 1
Debt: equity ratio ? 0,28 : 1
Return on total capital employed 7,2% 16,9%
Percentage return on average equity 10,9 % 13,4 %
Percentage return by Nkewu 11,7% 12.5%
Percentage return by Laing ? 14,9%
Questions
1. Solvability
a. Calculate the ratio of total assets to total liabilities for 2017.
b. Comment on this ratio. Is this business likely to experience a solvency
problem? Explain briefly.
2. Gearing and profitability

a. Calculate the debt: equity ratio for 2017.
b. Laing is not happy with the debt: equity ratio and feels that it is
negatively affecting the performance of the business. State two points
to support her opinion. The interest on the mortgage loan is 14%.
3. Return and equity

a. Calculate Laing’s percentage return on average equity for 2017.
b. Laing is of the opinion that her return is unsatisfactory and that Nkewu
is taking advantage of his senior position in the partnership. State three
points to support Laing’s opinion.
4. Liquidity
a. Calculate the average debtors collection period for 2017.
b. The customers are complaining that the business often does not stock
the items they are looking for. Which figures and financial indicators
provide proof of this problem? Briefly explain. State two points.
c. The partners disagree about the liquidity situation.
Nkewu is not worried about the liquidity situation for the
■
immediate future.

■ Laing feels that there are danger signs for the long-term
sustainability of the business as far as liquidity and cash flow are
concerned.
State two points to support Nkewu’s opinion and two points to
support Laing’s opinion.
Activity 8.5
The Great Outdoors is a partnership owned by two partners, S Yolisa and

K Williams. They trade in camping equipment.
Required
Study the information below to answer the following questions. Show all
calculations. Where comments are required, you are expected to quote the
relevant figures/ratios in your answer. Round off to one decimal.
1. Draw up the Current account of S Yolisa for the year ended 28 February
2018. The missing figure is the drawings for the year.
2. Calculate the percentage earnings of Yolisa. Use his average equity in
your equation.
3. Calculate the average rate on stock turnover for 2018.
4. Did the business change its policy in setting its prices (was 40% on the cost
price)? Explain briefly and show calculations.
5. Did this business policy have a favourable or unfavourable effect on the
financial results for 2018? Explain briefly.
6. Calculate the current ratio for 2018.
7. Comment on the liquidity of the business.
Information
General Ledger of The Great Outdoors

Dr Appropriation account Cr
2018 2018
Feb 28 Interest on capital 85 000 00 Feb 28 Profit and loss 188 500 00
Salary: Yolisa 40 000 00
Salary: Williams 44 000 00
Current account: Yolisa 9 750 00
Current account: Williams 9 750 00
188 500 00 188 500 00

The following balances appeared in the financial statements for the past two years:
2018 2017
Capital: Yolisa 500 000 00 400 000 00
Capital: Williams 500 000 00 300 000 00
Current account: Yolisa (cr) 12 666 00 (cr) 3 450 00
Current account: Williams (cr) 1 025 00 (cr) 7 640 00
Current assets 520 000 00 475 150 00
Trading stock (included in current assets) 375 000 00 195 000 00
Sales 1 976 000 00 2 047 500 00
Cost of sales 1 235 000 00 1 462 500 00
The partners increased their capital on 1 September 2017. Interest on capital is

calculated at 10% p.a.
The following ratios were calculated in respect of the previous financial period
2017
Percentage earnings on average owners equity: Yolisa 27%
Percentage earnings on average owners equity: Williams 23%
Current ratio 1,6 : 1
Rate of stock turnover 9 times
Percentage profit on cost price 40%

Activity 8.6
J & A Pet Shop is situated in the Paarl Mall and owned by partners J Kotze and
A Moller. The business’s financial year ends on 28 February. You are provided
with extracts from the financial statements of J & A Pet Shop. Round off to
one decimal. Read through these and answer the questions that follow.
J Kotze and A Moller

Trading as J & A Pet Shop
Income Statement for the year ended 28 February 2019
Note R R
2019 2018
Sales 1 363 600 00 1 215 500 00
Cost of sales (974 000 00) (935 000 00)
Gross profit 389 600 00 280 500 00
Operating expenses (348 870 00) (284 000 00)

Salaries and wages 205 000 00 170 000 00
Rent expense 85 600 00 80 000 00
Bank charges 3 150 00 3 010 00
Telephone, water and electricity 6 890 00 5 980 00
Advertising 8 000 00 5 000 00
Damaged stock written off 12 000 00 1 000 00
Trading stock deficit 8 560 00 790 00
Sundry expenses 19 670 00 18 220 00
Operating profit (loss) 40 730 00 (3 500 00)

Interest income (8 970 00) (15 600 00)
Net profit (loss) for the year 31 760 00 (19 100 00)

J Kotze and A Moller
Trading as J & A Pet Shop
Balance Sheet as at 28 February 2019
Note R R
2017 2016
ASSETS
CURRENT ASSETS 221 000 00 260 900 00

Inventories 148 000 00 140 000 00
Trade and other receivables 21 000 00 19 600 00
TOTAL ASSETS 454 600 00 462 300 00

OWNER’S EQUITY 249 600 00 205 400 00
Capital 240 000 00 200 000 00
Current accounts 9 600 00 5 400 00

Loan from XYZ Bank (180 000 – 20 000) 120 000 00 170 000 00

Trade and other payables 85 000 00 86 900 00
Questions
1. The business changed their policy with regards to profit mark-up from the
2018 to the 2019 financial year. What was the change?
2. Did this change in policy (question 1) have a favourable or unfavourable
effect on the financial results for 2019? Explain briefly.
3. Calculate the percentage operating expenses on turnover for 2019. This
percentage was 23,4% for the 2018 financial term. Comment on the
business’s cost control.
4. Which items in the Income Statement would be of concern to you? Suggest
three methods of better internal control to address this problem.
5. Partner Kotze is concerned about the large amount of rent that needs to be
paid every month. He is trying to convince partner Moller that they should
move out of the mall to another premises. What do they need to take into
consideration on making this decision?

6. Comment on the liquidity of the business by calculating the current ratio
for 2019. The current ratio for 2018 was 3 : 1. State at least three points in
your comment.
7. The partners want to expand their business in the next financial year. Will
they be able to secure a loan? (Use the debt/equity ratio to comment.)
Answer the following questions by referring to the extract from the financial
statements of Joubcon Traders for the year ended 31 December 2017.
Comparative figures for the previous period are provided. Show your calculations.
1. Calculate the current ratio on 31 December 2017. The current ratio on

31 December 2016, was 1,9 : 1. Comment on your findings. [10]
2. Calculate each partner’s total earnings for the year ended 31 December
2017, if partner Joubert withdrew R60 890 during the year and partner
Conradie R76 550. [8]
3. Which partner derives more advantage from the partnership?
Use the information in question 2 and show further calculations to
motivate your answer. [14]
4. Is the business’s credit control good? Motivate your answer by means
of calculations. [8]
Information from the financial statements for the year ended 31 December 2017
2017 2016
Capital: Joubert 250 000 00 200 000 00
Capital: Conradie 300 000 00 250 000 00
Current account: Joubert (cr) 2 450 00 (cr) 5 470 00
Current account: Conradie (cr) 1 890 00 (dr) 2 740 00
Tangible assets (carrying value) 320 560 00 284 776 00
Investments 2 000 00 10 000 00
Current assets 128 750 00 131 472 00
Debtors 18 972 00 20 774 00
Credit sales 189 752 00 – –

Jacques Maree and Ruan le Roux each owned a surf and skateboard shop
in Jeffrey’s Bay. Their average annual net profit was R155 000 and R115 000
respectively. On 1 July 2014 they decided to close down their respective
businesses and to form a partnership. Their new business is known as Ride It.
They immediately put the capital from their old businesses into the partnership
and took out a further loan of R100 000, at an interest rate of 13% per annum.
They will repay the loan within the following five years, at R20 000 per annum.
Information
The following information appeared in the financial records of Ride It

partnership on 30 June 2015.
J Maree R Le Roux
Capital balances at end of year 30/06/2015 450 000 00 250 000 00
Current account at the beginning of the year 30/07/2014 – – – –
Current account at the end of the year 30/06/2015 (cr) 69 175 00 (cr) 22 425 00
Drawings for the year ended 30/06/2015 84 000 00 97 000 00
• Each partner drew their monthly salaries, but Le Roux also drew his salary Hint
for July 2015 and took stock at a cost price of R6 000 for own use. Capital applied = Owner’s equity
• Both partners’ salaries that were drawn were debited to their Drawings + Long-term liabilities.
accounts. Maree made no other drawings during the year.
• Both partners earn interest on capital at 15% per annum. Le Roux increased
his capital by R50 000 on 1 January 2015. There was no change in Maree’s
capital during the year.
• Ride It partnership showed a net profit of R272 600 for the year ended
30 June 2015. Remaining profits/losses were shared equally.
Required
1. Draw up the Current account: Le Roux as it will appear in the General Ledger
on 30 June 2015.
2. Draw up the Appropriation account of Ride It partnership for the year ended
30 June 2015.
3. Give one advantage of a partnership as opposed to a sole trader.
4. How much of the net profit of R272 600 was earned by each partner?

5. Give three reasons why the net profit of Ride It partnership is more than the
joint profit of the two sole traders.
6. Calculate the proceeds on average capital applied of Ride It partnership for
the year ended 30 June 2015.
7. Solving a problem: Maree wants to withdraw from the partnership for
two reasons.
• He has his own house and motor vehicle. Le Roux is younger than
Maree and has no tangible assets. Should Le Roux behave irresponsibly,
the business will fall into serious debt and Maree will soon lose his
private assets.
• Maree is not gaining financially as well as he had hoped from
the business.
As an intermediary between the partners, raise the points that you
would and could in order to solve the problem. Include the following:
a. Each partner’s percentage income/earnings
b. Are Maree’s reasons for wanting to withdraw valid? Why?
c. Is the partnership agreement fair? Give reasons and solutions.

Chapter 9
Financial accounting of non-profit
organisations – Clubs
By the end of this chapter, you • post to the General Ledger,
will be able to: particularly to accounts unique
• define and explain accounting to non-profit organisations:
concepts unique to non-profit Accumulated Funds
■
organisations: Membership Fees

■
■ constitution Entrance Fees

■
■ accumulated funds Refreshments

■
■ membership fees • draft a Trial Balance

■ entrance fees • prepare a Statement of Receipts
■ affiliation fees and Payments
■ honorarium • understand the difference
■ surplus/deficit between receipts and income,
• prepare an Analysis Cash Book and payments and expenses.
Key concepts
• membership fees • entrance fees • affiliation • honorarium • refreshments • accumulated
funds • Statement of Receipts and Payments • Income and Expenditure account
• Trial Balance • bequests • capitalisation
Thank you for all your hard

work as the soup kitchen’s
secretary. Here is an
honorarium to compensate
for all your expenses.
F inancial acc o unting o f n o n - pr o fit o rgani s ati o n s – C lub s • c h a p t e r 9 289

1. Introduction
The main purpose of a trading or service business is to make a profit. In
the case of non-profit organisations or clubs, the main purpose is not to
make a profit, but to render a service to its members and to society.
In order to render a service, the club needs money – but the question
is where the money comes from, since there is no owner such as in a
sole trader. The money usually comes from the members, as well as
from sponsors and donations. It is therefore necessary to keep the books
meticulously, and to make sure all accounting records are written up. All
receipts and payments of a club are recorded in an Analysis Cash Book,
while all non-cash transactions are recorded in the General Journal.
Although a club does not have an owner, there are people who run
remuneration the club – usually at no remuneration. The administration of a club is
payment for services rendered
run by the following people:
• chairman
• vice-chairman
• secretary
• treasurer – responsible for the bookkeeping and for submitting
financial statements to the members at the annual general meeting.
• additional members.
Because a club is a non-profit organisation, the profit generated by the
surplus club’s activities is called a surplus, and a loss is a deficit.
where the income is more than the
expenses; money left over
2. Constitution of a non-profit organisation
A constitution is a set of principles according to which an organisation
deficit
is governed. All such organisations should have a constitution, which
where the expenses are more than the usually contains the following information:
income; have debt
• The name of the organisation/club
• The aims and objectives of the organisation
• Who may apply for membership?
• Membership fees will be set annually and agreed by the Executive/
Management Committee or determined at the AGM (Annual General
Meeting). How will fees be paid: annually, monthly or weekly?
• Officers of the club will be elected at the AGM, for example the
chairman, vice-chairman, secretary, treasurer etc.
• The club will be managed through the Management Committee.
• The constitution will stipulate how finances should be governed
• Annual General Meetings (AGM): the Committee will decide when
and where these will be held and notices to all members will be sent
out a set number of days before the meeting.
290 c h a p t e r 9 • F inancial acc o unting o f n o n - pr o fit o rgani s ati o n s – C lub s

• Discipline and appeals: complaints and disciplinary action will be
handled by the Management Committee.
• Dissolution: a resolution to dissolve the club can only be passed at an
AGM through a majority vote of the membership.
• Amendments to the constitution: the constitution will only be
changed through agreement by majority vote at the AGM.
3. Transactions and accounts specific to

sports clubs
3.1 Membership fees
• This is usually the club’s main source of income, and management
determines the membership fees on an annual basis.
• The members’ money received as membership fees are receipts. The
part of the membership fees that applies to the current financial year
is an income.
• However, it often happens that members do not pay their
membership fees. This is regarded as a loss for the club and recorded
as Membership Fees Written Off.
3.2 Entrance fees

• This is a once-off payment to be paid by a new member in order to
become a member of a club. Entrance fees can be dealt with as a
current income, or it can be partially or totally capitalised.
3.3 Affiliation fees

• This is the money that a club has to pay to the body that organises the
particular sport in the province or in the country – a club is usually
affiliated to a province.
• The affiliation fee is an expense for the club.
3.4 Crockery GAAP flash

• Some clubs own crockery. This is a fixed asset to the club. Historical cost principle:
• No depreciation, however, is written off on crockery and if it breaks it An asset is entered in the books at
is recorded as a loss under Crockery Written Off. cost price.
• In the Balance Sheet, crockery will always be shown at cost price.
3.5 Functions/tournaments
• A club often holds functions (for example a dance) or tournaments to
collect money for the club.
F I N A N C I A L A C C o U N T I N G o F N o N - P R o F I T o R G A N I s AT I o N s – C L U B s • c h a p t e r 9 291

• The ticket sales will be a receipt, the money generated by the
function/tournament are payments and eventually the profit or loss
generated will be calculated and shown.
3.6 Honorarium
• The secretary or the treasurer often incurs costs while rendering
services to the club. For example, if the secretary has to organise
matches by making use of his private telephone, he may be
remunerated by the club for doing so.
• This remuneration is called an honorarium and it is an expense for
the club.
3.7 Club badges/tracksuits/ties

• Some clubs sell club badges, tracksuits or ties to their members.
• The purchase of the items is a payment and the sales to members
are receipts.
• The difference between the receipts and payments is therefore a profit
made and it is an income for the club.
• Should any club badges, tracksuits or ties be left over at the end of the
financial year, they are shown as current assets in the Balance Sheet.
3.8 Refreshments
• Some clubs sell refreshments during matches or meetings to
generate funds.
• Purchasing the refreshments is a payment and the sales to members
are receipts.
• The difference between the receipts and payments is therefore a profit
and it is an income for the club.
• If any refreshments are left over at the end of the financial year, they
are shown as a current asset in the Balance Sheet.
3.9 Accumulated funds

It is important to remember that a sports club does not have a Capital
account. However, it does happen that surpluses accumulate over the
year. These accumulated surpluses are called Accumulated Funds. This is
an owner’s equity account.
3.10 Bequests
It often happens that a member of a club, on passing away, leaves money
to the club in his will. This can be dealt with as a current income or it can
be capitalised. You will deal with capitalisation later.

4. Differences between receipts and income,
and payments and expenses
Receipts Income
All cash received during the only income that was earned
financial year are recorded as during a financial year should
receipts. be taken into account for that
This can include cash received financial year, no matter when
for income generated in both the the money was received. In other
previous and next financial years. words, the matching principle GAAP flash
Example: should be applied. Matching principle: Income
A member pays his membership Example: and expenses are recognised and
fees for 2018 in advance during A member pays his membership recorded in the time period in
2017 – it will be regarded as fees for 2018 in advance during which they took place.
a receipt, but not an income 2017 – it will be regarded as an
for 2017. income for 2018, even though
Not all receipts are income; for the money was already received
example, a fixed deposit that in 2017.
matures is an asset, not an income.
Payments Expenses
All payments that was made It includes expenses that should
during the financial year, have been paid for that specific
regardless what they were for. In financial year only.
other words, all cash that flows Example:
out of the entity during that year is Maintenance of the sport facilities
regarded as a payment. paid during the financial year
Not all payments are expenses. amounts to R2 300. An amount of
If a payment is made to purchase R540 is still payable. The expense
equipment, it is an asset, not an for maintenance for that financial
expense. year will be R2 300 + R540
Example: = R2 840, while the payment
Payment for maintenance will be will only be R2 300.
R2 300, even though the expense
for the year is R2 840. An amount
of R540 is still payable.
Statement of Receipts Statement of Income

and Payments and Expenditure

5. Differences between partnerships and clubs
Partnerships Clubs
Receipts and payments are Receipts and payments are
entered in the CRJ and CPJ and entered in the Analysis Cash Book.
posted to the bank account At the end of the financial year, the
each month. treasurer draws up a Statement of
Receipts and Payments, which is a
summary of the information in the
Analysis Cash Book.
Credit transactions are entered in All transactions that cannot be
the CJ, DJ, CAJ, DAJ and GJ. entered in the Analysis Cash Book
are entered in a General Journal.
At the end of the financial year, an A Statement of Income and
Income Statement is prepared to Expenditure is prepared by the
calculate the net profit/loss. treasurer for the AGM to calculate
the surplus/deficit for the
financial year.
A Balance Sheet shows the A Balance Sheet shows the
financial position of the business. financial position of the club.
Example
The Fish River Canoe Club is situated in Cradock. Membership fees
are R500 a year for the financial year ending 31 December 2018. New
members have to pay an entrance fee of R100.
Required
Draw up the Analysis Cash Book for the Fish River Canoe Club
for 2018.
Receipts and payments of cash for 2018

Jan
01 The balance of the bank account was R3 049.
15 Receipts were issued to the following members for membership fees:
No. 64 to P de Wet, R500
No. 65 to P Lombard, R500
16 R Qoba joined the club. He paid an entrance fee of R100, as well as
his membership fees of R500. Issue receipt no. 66.
18 Bought refreshments for the clubhouse from Adami’s, R1 390 and
paid with cheque no. 121.

Example continued
Feb
09 Issued receipt no. 67 to PG Glass for a donation made to the club,
R2 000.
12 Receipts issued:
No. 68 to W Nienaber, R500 membership fees
No. 69 to L Copeman, R500 membership fees
No. 70 to Y Collett, R100 entrance fee and R500 membership fees
23 Bought fibreglass from Mica to repair the boats and paid with
cheque no. 122, R320.
28 Paid R1 300 with cheque no. 123 to B Cunningham for boat racks
installed in the clubhouse.
Apr
17 Receipts were issued to the following people for membership fees:
No. 71 to H Schultz
No. 72 to L Twetwe
No. 73 to W August
19 Bought refreshments for the clubhouse from Adami’s, R1 443 and
paid with cheque no. 124.
Jul
21 Deposited R3 240 in the bank account for refreshments sold at the
clubhouse.
30 Paid EP Canoe Union R1 800 affiliation fees, cheque no. 125.
Nov
13 Paid the secretary, L Copeman, a R200 honorarium.
16 Issued a receipt to P de Wet for R600, for his membership fees
for 2019.
30 Issued a cheque for R1 060 to Mandy Catering for the year-end
function.
Dec
31 Received a bank statement from YZ Bank, showing bank charges of
R102 for the year.

Example continued
Solution
Analysis Cash Book of Fish River Canoe Club for January to December 2018
Cash Receipts Cash Payments
Doc. Day Details Analysis Bank Member- Sundry accounts Doc Day Name of Bank Sundry accounts
No. of ship fees No. payee
receipts Amount Details Amount Details
1/1 Bank Balance 3 049 121 18/1 Adami’s 1 390 1 390 Refreshments
64 15/1 P de Wet 500 500 122 23/2 Mica 320 320 Fibreglass
65 P Lombard 500 1 000 500 123 28/2 B Cunningham 1 300 1 300 Boat racks
66 16/1 R Qoba 600 600 500 100 Entrance fee 124 19/4 Adami’s 1 443 1 443 Refreshments
67 9/2 PG Glass 2 000 2 000 2 000 Donation 125 30/7 EP Canoe Union 1 800 1 800 Affiliation fees
68 126 Cradock Water and
12/2 W Nienaber 500 500 11/9 Municipality 278 278 electricity
69 L Copeman 500 500 127 15/7 The Handy Man 600 600 Repairs
70 Y Collet 600 1 600 500 100 Entrance fee 128 13/11 L Copeman 200 200 Honorarium
71 129 Year-end
17/4 H Schultz 500 500 30/11 Mandy Catering 1 060 1 060 function
72 L Twetwe 500 500 BS 31/12 YZ Bank 102 102 Bank charges
73 W August 500 1 500 500
BS 21/7 Cash 3 240 3 240 3 240 Refreshments 31/2 Bank balance 5 096
74 16/11 P de Wet 600 600 600
13 589 5 100 13 589
1/1 Bank balance 5 096
Activity 9.1
At the Lingelihle Soccer Club, membership fees are R400 a year for the financial
year ending 31 December 2019. New members have to pay an entrance fee
of R200.
Required
Draw up the Analysis Cash Book for the Lingelihle Soccer Club for 2019.

Receipts and payments of cash for 2019
Jan
01 The balance in the bank account was R4 112.
20 Receipts issued to members for membership fees received:
No. 34 to R Seteni
No. 35 to N Tuku
No. 36 to B Kwezi
No. 37 to K Bango
25 Bought refreshments from Silwana Suppliers for R1 021 and pay with
cheque no. 187.
31 Bought soccer balls from Top Sport for R460.
Mar
10 Receipts issued as follows:
No. 38 to N Tshiwo for membership fees
No. 39 to B Madinge for membership fees, R400 and entrance fees, R200
No. 40 to W Butler for membership fees, R400 and entrance fees, R200
15 Bought 20 soccer jerseys at R120 each from Hippo Rock Clothing and
paid by cheque.
May
09 Receipt no. 41 issued to Tams Stores for a donation of R1 800.
16 Paid R1 500 to Green Finger Garden Services for maintenance of the
soccer field.
22 Receipts issued for membership fees as follows:
No. 42 to J King
No. 43 to M Tantsi
No. 44 to A Xhaso
Aug
23 Deposited R1 655 for refreshments sold.
31 Paid the municipality R345 for water and electricity.
Sep
08 Deposited R1 560 for soccer jerseys sold.
13 Paid affiliation fees to EP Soccer Union, R1 680.
Nov
11 Bought refreshments from Silwana Suppliers, R1 449.
22 Paid the secretary, M Tantsi a honorarium of R300.
30 Paid R1 500 to Green Finger Garden Services for maintenance of the
soccer field.
Dec
01 Deposited R1 664 for refreshments sold.
31 Bank charges as per bank statement received from SB Bank were R129.

Activity 9.2
The following information was provided for the Fish Eagle Angling Club.
Required
1. Prepare an Analysis Cash Book for the Fish Eagle Angling Club for the year
ended 31 December 2019 by entering the transactions below.
2. Compare the Analysis Cash Book at the end of 31 December 2019 with the
bank statement and make the necessary entries.
3. Balance the Analysis Cash Book properly.
4. Prepare a Bank Reconciliation Statement on 31 December 2019.
Transactions
2019
Jan
01 Balance in the bank, R3 254.
No. 43 to D Conradie, R500 for membership fees
No. 44 to C du Toit, R500 for membership fees
No. 45 to S Stofberg, R500 for membership fees and R200 for entrance fee
No. 46 to J de Ridder, R500 for membership fees and R200 for entrance fee
26 Bought fishing gear for R610 from Sportsman’s Den and paid by cheque
no. 119.
Feb
No. 47 to M Burger, R500 for membership fees
No. 48 to D Nel, R500 for membership fees and R200 for entrance fee
No. 49 to Y Xhaso for membership fees, R500
21 Receipt issued to L Ngwenya for donation, R2 000.
23 Bought refreshments from Makro for R1 050 and paid with cheque no. 120.
Mar
No. 51 to K Abrahams for membership fees, R500
No. 52 to D Swart for membership fees, R500
19 Bought fishing gear from KJ Sport and paid with cheque no. 121, R2 021.
Apr
21 Paid EP Fishing Union R900 affiliation fees.
Jul
16 Paid Dan the Handyman R600 with cheque no. 123 for repairs done to
the clubhouse.
Aug
25 Issued receipt no. 53 to L Pete for membership fees, R500.

Sep
02 Deposited R1 340 in the bank account for refreshments sold.
Oct
19 Issued cheque no. 124 to The Outdoor Shop for prizes purchased for the
prize giving, R1 300.
22 Paying King Catering R1 090 for the catering done for the annual prize-
giving, cheque no. 125.
Dec
02 Paid the municipality R1 589 for water and electricity, cheque no. 126.
06 Issued cheque no. 127 to D Conradie, the secretary, being honorarium, R350.
Information
The following bank statement was received from XY Bank:
The Treasurer XY BANK

Fish Eagle Angling Club Account no.: 124 600
P O Box 112 Date: 2019
Middleton
Date Details Fol. Debit Credit Balance
Jan 01 Balance 3 254 00
14 Deposit 2 400 00 5 654 00
28 Cheque 119 610 00 5 044 00
Feb 20 Deposit 1 700 00 6 744 00
21 Deposit 2 000 00 8 744 00
24 Cheque 120 1 050 00 7 694 00
Mar 06 Deposit 1 000 00 8 694 00
20 Cheque 121 2 021 00 6 673 00
Apr 22 Cheque 122 900 00 5 773 00
Jul 31 Cheque 123 600 00 5 173 00
Aug 25 Deposit 500 00 5 673 00
Sep 02 Deposit 1 340 00 7 013 00
Oct 19 Cheque 124 1 300 00 5 713 00
23 Cheque 125 1 090 00 4 623 00
Dec 01 Service fee 133 00 4 490 00
03 Cheque 126 1 589 00 3 901 00
10 Deposit: G Daniels 500 00 3 401 00
Interest 114 00 3 515 00
The deposit received on 10 December 2019 was for membership fees.

Example
Required
Use the information below to draw up the Membership Fees account in
the General Ledger of Winn Club (6 lines).
Information
• Membership fees amount to R150 per year.
• On 1 January 2020, 10 members’ membership fees (from the
previous year) were still outstanding.
• On 1 January 2020, three members had already paid their
membership fees for 2020 during 2019.
• Membership fees received during 2020 amount to R14 400.
Included in this amount are eight members who paid their
membership fees for 2019 and four members who paid their
membership fees for 2021 in advance.
• It was decided that members whose membership fees for 2019 had
not yet been paid by the end of 2020 should be removed from the
membership register and that these members’ membership fees
should be written off.
• Eight members had not yet paid their membership fees for 2020 by
31 December 2020.
Solution
General Ledger of Winn Club
Dr Membership Fees Cr
2020 2020
Jan 01 Accrued income 1 1 500 00 Jan 01 Income received in advance 1 450 00
Dec 31 Income received in advance 5 600 00 Dec 31 Bank 2 14 400 00
Income and expenditure 6 14 250 00 Membership fees written off 3 300 00
Accrued income 4 1 200 00
16 350 00 16 350 00
Comments
1 The entries on the first day of the financial year are always the totals
that appeared in the Balance Sheet of the previous year relating to
membership fees only, for the accounts Accrued Income and Income
Received in Advance.

Example continued
2 The money received for membership fees during the year (2020) is
recorded on the credit side.
Note: It is the total amount received, no matter which year’s
membership fees it represents.
3 The membership fees written off is the difference between the
outstanding fees accumulated during the previous year and the
amount received during the current year that relates to those
outstanding amounts.
4 The accrued income for the current year represents the members
who did not pay their membership fees during the current financial
year; in other words, fees still outstanding.
5 The income received in advance for the current year represents the
members who already paid in advance during the current financial
year for the following year – it is therefore not income for the
current year and is consequently deducted.
6 The amount carried over to the Income and Expenditure account is
the amount which should have been received for membership
fees. It is therefore the number of members multiplied by the
membership fees.
Activity 9.3
The financial year of Ace Tennis Club ends on 31 December.
Required
Draw up the Membership Fees account in the General Ledger of Ace Tennis Club
(6 lines).
Information
• On 1 January 2012 the Ace Tennis Club (annual membership fees R180 per
member) had 13 members who had not yet paid their membership fees for
2011, while nine members had already paid their membership fees for 2012
in 2011.
• During the year, the club received membership fees to the amount of
R16 200. These membership fees include arrears membership fees for 2011
from 10 members, and membership fees received in advance for 2013 from
seven members.
• At the end of 2012 management decided to write off membership fees still
outstanding for 2011.
• Four members still owed their membership fees for 2012.

Activity 9.4
The financial year of Umzinyathi Canoe Club ends on 31 December.
Required
Draw up the Membership Fees account in the General Ledger of Umzinyathi
Canoe Club (6 lines).
Information
• Membership fees amount to R480 per member per year.
• On 1 January 2019 the club had 100 members.
• On 1 January 2019 there were nine members who had not paid the previous
year’s membership fees, while three members had already paid their
membership fees for 2019 in advance during 2018.
• During the year, 15 new members joined the club.
• On 1 October 2019 three months’ membership fees were paid back to a
member who was unexpectedly transferred.
• At the end of 2019 it was found that R2 400 of the outstanding membership
fees with regards to 2018 had been paid – the rest were to be written off as
bad debts. Two members were in arrears with 2019’s membership fees and
10 members had already paid for 2020.
Activity 9.5
Giant Cycle Club has 70 members on 1 January 2013. Membership fees amount
to R100 per member per month.
Required
Draw up the Membership Fees account in the General Ledger of Giant Cycling
Club (5 lines).
Information
2013
01 Jan 15 members’ membership fees were still not received for December
2012, while eight members’ membership fees had already been paid
for March 2013.
31 Oct All the membership fees due up to 31 October 2013 had been paid.
Ten new members joined the club on 31 October.
30 Nov 68 members’ membership fees for November 2013 had
been received.
31 Dec 65 members’ membership fees for December had been received. Six
members’ membership fees for January 2014 had been received.

Activity 9.6
Membership fees amount to R450 per member per year for the Image Photo
Club. The club’s year end is February.
Required
Draw up the Membership Fees account in the books of Image Photo Club
(10 lines).
Information as at 1 March 2020

• Number of members in the membership register are 245.
• Membership fees are still owed by nine members.
• Membership fees with regards to the new financial year have already been
received from three members.
• Ten new members joined the club and their membership fees have
been paid.
• Four members have paid their membership fees for the previous
financial year.
• Membership fees still outstanding with regards to the 2019/2020 year
should be written off.
• Two members paid their membership fees for the following financial period
in advance.
• 229 old members have paid their membership fees for the current period.
• Some members’ membership fees were still outstanding on 28 February 2021.
• The secretary asked that, instead of receiving an honorarium, the amount
be regarded as his membership fees for the year.
6. Statement of Receipts and Payments

As already mentioned, the daily receipts and payments are recorded
in the Analysis Cash Book. At the end of the financial year, however,
the treasurer must present a statement of what happened to the club’s
cash during the year. A summary of all the receipts and payments is
made from the Analysis Cash Book, and a Statement of Receipts and
Payments is drawn up. The Statement of Receipts and Payments contains
the following:
• The cash balance (current bank account, savings account, petty cash)
at the beginning of the financial year
• The cash receipts during the year
• The cash payments during the year
• The cash balance at the end of the financial year.

Example
Statement of Receipts and Payments
Ace Tennis Club’s financial year runs from 1 January to 31 December.
A summary of the receipts and payments from January 2019 to
December 2019 is supplied.
Required
Draw up the Statement of Receipts and Payments of Ace Tennis Club
for the year ended 31 December 2019.
Information
Balances as at 1 January 2019
Current account at bank R20 210
Savings account at bank R2 000
Petty cash R100
Loan: AB Bank R100 000
Creditors R1 880
Accrued income (membership fees) R900
Income received in advance (membership fees) R600
Refreshments on hand R346
Summary of receipts and payments

from 1 January 2019 to 31 December 2019
• Membership fees amount to R300 per member per year. The
membership fees received during the year were compiled as follows:
■ 2018 membership fees R600
■ 2019 membership fees R7 800
■ 2020 membership fees R300
• Five new members joined during the year and paid entrance fees
of R100 each, of which 20% must be capitalised. Two members
had not yet paid their membership fees for 2019 by the end of the
financial year.
• Stationery bought and paid per cheque during the year, R240.
Stationery bought on credit was R120.
• Maintenance costs paid for the tennis courts and clubhouse, R2 110.
• This includes R200 paid in advance to garden services for 2020.
• Affiliation fees paid to the Mpumalanga Tennis Union, R4 500.
• Rent received from the local high school for the use of the tennis
courts, R2 750. The rent for December 2019 of R250 is still
outstanding.
• The bank statement received shows the following:
■ Interest on savings account R180
■ Bank charges on current account R810

Example continued
• Tennis balls purchased, R2 500. There are 230 tennis balls still not
used by the end of the year.
• During the year refreshments are sold:
■Receipts R8 520
■Payments for refreshments purchased R5 980
■R657 refreshments were left over at the end of the year.
• An honorarium is paid to the secretary, R600.
• A tournament was held during March 2019:
■Receipts during tournament R7 890
■Expenses paid during tournament R4 820
• Water and electricity paid, R2 332. The account for December 2019
for R212 is still outstanding.
• Equipment purchased in cash for R2 890 on 1 July 2019.
• Paid creditors, R1 520.
• The loan is paid annually on 31 December, in instalments of
R10 000. The payment was made on 31 December 2019. Interest is
15% per year and R11 250 in interest was paid during the year.
• Received a donation of R10 000 from ex-member of the tennis club.
Solution
Ace Tennis Club
Statement of Receipts and Payments for the year ended 31 December 2019
Note R
RECEIPTS 38 540 00
Membership fees (600 + 7 800 + 300) 8 700 00
Entrance fees 500 00
Interest on savings account 180 00
Refreshments 8 520 00
Tournament 7 890 00
Donations 10 000 00

Example continued
cont ... Note R

PAYMENTS (49 652 00)
Stationery 240 00
Maintenance cost 2 110 00
Affiliation fees 4 500 00
Bank charges 810 00
Tennis balls 2 500 00
Refreshments 5 980 00
Honorarium 600 00
Tournament 4 820 00
Equipment 2 890 00
Creditors 1 520 00
Surplus (deficit) for the year (11 112 00)
Opening balances 22 310 00

Bank 20 210 00
Savings account 2 000 00
Petty cash 100 00
Closing balances 11 298 00

Bank 9 018 00
Petty cash 100 00
Activity 9.7
Required
1. Use the information that follows to draw up the statement of Receipts
and Payments of the Golden Gate Cycling Club for the year ended
31 December 2019.
The number in brackets
2. Draw up the following accounts in the General Ledger:
indicates how many lines to • Membership fees (5)
leave open for each account. • Refreshments (4)
• Club cycling gear (4)
306 c h a p t e r 9 • F I N A N C I A L A C C o U N T I N G o F N o N - P R o F I T o R G A N I s AT I o N s – C L U B s

Balances on 1 January 2019
Bank account (dr) R1 879
savings account R4 320
Summary of transactions during 2019

• Twenty new members joined the club during the year. Entrance fees
amount to R100 per member and are paid by all new members.
• Membership fees received during the year amount to R24 000. Included
with this amount are R600 for 2020 fees and R900 for 2018 fees. on
31 December 2019, R300 membership fees for 2019 were still outstanding.
• Annual dinner:
■ Ticket sales R8 000
■ Total cost of dinner paid R6 560
• Donations received, R2 690
• Refreshments
■ Refreshments bought for cash R3 690
■ Refreshments sold R5 887
• The club had cycling gear made for R8 400. sales from that amounted to
R7 900 and R1 200 cycling gear is still on hand at the end of 2019.
• honorarium paid to the secretary, R500.
• Affiliation fee paid, R8 000.
• Bank charges during the year, R1 104.
• By 31 December 2019, interest of R224 was added to the savings account.
• Prizes purchased for the achievers of the year, R2 100.
• A refrigerator and other equipment were purchased for R4 200.
• Rent for the clubhouse building for the year amounted to R2 400.
• Invested R10 000 on a fixed deposit at ABC Bank on 31 December 2019.
Activity 9.8
A summary of the transactions by the Rovers Tennis Club for the year 2020
is provided.
Required
1. Draw up the statement of Receipts and Payments of the Rovers Tennis Club
• Membership fees (6) The number in brackets
• Refreshments (5) indicates how many lines to
• stationery (4) leave open for each account.
• honorarium (4)

Balances as at 1 January 2020
Cash in bank R700
Savings account R4 000
Equipment R6 700
Accrued income (membership fees) R1 200
Accrued expenses (honorarium) R100
Transactions and information for 2020

• Membership fees
■ The club had 120 members on 1 January 2020, and each member has to
pay annual membership fees of R240. Only 118 of these members had
paid their membership fees for 2020 in full during 2020.
■ Included in the 118 members who had already paid for 2020 are 10 new
members who joined the club during 2020. All of them paid an entrance
fee of R50.
■ Four members whose debt of 2019 was still outstanding paid these
membership fees during 2020. The club management decided to write
off the other members’ membership fees as bad debts.
■ Three members already paid their membership fees for 2021 during 2020.
• Refreshments
■ Sold for cash R9 870
■ Purchased for cash R5 972
■ On hand on 31 December 2020 R674
• Stationery
■ Bought and paid R320
■ Bought on credit, but not paid yet R113
■ On hand on 31 December 2020 R54
• Affiliation fee paid amounted to R12 000.
• The wages of the caretaker amounted to R10 800, of which only R9 900 has
been paid.
• Honorarium to the secretary paid for 2020, R600. An amount of R100 for
2019 was still outstanding to the secretary. This was paid to her in 2020.
• The club rents the grounds and clubhouse at R300 per month. The rent for
December 2020 has not yet been paid.
• Annual function
■ Money received R9 450
■ Expenses paid R5 980
• Tournament
■ Membership fees received R1 980
■ Prize money and other expenses paid R1 241
• Tennis balls
■ Purchased for R5 400
■ Tennis balls not used on 31 December 2020, R400

• A donation of R5 000 was received.
• Equipment bought for R1 890 and paid in cash. Equipment bought on credit
amounts to R2 670.
• Water and electricity paid, R3 744.
• Interest earned on the savings account, R276.
• Depreciation on equipment written off at 10% per year on the cost price
• Repairs paid during 2020 amounted to R340.
• Creditors paid, R1 965.
• An amount of R60 000 was loaned and received from AB Bank. The money
will be utilised in 2021 to expand the clubhouse. The loan was paid out to
the club on 1 october 2020 and interest at 15% p.a. has already been paid
for three months.
Activity 9.9
The information below applies to the Fish River Canoe Club.
Required
1. Draw up the statement of Receipts and Payments for the year ended
31 December 2021.
• Membership fees (9) The number in brackets
• Refreshments (6) indicates how many lines to
• honorarium (5) leave open for each account.
Balances on 1 January 2021

Clubhouse R106 357
Accumulated funds R100 000
Bank account (dr) R1 014
savings account R2 600
Equipment R6 700
Accrued expenses (honorarium) R500
Creditors R1 963
Transactions and other information for 2021

• Membership fees
■ Membership fees increase each year by roughly 10%.
■ Membership fees were received as follows:
2020 R600
2021 R11 880
2022 R720 (two members at R360 per member)

■ Membership fees for 2020 amounted to R300 per year, for 2021 it was
R330 and for 2022 it will be R360.
■ Membership fees outstanding for 2020 must be written off.
■ At the end of 2021, three members had not paid their membership fees
for 2021.
• During the year, eight new members joined the club and each paid an
entrance fee of R60.
• A new refrigerator was purchased on 1 July 2021 for R1 900.
• Honorarium
■ The secretary requested that R330 of the honorarium due to him for
2020 be kept as his membership fees for 2021. The rest of the amount
will be paid out to him.
■ At the end of the year, management decided to pay to an honorarium of
R700 to the secretary, but no payment was made by 31 December 2021.
• Affiliation fee paid, R5 400.
• Expenses with regards to clubhouse paid per cheque:
■ Repairs to building R700
■ Braai room built on R62 000
• A loan of R70 000 was made from XYZ Bank and received on 1 January 2021.
On 1 July 2021 an instalment of R10 000 was paid back as well as interest of
R7 500. The loan is repaid in half-yearly instalments of R10 000 on 1 January
and 1 July each year and interest amounts to 15 % per year. Some of the
interest is still outstanding.
• A debit order of R200 for insurance is deducted from the bank account
each month.
• Interest on the savings account earned, R215.
• Bank charges for the year amount to R331.
• Refreshments
■ Cash sales R11 567
■ Cash purchases R4 652
■ Purchased on credit R2 134
■ Refreshments on hand on 31 December 2021 R336
■ Refreshments sold on credit to members R230
• Creditors paid, R1 963.
• Water and electricity paid, R2 892. The account for December 2021 of R241
is still outstanding.
• Competition entries received amounted to R3 800.
• A bequest of R30 000 was received. It should be capitalised.
• Depreciation is brought into account at 10% per year on the diminished balance.
7. Income and Expenditure account

The Income and Expenditure account is just like the Profit and Loss account,
but with two differences:

• no net profit is calculated, but rather a net surplus, and
• and this net surplus is carried over to the Accumulated Funds account.
Likewise, the Income and Expenditure Statement is similar to the Income
Statement of a trade business. It therefore indicates the results of the
club’s activities for the accounting period, and shows whether the club
has made a net surplus or deficit. This statement is also presented to the
members of the club at the Annual General Meeting.
It is important to note that not all receipts are necessarily income.
A club could, for example, decide to capitalise a donation received. It
means it is not recorded as an income, but is credited directly into the
Accumulated Funds account.
Another example is refreshments. The money received for
refreshments is not regarded as income, but the profit made is income.
Therefore we should first do the Refreshments account where the
payments for refreshments are subtracted from the receipts, in order
to determine the profit in this way – the profit made from selling
refreshments is therefore the income generated. In any account,
therefore, which involves receipts and payments, for example
tournaments, club ties, tracksuits and so on, only the profit is recorded as
income and it is necessary to do the T-accounts first.
The same goes for expenses and payments. Not all payments are
expenses and not all expenses are necessarily paid. Some payments, like
the purchase of fixed assets, is increasing assets, while paying a creditor
entails a decrease in liabilities and is therefore not regarded as an expense.
Payments for assets and liabilities are therefore not recorded in the Income
and Expenditure account.
A further important principle of GAAP that should be remembered GAAP flash
and applied is the matching principle. The matching principle requires The matching principle requires
that income earned and expenses made during a financial period should that income earned and expenses
be taken into account for that period, even though they have not yet been made during a financial period
received or paid. It is therefore extremely important that accounts such should be taken into account for
as Accrued Income, Prepaid Expenses, Stock on Hand and so on should be that period.
written back at the beginning of the financial year, and adjusted at the
end of the financial year. bequest
It often happens that clubs receive bequests. There are different money or property that is left in a
ways of dealing with a bequest, depending on the testator’s request or will and testament to a person or
management’s decision. Generally, bequests received are capitalised. It organisation
means the Bequest account is debited and the Accumulated Funds account
is credited. It could also be decided to capitalise part of the bequest,
capitalise
for example 50%. In such a case, Bequest will still be debited, but now
Accumulated Funds and the Income and Expenditure account are each credited a payment that is not allocated as an
expense to the Income Statement,
with 50%. A final option, of course, is to use the entire bequest to cover but that is included directly in the
expenses and therefore close it off to the Income and Expenditure account. Balance Sheet

Writing back of Records of receipts and End-of-year
adjustments payments during the year adjustments
Beginning of the End of financial year

During the financial year
financial year
8. Drafting a Trial Balance

A Trial Balance is a list of all the account balances in the General
Ledger. A Trial Balance will ensure that the double-entry principle was
correctly applied throughout – in other words, every debit entry has a
corresponding credit entry.
A Pre-adjustment Trial Balance is compiled at the end of the
financial year and contains both the Balance Sheet accounts and the
nominal accounts.
A Post-adjustment Trial Balance is drafted after all the nominal
accounts have been closed off to the Income and Expenditure account – in
other words, it contains only Balance Sheet accounts.
The accounting cycle for a club is as follows:
Write back adjustments from the previous financial year. At the beginning of
the financial year

Enter transactions in the Analysis Cash Book.
During the
financial year
Post to the General Ledger.
Draft a Trial Balance.
Do year-end adjustments.
Draft a Post-adjustment Trial Balance.
At the end of the

Do the closing transfers – close off all the nominal financial year
accounts to the Income and Expenditure account.
Draft a Post-adjustment Trial Balance.
Prepare the following statements to present at the AGM:

Statement of Receipts and Payments, Statement of
Income and Expenditure, Balance Sheet.

Example
Income and Expenditure account
Ace Tennis Club’s financial year runs from 1 January to 31 December.
The following information is provided:
• The Post-closing Trial Balance at the end of the previous
financial year
• The Statement of Receipts and Payments for the current year
• The adjustments at the end of the financial year.
Required
1. Show the accounts in the General Ledger and close off the necessary
accounts to the Income and Expenditure account.
2. Draft a Post-adjustment Trial Balance.
3. Draft a Post-closing Trial Balance.
Post-closing Trial Balance for Ace Tennis Club as at 31 December 2018

Fol. Debit Credit
Accumulated funds 104 978 00
Clubhouse 180 000 00
Equipment 5 620 00
Current bank account 20 210 00
Petty cash 100 00
Creditors 1 880 00
Accrued income (membership fees) 900 00
Income received in advance (membership fees) 600 00
Accrued expenses (water and electricity) 268 00
Refreshments on hand 346 00
209 176 00 209 176 00
The Statement of Receipts and Payments for the year appears on the
next page. All cash transactions for the year have been recorded.

Example continued
Ace Tennis Club

Statement of Receipts and Payments for the year ended 31 December 2019
Receipts Payments
Balance on 1 January 2019 22 310 00 Stationery 240 00
Bank 20 210 00 Maintenance costs 2 110 00
Savings account 2 000 00 Affiliation fees 4 500 00
Petty cash 100 00 Bank charges 810 00
Membership fees 8 700 00 Tennis balls 2 500 00
2018 600 00 Refreshments 5 980 00
2019 7 800 00 Honorarium 600 00
2020 300 00 Tournament 4 820 00
Entrance fees 500 00 Water and electricity 2 332 00
Rent income 2 750 00 Equipment 2 880 00
Interest on savings account 180 00 Loan: AB Bank 10 000 00
Refreshments 8 520 00 Interest on loan 11 250 00
Tournament 7 890 00 Creditors 1 520 00
Donations 11 000 00 Balance on 31 December 2019 12 308 00
Bank 10 028 00
Petty cash 100 00
61 850 00 61 850 00
Adjustments on 31 December 2019

• Membership fees of R300 were received in advance for 2020,
while membership fees of R600 for 2019 are still outstanding.
Membership fees of R300 must be written off.
• 20% of the entrance fee must be capitalised.
• Stationery bought for credit, R120.
• R200 was paid in advance to garden services for maintenance of
the club building and grounds.
• The rent for December 2019 of R250 is still outstanding.
• There are tennis balls worth R230 still unused at the end of the year.
• Refreshments worth R657 are still on hand at the end of the year.
• December’s water and electricity account of R212 is still outstanding.
• Equipment was purchased on July 2019. Depreciation should be
ca1culated at 10% per year on the cost price.
• The loan is paid off on 31 December in annual instalments of
R10 000. Interest of R3 750 is still outstanding.

Example continued
Solution
1. General Ledger of Ace Tennis Club

Dr Accumulated Funds Cr
2019
Dec 31 Income and expenditure 769 00
Entrance fee 100 00
105 847 00
Dr Clubhouse Cr
2019
Dr Equipment Cr
2019
Jul 01 Bank 2 880 00
8 500 00

2019
Dec 31 Depreciation 706 00
2 156 00
Calculations
R5 620 × 10% = R562
__ 6
R2 880 × 10% ×  12 = R144
= R706

Example continued
Dr Current Bank account Cr

2019 2019
Jan 01 Balance b/d 20 210 00 Dec 31 Total payments 49 542 00
Dec 31 Total receipts 39 360 00 Balance c/d 10 028 00
59 570 00 59 570 00
2020
Dr Savings account Cr
2019
Dec 31 Interest on savings account 180 00
2 180 00
Dr Petty Cash Cr
2019
Jan 01 Balance b/d 100 00
Dr Loan: AB Bank Cr
2019 2019
Dec 31 Bank 10 000 00 Jan 01 Balance b/d 100 000 00
100 000 00 100 000 00
2020
Dr Creditors Cr
2019 2019
Dec 31 Bank 1 520 00 Jan 01 Balance b/d 1 880 00
Balance c/d 480 00 Dec 31 Stationery 120 00
2 000 00 2 000 00
2020
Jan 01 Balance b/d 480 00

Example continued
Dr Accrued Income Cr
2019 2019
Jan 01 Balance b/d 900 00 Jan 01 Membership fees 900 00
900 00 900 00
Dec 31 Membership fees 600 00
Rent income 250 00
850 00
Dr Income Received in Advance Cr

2019 2019
Jan 01 Membership fees 600 00 Jan 01 Balance b/d 600 00
Dec 31 Membership fees 300 00
Dr Accrued Expenses Cr
2019 2019
Jan 01 Water and electricity 268 00 Jan 01 Balance b/d 268 00
Dec 31 Water and electricity 212 00
3 962 00
Dr Refreshments on Hand Cr
2019 2019
Jan 01 Balance b/d 346 00 Jan 01 Refreshments 346 00
Dec 31 Refreshments 657 00
Dr Prepaid Expenses Cr
2019
Dec 31 Maintenance costs 200 00

Example continued
Dr Tennis Balls on Hand Cr

2019
Dec 31 Tennis balls 230 00
Nominal accounts
2019 2019
Jan 01 Accrued income 900 00 Jan 01 Income received in advance 600 00
Dec 31 Income received in advance 300 00 Dec 31 Bank 8 700 00
Income and expenditure 9 000 00 Membership fees written off 300 00
10 200 00 10 200 00
Dr Entrance Fees Cr
2019 2019
Dec 31 Accumulated funds 100 00 Dec 31 Bank 500 00
Income and expenditure 400 00
500 00 500 00
Dr Rent Income Cr
2019 2019
Dec 31 Income and expenditure 3 000 00 Dec 31 Bank 2 750 00
3 000 00 3 000 00
Dr Interest on Savings account Cr

2019 2019
Dec 31 Income and expenditure 180 00 Dec 31 Savings account 180 00

Example continued
Dr Refreshments Cr
2019 2019
Jan 01 Refreshments on hand 346 00 Dec 31 Bank 8 520 00
Dec 31 Bank 5 980 00 Refreshments on hand 657 00
Profit on sale of refreshments 2 851 00
9 177 00 9 177 00
Dr Tournament Cr
2019 2019
Dec 31 Bank 4 820 00 Dec 31 Bank 7 890 00
Income and expenditure 3 070 00
7 890 00 7 890 00
Dr Donations Cr
2019 2019
Dec 31 Income and expenditure 11 000 00 Dec 31 Bank 11 000 00
Dr Stationery Cr
2019 2019
Dec 31 Bank 240 00 Dec 31 Income and expenditure 360 00
Creditors 120 00
360 00 360 00
Dr Maintenance Costs Cr
2019 2019
Dec 31 Bank 2 110 00 Dec 31 Prepaid expenses 200 00
2 110 00 2 110 00
Dr Affiliation Fees Cr
2019 2019
Dec 31 Bank 4 500 00 Dec 31 Income and expenditure 4 500 00

Example continued
Dr Bank Charges Cr
2019 2019
Dr Tennis Balls Cr
2019 2019
Dec 31 Bank 2 500 00 Dec 31 Tennis balls on hand 230 00
2 500 00 2 500 00
Dr Honorarium Cr
2019 2019
Dr Water and Electricity Cr

2019 2019
Dec 31 Bank 2 332 00 Jan 01 Accrued expenses 268 00
Accrued expenses 212 00 Dec 31 Income and expenditure 2 276 00
2 544 00 2 544 00
Dr Interest on Loan Cr
2019 2019
Dec 31 Bank 11 250 00 Dec 31 Income and expenditure 15 000 00
15 000 00 15 000 00
Dr Depreciation Cr
Dec 31 equipment 706 00 Dec 31 Income and expenditure 706 00

Example continued
Dr Membership Fees Written Off Cr

2019 2019
Dec 31 Membership fees 300 00 Dec 31 Income and expenditure 300 00
Dr Profit on Sale of Refreshments Cr

2019 2019
Dec 31 Income and expenditure 2 851 00 Dec 31 Refreshments 2 851 00
Dr Income and Expenditure Cr

2019 2019
Dec 31 Stationery 360 00 Dec 31 Membership fees 9 000 00
Maintenance costs 1 910 00 Entrance fees 400 00
Affiliation fees 4 500 00 Rent income 3 000 00
Bank charges 810 00 Interest on savings account 180 00
Tennis balls 2 270 00 Profit from refreshments 2 851 00
Honorarium 600 00 Profit from tournament 3 070 00
Water and electricity 2 276 00 Donations 11 000 00
Depreciation 706 00
Membership fees written off 300 00
Accumulated funds 769 00
29 501 00 29 501 00

Example continued
2.
Post-adjustment Trial Balance of Ace Tennis Club as at 31 December 2019
Balance sheet accounts Fol. Debit Credit
Equipment 8 500 00
Bank account 10 028 00
Petty cash 100 00
Creditors 480 00
Income received in advance 300 00
Prepaid expenses 200 00
Tennis balls on hand 230 00
Nominal accounts
Membership fees 9 000 00
Entrance fees 400 00
Interest on savings account 180 00
Profit on sale of refreshments 2 851 00
Tournament 3 070 00
Donations 11 000 00
Stationery 360 00
Maintenance costs 1 910 00
Affiliation fees 4 500 00
Bank charges 810 00
Tennis balls 2 270 00
Honorarium 600 00
Depreciation 706 00
231 477 00 231 477 00

Example continued
3.
Post-closing Trial Balance of Ace Tennis Club as at 31 December 2019
Fol. Debit Credit
Equipment 8 500 00
Current bank account 10 028 00
Petty cash 100 00
Creditors 480 00
Income received in advance 300 00
Tennis balls on hand 230 00
Prepaid expenses 200 00
202 745 00 202 745 00
Activity 9.10
Use the information in Activity 9.9 to complete this activity for Fish River
Canoe Club.
Required
Competition Entries (2); Entrance Fees (2); Affiliation Fees (2); Repairs (2); The number in brackets
Interest on Loan (4); Insurance (2); Interest on savings (2); Bank Charges (2); indicates how many lines to
Water and Electricity (4); Depreciation (2); Membership Fees Written off (2); leave open for each account.
Profit on sale of Refreshments (2); Accumulated Funds (6); Clubhouse (4);
Equipment (4); Accumulated Depreciation on Equipment (4); Accrued
Income (3); Income Received in Advance (3); Refreshments on hand (3);
Accrued Expenses (6); Creditors (5); Debtors (2); Loan: XYZ Bank (5)
2. Draft a Post-adjustment Trial Balance as at 31 December 2021.
3. Close off all the above accounts to the Income and Expenditure account in
the General Ledger.
4. Draft a Post-closing Trial Balance as at 31 December 2021.

Activity 9.11
The information below applies to Lingelihle soccer Club for the year ended
31 December 2019.
Required
1. show the following accounts in the General Ledger:
The number in brackets
Accumulated Funds (4); Equipment (4); Accumulated Depreciation on
indicates how many lines to Equipment (4); savings account (5); Fixed Deposit: Best Bank (4); Creditors (5);
leave open for each account. Accrued Expenses (5); Accrued Income (3); Income Received in Advance (3);
Prepaid Expenses (5); Refreshments on hand (3); Entrance Fees (2); Membership
Fees (6); stationery (4); Refreshments (5); Wages (4); Affiliation Fees (4); Rates and
Taxes (4); sports Day (5); Interest on Fixed Deposit (2); Interest on savings (2);
Water and Electricity (4); honorarium (2); Depreciation (2); Membership Fees
Written off (2); Catering (2); Profit on sale of Refreshments (2).
2. Draw up the statement of Receipts and Payments for the year ended
31 December 2019.
3. Draw up the Income and Expenditure account for the year ended
31 December 2019.
Stipulations of the club’s constitution

• New members must pay an entrance fee of R40.
• Membership fees due with regards to a specific year should be paid before
30 November of the following year. If this is not met, the membership fees
owed should be written off as bad debts, and the member must be taken off
the membership register.
• Depreciation on equipment must be calculated at 10% per year on the
diminished balance.
Post-closing Trial Balance of Lingelihle Soccer Club as at 31 December 2018

Fol. Debit Credit
Equipment 10 300 00
Current account 6 780 00
Accrued expenses (Wages) 400 00
Accrued income (Membership fees) 720 00
Income received in advance (Membership fees) 240 00
Prepaid expenses (Rates and taxes) 1 000 00
203 184 00 203 184 00

Transactions for the year ended 31 December 2019
• The club has acquired 10 new members, who have all paid their entrance
fee and membership fees.
• Membership fees
■ Four of the members whose membership fees on 1 January 2019
were still outstanding, paid their fees this year.
■ Membership fees relating to the current year were received from
45 members (including the ten new members) during 2019.
■ Three members have already paid their membership fees for 2020.
■ Six members have not yet paid their membership fees for 2019.
• Stationery per cheque bought, R165.
Stationery bought on credit, R198.
• Refreshments bought and paid by cheque, R6 447
Refreshments sold for cash, R11 562
Free refreshments given to visiting teams (catering) supplied, R460
Refreshments on hand on 31 December 2019, R578
• Wages paid to caretaker, R7 200
• Affiliation paid
2019: R2 250 2020: R1 120
• Equipment bought on 1 May 2019 and paid by cheque, R3 000.
• Rates and taxes paid for the period 1 July 2019 to 30 June 2020, R2 400.
• Sports day held on 1 September:
■ Cash received R11 564
■ Costs paid by cheque R6 221
■ Costs due R987
• On 1 October 2019, R5 000 on a fixed deposit was invested at Best Bank, at
8% interest per year. R3 000 of this amount was withdrawn from the savings
account. Interest was received on 31 December.
• Creditors paid per cheque, R997.
• Interest earned on savings account at EC Bank, R134.
• Water and electricity paid, R2 268. Water and electricity for December 2019
for R189 is still outstanding.
• An honorarium of R780 was approved for the secretary, but not yet paid.
Activity 9.12
The information below was taken from the accounting records of the Sunshine
Coast Sports Club for the year ended 31 December 2012.
Required
Draw up the following ledger accounts for the period 1 January 2012 to
31 December 2012. Balance or close off the accounts:
• Accumulated Funds (5 lines)
• Membership Fees (7 lines)
• Tuck Shop (7 lines)

• Tracksuits (5 lines)
• Honorarium (5 lines)
Sunshine Coast Sports Club

Extract from the Post-closing Trial Balance at 31 December 2011
Accumulated funds R9 844 00
Tuck shop stock 2 640 00
Tracksuits on hand (35 tracksuits) 8 750 00
Accrued income (Membership fees) 720 00
Income received in advance (Membership fees) 1 920 00
Debtors for tuck shop 894 00
Accrued expenses (honorarium) 400 00
Sunshine Coast Sports Club

Extract from Statement of Receipts and Payments for the year ended 31 December 2012
Receipts Payments
Membership fees: 2011 240 00 Membership fees refunded 120 00
2012 11 280 00 Tuck shop purchases 12 510 00
2013 1 200 00 Creditors 4 120 00
Entrance fees 2 000 00 Purchase of 25 new tracksuits 6 250 00
Tuck shop sales 20 250 00 Honorarium 160 00
Sales of tracksuits 17 250 00
Debtors for tuck shop 1 245 00
Donations 10 000 00

• New members must each pay an entrance fee of R200. All the new members
have paid the entrance fee as well as their membership fees for 2012.
• Membership fees
■ Membership fees amount to R240 per member per year. On 1 January
2012 the club had 55 registered members.
■ Two members were transferred during the year. One member wanted
back half of his membership fees for the year. The other member
donated his half of the membership fees to the club. Management
decided to record it as a donation.
■ Any membership fees still outstanding for 2011 must be written off and
the members must be removed from the membership register.
■ The secretary asked that part of his honorarium due for 2011 should be
kept by the club as his membership fees for 2012.
■ At the end of 2012 there were members who still owe their membership
fees for 2012.

• Tuck shop
■ The club runs a tuck shop during all its sporting events.
■ Goods purchased on credit for the tuck shop amounts to R3 978.
■ The tuck shop sells goods to members on credit. During the year goods
of R1 042 were sold to members on credit.
■ A donation of tuck shop stock worth R1 400 was received from an
ex-member.
■ According to a physical stock take on 31 December 2012, the tuck shop
has stock on hand, R2 996.
• Tracksuits
■ Tracksuits are sold at cost price plus 50% to members. The cost price
remained the same for the past two years.
■ During the year, two tracksuits were presented as prizes to members for
outstanding achievement.
■ Some tracksuits were left over at the end of the year.
• The cash donation of R10 000 should be capitalised.
• Management has approved an honorarium of R500 for the secretary, but
this had not yet been paid by 31 December 2012.
• The Income and Expenditure Statement on 31 December 2012 shows a
surplus of R5 047.
Use the information below and complete the following in the books of Kenton
Sports Club.
Required
Complete the following accounts in the General Ledger:
• Membership Fees (6 lines) [15]
• Refreshments (5 lines) [10]
Balances as at 1 September 2016


Kenton Sports Club
Statement of Receipts and Payments for the year ended 31 August 2017
Receipts Payments
Entrance fees 6 000 00 Refreshments purchases 21 700 00
Membership fees: 2016 500 00 Stationery 700 00
2017 29 500 00 Advertisements 1 550 00
2018 1 250 00 Water and electricity 15 000 00
Refreshments sales 65 400 00 Dance expenses 4 496 00
Donations 8 900 00 Wages 24 000 00
Dance receipts 5 620 00 Insurance 5 115 00
Mortgage bond (01/03/2017) 20 000 00 Bank charges 680 00
Interest on mortgage bond 32 000 00
Fixed deposit (01/06/2017) 10 000 00

• Membership fees
Membership fees amount to R250 per member per annum.
■
Membership fees still outstanding for 2016 must be written off and the
■
members’ names removed from the membership register.

R32 500 is the amount that should have been received for membership
■
fees for the year ended 31 August 2017, according to the number of
members in the membership register.
Various members’ membership fees were still due on 31 August 2017.
■
• The following stock was on hand on 31 August 2017:

Refreshments
■ R300
stationery
■ R58
Activity 9.13
Required
Draw up T-accounts for
Indicate how the transactions below affect the statement of Receipts and
yourself, where necessary, for
the correct amounts to be calculated. Payments and the Income and Expenditure statement, by writing the
amount in the relevant column. The accounting period is 1 January 2012 to
31 December 2012.
Copy the following table into your book:

No. Statement of Receipts and Payments Income and Expenditure Statement
Receipts Payments Income Expenditure

Transactions
1. Paid R20 000 by cheque for dressing rooms built.
2. R10 000 was invested on 1 January 2012 with AB Bank at 8% interest p.a. On
31 December 2012, R600 interest was received from AB Bank.
3. The membership fees are R200 per member per year.
a. Balances on 1 January 2012 show accrued income from membership
fees of R1 200 and membership fees received in advance of R900.
b. Four members paid their membership fees during 2012, which were in
arrears for 2011.
c. Three members have already paid their membership fees for 2013.
d. Membership fees received in 2012 for 2012 amounted to R4 400.
e. Membership fees still outstanding with regards to 2011 must be written
off.
f. Five members have not yet paid their membership fees for 2012 by the
end of 2012.
4. Refreshments
a. Refreshments on hand on 1 January 2012 R389
b. Refreshments bought and paid by cheque R5 332
c. Refreshments bought on credit R1 024
d. Refreshments cash sales R8 772
e. Refreshments on hand on 31 December 2012 R422
5. Creditors paid by cheque, R2 978.
6. Depreciation calculated for 2012, R1 240.
7. An honorarium of R600 is paid to the secretary. An honorarium of R500 was
approved for the treasurer, but not yet paid.
8. Affiliation paid amounts to R9 700. Of this R700 is still outstanding
for 2011.
Activity 9.14
Show the way in which the following transactions will influence the Statement
of Receipts and Payments and the Income and Expenditure Statement of the
Egoli Sports Club. Write the amount in the relevant column. All the transactions
are relevant to the accounting period 1 January 2017 to 31 December 2017.
Example
Received R100 from Spring Outfitters as donation to the club
No. Statement of Receipts and Payments Income and Expenditure Statement
Receipts Payments Income Expenditure
100 100

Balances on 1 January 2017 R
Equipment 15 000
Crockery 2 100
Club tracksuits (at cost price) 1 500
Fixed Deposit: WP Bank 5 000
Loan: Coast Bank 4 000
Savings account 1 600
Bank 3 140
Petty cash 100
Refreshments on hand 360
Accrued expenses: Affiliation fees 1 750
Tennis balls on hand 500
Accrued income: Membership fees 2 500
Consumable goods on hand (stationery) 135
Income received in advance: Membership fees 1 500

1.
2017 2017
Jan 01 Accrued income Jan 01 Income received in advance
Dec 31 Bank – 2016 1 000 00
– 2017 135 500 00
– 2018 3 000 00
Note: Membership fees still outstanding on 31 December 2017 total R4 000.
2. During the year, 30 new members joined the club. Entrance fees amount to
R300 per member and 40% should be capitalised.
3. Cash purchases of refreshments, R1 110. Refreshments in the course of the
year sold for cash amount to R1 605. On 1 November 2017, refreshments to
the value of R100 were donated to the children’s home. On 31 December
2017 refreshments worth R140 were still on hand.
4. A fixed deposit of R5 000 expires on 31 December 2017. Received a cheque
for R5 640, which includes a year’s interest,
5. A sports day was held on 1 May 2017. Cash taken, R4 890. Costs paid,
R4 480. The sponsor’s fees of R5 000 have not yet been received. Costs still
outstanding, R700.
6. Affiliation paid:
2016: R1 750
2017: R2 000
2018: R2 500

7. Tennis balls bought on credit, R1 480. Old tennis balls sold for cash, R50.
Tennis balls won in a competition, R250. Tennis balls unused as at
31 December 2017, R130.
8. Interest earned on the savings account, R84.
9. Club tracksuits per cheque bought, R2 250. Club tracksuits sold on credit,
R400. Club tracksuits sold for cash, R3 400. Club tracksuits in stock as at
31 December 2017 at cost price, R900.
10. Payment to creditors, R740.
11. Stationery purchased:
Cash R266
Credit R157
On 31 December 2017 there was still stationery worth R123 on hand.
12. The rent amounts to R200 per month. All the rent outstanding until
31 October 2017 has been paid.
13. Paid to Coast Bank:
Repayment of loan (31/08/17), R4 000
Interest on loan at 18% per year
14. A bequest of R10 000 was received in cash and was capitalised.
15. Depreciation on equipment at 10% per year on the cost price.
16. Crockery purchased per cheque, R880. Of this, crockery worth R58 was
broken during the year.
The information below was taken from the financial records of the
Egoli Judo Club.
Required
1. Draw up the following accounts in the General Ledger of the club:
• Membership Fees (6 lines)
• Tracksuits (6 lines)
2. Answer the following questions:
a. If one tracksuit costs R230 and is sold at R276, what percentage profit
does the business make?
b. How many members did the club have on 31 December 2012?
c. By how much must the club increase the membership fees in the
following financial year to cover the expenses of R35 889?
d. If the management of the club does not want to increase the
membership fees in the new financial year, how many new members
must be conscripted to cover the expenses?
e. Suggest one method which the club can use to lower the cost of a judo
tournament which they want to have in the new financial year.

Information
• The following balances among others appeared in the records of Egoli Judo
Club on 1 January 2012:
■ Stock of tracksuits (cost price, R230 each) R5 750
■ Accrued income: Membership fees R720
■ Income received in advance: Membership fees R1 680
• The following information appeared in the Statement of Receipts and
Payments on 31 December 2012:
Receipts R R
2011 240 00
2012 24 960 00
2013 1 440 00
Sales of tracksuits 18 216 00
Payments
Membership fees refunded 240 00
Purchases of tracksuits (R230 each) 9 200 00
• Membership fees
■ On 1 January 2012 there were 108 registered members in the club.
Ten new members joined the club during the current financial year.
■ Any outstanding membership fees from the previous financial year
must be written off as bad debts and the name of the members must be
scrapped from the membership register.
■ One member resigned at the end of January because he moved.
Management decided to refund his membership fees.
■ Membership fees of five members were still outstanding on
31 December 2012.
• Tracksuits
■ An invoice for 20 tracksuits (R230 each) was received, but not paid yet.
■ Two tracksuits were damaged returned to the supplier.
■ Three tracksuits were given to members who form part of a
development programme.
■ There were 14 tracksuits on hand at 31 December 2012.
• A budget was drawn up for the next financial year and expenses roughly
amount to R35 889.

Activity 9.16 (Working backwards) (for enrichment only)
Financial information of Cheetah sports Club was destroyed in a fire. Use the
given information to do the following (all payments are per cheque and no
purchases are on credit).
Required
Membership Fees (6); Telephone (4); Insurance (4); Interest on Fixed The number in brackets
Deposit (4); stationery (4) indicates how many lines to
2. Draw up the statement of Receipts and Payments for the year ended leave open for each account.
31 December 2013.
Information
• The fixed deposit at AB Bank was increased on 1 January 2013.
• The instalment of R2 000 on the loan by XY Bank was paid on 30 June 2013.
General Ledger of Cheetah Sports Club

Dr Income and Expenditure Cr
2013 2013
Dec 31 Maintenance of fields 7 580 00 Dec 31 Membership fees 15 750 00
Water and electricity 2 445 00 Rent of fields 2 760 00
Stationery 410 00 Donations received 6 000 00
Donation expense 2 011 00 Interest on fixed deposit 750 00
Honorarium 2 000 00
Telephone 2 664 00
Insurance 2 540 00
Sundry expenses
(bank charges, etc.) 1 893 00
Depreciation 575 00
25 260 00 25 260 00

Post-closing Trial Balance of Cheetah Sports Club as at 31 December 2013
2013 2012
Dr Cr Dr Cr
Accumulated funds 85 697 00 84 605 00
Land and buildings 80 000 00 70 000 00
Equipment at cost price 7 000 00 7 000 00
Accumulated depreciation on equipment 1 825 00 1 250 00
Fixed deposit by AB Bank (15% p.a.) 5 000 00 2 000 00
Loan of XY Bank (20% p.a.) 8 000 00 10 000 00
Stock of stationery 109 00 145 00
Accrued income (see note) 950 00 1 000 00
Prepaid expenses: Insurance 230 00 185 00
Bank 2 944 00 16 468 00
Income received in advance: Membership fees 500 00 750 00
Accrued expenses: Telephone 211 00 193 00
notes
Accrued income . 2013 2012
Membership fees 750 00 1 000 00
950 00 1 000 00
Activity 9.17 (Working backwards) (for enrichment only)
The treasurer of Eastern soccer Club has disappeared with the Analysis Cash
Book and the statement of Receipts and Payments which were drawn up for the
year ended 31 December 2011.
Required
The number in brackets Membership Fees (6); soccer Balls (4); Insurance (4); Repairs (4)
indicates how many lines to 2. Draw up the statement of Receipts and Payments for the year ended
leave open for each account. 31 December 2011.
Information
The Income and Expenditure statement and Post-closing Trial Balance were
extracted from the minutes of a meeting.

Eastern Soccer Club
Income and Expenditure Statement for the year ended 31 December 2011
Income 43 000 00
Donations 15 000 00
Entrance fee 4 000 00
Expenses (28 140 00)
Depreciation 630 00
Repairs 5 810 00
Insurance 5 300 00
Wages 8 300 00
Sundry expenses 1 910 00
Soccer balls 2 830 00
Telephone 3 060 00
Surplus to accumulated funds 14 860 00
114 966 00
Post-closing Trial Balance of Eastern Soccer Club as at 31 December 2011

2011 2010
Debit Credit Debit Credit
Accumulated funds 111 945 00 97 085 00
Land and buildings 100 000 00 80 000 00
Equipment at carrying value 7 170 00 4 800 00
Stock: soccer balls 780 00 900 00
Accrued income: Membership fees 900 00 1 200 00
Prepaid expenses: Insurance 250 00 210 00
Bank 3 830 00 7 055 00
Accrued expenses: Repairs 180 00
Income received in advance: Membership fees 900 00
Fixed deposit 4 000 00
• All fixed assets bought, are paid per cheque.
• No fixed assets were sold.
• The fixed deposit expired on 1 January 2011.

Match the concepts of clubs in Column 1 with the explanations in Column 2.
Column 1: Concepts of clubs Column 2: Explanation

The money that a club has to pay to the
1. Treasurer A. body that organises the particular sport in
their province
Remuneration that is paid to one of the
2. Constitution of a club B.
committee members for services rendered
Responsible for the bookkeeping and for
3. Annual General Meeting (AGM) C. submitting financial statements to the
members at the AGM
A surplus that accumulated over the years
4. Membership fees D.
of money not spent in previous years
A set of principles according to which a club

5. Entrance fees E.
is governed
A fee, payable on an annual or monthly
6. Affiliation fees F. basis, to be part of a club or society and to
use their facilities
The surplus or deficit for the financial year
7. Honorarium G.
is calculated here.
8. Accumulated funds H. A fee that is payable when you join a club
A summary of all the accounts in the

9. Bequests I.
General Ledger
10. Statement of Receipts and Payments J. A meeting that is held once a year
A summary of all the receipts and payments

11. Income and Expenditure account K.
made from the Analysis Cash Book
The sum of money that is left to the club
12. Trial Balance L. in a will when a member of a club passes
away

Chapter 10
Cost Accounting
• identify and classify costs in a manufacturing environment
• calculate the following costs in a manufacturing environment:
■ prime cost
■ total manufacturing cost
■ unit cost
■ variable and fixed costs
■ the cost of a product using variable and fixed costs
■ contribution per unit
■ break-even point
• prepare General Ledger accounts of a manufacturing business
• integrate ethical, internal control and internal audit issues relating to a
manufacturing environment.
Key concepts
• direct material cost • indirect material cost • direct labour cost • indirect labour
cost • factory overheads • sales and distribution cost • administration cost
• prime cost • total manufacturing cost • unit cost • fixed cost • variable cost
• semi-variable cost • semi-fixed cost• contribution • break-even point
• raw material • work in progress • finished goods
Wow, Sally, these

Sanccob T-shirts are
selling like hot cakes!
You’re right, Randall. We

can’t keep up! Sanccob
only advertised this
past weekend – I was
told they expect to
break even by the end
of this week.
C o s t A cc o unting • c h a p t e r 1 0 337

1. Introduction
In the previous chapters, our main focus has been the accounting records
of trading enterprises. Trading enterprises are businesses that buy
“finished” products at a certain price, add a mark up and then sell the
products at a higher price without changing the products in any way.
The cost of the products, in the books of the trading enterprise, is simply
the price paid for the products.
In a manufacturing enterprise, the manufacturer purchases raw
materials that are then transformed, through a manufacturing process,
into finished products. A mark up is then added and the finished products
are sold. The cost of the product, in the books of the manufacturer, is
determined by adding all the costs incurred in producing that product.
In order to calculate the cost of manufacturing a product, the
manufacturer must account for all the material costs, labour costs and
factory overheads involved in the production process.
2. Types of manufacturing costs

Manufacturing costs may be broadly divided into three types:
• material costs
• labour costs
• factory overheads.
2.1 Material costs

Material costs consist of the costs of all the raw materials used in the
manufacture of a product. Material costs are further subdivided into
direct material costs and indirect material costs.
2.1.1 Direct material costs

These are the costs of all the raw materials that are used directly in the
manufacture of a product. These raw materials can be identified in the
final product.
Example T
he costs of the fabric, zips and buttons used to make a dress
are direct material costs.
2.1.2 Indirect material costs

This is 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. The indirect material
costs form part of the factory overheads.
338 c h a p t e r 1 0 • C o s t A cc o unting

Example T
he oil used to lubricate the sewing machine (not directly
identifiable in the finished product) and the thread used to
stitch the dress (relatively insignificant part of the finished
product), are indirect material costs.
2.2 Labour costs

Labour costs consist of the costs of all the labour involved in the
manufacture of a product. Labour costs are also subdivided into two
categories, namely direct labour costs and indirect labour costs.
2.2.1 Direct labour costs

This is the salaries and wages paid to the employees who are directly
involved in the manufacture of a product. The work done by these
employees can be directly identified in the production process. Direct
labour is often referred to as “touch labour” since these workers generally
“touch” the product that is being manufactured.
Example I n the manufacture of a dress, the wages paid to the sewing

machine operators who stitch the dress is a direct labour cost.
2.2.2 Indirect labour costs

This is the salaries and wages paid to the employees who are not directly
involved in the manufacture of a product. These employees are often
involved with a range of different products and the work done by these
employees cannot be directly identified in the production process of a
specific product. As with indirect material costs, indirect labour costs also
form part of the factory overheads.
Example The salary paid to a dress designer is an indirect labour cost.
2.3 Factory overheads

Factory overheads are all the costs of the manufacturing process which
are not directly identifiable with a specific product. In other words,
factory overheads include all the costs of production excluding the direct
material and direct labour costs.
Example F
actory overheads include costs such as indirect material,
indirect labour, water and electricity, factory rental and
depreciation on machinery.

3. Classification of manufacturing costs
Since indirect material costs and indirect labour costs form part of
factory overheads, manufacturing costs are generally classified under the
following three headings:
• direct material costs
• direct labour costs
• factory overheads.
Apart from the manufacturing cost, there are also other costs a
manufacturing business should provide for. The sales and distribution
cost is the cost incurred to market and sell the product. Finance cost is
primarily the interest on borrowed capital, and administrative cost is the
cost incurred to run the business. The sales and distribution cost, finance
period costs cost, as well as administrative cost are period costs and do not form part
costs related to the running of the cost price of the manufactured product.
the business and not to the
manufacturing process. It will Activity 10.1
decrease the net profit, but is not
taken into account when the cost The following costs were incurred in the production of a motor car. Classify each
price of the goods are calculated. one according to the type of manufacturing cost, choosing from:
direct material cost, direct labour cost, factory overheads, sales and distribution
cost, finance cost or administrative cost.
Manufacturing cost Type of cost

1. Rental of factory
2. Salary paid to a factory supervisor
3. Rubber used for the tyres of
the car
4. Wages paid to the person who spray paints
the car
5. Glass used for the windscreen
6. Wax used to polish the cars
7. Salary paid to the engineer who designed the
car
8. Water and electricity used in
the factory
9. Wages paid to the person who puts the wheels
on the car
10. Fabric used to cover the seats
11. Commission paid to marketing representative

cont. Manufacturing cost Type of cost
12. Interest on loan
13. Rent of office
14. Depreciation on delivery vehicle
15. Salary of secretary
4. Manufacturing cost calculations

In manufacturing cost calculations, the costs involved in manufacturing a
product are split into two groups:
• prime cost (direct costs)
• factory overheads (indirect costs).
4.1 Prime cost

The prime cost is the total direct costs involved in the manufacturing
process. The prime cost comprises the direct material costs, the direct
labour costs and any other direct costs. The prime cost is calculated
as follows:
Prime cost = D
irect material costs + Direct labour costs
+ Other direct costs
4.2 Total manufacturing cost

The total manufacturing cost, also known as the cost of production, is
calculated by adding all the costs involved in the manufacturing process.
This is equal to the sum of the prime cost and the factory overheads, and
may be represented by the following equation:
Total manufacturing cost = Prime cost + Factory overheads
4.3 Unit cost

The unit cost of a product is calculated by dividing the total
manufacturing cost by the total number of units produced.
The equation is:
Total manufacturing cost
Unit cost of a product = ______________________
          
Number of units produced

Example
In March 2017, Pants-up Manufacturers produced 2 000 leather belts.
The following is a list of the costs they incurred during the month:
Leather used for the belts R30 000

Buckles used for the belts R5 000
Wages paid to the leather cutters R9 000
Wages paid to the sewing machine operators R16 000
Rent paid for hiring of sewing machines R12 000
Salary paid to the factory supervisor R8 000
Other general overheads R20 000
Required
Use the information above to calculate the following costs.
1. The direct material cost
2. The direct labour cost
3. The prime cost
4. The factory overheads
5. The total manufacturing cost
6. The unit cost of a leather belt
7. The selling price of a leather belt if Pants-up Manufacturers use a
profit mark-up of 60% on cost
Solution
1. Direct material cost = Leather cost + Buckles cost
= R30 000 + R5 000
= R35 000
2. Direct labour cost = Wages (cutters) + Wages (sewing machine
operators)
= R9 000 + R16 000
= R25 000
3. Prime cost = Direct material cost + Direct labour cost
= R35 000 + R25 000
= R60 000
4. Factory overheads
= Rent (sewing machines) + Salary (supervisor) + General
= R12 000 + R8 000 + R20 000
= R40 000
5. Total manufacturing cost = Prime cost + Factory overheads
= R60 000 + R40 000
= R100 000

Example continued
6. Unit cost of a leather belt =  ______________________
  
   
R100 000
=  ________
2 000 
= R50
7. Selling price of a leather belt = Cost price + Profit mark-up
= R50 + (R50 × 60%)
= R50 + R30
= R80
Activity 10.2
Woolie Warmers Ltd produced 4 000 jerseys during April 2017. They incurred
the following manufacturing costs during the month:
Wool used for the jerseys R60 000

Buttons used for the jerseys R10 000
Wages paid to the factory cleaner R4 000
Wages paid to the knitting machine operators R20 000
Rent paid for hiring the knitting machines R30 000
Other general overheads R36 000
Required
Use the information given on the previous page to calculate the following:
1. The direct material cost
2. The direct labour cost
3. The prime cost
4. The factory overheads
5. The total manufacturing cost
6. The unit cost of a jersey
7. The selling price of a jersey if the company uses a profit mark-up of 75%
on cost.
5. C
lassification 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 cost behaviour

Fixed costs are
manufacturing costs that
do not vary according
Cost
to changing levels of
production. Even if
production is stopped,
these costs will still be
incurred. Fixed costs are
Figure 10.1 Fixed costs graph
constant at all levels of
production, even if no units are produced. The behaviour of a fixed cost
is represented in Figure 10.1.
Example T
he 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 cost behaviour

Variable costs are
vary according to the
Cost
number of units produced.

If production stops, these
costs will no longer be
incurred. Variable costs are
directly proportional to the
Figure 10.2 Variable costs graph
level of production.
The behaviour of a variable cost is represented in Figure10.2.
Example D
irect material costs and direct labour costs display variable
cost behaviour. A manufacturer who produces leather belts
pays R10 for a belt buckle. If 50 belts are produced, then the
cost for belt buckles will be R500 (R10 × 50). If no belts are
produced, then the cost for belt buckles will be zero.

5.3 Semi-variable
Semi-variable cost behaviour
costs
Semi-variable costs are
Cost
have both a fixed and
variable component. The
fixed component is the
minimum cost that will Number of units produced
be incurred even if no
units are produced, while Figure 10.3 Semi-variable costs graph
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 Figure 10.3.
Example T
he 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 Semi-fixed (step) cost behaviour

(step costs)
Cost of 3 machines
Semi-fixed costs are
manufacturing costs that Cost of 2 machines
Cost
are fixed up to a certain

level of production. If Cost of 1 machine
production exceeds this
1 000 2 000
level then these costs
increase in steps. For
example, a machine has Figure 10.4 Semi-fixed costs graph
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 Figure 10.4.

Activity 10.3
The following costs were incurred by a clothing manufacturer. Classify each one
according to behaviour, choosing from:
fixed cost, variable cost, semi-variable cost or semi-fixed cost.
Cost Cost behaviour

1. Rental of factory (assume unlimited capacity)
2. Rent paid to hire sewing machines
3. Zips required for tracksuits
4. The sewing machine operators who are paid per
unit completed
5. Electricity used in the factory
6. Thread used to stitch the dresses
7. Insurance for the factory
8. Fabric used to make dresses
9. Salaries for factory supervisors (one supervisor
is required for every ten sewing machines
operators)
10. The fabric cutters who are paid a basic wage
plus an amount per unit completed
5.5 G
eneral 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 overheads). 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. M
anufacturing cost calculations using fixed
and variable costs
For the purpose of this section we will ignore semi-variable cost and
semi-fixed cost behaviour, and categorise manufacturing costs as either
fixed or variable.
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, as
follows:
Unit cost of a product = ______________________
          
As the level of production increases, the variable costs will increase
proportionally while the fixed costs remain constant. From this it follows
that the unit cost of a product decreases as the number of units produced
increases. This is illustrated in the following table:
Number of units Variable costs Fixed costs Total Unit cost

manufacturing
cost
100 R1 000 R5 000 R6 000 R60
500 R5 000 R5 000 R10 000 R20
1 000 R10 000 R5 000 R15 000 R15
From this table we see that the variable cost per unit is constant:
 R1100
Variable cost per unit = ______000 R5 000
 =  ______ R10 000
_______
500 =   1 000 = R10
while the fixed cost per unit decreases as the level of production
increases:
 R5100
000
Fixed cost per unit = ______ R5 000
 = R50;  ______ R5 000
______
500 = R10;   1 000 = R5

Activity 10.4
Copy and complete the following table:
Number of units Variable costs Fixed costs Total Unit cost

manufacturing
cost
Hint
10 R100 R400 ? ?
As the calculation of the last row is 20 ? ? ? ?
quite challenging, start by letting the 50 ? ? ? ?
number of units be equal to n.
? ? ? ? R14
Activity 10.5
In a manufacturing process, when 500 units are produced, the variable costs
amount to R20 000 and the fixed costs are R5 000.
1. Calculate the total manufacturing cost.
2. Determine the unit cost of the product.
3. What is the variable cost per unit?
4. What is the fixed cost per unit?
The number of units produced is now increased to 2 500 units.

5. Calculate the new total manufacturing cost.
6. Determine the new unit cost of the product.
7. What is the variable cost per unit now?
8. What is the fixed cost per unit now?
7. Break-even analysis
Break-even 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 break-even point.
Example
We are given the following information about the manufacture and
sale of a product:
• Selling price R50 per unit
• Fixed costs R120
• Variable cost R20 per unit

Example continued
From this information we can draw up the following table:
No. of Income from Fixed cost Variable cost Total Profit (Loss)
units sales manufacturing
cost
1 R50 R120 R20 R140 (R90)
2 R100 R120 R40 R160 (R60)
3 R150 R120 R60 R180 (R30)
4 R200 R120 R80 R200 0
5 R250 R120 R100 R220 R30
6 R300 R120 R120 R240 R60
From the table we can see that the break-even point occurs when 4
units are produced and sold. At this point the income from sales is R200
(R50 × 4) and the manufacturing cost is also R200 [R120 + (R20 × 4)] .
If less than 4 units are produced (and sold) then the business will suffer
a loss, while the business makes a profit when production (and sales) is
more than 4 units.
7.1 Calculation of the break-even point

The following steps are used to calculate the break-even point:
1. Split the costs involved into fixed costs and variable cost per unit.
2. Calculate the difference between the selling price per unit and the
variable costs per unit. This is the amount that is “contributed”
towards covering the fixed costs from each unit that is sold. This
amount is called the contribution.
3. Divide the fixed costs by the contribution to get the break-even point.
Using the information from the previous example, these steps may be set
out as follows:
1. Fixed costs = R120
Variable cost per unit = R20
2. Contribution = Selling price per unit – Variable cost per unit
= R50 – R20
= R30
Fixed costs  
3. Break-even point =  ___________
Contribution
R120 
=  _____
R30
= 4 units

Activity 10.6
High-Flying Manufacturers is a small business that makes kites. The following is

a list of their manufacturing costs for April 2017:
Raw materials used to make 100 kites R4 500

Rental of factory R1 000
Salary paid to the factory supervisor R2 800
Wages paid to kite assemblers per completed kite R30
Insurance R400
(?)
Required
High-Flying Manufacturers sells the kites for R195 each. How many kites must
they sell in order to break even in April 2017?
Activity 10.7
Di Scofever, a learner at your school, has been put in charge of organising your
Matric dance. She draws up the following list of expected costs:
Venue hire R1 700

Food (per person) R35
DJ R500
Decorations R200
Printing of invitations (per person) R5
Required
Determine the minimum number of tickets that must be sold in order to break
even, if the tickets cost R100 per person. Check your answer by calculating
the income generated from the sale of tickets and the total dance costs, at the
break-even point.
Activity 10.8
One of your friends, Phumla Zwile, wants to start a small informal business
selling coffee to tourists on Robben Island. She asks for your assistance in
calculating the expected costs involved in her business, and provides you with
the following information.

She has drawn up the following list showing the costs of various items:
Coffee (500 grams per tin) R60 00
Sugar (2,5 kg per bag) R12 50
Milk (2 litres per bottle) R12 00
Polystyrene cups (50 cups per box) R10 00
A kettle R300 00
She has estimated that, on average, she will need to use the following
quantities per cup of coffee:
1 teaspoon of coffee 5 grams
2 teaspoons of sugar 10 grams
Milk (1 litre = 1 000 millilitres) 25 millilitres
Phumla has been told that she can pay for the kettle after 30 days.
She intends to charge R4,00 for a cup of coffee.
Required
Use the information given above to calculate the following for Phumla:
1. The cost per cup of coffee of each of the following items:
a. coffee c. milk
b. sugar d. a polystyrene cup
2. The total (direct) cost per cup of coffee
3. The gross profit per cup of coffee
4. The number of cups of coffee she must sell in order to make enough profit
to cover the cost of the kettle
Activity 10.9
Amy Baard bakes and sells rusks. During July 2019 she made and sold 200
packets of rusks. One bag of rusks is sold for R25. Amy wants to know how many
packets of rusks she should sell in a month to break even. She supplies you with
the following information for the month of July:
Flour and other ingredients used Variable R1 900

Wages paid to worker who helps with the baking Variable R1 000
Electricity paid to her mom monthly Fixed R300
Rent for the kitchen and equipment that is payable every Variable R120
month
Fuel for delivering the rusks Fixed R60
Cell phone account per month Fixed R90
Required
Work out the break-even point for Amy’s rusks. Show your calculations.

8. Manufacturing accounts in the General Ledger
We have learnt that during a manufacturing process costs, are incurred
for materials, labour and overheads. The materials purchased are
recorded in the Raw Material Stock account in the General Ledger. The
labour costs (wages and salaries) and the overheads costs are recorded in
individual expense accounts such as Wages, Salaries, Rent, Depreciation,
and so on.
8.1 Material
The following flow chart shows the route that material takes in the
production process and in the accounting records.
In the General Ledger the

Raw Materials Stock account
The raw materials stock is purchased is debited. Bank or Creditors Control
and placed in the warehouse. is the contra account. The Raw
Materials Stock account is an
asset account.
In the General Ledger, the

Raw Materials Stock account is
The factory requests the raw
credited and the Raw Materials
materials needed for production. It is
Issued account is debited – they
then transferred from the warehouse
are contra accounts for each other.
to the factory.
The Raw Materials Issued account is
a nominal account.

Raw Materials Issued account is
credited and the Direct Materials
Cost account is debited. Direct
The raw materials are processed
Materials Cost is a cost account.
during the manufacturing process.
Direct Materials Cost is then credited
and the Work-In-Progress account
is debited. The Work-In-Progress
account is an asset account.

In the General Ledger, the
The final product is transferred Work-In-Progress account is
from the factory to a warehouse for credited and the Finished Goods
finished products. From here it is account is debited – they are
sold to clients. contra accounts for each other. The
Finished Goods account is an asset.

Indirect Material account is
Indirect material transferred from the credited and Factory Overheads
warehouse to be used during the are debited. Indirect Material is a
manufacturing process. nominal account
and Manufacturing Overheads is a
cost account.
8.2 Labour
Salaries and wages are paid to different employees for different reasons.
Not all wages and salaries have something to do with the production
process. Certain forms of labour relate to the indirect manufacturing
cost, which is treated as factory overheads. Some salaries are an operating
expenditure and are recovered from the 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 in responsible for responsible for the
in manufacturing manufacturing but the administration sale, distribution
– direct labour – still working at the and management and marketing
are periodically factory, for example of the business, of the product,
transferred from factory security for example the for example the
the Salaries and – indirect labour secretary, are representative,
Wages account to – are periodically closed off and are closed off
the Direct Labour transferred to the transferred to the and transferred
Costs account. This Factory Overheads Administration Cost to the Sales
is a cost account. account. account at the end and Distribution
From there it is of the financial account at the end
carried over to the year. It is regarded of the financial
Work-In-Progress as period costs. term. It is regarded
account. as period costs.

8.3 Overheads
When costs are incurred, it is recorded in the different accounts, for
example, the Water and Electricity accounts are debited. The factory
overheads are recorded (and accumulated) in the different expense
accounts when incurred. The part of these expenses allocated for
manufacturing is periodically transferred to the Factory Overheads
account. In turn, the factory overheads are allocated and transferred from
the Factory Overheads account to the Work-In-Progress account.
Water and electricity paid
Electricity for factory Electricity for office
Factory Overheads account Administration Cost account
Work-In-Progress account Profit and Loss account
The flow of manufacturing costs is summarised below.
Allocation of manufacturing costs
Overheads for example rent,

Materials maintenance, insurance, Labour
depreciation, and so on
Factory
Indirect materials Indirect labour
Overheads
Work-In-
Direct materials Direct labour
Progress
Finished Goods

Completed products are physically moved from production into storage.
This movement is recorded in the General Ledger by transferring the
costs allocated to those products from the Work-In-Progress account to the
Finished Goods account, as shown above.
Example
The information below was taken from the accounting records of
Mdala Manufacturers, for the month ended 31 January 2017.
Raw material stock (01/01/2017) R20 000

Cash purchases of raw materials R40 000
Cash purchases of indirect material R3 000
Direct materials used in production R45 000
Indirect materials used in production R3 000
Wages paid: direct labour R15 000
Wages paid: indirect labour R5 000
Factory rent paid R6 000
Electricity paid (75% allocated to production) R4 000
Required
All products started during the month were manufactured in full.
Prepare the accounts, relating to manufacturing, in the General Ledger
of Mdala Manufacturers for January 2017.
Solution
General Ledger of Mdala Manufacturers
Dr Raw Materials Stock B1 Cr
2017 2017 Raw materials issued
Jan 01 Balance b/d 20 000 00 Jan 31 Work-in-progress 45 000 00
31 Bank 40 000 00 Balance c/d 15 000 00
60 000 00 60 000 00
2017
Feb 01 Balance b/d 15 000 00

Example continued
Dr Work-in-progress B2 Cr
2017 2017
Jan 31 Direct material costs 45 000 00 Jan 31 Finished goods 77 000 00
Direct labour costs 15 000 00 Balance c/d 15 000 00
Factory overheads 17 000 00
77 000 00 77 000 00
Dr Finished Goods B3 Cr
2017
Jan 31 Work-in-progress 77 000 00
Nominal accounts
Dr Raw Materials Issued N3 Cr
2017 2017
Jan 31 Raw material stock 45 000 00 Jan 31 Direct material cost 45 000 00
Dr Indirect Material N4 Cr
2017 2017
Jan 31 Bank 3 000 00 Jan 31 Factory overheads 3 000 00
Dr Wages N5 Cr
2017 2017
Jan 31 Gross wages 20 000 00 Jan 31 Direct labour costs 15 000 00
20 000 00 20 000 00
Dr Rent Expense N6 Cr
2017 2017

Example continued
Dr Electricity N7 Cr
2017 2017
20 000 00 20 000 00
2017
Cost accounts
Dr Direct Material Costs C1 Cr
2017 2017
Jan 31 Raw materials issued 45 000 00 Jan 31 Work-in-progress 45 000 00
Dr Direct Labour Costs C2 Cr

2017 2017
Jan 31 Wages 15 000 00 Jan 31 Work-in-progress 15 000 00
Dr Factory overheads N7 Cr
2017 2017
Jan 31 Indirect material 3 000 00 Jan 31 Work-in-progress 17 000 00
Wages 5 000 00
Rent expense 6 000 00
Electricity 3 000 00
17 000 00 17 000 00

Activity 10.10
Required
Use the information given below to draw up the following accounts in the
General Ledger of Stormers Manufacturers for the month ended 31 March 2017.

Raw material stock (6 lines)
Work-in-progress (6 lines)
Finished goods (2 lines)
Nominal accounts
Raw materials issued (2 lines)
Indirect materials (2 lines)
Wages (4 lines)
Electricity (5 lines)
Rent of factory (2 lines)
Repairs (2 lines)
Depreciation (2 lines)
Cost accounts
Direct material costs (2 lines)
Direct labour costs (2 lines)
Factory overheads (8 lines)
Summary of the transaction relating to manufacturing for March 2017:

Raw material stock (01/03/2017) R50 000
Credit purchases of raw materials R30 000
Direct materials issued to production R93 000
Indirect materials issued to production R7 000
Wages paid (80% direct labour and the rest indirect labour) R30 000
Repairs to machinery R2 500
Electricity paid (70% allocated to production) R5 000
Depreciation on machinery R2 000
90% of the production that was started during March was completed by the
end of the month.

Activity 10.11
BB Manufacturers is a business that makes picture frames. The following

balances appeared, among others, in their books on 31 December 2016:
Raw material stock R30 000

Work-in-progress R55 000
Finished goods R22 000
Summary of transactions relating to manufacturing for January 2017

• Raw materials purchased amounted to R40 000, of which 75% was
purchased on credit.
• Indirect materials valued at R6 700 were used in production during
the month.
• Materials on hand on the 31 January 2017 amounted to R16 000.
• Wages paid for direct labour during January 2017 amounted to R17 000.
Direct wages accounts for 85% of the total wages relating to manufacturing.
• Water and electricity used in the factory during the month cost R8 600.
• The total factory rental for the year ended 31 December 2016 was R144 000.
The rental agreement stipulates that the rent is increased by 15% in January
each year.
• Insurance of the raw materials, work-in-progress and finished goods
amounted to R3 800 for the month.
• BB Manufacturers paid R2 300 for repairs to factory machinery.
• Three quarters of the work started (or continued) during the month was
completed by the end of the month.
Required
Use the information provided to draw up the following manufacturing accounts
for the month ended 31 January 2017:

Finished goods (5 lines)
Cost account

9. Recording cost of sales in a manufacturing
enterprise
We have seen that when a trading enterprise sells goods, the Bank or
Debtors Control account is debited and the Sales account credited with
the selling price. Also, the Cost of Sales account is debited and the
Trading Stock account credited with the cost price of the goods. In a
manufacturing enterprise, a similar procedure is followed. However, here
the Finished Goods account is credited with the cost price (instead of the
Trading Stock account). This is illustrated in the example below.
Example (continuation of previous example)

Mdala Manufacturers uses a fixed mark up of 100% on cost to
determine their selling price. The total sales for January 2017 amounted
to R120 000. Complete the following accounts in the General Ledger of
Mdala Manufacturers:
• Finished goods (5 lines)
• Cost of sales (2 lines)
Solution
General Ledger of Mdala Manufacturers
Dr Finished Goods Cr
2017 2017
Jan 31 Work-in-progress 77 000 00 Jan 31 Cost of sales 60 000 00
77 000 00 77 000 00
Dr Cost of Sales Cr
2017
Jan 31 Finished goods 60 000 00

Activity 10.12
Viking Manufacturers, a manufacturer of wooden furniture, was formed on

1 July 2017 and production started on the same day.
Required
Use the information provided to prepare all the accounts relating to
manufacturing in the General Ledger of Viking Manufacturers for July 2017.
The following information was taken from the accounting records for month
ended 31 July 2017:

Credit purchases of raw materials R35 000
Carriage paid on raw materials purchased R5 000
Wages paid R35 000
Salaries paid R15 000
Electricity paid R6 000
Maintenance of machinery paid R2 000
Sales R200 000
Cash purchases of indirect material R5 000
• Raw material of R45 000 was issued towards manufacturing.
• Indirect material used in production amounted to R5 000.
• Workers who were directly involved in the production of furniture, received
80% of the wages for the month. The rest was paid to the cleaning staff.
• The factory supervisor received a salary of R7 000, while the sales
representative was paid R8 000 for the month.
• 95% of the electricity costs are allocated to manufacturing.
• All the work started during month was completed.
• Finished goods to the value of R7 700 were unsold as at 31 July 2017.
10. Closing transfers in manufacturing accounts

As with any other type of business, the nominal accounts of a
manufacturing business must be closed off at the end of the financial
term and the net profit calculated.
As discussed earlier, the accounts can be classified under the following:
• manufacturing accounts (direct material cost, direct labour cost and
factory overheads)
• period cost accounts (administrative costs, sales and distribution costs
and finance costs).

The following flow chart illustrates the route of the closing transfers.
Nominal accounts Cost accounts Balance Sheet accounts Final accounts
Expenses for
administration, for
example, telephone, Administrative
salary of secretary costs
Profit and Loss

account
Expenses for sales
and distribution costs, Sales and
for example, commission, distribution costs
fuel for the
delivery vehicle
Raw material issued Direct material cost
Wages paid to factory

staff directly involved Direct labour Work-in-progress
with manufacturing
Gross profit
Sundry expenses for
manufacturing, for
Factory overheads
example, water and
electricity of the factory
Finished goods sold

Cost of sales Finished goods
Sales Trading 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.
Wayne’s Racing Kayaks had the following stock on hand by the end of
the financial year:
2019 2020
Raw material stock (glass fibre, resin, etc.) R34 000 R36 800
Consumables on hand (indirect materials such as screws) R3 200 R2 150
Work-in-progress R18 000 R20 000
Finished product stock R47 080 R56 300
The balances below appeared in the General Ledger of Wayne’s

Racing Kayaks on 29 February 2020:
R
Sales 867 000
Wages paid to factory workers 180 000
Salaries paid to factory security 40 800
Salaries paid to office workers 102 400
Skills development levy (factory) 18 000
Unemployment Insurance Fund contribution (factory) 9 000
Rental expenditure 28 000
Rental expenditure: factory 21 000
Rental expenditure: office 7 000
Municipal levies 6 000
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

Example continued
cont .... R
Depreciation 24 000
Depreciation: factory equipment 16 000
Depreciation: delivery vehicle 6 000
Depreciation: office equipment 2 000
Advertising 1 100
Bad debts 3 400
Commission paid to marketing person 8 000
Delivery vehicle expenses 12 000
Interest on mortgage loan 16 210
• Direct material (raw material) bought on credit during the year
amounts to R270 000 and material bought for cash, R60 000.
• Indirect material was bought for R4 500 cash.
• During the year, raw material to the value of R327 200 and indirect
material to the value of R5 550 were transferred to the factory.
• The value of the finished products transferred from the factory to
the finished product warehouse was R628 550.
• During the year, finished products to the value of R619 330 were
sold (cost price).
Solution
General Ledger of Wayne’s Racing Kayaks
Dr Raw Materials Stock B11 Cr
2019 2020
Mar 01 Balance b/d 34 000 00 Feb 29 Raw materials issued 327 200 00
2020
Feb 29 Bank 60 000 00
Creditors control 270 000 00 Balance c/d 36 800 00
364 000 00 364 000 00
2020

Example continued
Dr Work-in-progress B12 Cr
2019 2020
Mar 01 Balance b/d 18 000 00 Feb 29 Finished goods 628 550 00
2020
Feb 29 Direct materials 327 200 00 Balance c/d 20 000 00
Direct labour 207 000 00
648 550 00 648 550 00
2020
Dr Finished Product 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-progress 628 550 00 Balance c/d 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

Example continued
Dr Cost of Sales N2 Cr
2020 2020
Feb 29 Finished goods 619 330 00 Feb 29 Trading account 619 330 00
Dr Raw Materials Issued N3 Cr

2020 2020
Feb 29 Raw materials 327 200 00 Feb 29 Direct materials 327 200 00
Dr Indirect Material N4 Cr
2019 2020
Mar 01 Consumables on hand b/d 3 200 00 Feb 29 Factory overheads 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 323 200 00 Feb 29 Direct labour cost 180 000 00
Administration cost 102 400 00
323 200 00 323 200 00
Dr Skills Development Levy N6 Cr

2020 2020
Dr Unemployment Insurance Fund Contributions N7 Cr

2020 2020

Example continued
Dr Rental Expense N8 Cr
2020 2020
Feb 29 Balance b/d 28 000 00 Feb 29 Factory overheads 21 000 00
28 000 00 28 000 00
Dr Municipal Levies N9 Cr
2020 2020
6 000 00 6 000 00
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
Feb 29 Balance b/d 13 000 00 Feb 29 Administration cost 13 000 00
Dr Depreciation N13 Cr
2020 2020
Sales and distribution cost 6 000 00
40 210 00 40 210 00

Example continued
Dr Advertising N14 Cr
2020 2020
Feb 29 Balance b/d 1 100 00 Feb 29 Sales and distribution costs 1 100 00
Dr Bad Debts N15 Cr

2020 2020
Dr Commission Paid N16 Cr

2020 2020
Dr Delivery Vehicle Expenses N17 Cr

2020 2020
Cost accounts
Dr Direct Materials C1 Cr
2020 2020
Feb 29 Raw materials issued 327 200 00 Feb 29 Work-in-progress 327 000 00
Dr Direct Labour C2 Cr
2020 2020
Feb 29 Raw materials issued 180 000 00 Feb 29 Work-in-progress 207 000 00
Skills development levy 18 000 00
Unemployment Insurance Fund 9 000 00
207 000 00 207 000 00

Example continued
Dr Factory Overheads C3 Cr
2020 2020
Feb 29 Salaries and wages 40 800 00 Feb 29 Work-in-progress 96 350 00
Rental expenditure 21 000 00
Municipal levies 4 000 00
Insurance 9 000 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 146 750 00
Stationery 1 140 00
Insurance 3 000 00
Telephone 13 000 00
146 750 00 146 750 00
Dr Sales and Distribution Cost C5 Cr

2020 2020
Feb 29 Depreciation 6 000 00 Feb 29 Profit and loss 30 500 00
Advertising 1 100 00
Bad debts 3 400 00
Commission paid 8 000 00
Delivery vehicle expenses 12 000 00
30 500 00 30 500 00

Example continued
Final accounts
Dr Trading account F1 Cr
2020 2020
Feb 29 Cost of sales 619 330 00 Feb 29 Sales 867 000 00
867 000 00 867 000 00
Dr Profit and Loss account F2 Cr

2020 2020
Feb 29 Administration cost 146 750 00 Feb 29 Trading account 247 670 00
Sales and distribution cost 30 500 00
Capital/appropriation 70 420 00
247 670 00 247 670 00
The Profit and Loss account is closed off to the Capital or Appropriation
account, depending on the type of business. If the manufacturing
enterprise is a sole proprietor, for example, the net profit will be closed
off to Capital. If the business is a partnership, Close Corporation or
company, the net profit will be transferred to the Appropriation account.
Summary/flow diagram of manufacturing Ledger accounts

Raw Materials Stock
Direct raw material issued to Raw
Starting balance of raw material
Materials Issued account
Acquisition of raw material
Work-in-progress
Starting balance of uncompleted Total cost of finished products
work
Direct material placed in factory
Direct labour in the manufacturing
process
Overheads allotted to
manufacturing

Finished Product Stock
Opening balance of finished Cost of finished products sold
products on hand
Cost of finished products
transferred from factory
Consumables on Hand
Indirect material on hand at Indirect material on hand at
beginning of year beginning of year
Indirect material on hand at end
of year
Nominal accounts
Sales
Closing transfer to Trading account Cash and credit sales for the year
Cost of Sales
Cost price of finished products sold Closing transfer to Trading account
Raw Material Issued

Raw materials issued from Raw Raw material used in
Materials Stock account manufacturing to Direct Material
Cost account
Indirect Material
Indirect material on hand at Indirect material on hand at end
beginning of year of year
Indirect material purchased Closing transfer to Factory
Overheads
Wages and Salaries

Wages and salaries paid during Wages of factory workers to Direct
the year Labour Cost
Salaries of office workers to
Administration Cost
Salaries of sales personnel to Sales
and Distribution Cost

Cost accounts
Direct Material Cost
Raw material issued Raw material used to Work-In-
Progress account
Direct Labour Cost

Wages and employer benefits of Transfer to Work-In-Progress
factory workers account
Factory Overheads
Indirect material used in Total factory overheads transferred
manufacturing to Work-In-Progress account
Sundry expenses allotted to
factory and 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 Account is closed of and
expenses transferred to Profit and Loss
account
Final accounts
Trading account
Cost of sales Sales
Profit and Loss account

Administration cost Trading account (gross profit)
Sales and distribution cost

Capital

Activity 10.13
The information below was taken from the accounting records of Creative Gear CC,
manufacturers of children’s clothing, for the year ended 28 February 2018.
Required
Complete the following accounts in the General Ledger and close it properly at
the end of the financial year, 28 February 2018:

Raw material stock (5); Work-in-progress (7); Finished goods (5); The number in brackets
Consumable stores on hand (3) indicates how many lines to
leave open for each account.
nominal accounts
sales (2); Cost of sales (2); Raw materials issued (2); Indirect material (4); salaries
and wages (5); Unemployment Insurance Fund contributions (2); Repairs
and maintenance (4); Rental expense (4); Municipal levies (4); stationery (2);
Insurance (4); Telephone (2); Depreciation (5); Advertisements (2); Bad debts (2);
Commission paid (2); Fuel (2); Bank costs (2)
Cost accounts
Direct material costs (2); Direct labour costs (4); Factory overheads (9);
Administration costs (10); sales and distribution costs (9)
Final accounts
Trading account (4); Profit and loss account (5)
Information
Creative Gear CC had the following stock on hand at the end of the financial year:
2017 2018
Raw material on hand (such as material, zips, etc.) R42 100 00 R39 860 00
Consumables on hand (indirect materials such as consumables,
thread, and so on) R2 156 00 R2 041 00
Work-in-progress account R8 750 00 R12 550 00
Finished products stock R30 870 00 R26 900 00
CosT ACCoUNTING • chapter 10 373

The following balances appeared in the General Ledger of Creative Gear CC
on 28 February 2018:
R
Sales 1 223 890 00
Wages paid to factory workers 203 000 00
Salaries paid to factory security 36 000 00
Salaries paid to office workers 104 000 00
Unemployment Insurance Fund contributions (factory) 4 520 00
Maintenance and repair costs 18 200 00
Repairs: sewing machines 16 200 00
Repairs: delivery vehicle 2 000 00
Rental expenditure: factory 67 200 00
Rental expenditure: office 16 800 00
Water and electricity: factory 6 558 00
Water and electricity: office 2 412 00
Stationery (office) 1 236 00
Insurance 11 000 00
Insurance: factory 8 000 00
Insurance: office 3 000 00
Telephone (office) 13 580 00
Depreciation: factory equipment 8 000 00
Depreciation: delivery vehicle 4 100 00
Depreciation: office equipment 1 560 00
Bad debts 2 363 00
Commission paid to marketing person 12 000 00
Vehicle expenses: Fuel for delivery vehicle 12 300 00

• Raw materials bought on credit during the year amounted to R169 000 and
raw materials bought for cash amounted to R204 300.
• Indirect material was bought for R8 976, cash.
• During the year, raw material to the value of R375 540 and indirect material
to the value of R9 091 were transferred to the factory.
• The value of the finished products transferred from the factory to the
finished product warehouse was R730 309.
• During the year, finished products to the value of R734 279 were sold
(cost price).
Activity 10.14
The information below was taken from the accounting records of slip-slops
Manufacturers, manufacturers of sandals.
Required
Complete the following accounts in the General Ledger and close it properly at
the end of the financial year on 28 February 2018.

Raw material stock (7); Work-in-progress (7); Finished goods (5); The number in brackets
Consumables on hand (3) indicates how many lines to
nominal accounts
sales (2); Cost of sales (2); Raw materials issued (2); Indirect material (4);
Wages (4); salaries (5); Depreciation (5); Factory maintenance (2); Insurance (4);
Bad debts (2); Commission on sales (2); sundry administrative expenses (2);
Rent expense (4)
Cost accounts
Direct material costs (2); Direct labour costs (2); Factory overheads (9);
Administration costs (7); sales and distribution costs (6)
Final accounts
Trading account (4); Profit and loss account (5)
CosT ACCoUNTING • chapter 10 375

Information
R R
Stock at the beginning of the financial year, 1 March 2017
Raw material stock 145 000
Work-in-progress 63 000
Finished goods 57 400
Consumable stores on hand (indirect material) 7 980
Transactions for the year ended 28 February 2018
Raw materials purchased: cash 279 600
Raw materials purchased: credit 65 970
Carriage paid on raw materials 5 320
Raw materials issued for production 424 630
Indirect materials: cash purchases 15 400
Cost of completed goods manufactured ?
Sales: finished goods 1 398 900
Totals on 28 February 2018
Wages 369 550
Direct labour 332 950
Indirect labour 36 600
Salaries 231 450
Factory foreman’s salary 77 000
Selling and distribution staff 87 920
Administrative staff 66 530
Depreciation 31 640
Depreciation on factory plant 5 400
Depreciation on office furniture 5 100
Depreciation on sales vehicle 21 140
Maintenance of factory 13 650
Insurance 38 340
Factory 18 380
Administration offices 19 660
Bad debts 1 085
Commission on sales 22 870
Sundry administrative expenses 31 100

cont ... R R
Rent expenses 33 600
Factory 24 000
Administration offices 9 600
Stock at the end of the year
Raw material stock (28/02/2018) ?
Work-in-progress (28/02/2018) 65 400
Consumable stores on hand (indirect material) (28/02/2018) 6 320
Finished goods (28/02/2018) 72 370
Activity 10.15
The information given below was taken from the accounting records of Siyanda
Manufacturers for March 2017.
Required
Prepare the following accounts in the General Ledger of Siyanda Manufacturers:
• Raw material stock (7 lines)
• Work-in-progress (7 lines)
• Wages (4 lines)
• Factory overheads (8 lines)
Balances on 1 March 2017
Raw material stock R32 300 00
Work-in-progress R14 400 00
Finished goods R23 700 00
Summary of transactions for the month ended 31 March 2017

Purchases of materials (80% on credit) R255 500 00
Import duty paid on materials purchased R4 700 00
Direct materials issued for manufacture R214 800 00
Indirect materials issued Rl3 300 00
Wages paid (75% direct labour) R220 800 00
Factory insurance paid R2 600 00
Factory rental paid R12 000 00
Maintenance of machinery paid R3 500 00
Electricity paid (90% allocated to manufacturing) R23 000 00
Sales R528 300 00

• Work-in-progress on 31 March 2017 was estimated at R121 700.
• Siyanda Manufacturers uses a sales mark-up of 50% on cost.
Case study 10.1
Carry All Manufacturers is a manufacturing concern that produces leather

handbags. The building they rent has two sections: a factory and a small
administration office. All the handbags they make are identical.
The production process involves the following stages:

• The leather is bought in a roll which is 20 m long and 1,5 m wide. It is
then cut, according to a specific pattern, into the required shapes for the
handbags. Carry All Manufacturers employs one person, John Blade, who
performs the entire cutting operation.
• Once the pieces of leather have been cut, they are transferred to the sewing
area of the factory. Here the three sewing machine operators, Cathy Cotton,
Naomi Needle and Sally Sewright, stitch the leather to form the handbag.
• The stitched handbags are then passed on to Paul Ish in the finishing
room. Paul’s job is to remove any loose pieces of thread and cut away any
protruding bits of leather. Once he has finished this, he polishes the bags
using a specially imported polishing spray.
• Finally, the bags go to the packing room where they are individually packed
by Jerry Packer into a special plastic container imported from Hong Kong.
The plastic container is used for both protective and cosmetic purposes.
The handbags are then ready to be distributed and sold to retailers across
the country.
• The factory supervisor, George Foreman, oversees the entire manufacturing
process.
Information
The information below relates to the production of handbags, by Carry All
Manufacturers, during December 2017.
Wages paid during December 2017

Employee Amount
John Blade R4 200 00
Cathy Cotton R5 100 00
Naomi Needle R5 100 00
Sally Sewright R5 100 00
Jerry Packer R3 800 00
George Foreman R6 200 00

Costs of the materials used in the production of the handbags
Item Cost
Leather R8 000 per 20 m roll
Thread R30 per 5 000 m spindle
Polishing spray R50 per bottle
Plastic containers R40 each
Movements of materials during December 2017

Item Opening stock Purchases Issued to production
Leather 5 rolls 2 rolls 4 rolls
Threat 10 spindles 4 spindles 3 spindles
Polishing spray 5 bottles 5 bottles 1 bottle
Plastic containers 500 units 200 units 400 units
• All purchases are on credit.

• Carry All Manufacturers pays R12 000 in rent a month for the building,
R2 000 of which is allocated to the rental of the administration office.
• The water and electricity bill for December 2017 amounted to R6 200.
The business has a policy of allocating 80% of the water and electricity cost
to production.
• Carry All Manufacturers pays a fixed monthly amount of R4 800 to Cover All
Insurers, to insure the factory and its contents.
• The business has a strict policy, whereby any production started in the
month is finished by the end of the month.
Required
Use the information above to answer the following questions.
1. Give the name of one employee whose wage would be part of the indirect
labour costs of the business. Give a reason for your answer.
2. Give the names of two employees whose wages would be part of the direct
labour costs of the business. Give a reason for each of your answers.
3. Which two materials, used in the manufacture of the handbags, would form
part of the direct material costs of the business? Give a reason for each of
your answers.
4. Which two materials, used in the manufacture of the handbags, would form
part of the indirect material costs of the business? Give a reason for each of
your answers.
5. Calculate the total wage bill for the month.
6. Split the total wages for the month into direct and indirect labour costs.
7. Determine the opening balance that would appear in the Raw Materials
Stock account and the Indirect Materials account on 1 December 2017.
8. Calculate the total cost of the materials purchased during the month.
9. Calculate the total cost of the direct materials issued to production during
the month.

10. Calculate the total cost of the indirect materials issued to production during
the month.
11. Draw up the following accounts in the General Ledger of Carry All
Manufacturers, for December 2017:
12. How many units were completed during the month? Give a reason for your
answer.
13. Calculate the unit cost of a handbag.
14. Calculate the selling price of a handbag, if Carry All Manufacturers maintains
a fixed mark-up of 100% on cost.
Activity 10.16
Required
From the information extracted from the records of Sihle Manufacturers,
prepare the following ledger accounts for the accounting period 1 March 2016
to 28 February 2017. The accounts must be properly balanced.
• Indirect material (5 lines)
• Administration costs (6 lines)
• Sales and distribution costs (5 lines)
Information
Work-in-progress R74 600
Finished goods R445 000
Consumable stores stock:

Indirect material (factory) R1 320
Consumable stores (office) R680
Summary of transactions for the year ended 28 February 2017

Purchases
Raw materials (cash) R357 000
Raw materials (credit) R421 520
Indirect material (factory) (cash) R3 480
Indirect material (factory) (credit) R4 720
Consumable stores (office) R1 560
Carriage on purchases of raw materials R7 800

Wages
Direct labour R390 800
Indirect labour R70 660
Sales and distribution department R49 600
Unemployment Insurance Fund contribution

Direct labour R2 400
Indirect labour R840
Salaries
Factory manager and security R139 300
Administrative department R153 080
Insurance
Factory R19 300
Administrative department R2 440
Maintenance of factory plant R35 280
Sales of finished goods

Cash R711 780
Credit R933 180
Depreciation
Factory plant R26 400
Office equipment R17 200
• Finished goods are sold at cost plus 25%.
• During the year, raw material worth R740 000 were issued for manufacturing
and goods amounting to R1 400 000 were completed.
• On 28 February 2017 the following goods were, amongst others, on hand:
■ Indirect material (factory) R1 300
■ Consumable stores (office) R500
You are provided with information relating to Kaden T-shirt Manufacturers for
the year ended 30 June 2019.
SECTION A
Required
1. Calculate the direct labour cost.
2. Prepare the following accounts in the General Ledger:
• Work-in-progress stock (7 lines)

Information
Factory activity
Number of factory employees working directly on the T-shirts (unchanged 9 employees
throughout the year)
Number of normal hours worked by each factory worker during the year 2 200 hours
Number of overtime hours worked by each factory worker during the year 100 hours
Wage rate (normal time) R16 per hour
Wage rate (overtime) R24 per hour
Stock balances
2018 2019
Raw material stock R38 600 00 R23 900 00
Work-in-progress stock R89 700 00 R80 400 00
Finished goods stock R13 900 00 R21 600 00
Consumable stores stock (all factory indirect materials) R2 400 00 R4 300 00
Transactions for the year

Raw materials purchased on credit R439 000 00
Raw materials purchased for cash R120 000 00
Carriage on raw materials purchased (cash) R18 200 00
Defective raw materials returned to suppliers R7 500 00
Raw materials damaged in store, due to roof that leaks R3 000 00
Salaries: Factory foreman R76 000 00
Office workers R180 000 00
Factory indirect material purchased R18 700 00
Sales of finished goods (R40 per unit) R3 357 000 00
Advertising R18 000 00
Factory maintenance R34 000 00
Electricity: factory R35 900 00
Office R19 300 00
Rent (to be allocated in proportion to floor area) R108 000 00
Floor area:
• Factory 1 000 square metres
• Office 500 square metres
• Sales department 500 square metres
Depreciation:
Factory plant R26 000
Office equipment R8 000
Delivery vehicle R12 000

SECTION B
On starting their business, Rainbow Rain Jacket Manufacturers expected that
they would manufacture 120 000 jackets in the first year at a unit cost of R160
each. The selling price is R200.
The expected unit costs were calculated as follows:

Direct material cost R70
Direct labour cost R50
Factory overhead cost R40
R160
At the end of the first year of operation, only 80 000 jackets were produced and
the following actual unit costs were calculated:
Direct material cost R66
Direct labour cost R58
Factory overhead cost R70
R194
All stocks were sold. The business was not able to fulfil all the orders.
Required
3. Compare the expected unit costs to the actual unit costs and then answer
the following questions:
a. Provide two possible reasons for the difference in direct material cost
per unit.
b. Provide two possible reasons for the difference in factory overhead cost
per unit.
c. Suggest two ways in which Rainbow Rain Jacket Manufacturers could
increase their profits next year.
4. If Rainbow Rain Jacket Manufacturers is a registered VAT vendor, how much
should the marked price per rain jacket be if the selling price the business
wants to receive is R200?

The following information was taken from the books of Abrahams

Manufacturers, manufacturers of study lamps.
SECTION A
Required
1. Prepare the following accounts in the General Ledger and balance and close
off the accounts:
• Raw material stock (7 lines) [10)]
• Work-in-progress stock (7 lines) [13]
• Finished goods stock (5 lines) [8]
• Factory overheads (8 lines) [13]

Work-in-progress stock R18 460
Finished goods stock R48 210
Consumable stores on hand (indirect material) R2 300
Summary of transactions and other information for the year ended

28 February 2018
Cash purchases of raw materials R416 985 00
Credit purchases of raw materials R93 300 00
Carriage paid on raw materials purchased R10 450 00
Wages: direct labour R354 700 00
Wages: indirect labour R145 650 00
Consumable goods bought for the production process R50 000 00
Rent paid R120 000 00
Factory insurance paid R31 500 00
Maintenance of factory equipment R48 500 00
Depreciation of factory equipment R32 460 00
Cost of sales of finished goods R1 304 700 00
Sales of finished goods R1 884 000 00
Cost of finished goods produced R1 299 000 00

• Rent expense must be divided between the different sections according to
floor space:
■ Factory floor space 120 m2
■ Office floor space 45 m2
■ Sales department floor space 35 m2
• The gross wage of one of the factory workers was omitted from the wages
journal for the last week of February 2018, R800.
• The balance of raw material stock on 28 February 2018 is R41 991.
• Consumable stores on hand (indirect material) on 28 February 2018
amounts to R2 140.
SECTION B
Required
2. Abrahams manufacturers purchase most of their plastic for raw material
stock from Gaidien Plastics. However, they have received an offer from
another supplier, Marquard Distributors, at a much lower price.
a. How can this influence the cost of production? [2]
b. Discuss two factors that Abrahams Manufacturers should consider
before deciding to change suppliers. [4]
3. The fixed cost for Abrahams Manufacturers amounts to R453 200. The
variable cost per unit is R89 and the study lamps are sold at R150 each
(VAT exclusive).
a. How many study lamps should Abrahams Manufacturers produce
in a year to break even? [7]
b. Did Abrahams Manufacturers produce enough products during
the financial year ending 28 February 2018 to show a profit?
Show calculations. [6]
11. Ethics
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 quest to minimise production costs. Production
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 on the next page.

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
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
Other unethical practices relating to the manufacturing sector:

• 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
respectable manufacturers to compete with unscrupulous manufacturers
in terms of price. This will often prejudice the respectable manufacturer,
since retailers look to source their supplies as cheaply as possible.
There is a growing demand for retailers to be held more accountable
for the actions of the manufacturers with whom they trade. 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.

Case study 10.2
Read the following article, which appeared on the Business Day website, and
answer the questions that follow.
Business finds “green” responsibility in their organisations. Only 37%

of companies are motivated by a desire to save
production brings the planet.
efficiency gains Factory costs have risen significantly this
year, with the producer price index climbing to
Using less electricity and 6,9% year on year in May, and 6,6% in April,
water in manufacturing is driven by substantial increases in the prices of
good for the bottom line electricity, fuel and commodities.
and for the planet, writes SA’s New Growth Path, which promises
Sue Blaine. five million jobs by 2020 and a “more inclusive
S
and greener economy”, is the latest in a
o-called “sustainable” business practices
succession of plans aimed at reducing the high
are looking much more enticing as the
unemployment rate, now at about 24%. The
costs of electricity, water and other
plan, released last November, estimates that SA
services rise ever higher. Businesses, as much
could create 300 000 “green” jobs by 2020.
as individuals, are looking for areas to save not
Twizza MD Ken Clark, whose soft-
only the planet, but their back pockets as well.
drink manufacturing business has “grown
Introducing efficiencies that can be labelled
exponentially” since its 2003 start in
“green” often involves some initial capital
Queenstown, in the Eastern Cape, has focused
outlay. While a green label gives products a
on sustainability through efficiency. Twizza sales
certain cachet, the resultant rise in product
grew 45% last year and it is aiming to match
price is also a hard sell in SA – as in the rest of
that this year.
the world – because everyone is strapped for
“It’s about ensuring a competitive edge and
cash, says Melissa Baird, sustainability strategist
a differentiator. It’s the culmination of a number
for Ogilvy Earth, the sustainability practice of
of practices that make us stand apart that make
advertising group Ogilvy & Mather.
us sustainable,” Mr Clark says.
“Consumers often see (the label) ‘green’ as
“Every single part” of Twizza’s vertically
an opportunity to put prices up ... but SA has
integrated manufacturing and distribution
serious resource issues, coupled with growing
chain is scrutinised to make it as efficient as
population needs, and a company’s water use
possible, he says. Waste is avoided through the
and energy consumption has an effect on your
recycling of “clean waste” – like plastic scraps
balance sheet,” says Ms Baird.
from bottle-making – and using new bottle-
The 2011 Grant Thornton International
and bottle cap-making technology.
Business Report indicates that the biggest driver
Through such technology, within six weeks,
for South African businesses to implement more
all Twizza bottles will be 18% lighter than the
ethical business practices is cost management.
industry standard, without detriment to shelf
A total of 62% of South African business owners
life or gas retention. Twizza received its ISO 9001
say this is a key driver for corporate social
and HACCP food safety accreditation in 2007.
Source: http://www.businessday.co.za (Accessed on 29 July 2011)

Questions
1. What is meant by the term “green production” (used in the title of
the article)?
2. What is meant by the term “bottom line” (used in the first sentence of
the article)?
3. Why does the writer suggest that “sustainable business practices are looking
much more enticing”?
4. Give two reasons why the introduction of “green efficiencies” in the
manufacturing of products may have a negative impact on the bottom line
of the business.
5. According to the 2011 Grant Thornton International Business Report:
a. What is the main motivation for south African businesses to implement
more ethical business practices?
b. What percentage of south African businesses are motivated by a desire
to save the planet?
6. What does “sA’s New Growth Path” promise?
7. What was the unemployment rate in south Africa at the time that this article
was written?
8. What has Twizza focused on in order to make their soft-drink manufacturing
business sustainable?
9. Give an example of a practice that is employed by Twizza that is both
environmentally friendly and economically beneficial.
12. Internal control and internal auditing

As you learnt in Chapter 2, 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 enterprise.
12.1 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 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.
388 chapter 10 • CosT ACCoUNTING

12.1.1 Production risks
These are risks that are associated with the efficiency of the production
process and the quality of the products that are manufactured. Such risks
include delays, stoppages or bottlenecks in the production line, shortages
of raw materials, contaminations within the production process, faulty
machinery, production of too many defective products, excess waste
etc. In the manufacturing industry, it is vital to control these risks as
inefficient and wasteful production can be extremely costly.
12.1.2 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.
12.1.3 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.
12.1.4 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.
12.2 Internal control relating to manufacturing

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-progress 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.
12.3 Internal audit of a manufacturing enterprise

As discussed in Chapter 2, 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 enterprise.

An internal audit of a manufacturing enterprise may typically involve
the following:
INTE
INTERNAL
INTE
INTERNAL AUDIT
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:
■ 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
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
■ 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 enterprise and
providing recommendations for improvement
• Establishing a follow-up process to monitor any corrective action
taken by management.

Chapter 11
Budgeting
• understand the difference between a Cash Budget and a Projected
Income Statement
• perform basic forecasting calculations, including the:
■ Debtors Collection Schedule
■ Creditors Payment Schedule
• prepare and present a Cash Budget for a sole trader
• prepare and present a Projected Income Statement for a sole trader
• integrate ethical, internal control and internal audit issues relating
to budgeting.
Key concepts
• Cash Budget • Debtors Collection Schedule • Creditors Payment Schedule • replenishment
of trading stock • Projected Income Statement
I’d just like to let you know that our clothing sales so far this
year have been excellent. We have already exceeded our
budgeted sales targets for the year and it’s only October. So
thank you all very much, all of you, and please keep up the
good work. I’m sure that there will be enough in the budget
for decent year-end bonuses for everyone.
B udgeting • c h a p t e r 1 1 393

1. Introduction
In Grade 10 you were introduced to various basic budget concepts. In
Grade 11, our focus will be on building on that knowledge and using it to
prepare Cash Budgets and Projected Income Statements for sole traders.
Once again, it is important to highlight the difference between these two
types of financial forecasts.
• The 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.
• The 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.
The main difference between these two types of financial forecasts lies
in the words cash and profit. In the Cash Budget the projected cash on
hand is determined by subtracting the expected cash payments from
the expected cash receipts. The Projected Income Statement is prepared
in order to determine the expected profit (or loss) of a business by
subtracting the expected expenses from the expected income.
2. The Cash Budget

A Cash Budget does not rely heavily on your previous accounting
knowledge; in fact, preparing a Cash Budget requires a bit of common
sense and asking yourself the following two simple questions:
• How much money (cash) will be received over the budget period?
• How much money (cash) will be paid over the budget period?
We then use this information, together with the amount of cash on hand
at the beginning of the budget period, to calculate the amount of cash
that should be available at the end of the budget period.
Before we discuss how to formally present a Cash Budget, complete
Activity 11.1 just by thinking of what we are trying to determine when
preparing a Cash Budget.
Activity 11.1
Polela Mdala is a young entrepreneur who wants to open a restaurant. She has
calculated that she requires R45 000 on 31 December 2017 in order to start the
business. On 30 June 2017, she asks you to help her determine whether she will
have enough money to start her business in six months’ time.
394 c h a p t e r 1 1 • B udgeting

Information
• On 30 June 2017 Polela has R24 000 in a savings account at Standard Bank.
• Polela teaches Accounting at a local high school. She has estimated that she
will be able to save R2 500 a month from her salary after she has paid her
general living expenses.
• She also gives private Accounting lessons to six Grade 11 learners and
charges them each R200 per month. She expects that to continue until the
end of November 2017.
• Polela is a talented chef and works at a restaurant during weekends. She
currently receives R1 000 per month from the restaurant. She has been told
that she will receive a 20% increase from August 2017.
• Polela intends spending R500 on a birthday present for her grandmother,
who turns 75 years old on 14 August 2017.
• Polela has a weakness for fashion and intends to spend R600 on clothes
every second month (i.e. in August; October and November).
• She is also currently attending evening classes twice a week at a
business school. The fees are R300 per month and the course finishes on
31 November 2017.
• Polela has a cell phone and on average uses R75 airtime per month.
Required
Use the information provided above to help Polela calculate whether she will
have enough money to start her restaurant on 31 December 2017.
Note: You do not need to use any special format – just set out your calculation
in a logical and organised manner.
If you managed to complete Activity 11.1 correctly – congratulations!

You have just prepared your first Cash Budget. If you had any difficulty,
don’t worry – we will now discuss the Cash Budget in greater detail and
there will be plenty more activities to attempt.

2.1 Importance of the Cash Budget
The Cash Budget is an essential tool used in business to monitor and plan
the liquidity of the business. By analysing the Cash Budget, management
can ascertain whether the business will have enough cash to:
• meet its short-term commitments such as paying creditors and
repaying loans
• purchase stock
• pay operating expenses
• purchase additional fixed assets.
Also, 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.
2.2 Format of the Cash Budget

In preparing the Cash Budget, the most important word to remember
is cash. Only the inflow and outflow of cash is predicted and planned
for in the Cash Budget. In other words, only future cash transactions
are considered when drawing up the Cash Budget. The Cash Budget is
divided into the following sections:
• cash receipts: a prediction of the cash receipts (inflow) for the
budget period
• cash payments: a prediction of the cash payments (outflow) for the
budget period
• cash surplus (shortfall): the total cash receipts less total cash
payments for the budget period
• bank (opening balance): the bank balance at the beginning of the
budget period
• bank (closing balance): the expected bank balance at the end of the
budget period.
These components may be summarised as follows:
Components of a Cash Budget:
Cash receipts R100 000
Cash payments R70 000
Cash surplus (shortfall) R30 000
Bank (opening balance) R10 000
Bank (closing balance) R40 000
• A cash surplus (an increase in cash) arises when the expected
cash receipts are greater than the expected cash payments for the
budget period.
• A cash shortfall (decrease in cash) is recorded if the expected cash
payments exceed the expected cash receipts for the budget period.

Activity 11.2
Copy the following Cash Budget format in your Exercise Book and use the
information and your calculations from Activity 11.1 to complete the Cash
Budget of Polela Mdala for the period 1 July 2017 to 31 December 2017.
Polela Mdala
Cash Budget for the Period 1 July 2017 to 31 December 2017
RECEIPTS
Salary (after living expenses)
Private lessons
Chef’s salary
TOTAL RECEIPTS
PAYMENTS
Grandmother’s birthday present
Clothes
Business School fees
Cell phone airtime
TOTAL PAYMENTS
CASH SURPLUS / DEFICIT

CASH BALANCE AT BEGINNING OF PERIOD
CASH ON HAND AT END OF PERIOD
2.3 Cash receipts and cash payments

The following is a list of some of the more common business activities
which would need to be considered in preparing a Cash Budget. The
activities are divided into cash receipts (causing an inflow of cash) and
cash payments (causing an outflow of cash).
Cash receipts (inflow of cash) Cash payments (outflow of cash)

Cash sales Cash purchases of stock
Receipts from debtors Payments to creditors
Investment income (e.g. interest) Operating expenses paid (e.g.
insurance)
Rent income received Cash drawings by owner
Disposals of fixed assets (for cash) Cash purchases of fixed assets
Loans received Repayments of loans
Investments that mature Investments such as fixed deposits

Note: All of the transactions listed above are cash transactions.
Transactions such as bad debts, depreciation, discount received, drawings
of stock, etc. are not cash transactions. They are therefore not taken
into account when preparing the Cash Budget.
Activity 11.3
Albert Akkerboom owns a small garden maintenance business called Green

Fingers Garden Services.
Required
Use the information given below to prepare the Cash Budget of Green Fingers
Garden Services for the two months March 2017 and April 2017.
Information
• Green Fingers Garden Services maintain the gardens of their clients and
charge a monthly fee of R500. Currently they have 22 clients. In March 2017
they expect to sign up three more clients and another five in April 2017.
They receive payment from their clients at the on the last day of every month.
• The business received R1 500 during February for hiring out its equipment
(lawnmowers, weed-eaters, wheelbarrows, etc.) over weekends. Albert
expects that this will remain the same in March 2017 and increase by 20%
in April 2017.
• The business has a fixed deposit of R20 000 invested at 15% p.a. at Green
Growth Bank. Interest is received monthly.
• Albert manages the business from home and has calculated that the
general office expenses amount to R800 per month. These expenses are
paid monthly.
• During March 2017, Green Fingers Garden Services plans to sell an old
lawnmower for R500 cash, and will replace it with a new lawnmower in
April 2017. The new lawnmower will cost R2 700 and will be paid for in
three equal monthly instalments starting in April 2017. Depreciation on
equipment amounts to R250 per month.
• Wages for February was R2 000, but Albert has decided to allow an increase
of 15% as from 1 April 2017.
• The monthly petrol expense of R1 000 is expected to increase by 25%
from 1 March 2017, due to an increase in the petrol price as well as the
additional clients.
• The bank account of the business had a favourable balance of R7 200 on
1 March 2017.

2.4 D
ebtors Collection Schedule and Creditors
Payment Schedule
In the previous activity, the business provided a service in order to
generate income. When preparing a Cash Budget for a retail business,
the expected cash generated from sales and the cash to be paid for
purchases of trading stock must also be included in the budget. When
goods are sold for cash, the money is received immediately, so expected
cash sales for a particular month are simply recorded as a cash receipt
for that month. Similarly, projected cash purchases of trading stock for
a particular month are recorded as a cash payment for that month (the
money is paid immediately).
When dealing with credit sales and credit purchases, the process
becomes a bit more complicated. Debtors arising from credit sales usually
settle their accounts within a three-month period, while creditors, from
credit purchases are normally paid over a similar length of time. For this
reason the Debtors Collection Schedule and Creditors Payment Schedule
are normally prepared before the Cash Budget is drawn up.
2.4.1 Debtors Collection Schedule

Payments received from debtors are an important source of cash that
must be determined when preparing the Cash Budget. This calculation
can often be quite challenging since debtors usually pay their debt
over a number of months. The 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. The preparation of the
Debtors Collection Schedule is illustrated in the example below.
Example
The actual and budgeted credit sales of Northern Traders are as follows:
Actual credit sales Budgeted credit sales

January 2017 R90 000
February 2007 R80 000
March 2017 R100 000
April 2017 R120 000
From past experience, the accountant of Northern Traders has

determined that debtors usually settle their accounts as follows:
• 50% pay within the month in which the sales took place.
• 30% pay in the following month.
• 15% pay in the second month after the sale.
• 5% is written off as irrecoverable in the third month.

Example continued
Required
Use the information given above to prepare the Debtors Collection
Schedule of Northern Traders for the period 1 March 2017 to
30 April 2017.
Solution
The credit sales for January 2017 amounted to R90 000, which means
that debtors owing R90 000 originated during January 2017.
• 50% of the R90 000 would have been received in January and
is therefore not part of the Cash Budget or Debtors Collection
Schedule for March and April.
• 30% of the R90 000 would have been received in February and is
therefore also not part of the Cash Budget or Debtors Collection
Schedule for March and April.
• 15% of the R90 000 is expected to be received in March and is
therefore part of the Cash Budget; and Debtors Collection Schedule
for March.
• 5% of the R90 000 is expected to be written off in April and is
therefore recorded under the bad debts column in the Debtors
Collection Schedule for April.
The same procedure is then repeated for the credit sales amounts for
February, March and April. The calculations are shown in brackets in
the schedule below.
Northern Traders
Debtors Collection Schedule for the period 1 March 2017 to 30 April 2017
Credit sales Collections Collections Bad debts
Mar 2017 Apr 2017
January 2017 R90 000 (90 000 × 15%) 13 500
(90 000 × 5%) 4 500
February 2017 R80 000 (80 000 × 30%) 24 000
(80 000 × 15%) 12 000
(80 000 × 5%) 4 000
March 2017 R100 000 (100 000 × 50%) 50 000
(100 000 × 30%) 30 000
April 2017 R120 000 (120 000 × 50%) 60 000
87 500 102 000 8 500

Activity 11.4
Required
Use the information given below to prepare the Debtors Collection Schedule of
One-Stop Traders for the period 1 June 2017 to 31 July 2017.
Actual credit sales Expected credit sales

March 2017 R56 000
April 2017 R68 000
May 2017 R63 000
June 2017 R72 000
Trade debtors normally settle their accounts as follows:

• 60% pay after 30 days (in the month following the transaction).
• 20% pay after 60 days (after two months).
• 17% pay after 90 days (after three months).
• 3% is written off as irrecoverable in the third month.
Activity 11.5
Required
Use the information given below to prepare the Debtors Collection Schedule of
Hewlett Traders for October and November 2017.
Information
• Actual total sales: August 2017 R150 000
September 2017 R160 000
• 60% of the total monthly sales are on credit.
• Sales for October 2017 are expected to increase by 10% on the September
2017 sales, while the sales for November 2017 are expected to be R10 000
more than the expected sales for October 2017.
• Debtors are offered a 5% discount, on payments received during the current Hint
sales month. Debtors payments are as follows: Draw up a table setting out the
■ 30% pay in the same month and receive a 5% discount for early payment. total sales and the credit sales for
■ 50% pay one month after the sales transaction. each month. Then proceed with the
■ 15% pay two months after the sales transaction. Debtors Collection Schedule.
• The rest of the debt is irrecoverable and is written off after three months.

2.4.2 Creditors Payment Schedule
When a business purchases trading stock on credit, creditors are created.
These creditors will have to be paid at some time in the future. In
preparing the Cash Budget, the business needs to calculate the expected
cash to be paid to creditors during the budget period. These payments
are set out in the Creditors Payment Schedule, as illustrated by the
following example.
Example
The purchases of trading stock of Franco Traders for March 2017 and
April 2017 amounted to R120 000 and R100 000 respectively.
• 70% of the total purchases of trading stock are on credit.
• Creditors are paid after 60 days (i,e. two months after the purchases
are made).
Required
Use the information provided to prepare the Creditors Payment
Schedule of Franco Traders for the period 1 May 2017 to 30 June 2017.
Solution
Determine the amount of credit purchases for each month:
• Credit purchases for March 2017 = R120 000 × 70% = R84 000
• Credit purchases for April 2017 = R100 000 × 70% = R70 000
Determine the amounts to be paid to creditors during the budget period:
• Creditors are paid after 60 days; therefore the creditors originating in
March 2017 will be paid in May 2017.
• Similarly, creditors from April 2017 will be paid in June 2017.
These calculations are set out in the Creditors Payment Schedule below.
Franco Traders
Creditors Payment Schedule for the period 1 May 2017 to 30 June 2017
Mar 2017 Apr 2017
Purchases 120 000 100 000
Cash purchases (30%) 36 000 30 000
Credit purchases (70%) 84 000 70 000
Credit purchases Payments Payments
May 2017 Jun 2017
March 2017 84 000 84 000
April 2017 70 000 70 000
84 000 70 000

Activity 11.6
The total purchases of trading stock of Brooke Traders for July 2017 and
August 2017 amounted to R80 000 and R90 000 respectively.
• Cash purchases amount 25% of the total trading stock purchased.
• Creditors are paid two months after the date of the invoice.
Required
Prepare the Creditors Payment Schedule of Brooke Traders for the period
1 September 2017 to 31 October 2017.
Activity 11.7
Required
Use the information below to draw up the Debtors Collection Schedule and
Creditors Payment Schedules of Ashwell Traders for July and August 2017.
Information
Credit sales Credit purchases
May 2017 (actual) R80 000 R65 000
June 2017 (actual) R88 000 R60 000
July 2017 (budgeted) R95 000 R72 000
August 2017 (budgeted) R100 000 R56 000
The business encourages debtors to pay early by allowing a 5% discount for

account settled within 30 days.
Debtors are expected to pay as follows:

• 60% in the same month as transactions (receive 5% discount)
• 25% in the following month
• 15% after two months
Creditors are paid as follows:
• 30% in the month after the transactions (the business receives a 2½% cash
discount)
• 70% after two months.

Example
Cash Budget for a trading business
Required
Use the information given below to draw up the Cash Budget of
Hillbrow Traders for the period 1 June 2017 to 31 July 2017.
Information
• Actual and budgeted information:
Sales Purchases
Actual Budgeted Actual Budgeted
April 2017 R80 000 R76 000
May 2017 R70 000 R64 000
June 2017 R60 000 R67 000
July 2017 R68 000 R72 000
• Credit sales are 50% of total sales.

• Debtors pay their accounts as follows:
■30% in the same month that the transaction takes place
(5% discount allowed)
■50% in the month following the transaction
■18% two months after the transaction
■2% written off after 60 days
• 40% of the purchases are for cash and creditors are paid after
two months.
• Rent of R2 400 is received monthly and will increase by 10% on
1 July 2017.
• The business has entered a contract to sell a vehicle that originally
cost R55 000. According to the agreement, a cheque for the carrying
value will be received on 1 July 2017. The accumulated depreciation
to date of sale will amount to R34 000. A new vehicle will be
purchased for R75 000 cash on the same day.
• An advertising campaign is planned for June 2017, R1 500 will be
paid in June and R800 in July.
• Other operating expenses usually amount to R30 000 per year and
are distributed evenly.
• The business plans to take out a loan of R60 000 during July 2017.
• The owner withdraws R1 500 cash and R1 000 trading stock monthly.
• Cash in the bank on 1 June 2017: R22 800.

Example continued
Solution
Hillbrow Traders
Cash Budget for the period 1 June 2017 to 31 July 2017
Jun 2017 Jul 2017 Total budget
RECEIPTS
Cash sales (60 000 × 50%) (68 000 × 50%) 30 000 00 34 000 00 64 000 00
Cash from debtors * 33 250 00 30 990 00 64 240 00
Rent income (2 400 × 110%) 2 400 00 2 640 00 5 040 00
Proceeds from sale of vehicle (55 000 – 34 000) – – 21 000 00 21 000 00
Loan – – 60 000 00 60 000 00
TOTAL RECEIPTS 65 650 00 148 630 00 214 280 00
PAYMENTS
Cash purchases (67 000 × 40%) (72 000 × 40%) 26 800 00 28 800 00 55 600 00
Payments to creditors (76 000 × 60%) (64 000 × 60%) 45 600 00 38 400 00 84 000 00
Vehicle purchased – – 75 000 00 75 000 00
Advertising 1 500 00 800 00 2 300 00
Other operating expenses (30 000 ÷ 12) 2 500 00 2 500 00 5 000 00
Drawings 1 500 00 1 500 00 3 000 00
TOTAL PAYMENTS 77 900 00 147 000 00 224 900 00
CASH SURPLUS/DEFICIT (12 250 00) 1 630 00 (10 620 00)

BALANCE AT BEGINNING OF PERIOD 22 800 00 10 550 00 22 800 00
CASH ON HAND AT END OF PERIOD 10 550 00 12 180 00 12 180 00
Hillbrow Traders
Debtors Collection Schedule for the period 1 June 2017 to 30 July 2017
Credit sales Collections Collections
Jun 2017 Jul 2017
April 2017 R80 000 (80 000 × 50% × 18%) 7 200
May 2017 R70 000 (70 000 × 50% × 50%) 17 500
(70 000 × 50% × 30%) 6 300
June 2017 R60 000 (60 000 × 50% × 30% × 95%) 8 550
(60 000 × 50% × 50%) 15 000
July 2017 R68 000 (68 000 × 50% × 30% × 95%) 9 690
33 250 30 990

Activity 11.8
Required
Use the information given below to prepare the Cash Budget of Nomvete
Traders for the period 1 April 2017 to 30 June 2017. The totals column is
not required.
Information
Actual sales and purchases
January February March
Cash sales R60 000 R51 300 R43 000
Credit sales R42 000 R38 000 R37 400
Cash purchases R55 000 R65 000 R56 600
Credit purchases R47 000 R31 600 R40 000
Budgeted sales and purchases

April May June
Cash sales R65 600 R63 000 R62 900
Credit sales R46 700 R41 500 R36 000
Cash purchases R54 000 R50 800 R58 500
Credit purchases R34 800 R35 000 R32 700
• Debtors settle their accounts as follows:
■ 50% after 30 days and receive a discount of 4%
■ 25% after 60 days
■ 5% is written off as irrecoverable
• Nomvete Traders pay their creditors in the month following the purchase in
order to take advantage of the 5% discount offered for early payment.
• Drawings are expected to amount to R3 000 per month, of which R800 will
be in the form of trading stock and R50 in stationery.
• On 1 January 2017, R50 000 was invested in a fixed deposit at Star
Bank. Interest at 18% p.a. is received every six months, on 30 June and
31 December.
• The business pays monthly wages of R15 000. The employees receive an
annual increase of 10% during June.
• Other operating expenses are expected to remain constant at R12 000 per
month over the budget period.
• The business expects to receive R20 000 for redundant equipment to be
sold during May 2017.

• On 1 May 2017, Nomvete Traders plans to purchase a vehicle costing
R50 000. A deposit of R20 000 will be paid on the same date and the
remainder of the purchase price will be paid in three equal instalments
starting in June 2017.
• On 31 March 2017, the bank account showed a favourable balance of
R32 850.
Activity 11.9
Required
Use the following information, taken from the books of Mayosi Traders, to draw
up the Debtors Collection Schedule and the Cash Budget of Mayosi Traders for
January 2018 and February 2018.
Information
Actual and budgeted information
Actual 2017 Budgeted 2018
November December January February
Sales R255 000 R270 000 R228 000 R283 000
Purchases R208 000 R222 000 R231 000 R192 000
Accrued salaries – R6 000 R8 000 –
Drawings R8 000 R8 000 R8 000 R9 000
Depreciation R12 000 R12 000 R12 000 R10 500
Sundry expenses R42 500 R38 000 R44 500 R45 600
• 50% of sales are on credit and debtors pay their accounts as follows:
■ 55% pay during the month of the transaction (4% discount is allowed)
■ 25% pay in the month following the transaction
■ 15% pay in the second month after the transaction
• 20% of the purchases of trading stock are for cash. Creditors are paid one
month after the date of purchase in order to receive a 3% discount.
• Salaries amount to R42 000 per month. In February each year all employees
receive a bonus equal to 50% of their salary. All salaries owing from a
particular month are paid in the following month.
• The owner withdraws R2 600 from stock each month.
• A delivery vehicle with a cost price of R65 000 will be sold for R35 000 cash
during January 2018. During February 2018, a new vehicle will purchased
for R120 000. This amount will be paid in ten equal instalments starting in
February 2018.
• 10% of the sundry expenses are paid in the following month.
• On 1 February 2018, Mayosi Traders will increase their loan from BNF Bank
from R30 000 to R50 000. Interest at 18% p.a. is payable monthly.
• On 31 December 2017, the bank overdraft amounted to R8 800.

2.5 Replenishment of trading stock
Some businesses have a policy of maintaining constant levels of trading
stock. This means that goods are replaced as soon as they are sold.
Example: A business operates with a fixed mark-up of 100% on cost. If sales

during a particular month amounts to R80 000, then the cost of
sales would have been R40 000. The business would therefore
need to spend R40 000 to replace this stock that was sold.
Note: For the purpose of this calculation it can be assumed that the
purchase price of the goods remains constant.
Replenishment of trading stock can form an important part of
drawing up a Cash Budget, since the estimated purchases of stock and
the payments to creditors will be determined using the expected sales
amounts. This is demonstrated in the next example.
Example
Replenishment of trading stock
Required
Use the information given below to determine:
• the expected cash purchases for March and April 2017
• the expected payments to creditors for March and April 2017.
Information
Sales
January February March April
Actual sales R90 000 R60 000
Budgeted sales R75 000 R69 000
• The business maintains constant levels of trading stock.

• The business operates with a fixed mark-up of 50% on cost.
• 70% of all purchases of trading stock are on credit.
• Creditors are paid in the month following the purchase in order to
receive a 5% discount.
Solution
Remember that when constant levels of stock are maintained, then for
any given month:
Total purchases = Cost of sales
The simplest approach to this type of question is to construct a table
setting out the total purchases, cash purchases and credit purchases for
the relevant months.

Example continued
January February March April
 100 )
Total purchases (sales × ___ R60 000 R40 000 R50 000 R46 000
150
Cash purchases (30%) R18 000 R12 000 R15 000 R13 800
Credit purchases (70%) R42 000 R28 000 R35 000 R32 200
By using the information from the table above, the following solution
may be determined:
March April
Cash purchases R15 000 R13 800
Payments to creditors (28 000 × 95%) (35 000 × 95%) R26 600 R33 250
Activity 11.10
Required
Use the following information to prepare the Cash Budget of Mbalula Traders
for August 2016.
Information
• The bank account of Mbalula Traders showed an overdraft of R8 200 on
31 July 2016.
• Actual and budgeted sales
Cash Credit
Actual sales
June 2016 R25 800 R88 200
July 2016 R18 400 R60 500
Budgeted sales
August 2016 R22 600 R82 400
• Credit sales are collected as follows:

■ 50% in the month of the sale (a discount of 5% is allowed to these debtors)
• Purchases of trading stock:
■ The business maintains constant stock levels.
■ The business uses a fixed mark up of 50% on cost.
■ 30% of purchases are for cash and the remainder is on credit.
■ Creditors are paid in the month after the purchase of the stock.

• On 1 August 2016, the rent income of R6 000 per month will be increased
by 15%.
• Each month the owner, Mrs Mbalula, draws R2 000 cash and takes home
R1 200 of merchandise.
• The total amount paid for salaries in July 2016 was R20 000, but Mrs Mbalula
will increase all salaries by 8% in August 2016.
• Other operating expenses amount to R14 500 per month and are paid
by cheque.
• Bank charges are expected to remain constant at R1 500 per month.
Required
Use the information given below to prepare the Cash Budget of Marley Traders
for the three months ended 31 March 2017. Show the collection from debtors in
the Cash Budget. A totals column is not required.
Information
The following balances appeared in the books of Marley Traders on
31 December 2016, the end of the previous financial year:
Vehicles R25 000
Equipment R30 000
Fixed deposit R24 000
Bank (overdraft) R3 400
Sales R120 000
Rent income R19 500
Sundry expenses R66 000
• Sales figures for November 2016 and December 2016 were recorded as
R11 000 and R14 000 respectively. Sales for January 2017 are expected to
increase by 30% on the previous year’s average monthly sales. The sales for
February should increase by a further R2 000 and then decrease by 10% in
March 2017.
• Only 10% of sales are for cash.
• Debtors are expected to pay their accounts as follows:
■ 60% during the month after the sales (a discount of 5% is allowed)
■ 36% after two months
■ 4% is written off as irrecoverable after 60 days
• Stock is kept at constant levels and a profit mark-up of 100% on cost is
maintained. 80% of the trading stock is bought on credit and creditors are
paid after 30 days.

• Part of the building has been let since March 2015. Rent is received on
the 5th day of each month. The lease agreement stipulates that the rental
amount will be increased by 10% in March each year.
• Interest at 14% per annum on the fixed deposit, is received quarterly, on the
last day of March, June, September and December.
• The monthly insurance premium amounts to R800. An additional six-month
insurance policy for R3 000 will be paid for on 1 February 2017.
• Marley Traders owns only one vehicle, which will be sold on 1 January 2017
for a profit of R2 800.
• Depreciation on equipment is calculated at 20% per annum at cost.
• Sundry expenses are spread evenly over the year and are expected to
remain constant.
• Wages are increased annually in March by 10%. Marley Traders has
calculated that wages for March 2017 will amount to R2 750.
Activity 11.12
The following information applies to Sharp Stores, owned by Jacques Wilken.
Required
1. Use the information to prepare the Cash Budget of Sharp Stores for March
2016 and April 2016.
2. Jacques’ company has an overdraft limit of R20 000. What problems do
you anticipate, looking at the budget? Offer possible solutions to solve the
problems.
Information
• Balances on 29 February 2016
■ Bank R17 000 (cr)
■ Capital R100 000
■ Fixed deposit R50 000
■ Mortgage loan R120 000
• Sales
Actual Budgeted
December 2015 240 000
January 2016 225 000
February 2016 300 000
March 2016 262 500
April 2016 337 500
• Cash sales amount to 20% of total sales. Gross mark-up is 40% on turnover.
• Debt will be collected as follows:
■ 50% paid within month of credit sales; 5% discount allowed
■ 25% paid after 30 day

■ 20% paid after 60 days
■ 5% is irrecoverable.
• All purchases of trading stock are made on credit. Creditors are paid 60 days
after purchase. Trading stock must be maintained by monthly purchases.
Note 8 will also have an effect on purchases of trading stock.
• Cash purchases of packaging material amount to 1% of turnover.
• The owner plans to increase his capital to R120 000 during April 2016.
• It is expected that a vehicle will be sold for cash during April 2016 at a loss
of R4 000. The vehicle was bought at a cost of R30 000 and the accumulated
depreciation will amount to R12 000 on the date of sale. The owner, Jacques
Wilken, will buy a new vehicle in the same month, for R60 000 in cash.
• The owner’s withdrawals will amount to R4 000 per month, of which R1 500
will be taken in the form of stock.
• Interest rate on the fixed deposit is 15% per year. Interest is received
quarterly on 25 March, 25 June, 25 September and 25 December.
• Depreciation for the year amounts to R36 000.
• The interest rate on mortgage loans is 24% per year, payable in monthly
instalments. On 1 April 2016 the company has to pay an amount of R60 000
to service the bond.
• Salaries amount to R312 000 per year, including bonuses. Bonuses are paid
in March and all employees are paid bonuses equal to their monthly salaries.
• Other expected operating expenses:
■ March 2016 R41 600
■ Apri1 2016 R49 175
3. The Projected Income Statement

The Projected Income Statement is used to predict and plan the amount
of profit that the business will generate through its future operations, by
setting out the estimated income and expenses for the forecast period.
Often learners experience difficulties when switching focus from
the Cash Budget to Projected Income Statement. The key here is to
remember that we are trying to determine future profit, and thus the
Projected Income Statement will include:
• all income that is expected to be earned during the budget period,
whether received or not.
• all expenses that are expected to be incurred during the budget
period, whether paid or not.
In preparing a Projected Income Statement, management must analyse
and estimate how certain decisions will impact on the profit of the
business. For example, a proposed advertising campaign may result in
an increase in income by increasing sales, but the expenses would also
increase because of the extra advertising cost. If it is predicted that
the increase in sales will exceed the additional cost of the advertising

campaign, then the expected profit would also increase, and the
management should proceed with the campaign.
Also, most businesses experience “quiet” and “busy” times in the year.
For example, a business that sells umbrellas will need more stock and
extra staff in the rainy season, while the opposite would be true for the
dry months.
3.1 Importance of the Projected Income Statement

The Projected Income Statement is an essential tool used to monitor and
plan the profitability of the business. By analysing the Projected Income
Statement, management can ascertain whether:
• the business will be profitable over the budget period
• the projected sales figures are satisfactory
• expenses need to be cut
• they can afford to hire additional staff, run an advertising campaign,
and so on.
Also, if the Projected Income Statement of the business predicts a loss in
a specific month, the management can make suitable arrangements to try
to prevent this from actually happening.
3.2 Format 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. Also, often several columns are required
since the budget period may span several months or even years.
Example
Projected Income Statement
Required
Use the information provided to draw up the Projected Income
Statement of Thabiso Traders for the month ended 31 January 2017.

Example continued
Thabiso Traders
Income Statement for the year ended 31 December 2016
Sales R600 000 00
Other operating income 48 000 00

Insurance 12 500 00

Interest income – –
Interest expense (11 500 00)
Information
• The average monthly sales are expected remain the same for
January 2017.
• Thabiso Traders uses a fixed profit margin.
• The lease agreement stipulates that the monthly rental will increase
by 15% from 1 January 2017.
• The Trade Union successfully negotiated a pay increase of 10% for
all employees from January 2017.
• The annual insurance is expected to increase by R1 900.
• The depreciation for the coming year is expected to remain
unchanged.
• Advertising is budgeted at 3% of sales.
• Interest on the loan of R50 000 is charged at 18% p.a.

Example continued
Solution
Thabiso Traders
Projected Income Statement for the month ended 31 January 2017
Sales (600 000 ÷ 12) R50 000 00
LESS: Cost of sales (50 000 × 60%) (30 000 00)
Gross profit (50 000 × 40%) 20 000 00
ADD: Other income 4 600 00
Rent income 48 000 ÷ 12) × 115% 4 600 00

LESS: Operating expenses (10 825 00)
Salaries and wages (75 000 ÷ 12) × 110% 6 875 00
Insurance [(12 500 + 1 900) ÷ 12] 1 200 00
Depreciation (15 000 ÷ 12) 1 250 00
Advertising (50 000 × 3%) 1 500 00

ADD: Interest income – –
  1  )
LESS: Interest expense (50 000 × 18% × __ (750 00)
12
Net profit (loss) for the month 13 025 00
 240
Note: The gross profit margin = ______ 100
000 × ___
600 000    1 = 40%
Hopefully you have noticed from the previous example that, if you are
able to prepare a “normal” Income Statement, drawing up a Projected
Income Statement simply requires you to understand the given
information and to perform the necessary calculations.

Activity 11.13
Required
Use the information below to draw up the Projected Income Statement of
Sipho Stores for the month ended 31 March 2017.
Sipho Stores
Projected Income Statement for the month ended 28 February 2017
Sales R400 000 00
LESS: Cost of sales (250 000 00)
ADD: Other operating income 54 000 00
Rent income 48 000 ÷ 12) × 115% 54 000 00

LESS: Operating expenses (152 700 00)
Wages 84 000 00
Insurance 16 400 00
Stationery 11 200 00
Sundry expenses 27 600 00

ADD: Interest income 12 700 00
LESS: Interest expense – –
Net profit (loss) for the month 110 000 00
Information
• Sipho Stores expects to make a gross profit of R18 000 in March 2017, while
maintaining the same mark-up as the previous year.
• The rental will be increased by 16% in March 2017.
• The wage per employee is expected to remain constant. However, an
additional employee will be hired on the 1 March 2017. Only two wage
earners were employed during the previous financial year. All employees
earn the same wage.
• Advertising, costing R7 800, will be paid in March 2017. The contract
stipulates that an advert will be placed in each issue of the Sunday Times
during March, April and May 2017.
• Annual insurance of R18 000 was paid on 1 November 2016. An additional
six-month insurance contract, costing R4 800, will be signed and paid for on
1 March 2017.

• The stationery on hand on 28 February 2017 amounted to R2 200. It is
expected that R550 of this will be used during March 2017. No stationery
will be purchased during March 2017.
• Sundry expenses are expected to increase by 10% and are incurred evenly
throughout the year.
• The fixed deposit will be increased to R78 000 on 1 March 2017. Interest at
14% p.a. is received half-yearly on 31 August and 28 February.
Activity 11.14
Kylie Slater wants to start her own business, selling surfboards and wetsuits,
on 1 November 2017. She has drawn up a business plan and researched the
market, but wants you to help her decide if the business will be profitable by
preparing a Projected Income Statement.
Required
1. Prepare the Projected Income Statement of Kylie’s Surf Shop for November
and December 2017. A totals column is not required.
2. Would you recommend that Kylie start this business? Refer to your Projected
Income Statement to support you answer.
Information
• She intends to call her business Kylie’s Surf Shop, and feels that she will
need to advertise extensively in order to become known in the market. She
has calculated that it will cost R3 500 to produce and distribute flyers during
November, advertising her shop. She will also advertise with the local radio
station during November and December at a cost of R1 500 per month.
• Kylie has determined that if she uses a 33 __13 % mark-up on cost, she can sell
the surfboards and wetsuits at the following very competitive prices:
■ Selling price for a surfboard R1 800
■ Selling price for a wetsuit R1 400
• From the information gathered doing market research, Kylie has drawn up
the following expected sales figures:
November 2017 December 2017

Expected number surfboards to be sold 8 15
Expected number wetsuits to be sold 10 20
• She will need to employ a shop assistant from November at R2 800

per month.
• Kylie intends to operate her shop from part of a building near the beach,
which she would rent for R2 200 per month. The building has been
neglected and will require some repairs in November. Kylie has received a
quote for R4 300 for the work required.
• In order to earn additional income, Kylie intends to hire out storage space
to surfers, divers and fishermen to store their equipment. She estimates that

this will yield rental income of R2 500 in November and then double from
December onwards.
• She will need to buy equipment for the shop costing R18 000. This will
be paid for in six equal monthly instalments starting on 1 November.
Depreciation will be written off at 10% p.a. on cost.
• AA Bank has approved Kylie’s loan application for R50 000. She will receive
the loan on 1 November 2017 at an interest rate of 15% p.a. The amount will
be repaid in five equal annual instalments starting on 31 October 2018.
• Other general expenses (including water and electricity; telephone;
insurance and stationery) are estimated to cost R2 500 per month.
Case study 11.1
Marie Joubert wants to start her own business called Bag It. She has done
a fair amount of market research, and has had meetings with suppliers and
potential clients. Marie plans to purchase handbags, which she will embroider
and decorate. These will be supplied to selected clothing shops and boutiques.
She negotiated a 90-day payment term with her suppliers. Her clients are
expected to pay within 60 days. Approximately 40% of the clients will pay
in the month following a purchase, with 60% paying in the second month
following a purchase. Marie does not have any accounting experience and asks
for your help.
Required
1. Prepare a Projected Income Statement for the period 1 September 2016 to
28 February 2017. A totals column is not required.
2. Prepare a Debtors Collection Schedule for the same period.
3. Prepare a Cash Budget for the period 1 September 2016 to
28 February 2017. A totals column is not required.
4. a. Why are Marie’s budgeted sales for December 2016 considerably higher
than the other months in the period budgeted for?
b. Is it necessary for Marie to secure a loan of R100 000? Give reasons for
your answer.
Information
• Marie has already opened a bank account in the name of the business.
On 1 September 2016 she will deposit a capital contribution of R100
000, and she expects a loan amounting to R100 000 to be approved and
deposited on the same day.
• The loan will be paid back in monthly payments of R1 200, of which R800
is interest, and R400 contributes to the payment of the loan amount.
The first payment will be deducted from the business’s bank account on
1 October 2016.

• Marie will purchase the equipment she needs to manufacture the handbags
during September. The cost of the equipment will be R60 000, and it will
be paid in cash. She will also purchase a computer, printer and other office
equipment, amounting to approximately R10 000. Depreciation will be
calculated against cost price at 12% per year.
• Marie’s first orders for handbags came in during October 2016. She met with
potential clients and made the following projections regarding sales:
Sep 2016 Oct 2016 Nov 2016 Dec 2016 Jan 2017 Feb 2017
Cash sales 0 30 000 32 000 60 000 42 000 18 000
Credit sales 0 15 000 16 000 30 000 21 000 9 000
Cost of sales 21 000 22 000 36 000 26 000 15 000
• Purchase of stock for October sales has to be done in September, and Marie
has made the following projections:
Sep 2016 Oct 2016 Nov 2016 Dec 2016 Jan 2017 Feb 2017
Cash purchases 10 000 10 700 20 000 13 000 6 000 6 000
Purchases on credit 5 000 5 300 10 000 7 000 3 000 3 000
Cost of sales 21 000 22 000 36 000 26 000 15 000
• Creditors will be paid two months after purchases are made.

• Marie employs two women who embroider and decorate the handbags.
She takes care of the administration, marketing and design of the handbags
herself. The employees will each earn a wage of R2 500 per month, and
she will pay herself a salary of R6 000 per month. During December, every
employee will receive a bonus of R300. All wages and salaries will increase
by 5% from January 2017.
• Marie runs her business from premises which she rents for R3 300 per month.
A deposit equal to one month’s rent must be paid in September 2016.
• Water and electricity and the telephone bill will amount to approximately
R500 each from September 2016 and must be paid in the following month.
• Insurance will cost R300 per month, and the first payment will be made on
7 October 2016.
• Marie is planning a big marketing campaign for December, the cost of
which will be approximately R1 800.
• Other overheads like fuel and consumable goods will amount to an
estimated R1 000 per month, and should be taken into account from
September.

4. Ethical challenges in budgeting
Budgeting is an extremely useful management tool that is used
extensively in the planning and monitoring of business activities. In fact,
a budget may be seen as a business map which sets the course that is used
to guide business operations and steer the corporate ship. As such, it is
critical that budgets are prepared with the utmost care and due diligence.
Remember that budgets are based on forecasts, trends and predictions
of future business events rather than established facts. So budgets rely
heavily on the opinion and judgement of the people involved in the
budget process. It is therefore essential that these people display ethical
qualities such as integrity, objectivity and professionalism in order to
ensure that the budgets are free of any bias and are a fair, reasonable and
accurate representation of future expectations.
Unfortunately, budgeting can sometimes promote unethical behaviour
and can even lead to employees becoming counterproductive. Budgets
frequently play a key role in the performance evaluation of employees,
where the employees’ performance is measured against budget targets.
For example, departmental budgets or special project budgets may be
used to set income and expenditure targets that the employees involved
in those departments or projects are expected to achieve. However, those
same employees are often required 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.
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.
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,
Cooking the books where the employees feel that the only way to achieve the unrealistic
intentionally falsifying accounting budget targets is by deliberately distorting the accounting records or
information “cooking the books”.

A Professor of Business Administration at Harvard University, Michael
C. Jensen, wrote an interesting paper aptly entitled Paying People to
Lie: The Truth About the Budgeting Process, in which he analyses the
counterproductive effects associated with using budgets targets to
evaluate employee performance. In the paper, he goes so far as to suggest
that these budgeting systems “teach people to lie because if they tell the
truth they often get punished and if they lie they get rewarded”. This is
obviously not the kind of message that any business wants to convey to
their employees.
Even though there are certain ethical challenges associated with
budgeting, it still remains an essential business tool. In order to overcome
these ethical challenges:
• People involved in the budget process need to demonstrate a high
level of integrity, objectivity and professionalism.
• Senior management needs to guard against the dangers of relying too
heavily on budget targets to evaluate performance.
• Senior management also needs to be careful to create budgets that are
realistic and attainable.
• Employees need to 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.

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 budgeting process, before we discuss the
internal controls used to guard against these risks and the internal audit
of the budgeting process.
5.1 Risks associated with the budgeting process

RISK!
Budgeting is an essential management tool used to assist in the planning
and monitoring of business operations. In fact, budgeting plays a valuable
part in the internal control system, since it is used to help protect the
business against potential future risks, most notably cash flow problems
and overspending. Furthermore, budgeting is also used to assess the
feasibility of new projects before they are implemented. If the budget
predicts that the project will not be sufficiently profitable, then the
project will be shelved and the risk is avoided.
BUDGETING • chapter 11 421

In order for budgeting to serve as an effective control mechanism, it
is vital that budgets are accurately prepared, properly implemented and
strictly adhered to. From this we can ascertain that the risks associated
with the actual budgeting process, may typically include these risks.
5.1.1 Risks relating to the preparation of budgets

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 accurately prepared in accordance with established standards
and policies.
5.1.2 Risks relating to the implementation of budgets

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.
5.1.3 Risks relating to compliance with budgets

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.
5.2 Internal control of the budgeting process

It is very important that businesses establish strict internal control
procedures to address the risks associated with the budgeting process.
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:

INTE
INTERNAL AUDIT
INTE
INTERNAL AUDIT
• 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 are 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.
5.3 Internal audit of the budgeting process

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:

INTE
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
INTE
priority to those areas of greatest risk
•
INTERNAL AUDIT
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:
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.

The information given on the next page was taken from the books of
Camel Traders.
Required
1. Draw up the Debtors Collection Schedule of Camel Traders for March
and April 2018. The bad debts column may be omitted. [20]
2. Prepare the Cash Budget of Camel Traders for March and April 2018.
The totals column may be omitted. [46]
Information
Actual and budgeted sales
Actual sales Budgeted sales
January R25 000
February R32 000
March R26 000
April R28 000
• 40% of sales are cash sales.

• Debtors are expected to settle their accounts as follows:
■ 50% in the month of sale and they receive 4% discount
■ 30% in the month after the sale
■ the rest is written off as irrecoverable
• The business uses a fixed mark-up of 100% on cost. Stock is replaced as it is
sold. 70% of purchases are on credit. All creditors are paid in the month after
the purchase and a discount of 5% is received.
• Old stationery, with a book value of R2 350 on the 28 February 2018, will be
donated to the local high school during March 2018. This will be replaced in
the same month with stationery costing R5 600, of which 25% will be paid
by cheque and the rest will be settled during April 2018.
• Interest, on the fixed deposit of R20 000 is received quarterly on 31 March,
30 June, 30 September and 31 December. The interest rate was fixed at
12½% per annum.
• The owner draws a monthly salary of R3 600 of which R100 is stationery.
• The following information appeared in the Income Statement of Camel
Traders for the year ended 28 February 2018:
Rent income R10 980
Insurance R4 800
Sundry expenses R18 000

• The rent is increased annually by 10% on 1 January. The tenant was overseas
during February 2018 and his rent for that month was outstanding. He has
promised to pay this in March 2018.
• The insurance premium for the current financial year is expected to increase
by R75 per month and is paid monthly.
• Sundry expenses are expected to increase by 8% in the new financial year.
• On 28 February 2018, the bank account showed an unfavourable balance
of R3 450.
Project 11.1
The aim of this project is to develop a realistic Projected Income Statement for
a small business. You are required to think of a small business that you could
possibly start.
Required
1. Draw up a basic business plan outlining the following information:
• The name of your business
• How your business would generate income
• The main expenses of your business
• Your target market
• Your competitive edge
• The number of employees that would be required
• How you would advertise your business
• Any other relevant information about your business
2. Perform research to establish as accurately as possible your potential
earnings and the costs of the expenses listed in your business plan.
For example:
• If you intend to sell a product: contact a supplier and find out the cost
price of your product. Compare this cost with retail prices in order to
determine an appropriate mark up.
• If you intend to provide a service: find out the price charged for a
similar service.
• If you intend renting a shop: look in a newspaper or contact an estate
agent to find out how much rent you would need to pay.
• Interview business people in your area to determine the costs of your
other expenses.
Draw up a report setting out this information and showing how each item
of income and expense will be determined.
3. Prepare a Projected Income Statement for your business for the first
six months.
4. Comment on the viability of your business. Refer to your Projected Income
Statement to support your conclusions.
You will be assessed according to the rubric in your Exercise Book.

Chapter 12
Inventory systems
• define and explain the following that of the perpetual stock
inventory systems: system
■ perpetual stock system • draw up the following accounts
■ periodic stock system in the General Ledger:
• discuss the advantages and the Purchases
■
disadvantages of the periodic Opening Stock

■
and perpetual stock systems Closing Stock

■
• record transactions using the Trading account

■
periodic stock system in the: Carriage on Purchases

■
■ subsidiary journals Customs and Import Duties

■
■ General Ledger • compare the Trading account in

• compare the book entries of the perpetual stock system with
the periodic stock system with the Purchases account in the
periodic stock system.
Key concepts
• purchases • carriage on purchases • customs and import duties • opening stock • closing
stock • Trading account • Trading Stock account • physical stock take • gross profit
Randall, with our annual

stock take coming up, we will
have to appoint extra staff to
Yes Mrs Patel, we will have to do it
help us count all the stock.
quickly and properly. We don’t want
to calculate the wrong closing stock
amount because it will affect our
gross profit calculation.
I nvent o ry s y s tem s • c h a p t e r 1 2 427

1. What is an inventory (stock) system?
An inventory system is an administrative system that monitors and
records the movement of stock through the business, from the time it is
bought to the time it is sold.
A trading business can use one of two systems to record the movement
of stock:
Inventory systems
Perpetual stock system Periodic stock system
2. Two main types of inventory systems

2.1 The perpetual stock system
In Grade 10, you learnt about the perpetual stock system. The word
perpetual means continuous which means that the balance of the Trading
book value Stock account (book value) is continuously balanced to the physical
the balance in the Trading Stock value in the store. In this system:
account • The Trading Stock account is debited with the cost price when stock
is bought.
• The Trading Stock account is credited with the cost price when stock
physical value is sold.
the value of stock in the store; • The cost price of the stock sold (cost of sales) is calculated after every
determined by doing a stock take sale, using the pre-determined mark-up percentage, and the Cost of
Sales account is debited.
• The additional cost incurred in purchasing stock (carriage on
purchases and customs duty) is debited to the Trading Stock account.
• When stock is returned by a customer, the Cost of Sales account is
credited and the Trading Stock account is debited.
• When stock is returned to a supplier, the Trading Stock account
is credited.
• Therefore the Trading Stock account will always reflect the value
of stock on hand (closing stock) because it is continuously
(perpetually) updated.
In this system, the assumption is that the balance in the Trading Stock
account (book value) equals the physical value of the stock in the store.
428 c h a p t e r 1 2 • I nvent o ry s y s tem s

2.2 The periodic stock system
The word “periodic” implies that, in this stock system, the value of stock
on hand (closing stock) will only be determined at the end of a period or
at regular intervals.
In this system:
• The Purchases account is debited with the cost price when stock
is bought.
• When stock is sold, the cost price of the stock (cost of sales) cannot be
determined so no entry will be made.
• The cost price of stock sold (cost of sales) is only calculated after a
physical stock count is done after closing stock is determined.
• The additional cost incurred in purchasing stock (carriage on purchases
and customs duty) is debited to the relevant expense account.
• The Trading Stock account is not updated when stock is returned by a
customer.
• When stock is returned to a supplier, the value is credited to the
Purchases account.
• At the end of the period: Opening Stock + Purchases – Closing Stock
= Cost of Sales.
• The balance in the Trading Stock account will only reflect the opening
stock value at the beginning of the year and the closing stock value at
the end of the year.
• Therefore the balance in the Trading Stock account is NOT equal to
the physical value during the financial year.
A business using the periodic stock system has no continuous book value
of the stock they have in their store. The only time the value of stock on
hand (closing stock) can be determined is when they do a physical stock
count (stock take). It is therefore crucial that the business counts their
stock as often as possible in order to determine the closing stock value.
3. Stock validation
Stock validation is the process whereby the integrity of the stock
administrative system is tested. This is done by way of a stock take to
determine the value of items left over in the store.

3.1 The importance of doing a stock take
A physical stock take is done whether the business uses the perpetual or
periodic stock system. However, the outcome for each system is different.
Perpetual Periodic
• This business can determine • This business cannot
the value of stock on hand determine the value of stock
(closing stock) by referring to on hand (closing stock) by
the Trading Stock account. referring to an account in its
• A physical stock take is done books. This value must be
and this value is compared determined by doing a stock
with the book value in the take. Only after the stock take
Trading Stock account. This are they able to determine the
forms part of the internal closing stock value.
control process because it • The closing stock value
verifies the reliability of the cannot be compared to any
book value and determines amount in the books. It is
any stock losses. therefore difficult to determine
• Any difference between the stock losses.
two reveals a trading stock • The business will be able to
deficit: estimate any stock losses (this
Book value – Physical value = will be discussed later on in
Trading stock deficit the chapter).
4. T
he subsidiary journals of a business using
the periodic stock system
There are several differences between the journals of a business using the
perpetual stock system, and one using the periodic stock system.
4.1 CRJ, DJ and DAJ

There is no Cost of Sales column in the CRJ, DJ and DAJ since this
amount cannot be calculated.

Doc. Day Details Analysis of Bank Sales Debtors Discount Sundry accounts
no. receipts control allowed Amount Details
Debtors Journal
Doc. Day Debtor Sales
no.

Debtors Allowances Journal
Doc. Day Debtor Debtors allowances
no.
4.2 CPJ, PCJ, CAJ and CJ

The Purchases column replaces the Trading Stock column in the CPJ,
PCJ, CAJ and CJ.

Doc. Day Name of payee Bank Purchases Creditors Discount Debtors Sundry accounts
no. control received control Amount Details
Petty Cash Journal

Doc. Day Details Petty cash Purchases Stationery Sundry accounts
no. Amount Details
Creditors Journal
Doc. Day Creditor Creditors Purchases Stationery Equipment Sundry accounts
Creditors Allowances Journal

Doc. Day Creditor Creditors Creditors Stationery Equipment Sundry accounts
no. control allowances Amount Details
4.3 General Journal

The format for this journal remains the same. The only difference is
when the owner takes goods (drawings) or the business donates goods.
Where the Trading Stock account would have been credited in the
perpetual stock system, the Purchases account is now credited.
General Journal
Creditors control Debtors control
Day Details Debit Credit Debit Credit Debit Credit
10 Drawings xxxx
Purchases xxxx
(The owner took goods for own use)
15 Donation xxxx
Purchases xxxx
(The owner donated goods on behalf of the business)

4.4 M
ain differences between perpetual and periodic
stock systems
Perpetual Periodic
1. Trading Stock account is continuously updated Trading Stock account is not affected by
when stock is bought and sold, therefore there movements of stock during the year. This
is better control over the movement of stock. account reflects the opening stock amount
throughout the year.
2. The balance in the Trading Stock account The value of closing stock is determined
(closing stock) should, at any time, be equal to by a physical stock take done periodically,
the actual value of stock in the store, therefore therefore it is very difficult to determine stock
stock losses can easily be detected. losses after a stock take has been done.
3. The Cost of Sales account represents the cost No Cost of Sales account because the cost
price of stock sold, therefore gross profit can be price of the goods sold cannot be determined
determined at any point during the financial at the point of sale. Cost of sales is only
year. By doing this the business can keep track calculated at the end of the financial year after
of its mark-up policy. a stock take has been done.
4. This system is used in businesses selling This system is used in a business where the
expensive stock and has a low stock turnover. cost price is difficult to determine or it would
not be viable to determine to cost price of a
single item.
5. Because this system is complex, expensive This system is cheaper to administer as it does
computer equipment is required to not require expensive computer equipment.
administer it.
6. It is easy to determine the trading stock No Trading Stock Deficit account. It is difficult
deficit. (Book value – Physical value) to determine because a continuous balance of
stock on hand is not kept.
7. When stock is purchased, cash or credit, the When stock is purchased, cash or credit, the
Trading Stock account is debited. Purchases account (an expense) is debited.
8. Carriage on Purchases account is debited to The Carriage on Purchases account (an
the Trading Stock account because it increases expense) is debited when goods purchased
the cost of the stock. is transported to our store by an outside
business.
9. Customs duty (import tax) is debited to the The Customs Duty (import tax) account (an
Trading Stock account because it increases the expense) is debited when goods are imported
cost of the stock. to South Africa.

Activity 12.1
Read the following paragraphs and for each criterion, indicate the differences
between the perpetual and periodic stock systems.
Criteria Perpetual Periodic

1. When stock is bought, the cost price is
debited to the:
2. When stock is sold, the cost price is
credited to the:
3. How is cost of sales determined?
4. Carriage on purchases and customs
duty is debited to the:
5. When stock is returned by a customer,
the cost price is debited to the:
6. When stock is returned to a supplier,
the cost price is credited to:
7. How is the value of closing stock
determined?
8. How does the business determine
stock losses?
Activity 12.2
Answer the following questions with regards to a business using the periodic
stock system.
1. Give a reason why the Trading Stock account will not be affected by the
purchase and sale of stock during the year.
2. Explain why it is impossible to calculate the cost of sales amount when
goods are sold.
3. When stock is purchased on credit, which accounts will be affected?
4. When stock is sold for cash, which accounts will be affected?
5. Which accounts will be affected by the payment for the transport of goods
purchased?
6. Why is it important that a business that uses the periodic method of stock
control, perform a stock take as often as possible?
7. Which types of business are best suited to use the periodic method of stock
control?
8. Customs duties are taxes paid to the SARS on imported goods. Why does
the government charge taxes on imports? Do you think the government
should do this?

Activity 12.3
Use only numbers 1. to 6. of the previous table. Extract the advantages and
disadvantages of each system, using the following layout:
Perpetual stock system

Advantages Disadvantages
Periodic stock system

Activity 12.4
Affordable Building Supplies buys and sells building supplies to the public. They
use the periodic stock system of stock control. Stock is purchased from various
wholesalers because their policy is to find the most affordable cost price, which
they then pass on to their customers. They do not have a fixed profit mark-up
on their trading stock.
Required
Complete the following subsidiary journals in the books of Affordable Building
Supplies:
1. CRJ: with columns for Analysis of receipts, Bank, Sales, Debtors control,
Discount allowed and Sundry accounts (11 lines)
2. CPJ: with columns for Bank, Purchases, Creditors control, Discount received,
Debtors control and Sundry accounts (15 lines)
3. DJ: allow for the Sales column only (6 lines)
4. DAJ: allow for the Debtors allowances column only (2 lines)
5. CJ: with columns for Creditors control, Creditors allowances and Sundry
accounts (5 lines)
6. CAJ: with columns for Creditors control, Purchases and Sundry accounts
(2 lines)
7. GJ: with column for Debtors control; no narrations required (12 lines)
8. PCJ: with columns for Petty cash, Purchases, Carriage on purchases and
Sundry accounts (6 lines)

Transactions for August 2019
01 Bought goods from Milestone Traders for R4 400. Issued cheque no. 187
02 Settled our account with Ash Suppliers by issuing them with a cheque for
R1 649 and received a discount of R87 for early payment.
03 Cash sales according to the cash register roll, R2 288.
Received a cheque from Naran Paints for R1 729, in settlement of his
account of R1 850. Issued receipt no. 64
06 Received an invoice from Tiger Brands for goods purchased on credit,
R3 560 less 20% trade discount. (Renumbered no. 52)
Issued a cheque to Giardino Moulds for R6 400 for goods purchased.
Goods for R350 were for the owner’s personal use.
07 Credit card sales amounted to R2 400.
Invoices (numbered 89 to 91) were issued to D’Argie Builders, R1 224;
Seal Roofing, R3 122 and Balu Electricians, R4 780.
08 Received a service invoice for repairs to the delivery van from Auto
Repairs for R887.
Paid Star Express R128 from petty cash to deliver goods to our store.
Voucher no. 18.
09 Sent credit note (no. 21) to D’Argie Builders to correct an overcharge of
R24 on the goods bought on the 7th.
12 The owner donated building supplies with the cost price of R850 to
Habitat for Humanity on behalf of the business.
Paid Cavalry Stationery for the purchase of stationery by issuing a cheque
for R214.
Drew a cash cheque for wages, R3 569.
13 The bank returned the cheque of Naran Paints marked R/D (see 03
above). This discount must still be cancelled.
Charged the account of Naran Paints with R24 interest.
14 Received a cheque from MT Plumbers for R1 200. Their account was
previously written off as irrecoverable.
15 Cash sales according to cash register roll, R8 480.
Naran Paints is insolvent. Their estate paid 50c in the rand. Management
decided to write off the remainder as irrecoverable.
18 Paid Zamani Traders for the following: merchandise, R5 000 (less 10%
trade discount), stationery, R780.
Paid Star Express for the delivery of the above merchandise, R150 from
petty cash.
22 Received an invoice from Alpha Building Supplies for merchandise
bought for R8 210.
Paid the water and rates account by issuing a cheque for R640 to the
municipality.
Sold goods on credit to D’Argie Builders for R3 200.
Bought packaging material for R28 from petty cash.
Cash sales according to the cash register roll, R6 600.

Received a cheque from Maxi Builders for the monthly rent, R2 400.
23 Issued a debit note no. 7 to Alpha Building Supplies for stock returned,
R525.
Paid for postage, R32 from petty cash.
The owner took stock for his own use, R650.
25 Paid the net salaries by cheque: J Maple, R6 682 and C Wood, R7 654.
28 Received the bank statement from National Bank.
Debited: Service fees: R233
Cash handling fee: R60
Stop order to N-sure for insurance: R500
Debit order to CarFin for vehicle instalment: R2 400
Credited: Interest on current account: R84
30 Cashed a cheque for R850 for the owner’s personal use.
Activity 12.5
The Plant People sells plants and fertilisers to customers and is situated in the
Bergvliet, Cape Town. They use the periodic stock system.
Required
Use the transactions for August 2020 to draw up the following journals:
1. Cash Receipts Journal with columns for Analysis of receipts, Bank, Sales,
Debtors control, Discount allowed and Sundry accounts (10 lines)
2. Cash Payments Journal with columns for Bank, Purchases, Wages, Creditors
control, Discount received and Sundry accounts (12 lines)
3. Creditors and Creditors Allowances Journals with columns for Creditors
control, Purchases, Stationery, Equipment, and Sundry accounts
(6 lines each)
4. Debtors and Debtors Allowances Journal (5 lines each)
5. Petty Cash Journal with columns for Petty cash, Purchases, Stationery and
Sundry accounts (5 lines)
6. General Journal (20 lines)
Transactions for August 2020
Invoices received from suppliers for items bought

Day Doc. no.
04 112 Forest Wholesalers Plants, fertilisers and so on R3 890, less 20%
trade discount
13 113 George Hardware Equipment, R1 860
23 114 Forest Wholesalers Stock of R4 220 and equipment, R2 330
28 115 DJ Printers Stationery, R1 230, and posters for
advertising campaign, R1 450

Debit notes issued to suppliers
Day Doc. no.
06 56 Forest Wholesalers Stock worth R500 was returned
16 57 George Hardware Overcharge on invoice no. 113 for
equipment, R330
29 58 DJ Printers Incorrect printing on stationery, R100
Invoices issued to customers for stock sold on credit

Day Doc. no.
02 104 D Conradie R480
15 105 K Joubert R896
24 106 E Wilken R1 032
Credit notes issued to customers

Day Doc. no.
17 23 K Joubert R88, goods returned
25 24 E Wilken R72, plants damaged
Receipts issued
Day Doc. no.
02 144 L Truter R740, in settlement of account
(discount allowed, R60)
08 145 J Jacobs R365, in payment of an account that was
previously written off as irrecoverable
10 146 K Joubert R1 560, in part-payment of account
29 147 D Conradie Settled full account, R1 050
(discount allowed, R150)
Cash register rolls

Day
02 R6 736
08 R8 368
10 R3 632
27 R6 848
Petty cash vouchers

Day Doc. no.
05 32 Mill Stores Stock, R80
19 33 Makro Printer paper and pens, R60
25 34 Wages Paid casual labour for the day, R40

Cheque counterfoils
Day Doc. no.
01 188 Cash R200 to restore petty cash imprest amount
04 189 George Hardware R1 860 in settlement of account
(discount received, R140)
06 190 Forest Wholesalers R4 010 in part-payment of account
14 191 Cash R6 400 for wages and R180 for fuel for the
owner’s car
15 192 Municipality R570, water and electricity
16 193 Piet’s Farm R6 880 for merchandise
17 194 JJ the Handyman R3 625 for installation of display shelves
20 195 Cash R6 400 for wages
21 196 Telkom R625 for telephone account
27 197 DJ Printers Settled the full account, R670
(R30 discount received)
General Journal entries

Day
01 The owner gave his personal van to the business to use for delivery
purposes. The vehicle was valued at R50 000.
05 The owner’s wife took plants worth R560 for own use.
09 DJ Printers charged the business’s overdue account with R16 interest.
16 Charged D Conradie’s overdue account with R12 interest.
31 Debtor L Truter was declared insolvent. Write off his account of R1 250
as irrecoverable.
Stationery purchased for the enterprise was accidentally recorded as stock
purchased, R210.
5. Posting the subsidiary journals to the

General Ledger
For this section we will only focus on the accounts affected by the
movement of stock in and out of the business. When posting from
the journals to the General Ledger, the same entries that apply to the
perpetual stock system apply to the periodic stock system, with the
following exceptions:
5.1 Stock accounts in the periodic stock system

Trading Stock Carriage on Purchases
Sales Customs Duty
Debtors Allowances Opening Stock
Purchases Closing Stock

5.2 The function of the Trading Stock account
This account is used to hold, as a value, the closing stock as per the stock
take, at the end of the current year.
Example
If a stock take revealed that there was R20 000 worth of stock on hand,
then the closing stock in the Trading Stock account should be R20 000.
The closing stock at the end of a particular financial year becomes the
opening stock at the beginning of the next financial year. This will be
explained in detail later.
5.3 Main stock account for each system

The main stock account in each of the two systems is as follows:
Perpetual stock system Periodic stock system
Trading Stock Purchases
Balance b/d Cost of sales 5 Balance b/d Creditors control 7
Bank 1 Cost of sales 6 Bank 1 Drawings 8
Creditors control 2 Creditors control 7 Creditors control 2 Donations 9
Petty cash 3 Drawings 8 Petty cash 3 Balance c/d

Cost of sales 4 Donations 9
Balance c/d
1 Stock bought for cash 1 Stock bought for cash

2 Stock bought on credit 2 Stock bought on credit
3 Stock bought from Petty cash 3 Stock bought from petty cash
4 Cost price of stock returned 4 No entry
by debtors
5 Cost price of stock sold for cash 5 No entry
6 Cost price of stock sold on credit 6 No entry
7 Cost price of stock returned 7 Cost price of stock returned
to creditors to creditors
8 The owner took stock for 8 The owner took stock for
own use own use
9 The business donated stock to 9 The business donated stock to
a charity a charity
There is no Cost of Sales account in the periodic stock system, and the
cost price of stock sold is only calculated after a stock take is done at the
end of a particular period.

In the perpetual stock system, when goods are transported to the
business premises, the cost of the transport is added to the Trading Stock
account because it increases the total cost of the stock.
In the periodic stock system, however, the cost to transport stock is dealt
with as follows:
A separate expense account is created. This account is debited and
depending on how it was transported, will be called one of the following:
• Carriage on purchases: if stock is transported by road or rail
• Customs duty: a charge at the customs office when stock is imported
• Freight duty: when stock is transported by air or ship
• Import duty: if certain stock is imported, an additional tax is charged
on the import.
This concept is explained in the summary that follows.
5.4 S
ummary of how movement of stock affects
General Ledger
The following summary shows the differences between the accounts that
are affected by the movement of stock in and out of the business.
When stock is bought:
Purchases
Bank
Creditors control
Petty cash
When stock is sold:

Sales
Bank
Debtors control
When stock is returned by a debtor (credit customer):

Debtors Allowances
Debtors control
When stock is returned to a creditor (credit supplier):

Purchases
Creditors control (returned)

When stock is donated and taken for own use (drawings):
Purchases
Donations
Drawings
When stock is transported by road or rail:

Carriage on Purchases
Bank
Creditors control
Risk, control and internal audit of trading stock

There is a high risk involved for any business selling stock. The table below
describes the potential risk, internal control and the internal audit processes
involved in the administration of stock.
Potential risk Internal control Internal audit

• Stock can be stolen Stock in the storeroom must be kept safe to guard against Conduct
theft. Access should be limited to senior staff only. walkthrough tests to
Stock on the shop floor should be tagged. ensure that the controls
are being adhered to.
• Stock records could Stock records should be kept and movement of stock Conduct substantive
be falsified by staff recorded in the proper journal. tests on a
(fraud). Proper authorisation and approvals should be obtained for representative sample
• Stock could be the procurement of stock. of transactions, source
ordered for personal Delivered stock should be compared to the delivery note documents and records
use of staff or the or the purchase invoice and any errors reported. by checking information
owner. There should be separation of duties by staff members. and re-performing
• Stock could become tasks.
Stock taking should take place regularly.
obsolete.
Activity 12.6
Required
Analyse the following transactions as shown in the example below:
Example: The owner took merchandise at cost for personal use.
No. Perpetual stock system Periodic stock system

Account to be Account to be Account to be Account to be
debited credited debited credited
Drawings Trading stock Drawings Purchases

Transactions
1. Purchased stock on credit from a supplier
2. Sold goods on credit to a customer
3. Paid carriage on purchases of stock to a transport business
4. Donated merchandise to a local high school
5. Sold goods to a customer who paid with a credit card
6. A customer returned goods sold to him that were not according to sample.
7. Returned damaged stock to a supplier
5.5 Posting to the General Ledger

Example
Zoot Clothing started trading on 1 September 2019. They sell men’s
and ladies’ clothing and use the periodic stock system. The following
information was found in their books at the end of their first month
of trading.
Cash Receipts Journal of Zoot Clothing for September 2019

Bank Sales Debtors control Discount allowed Sundry accounts
135 000 46 000 25 000 (1 000) 65 000
Cash Payments Journal of Zoot Clothing for September 2019

Bank Purchases Creditors control Discount received Carriage on purchases Sundry accounts
89 650 40 000 18 000 (850) 500 32 000
Petty Cash Journal of Zoot Clothing for September 2019

Petty cash Purchases Stationery Carriage on purchases Sundry accounts
800 480 95 45 180
Debtors Journal Debtors Allowances Journal

Sales Debtors allowances
60 000 1 500
Creditors Journal of Zoot Clothing for September 2019

Creditors control Purchases Equipment Carriage on purchases Sundry accounts
36 000 24 000 6 000 1 800 4 200
Creditors Allowances Journal of Zoot Clothing for September 2019

Creditors control Creditors allowances Equipment Stationery Sundry accounts
5 980 4 000 600 180 1 200

Example continued
General Journal of Zoot Clothing for September 2019

08 Drawings 320 00
Purchases 320 00
(The owner took stock for own use)
22 Donation 100 00
Purchases 100 00
(Donated stock at cost price to the local high school)
Note
Only the ledger accounts used during the purchase and sale of stock
will be shown.
Solution
General Ledger of Zoot Clothing
Nominal accounts
Dr Sales Cr
2019
Sep 30 Bank CRJ 46 000 00
106 000 00
Dr Purchases Cr
2019 2019
Sep 30 Bank CJ 40 000 00 Sep 08 Drawings GJ 320 00
Creditors control CJ 24 000 00 22 Donations GJ 100 00
Petty cash PCJ 480 00 30 Creditors control CAJ 4 000 00
64 480 00 64 480 00
Dr Debtors Allowances Cr
2019
Sep 30 Debtors control DAJ 1 500 00

Example continued
Dr Carriage on Purchases Cr
2019
Sep 30 Bank CPJ 500 00
Creditors control CJ 1 800 00
Petty cash PCJ 45 00
2 345 00
Activity 12.7
Tembisa Dealers sells kitchenware and electrical appliances for cash and on
credit to customers. They buy their stock from suppliers for cash and on credit
and use the periodic stock system of stock control.
Required
Post the subsidiary journals below to the following accounts in the General
The number in brackets Ledger of Tembisa Dealers:
indicates how many lines to Debtors control (6), Creditors control (6), Purchases (8), sales (5), Carriage on
purchases (6), Debtors allowances (4)
Information
The balances and totals below appeared in their books on 1 october 2019:
Debtors control R23 000 Creditors control R37 000
Purchases R270 000 sales R450 000
Carriage on purchases R17 800 Debtors allowances R11 400
The following totals were extracted from the subsidiary journals for october 2019.

26 000 10 600 12 700 (900) 3 600

Bank Purchases Creditors control Discount received Carriage on Sundry accounts
purchases
50 940 15 800 25 700 (3 100) 4 000 8 540
Petty Cash Journal

Petty cash Purchases Stationery Carriage on purchases Sundry accounts
495 160 65 80 190
444 chapter 12 • INVENToRY sYsTEMs

57 000 3 600
Creditors Journal
Creditors control Purchases Repairs Carriage on purchases Sundry accounts
55 760 22 800 11 900 650 20 410

Creditors control Creditors allowances Stationery Sundry accounts
2 900 2 200 100 600
General Journal information

• One of the owners, S Tembisa, took a microwave costing R1 200 as a
birthday present for his wife. This has not yet been entered.
• Stationery purchased for R200 was incorrectly entered as Purchases.
Correct the error.
• A food blender with the cost price of R1 700 was donated to the baby unit at
Red Cross Hospital. No entries have yet been made for this transaction.
Activity 12.8
On 1 November 2019, the General Ledger accounts of Du Toit Traders showed

the following balances, among others:
Debtors control R8 742 Purchases R104 400
Equipment R120 205 Stationery R700
Creditors control R3 508 Debtors allowances R807
Sales R55 150
Required
1. Open the above accounts in the General Ledger with the given balances.
2. Post entries from the journals to the given accounts.
Information
The column totals of the subsidiary journals in the books of Du Toit Traders on
30 November 2019 appear on the next page.

Cash Receipts Journal CRJ Cash Payments Journal CPJ
Bank R124 730 Bank R121 865
Sales R88 800 Purchases R83 225
Debtors control R33 200 Creditors control R25 980
Discount allowed R800 Discount received R650
Sundry accounts R3 530 Debtors control R380
Sundry accounts R12 930
Creditors Journal CJ Creditors Allowances Journal CAJ

Creditors control R86 120 Creditors control R10 795
Purchases R53 310 Creditors allowances R6 240
Equipment R28 230 Equipment R2 370
Packing material R480 Packing material R55
Sundry accounts R4 100 Sundry accounts R2 130
Debtors Allowances Journal DAJ Debtors Journal DJ

Debtors allowances R5 560 Sales R62 480
General Journal GJ
Debtors control Debit R127
Credit R475
Creditors control Debit R132
Credit R350
6. Year-end procedures
At the end of the financial year, the books need to be closed off in order
for the business to establish its financial result and financial position.
The following accounts are drawn up in order to establish the financial
position:
• Trading account
• Profit and Loss account
In the periodic stock system, The Profit and Loss account remains the
same as for a business using the perpetual stock system, except that there
is no Trading Stock Deficit account. The only account that differs is the
Trading account.

6.1 Closing transfers
In this section we will discuss the purpose of the Trading Stock, Opening
Stock and Closing Stock accounts.
The Trading Stock account is used to hold the value of the opening
stock for the accounting period. The closing stock amount of the
previous year becomes the opening stock amount for the current year.
This is the process that is followed:
Trading Stock
Balance b/d (opening stock) Opening stock 1
Closing stock 3
Opening Stock
Trading stock 1 Trading account 2
Closing Stock
Trading account 4 Trading stock
Trading account
Opening stock 2 Sales
Purchases Closing stock 4
Carriage on purchases
Customs duty
Profit and loss (gross profit)
1 At the end of the year, the Balance b/d on the debit side of the
Trading Stock account is transferred to the Opening Stock account.
2 This amount is then transferred immediately to the Trading account.
3 A stock take is done and the closing stock value is determined and
entered into the Trading Stock account and the Closing Stock account.
4 This amount is then transferred immediately to the Trading account.
The other closing transfers are discussed below. This opening stock is
important when doing year-end procedures.
Closing transfers are done in the General Journal and the information
is obtained from the Post-adjustment trial balance. The General Journal is
then posted to the General Ledger.

The following steps must be followed when doing closing transfers to
the Trading account:
1. Close off Debtors Allowances to the Sales account.
2. Transfer the balance in the Trading Stock account to the Opening Stock account.
Close off Opening Stock, Purchases, Carriage on Purchases and Customs Duty
3.
to the Trading account.
Enter the closing stock amount into the Trading Stock account and the
4.
Closing Stock account.
5. Close off Sales and Closing Stock to the Trading account.
6. Calculate the gross profit and transfer to the Profit and Loss account.
6.1.1 C
losing off accounts affected by stock to establish cost of
sales and gross profit
Example
Matsebula Stores have been trading for three years now. They use the
periodic stock system of stock control.
Required
Use the balances, extracted from the Post-adjustment Trial Balance
of Matsebula Stores on 30 November 2019, to complete the closing
transfers in the General Journal and General Ledger.
Information
A stock take revealed that there was R15 000 stock on hand
(closing stock).

Example continued
Balances extracted from the Post-adjustment Trial Balance of

Matsebula Stores on 30 November 2019
Trading stock (opening stock) 25 000 00
Nominal accounts
Sales 143 540 00
Purchases 54 100 00
Customs duty 450 00
1. General Journal of Matsebula Stores for November 2019

28 Sales 1 200 00 1

(Closing transfer)
Opening stock 25 000 00
Trading stock 25 000 00 2
(Opening stock transferred to nominal account)

Trading account 80 150 00
Opening stock 25 000 00
Purchases 54 100 00 3

Customs duty 450 00
(Closing transfer)
Closing stock 15 000 00 4
(Closing stock taken into consideration)

Sales 142 340 00
Closing stock 15 000 00
Trading account 157 340 00 5
(Closing transfer)
Trading account 77 190 00
Profit and loss account 77 190 00 6
(Transfer of gross profit)

Example continued
2. General Ledger of Matsebula Stores

Dr Trading Stock Cr
2018 2019
Dec 01 Balance b/d 25 000 00 Nov 30 Opening stock 2 GJ 25 000 00
2019
Nov 30 Closing stock 4 GJ 15 000 00
Nominal accounts
Dr Sales Cr
2019 2019
Nov 30 Debtors allowances 1 GJ 1 200 00 Nov 30 Balance b/d 143 540 00
Trading account 5 GJ 142 340 00
143 540 00 143 540 00
Dr Purchases Cr
2019 2019
Nov 30 Balance b/d 54 100 00 Nov 30 Trading account 3 GJ 54 100 00
54 100 00 54 100 00
Dr Debtors Allowances Cr
2019 2019
Nov 30 Balance b/d 1 200 00 Nov 30 Sales 1 GJ 1 200 00
Dr Carriage on Purchases Cr
2019 2019
Nov 30 Balance b/d 600 00 Nov 30 Trading account 3 GJ 600 00

Example continued
Dr Customs Duty Cr
2019 2019
Nov 30 Balance b/d 450 00 Nov 30 Trading account 3 GJ 450 00
Dr Opening Stock Cr
2019 2019
Nov 30 Trading stock 2 GJ 25 000 00 Nov 30 Trading account 3 GJ 25 000 00
Dr Closing Stock Cr
2019 2019
Nov 30 Trading account 5 GJ 15 000 00 Nov 30 Trading stock 4 GJ 15 000 00
Final accounts
Dr Trading account Cr
2019 2019
Nov 30 Opening stock 3 GJ 25 000 00 Nov 30 Sales 5 GJ 142 340 00
Purchases 3 GJ 54 100 00 Closing stock 5 GJ 15 000 00
Carriage on purchases 3 GJ 600 00
Customs duty 3 GJ 450 00
Profit and loss 6 GJ 77 190 00
157 340 00 157 340 00
Dr Profit and Loss account Cr

2019
Nov 30 Trading account 6 GJ 77 190 00

6.2 Calculating cost of sales
Example
From the previous example we can calculate cost of sales as follows:
Sales – Gross profit = Cost of sales
R142 340 – 77 190 = R65 150
or
Opening stock R25 000
Purchases R54 100
Carriage on purchases R 600
Customs duty R 450
Goods available R80 150
Closing stock R(15 000)
Cost of sales R65 150
6.3 Determining average profit mark-up

The following formula is used in order to determine the achieved profit
mark-up. Because all goods are marked up differently, the business can
only determine the profit mark-up achieved at the end of the year or after
a stock take. This will be compared with the projected profit mark-up in
order to determine if any stock losses occurred.
Example
Using the values in the previous examples, we can calculate the average
profit mark-up as follows:
Gross profit ___
___________
   ×  100 
Cost of sales 1
77 190 × ___
 ______ 100
65 150    1 
= 118,5% (profit mark-up achieved)
Note
If the projected profit mark-up was 120% then a loss has occurred.
Activity 12.9
Jouba Lights, a business selling lighting, closes off their books on 30 June each
year. They use the periodic stock system. The business is owned by brothers
Michael and Sydney Jouba who have equal share in the business.

Required
1. Open the accounts mentioned below in the General Ledger and post the
subsidiary journals for June 2019 to the relevant accounts.
2. Show the closing transfers in the General Journal for 30 June 2019.
3. Complete the Trading account and transfer the gross profit to the
Profit and Loss account.
4. Calculate the cost of sales and profit mark-up achieved for the year ended
30 June 2019.
Information
The following balances were found, among others, in the books on 1 June 2019:
Trading stock (1 July 2018) R64 250 Debtors allowances R16 720
Sales R1 254 000 Carriage on purchases R34 100
Purchases R895 014
The following totals appeared in the subsidiary journals on 30 June 2019:

81 240 48 700 31 200 1 400 2 740

Bank Purchases Creditors control Discount received Carriage on Sundry accounts
purchases
76 766 44 700 24 000 1 520 840 8 746

60 800 1 870
Creditors Journal
Creditors control Purchases Equipment Carriage on purchases Sundry accounts
40 775 28 960 8 300 1 045 2 470

Creditors control Creditors allowances Equipment Stationery Sundry accounts
6 263 5 800 210 106 147
General Journal
30 Drawings 520 00
Purchases 520 00
(The owner took stock for own use)
Closing stock according to a physical stock take is R47 679.

Activity 12.10
Dube Traders, owned by Saul and Lindiwe Dube, sells antique furniture and
paintings and uses the periodic stock system. Some of their items are imported
from abroad.
Required
Use the information given below to complete the following accounts:
• Trading stock (5 lines)
• Purchases (5 lines)
• Carriage on purchases (4 lines)
• Trading account (7 lines)
Information
The following is an extract from the Pre-adjustment Trial Balance on
28 February 2019, the last day of the financial year.
Debit Credit
Trading stock (20 February 2019) 27 255 00
Purchases 243 455 00
Sales 372 190 00
Carriage on purchases 4 945 00
Customs duty 3 950 00
Donations 2 875 00
Adjustments and additional information

• A painting was donated to the local children’s home on 5 February 2019 for
their auction. The entry was recorded at selling price, R1 520, by mistake.
The cost price is R950.
• No entry has been made of an invoice for R4 000 received from Duncan
Restorers on 26 February 2019. The invoice was for goods purchased R3 610
and for the delivery of the goods, R390.
• On 20 February 2019, Lindiwe withdrew stock at cost for her own use, R575.
The following entry was made in the General Journal:
Debit: Drawings: Lindiwe R575
Credit: Trading Stock R575
• Stock with a cost price of R3 910 was returned to a supplier but was not
recorded in the books.
• Closing stock according to a stock take held on 27 February 2019, R26 400.

Activity 12.11
Bergvliet Pet Store, owned by Tanya Scott and Larissa de Waal, uses the periodic
stock system. They projected that their average profit mark-up on stock would
be 75% on cost.
Required
1. Prepare the following accounts in the General Ledger:
• Trading account (6 lines) (show all workings in brackets)
2. Calculate the mark-up percentage achieved during the year. Show all
workings.
3. The partners are concerned that their sales have dropped over the past year.
Figures for the previous year were:
Sales R300 000
Cost of sales R194 000
Should they be concerned? Comment briefly on the results for 2019.
4. Briefly explain the main advantages of the perpetual stock system over the
periodic stock system.
5. Briefly explain the main advantages of the periodic stock system over the
perpetual stock system.
Information
The following balances appeared in the Pre-adjustment Trial Balance on
30 September 2019, the last day of the financial year:
Trading stock (1 October 2018) R55 000
Sales R290 000
Purchases R166 000
Carriage on purchases R11 000
Carriage on sales R8 000
Other operating expenses R83 000
No entries have been made for the following:

• On 29 September 2019, Tanya Scott took goods for her personal use at
cost, R760.
• An invoice for goods purchased on 29 September 2019 was received from
MT Pet Stockists. The cost price was R2 100 and delivery charges amounted
to R105.
• On 30 September 2019, a physical stock take revealed that trading stock
costing R61 000 was on hand.
• A debtor returned goods with a selling price of R2 450 (cost price R1 400)
on 30 September 2019 (after stock take), which he said he did not order.
The goods were placed back into stock.

Sibusiso and Shahied, the owners of SS Shoe Shop, started trading on 1 January
2019. Entering a very competitive market, they decided to only mark up their
shoes at 68% on the cost price. Since they sell a variety of shoes, they decided
to use the periodic stock system, as it would be easier for them to administer.
At the end of the first financial year they made 67,1 % gross profit on cost of
sales (profit mark-up).
On 31 December 2020, the end of the second financial year, their bookkeeper
presented them with the following Trading and Profit and Loss accounts.
General Ledger of SS Shoe Shop

Final accounts
2020 2020 Sales
Dec 31 Opening stock 211 900 00 Dec 31 (915 000 – 24 230) 1 090 770 00
Purchases 690 350 00 Closing stock 255 000 00
1 345 770 00 1 345 770 00
Dr Profit and loss account Cr

2020 Wages and salaries 2020
Dec 31 (2 shop assistants) 100 800 00 Dec 31 Trading account 433 590 00
Advertising
(newspaper / pamphlets) 25 200 00 Interest on current account 760 00
Insurance (on contents of shop) 8 400 00
Rent expense
(for shop on main road) 43 200 00
Water and lights 9 600 00
Depreciation
(equipment / vehicles) 8 130 00
Interest on overdraft 3 010 00
Interest on loan
(from Main Bank at 13,5% p.a.) 8 100 00
Fuel (owners’ vehicles) 12 000 00
Appropriation 215 910 00
434 350 00 434 350 00

Required
1. Calculate the cost of sales for the year ended 31 December 2020.
2. Calculate the profit mark-up percentage made for the current year.
3. The bookkeeper advised the owners that expenses are too high. Calculate
the percentage expenses on gross profit. Recommend to Sibusiso and
Shahied what they could do in order to improve this situation. Refer to
specific expenses and amounts in your answer.
4. Sibusiso and Shahied want to increase their profit mark-up to 100% on
the cost price in order to increase the net profit. Would you advise them
to do this?
5. Do you think that the business is keeping proper control of their sales? Refer
to the sales and debtors allowances amounts above.
6. Should the owners be concerned about their control of stock? Refer to your
calculation in Question 2 and the intended profit mark-up of 68%.
7. Explain what happens to the appropriation amount of R215 910 in the
Profit and Loss account.
Activity 12.13
The accounting period of Sunshine Café ends annually on the last day of
February, they use the periodic stock system.
Required
1. Use the given information and draw up the following accounts in the
General Ledger of Sunshine Café (close off the accounts):
• Carriage on purchases (4 lines)
• Trading account (6 lines)
2. Calculate the percentage profit on cost price the business earned during the
financial year.
3. The owner is worried about the control over stock. Discuss two methods
how he can improve the internal control over stock.
4. Trading stock should be valued at the lower of cost and net realisable value.
Which GAAP principle states this point?
Information
The following balances appeared in the Pre-adjustment Trial Balance of
Sunshine Café on 28 February 2019:
Trading stock (1 March 2018) R98 000 00
Sales R430 900 00
Purchases R210 765 00
Carriage on purchases R9 775 00
Debtors allowances R12 430 00
Delivery costs on sales R2 276 00

The following transactions have not been recorded:
• According to a physical stock take, stock on hand on 28 February 2019
was R87 640.
• An invoice was received from EP Traders for trading stock purchased.
The cost price of the stock purchased was R4 800 and the railage was R330.
• A debit note was issued to AB Wholesalers, a creditor, for damaged goods
returned by Sunshine Café, R15 470.
• The owner withdrew merchandise at cost for his own use, R690.
• Merchandise was donated to the local children’s home at cost, R1 380.
Seedgrow Seed Traders’ warehouse was destroyed by a fire. On 31 August 2019,

the day after the fire, it was discovered that all the stock had been destroyed,
except for two barrels of seed with a total cost price of R800, which were saved
by the fire department.
The business maintains a gross profit margin of 30% on selling price. The
periodic stock system is in use.
Information
The following information was obtained from the accounting records:
From 1 August to 30 August 2019

Sales: cash R45 000 00
Sales: credit R66 000 00
Purchases: cash R48 000 00
Purchases: credit R36 000 00
Purchases returned R4 500 00
Seed stock on 1 August 2019 R33 000 00
Required
Use a Trading account to show how much the business should claim from the
insurance company.

The transactions below had an effect on the books of Du Toit Stores. Du Toit
Stores make use of the periodic stock system.
Required
Show how the transactions will be recorded in the books of Du Toit Stores.
Indicate which account will be debited and which account will be credited in the
General Ledger, and by which amount. The example shows you what is required.
Example: Paid the telephone account by cheque, R230.
No. Source Journal Account to Account to Amount

document debit credit
e.g. Cheque CPJ Telephone Bank R230
counterfoil
Transactions
1. Purchased trading stock on credit from Rabie Traders for R4 560, as
well as packing material for R680 and received 10% trade discount
on the trading stock. [8]
2. Paid R166 to Speedy Transport for the delivery of the above goods. [5]
3. Returned trading stock worth R340 (after 10% trade discount) and
packing material worth R90 to Rabie Traders, because it was not
according to sample. [7]
4. A debtor, J Maree, purchased trading stock with a cost price of
R360 and a selling price of R720 on credit. [5]
5. Debtor J Maree returned goods with a selling price of R240 because
the size was incorrect. [5]
6. The owner took stock (cost price R460 and selling price R920) for
own use. [5]

Required
Use the following information to complete the General Ledger of Mike Traders,
owned by Mike and Sandy Lotter:
• Trading stock (3 lines) [6]
• Purchases (6 lines) [15]
• Carriage on purchases (4 lines) [6]
• Trading account (6 lines) [12]
Information
Mike Traders’ financial year ends on 30 June every year.
Extract from Pre-adjustment Trial Balance on 30 June 2019

Debit Credit
Trading stock (1 July 2018) 28 620 00
Sales 436 255 00
Donations 3 375 00
The following transactions on 30 June 2019 must still be recorded:

• Trading stock was donated to the local children’s home at cost price, R1 200.
• An invoice was received from Blue Stores contains the following:
Trade discount (20%) R1 080
R4 320
Delivery costs R 400
R4 720
• Returned stock with a cost price of R4 590 to a supplier but did not record in
the books.
• The owner, Mike, withdrew trading stock at cost price for own use, R675.
• Trading stock at hand on 30 June 2019, R30 980.

Chapter 13
Value-added Tax (VAT)
• understand the basic principles of VAT
• perform the following VAT calculations using the current rate:
■ add VAT to cost price plus mark-up amount
■ extract VAT from VAT-inclusive amounts
• explain the difference between the invoice basis and payments basis of
accounting for VAT
• describe the effect of VAT on bad debts, discounts and goods returned
• integrate ethical, internal control and internal audit issues relating
to VAT.
Key concepts
• VAT rates • standard rate • exempt items • zero-rated • output tax • input tax • VAT
payable to SARS • value-added • VAT inclusive amount • tax periods • VAT 201 return form
• invoice basis • payments basis • tax invoice • VAT adjustments • VAT fraud
Here’s your tax invoice, showing

the price before VAT of R200,
the VAT amount of R28 and the
price including VAT of R228.
Thank you so much.

Please just charge it to
my credit card.
V alue - added Tax ( V AT ) • c h a p t e r 1 3 461

1. Basic principles of VAT
Although the main focus of this chapter will be on VAT calculations,
it is essential that you first have a thorough understanding of the basic
principles of VAT.
1.1 Introduction
Value-added tax, commonly known as VAT, is the tax that is charged
whenever goods are sold or services are rendered, by a registered VAT
vendor. A registered VAT vendor is a vendor (business enterprise) 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 annual income is in excess of R50 000.
1.2 VAT rates

In general, VAT is charged at a rate of 14% (currently) of the normal
selling price (or service price) of the goods or services. This rate is known
as the standard rate.
There are, however, certain goods and services that are exempt from
VAT altogether, while for others VAT is charged at 0% (zero-rated).
Exempt items are goods or services on which VAT is not charged
at either the standard rate or zero rate. Examples of some of the more
commonly known exempt items are:
• financial services
• rental of a private residence
• transportation of people by road or rail
• educational services when supplied by the State.
Zero-rated items are goods or services which are taxed at a rate of 0%.
These items comprise mainly of basic foodstuffs and certain exports.
Examples of some of the more commonly known zero-rated items are:
• brown bread, maize products and rice
• milk, milk powder, milk blends
• fruit and vegetables
• lentils, dried beans and legumes
• vegetable oil
• eggs
• canned pilchards
• export of moveable goods
• petrol and diesel
• international transport of passengers and goods
462 c h a p t e r 1 3 • V alue - added Tax ( V AT )

1.3 How does VAT work?
Registered VAT vendors are responsible for collecting VAT from their
customers or clients on behalf of the South African Revenue Services
(SARS). This means that whenever a registered VAT vendor sells a
product or provides a service, VAT must be included in the price charged
to the customer or client.
Since VAT is included in the selling price (or service price) charged to
the customer, it is ultimately the customer who pays VAT. It follows that
whenever we purchase something (from a registered VAT vendor) we are
actually paying the VAT. The business enterprise is merely collecting this
VAT and passing it on to the South African Revenue Services.
The VAT collected by the VAT vendor is called output tax.
1.3.1 Output tax

Output tax is the VAT charged by a business enterprise when it sells
goods or renders services. The price that the customer is charged for
the goods or services includes the output tax. The following example
illustrates how a business enterprise would calculate the price to charge
its customer inclusive of VAT (output tax).
Example
Jomo Traders, a registered VAT vendor, sells T-shirts and uses a fixed
mark-up of 100% on cost. The T-shirts are bought from a factory at
R50 each.
1. Calculate the price that a customer must pay for a T-shirt (that is,
the selling price).
2. How much VAT (output tax) is included in the selling price?
Solution
1. Cost price per T-shirt R50
Add: Mark-up (R50 100%)
× R 50
Selling price exclusive of VAT R100
Add: VAT (R100 × 14%) R 14
Selling price inclusive of VAT R114
2. R14 VAT (output tax) is included in the selling price.

The flow of output tax
OUTPUT: Goods sold to customer
Customer
Payment received from customer = R114

Including VAT (output tax) = R14
1.3.2 Input tax

Input tax is the VAT charged to or paid by a business enterprise in
acquiring goods or services from another VAT vendor. The input tax is
included in the cost of the goods or services.
The business enterprise will be charged input tax when it purchases
trading stock, stationery, packing materials, equipment, and so on.
Input tax is also charged for services received by the business
enterprise such as repairs, legal fees, telephone bills etc.
In the previous example, Jomo Traders collected R14 VAT (output
tax) for every T-shirt sold. It is important to realise, however, that Jomo
Traders will be charged VAT on goods or services received from another
registered VAT vendor. In this case, Jomo Traders acts as the “customer”
and pays VAT (input tax) to the other vendor. This is illustrated in the
following example:
Example
Jomo Traders pays R1 140 to place an advertisement in the local
newspaper (a registered VAT vendor). How much VAT (input tax) is
included in the amount paid?
Solution
14%
VAT (input tax) = R1 140 ×  _____
114% = R140

The flow of input tax
INPUT: Advertising in newspaper
Payment made for advertising = R1 140

Including VAT (input tax) = R140
A business enterprise can therefore be both a “payer” of VAT and

a “charger” of VAT. The terms input tax and output tax are used to
distinguish between these two types of VAT. Input tax is the VAT
paid by a registered VAT vendor on its purchases (“inputs”) from
another registered VAT vendor, while output tax is the VAT charged
by a registered VAT vendor to its customers for its goods or services
(“outputs”).
1.3.3 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 claims his input tax
against his output tax. In other words, the amount of VAT that must be
paid to SARS by the business enterprise is calculated by subtracting the
input tax paid from the output tax charged. In equation form:
VAT payable = Output tax – Input tax
Note
If the input tax exceeds output tax for any period, then the vendor is
entitled to claim the difference as a VAT refund from SARS.
The following example illustrates the difference between input tax and
output tax and shows how to calculate the VAT payable to SARS:

Example
Rodney Bass is the owner of Rodney’s Tackle and Bait Fishing Store,
a registered VAT vendor. The following transactions were recorded
during January 2017:
a. Sold bait for R57 (including R7 VAT)
b. Paid for advertising, R342 (including R42 VAT)
c. Bought trading stock (fishing rods) for R2 565 (including R315 VAT)
d. Sold a fishing rod and bait for R3 420 (including R420 VAT)
e. Paid the electricity bill, R855 (including R105 VAT)
f. Sold fishing accessories R2 280 (including R280 VAT)
Required
1. Compile a table showing input tax and output tax from the
transactions for January 2017.
2. Calculate the amount of VAT payable to SARS for January 2017.
Solution
1. Table showing input tax and output tax for January 2017:
Transaction Input tax Output tax

a. R7
b. R42
c. R315
d. R420
e. R105
f. R280
Totals R462 R707
2. VAT payable to SARS = Output tax – Input tax

= R707 – R462
= R245

The flow of input tax and output tax
INPUT: Goods and services acquired OUTPUT: Goods sold

(advertising, trading stock and electricity) (bait, fishing rod and fishing accessories)
INPUT TAX = R462 OUTPUT TAX = R707
VAT payable to SARS: Output tax – Input tax

(R707 – R462 = R245)
As a matter of interest only – on the next page is an example of a VAT

return form (VAT 201) using the information from the previous example.


1.4 Why value-added?
In order to understand why this tax is called value-added tax, we will use
the following example.
Example
A retailer (a registered VAT vendor) purchases a product for R171 from
a manufacturer and then sells it for R228, as shown in the following
table:
Price (inclusive of VAT) VAT Price (exclusive of VAT)
Purchase price R171 R21 R150
Selling price R228 R28 R200
Required
1. Calculate the amount of VAT payable to SARS.
2. Calculate the mark-up amount added by the retailer to get the
selling price. (Use the prices exclusive of VAT.)
3. Calculate the VAT (at 14%) on the mark-up amount.
Solution
1. VAT payable to SARS = Output tax – Input tax
= R28 – R21
= R7
2. Mark-up amount = R200 – R150 = R50
3. VAT on mark-up amount = R50 × 14% = R7
In the example above, we see that the VAT payable to SARS (R7) is equal
to the VAT calculated on the mark-up amount. This is no coincidence;
the mark-up amount is actually the “value” which the retailer “added” to
the product to arrive at the selling price and it is the VAT on this amount
that the retailer is responsible for paying. Thus, the VAT that the retailer
must pay to SARS is equal to 14% of the “value” he “added” to the
product, hence the name “value-added tax”.
Also note that SARS will ultimately receive the VAT on the final selling
price, R28. This is made up of the R21 VAT that the manufacturer
collects from the retailer plus the R7 VAT from the retailer.

1.5 H
ow does SARS benefit from the value-added
tax system?
The benefit of this system to SARS is that they don’t have to wait for
the product to be sold to the end customer before receiving tax. Tax is
collected and passed on to SARS as the product is sold from the supplier
of raw materials to the manufacturer; and then to the wholesaler; then
on to the retailer; and finally to the customer. The collection of VAT
throughout the production and distribution chain is illustrated in the
diagram below.
Output tax –
VAT vendor VAT payable
Input tax
Supplier
Sells raw material to R28 – 0 R28
manufacturer, R228
Manufacturer
Sells manufactured
R84 – R28 R56
product to
wholesaler, R684
Wholesaler
Sells products to R105 – R84 R21
retailer, R855
Retailer
Sells product to R140 – R140 R35
customer, R1 140
Total VAT payable

R140
to SARS

Activity 13.1
Answer the following questions on the basic principles of VAT:

1. What does VAT stand for?
2. What is VAT?
3. Explain the difference between compulsory and voluntary registration
for VAT.
4. At what rate (percentage) is VAT currently charged?
5. What are VAT-exempt items?
6. Give two examples of VAT-exempt items.
7. What are zero-rated items?
8. Give three examples of zero-rated items.
9. Briefly, explain the difference between input tax and output tax.
10. Write down an equation used to calculate the amount of VAT payable to SARS.
11. Briefly, explain the relevance of VAT being called “value-added” tax.
12. How does SARS benefit from the system used to collect VAT?
2. VAT calculations
There two types of VAT calculations which you should be able to perform.
2.1 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 mark-up, before VAT has been added. You are required to
calculate the selling price inclusive of VAT (incl. VAT). You must first
calculate the selling price exclusive of VAT (excl. VAT).
There are two methods you can use:
• The two-step approach: here you calculate the VAT at 14% and then
add it to the price (excl. VAT).
Step 1 Calculate the VAT, from the price (excl. VAT), using the
following formula:
VAT = Price (excl. VAT) × 14%
Step 2 C
alculate the price (incl. VAT) by adding the VAT calculated in
Step 1 to the price (excl. VAT):
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 R100 and a mark-up of 50% on cost. (Use the two-step
approach.)
Solution
Price (excl. VAT) = R100 + (R100 × 50%) = R150
VAT = Price (excl. VAT) × 14% Step 1
= R150 × 14%
= R21
Price (incl. VAT) = Price (excl. VAT) + VAT Step 2
= R150 + R21
= R171
• 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 (see mathematical derivation below).
Example
Calculate the selling price of a product inclusive of VAT, given the
cost price of R100 and a mark-up of 50% on cost. (Use the one-step
approach.)
Solution
Price (excl. VAT) = R100 + (R100 × 50%) = R150
114 
Price (incl. VAT) = Price (excl. VAT) × ___
 100
114 
= R150 × ___
 100
= R171

The following shows the mathematical derivation of the formula used to
calculate the VAT inclusive price directly (for enrichment only):
Price (incl. VAT) = Price (excl. VAT) + VAT [But: VAT = Price (excl. VAT) × 14%]
∴ Price (incl. VAT) = Price (excl. VAT) + Price (excl. VAT) × 14%
14
∴ Price (incl. VAT) = Price (excl. VAT) + Price (excl. VAT) × ____
 100 
  14  )
∴ Price (incl. VAT) = Price (excl. VAT) × (1 + ____
100
100
∴ Price (incl. VAT) = Price (excl. VAT) (   + ____
× ____   14  )
100 100
114
∴ Price (incl. VAT) = Price (excl. VAT) ×  ____
100
2.2 Extracting VAT from the VAT-inclusive amount

Here you are given the selling price of a product (or service) including
VAT and you are required to calculate the amount of VAT included in
this price. Once again there are two methods you can use:
• The two-step approach: here you calculate the price (excl. VAT) and
then subtract it from the price (incl. VAT) to get the amount of VAT
included.
Step 1 Calculate the price (excl. VAT) from the price (incl. VAT).
The method used to perform this calculation is derived from the
formula used above:
114
Price (incl. VAT) = Price (excl. VAT) × ____
 100 
By manipulating this equation, we can make the price (excl. VAT) the
subject of the equation, to get:
100
Price (excl. VAT) = Price (incl. VAT) × ____
 114 
Step 2 C
alculate the amount of VAT included, by subtracting the
price (excl. VAT) from the price (incl. VAT):
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 R342. Calculate the
amount of VAT included in the price. (Use the two-step approach.)
Solution
100
Price (excl. VAT) = Price (incl. VAT) ×  ___
114  Step 1
100 = R300
= R342 × ___
 114
VAT = Price (incl. VAT) – Price (excl. VAT) Step 2
= R342 – R300
= R42
• The one-step approach: here you calculate the amount VAT included
directly from the price (incl. VAT), using the formula below:
14
VAT = Price (incl. VAT) × ____
 114 
Note
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 (see
mathematical derivation after the next example).
Example
The selling price of a product inclusive of VAT is R342. Calculate the
amount of VAT included in the price. (Use the one-step approach.)
Solution
VAT = Price (incl. VAT) × ___14  
 114
= R342 × ___ 14  
 114
= R42

The following shows the mathematical derivation of the formula
used to extract the VAT directly from the VAT inclusive price
(for enrichment only):
VAT = Price (incl. VAT) – Price (excl. VAT)

100
[But: Price (excl. VAT) = Price (incl. VAT) × ____
 114 
100
∴ VAT = Price (incl. VAT) – Price (incl. VAT) × ____
 114 
 100 )
∴ VAT = Price (incl. VAT) × (1 – ____
114
114
∴ VAT = Price (incl. VAT) (   – ____
× ____  100 )
114 114
14
∴ VAT = Price (incl. VAT) × ____
 114
Activity 13.2
Calculate the selling price inclusive of VAT for each of the following:
1. Cost price of R200 and a mark-up of 50% on cost
4. Cost price of R150 and a mark-up of 33 __13 % on cost
Activity 13.3
Calculate the amount of VAT included in each of the following (round off to the
nearest cent where necessary):
1. A loaf of white bread sold for R4,56
2. A pair of shoes sold for R250,80
3. A cricket bat sold for R741
4. A newspaper sold for R8,15
5. A bicycle sold for R1 995
Activity 13.4
Copy and complete the table below. First work alone and then compare your
answers with a partner. Discuss any answers that are different and make the
necessary corrections.
No. Cost price % mark-up on Selling price VAT Selling price
cost (excl. VAT) (at 14%) (incl. VAT)
1. R250 100%
2. R300 R400
3. R4 200 R5 985
4. 150% R250
5. 100% R140

Activity 13.5
A friend of yours, William Gates, owns Bill’s Computer Suppliers, which is a

registered VAT vendor. The business buys and sells computer hardware. While
working on his VAT returns, William accidentally set fire to some invoices and
cash sales slips and is now unable to read various figures recorded on those
documents. He asks you to help him calculate the missing figures on the
invoices and cash sales slips provided.
INVOICE 1
Tax invoice: Invoice No. 223 Date: 2 May 2017

From: Bill’s Computer Suppliers
To: CBA Data Company
Description Amount
2 × HP Laser Printers R6 000 00
VAT @ 14% ?
Total ?
INVOICE 2

To: Sea View Hotels
Description Amount
2 × Dell Laptops ?
VAT @ 14% R2 100 00
Total ?
INVOICE 3

To: CompuStudy CC
Description Amount
18 × Compaq 17 inch monitors ?
VAT @ 14% ?
Total R13 680 00

InVOICE 4

To: Learn-well High School
Description Amount
10 × Mecer keyboards R6 000 00
10 × HP Genius mouse ?
Sub-total ?
VAT @ 14% R490 00
Total ?
Bill’s Computer Supplies Bill’s Computer Supplies

.............................. ..............................
Cash sales slip 323 Cash sales slip 334
Total (excl. VAT) R56,00 Total (excl. VAT) ?
VAT @ 14% ? VAT @ 14% ?
Total (incl. VAT) ? Total (incl. VAT) R90,06
Bill’s Computer Supplies

..............................
Cash sales slip 351
Total (excl. VAT) ?
VAT @ 14% R21,35
Total (incl. VAT) ?
V A L U E - A D D E D TA X ( V AT ) • c h a p t e r 1 3 477

3. Further principles of VAT
Registered VAT vendors are legally required to perform certain duties.
For example, VAT vendors must:
• ensure that they collect VAT on all taxable transactions
• submit VAT returns within the required tax period
• make VAT payments on time and where required
• issue legitimate tax invoices.
3.1 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.
• 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.

3.2 Submissions 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. They do this 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 460.
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.
Example
A vendor, who is registered with a Category A tax period, collects
output tax of R15 000 during February and March 2016; and incurs
input tax of R11 500 during the same two-month period.
1. Determine the amount of VAT payable to SARS for the tax period
ending 31 March 2016.
2. By what date is the vendor required to submit the VAT 201 return
and make the VAT payment to SARS?
Solution
1. VAT payable to SARS for the tax period ending 31 March 2016
= R15 000 – 11 500 = R3 500
2. The VAT 201 return must be submitted and the VAT payment must
be made to SARS by no later than 25 April 2016.
Vendors who fail to make their VAT payments on time will be liable for
a penalty equal to 10% of the amount owing and will also be charged
interest on the outstanding amount.
3.3 Accounting basis

In South Africa, the standard method used to account for VAT is called
the invoice basis. This means that vendors are generally required to
account for VAT on the basis of invoices being issued or received.
However, under certain circumstances vendors may be authorised to
use an alternative method, known as the payments basis. This method
allows vendors to account for VAT based on actual payments being made
and received.

These two methods are discussed in more detail below.
3.3.1 Invoice basis

In general, the invoice basis requires vendors to account for VAT based
on the tax period in which invoices are issued or received. Thus 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. Similarly,
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. Since this method of
accounting for VAT follows the accrual approach, it is also often referred
to as the “accrual basis”.
• VAT on credit purchases can be • VAT on credit sales is included
deducted before payment is before payment is received
made to creditors. from debtors.
• It is relatively easy to calculate • It can lead to cash flow
and administer. problems.
As mentioned previously, all vendors are required to use the invoice basis
to account for VAT unless they have been specifically authorised to use
the payments basis.
3.3.2 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. Similarly, 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.
Since this method of accounting for VAT is based on the actual
receipts and payments of “cash”, it is also often referred to as the
“receipts basis” or “cash basis”.
The payments basis of accounting for VAT is generally intended to
help small businesses and is only available to:
• vendors who are natural persons with an annual turnover of less
than R2,5 million
• public authorities, certain municipal entities, non-profit associations
and welfare organisations

• VAT on credit sales is only • VAT on credit purchases
included when payment is can only be deducted after
received from debtors. payment is made to creditors.
• It can assist cash flow. • It can be more difficult to
calculate and administer.
The following example illustrates the fundamental difference between

the two methods of accounting for VAT.
Example
ABC Traders is a VAT vendor registered with a Category B tax period.
The table below shows a summary of the transactions of ABC Traders
for the tax period January to February 2016.
Amount including VAT VAT amount
Total sales (invoices issued) R34 200 00 R4 200 00
Total cash receipts R20 520 00 R2 520 00
Total purchases (invoices received) R28 500 00 R3 500 00
Total cash payments R22 800 00 R2 800 00
Required
Determine the amount of VAT payable to SARS for the tax period
January to February 2016, if ABC Traders accounts for VAT using the:
1. invoice basis
2. payments basis.
Solution
1. Invoice basis 2. Payments basis

Output tax R4 200 00 R2 520 00
Input tax R3 500 00 R2 800 00
VAT payable/(refundable) R700 00 (R280 00)

Activity 13.6
1. Match each of the tax period categories in Column A with the most
appropriate description in Column B. Write down only the numbers (1. to 6.)
and the corresponding letters (e.g. 1.1 – A.).
Column A: Column B:
Tax period categories Descriptions
A one-month period, generally allocated to vendors with an annual
1.1 Category A A.
turnover in excess of R30 million
A twelve-month period, only allocated to companies or trust funds that
1.2 Category B B.
meet very specific requirements
A four-month period ending on the last day of June, October and February,
1.3 Category C C. solely allocated to small businesses with an annual turnover of less than
R1,5 million
A two-month period ending on the last day of February, April, June,
1.4 Category D D.
August, October and December
A two-month period ending on the last day of January, March, May, July,
1.5 Category E E.
September and November
A six-month period ending on the last day of February and August,
1.6 Category F F. specifically for farmers and farming enterprises with an annual turnover of
less than R1,5 million
We work with tax invoices every day.

2. What form must vendors use to submit their VAT returns to SARS?
3. By which day of the month must vendors submit VAT returns and pay VAT?
4. What two measures are taken against vendors who fail to make their VAT
payments on time?
5. Briefly explain the difference between the invoice basis and payments basis
of accounting for VAT.
6. Provide another term that is used to refer to the invoice basis of accounting
for VAT.
7. List two other terms that are used to refer to the payments basis of
accounting for VAT.
8. List two advantages and two disadvantages of using the invoice basis of
accounting for VAT.
9. List two advantages and two disadvantages of using the payments basis of
accounting for VAT.
3.4 Tax invoices

In order to claim input tax, a vendor must be in possession of a valid tax
invoice. A tax invoice is a document that contains certain specific details
as prescribed in the VAT Act. This document is used to support the input
tax claim and provides evidence of the transaction on which the tax claim
is based. Vendors are required to retain tax invoices for a period of at least
five years.
A full tax invoice must be issued on transactions that exceed R3 000,
while an abridged tax invoice may be used to support transactions of
less that R3 000. A tax invoice is not required for transactions of R50 or
less. However, such transactions should be supported by a valid source
document (such as a cash register slip or sales slip) indicating the amount
of VAT charged.
A full tax invoice must contain the following details:
• The words “TAX INVOICE” in a prominent place
• Name, address and VAT registration number of the supplier
• Name, address and VAT registration number (if applicable) of the
recipient
• Serialised invoice number
• Date of issue of the tax invoice
• Full and accurate description of goods or services supplied
• Quantity or volume of goods or services supplied
• Price and VAT
An abridged tax invoice must contain the same details as a full tax invoice,
except that the following does not need to be specified:
• Name, address and VAT registration number (if applicable) of the
recipient
• Quantity or volume of goods or services supplied

An example of a full tax invoice is shown below:
Name and address Invoice No. 2016/0191

of the supplier
TAX INVOICE
Tax invoice number
From: Nomsa (serialised)
Wholesalers
7 Factory Road
Ottery VAT number of Date of the tax invoice
6717 the supplier
VAT No. 345123475 Date: 17 February 2016
To: Stofile Stationers Name and address

2 Main Road of the recipient
Quantity
Cape Town Accurate description or volume
8001 of goods or services supplied
VAT number of supplied
VAT No. 266557091 the recipient
DATE DESCRIPTION QUANTITY AMOUNT

17/02/2016 Rexel staplers N16 @ R30 each 30 R900
Bantex paper punches P012 @ R20 each 40 R800
Mondi Rotatrim printer paper A4 160g @ R12 each 50 R600
Selling price
R2 300
VAT@14% R322 VAT
TOTAL R2 622 charged
Total price
The following two alternative methods can also be used to reflect the
price and VAT on the tax invoice:

17/02/2016 Rexel staplers N16 @ R30 each 30 R1 026
Mondi Rotatrim printer paper A4 160g @ R12 50 R684
each
TOTAL R2 622
Statement that the price
includes VAT and the
Purchase price includes VAT @ 14% Total price charged
rate of VAT charged

17/02/2016 Rexel staplers N16 @ R30 each 30 R1 026
Mondi Rotatrim printer paper A4 160g @ R12
50 R684
each
TOTAL R2 622
Total price charged VAT R322
included
Amount of VAT included
Activity 13.7
The following partially completed tax invoice was issued by Cellular Warehouse
(Pty) Ltd to Cele Cellphone Stores on 8 August 2016.
Required
Use the information provided, together with the additional information given
below, to complete this tax invoice in your workbook.
Invoice No.: _____________

TAX INVOICE
From: ____________________ Date: _____________
____________________
____________________
____________________
To: ____________________
____________________
____________________
____________________

Vodafone 252 Oscar @ R75 each 40 R3 420
Nokia 1280 @ R100 each 25 ?
Samsung E250 @ R250 each ? R5 700
Nokia 5130 Xpress Music @ ? each 10 R4 560
BlackBerry Curve 9300 @ R1 500 each 6 ?
TOTAL ?
VAT included ?

• Cellular Warehouse (Pty) Ltd, a registered VAT vender (VAT registration
number: 4030251382), is located at 17 Cell Park, Johannesburg, 2001.
• Cele Cellphone Stores is a registered VAT vender (VAT registration number:
6578236575) and traders from a shop at 28 Maseru Street, Orlando,
Soweto, 1840.
• The previous tax invoice issued by Cellular Warehouse (Pty) Ltd was invoice
number 1004764.
4. VAT adjustments
As a result of certain transactions, vendors may be required to make
VAT adjustments in order to reverse the effect of input tax or output
tax that had been accounted for previously. Such adjustments may be
required when:
• a debt is written off as irrecoverable (bad debts)
• discount is allowed or received for prompt settlement of an account
• goods are returned by a customer or to a supplier (a debit or credit
note is issued or received).
We will look at the effect of each of these transactions on the amount
of VAT payable by the vendor and also discuss the VAT adjustment that
is required in each case. In this section we will assume that the vendor
accounts for VAT on the invoices basis, unless otherwise specified.
4.1 Bad debts

As you learnt in Grade 10, bad debts occur when a debtor becomes
insolvent or cannot be traced and the vendor then decides to write off
the debt as irrecoverable. Remember that a debt originates when a
vendor sells goods (or provides services) on credit to the debtor. The VAT
amount on the invoice issued to the debtor is accounted for as output tax
by the vendor. This increases the amount of VAT payable by the vendor.
If the debt is subsequently written off as irrecoverable, then the VAT
component of the amount written off will not actually be received by
the vendor. The vendor is thus entitled to account for this by making an
adjustment that will decrease the amount of VAT payable. The method
used to account for this depends on the timing of these transactions:
• In the unlikely event that the debt goes bad during the same tax
period as it originated, then the vendor can either set off (subtract)
the VAT component of the amount written off against the output
tax for the tax period, or include the VAT component of the amount
written off as input tax for the tax period.

• Normally a debt will only be written off after the tax period in which
it originated; in this case the vendor must account for this by including
the VAT component of the amount written off as input tax for the tax
period in which the debt was written off.
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.
Example
Odwa Traders, a VAT vendor registered with a Category A tax period,
uses the invoice basis to account for VAT.
On 23 March 2016, Odwa Traders sold goods on credit to a
customer for R1 140 (including VAT of R140) and issued a tax invoice
to the customer.
Solution
• Odwa Traders will account for the VAT of R140 as output tax in the
VAT return submitted during April 2016.
Transaction Input tax Output tax VAT payable to SARS

Sold goods on credit to customer + R140 + R140
Example continued
In May 2016, the customer (debtor) was declared insolvent and Odwa
Traders decided to write off the entire debt as irrecoverable.
Solution
• This means that Odwa Traders will not actually receive the R140
output tax that had already been included in the April VAT return.
• In order to account for this, Odwa Traders will make a VAT
adjustment by including the R140 as input tax on the VAT return
submitted in June 2016.

Debt written off as irrecoverable + R140 – R140
In the example above, if Odwa Traders had been registered to account for
VAT on the payments basis, then this adjustment would not be required.
Remember that on the payments basis, output tax is only accounted for
when the vendor actually receives payment from the debtor. Since the
debtor never actually settled his debt with Odwa Traders, no output tax
would have been processed on the original transaction and thus no VAT
adjustment would be required when the debt is written off.

Furthermore, if Odwa Traders subsequently receives payment from
this customer after the debt had been written off (bad debts recovered),
then Odwa Traders must account for the VAT on the amount received as
output tax in the tax period in which the payment was received.
4.2 Discount allowed

Vendors regularly allow discounts to debtors who settle their accounts
promptly. As mentioned previously, when a vendor sells goods on credit
he must account for the VAT amount on the invoice as output tax for
the tax period during which the invoice was issued. This increases the
amount of VAT payable by the vendor. If the vendor subsequently allows
the debtor a discount, then the vendor will not actually receive the full
amount owing and will thus also not receive the total amount of output
tax that was accounted for originally. The vendor must thus make an
adjustment to decrease the amount of VAT payable.
The method used to account for this depends on the timing of
these transactions:
• If the discount is allowed during the same tax period as the invoice
was issued, then the vendor can either set off (subtract) the VAT
on the discount amount against the output tax for the tax period, or
include the VAT on the discount amount as input tax for tax period.
• If the discount is allowed after the tax period in which the invoice
was issued, then the vendor must include the VAT on the discount
amount as input tax for tax period in which the discount took place.
VAT payable.
Example
On 23 March 2016, Odwa Traders sold goods on credit to a
customer for R1 140 (including VAT of R140) and issued a tax invoice
to the customer.
Solution
• Odwa Traders will account for the VAT of R140 as output tax in the
VAT return submitted during April 2016.

Sold goods on credit to customer + R140 + R140

Example continued
On 3 May 2016, the customer (debtor) settled her account and Odwa
Traders allowed her a 5% discount for paying promptly (within 45
days). The discount amounted to R57, including VAT of R7.
Solution
• This means that Odwa Traders will not actually receive the full R140
output tax that had already been included in the April VAT return.
Example continued
adjustment by including the R7 as input tax on the VAT return

Discount allowed to customer + R7 – R7
In the example above, if the customer had settled her account before the
end of March 2016, Odwa Traders could have set off the R7 against the
R140 output tax and then only included R133 as output tax in the VAT
return submitted during April 2016.
4.3 Discount received

A similar approach is followed when a vendor receives a settlement
discount from a supplier (creditor). However in this case, the VAT on the
original transaction (credit purchases) would be accounted for as input
tax. The input tax decreases the amount of VAT payable by the vendor.
If the vendor subsequently receives a discount from the supplier, then the
vendor will not actually pay the full amount owing to the supplier.
Therefore, the vendor will also not actually be paying the total
amount of input tax that was accounted for originally. Thus the vendor
must make an adjustment to increase the amount of VAT payable.
The method used to account for this depends on the timing of these
transactions:
• If the discount is received during the same tax period as the invoice
was received, then the vendor can either set off (subtract) the VAT
on the discount amount against the input tax for the tax period, or
include the VAT on the discount amount as output tax for tax period.
• If the discount is received after the tax period in which the invoice
was received, then the vendor must include the VAT on the discount
amount as output tax for tax period in which the discount took place.

the net effect will be the same, namely, an increase in the amount of
VAT payable.
4.4 Goods returned by a customer (debtors allowances)

A vendor may receive a debit note from a debtor when the debtor returns
goods or requests an allowance. The vendor, in turn, will issue a credit
note to confirm that the allowance has been granted.
The vendor will then decrease the debtor’s account by the allowance
amount. Bear in mind that the vendor would have accounted for the
output tax when the invoice for original credit sales transaction was
issued, thereby increasing the amount of VAT payable by the vendor.
However, this output tax includes the VAT portion of the allowance
amount that will not actually be received by the vendor. The vendor must
thus make an adjustment to decrease the amount of VAT payable.
Once again, the method used to account for this depends on the
timing of these transactions:
• If the credit note is issued during the same tax period as the invoice
was issued, then the vendor can either set off (subtract) the VAT on
the allowance amount against the output tax for the tax period, or
include the VAT on the allowance amount as input tax for tax period.
• If the credit note is issued after the tax period in which the invoice
was issued, then the vendor must include the VAT on the allowance
amount as input tax for tax period in which the allowance was made.
VAT payable.
4.5 Goods returned to a supplier (creditors allowances)

A vendor will issue a debit note to a supplier (creditor) 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.
To account for the allowance, the vendor decreases the creditor’s
account by the allowance amount. Remember that the vendor would
have already accounted for input tax when the invoice for original credit
purchases transaction was received, thereby decreasing the amount of
VAT payable by the vendor. However, this input tax includes the VAT
portion of the allowance amount that will not actually be paid by the
vendor. The vendor must thus make an adjustment to increase the
amount of VAT payable.
As discussed previously, the method used to account for this depends
on the timing of these transactions:

• If the credit note is received during the same tax period as the invoice
was received, then the vendor can either set off (subtract) the VAT
on the allowance amount against the input tax for the tax period, or
include the VAT on the allowance amount as output tax for tax period.
• If the credit note is received after the tax period in which the
invoice was received, then the vendor must include the VAT on the
allowance amount as output tax for tax period in which the allowance
was received.
the net effect will be the same, namely, an increase in the amount of
VAT payable.
Example
On 28 March 2016, Odwa Traders bought goods on credit from
a supplier for R11 400 (including VAT of R1 400) and received a tax
invoice from the supplier.
Solution
• Odwa Traders will account for the VAT of R1 400 as input tax in
the VAT return submitted during April 2016.

Bought goods on credit from supplier + R1 400 – R1 400
Example continued
On 4 April 2016, Odwa Traders issued a debit note to the supplier
reflecting the value of damaged goods returned as R5 700 including
VAT of R700. On the same day, Odwa Traders received a credit note
from the supplier confirming that the allowance had been granted.
Solution
• This means that Odwa Traders will not actually end up paying the
supplier the full R1 400 of input tax that was already included in the
April VAT return.
adjustment by including the R700 as output tax on the VAT return

Damaged goods returned to supplier + R700 + R700

Activity 13.8
Required
Show the effect of the following transactions on the amount of VAT that will be
payable by the vendor to SARS. For each transaction, show the amount of VAT
and whether it will increase or decrease the amount of VAT payable to SARS.
All the amounts include VAT at 14%.
Example: Goods sold for cash, R2 280

Effect on the amount of VAT payable to SARS
No. Workings
Decrease (–) Increase (+)
E.g. R280   14 = R280

R2 280 × ___
114
Transactions
1. Sold goods on credit to a customer, G Gadla, for R1 710.
2. Bought goods on credit from a supplier, Sisulu Wholesalers, R2 850.
3. Paid the telephone account, R855.
4. Received R741 from a debtor whose account had previously been written
off as irrecoverable.
5. A debtor, B Maku, settled his account of R1 824 less 5% discount.
6. Returned damaged goods to Sisulu Wholesalers and received a credit
note, R399.
7. A debtor, I Knott-Pay, was declared insolvent and his debt of R798 was
written off as irrecoverable.
8. Issued a credit note to G Gadla who returned damaged goods, R319,20.
9. Paid Sisulu Wholesalers in settlement of the account of R 2 451 less
4% discount.
Activity 13.9
Match each of the transactions in Column A with the most appropriate

description of the effect that the transaction will have on the amount of VAT
payable to SARS in Column B. Write down only the numbers (1. to 6.) and the
corresponding letters (e.g. 1. – A.).
Column A: Transactions Column B: Effect on the amount of VAT payable

to SARS
1. Bad debts (debt written off as A. VAT payable decreases by the VAT portion of
irrecoverable) the allowance amount
2. Bad debts recovered B. VAT payable increases by the VAT portion of
the discount amount
3. Discount allowed C. VAT payable increases by the VAT portion of
the amount written off
4. Discount received D. VAT payable increases by the VAT portion of
the allowance amount

5. Goods returned by a customer (debtors E. VAT payable decreases by the VAT portion of
allowances) the amount written off
6. Goods returned to a supplier (creditors F. VAT payable decreases by the VAT portion of
allowances) the discount amount
G. VAT payable decreases by the VAT portion of
the amount received
H. VAT payable increases by the VAT portion of
the amount received
Activity 13.10
Read the following statements relating to VAT adjustments and indicate

whether each statement is TRUE or FALSE. If the statement is FALSE, correct the
statement by changing a word or a phrase in the statement. Write the corrected
statement in your workbook and underline the word or phrase that you have
changed.
1. When a vendor issues an invoice to a debtor, the vendor must account for
the VAT amount on the invoice as input tax.
2. When a vendor writes off a debt as irrecoverable, the amount of VAT payable
by the vendor should be decreased by the total amount written off.
3. A debt is usually written off in the same tax period as it originated.
4. If a vendor allows a discount to a debtor after the tax period in which the
original invoice was issued, then the vendor must include the VAT on the
discount amount as input tax for tax period in which the discount took
place.
5. In order to decrease the amount of VAT payable, a vendor must make an
adjustment that either decreases output tax or decreases input tax.
6. When a vendor receives a settlement discount from a supplier, the vendor
must make an adjustment to increase the amount of VAT payable.
7. When a vendor purchases goods on credit, the vendor must account for the
VAT amount on the invoice as input tax.
8. When a vendor issues a credit note to a debtor, the vendor must make an
adjustment that increases the amount of VAT payable.
9. If a vendor receives a payment from a customer whose debt had previously
been written off, then the vendor must account for the VAT on the amount
received as input tax.
10. When a vendor receives an allowance from a supplier for damaged goods
returned, the vendor can account for the VAT adjustment by including the
VAT portion of the amount on the credit note as output tax.

Activity 13.11
Complete the following passage by selecting the correct word, amount or

phrase from the options provided in brackets. Write down only the numbers
(❶–❿) and the correct word, amount or phrase.
Kolisi Traders is a registered VAT vendor with a Category B tax period.
On 5 January 2017, Kolisi Traders sold goods on credit to B. Habana for R8

208. Kolisi Traders issued a tax invoice to B. Habana, which showed the VAT
amount to be ❶ (R1 149,12 / R1 008,00). Kolisi Traders will account for this
VAT amount by including it as ❷ (output tax / input tax) in the VAT return to
be submitted during ❸ (February / March) 2017.
On 12 January 2017, B. Habana returned damaged goods to Kolisi Traders.

Kolisi Traders issued a credit note to B. Habana which reflected the VAT
amount as R168,00 and the total amount as ❹ (R1 200,00 / R1 368,00).
In order to account for this, Kolisi Traders makes a VAT adjustment by
including the R168,00 as ❺ (output tax / input tax) in the VAT return. This
adjustment will ❻ (decrease / increase) the amount of VAT payable.
On 28 January 2017, B. Habana settled his account with Kolisi Traders,

who allowed B. Habana an early settlement discount of 5%. This discount
amounted to ❼ (R300,00 / R342,00) and included VAT of R42,00. Kolisi Traders
will therefore need to make a VAT adjustment that will ❽ (decrease / increase)
the amount of VAT payable by R42,00. Kolisi Traders can accounted for this by
either setting off the R42,00 against ❾ (output tax / input tax), or by including
the R42,00 as ❿ (output tax / input tax) for tax period.
5. Ethics
In terms of tax revenue collected and refunded, VAT is by far the largest
tax administered by SARS.
VAT is arguably also the tax system that is most susceptible to fraud
and abuse. This is largely due to its reliance on self-assessment by vendors
and its refund mechanism. VAT fraud is committed by unethical and
dishonest vendors who seek to exploit the vulnerabilities in the VAT
system. Although VAT fraud may often entail complex and elaborate
schemes, this type of fraud is typically based on the following unethical
and illegal acts:
• collecting VAT from customers, but not paying all or some of it over
to SARS
• claiming VAT refunds on fictitious invoices
• charging VAT without being registered as a VAT vendor.

A particular type of VAT fraud, known as round tripping or carousel
fraud, occurs when a vendor falsely claims that goods have been exported
(sold overseas). Remember that exports are zero-rated (VAT is charged
at a rate of 0%), but the input tax relating to those goods can still be
claimed. The vendor then sells those goods locally and claims the VAT
refund for the input tax, but accounts for the output tax at 0% and thus
doesn’t pay the VAT collected over to SARS.
Another unethical practice relating to VAT, involves the vendor
(usually a sole trader) offering a customer a discount, provided that:
• the customer is prepared to pay in cash (actual money); and
• the customer doesn’t require an invoice.
For example, a vendor provides a service to a customer and quotes a
price of R11 400 including VAT of R1 400. The vendor then offers to
reduce the price to R10 900 if the customer pays in cash and doesn’t
require an invoice. The customer, in such cases, is often ignorant of the
tax implications and thus gratefully accepts the discount, pays in cash and
leaves without an invoice. The vendor then simply pockets the money
without recording the transaction in the books of the business. The
vendor will still claim input tax relating to this transaction, but doesn’t
account for or pay any output tax on this transaction.
The net effect of this illegal ploy is that the vendor uses R500, of the
R1 400 VAT that should have been paid over to SARS, to influence the
customer and then keeps the remaining R900 for himself. Furthermore,
since there was no record of this income being received, the dishonest
vendor will also not pay income tax on this amount.
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.

Case study 13.1
Read the article below and then answer the questions that follow.
VAT fraudster to spend As directors of the labour broking business

VGS Industrial Supplies (Pty) Ltd, the Eksteens
ten years behind bars ran two sets of invoices; one with the full and
A
correct amount of VAT for their customers and
labour broker found guilty on 4 228 one with a lesser amount of VAT for SARS. They
counts of fraud amounting to R6,4m for also contravened 16 offences in terms of the
issuing false VAT invoices will now have VAT Act by not keeping proper records and not
to serve his full 10-year sentence in prison. informing SARS of a change of the company's
Stephanus Eksteen (56), previously from representative vendor.
Gustrouw Road in Gordon's Bay, was sentenced At the time of his sentencing the court
in the Bellville Regional Court on 13 June 2008. described the broker as the mastermind of the
He has been in jail ever since, after failing to offences which he described as one of the “worst
raise bail money of R75 000. hotbeds of dishonesty” which the court has seen
His wife, Petronella (51) was found guilty in a long time.
of the same offences and is serving a four-year SARS would like to urge all South Africans
jail sentence. She did not appeal the ruling. to continue reporting suspicious activities and
Eksteen notified the court on Friday tax fraud to our Anti-Corruption and Fraud
(17 April) that he would not proceed with an Hotline on 0800 00 28 70.
appeal against the conviction and sentence.
Source: http://www.moneywebtax.co.za (Accessed on 27 August 2011)
Questions
1. What was the total value of the VAT fraud committed by the Eksteens?
2. Provide a short phrase from the article that explains the nature of the
VAT fraud.
3. Now explain in more detail the scheme that the Eksteens used to commit
this VAT fraud.
4. How many years will Stephanus Eksteen have to serve in prison?
5. How many years will his wife, Petronella Eksteen, have to serve in prison?
6. Briefly explain the meaning of the phrase, “worst hotbeds of dishonesty”,
that was used to describe this crime.
7. What is the purpose of the Anti -Corruption and Fraud Hotline?

of the business in order to determine whether risk is being managed
and controlled to an acceptable level. Thus, it makes sense that we first
consider the risks associated with VAT, before we discuss the internal
controls used to guard against these risks and the internal audit of VAT.
6.1 Risks associated with VAT RISK!

As mentioned earlier, VAT is a significant source of state revenue
and SARS has become increasingly vigilant at ensuring that vendors
account for and pay VAT in accordance with tax legislation. Vendors
need to bear in mind that non-compliance with VAT regulations, even
if unintentional, is punishable by law and could cost their business both
financially and in terms of their reputation in the business community.
Some of the risks associated with the collection and payment of VAT
can be summarised as follows:
• 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.
• 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 input 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.
6.2 Internal control of VAT

It is essential that businesses establish strict internal control processes
to address the risks associated with VAT. Although the internal control
policies and procedures relating to VAT may differ from one business
to another depending on the complexity, size and nature of the
business, most businesses should adhere to the following basic
internal control procedures:
V A L U E - A D D E D TA X ( V AT ) • c h a p t e r 1 3 497

• Invoices from vendors (suppliers) should be checked to determine
that the invoices meet all the requirement 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.

6.3 Internal audit of VAT
essential that an internal audit is performed to assess the effectiveness of
these internal controls and to evaluate the risk management relating to
VAT. An internal audit of VAT may typically involve the following:
INTE
INTERNAL AUDIT
• Performing a risk-based assessment of the VAT-
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 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.
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 VAT accounting process
■ collection of debt is carefully managed so that output VAT is
received as soon as possible

INTE
INTERNAL AUDIT
INTE
INTERNAL AUDIT
■ 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 is 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.
This class assessment must be done individually. Read the information below
and answer the questions that follow.
1. Cellular Traders, a registered vat vendor, buys and sells cell phones.
Calculate the selling price of a cell phone inclusive of VAT, if a cell
phone costs them R450 and they use a mark-up of 50% on cost. [5]
2. The Music Warehouse is advertising a Bob Marley CD for R85,50
inclusive of VAT. Calculate the amount of VAT included in the price
as well as the price exclusive of VAT. [5]
3. Copy and complete the table below.
No. Cost price % mark-up on Selling price VAT Selling price
cost (excl. VAT) (incl. VAT)
a. R400 100%
b. R2 200 R3 762
c. 150% R728
[15]

Chapter 14
Revision activities
This chapter has revision activities on:
• Bank reconciliation 14.1 – 14.3
• Creditors reconciliation 14.4
• Asset disposal 14.5 – 14.8
• Partnerships: General Ledger 14.9
• Partnerships: General Journal and General Ledger 14.10
• Partnerships: Financial Statements 14.11
• Partnerships: Interpretation of Financial Statements 14.12
• Clubs: Ledger accounts 14.13 – 14.15
• Cost Accounting 14.16 – 14.18
• Budgets 14.19 – 14.21
• Periodic stock system 14.22 – 14.25
• VAT 14.26 – 14.28
• Periodic stock system and VAT 14.29
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:
Ah, I see you are Yes, I’m about to write

buying one of our lined my Grade 11 exams
tracksuits. They are so and need to be as
warm and comfortable – comfortable as possible.
you can even sleep in it.
R evi s i o n activitie s • c h a p t e r 1 4 501

Activity 14.1 Bank reconciliation
Caron’s Boutique has a bank account with Southern Bank.
Required
1. Do the additional entries in the Cash Journals of Caron’s Boutique on
30 April 2016.
2. Prepare the Bank account in the General Ledger and balance the account.
3. Prepare the Bank Reconciliation Statement on 30 April 2016.
Information
Bank Reconciliation Statement of Caron’s Boutique on 31 March 2016

Debit Credit
Credit balance according to bank statement 9 120 00
Debit cheques not presented for payment:
No. 304 500 00
No. 512 1 210 00
No. 526 2 380 00
18 020 00 18 020 00
• The totals of the bank columns in the Cash Journals on 30 April 2016, before
doing the additional entries:
Cash Receipts Journal Cash Payments Journal
Bank R54 600 Bank R42 120
• The bank statement showed a positive balance of R24 794 on 30 April 2016.
• Cheque no. 304 has matured. It was issued to the Vergelegen Retirement
Home on 2 December 2015 as a donation, but the cheque was lost. No entry
was made in the business books about this. The owner instructed that a
new cheque (no. 599) be issued. The cheque was entered in the books and
posted, but it does not appear on the April 2016 bank statement.
• The following items appeared on the bank statement for April, but not in
the journals for April:
■ A deposit for R8 900
■ Cheque no. 512 for R1 210
■ A deposit for R1 900 for rent directly deposited in the bank account by
the tenant, Elzaan Properties
■ Bank charges, R389
■ Interest in the credit column of the bank statement, R107
■ A debit order to Allsure for insurance, R890
■ A cheque for R405, received from debtor, L King, in settlement of her
account of R450, was dishonoured by the bank due to insufficient funds.
502 c h a p t e r 1 4 • R evi s i o n activitie s

• Cheque no. 574 appeared on the bank statement for April as R590, but
the entry in the CPJ was made for R950, issued to Pen & Ink for stationery
purchased. An investigation revealed that the entry in the business’s books
is incorrect.
• The following items appeared in the journals for April, but not on the
bank statement:
■ A deposit of R7 659 made on 30 April 2016
■ Cheque no. 591 for R1 980 dated 15 May 2016
You are given information relating to LL Stores. They need your help with the
Bank Reconciliation Statement for October 2015.
Information
The following information appeared in the Bank Reconciliation Statement of
LL Stores on 30 September 2015:
Balance as per bank statement R9 285
Balance as per bank account in the Ledger R22 715
Outstanding deposit dated 30 September 2015 R25 600
Outstanding cheques:
No. 877 dated 15 April 2015 R800
No. 1997 dated 12 December 2015 R7 400
No. 2041 dated 30 September 2015 R3 970
Upon comparing the October bank statement with the Cash Receipts
Journal (CRJ) and the Cash Payments Journal (CPJ) for October, the following
differences were noticed:
• A deposit of R25 600 appears in the bank statement on 1 October 2015, but
not in the October journals.
• A deposit of R9 980 appears in the CRJ on 31 October 2015, but not in the
bank statement.
• Rent income of R2 600 from E Marais appears on the bank statement, but
not in the journals.
• Bank charges amounting to R389 appears in the bank statement, but not in
the journals.
• The bank statement reflects a dishonoured cheque for R465. This cheque
was originally recorded in the CRJ for September 2015. The drawer was
K Habana.
• Cheque no. 877 has expired and should be cancelled. The cheque was
originally made out to the Ring o’ Roses Crèche as a donation, but the
school has closed down.
• Cheque no. 2041 for R3 970, dated 30 September 2015, appears in the bank
statement, but not in the journals, for October.
• Two cheques appear in the CPJ, but not in the bank statement:

■ Cheque no. 2052 for R5 780, dated 27 October 2015
■ Cheque no. 2101 for R7 500, dated 22 December 2015, issued to
a creditor
• The bank statement shows a positive balance of R68 439 on 31 October 2015.
Required
1. Which two additional items will be recorded in the CRJ for October 2015?
2. Which two additional items will be recorded in the CPJ for October 2015?
3. Draw up the Bank Reconciliation Statement on 31 October 2015.
4. Explain how you would deal with cheque no. 2101 when you draw up the
financial statements.
5. Briefly explain why it is important to draw up a Bank Reconciliation
Statement each month.
The inexperienced bookkeeper of Breede River Traders closed off and

posted the Cash Journals for September 2013 before the bank statement for
September 2013 was received. He balanced the Bank account, which showed
an overdrawn balance of R1 979. He has asked you to help him with the bank
statement for September 2013.
Required
1. Draw up the Bank account by making all additional entries directly into the
Bank account. Balance the Bank account.
2. Draw up the Bank Reconciliation Statement on 30 September 2013.
Information
Breede River Traders

Debit Credit
Debit balance according to the bank statement 2 048 00
Credit outstanding deposit 8412 00
Cheques not yet presented for payment:
No. 1477 300 00
No. 2454 1 056 00
No. 2469 963 00
No. 2471 2 334 00
No. 2473 610 00
8 412 00 8 412 00

Additional information regarding the Bank Reconciliation Statement
• Cheque no. 1477 was issued during May to the Guppie Canoe Club as a
donation, but the club was dissolved and the cheque should therefore
be stopped.
• Cheque no. 2454 was issued to Dreyer Traders for packaging material,
but the cheque was lost in the mail and has to be replaced with cheque
no. 2501.
• Cheque no. 2469 was issued for wages, but was incorrectly entered in the
Cash Payments Journal. The correct amount appears in the bank statement
for September 2013.
After the bank statement for September 2013 was compared with the Cash
Journals for September 2013, the following items had not yet been attended to:
ABC Bank
Bank statement of Breede River Traders for September 2013
Number Details Cheques and Deposits, etc. Date Balance
other debits
8 412 00 01-09-13
2469 936 00 03-09-13
Cheque unpaid 582 00 05-09-13
2471 2 334 00 09-09-13
Cash handling levy 137 00 21-09-13
Service fee 249 00 22-09-13
Stop order 600 00 25-09-13
11044 1 480 00 26-09-13
Interest 83 00 28-09-13
1 240 00 29-09-13
650 00 30-09-13 1 664 00
• The unpaid cheque issued on 5 September 2013 was drawn by
P Marais in payment of his account of R600 and was dishonoured due
to insufficient funds.
• A stop order in favour of Allsure Insurance, R400 is for insurance of the
business and the rest for the owner’s vehicle.
• The deposit on 29 September 2013 was deposited directly into the account
by the tenant, G Solomon.
• The deposit on 30 September 2013 was received from debtor P Cole. It had
previously been written off as a bad debt.

Errors found on the bank statement:
Cheque no. 11044 was debited on the bank statement. It was issued by Berg
River Traders.
Entries in the Cash Receipts Journal that do not appear on the bank statement:
Deposit, R4 899
Entries in the Cash Payments Journal that do not appear on the bank statement:
Cheque no. 2489 for R997 (dated 30 September 2013)
Cheque no. 2500 for R3 465 (dated 15 October 2013)
Activity 14.4 Creditors reconciliation
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 below.
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 2020.
Information
Creditors Ledger of Joseph Stores

Adam Dealers
Date Details/Document no. Fol. Debit Credit Balance
2020
March 01 Account rendered 15 240 00
03 Invoice no. 411 CJ 6 779 00
05 Debit note no. 194 CAJ 450 00
11 Cheque no. 7891 CPJ 2 250 00
Cheque no. 7891 (discount) CPJ 250 00
24 Invoice no. 478 CJ 2 128 00
25 Invoice no. 12268 CJ 490 00
31 Cheque no. 7929 CPJ 3 500 00 18 187 00

ACCOUNT STATEMENT
Adam Dealers
3 Eiland Road
Paarl
7646
Statement of account : Joseph Stores Account no.: 22356
23 Church Road Date: 29 March 2020
Wellington
Date Transaction Debit Credit
2020
Feb 27 Balance 8 910 00
29 Invoice no. 332 6 540 00
March 01 Discount omitted in February 210 00
03 Invoice no. 411 6 779 00
11 Receipt no. 207 2 250 00
24 Invoice no. 478 1 228 00
28 Interest on overdue balance 97 00
Balance owing R21 044 00
Adam Dealers
Creditors Reconciliation Statement on 29 February 2020
Debit Credit
Balance according to statement of account 8 910 00
Credit purchases after 26 February 2020 6 540 00
Debit discount omitted 210 00
Balance according to Creditors Ledger 15 240 00
15 450 00 15 450 00
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 2020.
• Invoice no. 478 on 24 March 2020 was incorrectly recorded as R2 128,
instead of R1 228.
• Invoice no. 12268 on 25 March 2020 was stationery purchased from Adami
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 2020.

Activity 14.5 Asset disposal
The information below refers to Trendy Trading. They write off depreciation
on vehicles at 20% per annum according to the diminished balance method.
Round off decimals to the nearest rand.
Required
Enter the transactions below in the General Ledger of Trendy Trading for the
year 1 July 2013 to 30 June 2014, in the following accounts:
Information
Balances on 1 July 2013

Vehicles R120 000
Transactions
2013
01 Oct Sold a Mazda bakkie for R20 000 cash. The bakkie was purchased on
1 January 2010 for R60 000.
2014
28 Feb Purchased a new vehicle on credit from Marais Motors for R80 000.
30 Jun Update depreciation for the year.
The financial year of Dolphin Coast Traders ends on 28 February.
Required
Show the accounts below in the General Ledger of Dolphin Coast Traders for
the period 1 March 2014 to 28 February 2015.
• Computers (5 lines)
• Accumulated depreciation on computers (7 lines)
Information
The asset register of Dolphin Coast Traders shows the following:
Computers:
• Intel Celeron 2.4 Ghz purchased on 1 October 2010 for R4 000
• AMD Athlon 2.6 Ghz purchased on 1 November 2013 for R4 600

Vehicles:
• Toyota Venture purchased on 1 September 2011 for R60 000
• Suzuki delivery motor cycle purchased on 1 March 2013 for R7 000
Depreciation:
• On vehicles at 10% per annum on the diminished balance
• On computers at 15% per annum on the cost price
Transactions during the period 1 March 2014 to 28 February 2015:
• Sold the Intel Celeron computer for cash, R1 200, on 1 May 2014.
On the same date a new computer, Intel Pentium 3 Ghz, was purchased
for cash, R7 000.
• On 1 July 2014 the business purchased a Corsa bakkie for R90 000 on credit
from CJ Motors. The Toyota Venture was traded in for R45 000.
The Camping Spot is a business in Paarl, with owner Rian Nel. The Camping
Spot owns two vehicles, a Nissan bakkie and a motorcycle used for deliveries.
Information
The Camping Spot’s financial year is from 1 March to 28 February.
Depreciation is calculated as follows:

• On vehicles at 20% per annum on the diminished balance
• On equipment at 15% per annum on the cost price
On 1 March 2018 these balances appeared in the books of The Camping Spot:
Balance Sheet accounts Debit Credit
Vehicles 122 000 00
Equipment 32 000 00
Transactions during the financial year:

2018
01 May Bought a colour printer for the business and pay R7 000.
31 May The Nissan bakkie was used by the rep for marketing. On 30 May
the Nissan bakkie was stolen in front of his house. The insurance
company, Allsure Insurance, was only willing to pay 80% of the
carrying value because the car was not parked in a garage but on
the street. The cost price of the Nissan bakkie was R80 000 and the
accumulated depreciation on 1 March 2018 amounted to R28 800.
01 Oct Bought a new delivery vehicle on credit from CJ Garage for R120 000.
2019
28 Feb Brought depreciation up to date at the end of the financial period.

Required
1. Prepare the following accounts in the General Ledger of The Camping Spot
for the period 1 March 2018 to 28 February 2019:
2. Prepare the note for fixed assets as it would appear in the Balance Sheet on
28 February 2019.
3. What can Rian do to prevent another incident, like the Nissan bakkie being
stolen, from happening?
The following incomplete accounts appear in the books of Adam Traders.

The business depreciated equipment at 20% p.a. on the carrying value and the
financial year ends on 28 February.
Dr Equipment Cr
2011 2013
Mar 01 Bank CPJ 40 000 00 Jun 01 Asset disposal GJ 40 000 00
2011 2014
Dec 01 Bank CPJ 20 000 00 Sep 30 Balance c/d 48 500 00
2014
Aug 01 Creditors control CJ 28 500 00
88 500 00 88 500 00
2014

2013 2012
Jun 01 Asset disposal CJ (e) Feb 29 Depreciation GJ (a)
2014 2013
Feb 28 Balance c/d (h) Feb 28 Depreciation GJ (b)
2013
Jun 01 Depreciation GJ (d)
2014
Feb 28 Depreciation GJ (f)
(g) (g)
2014
Mar 01 Balance b/d (h)
2015
Feb 28 Depreciation GJ (i)
(j)
2013 2013
Jun 01 Equipment GJ (c) Jun 01 Bank CRJ 22 600 00
Accumulated depreciation
on equipment (e)
Loss on sale of asset (k)
Required
1. Complete the Accumulated Depreciation on Equipment account for the Answer the questions
period 1 March 2011 to 28 February 2015. systematically, (a) to (j).
2. Complete the Asset Disposal account on 1 June 2013, closing it off properly.
REVIsIoN AC TIVITIEs • chapter 14 511

Activity 14.9 Partnerships: General Ledger accounts
You are provided with the appropriation statements of Bessie Best for the past
two financial years. Mr Batt and Mr Bester are partners in this business.
Required
Answer the questions below. All calculations (up to one decimal place) must
be shown.
1. Draw up the Current account of Batt and balance the account.
2. Calculate the profit earned by Bester on his investment in the business for
the year 2020.
(Use year-end closing balances in your calculations.)
3. The partners calculate interest on capital at a rate of 8% p.a. Bester paid
in additional capital on 1 July 2019. Calculate the additional amount
contributed by him.
Information
Bessie Best
Appropriation statement for the year ended 30 June 2020
2020 2020 2019 2019
Batt Bester Batt Bester
Interest on capital 6 400 00 12 800 00 6 400 00 11 520 00
Salaries 13 200 00 8 400 00 13 200 00 7 200 00
Share of remaining profit 3 760 00 7 520 00 16 028 00 28 852 00
30 June 2020 30 June 2019
Capital: Batt 80 000 00 80 000 00
Capital: Bester 160 000 00 ?
Current account: Batt (Cr) 9 100 00 8 000 00
Current account: Bester (Cr) 8 000 00 8 000 00
Batt was overseas for business during June 2020 and his salary for June was not
paid to him.
Activity 14.10 Partnerships: General Journal and General Ledger
A year ago, Simon Powell and Rory Firman combined their expertise and
set up a partnership – Sleeptight Mattresses – that manufactures high-
quality mattresses.

Required
Use the information provided from the records of Sleeptight Mattresses to do
the following:
1. Show the General Journal for the partnership agreement, additional
information and closing transfers (you need not include narrations).
2. Draw up the Appropriation account in the General Ledger.
Information
The following appeared in the financial records of Sleeptight Mattresses on
30 June 2015:
Capital balances at the end of the year 30 June 2015

Powell R550 000
Firman R550 000
Current accounts at the beginning of the year 1 July 2014

Powell R0
Firman R0
Drawings for the year ended 30 June 2015

Powell R72 600
Firman R56 000
Net profit 30 June 2015 (before adjustments below) R299 040

• During the year, Powell donated, in his private capacity, mattresses at a
cost price of R17 650 to the local school hostel, but the bookkeeper did not
record this in the accounting books.
• A cheque for R2 500 was paid to CommTel for the monthly cell phone
account of the business. The amount was debited against the Telephone
account, but Firman had used R780 of that amount for private calls. No
record was made of this adjustment.
• The partnership agreement makes provision for the following:
The partners are entitled to the following monthly salaries:
Powell R5 500
Firman R7 000
The above amounts represent the salaries that the partners were receiving
before Powell received an increase of 6% as from 1 March 2015. Powell has
drawn all his salary cheques per month, but Firman has drawn salary cheques
for only five months.
• The interest on capital amounts to 12% per annum. Firman decreased his
capital by R45 000 on 1 January 2015, while Powell increased his by R20 000
on the same date.
• Profits and losses are shared according to the capital ratio as at the end of
the year.

Activity 14.11 Partnerships: Financial statements
The financial year of Samba Traders, a partnership with partners S Sam and
B Banga, ends on 28 February. The business makes use of the continuous
inventory system and makes a profit mark-up of 80% on the cost price.
Required
1. Draw up the Income Statement for the year ended 28 February 2015.
2. Show the Accumulated Depreciation on Equipment account in the General
Ledger for the period 1 March 2014 to 28 February 2015. Balance properly.
3. How much did the business receive for the sale of the equipment on
31 August 2014?
4. Did the business achieve its profit margin of 45% on the turnover this year?
Give a possible reason for a difference.
5. Compile the following notes to the Balance Sheet on 28 February 2015:
a. Trade and other receivables
b. Trade and other payables
c. Tangible assets
d. Capital
e. Current accounts
6. Show the Equity and Liabilities section of the Balance Sheet on
28 February 2015.
Information
Pre-adjustment Trial Balance of Samba Traders on 28 February 2015
Balance Sheet accounts Debit Credit
Capital: Sam 100 000 00
Capital: Banga 75 000 00
Drawings: Sam 107 000 00
Drawings: Banga 88 200 00
Current account: Sam 3 117 00
Current account: Banga 1 045 00
Equipment 80 970 00
Bank 10 452 00
Loan: SA Bank (14% per annum) 120 000 00
SARS (PAYE) 6 890 00

Nominal accounts Debit Credit
Sales 1 540 230 00
Bad debts recovered 1 087 00
Bad debts 1 870 00
Stationery 1 026 00
Telephone 8 389 00
Insurance 15 800 00
Depreciation 243 00
Profit on sale of asset 400 00
Unemployment Insurance Fund contribution 2 664 00
1 940 204 00 1 940 204 00

• One of the wage earners took R400 in advance on his wages for March 2015,
because his daughter was getting married. No record was made of this.
• Equipment at a cost price of R6 000 was sold for cash on 31 August 2014
and correctly recorded. The equipment was bought on 1 March 2012.
Depreciation on equipment is taken into account at 10% per annum on the
diminished balance.
• Bring depreciation on 28 February 2015 up to date.
• A debtor returned goods with a cost price of R560 (profit mark-up is 80%
on the cost price) on 28 February 2015. The goods were received after the
physical stock take and no record was made in the books.
• The stock at hand as per the physical stock take is as follows:
■ Trading stock R41 780
■ Stationery R340
• An office in the building is rented out. The rent increases by 10% annually
on 1 January and the rent is received one month in advance.

• The following accounts were received for February 2015, but have not
been paid:
■ Water and electricity, R334
■ Telephone, R478
• The loan is paid in annual instalments of R24 000 on 31 May each
year. Record has been made of the repayment. Make provision for the
outstanding interest on the loan.
• Insurance includes an annual premium of R3 600 for the period 1 July 2014
to 30 June 2015.
• The bank statement for February 2015 shows the following information,
which has not yet been recorded:
■ Bank charges, R189
■ A debtor’s cheque for R2 000 was dishonoured by the bank.
This cheque was received from L Louw in payment of her debt of R2 250 and
was deposited on 25 February 2015.
■ Interest on overdrawn account, R34
• Make provision for bad debts at 5 % on outstanding debtors.
• Improvements of R70 000 were made to land and buildings and correctly
recorded.
■ Interest on capital is earned at 12% per annum. Note that S Sam
increased his capital on 1 July 2014 by R50 000.
■ Partner Sam earns an annual salary of R96 000 and partner Banga an
annual salary of R72 000. Note that Banga has already drawn his salary
for March 2015, and that it has been correctly recorded.
■ Remaining profit or loss is shared equally between the partners.
Activity 14.12 Partnerships: Interpretation of financial statements
Jenny and Graham are partners in a partnership called King Traders. Their
financial year ends on 28 February 2015.
Required
1. Show the Appropriation account on 28 February 2015.
2. Calculate Graham’s percentage earnings for the year ended 28 February
2015. Does he have reason to be satisfied?
3. Calculate the debt/equity ratio on 28 February 2015. Round off to two
decimal places.
4. The partners are considering taking out an additional loan of R200 000 at
the same interest rate in order to finance extensions. Do you think this is
advisable? Refer to the amounts of two financial indicators or ratios for 2015
to motivate your answer.
5. Calculate the acid test ratio for 2015.
6. Comment on the liquidity position of King Traders as indicated by the acid
test ratio and rate of stock turnover (refer to appropriate figures in your
comments).

Information
The following balances were taken from the accounting records:
28 Feb 2015 28 Feb 2014
Owner’s equity 1 038 154 00 998 054 00
Capital: Jenny 500 000 00 400 000 00
Capital: Graham 500 000 00 600 000 00
Current account: Jenny (cr) 32 592 00 (cr) 1 042 00
Current account: Graham (cr) 5 562 00 (dr) 2 988 00
Mortgage loan (20% p.a.) 250 000 00 320 000 00
Current assets 68 000 00 71 000 00
Inventories (stock) 28 400 00 23 600 00
Additional information for the year ended 28 February 2015

• Net profit for the year is R420 100.
• Annual salaries for Jenny are R165 000 – 50% more than Graham’s.
• Interest on capital: Jenny R48 000 and Graham R60 000.
• Drawings for the year: Jenny, R200 000 and Graham, R180 000.
• Partners share the remaining profit equally.
The following financial indicators have been given:
28 Feb 2015 28 Feb 2014
Rate of stock turnover 9,2 times 8,4 times
Profit on total capital applied 32,2% 27,9%
Debt/equity ratio ? 0,3 : 1
Acid test ratio ? 1,1 : 1
Activity 14.13 Clubs (challenge)
The following information was taken from the books of Rovers Rugby Club.
Round off to the nearest rand where necessary.
Required
1. Show the following accounts in the General Ledger for the year 1 January
2014 to 31 December 2014:
• Membership fees (9 lines)
• T-shirts (5 lines)
• Stationery (4 lines)
• Insurance (4 lines)
• Interest on investment (4 lines)
• Interest on mortgage bond (4 lines)

• Refreshments (6 lines)
• Rugby balls (4 lines)
• Wages (4 lines)
• Telephone (4 lines)
• Honorarium (5 lines)
• Accumulated funds (5 lines)
• Income and expenditure (13 lines)
3. Do you think it is a good idea for the club to increase its membership fees by
R10 for the year 2015? Provide a reason.
4. In your opinion, has the committee made a wise decision by investing
money in a fixed deposit at 10% interest per annum, while paying interest of
18% per annum on the mortgage bond? Explain briefly.
5. What is the gross profit made on cost price of refreshments for 2014?
Post-closing Trial Balance on 31 December 2013

Debit Credit
Club buildings at cost price 200 000 00
Equipment at cost price 25 000 00
Mortgage bond: AMR Bank 75 000 00
Fixed Deposit: Tedbank (10% p.a.) 20 000 00
Income received in advance: membership fees 440 00
Accrued income: membership fees 300 00
Rugby balls at hand 560 00
Stock: club T-shirts 840 00
Stock: refreshments 310 00
Accrued expenses: honorarium 250 00
Accrued expenses: telephone 254 00
Prepaid expenses: insurance 400 00
Savings account 600 00
Bank 8 714 00
Creditors 1 540 00
256 724 00 256 724 00

Summary of Receipts and Payments for the year ended 31 December 2014
Receipts Payments
Entrance fees 1 500 Purchase of T-shirts 4 200
Membership fees 6 410 Refreshments 23 410
2013 200 Creditors 1 980
2014 5 610 Wages 11 000
2015 600 Stationery 328
Refreshments 33 770 Telephone 2 676
Mortgage bond: AMR Bank
Donations 1 000 1 August 2014 20 000
Interest on investment 1 500 Bank charges 364
Sales of T-shirts ? Rugby balls 2 080
Sponsorship 17 000 Equipment (31/05/2014) 10 000
Affiliation 600
Honorarium 500
Extensions to club buildings 30 000
Insurance 3 520
Interest on mortgage bond 7 000
• Entrance fees amount to R100 for new members and in the course of the
year 15 new members joined the club. One-third of entrance fees should be
capitalised.
• Membership fees
■ Membership fees amounted to R100 for the year in 2013, to R110 in the
course of 2014 and the committee decided to increase it by a further
R10 for 2015.
■ On 1 January 2014 the club had 50 members. Of these 50 members, six
had moved to other towns, while 15 new members joined the club.
■ Membership fees outstanding for the 2013 book year should be written
off and the members removed from the members’ register.
■ Some members’ membership fees for 2014 were still outstanding.
■ The secretary asked that part of his honorarium for 2014 should be
kept as his membership fees for 2014. Management decided that his
honorarium for the year should amount to R800.
• T-shirts
■ The cost price of T-shirts is R70 each (the price has remained
unchanged).
■ The club sells the T-shirts at cost price plus 20%.
■ 16 T-shirts were in stock on 31 December 2014.

• Stationery
■ Stationery bought on credit amounts to R126.
■ Stationery at hand on 31 December 2014: R87.
• Depreciation on equipment is calculated at 12% per annum on the cost price.
• The bank statement shows a debit order of R210 for insurance for
January 2015.
• The fixed deposit was made on 1 July 2013, for 24 months. Part of the
interest is still due.
• Interest on the mortgage bond increased from 16% to 18% on 1 August 2014.
On the same date, an annual payment of R20 000 is made towards the loan.
• Refreshments
■ Refreshments of R3 200 were bought on credit in the course of the year.
■ Refreshments at hand on 31 December 2014 amount to R1 430.
• Rugby balls at hand on 31 December 2014: R650.
• Wages owed to the janitor on 31 December 2014: R1 000.
Activity 14.14 Clubs
You are provided with the information relating to the Berg-en-Dal Hiking Club
Required
1. Complete the following accounts in the General Ledger of Berg-en-Dal
Hiking Club. Balance/close off these accounts on 31 December 2016.
■Membership fees (9 lines)
■Backpacks (6 lines)
2. Make any two suggestions to the club’s treasurer with regards to the
club’s finances.
Information
Berg-en-Dal Hiking Club

Extract from the Post-closing Trial Balance on 31 December 2016
Debit Credit
Stock: Backpacks at R450 each 6 300 00
Accrued income: membership fees, R1 800 2 000 00
Income received in advance: Membership fees 1 500 00
Extract from the Statement of Receipts and Payments

for the year ended 31 December 2016
Accrued income: membership fees, R1 800 108 000 00
Stock: Backpacks at R450 each 900 00
Income received in advance: Membership fees 10 350 00

The constitution of the club states that:
• Membership fees amount to R300 per member per year or part thereof.
Membership fees
• On 31 December 2015 there were 349 registered members.
• Membership fees still due for 2015 must be written off as irrecoverable and
the membership of the members concerned terminated with effect from
1 January 2016.
• On 1 January 2016, 30 new members joined the club and they paid their
entrance fees as well as membership fees in full.
• The secretary requested that part of the honorarium of R1 000 due to him,
in respect of 2015, be retained by the club to cover the membership fees for
2016. The request was granted.
• Some of the membership fees for 2016 are still outstanding on
31 December 2016.
Backpacks
• Backpacks are sold to the members at cost plus 18%.
• An amount of R7 200 is still payable to Outdoor Manufacturers for
16 backpacks bought on credit. These were the only backpacks bought
on credit for the year.
• Three backpacks were given to members as gifts at the Annual General
Meeting, to thank them for the services provided.
• At the end of the year there were some unsold backpacks on hand.
Activity 14.15 Clubs (challenge)
The following information was taken from the accounting records of

Stellenbosch Tennis Club on 31 December 2014. Each member is expected to
pay annual membership fees of R1 200.
A new tennis club was founded in Paarl (30 minutes’ drive from
Stellenbosch). The club has many modem facilities and the Stellenbosch club
has already lost members to them.
Required
1. Draw up the Membership Fees account.
2. Will the club committee be satisfied with the collection of fees from the
members? Give two reasons for your answer.
3. A group of members presented a formal complaint to the committee that
the membership fees of R1 200 were too high. This dissatisfied group said:
“The club is supposed to be a non-profit organisation, but this is clearly
not the case.” Do you agree with the members’ complaints and concerns?
Explain briefly.
4. If you were the chairperson of the club, how would you deal with the
complaints of the group members? Name two solutions.

Information
The following balances appear in the books on 31 December 2013:
Investment (fixed deposit): AB Bank R180 000
Tennis courts (building in 1985) R16 000
Club house (building in 1985) R200 000
Accrued income (membership fees) R15 600
Income received in advance R8 400
Extract from the Receipts and Payments Statement on 31 December 2014

Receipts
Membership fees 2013 4 800 00
2014 109 200 00
2015 9 600 00
Payments
Membership fees refunded 2 400 00
Maintenance costs of tennis court 50 000 00
Repairs to club house 21 000 00
Additional information: Membership fees

• On 31 December 2013 there were 109 members registered at the club.
• During 2014, 18 members joined the club, but four of the existing members
went over to the Paarl Tennis Club.
• Certain members moved house at the beginning of the year and their
membership fees were refunded.
• The membership fees of those members who have not paid their
membership fees for 2013 should be written off, and they should be
removed from the members’ register by 1 January 2014.
• Some members have not yet paid their membership fees for 2014.
Surplus for the year ended 31 December 2014

The Income and Expenditure account shows a surplus of R76 000, after all the
adjustments have been brought into account.
Activity 14.16 Costs in manufacturing (challenge)
Hippo Rock is manufacturer of corporate and sports clothes, with Elizabeth

Spies as the owner. The Learners’ Representative Council of Greenfields High
School want to order 120 Matric blazers for their Matric class and asked
Elizabeth for a quotation.

Information
Costs for the manufacturing of the Matric blazers:
Labour costs per blazer R60
Material per blazer R56
Zipper per blazer R7
Cotton/thread per blazer R3
Embroidery per blazer R8
Costs of 120 pockets (packaging) R25
Rent of building per month R2 300
Water and electricity per month R1 450
Telephone per month R870
Insurance per month R600
Required
1. Explain the difference between fixed and variable costs and give one
example of each from the costs above.
2. Calculate the variable costs per blazer.
3. What should Elizabeth quote the Matric learners per blazer if she wishes to
add a profit of 40% to the variable costs of the blazers?
4. If the fixed costs above are the only fixed costs for the business, determine
how many similar blazers the business has to manufacture to reach the
break-even point.
5. Calculate the VAT that Elizabeth should add to the costs of the Matric blazers.
6. How does SARS benefit from the value-added tax system?
Activity 14.17 Cost Accounting: Break-even analysis
Niedaa Levy is starting a small business that manufactures photo frames. She
can make 300 frames per month.
Information
Her average expenses are:
Cost of material per frame R40 00
Wage to helper per frame completed R20 00
Rent of workshop per month R1 000 00
Sundry overhead expenses per month R2 300 00
Salary to herself per month R9 000 00
Required
Answer the following questions:
1. Calculate the price she must charge in order to break even.
2. What can Niedaa do to still break even, if the rent per month increases and
she does not want to increase the selling price?

Activity 14.18 Cost Accounting: Ledger accounts
Withit Wellies is manufacturers of rain boots. Their financial year ends on

28 February.
Required
1. Prepare the following accounts in the General Ledger of Withit Wellies for
the period 1 March 2010 to 28 February 2011:
■
■
Consumable stores stock (6 lines)

■

■
2. Calculate the cost of sales.
Information
The following balances appeared in the business books on 1 March 2010:
Raw material stock R87 330 00
Work-in-progress R36 200 00
Finished goods R64 630 00
Consumable stores stock R6 880 00
The following transactions took place during the year ended

28 February 2011:
Raw material purchased on credit R866 900 00
Payments made on the carriage of raw materials R22 988 00
Wages: direct labour R829 300 00
Wage: indirect labour R68 700 00
Salary: sales staff R223 600 00
Rent paid (factory  _23 ; sales department _ 13 ) R150 000 00
Insurance paid for factory R38 870 00
Maintenance: Factory equipment R45 682 00
Maintenance: Shop equipment R12 330 00
Depreciation on factory equipment R49 200 00
Depreciation on shop equipment R10 400 00
Depreciation on vehicle (Factory: Shop = 3 : 4) R24 647 00
Consumable stores purchased by cheque R25 890 00
Consumable stores issued to factory R21 556 00
Consumable stores issued to sales department R3 452 00
Raw materials issued for processing R965 690 00
Uncompleted goods as calculated on 28 February 2011 R39 870 00
Finished goods stock on 28 February 2011 R56 400 00
Sales R2 987 769 00

Activity 14.19 Budgets (challenge)
The information below is from the books of First Traders.
Required
1. Draw up a Debtors Collection Schedule for the period 1 January 2015 to
28 February 2015.
2. Draw up a Cash Budget for the period 1 January 2015 to 28 February 2015.
3. Study the additional information at the end of this activity. Then answer the
questions below.
a. Give one good reason why John should buy the premises.
b. In your opinion, which one of the financing options above, or
combination of options, should John take? Explain briefly how your
suggestions would affect the cash budget.
Information
Extract taken from the Income Statement for the year ended 31 December 2014
Sales R440 000 00
Costs of sales R352 000 00
Rent expense R28 800 00
Salaries R18 000 00
Insurance R1 800 00
Depreciation R9 000 00
Bad debts R6 000 00
Extract taken from the Balance Sheet, and notes to the financial statements for
the year ended 31 December 2014
Vehicles R90 000 00
Accumulated depreciation on vehicles R72 000 00
Bank overdraft R2 000 00
Trading stock R40 000 00
Prepaid expenses (salaries) R400 00
• The owner plans to purchase a new vehicle in January 2015 for R165 000.
He will pay a 20% deposit in January and the rest in monthly instalments of
R3 100 as from 1 February 2015.
• Salaries will increase by 10% as from 1 February 2015.
• Rent expense will increase by 20% on 1 January 2015.
• The owner to take cash of R1 500 monthly for own use.
• Sales (20% is for cash)

Actual
October 2014 R40 000
November 2014 R45 000
December 2014 R50 000
Budgeted
January 2015 R35 000
February 2015 R40 000
• Debtors’ collection is as follows:
■ 20% in the month of the transaction to take advantage of 5% discount
for early payment
■ 75% in the following month
■ 5% is usually written off after 60 days
• Trading stock is kept at a constant level. Profit mark-up is 20% on the
turnover. Cash purchases of stock are usually 25 % of all purchases. Creditors
for credit purchases are paid one month after the date of the transaction.
• Stationery is bought annually for cash in February, R500.
• The annual insurance premium is due on 28 February 2015. It is expected
that insurance will increase by 20%.
• R100 000 was invested on 30 November 2014 at 6% interest per annum.
Interest is received monthly and paid into the current account. Half of the
fixed deposit expires on 28 February 2015.
There is an increasing demand for the business’s product, as well as a need for
extensions. The business needs bigger premises. The owner, John Kumalo, has
the option to purchase premises at R200 000. This means he no longer needs to
pay rent. But he needs additional funding. This matter is a bone of contention
between John and his bookkeeper, who feels that John ought to come up with
the additional capital. John is not in favour of this, as he feels he cannot afford
to provide more than R40 000.
The various options are:

• Take out a mortgage bond at 10,5% interest per annum.
• Provision of capital by John
• Increasing overdraft facilities
• Use of remaining investments
• Selling fixed assets

Activity 14.20 Budgets
The information below was provided by Green Store.
Required
1. Draw up a Debtors Collection Schedule for the period 1 October to
31 October 2014.
2. Draw up the Cash Budget for the period 1 October 2014 to 31 October 2014.
Information
• The bank account shows a credit balance of R2 135 on 30 September 2014.
Actual sales Budgeted sales

July August September October November
Cash sales 9 000 12 000 15 000 18 000 24 000
Credit sales 18 000 21 000 24 000 20 000 26 000
Cash purchases of stock 4 500 6 300 5 700 4 900 5 200
Credit purchases of stock 8 250 7 850 7 900 6 835 9 400
Current expenses 1 300 1 400 1 700 1 800 1 900
• Debtors pay their accounts as follows:

■ 5% written off after 120 days.
• Creditors are paid one month after purchases.
• Current expenses are paid, in cash, two months after they have been
incurred.
• Depreciation amounts to R870 per month.
• A building is rented out at R1 750 per month. The rent is received monthly
and increases annually on 1 October by 10%.
• The following drawings are made by the owner on a monthly basis:
■ Stock R530
■ Cash R500
• New equipment was purchased on 1 September 2014 for R15 000.
It will be repaid in five equal monthly payments. The first payment is due
on 30 September 2014.

Activity 14.21 Budgets
Required
Use the information provided to draw up a Projected Income Statement for
Bennie Stores for the three months 1 September 2020 to 30 November 2020.
Information
Bennie Stores
Income Statement for the year ended 31 August 2020
Note R
Sales (436 125 – 4 125) 2 520 000 00
Cost of sales (1 680 000 00)
Other operating incomes 25 200 00

Bad debts 75 600 00
Salaries 403 200 00
Insurance 3 780 00
Stationery 1 260 00

Interest income 2 400 00
• The sales for September are expected to increase by 30%. Sales of R198 000
are expected for October and an average monthly increase of 10% in sales
are expected from November 2020.
• The gross profit margin of 50% on cost of sales was maintained for
September and October. The gross profit margin changed from November
to 40% on the turnover.
• The rent increased on 1 October 2020, to R28 980 per year.
• The fixed deposit of R15 000 was invested on 1 October 2019 for 12 months
at Nkosi Bank at 16% interest per annum.
• Bad debts are calculated at 3% of the expected turnover.
• Depreciation should remain constant.
• Additional sales personnel will only be employed for September.
Their total expected salaries amount to R7 000.
Salaries increased on 1 October 2020 by 15%.

• Additional insurance of R840 per annum will be in effect from
1 November 2020.
• Stationery is expected to increase by R21 per month from 1 October 2020
and will then remain constant for November.
• Other expenses are expected to increase at an average of 10% from October
and will be spread equally throughout the year.
Activity 14.22 Periodic stock system (challenge)
Li-an Outfitters is a retail business owned by Li-an Theron. She uses the periodic
stock system and prices her stock at a mark-up of 80% on cost.
Required
1. Prepare the following accounts in the General Ledger of Li-an Outfitters.
Balance/close off the accounts on 29 February 2016. Where necessary, show
calculations in brackets.
■ Purchases (5 lines)
■ Trading account (6 lines)
2. Calculate the cost of sales by completing the Cost of Sales note in the
financial statements.
3. Calculate the percentage mark-up achieved on cost (calculate to one
decimal place).
4. How does the real profit on cost price compare to the mark-up of 80% that
Li-an uses on her stock? What are the possible reasons for this difference
and should this worry Li-an?
Information
The information below was extracted from the accounting records of Li-an
Outfitters on 29 February 2016.
Trading stock (1 March 2015) R82 800 00
Sales R504 840 00
Carriage on sales R1 025 00
No entries were made for the following transactions:

• Goods returned to creditors, R17 380, at the end of the accounting period
were not recorded in the books. These goods were returned before the
stock count took place.
• Before the stock take took place, Li-an took merchandise for her own
personal use on 26 February, at cost price, R1 340.
• An invoice for stock purchased on credit on 26 February 2016 from Thembe
Wholesalers, was not recorded. The invoice reflected the cost price of R3 460
and the delivery charge of R350.

• The physical stock count on 29 February 2016 revealed that trading stock
costing R76 900 was on hand.
• A debtor returned goods with a selling price of R576 on 29 February 2016,
which he said he did not order. These goods were placed back into stock
after the stock take took place. No trade discount was granted on the
original sale.
Activity 14.23 Periodic stock system
Sunshine Café, a sole trader, uses the periodic stock system. The financial year
ends on 30 June.
Required
1. Show the following accounts in the General Ledger and close off the
accounts properly on 30 June 2015:
■ Purchases (4 lines)
■ Carriage on purchases (4 lines)
■ Trading account (7 lines)
2. The owner of Sunshine Café considers making use of the perpetual stock
system. Name one advantage of the periodic and one advantage of the
perpetual stock system.
Information
Extract from the Pre-adjustment Trial Balance for Sunshine Café

on 30 June 2015
Balance Sheet account Debit Credit
Trading stock (01/07/2014) 34 650 00
Nominal accounts
Sales 598 520 00
Carriage on sales 2 364 00
Additional information and adjustments

• Stock unsuitable for sale, at a cost price of R4 682, was sent back to the
supplier on 28 June 2015. No record was made of the transaction.
• Trading stock, cost price R24 500, was bought on credit from overseas on
27 June 2015. The following were paid by cheque:
■ Carriage on purchases, R1 700
■ Customs duties, R3 620.
No record was made of any of the transactions.
• A stock take was done on 30 June 2015 and showed that trading stock of
R54 800 was at hand.

Analyse the following transactions of Fatimah’s Stationery Shop

according to the example given. The bank balance is favourable. The
periodic stock system is in operation. The business uses a mark-up
of 60% on the cost price of goods.
Example: Bought stationery and paid by cheque, R210.
No. Source Subsidiary General Ledger Amount

document book Account debited Account credited
e.g. Cheque CPJ Stationery Bank R210
counterfoil
Note: Abbreviations may be used for the subsidiary journals.
Transactions
1. Purchased stock to the value of R34 200 on credit from Levy Traders.
2. Paid R450 by cheque to Speedy Deliveries for the delivery of the above
mentioned stock.
3. Return goods not according to sample to Levy Traders, R2 100.
4. The owner, Fatimah Latief, withdraws stock to the value of R980 for
own use.
5. The business used stationery to the value of R430 in the office. This
stationery is included in the stock purchased from Levy Traders (no. 1).
Make the necessary entries.
6. Goods with a cost price of R870 were delivered to a debtor, R Roux,
on credit.
7. R Roux returns goods with a selling price of R120 to the business.
The following extract was reproduced from the ledger of Mbekwa Traders.
The business utilises the periodic stock system.
2020 2020
Feb 29 Opening stock 23 400 00 Feb 29 Sales 689 088 00
Purchases 442 900 00 (c) 22 360 00
(b) (a)

Required
1. Calculate the gross profit labelled (a). Also calculate the percentage gross
profit on sales achieved for the year ended 29 February 2020.
2. The mark up on sales is 33 __13 % for Mbekwa Traders. Give three possible
reasons for the difference between your answer in 1. and the mark-up of
33 __13 %.
3. Identify the contra account labelled (b).
4. Identify the contra account labelled (c).
5. Calculate the cost of sales.
6. The owner of Mbekwa Traders is considering changing to the perpetual
stock system. Give one advantage and one disadvantage of the perpetual
stock system.
Activity 14.26 VAT
Step-Up Shoe Shop buy their stock from wholesalers and then sell it at a profit
mark-up of 60% on the cost price.
Information
Step-Up Shoe Shop received the following invoice on purchases:
JK WHOLESALERS Invoice: 235

To: Step-Up Shoe Shop Date: 11/09/2016
20 pairs of Wannabe sneakers ?
Delivery cost 40 00
2 340 00
14% VAT ?
Total 2 667 60
Required
Answer the following questions:
1. Calculate the input tax paid on the purchases of the stock from
JK Wholesalers.
2. What is the cost price per pair of Wannabe sneakers?
3. Calculate the selling price (VAT inclusive) a customer will pay for a pair of
Wannabe sneakers.
4. Explain the difference between input tax and output tax.
Activity 14.27 VAT
Mbekwa Traders’ total amount received for sales during January 2020 and
February 2020 amounted to R133 632 (VAT inclusive), this includes sales on
zero-rated items to the amount of R21 000.

Required
1. Calculate the amount of output tax included in the total sales amount.
2. If the total input tax paid by Mbekwa Traders during January and February
2020 amounted to R5 977, how much do they need to pay over to SARS at
the end of February 2020?
3. Mbekwa Traders received an invoice of R3 990 (VAT incl.) from Jumaats & Co.
for goods purchased on credit. They paid Speedy Transport R228 (VAT incl.) to
have it delivered at the business. What should the price tag on the goods be, if
Mbekwa Traders want to make a profit of 80% of the cost price of the goods?
Activity 14.28 VAT
Thembelihle Nkewu sells toys for children from her home. She is not a
registered as a VAT vendor. Her turnover in a year is approximately R200 000
per annum. Thembelihle does not want to break the law and asks you some
questions with regards to VAT.
Required
1. When is it compulsory for a business to register as a VAT vendor?
2. What is the difference between input tax and output tax?
3. If she registered as a VAT vendor, how often will she have to pay VAT over
to SARS?
4. Thembelihle received the invoice below when she purchased trading stock
from a supplier that is a VAT vendor. Calculate the amount of input tax on
the invoice.
5. If Thembelihle is a VAT-registered business and she wants to make a profit
of 60% on all products, what should the price tag on a wooden truck (VAT
inclusive) be?
6. If Thembelihlie is registered as a VAT vendor and she sells all of the stock on
the invoice below at a mark-up of 60%, how much of that is payable to SARS?
Tree Top Distributors Invoice: 211

To: Thembelihle Nkewu Date: 7 September 2019
Number Description Price Amount
2 Wooden trucks 130 00 260 00
3 Doll houses 440 00 1 320 00
1 580 00
VAT at 14% ?
?

Activity 14.29 Periodic stock system and VAT (challenge)
Sam’s Sport Shop, owner Sam Cunningham, sells sport clothes and equipment. It
is a registered VAT business. He adds a profit of 40% on all the products he buy to
determine the selling price and makes use of the periodic stock system.
Required
1. Prepare the Trading account (6 lines) for the year ended 28 February 2018.
2. Sam is concerned about the control of stock in his business. Suggest two
ways in which he could maintain good internal control over the stock in
his business.
3. Sam is considering rather using the perpetual stock system. Make a
suggestion, with reasons, to him on whether he should or should not
change to the perpetual stock system.
4. Trading stock should be valued at the lower of cost and net realisable value.
Which accounting concept according to GAAP covers this point?
5. Sam’s Sport Shop is a registered VAT vendor. What does this mean and when
is it compulsory for a business to register?
6. Sam purchased tennis balls for R100. What should his marked price
(VAT inclusive) be?
7. One of the local schools who purchase their sport equipment from Sam
enquired about the possibility of purchasing the equipment at the VAT-
exclusive amount. They are planning to pay in cash and are therefore
suggesting that Sam does not put the transaction with the school through
his books. They will pay more or less R1 000 less on their purchases if Sam
agrees. What advice would you give Sam on this suggestion?
Information
Sales R1 259 500 00
Carriage on sales R7 221 00
Stock returned to creditors not yet recorded R9 880 00
Opening stock (1 March 2017) R76 120 00
The closing stock amount is not provided. The percentage gross profit on sales
is 33 __13 %.

Examination
Grade 11 Time: 3 hours
November Accounting Marks: 300
INSTRUCTIONS AND INFORMATION

1. You are provided with a question paper and an answer book.
2. The paper comprises SEVEN compulsory questions. Answer ALL these questions.
3. Use the formats provided in order to reflect your answer.
4. Workings must be shown in order to achieve part-marks.
5. You must attempt to comply with the suggested time allocations.
6. Non-programmable calculators may be used.
7. You may use a dark pencil or blue/black ink to answer the questions.
QUESTION 1: 38 marks; 22 minutes
The topic of the question is: The subject covered is:
Manufacturing and cost calculations Managerial accounting
Apply cost concepts and calculations in manufacturing and preparing manufacturing ledger
accounts
Budgets Managerial accounting
Prepare a Cash Budget
Financial statements of a partnership and asset disposal Financial information
Define and explain accounting concepts
Record the information of a partnership within the context of the accounting cycle
Prepare the final accounts and financial statements of a partnership
Managing resources
Calculate and enter depreciation and the acquisition of assets
Complete transactions in regards with the perpetual stock system
Interpretation of financial statements Financial information
Prepare ledger accounts of a partnership
Interpret the financial statements of a partnership
Inventory systems Managing resources
Compare the perpetual and periodic stock systems
Apply internal control and audit processes
Bank reconciliation Financial information
Prepare a Bank Reconciliation Statement
Manage resources
Apply internal control and audit processes
The topic of the question is: The learning outcomes covered are:
VAT and ethics Financial information
Perform VAT calculations
Managing resources
Apply ethics
examinati o n 535

Question 1 Manufacturing and cost calculations
(38 marks: 22 minutes)
Jo-Jo Shoes manufactures shoes for men and women.
Required
Prepare and balance the following accounts in the General Ledger on
30 June 2011:
1.1 Raw material stock (9 lines) (10)
1.2 Work-in-progress stock (9 lines) (11)
1.3 Factory overhead costs (12 lines) (10)
1.4 Finished goods stock (9 lines) (7)
Information
Balances on 1 July 2010 R
Work-in-progress stock 75 100
Finished goods stock 121 000
Consumable stores on hand: indirect materials 1 080
Transactions for the year ended 30 June 2011

Raw material purchased on credit 960 000
Carriage on raw material paid 14 300
Indirect material purchased 38 700
Factory wages 468 000
Factory electricity 67 000
Factory rent 120 000
Maintenance of factory equipment 43 000
Depreciation on factory equipment 50 000
Factory insurance 32 000
Balances on 30 June 2011

Work-in-progress stock 65 300
Finished goods stock 66 200
Consumable stores on hand – indirect materials 2 340
536 examinati o n

Question 2 Budgets
The following information has been extracted by the accountant from the various
departmental budgets of Leri’s Toy Shop. The owner, Leri Louw, requested a Cash
Budget for the next two months.
Required
2.1 Complete the Debtors Collection Schedule for July and August 2011. Note that it
is partially completed. (6)
2.2 Complete the Cash Budget for July and August 2011. (36)
Information
1. Extracted from the Projected Income Statement for July and August 2011
July August
Sales (30% for cash) 150 000 180 000
Purchases (20% for cash) 75 000 135 000
Salaries and wages 20 000 23 000
Rental of premises 15 000 16 500
Sundry expenses 14 300 15 000
Depreciation 7 500 9 100
Loss on asset disposal – 4 000
2. Extracted from the Balance Sheet as at 30 June 2011
Expenses payable (Salaries and wages) 2 000
Accrued income (Rent) 3 000
SARS (VAT payable) 9 760
Creditors 36 000
Bank (debit balance) 13 200
3. The amount owing to SARS for VAT will be paid in August 2011.
4. Credit sales are collected as follows:
• 30% in the month of the sale. A settlement discount of 5% is given.
• 50% in the month following the sale
• 15% in the second month
• 5% is written off as irrecoverable.
5. Credit purchases are paid 30 days after the date of purchase.
6. A new vehicle is to be purchased in July 2011 for R180 000 for which a deposit of
R20 000 is payable in the month of purchase. The balance of the purchase price
is payable in 20 equal instalments starting from 10 August 2011. In the same
month (August) a motor vehicle with a carrying value of R13 000 will be sold for
cash, at a loss of R4 000.
7. An amount of R2 000 is still payable for salaries on 30 June 2011. This amount
will be paid in July.
8. The business sub-lets part of the premises to a tenant. It receives 20% of the rent
amount paid by the business from this tenant. The tenant is in arrears with the
rent for June 2011. This rent will be received in July 2011.
9. Interest is earned on an investment of R150 000 at 10% per year. The interest
is receivable in cash each quarter. The last receipt was in April of this year. The
investment matures at the end of July and will not be re-invested.
10 L Louw withdraws R16 000 cash each month for her personal use.
11. Sundry expenses are paid in the same month the expense is incurred.
examinati o n 537

Question 3
Partnership: Financial statements and asset disposal

The given information appeared in the books of JC Traders with partners J Jacobs
and C Minnaar.
Required
3.1 Answer the following questions:
3.1.1 Briefly explain why a business would write off depreciation on
its assets. (2)
3.1.2 What type of account is Depreciation and what effect will it
have on the profit of the business? (2)
3.1.3 What type of account is Accumulated Depreciation
on Vehicles? (1)
3.1.4 According to the historical cost principle of GAAP, fixed assets
are recorded at their cost price in the General Ledger, but in
the Balance Sheet they are recorded at the carrying value.
Give a reason why you think this is so. (2)
3.2 Prepare the Income Statement for the year ended 28 February 2011. (54)
3.3 Prepare the following notes to the Balance Sheet:
3.3.1 Fixed assets (20)
3.3.2 Current accounts (18)
3.3.3 Trade and other payables (9)
Information
Trial Balance of JC Traders on 28 February 2011
Fol. Debit Credit
Capital: Jacobs 200 000
Capital: Minnaar 250 000
Current account: Jacobs 21 021
Current account: Minnaar 10 124
Drawings: Jacobs 165 000
Drawings: Minnaar 161 000
Vehicles 210 000
Equipment 56 000
Accumulated depreciation: Vehicles 103 000
Accumulated depreciation: Equipment 13 500
Bank 95 600
Cash float 2 000
Fixed deposit: MB Bank (8% p.a.) 120 000
538 examinati o n

Nominal accounts
Sales 1 696 699
Cost of sales 942 000
Debtors allowance 1 099
Rent expense 105 440
Bad debts 1 044
Telephone 14 552
Insurance 11 370
Salaries 288 000
Pension fund contributions 4 320
Bad debts recovered 680
Interest on fixed deposit ?
Stationery 3 220
Interest on current account 330
Bank charges 2 412
2 326 885 2 326 885

1. Goods with a selling price R936 was returned by debtor L King and has not been
entered in the books. The business uses a mark up of 80% on cost price.
2. A physical stocktake on 28 February 2011 showed the following stock
on hand:
Stationery R410
3. J Pretorius, a debtor whose debt had been written off during December 2010,
paid the amount of R600 on 21 February 2011. This amount was credited against
Debtors Control.
4. Provision for bad debts must be adjusted to 4% of outstanding debtors.
5. The details of an employee who was employed on 1 February 2011 were
omitted from the Salaries Journal for February by mistake. The following details
are applicable:
Gross monthly salary R8 000
PAYE deduction R1 430
Pension fund R200
For every R1 the employee contributes to the pension fund, the employer
contributes R1,50.
6. The rent for the building increases annually with 6% on 1 January. The rent
agreement stipulates that rent should be paid one month in advance and
therefore the rent for March 2011 has already been paid.
7. The following expenses for February 2011 was still payable on
28 February 2011:
Water and electricity R1 023
Telephone R764
examinati o n 539

8. Interest on the fixed deposit is capitalised; in other words, re-invested on the
fixed deposit. A statement received from the bank on 28 February 2011 showed
the following with regards to the fixed deposit (no entry was made of this):
Balance of fixed deposit on 1 March 2010 R120 000

Interest for the year capitalised R9 600
Balance of fixed deposit on 28 February 2011 R129 600
9. Insurance includes a premium of R2 400 which was paid for the period
1 January 2011 to 30 June 2011.
10. Depreciation is calculated as follows:
10.1 On equipment at 20% p.a. on the cost price
10.2 On vehicles at 15% p.a. on the diminishing balance. A vehicle (cost price,
R90 000 and accumulated depreciation on 1 March 2010 of R68 000) was
sold for cash on 31 August 2010 for R24 000. This transaction was not
recorded at all.
11. The partnership agreement stipulates the following:
11.1 Partners are entitled to interest on capital at 12% p.a. Jacobs has
increased her capital on 1 December 2010 with R50 000. It was correctly
recorded.
11.2 The partners receive a monthly salary of R9 000 each.
11.3 Jacobs and Minnaar share profits (or losses) in the ratio 3 : 2.
Question 4 Interpretation of financial statements

Checkmate Suppliers is a business that import and sell board games to retail
business. It is a partnership with partners S. Stofberg and C. du Toit.
Required
Study the information. Then answer the questions that follow.
Information
The business applies a strict percentage mark-up of 100% on cost price.
All purchases of stock are done on credit. Suppliers are extremely strict in cutting off
supply if debtors do not meet their terms of credit of 90 days.
The business policy with regards to debtors is to allow 45 days’ credit. If the
customer pays within 30 days they are granted a 1% settlement discount.
The profit-sharing ratio between Stofberg and Du Toit is 3 : 2. Du Toit’s profit share
for the financial year ended 30 June 2011 is therefore R517 000.
Extract from the Income Statement of Checkmate Suppliers for the year ended 30
June 2011
Revenue / Sales (90% on credit) 5 000 000
Operating expenses (825 000)
Interest on loan (382 500)
Net profit for the year 1 292 500
540 examinati o n

Extract from the Balance Sheet as at 30 June
2011 2010
Owners equity 2 500 000 1 300 000
Capital: Stofberg 1 000 000 750 000
Capital: Du Toit 750 000 500 000
Current account: Stofberg 400 000 30 000
Current account: Du Toit 350 000 20 000
Loan: XYZ Bank 2 500 000 1 750 000
Current liabilities 300 000 750 000
Creditors 300 000 650 000
Bank overdraft – 100 000
Tangible/Fixed assets 1 800 000 1 100 000
Current assets 3 500 000 2 700 000
Inventories 2 250 000 2 000 000
Debtors 1 200 000 700 000
Cash 50 000 –
The following ratios were calculated:

2011 2010
Current ratio 11,67 : 1 3,6 : 1
Acid test ratio ? 0,93 :1
Operating expenses on sales ? 21%
Number of days’ stock on hand ? 240 days
Debtors collection period ? 51 days
Creditors payment period 69 days 91 days
Debt:equity ? 1,35 : 1
Percentage earnings by partner Stofberg ? 31%
Questions
4.1 Calculate the following ratios for 2011(round off to 2 decimal places):
4.1.1 Acid test ratio (3)
4.1.2 Percentage operating expenses on sales (3)
4.1.3 Number of days’ stock on hand (4)
4.1.4 Debtors collection period (4)
4.1.5 Debt : equity (3)
4.1.6 Percentage earnings by partner Stofberg (5)
4.2 Comment on the liquidity situation at the end of the current
financial year. (4)
4.3 Comment on the credit control of the business. (4)
4.4 Are the stock levels of Checkmate Suppliers appropriate? Explain. (3)
4.5 Has the new policy concerning operating expenses been effective
this financial year? Explain. (3)
4.6 Comment on the risk facing Checkmate Suppliers by referring to
the debt : equity ratio. (3)
4.7 C du Toit has offered his partner Stofberg R2 500 000 to buy his
share of the business. What advice would you give Stofberg
concerning this offer? Should he accept or reject it? Is this offer fair? (6)
examinati o n 541

Question 5 Inventory systems
The following information was taken from the books of Mudpie Traders. The
business uses a mark-up of 40% on cost.
Required
Study the information. Then answer the questions that follow.
Information
The following accounts appeared in the books of Mudpie Traders.
General Ledger of Mudpie Traders

Dr Purchases Cr
2011 2011
Feb 28 Balance b/d 567 015 00 Feb 28 Creditors allowances CAJ 12 430 00
Donations GJ 1 560 00
Drawings GJ 800 00
Trading account GJ 552 225 00
567 015 00 567 015 00
2011 2011
Feb 28 Opening stock GJ 130 800 00 Feb 28 Sales GJ 797 194 00
Purchases GJ ? Closing stock GJ 89 320 00
Carriage on purchases GJ 10 230 00
Profit and loss GJ ?
Questions
5.1 Calculate the cost of sales for the accounting period. (4)
5.2 Calculate the actual mark-up achieved during the accounting period. (4)
5.3 Calculate the stock turnover rate for the accounting period. The rate
of stock turnover in the previous financial period was 4 times per year. (4)
5.4 The mark-up policy of the business is 40% on the cost price.
Suggest any TWO reasons why the business did not achieve this. (4)
5.5 Name the two inventory systems. (2)
5.6 Which inventory system is Mudpie Traders using? (1)
542 examinati o n

Question 6 Bank reconciliation
Information
On 31 October 2011, Wilteno Traders compared the bank statement for October
2011 with the Bank Reconciliation Statement for September and the Cash Journals
for October. The following came to light:
1. The Bank account showed a favourable balance of R3 501 on
1 October 2011.
2. The bank statement showed an overdraft of R2 310 on 31 October 2011.
3. The Cash Journals showed the following totals on 31 October 2011:
CASH RECEIPTS JOURNAL CASH PAYMENTS JOURNAL

Bank Sundry accounts Bank Debtors control Sundry accounts
R13 845 R2 475 R20 799 R345 R2 679
4. The bank statement shows R1 200 deposited by Maske Florist on the current
account of Wilteno Traders for rental.
5. The bank statement received from SC Bank shows the following charges:
service fees, R61; tax levy, R36; cash handling fee, R23; cheque book, R15;
interest on overdraft, R51.
6. The bank statement shows an unpaid cheque for R225, received from
R Botes and dishonoured because of insufficient funds. The cheque was received
on 21 September 2011 in settlement of her account of R236.
7. The bank statement shows a stop order for R540 in favour of LIFE Ltd for
insurance.
8. A deposit of R1 845 has not been credited on the bank statement yet.
9. The following cheques had not been presented for payment by
31 October 2011:
No. 312, R114 (this cheque appears on the Bank Reconciliation Statement for
September 2011)
No. 389, R156
No. 412, R1 590
10. The bank statement shows R780, deposited by the owner Wilteno Burger on his
personal account, was credited to the account of Wilteno Traders
by mistake.
11. Cheque no. 401, issued to Walton’s for stationery, appeared on the bank
statement as R1 102, but was entered in the CPJ as R1 201. The amount on the
bank statement is correct.
Required
6.1 Show the additional entries in the Cash Receipts Journal and Cash Payments
Journal for October 2011 and close off the Cash Journals. (18)
6.2 Post the entries to the Bank account in the General Ledger of
Wilteno Traders and balance the account. (5)
6.3 Prepare the Bank Reconciliation Statement on 31 October 2011. (8)
examinati o n 543

Question 7 VAT and ethics
Section A [10 marks]
Luca Hartman is the owner of Books Galore. She buys goods from
KLM Wholesalers for R4 800 (excluding VAT). Luca pays Speedy Transport R456
(including VAT) to transport the goods to her shop in Swellendam. Luca sells half of
the items purchased from KLM Wholesalers to James Stevens at a profit mark-up of
50% on cost price. VAT is calculated at 14%.
Required
7.1.1 Calculate the total cost price of the goods purchased from
KLM Wholesalers, including transport, but excluding VAT. (4)
7.1.2 Calculate the amount of money Books Galore will receive from James
Stevens for the items sold to him (VAT inclusive). (4)
7.2 State whether the following statements are TRUE of FALSE:
7.2.1 When goods are sold on credit, the output tax receivable
from the debtor is paid over to SARS immediately and not
only when the money is received from the debtor. (1)
7.2.2 White bread is a zero-rated item. (1)
Section B [7 marks]
Read the following extract from an article that appeared in Die Burger on
28 July 2011:
MAN SENT TO PRISON FOR 8 YEARS DUE TO

FRAUD OF R2,9 MILLION
A Belgian businessman, who committed

fraud against the South African Revenue
Services (SARS) to the amount of R2,9
million, was sent to prison on Tuesday in the Blue
Downs Magistrate’s court.
Feyen established six Close Corporations (CCs)
after his arrival in South Africa in 2002. He claimed
VAT expenses till 2005, while an investigation showed
that the CCs were not trading at all after 2003.
While trading the CCs, transactions were mostly
Paul Feyen (54) was found guilty on 25 February in cash and not shown on the bank statements.
on 53 charges of fraud and 23 charges regarding Feyen is also wanted in Belgium, where he was
tax evasion. found guilty of fraud and sentenced to four years in
Magistrate Piet Nel said that Feyen lost all his prison. He escaped to South Africa.
assets to repay an amount of R2,1 million to SARS.

7.3.1 What is the penalty for tax evasion? (1)
7.3.2 How did SARS recover some of the money owed to them
by Feyen? (2)
7.3.3 Names two ways in which Feyen evaded tax. (4)
Total: 300 marks
544 examinati o n

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 amounts that relate to the current financial year,
but will only be paid in the next financial year. To show the expense in the
correct (current) financial year, the expense is accrued using a journal entry.
Accrued income is amounts that were earned in the current financial year,
but that have not yet been received. To show this income in the correct
(current) financial year, the income is accrued using a journal entry.
Accumulated depreciation is all the depreciation that has accumulated on

an asset since it was bought.
Administrative costs are the costs incurred in administering a

manufacturing business.
Affiliation fees are the fees that a club pays to the body that organises the
particular sport in the province or in the country.
Appropriation account is the account that is used to record the distribution

of profit between the partners in a partnership.
Asset disposal means to sell or dispose of an asset owned by the business.
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.
Authorisation of transactions is a primary means of control, which requires

that transactions should only be approved and carried out by personnel
acting within the scope of their authority.
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 the

business on a specific date.
gl o s s ary 545

Bank charges are the fees that banks charge their customers for the
services they provide.
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.
Bank Reconciliation Statement is the statement used to reconcile the

differences between the Cash Journals of the business and the bank
statement.
Break-even 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.
Capital accounts (in a partnership) are used to account for the capital
contributions of each partner.
Capital is cash or other assets that the owner contributes towards the
business.
Carrying value is the value of an asset at the present time; in other words,
the cost price of the asset less all the depreciation that has accumulated on
the asset to date.
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 register roll is the source document that is used to record cash sales
of merchandise to customers.
Cheque is a legal document that instructs the bank in writing to pay the
amount of money written on the cheque, to the person or entity written on
the cheque, from the business’s bank account.
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.
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.
546 gl o s s ary

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 is the difference between the selling price per unit and the
variable costs per unit of a product.
Credit invoice is the source document that received from a supplier when
credit purchases are made by the business.
Credit note is the source document that is issued by the business to a

debtor to acknowledge the receipt of returned goods or to confirm that the
debtor’s account will be reduced by an overcharged amount.
Credit sales invoice is the source document that is used to record credit
sales of merchandise to customers.
Creditors List is a summary of all individual creditors’ balances in the

Creditors Ledger.
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.
Creditors Reconciliation Statement is the statement used to reconcile

the differences between a creditors account in the Creditors Ledger of the
business and the statement of account received from the creditor.
Current accounts (in a partnership) are used to account for the earnings
and drawings of each partner.
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.
Debit note is the source document that is issued to a supplier when the
business returns unwanted or defective goods to them or was overcharged
on an invoice.
Debit order is an instruction initiated by a third party with the permission

of the business, which instructs the bank to pay the third party directly from
the business’s bank account.
gl o s s ary 547

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.
Deficit is when the expenses of a non-profit organisation exceed its income.
Deposit slip is a document that is completed when depositing money or

cheques into a bank account.
Depreciation is the amount by which the carrying value of an asset is

reduced because of wear and tear, use and aging.
Diminishing balance method is a method depreciating assets, where a

certain percentage of the carrying value is depreciated every year.
Direct labour costs are the salaries and wages paid to the employees who
are directly involved in the manufacture of a product.
Direct material costs are the costs of all the raw materials that are used
directly in the manufacture of a product.
Dishonoured cheque is a cheque that the bank refuses to honour (pay),

usually due to insufficient funds in the drawer’s account or a problem on
the cheque (such as incorrect signature or amount in words not matching
amount in figures).
Division of duties (segregation of duties) is a primary means of control,

which involves the separation of those responsibilities or duties that would,
if combined, enable one individual to record and process a complete
transaction.
Drawings comprise cash or other assets that the owner withdraws from the
business.
Electronic funds transfer (EFT) is a payment that is made by transferring

funds electronically using Internet banking.
Entrance fees are one-off payments that new members of a club pay in
order to become members of the club.
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.
548 gl o s s ary

External auditors are the people who perform an independent audit on a
company’s books. They are employed by independent auditing firms and
generally perform audits on many different companies.
Favourable bank balance is a debit balance in the Bank account in the

General Ledger of the business or a credit balance on the bank statement.
Fixed asset management is the accounting process of keeping track of all

the business’s fixed assets.
Fixed asset register is a register that is used to record all the relevant
information relating to each of the fixed assets owned by the business.
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.
Follow-up process is the process used by internal auditors to monitor any

corrective action taken by management, in order to help ensure that those
actions have been effectively implemented.
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.
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.
Honorarium is the remuneration that the club pays to the secretary and
treasurer of the club.
I/F is an abbreviation that may be written on a dishonoured cheque or in

the CPJ, which stands for “Insufficient Funds”.
Imputed expense is an expense that is not physically paid, but is accounted

for by reducing the carrying value of an asset.
Income and Expenditure account of a non-profit organisation is used to

calculate the surplus or deficit of the non-profit organisation and is similar
to the Profit and Loss account of a trading business.
gl o s s ary 549

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 is income that has been received during the
current financial year for the following financial year.
Income Statement is a statement that shows the results of the business

activities for a specific accounting period.
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 business 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 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 means that interest is added directly to the capital

amount of a loan or an investment.
Interest on capital is the interest earned on the capital contributed by each

partner in a partnership.
Interest on current account is the interest earn by a client for having a

favourable bank account balance.
Interest on overdraft is the interest that the bank charges a client for
having an overdrawn bank account balance.
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.
550 gl o s s ary

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.
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.
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.
Labour costs consist of the costs of all the labour involved in the
manufacture of a product.
Liability is a current obligation, because transactions from the past and the
settlement of this obligation will lead to an outflow of resources from the
business.
Liquidity is the ability of a business to pay its short-term debts.
Manufacturing overheads are all the costs of the manufacturing process

which are not directly identifiable with a specific product.
Matching concept is a fundamental GAAP principle, which provides that

income and expenses are recognised and recorded in the correct time period.
Material costs consist of the costs of all the raw materials used in the
manufacture of a product.
gl o s s ary 551

Materiality principle is a fundamental GAAP principle, which provides that
all significant information must be included in the financial statements,
while items which are insignificant need not be disclosed in detail.
Membership fees are fees that members of a club pay to retain their
membership at the club.
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.
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-tangible asset is an asset that you cannot physically touch, such as a

fixed deposit.
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.
Output tax is the VAT charged by a business when it sells goods or renders
services.
Overdraft is a facility provided by the bank, which allows clients to

overdraw on their current bank account (spend more than they have in
their account).
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.
Physical controls are controls that are used to physically safeguard and
restrict access to assets and records.
Post-dated cheque is a cheque that has been issued for a date in the future
and can only be presented for payment on or after that date.
552 gl o s s ary

Prepaid expenses are expenses that have already been paid in the current
financial year, but that apply to the following financial year.
Prime cost is the total direct costs involved in the manufacturing process.
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.
Proper documentation is a primary means of control, which requires that

proper and accurate documentation is maintained and used to support all
transactions.
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.
Prudence concept is a fundamental GAAP principle, which provides

that accountants should be conservative in the preparation of financial
statements and should take care not to overstate assets or income and not
to understate liabilities and expenses.
R/D is an abbreviation that may be written on a dishonoured cheque or in

the CPJ, which stands for “Refer to Drawer”.
Receipt is the source document that is issued to acknowledge the

acceptance of money.
Reconciliations involve the process of comparing two sets of records

in order to check that they are in agreement and to account for any
differences that may be found.
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.
Replenishment of trading stock is the policy of replacing goods as soon as

they are sold, in order to maintain constant levels of trading stock.
Risk management is the process of identifying, assessing and managing risk.
Risk response is the action taken by the risk management function to

address a risk.
gl o s s ary 553

Risk-based internal audit is an internal audit that follows a risk-based
approach, which involves identifying and focusing on the areas of greatest
risk to the business.
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.
Sales and distribution costs are the costs incurred in marketing,

distributing and selling manufactured products.
Sampling is a process whereby internal auditors select and test a sample

of items from a large group of items and then use those test results to draw
conclusions and express an opinion about the entire group.
SARS is the abbreviation for the South African Revenue Services.
Semi-fixed costs are manufacturing costs that are fixed up to a certain level
of production and if production exceeds this level, then these costs increase
in steps.
Semi-variable costs are manufacturing costs that have both a fixed and
variable component.
Solvency is the ability of a business to pay all of its debts.
Source documents are the documents that are first used to record the
details of a transaction and are then used to record the transaction in the
accounting records of the business.
Stale cheque is a cheque that has not been cashed within the six months
after it was issued.
Standard rate is the normal rate at which VAT is charged (currently 14%).
Statement of account is an external document recorded by a creditor,

which shows all the transactions that took place between the business and
the creditor over a given period.
Statement of Receipts and Payments is a summary of the cash transactions

of the club for a financial year.
Stop order is an instruction given to the bank by the business, which instructs
the bank to pay a third party directly from the business’s bank account.
Straight-line (cost-price) method is a method depreciating assets, where a

certain percentage of the cost price is depreciated every year.
554 gl o s s ary

Substantive tests (tests of detail) involve testing, checking and verifying
the completeness, validity and accuracy of the financial and operating
information.
Surplus is when the income of a non-profit organisation exceeds its expenses.
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.
Tangible asset is an asset something that you can physically touch or see,
such as a computer.
Trading stock deficit is the difference between the value of the stock
shown in the Trading Stock account and the value of the stock as
determined by a physical stock take.
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”.
Unfavourable bank balance is a credit balance in the Bank account in the

General Ledger of the business or a debit balance on the bank statement.
Value-added tax (VAT) is the 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.
Walkthrough tests involve tracing a small sample of transactions through

various business systems in order to check whether controls exist and
to enable internal auditors to gain a better understanding of the various
control processes of the business.
Work in progress 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%.
gl o s s ary 555

Grade
Study & Master Study & Master
11 11
Accounting
Accounting
Study & Master Accounting Grade 11 has been especially
Accounting Learner’s Book

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: CAPS

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
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
Learner’s Book Grade
11
www.cup.co.za
I S B N 978-1-107-63494-7
9 781107 634947
SM_Accounting_11_LB_CAPS_ENG.indd 2-3 2012/08/07 3:40 PM

Study &amp; Master Accounting Grade 11 Learners Book

Uploaded by

Document Information

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 &amp; Master Accounting Grade 11 Learners Book

Uploaded by

Copyright:

Available Formats

Grade

Study & Master Study & Master

Accounting Learner’s Book

The comprehensive Learner’s Book includes: CAPS

The Teacher’s Guide includes:

Study & Master

Learner’s Book Grade

SM_Accounting_11_LB_CAPS_ENG.indd 2-3 2012/08/07 3:40 PM

Elsabé Conradie • Derek Kirsch • Mandy Moyce

SM Accounting_G11_LB_TP.indd 1 2012/08/07 3:33 PM

Cambridge, New York, Melbourne, Madrid, Cape Town,

Cambridge University Press

© Cambridge University Press 2012

This publication is in copyright. Subject to statutory exception

First published 2012

Editor: Christine de Nobrega

Cambridge University Press has no responsibility for the persistence or

Photographs: pp 5 and 6 – Africa Media Online

Text and other materials: p 13 – “SAICA’s commitment to sustainability”, SAICA; p 10 –

Acc Gr 11 Book.indb 2 8/7/12 10:49:42 AM

How to use this book iv

Chapter 2 Internal controls and audit processes 13

Chapter 3 Reconciliations – Bank reconciliations 37

Chapter 4 Reconciliations – Creditors reconciliations 101

Chapter 5 Fixed assets 121

Chapter 6 Partnerships – Accounting concepts and final accounts 165

Chapter 7 Partnerships – Financial statements 227

Chapter 8 Partnerships – Interpretation of financial statements 259

Chapter 9 Financial accounting of non-profit organisations – Clubs 289

Chapter 10 Cost Accounting 337

Chapter 11 Budgeting 393

Chapter 12 Inventory systems 427

Chapter 13 Value-added Tax (VAT) 461

Chapter 14 Revision activities 501

Acc Gr 11 Book.indb 3 8/7/12 10:49:42 AM

fixed deposit Definitions are provided for new or difficult

i The business makes use of a

Transactions on discount Notes in the margin remind you of

GAAP flash GAAP flashes appear where GAAP

Risk! warnings highlight potential problems

Clipboards appear throughout the textbook

Internal audit checklists provide lists of

Acc Gr 11 Book.indb 4 8/7/12 10:49:47 AM

Hey Siya, can I

Sorry, Sally, but that would

Acc Gr 11 Book.indb 1 8/7/12 10:49:48 AM

2. The King Code

Acc Gr 11 Book.indb 2 8/7/12 10:49:49 AM

Acc Gr 11 Book.indb 3 8/7/12 10:49:49 AM

Example: The concept of sustainability may be applied to the manner in

Acc Gr 11 Book.indb 4 8/7/12 10:49:49 AM

Bottom line Economic performance Profit

Social performance People

Triple bottom line Environmental performance Planet

Economic performance Profit

Acc Gr 11 Book.indb 5 8/7/12 10:49:49 AM

Acc Gr 11 Book.indb 6 8/7/12 10:49:51 AM

1. What is a code of ethics?

Acc Gr 11 Book.indb 7 8/7/12 10:49:55 AM

The following headlines appeared in the Ethics Times newspaper (a fictitious

Use your knowledge of the terms accountability, transparency and

The following headlines appeared in the newspapers in various countries

Acc Gr 11 Book.indb 8 8/7/12 10:49:55 AM

Use your knowledge of the terms accountability, transparency and

Study & Master Accounting Grade 11 Learners Book

Study & Master Accounting Grade 11 Learners Book

Example: The concept of sustainability may be applied to the manner in