Student s Book. Financial

Transcription

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2 FET FIRST NATED Series Financial Accounting N4 Student s Book R. Eyssen

3 FET FIRST NATED Series Financial Accounting Student s Book R. Eyssen, 2012 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, photocopying, recording, or otherwise, without the prior written permission of the copyright holder or in accordance with the provisions of the Copyright Act, 1978 [as amended]. Any person who does any unauthorised act in relation to this publication may be liable for criminal prosecution and civil claims for damages. First published 2012 by Troupant Publishers [Pty] Ltd P. O. Box 4532 Northcliff 2115 Distributed by Macmillan South Africa [Pty] Ltd ISBN: , eisbn: It is illegal to photocopy any page of this book without written permission from the publishers. While every effort has been made to ensure the information published in this work is accurate, the authors, editors, publishers and printers take no responsibility for any loss or damage suffered by any person as a result of reliance upon the information contained therein. The publishers respectfully advise readers to obtain professional advice concerning the content. To order any of these books contact Macmillan Customer Services at: Tel: (011) Fax: (011) [email protected]

4 Contents Syllabus Grid: Financial Accounting N4.... v Module 1 Introduction (revision of components of previous syllabi)...1 Part 1: Accounting theory, principles and concepts...1. Unit 1.1: Accounting theory, principles and concepts Unit 1.2: Types of commercial organisation... 3 Unit 1.3: Activities of organisations... 5 Unit 1.4: The accounting transactions of service and trading activities Part 2: Recording transactions from source documents according to the continuous (perpetual) stock system Unit 1.5: Accounting cycle Unit 1.6: Source documents Unit 1.7: Books of original entry Unit 1.8: Posting to the general and subsidiary ledgers Unit 1.9: Drawing up a Trial Balance Part 3: Bank reconciliations Unit 1.10: Aims of a bank reconciliation Unit 1.11: Aims and uses of a bank statement Unit 1.12: Comparing the bank statement with the Cash Journals Unit 1.13: Reconciling a bank statement with the previous month s reconciliation statement Unit 1.14: Steps to reconcile the bank statement Unit 1.15: Dealing with stop payment cheques Unit 1.16: How to record postdated cheques Part 4: Control accounts Unit 1.17: Aim of control accounts Unit 1.18: Adjustment of books of original entry Unit 1.19: Debtors and creditors control accounts Unit 1.20: Reconciliation of the balance of the control accounts and the totals of the lists of debtors and creditors Unit 1.21: Transfers between debtors and creditors ledgers Part 5: Results of sole traders Unit 1.22: Additional transactions Unit 1.23: Accounting adjustments Unit 1.24: Post-adjustment Trial Balance Unit 1.25: Closing transfers Unit 1.26: Final accounts Unit 1.27: Income Statement Unit 1.28: Balance Sheet Module 2 accounting entries for a trading organisation according to the periodic stock system Unit 2.1: Recording transactions for stock movements using the periodic stock system Unit 2.2: Adjusting books of first entry to accommodate the periodic stock system

5 Unit 2.3: Calculating the cost of sales value Unit 2.4: The end-of-year adjustment for trading stock Unit 2.5: Year-end closing transfers for stock Unit 2.6: Dealing with stock in the Income Statement Module 3 Departmental accounts according to the periodic stock system Unit 3.1: Aim of departmental accounts Unit 3.2: Adaptation of source documents for departmental purposes Unit 3.3: Adaptation of books of original entry for departmental purposes Unit 3.4: Adaptation of General Ledger accounts for departmental purposes Unit 3.5: Drawing up a Departmental Trading Statement Unit 3.6: Drawing up a Departmental Income Statement MODULE 4 Non-trading organisations (organisations without a profit motive) Unit 4.1: The aim of a non-trading organisation Unit 4.2: Special items (ledger accounts) Unit 4.3: Special funds Unit 4.4: Accounting concepts for non-profit organisations Unit 4.5: Analysis Cash Book Unit 4.6: Operating (Trading) account per activity Unit 4.7: Statement of Income and Expenditure Unit 4.8: Balance Sheet for an NPO MODULE 5 The Cash Flow Statement for a sole trader Unit 5.1: The aim of a Cash Flow Statement (CFS) Unit 5.2: Users of a Cash Flow Statement Unit 5.3: Explanations and concepts of a Cash Flow Statement Unit 5.4: Dealing with non-cash items Unit 5.5: Procedure for drawing up a Cash Flow Statement Unit 5.6: Dealing with special items Glossary Abbreviations/acronyms

6 SYLLABUS GRID: Financial accounting Page in SB Learning Content MODULE 1: INTRODUCTION (REVISION COMPONENTS OF PREVIOUS SYLLABI) ACCOUNTING THEORY, PRINCIPLES AND CONCEPTS Revision components i.r.o. accounting principles of the sole trader (service and trading enterprise) Accounting theory, principles and concepts Types of organisations Sole trader Partnership Close Corporation Company with limited liability Public company Organisations with no profit motive Activities of organisations Service activities Trading activities Manufacturing activities Activities with no profit motive The accounting transactions of service and trading activities with relation to the usage of source documents, the double entry principle and influence of the double entry transactions on the accounting equation Learning Objectives On completion of this module the student must be able to: briefly describe the basic accounting concepts, principles and policy identify the different forms of organisations by explaining the similarities and differences between each identify the business activities of the organisations mentioned in par and to indicate the difference between each in respect of generating profit identify the source document and the accounts involved with each transaction, and to determine which account must be debited or credited, as well as explaining the influence of the relevant transaction on the accounting equation DIDACTIC DIRECTIVES With reference to learning objectives to 1.1.3: 1. Topics in this section must be discussed briefly to serve as revision of students background knowledge. Illustrate with good examples. Additional literature, such as published annual statements of listed companies, as well as accounting statements can be consulted. With reference to learning objective 1.1.4: 2. Students should be able to handle each transaction on the basis of the following structure: source document for the transaction ledger account debited and ledger account credited the influence of the double entry on the accounting equation. 3. Topics dealt with in this module, must be emphasised continuously in all other modules. Use practical examples to illustrate the accounting practice visually. Evaluation With reference to learning objectives to 1.1.3: 1. Theory questions can be asked in class tests. In examination papers the emphasis should rather be on practical than on theoretical questions as students should already have mastered the theory concepts. With reference to learning objectives to 1.1.4: 2. Students must be evaluated on a daily basis to determine whether the student has grasped the double entry principle, including all other elements involved (also refer in this regard to the evaluation guidelines (par 4) at the beginning of the syllabus). MODULE 1: (Cont.) THE RECORDING OF TRANSACTIONS FROM SOURCE DOCUMENTS ACCORDING TO THE CONTINUOUS (PERPETUAL) STOCK SYSTEM The accounting cycle identify and describe briefly the steps in the accounting cycle v

7 Page in SB Learning Content Source documents Books of original entry: Cash receipts journal Cash payments journal Debtors journal Creditors journal Debtors allowances journal Creditors allowances journal Petty cash journal General journal Wages journal Salaries journal Cash book with analysis columns Posting to the general and subsidiary ledgers Drafting of a trial balance Learning Objectives On completion of this module the student must be able to: define a source document, describe the necessity of it as a source of information and to distinguish between the original and duplicate as well as source and supporting documents and also external and internal documents do the recording of transactions in the subsidiary books of organisations from source documents do the posting of all the transactions in columns from the books of original entry to the general and subsidiary ledgers, as well as the grouping of ledger accounts, T-form and three column accounts test the correctness of the double entries with the aid of the trial balance, and to trace the errors if it does not balance DIDACTIC DIRECTIVES With reference to the learning objectives and 1.2.2: 1. Topics can only be discussed briefly to serve as revision for background knowledge of the students. With reference to the learning objectives to 1.2.4: 2. Students should at all times be able to do exercises directly from sets of source documents. 3. Students should be able to do all cash and credit transactions of a service and trading organisation which are usually recorded in the journals mentioned and which have been dealt with in the N3/NSC and std 10 HG/SG syllabi. With reference to learning objective 1.2.3: 4. Both methods of dealing with employer s contribution must be dealt with. 5. Students must be informed that different names for the same subsidiary journals are in use, e.g. debtors journal/sales journal/sales book. 6. Columns and the position of columns can also vary in the subsidiary journals of the different enterprises. With reference to learning objective 1.2.5: 7. It must be emphasised that the trial balance only indicates that for every debit entry a corresponding credit entry was made. Evaluation With reference to learning objective to 1.2.5: 1. Theory questions can be asked in class tests. In examination papers the emphasis should rather be on practical than on theoretical questions as students should already have mastered the theory concepts. With reference to learning objectives to 1.2.5: 2. Examination questions will be set from actual source documents with the exception of the salaries and wages journals. 3. Students should reach a high competency level in regard to these topics. 4. To increase the competency level of the students, short assignments and exercises must be evaluated on a regular basis. 5. Students can be evaluated on all transactions that are recorded in the subsidiary journals mentioned and which were dealt with in the N3/NSC and std 10 HG/SG syllabi. vi

8 Page in SB Learning Content MODULE 1: (Cont.) BANK RECONCILIATION Aim of bank reconciliation Bank statement: aim and uses Reasons for the differences between the balances as in the bank statement and the bank account Items in the cash journals/cash book, but not on the bank statement Outstanding deposits Outstanding cheques Items on the bank statement, but not in the journals/cash book Bank charges Interest on overdraft Stop and debit orders Dishonoured (R/D) cheques Deposits by debtors Interest on current account (favourable balance) Errors in the cash journals/cash book Errors on the bank statement Deposits credited in error on the bank statement Cheques debited in error on the bank statement Steps to reconcile the bank statement and the cash journals/cash books Learning Objectives On completion of this module the student must be able to: describe the aim of bank reconciliation name the aim and functions of the bank statement compare the bank statement with the cash journals/cash book and identify and record the differences record the supplementary entries in the cash journals/cash book Recording of outstanding transactions in the cash journals/cash book Drafting of the bank reconciliation statement where the bank account has a favourable balance where the bank account has an overdrawn balance Reconciliation of the bank statement with a bank reconciliation statement of a previous month Payment stopped due to lost cheque stale cheques disputes Postdated cheques received issued draw up a bank reconciliation statement and to compare the balance in the bank statement with the balance in the bank account/cash book compare the bank statement with the cash journals/cash book of the current month and the reconciliation statement of the previous month and to do the necessary entries briefly describe the procedure to stop the payment of a cheque, recording of the cancellation in the applicable cash journal/ cash book, and the issuing of a new cheque the correct procedure and entries with regard to postdated cheques DIDACTIC DIRECTIVES With reference to learning objective 1.3.4: 1. Students should be able to do bank reconciliation from a given bank statement and actual source documents. vii

9 Page in SB Learning Content Learning Objectives On completion of this module the student must be able to: Evaluation With reference to learning objectives to 1.3.7: 1. Theory questions can be asked in class tests. In examination papers the emphasis should rather be on practical than on theoretical questions as students should already have mastered the theory concepts. 2. Students should reach a high competency level in regard to this topic. MODULE 1: (Cont.) CONTROL ACCOUNTS Aim of control accounts Adjustment of books of original entry Debtors and creditors ledger Debtors control account Creditors control account Transfers between debtors and creditors ledgers 1.5 RESULTS OF SOLE TRADERS: ACTIVITIES AND FINANCIAL STATUS Additional transactions Carriage on purchases Bad debts recovered Sale of fixed assets briefly describe the aim of control accounts provide additional columns required in the books of original entry post from the books of original entry to the subsidiary ledgers post from the books of original entry to the debtors control account in the general ledger draft a list of debtors at a given stage and reconcile it with the debtors control account post from the books of original entry to the creditors control account in the general ledger draft a list of creditors at a given stage and reconcile it with the creditors control account make transfers between the debtors and creditors by means of journal entries and post to the general and subsidiary ledgers do the following in connection with transactions in par and of the contents column: record the entries in the correct subsidiary journal post the entries to the correct accounts in the general ledger indicate the influence on the accounting equation do the following in connection with transactions in par of the contents column: complete or adjust the asset register do the recording procedure for the sale of fixed assets during and at the end of the financial period, namely journalise the applicable transactions and record the cash transactions in the cash journals post the entries to the relevant ledger accounts indicate the influence on the accounting equation viii

10 Page in SB Learning Content Adjustments Additional bad debts Provision for bad debts Provision for depreciation on fixed assets: Provision for discount allowed Provision for unforeseen expenses Expenses payable/accrued expenses Income receivable/accrued income Prepaid expenses Income received in advance Consumable stores on hand Trading stores on hand Correction of errors and omissions Learning Objectives On completion of this module the student must be able to: do the following in connection with transactions in par to in the contents column: briefly explain the aim of adjustments journalise the necessary adjustments post the adjustments to the correct ledger accounts indicate the influence on the accounting equation indicate how the relevant ledger accounts will be shown in the financial statements identify and journalise the amounts that must be written back at the beginning of the next financial period, and adjust the relevant ledger accounts Post-adjustment trial balance draft a post-adjustment trial balance after all adjustments have been journalised and transferred to the relevant accounts Closing transfers journalise the closing transfers and post to the relevant accounts Final accounts draft a trading account and profit and loss account as well as a post-closing trial balance Income statement draft an income statement in vertical form Balance sheet draft a balance sheet in vertical form with the necessary notes DIDACTIC DIRECTIVES With reference to learning objectives to 1.5.7: 1. After the completion of module 1 the students should be able to draft a complete set of books for a sole trader (service and trading enterprise) from the subsidiary books up to the balance sheet. With reference to learning objective : 2. Refer to the requirements of the Receiver of Revenue i.r.o. the time-limit for writing off an asset. Evaluation With reference to all learning objectives in module 1: 1. This module will be examined in full. 2. Questions should be in the form of practical applications where students will be asked to do entries directly from source documents. MODULE 1: (Cont.) DOCUMENT PROJECT (ACCORDING TO THE CONTINUOUS/PERPETUAL STOCK SYSTEM) Complete document assignment on a combined service and trading organisation complete a comprehensive assignment from source documents within a specified time DIDACTIC DIRECTIVES With reference to learning objective 1.6: 1. The lecturer can draw up a comprehensive assignment where students must use a set of source documents to complete the books of account for a combined service and trading organisation within a specified time. 2. This set of documents must be compiled in such a manner that it simulates the practice of accounting as faithfully as possible. 3. The following aspects must be dealt with in the assignment: 3.1 Grouping of documents in bundles. ix

11 Page in SB Learning Content Learning Objectives On completion of this module the student must be able to: 3.2 Arranging in date order. 3.3 Drafting of all subsidiary journals revised in module 1: Cash receipts journal Cash payments journal Debtors journal Creditors journal Debtors allowance journal Creditors allowance journal Petty cash journal General journal Wages journal/salaries journal 3.4 Posting to the debtors and creditors ledger. 3.5 Posting to the general ledger. 3.6 Drafting of a bank reconciliation statement. 3.7 Drafting of a debtors list and reconciliation with the debtors control account. 3.8 Drafting of a creditors list and reconciliation with the creditors control account. 3.9 Drafting of a pre-adjustment trial balance All the additional transactions and adjustments dealt with Drafting of a post-adjustment trial balance Drafting of the annual financial statements. Evaluation 1. The assignment can be evaluated as part of the semester work. 2. The following methods of evaluation can be followed: 2.1 Students can complete the assignment in the prescribed time under test conditions after which the complete assignment is handed in to be marked. 2.2 Students can complete sections of the assignment in their own time while other sections are done under test conditions. Marks are then allocated for those sections completed under test conditions. MODULE 2: ACCOUNTING ENTRIES FOR A TRADING ORGANISATION ACCORDING TO THE PERIODIC STOCK SYSTEM Recording of the following transactions in the ledger accounts: Purchasing of stock Sales of stock Returns of stock bought by the organisation Returns of stock bought by clients Withdrawal of stock by the owner Carriage on purchases (carriage in) Other purchasing costs that increase the purchase price Carriage on sales (carriage out) 2.2 Adjusting of books of first entry to accommodate the periodic stock system 2.1 enter the transactions mentioned in general ledger accounts 2.2 adjust the columns of the respective books of first entry, properly closing off and posting them to the general ledger 2.3 Calculation of cost of sales 2.3 identify the accounts involved in the calculation of the cost of sales and to do the calculation 2.4 Trading stock as year-end adjustment 2.4 record the adjustment of the trading stock amount in the general journal and post it to the general ledger 2.5 Closing transfers 2.5 do the closing transfers to the trading account, profit and loss account and capital account x

12 Page in SB Learning Content Learning Objectives On completion of this module the student must be able to: 2.6 Financial statement 2.6 do the trading section (calculation of the gross profit) in the income statement DIDACTIC DIRECTIVES With reference to learning objective 2.1 to 2.6: 1. After completion of this module the students should be able to compile the books of an organisation according to the continuous (perpetual) as well as the periodic stock system. Evaluation 1. During evaluation there should only be concentrated on the learning objectives as set out above. It should therefore not be necessary to evaluate a complete set of books according to the periodic stock system. MODULE 3: DEPARTMENTAL ACCOUNTS ACCORDING TO THE PERIODIC STOCK SYSTEM Aim of departmental accounts 3.1 explain the aim of departmental accounts and explain how to control the departmental profits by making use of departmental accounts 3.2 Adaptation of source documents 3.2 interpret source documents or departmental codes on source documents and enter them in the books of original entry 3.3 Adaptation of books of original entry 3.3 adapt the books of original entry mentioned Columnar creditors journal in the contents column by providing Columnar creditors allowances journal additional columns, recording the Columnar debtors journal transactions, and closing them off Columnar debtors allowances journal Cash journals/cash book Columnar inter-departmental transfers journal General journal 3.4 Adaptation of relevant accounts in the general ledger 3.4 adapt the accounts mentioned in the contents column by providing additional Departmental purchases account columns, recording the relevant journal Departmental sales account totals in them, and closing them off 3.5 Departmental trading statement 3.5 draw up the departmental trading statement at the end of the accounting period 3.6 Departmental income statement 3.6 draw up the departmental income statement at the end of the accounting period. DIDACTIC DIRECTIVES With reference to learning objective 3.1 to 3.6: 1. Departmental sets of accounts with two departments will be sufficient. 2. Practical contact with departmental organisations is of the utmost importance for students to gain knowledge of departmental stock recording and especially stock control. 3. Students must complete some exercises from source documents that are based on departmental stock codes. Evaluation 1. Evaluation must be based on practical orientated exercises and questions. 2. Theory questions can be asked in class tests. MODULE 4: ORGANISATIONS WITHOUT A PROFIT MOTIVE (NON-TRADING ORGANISATIONS) Aim of non-trading organisations Terminology Administration Characteristics 4.1 explain the difference between organisations with and without a profit motive, as well as give a brief explanation of the general and accounting administration of a non-trading organisation xi

13 Page in SB Learning Content 4.2 Special items (ledger accounts) Entrance fees Subscriptions Affiliation fees Honorarium Legacies and donations 4.3 Special funds Creation and expansion of funds and fund investments Interest on funds Capitalisation of interest to funds Interest to cover current expenses Allocation of prizes from interest 4.4 Concepts i.r.o. incomes and expenses as well as receipts and payments Receipts and incomes Payments and expenses Capital expenses and current expenses Capital receipts and current receipts Learning Objectives On completion of this module the student must be able to: 4.2 explain the aim of the different ledger accounts typical to a non-trading organisation, interpret and record the entries allocated to them 4.3 explain the aim of special funds and record the entries i.r.o. the creation of the fund as well as the employment of the income from the special fund 4.4 define the concepts in the contents column and explain the difference between the respective concepts 4.5 Analysis cash book 4.5 draw up an analysis cash book with relevant entries and post to the correct ledger accounts 4.6 Trading account per activity 4.6 draw up a trading account for the different activities of a non-trading organisation 4.7 Statement of incomes and expenses (income and expenditure statement) 4.8 Adjustments of the set of accounts to provide for a profit section 4.7 indicate the surplus or deficit by means of an income statement 4.8 do the necessary adjustments to accommodate a section with a profit motive within the books of a non-trading organisation 4.9 Balance sheet 4.9 draw up the balance sheet of the nontrading organisation in vertical form DIDACTIC DIRECTIVES With reference to learning objective 4.3: 1. The operation of only one special fund is sufficient. With reference to learning objective 4.9: 2. For the placement of the special fund in the balance sheet of the non-trading organisation see annexure 2. Evaluation 1. Evaluation must be based on practical orientated exercises and questions. 2. Theory question can be asked during class tests. 3. Questions should include all types of non-trading organisations and not only clubs. MODULE 5: CASH FLOW STATEMENT OF A SOLE TRADER The aim of a cash flow statement 5.1 explain the aim of a cash flow statement Users of the cash flow statement 5.2 name the users of the cash flow statement Entrepreneur/owner of an organisation and indicate why they are Credit providers interested in the cash flow statement Cash flow planning 5.3 Explanations and concepts 5.3 define the different cash flow items and explain the important principles i.r.o. the setting out of the cash flow statement xii

14 Page in SB Learning Content Learning Objectives On completion of this module the student must be able to: 5.4 Non-cash flow items 5.4 name and explain the different non-cash flow items 5.5 Procedure for the drafting of a cash flow statement Cash retained from operating activities Cash utilised in investment activities Cash goods from financing activities 5.6 Special items Depreciation Profit/loss on sale/scrapping of fixed assets DIDACTIC DIRECTIVES With reference to learning objectives 5.1 to 5.6: See annexure 1 for the form of the cash flow statement. 5.5 follow the correct procedure for the drafting of the cash flow statement 5.6 explain special items i.r.o. the cash flow and record these in the cash flow statement Evaluation Students can be requested to draft a complete cash flow statement from given cash flow information applicable to a sole trader. xiii

15 Part 1: Accounting theory, principles and concepts Overview Module 1 Introduction (revision of components of previous syllabi) When you have completed Part 1 of this module, you should be able to: Briefly describe the basic accounting concepts, principles and policy. Identify the different forms of organisations by explaining the similarities and differences between each. Identify the business activities of the organisations mentioned above and indicate the difference between each in respect of generating profit. Identify the source document and the accounts involved with each transaction and determine which account must be debited and credited, as well as explaining the influence of the relevant transaction on the accounting equation. Unit 1.1: Accounting theory, principles and concepts Accounting is the process of transaction recording in order to have a permanent record of those transactions. From these records an enterprise can determine whether a profit was made or a loss was suffered for a financial period. This profit or loss will have an effect on the owner s equity or the wealth of the owner. It is also important for an enterprise to report on its assets and liabilities, indicating whether there was an increase or decrease in these accounts. The main objective of all enterprises is to make a profit at the end of a financial period. A profit is recorded when the income exceeds the expenses of that enterprise, while a loss is suffered when the expenditure exceeds the income of the enterprise. The accounting equation defines the relationship between assets, owner s equity and liabilities. This relationship defines assets as being equal to the owner s equity and liabilities, or A = O + L. Assets Assets can be defined as the possessions owned by an enterprise, like a vehicle. All assets can be divided into two groups (types): Non-current (fixed) assets These assets are bought to be used (not for resale) in the enterprise. Therefore these assets have a long life span and assets: Are the possessions owned by an enterprise, for example a vehicle. All assets can be divided into two groups (types): non-current (fixed) assets and current assets. All asset accounts increase on the debit side of the account and decrease on the credit side of the account. 1

16 will be used for periods longer than 12 months. However, these assets can be resold close to the end of their life span and be replaced with new assets for the same purpose or to expand current operations. Examples of fixed assets are land and buildings, vehicles and equipment. Current assets These assets include the cash in the enterprise s current bank account or any other asset that can be converted into cash within a year. Examples of current assets are the cash in the current account or any other forms of cash, like petty cash or cash float, trading stock and debtors. All asset accounts increase on the debit side of the account and decrease on the credit side of the account. Owner s equity Owner s equity refers to the wealth of the business owner or the interest the owner has in his or her enterprise. There are two owner-related accounts that have an effect on the owner s equity. These accounts are capital and drawings. Any contribution that an owner makes towards his or her business is called his or her capital contribution and will increase the owner s equity. If the owner withdraws cash or trading stock from his or her business this is referred to as drawings and will decrease the owner s equity. All income and expenditure accounts will also have an effect on the owner s equity. Income will increase the owner s equity, while expenditure will decrease the owner s equity. The capital and all income accounts increase on the credit side of the account and decrease on the debit side of the account. The drawings and all expenditure accounts increase on the debit side of the account and decrease on the credit side of the account. Liabilities Any amount owed by an enterprise to entities or enterprises is called a liability. These entities or enterprises are referred to as creditors. current assets: Include the cash in the enterprise s current bank account or any other asset that can be converted into cash within a year. Examples of current assets are the cash in the current account, trading stock and debtors. liability: Any amount owed by an enterprise to entities or enterprises is called a liability. These entities or enterprises are referred to as creditors. Liabilities can also be divided into two groups: non-current and current liabilities. Liability accounts increase on the credit side of the account and decrease on the debit side of the account. current liabilities: Are short-term liabilities like an overdrawn bank account and creditors. non-current liabilities: Include long-term loans, and are also known as interest-bearing liabilities. Liabilities can also be divided into two groups. These groups are non-current and current liabilities. Non-current liabilities, for example, long-term loans are also known as interest-bearing liabilities. Current liabilities are short-term liabilities like an overdrawn bank account and creditors. Liability accounts increase on the credit side of the account and decrease on the debit side of the account. 2

17 To summarise: dr assets, DRAWINGS OR EXPenses cr INCREASE DECREASE dr liabilities, CAPITAL OR INCOMe cr INCREASE DECREASE So far, we have talked about businesses and organisations. From an accounting point of view they have to keep similar records and the accounting process is the same for all entities. In the next unit, we are going to focus on the different types of business. Unit 1.2: Types of commercial organisation When you look around, you will easily identify many different organisations. These organisations all differ in size but each of these entities is also a different type of commercial organisation, because of the number of people who own all or part of the business. The different ways in which a business is set up depend on two basic elements, namely: The number of people who invest in or own the business. The level of risk that investors are willing to take. Therefore, business owners have to decide how to protect themselves and their businesses. One of the ways of doing this is through their choice of business structure. Table 1.1 shows how many investors can own a business and the advantages and disadvantages that need to be taken into account: Table 1.1 The advantages and disadvantages of the different types of business structure Business format Maximum no. of investors (owners) Advantages Disadvantages Sole trader 1 Legal business registration not required. Business can start to operate without registration delays. A sole proprietor receives all business profits. Business accounts do not have to be professionally prepared or audited. Partnership 2 20 Legal business registration not required. Business can start to operate without registration delays. Two or more owners share business responsibilities. The owner is self-reliant. A sole proprietor is personally liable for all business debts. The owner s personal assets can be sold to pay business debts. The business ceases on the death of the owner. The business name is not registered and protected. Partners are personally liable for all business debts. Partners personal assets can be sold to pay business debts. The business name is not registered and protected. 3

18 Business format Close corporation (CC) Limited liability company Public company Non-profit organisation (NPO) Maximum Advantages no. of investors (owners) Partners share profits between them. Business accounts do not have to be professionally prepared or audited Registration was easier than for a private limited company. Members liability is limited to the amounts invested in the business. Ownership can be easily transferred by selling a member s interest. A CC continues after the death of a member. In terms of the Companies Act, 2008, no new CCs may be established. However, existing CCs may continue or convert to other business formats. Max 50 Shareholders liability for business debts is limited to the amounts paid for shares. Shareholders can employ managers to run the company. Companies tend to be perceived as being more stable. Companies generally have easier access to loan capital. Min 7 Shares can be bought and sold easily on the Johannesburg Stock Exchange (JSE). There is no limit to the number of shareholders. Shareholders liability for business debts is limited to the amounts paid for shares. Shareholders employ managers to run the company. Companies are usually large and therefore perceived as being stable. Public companies generally have access to loan capital. Public companies can issue more shares in order to raise more capital. Various There are different forms of non-profit organisations that are governed by different rules. Small NPOs generally have to meet the same rules as private limited companies (see above). Large NPOs generally have to meet the same rules as public limited companies (see above). Disadvantages Ownership of a CC is limited to ten people. Dividends can only be paid if the business is solvent. Accounts have to be formally audited and presented to members. Limited liability results in creditors demanding more financial information. Companies must be formally registered. Business accounts must be professionally prepared and audited. Business information must be circulated to shareholders at specified times. A private limited company can have a maximum of 50 shareholders. Shares in a private limited company cannot generally be sold to the public. Companies must be formally registered with the JSE. Business accounts must be professionally prepared and audited. Formal business reports and information must be circulated to shareholders every year. Public companies must hold a public annual general meeting to report to shareholders. 4

19 Exercise In the following table, choose the term in Column A that matches the description in Column B: Column A Column B a) Non-profit organisations i) disallows new close corporations b) Close corporations ii) occurs when two friends start a new business without formal registration c) A sole trader iii) is the Johannesburg Stock Exchange d) Limited liability iv) may not have more than ten members e) A public company v) requires business assets to be worth more than liabilities f) JSE vi) generally have to comply with the rules for limited companies g) The 2011 Companies Act vii) allows people to start a business with minimum risk h) A partnership viii) is a one-person business with high personal risk i) Solvency ix) can trade its shares on the JSE j) A limited liability company x) means that the investor can only lose the value of his or her investment Having identified the different formats for organisations, we will now look at the activities of these organisations in more detail. Unit 1.3: Activities of organisations The activities of the different organisations listed in Unit 1.2 can be classified under the following headings: Service activities. Trading activities. Manufacturing activities. Activities with no profit motive. Service activities A service enterprise is a business that sells a service to the public to generate income, where this activity is its main source of income. Examples of service enterprises: Doctors. Garden services. Attorneys. Trading activities A trading enterprise is a business that buys and sells goods to generate income, where this activity is its main source of income. 5

20 Examples of trading enterprises: General dealers. Wholesalers. Manufacturing activities A manufacturing enterprise is a business that buys raw material and turns it into a product. Examples of manufacturing enterprises are factories that produce products through a manufacturing process, like a clothing factory. manufacturing enterprises: Are businesses that buy raw material and turn it into a product. Examples of manufacturing enterprises are factories that produce products through a manufacturing process, like a clothing factory. Activities with no profit motive In some cases an enterprise is incorporated not to make a profit, but rather to provide a service to a group of people with a common interest. These enterprises are called nonprofit enterprises and an example is a tennis club where people get together to play tennis. In Module 2, you will learn how to create and maintain accounting records, but we first need to find out where accounting information comes from and the type of systems used in the accounting process. Unit 1.4: The accounting transactions of service and trading activities In this unit we will look at the accounting transactions in relation to the use of source documents, the double-entry principle and the influence of double-entry transactions on the accounting equation. Accounting processes begin when you write out a piece of paper that shows details of a transaction relating to a product or service you are selling, or that specifies goods or services you have received from another business. These are called source documents. A source document is proof that a transaction has taken place and can be classified as an internal or external source document. Internal source documents are documents used internally, like petty cash vouchers, while external source documents are documents received from outside the enterprise, such as an invoice from a supplier. The most important source documents are the following: Receipts This source document will be issued for money received from the owner or debtor. Cash register roll This source document will be issued for money received from cash sales. Cheque counterfoil 6

21 This source document is left behind in the cheque book and will be applicable when payment is made by cheque. Invoice This source document will be issued to clients (debtor) for credit sales or will be issued by the supplier (creditor) for credit purchases. Petty cash voucher This source document will be issued when money is withdrawn from petty cash. Debit note This source document will be issued for returns on a credit purchase. Credit note This source document will be issued for returns on a credit sale. Journal voucher This source document will be issued for any entry in the General Journal. General Journal (GJ): This journal is used to capture all transactions for which no specific journal is opened. The source document applicable to this journal is the journal voucher (internal office memo). The first line of every journal entry is the debit entry, which will be posted to the debit side of the relevant account. The second line of every journal entry is the credit entry, which will be posted to the credit side of the relevant account. The control columns will be debited or credited to the relevant control account as journal debits or journal credits. For all transactions, at least two accounts are always applicable. Example: Purchase a vehicle per cheque, R , from TSP Traders. For this example, we buy a vehicle and pay by cheque. The two accounts are vehicles and bank. One of these accounts will be debited and the other account will be credited. Or, for every account debited, there will be an account that will be credited. This principle is known as the double-entry principle. The vehicle account is an asset. When a vehicle is bought, this account will increase. Asset accounts increase on the debit side of the account and decrease on the credit side of the account. Therefore, the vehicle account will increase on the debit side of the account. So, the vehicle account is debited. The bank account is also an asset, given the fact that the bank is not in overdraft. When a cheque is issued, the cash in your bank account decreases. Therefore, the bank account will decrease on the credit side of the account. So, the bank account is credited. All transactions can be analysed on the basis of the accounting equation. 7

22 The accounting equation is: ASSETS = OWNER S EQUITY + LIABILITIES Or A = O + L In the previous example we indicated that: The vehicle account will increase on the debit side of the account by R The bank account will decrease on the credit side of the account by R Let s analyse this transaction on the basis of the accounting equation: For the vehicle account, the entry will be under ASSETS, because the vehicle account is classified as an asset account. If the vehicle account increases, the assets of the enterprise will also increase. ACCOUNTING EQUATION A O L This is only one entry and the bank account entry must also be indicated on this equation. For the bank account, the entry will be under ASSETS, because the bank account is classified as an asset account. If the cash in the bank account decreases, the assets of the enterprise will also decrease. ACCOUNTING EQUATION A O L No entries are made under O and L, because the applicable accounts are all assets. The net result under assets is zero, but it is worth noting that the accounting equation is balanced. The left of the equation, assets, is equal to the right of the equation, owner s equity plus liabilities. Let s consider the following transactions: Transaction 1 The owner, T Smit, increases his capital contribution by R Issue receipt 5. For this transaction, the enterprise receives money from T Smit, the owner. The enterprise will issue a receipt to T Smit as proof of the money received. The receipt is the source document and proof that a transaction took place. 8

23 All receipts will be recorded in the Cash Receipts Journal (CRJ). This journal will provide a summary of all monies received for a particular month. The two accounts for this transaction are Capital and Bank. Capital is an Owner s Equity account. Capital will increase on the credit side of this account with a bank entry of R Cash Receipts Journal (CRJ): In this journal, all cash receipts of the enterprise are captured. The source documents applicable to this journal are cash register roll slips (for cash sales) and receipts (for all other receipts). DR Capital cr Bank This is the credit entry. Bank is the contra account in this case. Bank is an asset account. The cash in the bank will increase on the debit side of this account with a capital entry of R DR Bank cr Capital This is the debit entry. Capital is the contra account in this case. On the accounting equation: For Capital account: Capital is an Owner s Equity account; therefore the entry under O. If capital increases, the owner s equity will also increase; therefore the +. ACCOUNTING EQUATION A O L For Bank account: Bank is an asset account; therefore the entry under A. If Bank increases, the assets will also increase; therefore the +. ACCOUNTING EQUATION A O L

24 Transaction 2 Buy trading stock on credit from TRS Dealers, R10 000, and receive invoice 45. For this transaction, the enterprise receives trading stock from TRS Dealers. This is a credit purchase. TRS Dealers will issue an invoice to the enterprise as proof of the credit purchase. The invoice is the source document and the proof that a transaction took place. All invoices received will be recorded in the Creditors Journal (CJ). This journal will provide a summary of all credit purchases for a particular month. The two accounts for this transaction are Trading Stock and Creditors Control. Trading Stock is an asset account. Trading Stock will increase on the debit side of this account with a creditor control entry of R Creditors Journal (CJ): In this journal, all credit purchases of the enterprise are captured. The source document applicable to this journal is the credit invoice. The creditor control column will be credited to the Creditors Control account and all other columns or entries (like equipment and trading stock) will be debited to the relevant ledger account. dr trading Stock cr Creditors control This is the debit entry. Creditors Control is the contra account in this case. Creditors Control is a liability account. The Creditors Control account will increase on the credit side of this account with a trading stock entry of R dr creditors Control cr Trading Stock This is the credit entry. Trading Stock is the contra account in this case. On the accounting equation: For Trading Stock account: Trading Stock is an asset account; therefore the entry under A. If trading stock increases, the assets will also increase; therefore the +. ACCOUNTING EQUATION A O L

25 For Creditor Control account: Creditors Control is a liability account; therefore the entry under L. If creditors control increases, the liabilities will also increase; therefore the +. ACCOUNTING EQUATION A O L Transaction 3 Pay the salary of K Nel per cheque, R Issue a cheque. For this transaction, the enterprise pays the salary of K Nel. This is a normal payment. The enterprise will issue a cheque to K Nel as proof of the payment. The cheque counterfoil is the source document and the proof that a transaction took place. All cheque counterfoils will be recorded in the Cash Payments Journal (CPJ). This journal will provide a summary of all cheque payments for a particular month. The two accounts for this transaction are Bank and Salary. Bank is an asset account. The cash in the bank will decrease on the credit side of this account with a salary entry of R Cash Payments Journal (CPJ): In this journal, all cash payments of the enterprise are captured. The source document applicable to this journal is the cheque counterfoil. Therefore, this journal will be posted to the credit side of the bank account in the General Ledger. Accounts like Trading Stock and Creditors Control will be debited in the General Ledger. DR Bank cr Salary This is the credit entry. Salary is the contra account in this case. Salary is an expense and an Owner s Equity account. The Salary account will increase on the debit side of this account with a bank entry of R DR Salary cr Bank This is the debit entry. Bank is the contra account in this case. On the accounting equation: For Bank account: Bank is an asset account; therefore the entry under A. If Bank decreases, the assets will also decrease; therefore the. 11

26 ACCOUNTING EQUATION A O L For Salary account: Salary is an expense and an Owner s Equity account; therefore the entry under O. If Salary increases, the owner s equity will decrease; therefore the. ACCOUNTING EQUATION A O L Transaction 4 Receive a payment from G Smith on his account, R Issue receipt 7. For this transaction, the enterprise receives money from G Smith, a debtor. The enterprise will issue a receipt to G Smith as proof of the money received. The receipt is the source document and the proof that a transaction took place. All receipts will be recorded in the Cash Receipts Journal (CRJ). This journal will provide a summary of all monies received for a particular month. The two accounts for this transaction are Bank and Debtors Control. Bank is an asset account. The cash in the bank will increase on the debit side of this account with a debtors control entry of R DR Bank cr Debtors control This is the debit entry. Debtors Control is the contra account in this case. Debtors Control is an asset account. Debtors Control will decrease on the credit side of this account with a bank entry of R dr debtors Control cr Bank This is the credit entry. Bank is the contra account in this case. 12

27 On the accounting equation: For Bank account: Bank is an asset account; therefore the entry under A. If Bank increases, the assets will also increase; therefore the +. ACCOUNTING EQUATION A O L For Debtors Control account: Debtors Control is an asset account; therefore the entry under A. If Debtors Control decreases, the assets will also decrease; therefore the. ACCOUNTING EQUATION A O L Exercise Analyse the following transactions according to the columns of the table and example provided. Example: The owner, T Smit, increases his capital contribution by R Issue receipt 5. No. Source document Account debited Account credited A O L e.g. Receipt Bank Capital Transactions 1. Issued a cheque for R990 to Macro Traders in settlement of our account. 2. Buy trading stock from TRS Suppliers, R and pay per cheque. 3. The owner took trading stock at a cost price of R350 for personal use. 4. Buy stationery on credit from Write Nice and receive an invoice. 5. Credit sales, R1 200 (cost price, R1 000) 13

28 Part 2: recording transactions from source documents according to the continuous (perpetual) stock system Overview When you have completed Part 2 of this module, you should be able to: Identify and briefly describe the steps in the accounting cycle. Define source documents and the information they contain. Record basic transactions in accounting records of original entry. Post transactions from books of original entry into general and subsidiary ledgers. Test the accuracy of accounts with the aid of a Trial Balance. Unit 1.5: Accounting cycle The accounting cycle represents the movement of a transaction through the organisation to reach the end of a financial period. Step 1: Transaction (daily) Step 2: Source documents (daily) Step 3: Journals (daily) Step 4: Ledger accounts (monthly) Step 5: Trial Balance (monthly) Step 6: Income statement (annually) Step 7: Balance Sheet (annually) Trial Balance: Is usually implemented at the end of a given financial period and is used to make sure that accounting entries have been carried out accurately. The Trial Balance often leads to the preparation of financial statements called the Income Statement and Balance Sheet. accounting cycle: Represents the movement of a transaction through the organisation to reach the end of a financial period. Income Statement: This statement indicates whether a profit was made or a loss suffered for the past financial year. Therefore, the Income Statement provides the financial results for a particular financial year. Transactions occur daily in the books of the enterprise. At this point a source document is issued as proof of the transaction. These source documents are captured or recorded in the relevant subsidiary journal. At the end of each month, all subsidiary journals are posted to the relevant ledger accounts and a Trial Balance is drawn up from these ledger accounts. Therefore, the purpose of the Trial Balance is to provide a summary of ledger account balances, as well as to check that the double-entry principle has been applied throughout. 14

29 Annually, the financial year-end statements are drawn up. The Income Statement will indicate if a profit was made or a loss suffered for the past financial year. Therefore the Income Statement provides the financial results for a particular financial year. The Balance Sheet will check if the total assets are equal to the owner s equity plus liabilities, or if the accounting equation throughout is balanced. Therefore the Balance Sheet provides the financial position of the enterprise s assets, owner s equity and liabilities on a given date. Unit 1.6: Source documents Every financial transaction in a business should have a source document. Source documents therefore record a specific business transaction and provide details of a particular transaction. The most important source documents are the following: Receipts This source document will be issued for money received from the owner or debtor. Cash register roll This source document will be issued for money received from cash sales. Cheque counterfoil This source document is left behind in the cheque book and will be applicable when payment is made by cheque. Invoice This source document will be issued to the client (debtor) for credit sales or will be issued by the supplier (creditor) for credit purchases. Petty cash voucher This source document will be issued to withdraw money from the petty cash. Debit note This source document will be issued for returns on a credit purchase. Credit note This source document will be issued for returns on a credit sale. Journal voucher (internal office memo) This source document will be issued for any entry in the General Journal. Balance Sheet: This statement checks if the total assets are equal to the owner s equity plus liabilities, or if the accounting equation throughout is balanced. Therefore, the Balance Sheet provides the financial position of the enterprise s assets, owner s equity and liabilities on a given date. accounting equation: Defines the relationship between assets, owner s equity and liabilities. This relationship defines assets as being equal to the owner s equity and liabilities, or A = O + L. Original and duplicate source documents When you have to provide an original document for another business or individual, such as a receipt, credit invoice, credit note or cash register roll slip, you need to also keep a copy of that document for your own records. To achieve this, you raise documents in duplicate. 15

30 Table 1.2 shows how original and duplicate documents are dealt with. Table 1.2 Original and duplicate source documents Document Original Duplicate Receipt Receipt given to customer Receipt retained by business for entry into own records Cash register roll slip Slip given to customer Slip retained by business for entry into own records Cheque counterfoil Cheque given to supplier or individual as payment No cheque duplicate. The cheque counterfoil stays in the cheque book for entry into own records Invoice to a debtor Issue to customer Retained by business for entry into own records Invoice from a creditor Petty cash voucher Received from supplier and used to enter into own records Retained by business for entry into own records Retained by suppliers for their records No duplicate required Credit note Credit note issued to customer Retained for entry into own records Debit note Journal voucher (internal office memo) Received from supplier and used to enter into own records Retained by business for entry into own records Retained by suppliers for their records No duplicate required Internal and external source documents Source documents can also be defined as internal or external to the organisation according to where the document is raised. This is shown in Table 1.3. Table 1.3 Internal and external source documents Document Internal/External Receipt Internal (raised by your business) Cash register roll slip Internal (raised by your business) Cheque counterfoil Internal (raised by your business) Invoice to a debtor Internal (raised by your business) Invoice from a creditor External (raised by the supplier) Petty cash voucher Internal (raised by your business) Credit note Internal (raised by your business) Debit note External (raised by the supplier) Journal voucher (internal office memo) Internal (raised by your business) While the internal/external definitions are interesting, the important thing to remember about source documents is that you should have one to cover every financial transaction. Unit 1.7: Books of original entry Traditional bookkeeping practice teaches that financial transactions are first entered into books of original entry or accounting records called journals. These journals can comprise: Cash Receipts Journal (CRJ). 16

31 Cash Payments Journal (CPJ). Debtors Journal (DJ). Creditors Journal (CJ). Debtors Allowance Journal (DAJ). Creditors Allowance Journal (CAJ). Petty Cash Journal (PCJ). General Journal (GJ). Wages Journal (WJ). Debtors Journal (DJ): In this journal, all credit sales of the enterprise are captured. The source document applicable to this journal is the credit invoice. The sales column will be debited to the Debtors Control account and credited to the Sales account. However, the cost of sales column will be debited to the Cost of Sales account and credited to the Trading Stock account. Debtors Allowance Journal (DAJ): In this journal, all credit returns from debtors of the enterprise are captured. The source document applicable to this journal is the credit note. The debtors allowance column will be debited to the Debtors Allowance account and credited to the Debtors Control account. However, the cost of sales column will be credited to the Cost of Sales account and debited to the Trading Stock account. Creditors Allowance Journal (CAJ): In this journal, all credit returns to creditors of the enterprise are captured. The source document applicable to this journal is the debit note. The creditor control column will be debited to the Creditors Control account and all other columns or entries (like stationery and trading stock) will be credited to the relevant ledger account. Petty Cash Journal (PCJ): In this journal, all cash payments (small amounts) of the enterprise are captured. The source document applicable to this journal is the petty cash voucher. The petty cash column will be credited to the Petty Cash account and all other columns or entries (like stationery and refreshments) will be debited to the relevant ledger account. General Journal (GJ): This journal is used to capture all transactions for which no specific journal is opened. The source document applicable to this journal is the journal voucher (internal office memo). The first line of every journal entry is the debit entry, which will be posted to the debit side of the relevant account. The second line of every journal entry is the credit entry, which will be posted to the credit side of the relevant account. The control columns will be debited or credited to the relevant control account as journal debits or journal credits. Wages Journal (WJ) and Salaries Journal (SJ): In this journal, all wage and salary payments to employees of the enterprise are captured. The source document applicable to this journal is the cheque counterfoil. Salaries Journal (SJ). Transactions are entered on a daily basis, from where the transactions are posted to the General Ledger on a monthly basis. Cash Receipts Journal (CRJ) In this journal all cash receipts of the enterprise are captured. The source documents applicable to this journal are cash register roll slips (for cash sales) and receipts (for all other receipts). Doc no. D Details Details of sundry accounts CASH RECEIPTS JOURNAL OF TH dealers MAY 2010 Sundry Sales Cost of accounts Sales Analysis of receipts 15 1 TH Smit Capital CRR Sales Bank 17

32 Therefore this journal will be posted to the debit side of the Bank account in the General Ledger. Accounts like capital and sales will be credited in the General Ledger. Cash Payments Journal (CPJ) In this journal all cash payments of the enterprise are captured. Doc no. The source document applicable to this journal is the cheque counterfoil CASH PAYMENTS JOURNAL OF TH dealers MAY 2010 D Details Details Sundry Trading Creditors Salaries of sundry accounts Stock control accounts Trutect TP Suppliers Therefore this journal will be posted to the credit side of the bank account in the General Ledger. Accounts like Trading Stock and Creditors Control will be debited in the General Ledger. Debtors Journal (DJ) In this journal all credit sales of the enterprise are captured. Doc no. The source document applicable to this journal is the credit invoice. DEBTORS JOURNAL OF TH dealers MAY 2010 D Debtors Sales Cost of Sales 65 1 TH Smit K Nel The sales column will be debited to the Debtors Control account and credited to the Sales account. However, the cost of sales column will be debited to the Cost of Sales account and credited to the Trading Stock account. Creditors Journal (CJ) In this journal all credit purchases of the enterprise are captured. The source document applicable to this journal is the credit invoice. CREDITORS JOURNAL OF TH dealers MAY 2010 Doc D Creditors Creditors Trading Stationery Sundry accounts no. control Stock Amount Details Trutect Equipment TP Suppliers Bank 18

33 The creditors control column will be credited to the Creditors Control account and all other columns or entries (like equipment and trading stock) will be debited to the relevant ledger account. Debtors Allowance Journal (DAJ) In this journal all credit returns from debtors of the enterprise are captured. The source document applicable to this journal is the credit note. DEBTORS allowance JOURNAL OF TH dealers MAY 2010 Doc no. D Debtors Debtors allowance Cost of Sales 4 8 K Nel R Roux The debtors allowance column will be debited to the Debtors Allowance account and credited to the Debtors Control account. However, the cost of sales column will be credited to the Cost of Sales account and debited to the Trading Stock account. Creditors Allowance Journal (CAJ) In this journal all credit returns to creditors of the enterprise are captured. The source document applicable to this journal is the debit note. CREDITORS ALLOWANCE JOURNAL OF TH dealers MAY 2010 Doc D Creditors Creditors Trading Stationery Sundry accounts no. control Stock Amount Details Trutect TP Suppliers The creditors control column will be debited to the Creditors Control account and all other columns or entries (like stationery and trading stock) will be credited to the relevant ledger account. Petty Cash Journal (PCJ) In this journal all cash payments (small amounts) of the enterprise are captured. Doc no. The source document applicable to this journal is the petty cash voucher. PETTY CASH JOURNAL OF TH dealers MAY 2010 D Details Details Sundry Stationery Refreshments Postage of sundry accounts accounts Petty cash Trutect TP Suppliers

34 The petty cash column will be credited to the Petty Cash account and all other columns or entries (like stationery and refreshments) will be debited to the relevant ledger account. General Journal (GJ) This journal is used to capture all transactions for which no specific journal is opened. The source document applicable to this journal is the journal voucher (internal office memo). 30 Trading Stock GENERAL JOURNAL OF TH dealers MAY 2010 DR CR DEBTORS CONTROL creditors CONTROL DR CR DR CR TS Dealers The first line of every journal entry is the debit entry which will be posted to the debit side of the relevant account. The second line of every journal entry is the credit entry which will be posted to the credit side of the relevant account. The control columns will be debited or credited to the relevant control account as journal debits or journal credits. For example, the R3 400 in the credit column of the Creditors Control account, will be posted to the credit side of that account as journal credits of R Wages Journal (WJ) and Salaries Journal (SJ) In this journal all wage and salary payments to employees of the enterprise are captured. The source document applicable to this journal is the cheque counterfoil. control account: Is a ledger account in the General Ledger that contains all the postings for a particular function such as debtors and creditors. The total value of all transactions for a specific function (debtor or creditor) is shown in the control account. Wages are normally paid weekly, while a salary is paid once a month. The first section of these journals focuses on calculating the total remuneration (normal and overtime) for each employee, referred to as the gross wage or salary before any deductions. The second section of these journals focuses on calculating the total deductions applicable to each employee. The difference between the gross wage (salary) and the total deductions per employee will result in the net wage (salary). This amount is payable to the employee. The third section of these journals focuses on any employer contribution. The employer can decide to make an additional contribution to each employee for pension and medical. These additional contributions can form part of the fringe benefits that these employees may have. 20

35 WAGES JOURNAL OF TH DEALERS FOR WEEK ENDED 30 MAY 2010 Details Normal time Overtime Gross Rate Hours Amount Rate Hours Amount wages Pension fund Deductions Net wages Medical fund PAYE UIF Total deduction K Nel P Smit C Maasdorp Employer contribution

36 Unit 1.8: Posting to the general and subsidiary ledgers Ledger accounts are where all entries need to end up they are the accounts that show the situation in a business at any moment in time. Postings are done from all journals to all ledger accounts in the General Ledger. Ledger accounts are formatted in T-accounts, meaning that they have two sides (Debit and Credit) that are separated by a vertical bar in the middle and a top bar over which the name of the account appears. Let s have a look at the following example illustrating how ledger accounts are drawn up from the journals provided. Example: E Collier, the owner of TB Traders, provided the following totals of the subsidiary journals: Balances as on 1 June 2010: Trading Stock R Sales R Cost of Sales R Equipment R Insurance R3 500 COLUMN TOTAL OF JOURNALS AS on 30 June 2010 AMOUNTS CASH RECEIPTS JOURNAL (CRJ) Sales Cost of Sales Debtors control Discount allowed Sundry accounts CASH PAYMENTS JOURNAL (CPJ) Trading Stock Wages Debtors control 450 Creditors control Discount received Sundry accounts (on the 5th insurance = R1 500) DEBTORS JOURNAL (DJ) Sales Cost of Sales DEBTORS allowance JOURNAL (DAJ) Debtors allowance Cost of Sales

37 CREDITORS JOURNAL (CJ) Total Trading Stock Equipment Sundry accounts creditors allowance JOURNAL (CAJ) Total Trading Stock Equipment 150 GENERAL JOURNAL (GJ) Debtors control debit 75 Debtors control credit 180 Creditors control debit 45 Creditors control credit 115 Required: Open the following accounts with the given balances/totals: Post the totals of the journals to the following ledger accounts and balance all the accounts on 30 June Trading Stock. 2. Sales. 3. Cost of Sales. 4. Equipment. 5. Insurance. Solution: The process to follow for drawing up a ledger account is: Step 1: Open the relevant ledger account in the General Ledger. Step 2: Post the opening balance of this account, if provided. Step 3: Post all relevant entries from journals to the applicable account. First the entries in the sundry account column and thereafter the column totals. Step 4: Close off every ledger account if requested. Steps 1 and 2: Open and balances Trading Stock Balance Jun Sales Balance Jun 23

38 Balance Jun Cost of Sales Balance Jun Equipment Balance Jun Insurance Step 3: Posting On 5 June 2010 in the sundry account column of the CPJ a payment was made for insurance. This entry must be posted on the given date to the Insurance account, because entries in the sundry account column are posted individually. Let s do it. Insurance Balance Jun 5 Bank Remember, Bank is the contra account for this transaction and the reason why the bank entry appears in the Insurance account. The next account: Scan all journals for any equipment entries. The only journals with equipment entries are the Creditors Journal and the Creditors Allowance Journal. All postings will be done on the column totals calculated on the last day of June Therefore the posting will also be done on the last day of June 2010 in the Ledger account. Equipment Balance Creditors control CAJ Jun 30 Creditors control CJ Jun The debit entry is from the CJ where the contra account is Creditors Control. The credit entry is from the CAJ where the contra account is also Creditors Control. 24

39 There are insufficient funds in the bank account to cover the cheque and the bank refuses payment. The cheque will be cancelled in the CRJ. postdated cheque: Is a promise to pay a particular amount at a later date. Unit 1.16: How to record postdated cheques You may occasionally be in the position where you want to deal with a supplier in good faith but you are waiting to receive expected payment to you in order to pay the supplier s account. Alternatively, you may want to secure a future delivery without risking paying for it right now. In both cases you can write a postdated cheque. A bank will not enter an item on the bank statement until the date shown, so you have to treat postdated items in a different way when entering them into your Cash Journals. Postdated cheques received A postdated cheque received is a promise to pay a particular account at a later date. You need to identify that you have received a postdated cheque so that you do not continue to chase the customer for payment. You can, of course, do this by making a note in the customer s Debtors Ledger account and store the cheque for safekeeping in your safe until the date arrives. You can also enter the cheque in the current Cash Receipts Journal and Debtors Ledger account, writing in the date it can be presented so that you know that it will not appear on any bank statement received before the cheque date. Therefore a postdated cheque will be recorded in the Bank Reconciliation Statement by an entry credit postdated cheque received. Whichever way you deal with postdated cheques, you must make sure that a cheque you receive is presented to the bank for payment on the date shown on the cheque so that you can get payment at the earliest opportunity. Postdated cheques issued When you issue a postdated cheque to a supplier, you would normally enter that cheque counterfoil in the current Cash Payments Journal and ledgers, also making a note of the date it should be paid, so that you can record this in the Bank Reconciliation Statement as part of the other outstanding cheques. Let s consider the following example. You will note the format of this question is different from the previous example. In this example all the comparisons were done and indicated. Example: Required: Use the information given below to prepare the following in the accounting records of MICKOR TRADERS. 42

40 1. Complete the CASH JOURNALS for SEPTEMBER (Only total the bank columns.) 2. Post to the BANK ACCOUNT in the GENERAL LEDGER and balance it. 3. Draw up the BANK RECONCILIATION STATEMENT on 30 SEPTEMBER NOTE: MICKOR TRADERS operates its current banking account at CAPITEC BANK. Information: A. BANK RECONCILIATION STATEMENT OF MICKOR traders ON 31 AUGUST 2009 Debit Credit Debit balance as per bank statement Credit outstanding deposit Debit outstanding cheques No No No Credit balance as per bank account B. The Cash Journals showed subtotals before the September bank statement was received: CASH RECEIPTS JOURNAL OF MICKOR traders SEPTEMBER 2009 Date Details Sundry accounts Sales Debtors control Discount allowed Bank 30 Totals CASH PAYMENTS JOURNAL OF MICKOR traders SEPTEMBER 2009 Date Details Sundry accounts Debtors control Trading Stock Creditors control Discount received 30 Totals C. A comparison of the bank statement (no. 9) for September 2009 and the previous Bank Reconciliation Statement revealed the following: The outstanding deposit of R4 350 appeared on the bank statement. Cheque no appeared on the bank statement, but cheque no does not appear on it. Cheque no. 580 was issued to BOXER TRADERS for merchandise bought on 20 February This cheque is now stale. D. A comparison of the bank statement (no. 9) for September 2009 and the Cash Journals for September 2009 showed the following: The bank statement showed an overdrawn balance of R7 647 on 30 September Bank 43

41 A deposit of R1 458, which was deposited on 10 September, did not appear on the bank statement. The following items appeared on the bank statement for September 2009: Service fees R720 Cheque book fee R70 Levy on credit card sales R49 Interest on current account R180+ Interest on overdrawn account R971 A cheque received from J Sono, a debtor, has been dishonoured by the bank due to insufficient funds, R165. A debit order for R500 appeared only on the bank statement. The payment was made to Eagle Insurance for the monthly insurance premium. G Smith, a tenant, deposited his rent of R2 700 directly into the current account of the business. Cheque no was incorrectly entered in the Cash Payments Journal as R1 260, instead of R1 620, which is correct on the bank statement. This cheque was issued to VW MOTORS for repairs to the vehicle. A deposit on the bank statement of R3 740 was incorrect. The correct amount appeared in the Cash Receipts Journal as R The bank had debited the current account of the firm with R600 in error. This cheque was drawn by GAUTENG TRADERS. A cheque dated 18 November 2009 (received from R Naidoo, a debtor) was deposited in error. The cheque was held over for re-deposit on 18 November 2009, R680. The following cheques were still outstanding on 30 September 2009: No R3 000 No R5 217 Answers: 1. Doc no. CASH RECEIPTS JOURNAL OF Mickor Traders September 2009 D Details Details Sundry Sales Debtors Discount Bank of sundry accounts control allowed accounts 30 Totals Boxer Traders G Smith Trading Stock Interest on current account Rent income

42 Doc no. D Name of payee CASH PAYMENTS JOURNAL OF Mickor Traders September 2009 Details of sundry accounts Sundry accounts Debtors control Trading Stock Creditors control Bank 30 Totals Bank charges Interest on overdrawn account J Sono Eagle Insurance Insurance VW Motors Repairs Bank Total receipts Balance Sept Balance Sept 30 Total payments Oct 1 Balance BANK RECONCILIATION STATEMENT OF Mickor Traders on 30 September 2009 Debit Credit Debit balance as per bank statement Credit outstanding deposit Debit outstanding cheques No No No Debit deposit error on bank statement Credit cheque incorrectly debited Credit postdated cheque received Credit balance as per bank account

43 Exercise A The following information was taken from the books of MY WAY TRADERS. Information: MY WAY TRADERS BANK RECONCILIATION STATEMENT ON 31 MARCH 2011 Debit Credit Credit balance as per bank statement Credit deposit not credited by the bank Debit outstanding cheques No No No Debit balance as per bank account cash RECEIPTS JOURNAL OF MY WAY traders APRIL 2011 crj8 Doc D Details Analysis of Bank Sales Debtors Sundry accounts no. receipts control Amount Details J Naidoo Capital CRR1 6 Sales W Botha Rent income CRR2 17 Sales L Viret cash PAYMENTS JOURNAL OF MY WAY traders APRIL 2011 cpj8 Doc D Name of Bank Creditors Trading Wages Sundry accounts no. payee control Stock Amount Details MAKRO TELKOM Telephone J Naidoo Drawings Trade Centre Cash Waltons Stationery Cash Cash float

44 ABSA BANK BANK STATEMENT MY WAY TRADERS DATE: 30 April 2011 P O Box 9663 bank statement no.: 09 CAPE TOWN 8000 Date Details Amount Balance 01 April Balance April Deposit April Cheque no April Cheque no April Deposit April Cheque no April Deposit April Deposit April Cheque no April Cheque no April Deposit April Interest on credit balance April Deposit April Cheque no April Stop order April Service fees April Cheque book fees April Cheque no April Dishonoured cheque Additional information: 1. On 19 April 2011 an amount of R4 300 was paid directly into the bank account of MY WAY TRADERS. The amount was deposited by B Mans as payment on his account. 2. Cheque no. 56 was drawn by another client, WAY TRADERS. This error will be rectified on next month s bank statement. 3. The stop order of R1 200 represented an insurance premium paid to SANTAM. 4. The dishonoured cheque on 30 April 2011 was received from W Botha. (Refer to 11 April 2011 in the CRJ.) 5. Cheque no. 728 was entered incorrectly as R in the Cash Payments Journal. The correct amount should be R (The bank statement is correct.) 6. Cheque no. 716 was issued on 15 November 2010 to MAKRO for trading inventory. Required: 1. Compare the bank statement with the Bank Reconciliation Statement of the previous month, as well as the Cash Receipts Journal and the Cash Payments Journal. 47

45 Make SUPPLEMENTARY ENTRIES in both journals. Total the bank column in these journals. 2. Post to the BANK ACCOUNT in the General Ledger. Balance the account. 3. Draft the BANK RECONCILIATION STATEMENT on 30 April Exercise B The information given below was extracted from the books of WILLGOOD DEALERS. Required: 1. Complete the CASH RECEIPTS and CASH PAYMENTS Journals on 31 August Total the bank column in the journals. 2. Post to the BANK ACCOUNT in the General Ledger and balance the account. 3. Prepare the BANK RECONCILIATION STATEMENT on 31 August NOTE: WILLGOOD DEALERS operates its current banking account at National Bank. Information: WILLGOOD DEALERS BANK RECONCILIATION STATEMENT ON 31 JULY 2010 Debit Credit Credit balance as per bank statement Credit deposit not yet credited Debit outstanding cheques: No No No No Debit cheque no wrongly credited Credit balance according to the bank account CASH RECEIPTS JOURNAL OF willgood dealers AUGUST 2010 Date Details Bank Sales Cost of Sales Debtors control Discount allowed Sundry accounts 30 Totals CASH PAYMENTS JOURNAL OF willgood dealers AUGUST 2010 Date Details Bank Trading Stock Debtors control Creditors control Discount received Sundry accounts 30 Totals

46 Additional information: 1. The bank statement showed a favourable balance of R on 31 August The bank had credited an outstanding deposit, R8 200, on the bank statement for August. 3. Cheques no. 281 and 282 appeared on the bank statement for August, but cheque no. 296 does not appear on it. 4. Cheque no. 191 had been given to W Rooney for stationery on 4 January this year. 5. The bank statement for August included the adjustment for the wrong cheque no. 1222, which appeared on the previous month s Bank Reconciliation Statement. 6. On 10 August 2010 cheque no. 287 for R4 800 was drawn in favour of T Manuel for equipment. The cheque was dated 30 November The tenant, Morefresh, had deposited its rent directly into the bank account of the business, R The following items appeared on the bank statement for August: Interest on debit balance R397 Cash deposit fee R220 Service fees R175 Cheque book fees R A deposit on the bank statement of R7 340 was incorrect. The correct amount appeared in the Cash Receipts Journal as R The bank had placed a cheque no. 390 for R400, drawn by Willgood Stores, on the bank account of the business in error. 11. The owner, Mr T Willgood, made an additional capital contribution by means of an electronic transfer directly into the business s bank account, R A cheque received from R Nel as payment on account has been returned by the bank due to insufficient funds, R The debit order in favour of Propsure is for building insurance, R Cheque no. 355 for R1 500 appeared only in the Cash Payment Journal. 15. A deposit of R6 375, which was made on 31 August 2010, does not appear on the bank statement. 16. Cheque no. 460 was erroneously debited twice on the bank statement, R500. SUMMARY In this part, we looked at the process of reconciling a bank statement with entries in the Cash Journals and associated ledgers, first defining the aims of the reconciliation and the reason why differences occur between the two accounting documents. We went on to explain the items that can be omitted from a bank statement or Cash Journals and the differences that result from errors in either record. We then showed you how to complete a Bank Reconciliation Statement to achieve a balance between the bank statement and Cash Journals, and how you need to post items from the Bank Reconciliation Statement to the Cash Journals and associated ledgers; also how you use a Bank Reconciliation Statement for the following month s reconciliation. Finally, we explained how to deal with stop payments and postdated cheques. 49

47 Part 4: Control accounts Overview When you have completed Part 4 of this module, you should be able to: Briefly describe the aim of control accounts. Provide additional columns in books of original entry. Post from books of original entry to subsidiary ledgers. Post from books of original entry to the Debtors Control account in the General Ledger and draw up a List of Debtors at a given stage to reconcile with the Debtors Control account. Post from books of original entry to the Creditors Control account in the General Ledger and draw up a list of creditors at a given stage to reconcile with the Creditors Control account. Make transfers between debtors and creditors by means of journal entries and post to the General Ledger and subsidiary ledgers. Unit 1.17: Aim of control accounts A control account is a ledger account in the General Ledger that contains all the posting for a particular function such as debtors and creditors. Individual transactions related to a particular debtor or creditor are also recorded in the Subsidiary Ledger, referred to as the Debtors Ledger or Creditors Ledger. These accounts in the Subsidiary Ledger are the individual accounts for a particular debtor or creditor. The balance of a control account should match the total of all the accounts of a Subsidiary Ledger. This means that: The total value of all transactions of a specific function (debtor or creditor) are shown in the control account. The detailed values (outstanding balances) for individual accounts are shown in the subsidiary ledgers. Subsidiary Ledger: Records individual transactions related to a particular debtor or creditor. These accounts are the individual accounts for a particular debtor or creditor. The balance of a control account should match the total of all the accounts of a subsidiary ledger. The detailed values (outstanding balances) for individual accounts are shown in the subsidiary ledgers. Unit 1.18: Adjustment of books of original entry In the following journals, debtor-related transactions are recorded in a debtors control column or in the sundry accounts column: Cash Receipts Journal Transactions where debtors pay their accounts are recorded in the CRJ. Doc no. D Details Details of sundry accounts CASH RECEIPTS JOURNAL OF TH dealers MAY 2010 Sundry accounts Sales Debtors control Analysis of receipts 15 1 TH Smit Capital Bank 50

48 16 R Nel Cash Payments Journal Referred to drawer cheques received from debtors are recorded in the CPJ, as they are returned by the financial institution (bank). Doc no. D Details Details of sundry accounts CASH PAYMENTS JOURNAL OF TH dealers MAY 2010 Sundry accounts Trading Stock Creditors control Debtors control Trutect R/D R Nel Debtors Journal Credit sale transactions are recorded in the DJ. DEBTORS JOURNAL OF TH dealers MAY 2010 Doc no. D Debtors Sales Cost of Sales 65 1 TH Smit K Nel Bank Debtors Allowance Journal Return of credit sale transactions are recorded in the DAJ. Doc no. DEBTORS allowance JOURNAL OF TH dealers MAY 2010 D Debtors Debtors allowance Cost of Sales 4 8 R Nel R Roux Petty Cash Journal Transactions where carriage on purchase is paid on behalf of a debtor from petty cash. Doc no. D Details Details of sundry accounts PETTY CASH JOURNAL OF TH dealers MAY 2010 Sundry accounts Stationery Refreshments Petty cash Trutect R Nel Debtors control (carriage on purchase)

49 General Journal Debtor-related transactions not covered in the aforementioned journals are recorded in the General Journal. GENERAL JOURNAL OF TH dealers MAY 2010 DR CR DEBTORS CONTROL creditors CONTROL 30 R Nel Interest received DR CR DR CR In the following journals, creditor-related transactions are recorded in a creditors control column: Cash Payments Journal Transactions where payments made to creditors are recorded in the CPJ. Doc no. D Details Details of sundry accounts CASH PAYMENTS JOURNAL OF TH dealers MAY 2010 Sundry accounts 43 Trading Stock Creditors control Debtors control Trutect TS Dealers Creditors Journal Credit purchase transactions are recorded in the CJ. Doc no. D Creditor Creditors control CREDITORS JOURNAL OF TH dealers MAY 2010 Trading Stock Bank Stationery Sundry accounts Amount Details Trutect Equipment TP Suppliers Creditors Allowance Journal Return of credit purchase transactions are recorded in the CAJ. Doc no. CREDITORS ALLOWANCE JOURNAL OF TH dealers MAY 2010 D Creditor Creditors control Trading Stock Trutect Stationery TP Suppliers Sundry accounts Amount Details 52

50 General Journal Creditor-related transactions not covered in the aforementioned journals are recorded in the General Journal. 30 Interest paid 154 GENERAL JOURNAL OF TH dealers MAY 2010 DR CR DEBTORS CONTROL creditors CONTROL DR CR DR CR Trutect Postings are done from all these journals to the relevant control account to determine the total amount of debt owed by debtors and debt owed to creditors. Unit 1.19: Debtors and creditors control accounts Let s have a look at the following example to see how we do the posting to the relevant control accounts. Example: E Smit, the owner of CTB Traders, provided the following totals of the subsidiary journals: Balances as on 1 June 2010: Debtors Control R Creditors Control R COLUMN TOTAL OF JOURNALS as on 30 June 2010 AMOUNTS CASH RECEIPTS JOURNAL (CRJ) Sales Cost of Sales Debtors control Discount allowed Sundry accounts CASH PAYMENTS JOURNAL (CPJ) Trading Stock Wages Debtors control 450 Creditors control Discount received Sundry accounts (on the 5th insurance = R1 500) DEBTORS JOURNAL (DJ) Sales Cost of Sales

51 DEBTORS allowance JOURNAL (DAJ) Debtors allowance Cost of Sales 900 creditors JOURNAL (CJ) Total Trading Stock Equipment Sundry accounts creditors allowance JOURNAL (CAJ) Total Trading Stock Equipment 150 PETTY CASH JOURNAL (PCJ) Petty cash 800 Stationery 350 Sundry accounts (on the 10th, carriage on purchase was 450 paid on behalf of a debtor = R450) GENERAL JOURNAL (GJ) Debtors control debit 75 Debtors control credit 180 Creditors control debit 45 Creditors control credit 115 Required: Open the following accounts with the given balances/totals: Post the totals of the journals to the following ledger accounts and balance all the accounts on 30 June Debtors Control. 2. Creditors Control. Solution: The process to follow for drawing up a ledger account is: Step 1: Open the relevant ledger account in the General Ledger. Step 2: Post the opening balance of this account, if provided. Step 3: Post all relevant entries from journals to the applicable account; first the entries in the sundry account column and thereafter the column totals. Step 4: Close off the ledger account if requested. Steps 1 and 2: Open with balances Balance Jun Debtors Control 54

52 Creditors Control Balance Jun Steps 3 and 4: Posting and closing off The posting to Debtors Control account: Scan all journals for any debtors control entries. Remember any entry made in a sundry column will be posted first on the given date and then posting of the column totals will follow. PCJ: Sundry account column: On the 10th for carriage on purchases R450. CRJ: Column total: R Bank and Discount Allowed are the contra account. CPJ: Column total: R450. Bank is the contra account. DJ: Column total: R Sales is the contra account. DAJ: Column total: R Debtors Allowance is the contra account. GJ: Column total: R75 (debit) as journal debits and R180 (credit) as journal credits. Debtors Control Balance Bank and discount allowed Jun 10 Petty cash PCJ Jun Debtors allowances CRJ DAJ Bank CPJ Journal credits GJ Sales DJ Balance Journal debits GJ Jul 1 Balance On 1 July the total outstanding debt owed by debtors is R The posting to the Creditors Control account: Scan all journals for any creditors control entries. Remember any entry made in a sundry column will be posted first on the given date and then posting of the column totals will follow. CPJ: Column total: R Bank and Discount Received are for contra account. CJ: Column total: R Different accounts are applicable and therefore Sundry Purchases or Sundry Accounts are the contra account. CAJ: Column total: R Different accounts are applicable and therefore Sundry Returns or Sundry Accounts are the contra account. GJ: Column total: R45 (debit) as journal debits and R115 (credit) as journal credits. 55

53 Bank and discount received Creditors Control CPJ Balance Jun Sundry returns CAJ Jun 30 Sundry purchases CJ Journal debits GJ Journal credits GJ Balance Jul 1 Balance On 1 July the total outstanding debt owed to creditors is R Exercise At the end of May 2010 the owner of P&S Traders provided you with the following column totals of the subsidiary journals. Required: Open the following accounts with the given balances and post the totals of the journals to the following ledger accounts and balance all the accounts on 31 May Debtors Control. 2. Creditors Control. 3. Trading Stock. 4. Sales. 5. Cost of Sales. 6. Stationery. 7. Discount Received. LEDGER ACCOUNTS BALANCE (1 May 2010) Debtors control Creditors control Trading Stock Cost of Sales Sales COLUMN TOTAL OF JOURNALS as on 31 May 2010 CASH RECEIPTS JOURNAL (CRJ) Debtors Discount allowed Cost of Sales Sales Sundry accounts CASH PAYMENTS JOURNAL (CPJ) Debtors 900 Creditors Discount received Stationery Wages Trading Stock

54 DEBTORS JOURNAL (DJ) Sales Cost of Sales DEBTORS allowance JOURNAL (DAJ) Debtors allowance Cost of Sales creditors JOURNAL (CJ) Total Trading Stock Equipment Stationery Sundry accounts creditors allowance JOURNAL (CAJ) Total Trading Stock Stationery 300 GENERAL JOURNAL (GJ) Debtors control credit 150 Creditors control debit 360 Debtors control debit 90 Creditors control credit 115 This exercise required you to draft the control accounts from the information given in the journals. However, if a control account is given, you must be able to answer related questions. Let s have a look at the following example: Example: WESTMIN TRADERS is a retail business which uses a mark-up of 60% on cost at all times. The business uses the continuous inventory system. Study the DEBTORS CONTROL ACCOUNT below and answer the questions that follow: GENERAL LEDGER OF WESTMIN TRADERS Debtors Control Balance Bank and discount allowed CRJ Jan 31??? DJ Jan??? DAJ Bank??? Journal credits GJ Petty cash PCJ Balance??? 00 Journal debits GJ Feb 1 Balance??? 00 57

55 Required: 1. Describe ONE transaction that could give rise to the entry of R224 on the debit side of the account. 2. Describe ONE transaction that could give rise to the entry of R5 360 on the credit side of the account. 3. Which GENERAL LEDGER ACCOUNT (contra account) will be debited as a result of the credit entry of R2 912? 4. What is the source document for the credit entry of R2 912? 5. Calculate the balance on 1 February Name the contra account for the amount of R on the debit side of the account. 7. Calculate the COST OF SALES in the Debtors Journal for January What is the folio reference for the entry Bank R832 on the debit side of the account? 9. What was the outstanding balance on debtors debt on 31 December 2009? 10. Determine the cost of returned goods by debtors for January Answers: Let s first deal with mark-up rate: 60% on cost. 60% on cost => Profit = 60% = 60 => CP.100 P60 cost price 100 SP Pay carriage on purchase, R224, on behalf of a debtor from the petty cash. 2. Write off the debt of R Nel, R5 360, as irrecoverable. 3. Debtors allowance. 4. Credit note. 5. R R R2 912 R5 360 = R Sales. 7. Cost of sales = CP SP = = R CPJ. 9. R Cost of goods returned = CP SP = = R Let s see how you will do in the next exercise. Exercise UMPA TRADERS is a retail business which uses a mark-up of 25% on cost at all times. The business uses the continuous inventory system. Required: Study the Debtors Control account below and answer the questions that follow: 58

56 GENERAL LEDGER OF UMPA TRADERS Debtors Control Balance Bank and discount allowed CRJ May 31 Sales??? May??? DAJ Bank CPJ Journal credits GJ ??? PCJ Balance??? Journal debits GJ Questions: 1. State the total amount owed by the debtors to UMPA Traders at the end of April What is the folio reference for the entry Sales R on the debit side of the account? 3. Name the contra account for the amount of R924 on the debit side of the account. 4. Calculate the balance b/d on 1 June State whether the balance b/d is a debit or a credit balance. 6. Describe ONE transaction that could possibly give rise to the entry of R855 on the debit side of the account. 7. Calculate the COST OF SALES in the Debtors Journal for May What is the source document for the credit entry of R55 660? 9. Which General Ledger account (contra account) will be debited as a result of the credit entry of R22 912? 10. Describe ONE transaction that could give rise to the entry of R960 on the credit side of the account. Unit 1.20: Reconciliation of the balance of the control accounts and the totals of the lists of debtors and creditors The balance of the control accounts should reconcile with the total of the List of Debtors or Creditors. If the balance of the control account and total of the list do not reconcile, a reconciliation statement should be drawn up to correct any mistakes and omissions. Example: The following balances and total of the List of Debtors as well as the total of the List of Creditors appeared in the books of THI Dealers on 28 February Debtors Control R9 840 List of Debtors R8 760 Creditors Control R4 520 List of Creditors R

57 The following mistakes and omissions were found: 1. The List of Debtors was overcast by R The total of the debtors control column, R300, in the Cash Receipts Journal was incorrectly posted to the debit side of the Debtors Control account. 3. The total of the sales column in the Debtors Journal was undercast by R A debit note of R51 in the Creditors Allowance Journal was erroneously not posted to the creditor s account. 5. The total of the debtors allowance column in the Debtors Allowance Journal was wrongly posted to the debit side of the Debtors Control account, R The account of a debtor was balanced incorrectly. The balance had to be R650 instead of R The creditors control column in the Creditors Journal was incorrectly added as R170 instead of R160 and posted as such. 8. A debit note of R450 was incorrectly entered as R495 in the Creditors Allowance Journal and posted as such. 9. An invoice for R236 was not entered in the Creditors Journal. 10. The balance of a creditor s account was by mistake omitted from the List of Creditors, R340. Required: Indicate how the mistakes and omissions should be corrected to reconcile the various totals with the control accounts. Solution: DEBTORS CONTROL list OF DEBTORS creditors CONTROL list OF CREDITORS DR CR DR CR DR CR DR CR Totals Wrong Wrong Wrong Wrong balance total balance total Plus 200 Plus 100 Plus 281 Plus Less Less 120 Less 10 Less

58 Exercise The following balances and total of the List of Debtors as well as the total of the List of Creditors appeared in the books of ST Traders on 30 May Debtors Control R5 175 List of Debtors R2 745 Creditors Control R5 670 List of Creditors R5 581 The following mistakes and omissions were found: 1. The balance of a creditor s account was by mistake omitted from the List of Creditors, R The account of a debtor was balanced incorrectly. The balance had to be R250 instead of R A debit note of R351 in the Creditors Allowances Journal was erroneously not posted to the creditor s account. 4. The total of the debtors control column, R500, in the Cash Receipts Journal was incorrectly posted to the debit side of the Debtors Control account. 5. A debit note of R495 was incorrectly entered as R435 in the Creditors Allowance Journal and posted as such. 6. The List of Debtors was undercast by R An invoice for R360 was not entered in the Creditors Journal. 8. The total of the sales column in the Debtors Journal was overcast by R The creditor control column in the Creditors Journal was incorrectly added as R270 instead of R280 and posted as such. 10. The total of the debtors allowance column in the Debtors Allowance Journal was wrongly posted to the debit side of the Debtors Control account, R150. Required: Indicate how the mistakes and omissions should be corrected to reconcile the various totals with the control accounts. Unit 1.21: Transfers between debtors and creditors ledgers It is possible to have customers who are also suppliers. In this case, you have a Debtors Ledger account and a Creditors Ledger account for the same person or business. In theory, you should receive the total amount owed by this customer for products supplied by you, and you should pay the customer s account in full for products you have bought. This process would result in bank charges for both businesses and it makes sense to agree a net payment system rather than both parties sending payments to each other. The process is called set-off you set off one balance against another to identify the net amount payable. For example, if you owe R500 to T Smith, a supplier, who also owes you R400, it makes sense for you to offset the amounts and accept R100 in full settlement of both debts. You would therefore raise a journal voucher to create a source document for the transaction and enter the transaction in the General Journal as follows: 61

59 On 31 May 2010: T Smith as a creditor T Smith as a debtor R500 R400 Offset the R400 against the R500 owed. GENERAL JOURNAL OF TH dealers MAY 2010 DR CR DEBTORS CONTROL creditors CONTROL DR CR DR CR 31 T Smith T Smith Summary In this part, we looked at how we can use control accounts to provide clearer information in relation to an accounting function where there are a number of entries every month. We explained that the main use of the control account is for debtors and creditors. We also reconcile the control accounts with the particular list by addressing any errors and/or omissions. We explained the process of set-off when you supply products to a business from which you also buy. 62

60 Part 5: Results of sole traders Overview When you have completed Part 5 of this module, you should be able to: Record accounting entries for carriage on purchases, bad debts recovered, sales of fixed assets (including adjustments to the asset register), and show the influence on the accounting equation. Briefly explain the purpose of accounting adjustments and record account entries for adjustments in relation to additional bad debts, provision for bad debts, depreciation of fixed assets, provision for discount allowed, provision for unforeseen expenses, accrued expenses, accrued income, prepaid expenses, income received in advance, consumable stores on hand, trading stock deficit and correction of errors and omissions. Draw up a post-adjustment Trial Balance after all adjustments have been journalised and transferred to relevant accounts. Journalise the closing transfers and post to the relevant accounts. Draw up Trading and Profit and Loss accounts as well as a post-closing Trial Balance. Draw up an Income Statement in vertical format. Draw up a Balance Sheet in vertical format with relevant notes. Unit 1.22: Additional transactions During the course of a financial year, you may have to deal with unusual accounting items, some of which we cover below. Carriage on purchases When you buy materials from a supplier, you may have to pay carriage for delivering the goods to your business premises. Many businesses treat this as part of the cost of the stock, entering the total invoice amount into the Trading Stock account, for a continuous stock system. The Trading Stock account includes the cost price of stock bought and any indirect costs like carriage. Example: Paid R2 500 per cheque to TBM Transport for delivery of stock ordered. This transaction will be recorded in the Cash Payments Journal. TRADING STOCK Bank

61 BANK Trading stock On the accounting equation: ACCOUNTING EQUATION A O L Bad debts recovered At some point, you may find that a bad debt you wrote off some months before is suddenly paid, in full or in part. This is called a bad debt recovered and is classified as an income account. Example: Received R500 from Mrs K Walton, a debtor, whose debt had previously been written off as irrecoverable. This transaction will be recorded in the Cash Receipts Journal. BANK Bad debt recovered

62 BAD DEBT recovered Bank On the accounting equation: ACCOUNTING EQUATION A O L Loans (long-term) An enterprise may have a need for additional funding, but due to its current situation does not have enough money of its own. One way of getting additional funding will be to request the owner to make an additional capital contribution, but sometimes an enterprise will apply to a financial institution to borrow money. The money borrowed from it is a long-term loan and forms part of the long-term liabilities of this enterprise. Two actions will follow: Repayment of the loan to decrease the initial liability. Interest payable cost related to having a loan. The following example will focus on the three aspects of a long-term loan: Receiving money from the financial institution as a loan. Repayment of the loan. Interest payment. Example: 1. Received an amount of R from BNT Bank for signing a loan agreement. This transaction will be recorded in the Cash Receipts Journal. 65

63 BANK Loan: BNT Bank LOAN: BNT BANK Bank This loan is a long-term liability for this enterprise. On the accounting equation: ACCOUNTING EQUATION A O L Paid R per cheque to BNT Bank as an instalment on the loan. This transaction will be recorded in the Cash Payments Journal. BANK Loan: BNT Bank Loan: BNT Bank LOAN: BNT BANK Bank Bank This payment decreases this liability and will have a direct result on future calculations. On the accounting equation: ACCOUNTING EQUATION A O L

64 3. Paid R2 500 per cheque to BNT Bank as interest on loan. This transaction will be recorded in the Cash Payments Journal. This interest is a cost of having a loan and is therefore an Expense account. BANK Loan: BNT Bank Loan: BNT Bank Interest on loan LOAN: BNT BANK Bank Bank INTEREST ON LOAN Bank On the accounting equation: ACCOUNTING EQUATION A O L Fixed deposit A fixed deposit is the opposite of taking up a loan. An enterprise may have additional funds on its current account that can be invested to earn a better interest than is offered on the current account. Money in the enterprise s current account is a current asset and if this money is invested at a financial institution in the form of a fixed deposit this will be classified as a long term (non-current) asset. Fixed deposits are classified as financial assets. Two actions will follow: Repayment of the fixed deposit by the financial institution at the end of the agreed term. Interest receivable income related to having a fixed deposit. The following example will focus on the three aspects of a fixed deposit: Paying money to the financial institution as a fixed deposit. fixed deposit: Is the opposite of taking up a loan. An enterprise may have additional funds on its current account that can be invested to earn a better interest than is offered on the current account. Money in the enterprise s current account is a current asset, and, if this money is invested with a financial institution in the form of a fixed deposit, this will be classified as a long-term (non-current) asset. Fixed deposits are classified as financial assets. 67

65 Interest receivable. Repayment of the fixed deposit by the financial institution at the end of the agreed term. Example: 1. Pay an amount of R over to Z Bank as a fixed deposit. This transaction will be recorded in the Cash Payments Journal. BANK Fixed deposit: Z Bank FIXED DEPOSIT: Z BANK Bank This fixed deposit is a long-term (non-current) financial asset for this enterprise. On the accounting equation: ACCOUNTING EQUATION A O L Received a cheque for R1 250 from Z Bank as interest on fixed deposit. This transaction will be recorded in the Cash Receipts Journal. This interest is a receipt for having a fixed deposit and is therefore an Income account. BANK Interest on fixed deposit Fixed deposit: Z Bank FIXED DEPOSIT: Z BANK Bank

66 INTEREST ON FIXED DEPOSIT Bank On the accounting equation: ACCOUNTING EQUATION A O L Received a cheque of R from Z Bank as repayment of the fixed deposit at the end of the period. This transaction will be recorded in the Cash Receipts Journal. BANK Interest on fixed deposit Fixed deposit: Z Bank Fixed deposit: Z Bank FIXED DEPOSIT: Z BANK Bank Bank INTEREST ON FIXED DEPOSIT Bank This receipt decreases this financial asset. On the accounting equation: ACCOUNTING EQUATION A O L

67 Example: The following information was given to you as the accountant on 31 December 2010, the end of the financial year: Fixed deposit: ABSA (9% p.a.) R Loan: FNB (21% p.a.) R Interest on loan R Required: 1. If the fixed deposit was increased by R on 1 October 2010, calculate the interest receivable for the financial year ended 31 December The loan at FNB was obtained on 1 April Calculate the interest STILL PAYABLE for the financial year ended 31 December Answers: 1. FINANCIAL YEAR 2010 Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Jan Calculation: 1 Jan 2010 to 30 Sept 2010: % = Oct 2010 to 31 Dec 2010: % = Total = FINANCIAL YEAR 2010 Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Jan Calculation: 1 Apr 2010 to 31 Dec 2010: % = Already paid = Still payable = Asset disposal Purchase of fixed assets is deemed to be part of investing activities for use in the enterprise. These assets are usually depreciated over the life span of these assets. Selling these assets is not normally a trading activity within the enterprise, but merely a way of replacing existing assets with new technology. Selling assets is referred to as asset disposal. asset disposal: The selling of assets. There are three ways of disposing of an asset: 1. Selling an asset for cash. 2. Selling an asset on credit. 3. Trade-in on a new asset. 70

68 There are three ways of disposing of an asset: Selling an asset for cash. Selling an asset on credit. Trade-in on a new asset. Information needed to dispose of an asset on a given date: The cost price of the asset. Accumulated depreciation of that asset on date on sale. Selling price (Proceeds). Profit or loss on the sale of an asset. With this information the following entries will be recorded in the books for the disposal of an asset: Transfer the cost price of the asset from the Asset account to the Asset Disposal account. ASSET ACCOUNT Asset disposal XXX ASSET DISPOSAL Asset account XXX Transfer the accumulated depreciation related to that asset from the Accumulated Depreciation account to the Asset Disposal account. ASSET ACCOUNT Asset disposal XXX ACCUMULATED DEPRECIATION Asset disposal XXX ASSET DISPOSAL Asset account XXX Accumulated depreciation XXX 71

69 Record the sale. ASSET ACCOUNT Asset disposal XXX ACCUMULATED DEPRECIATION Asset disposal XXX BANK Asset disposal XXX ASSET DISPOSAL Asset account XXX Accumulated XXX depreciation Bank XXX Calculate the result of the sale. If the credit side of the Asset Disposal account is more than the debit side, a profit will be recorded on the debit side of the Asset Disposal account, or if the debit side of the Asset Disposal account is more than the credit side, a loss will be recorded on the credit side of the Asset Disposal account. ASSET ACCOUNT Asset disposal XXX ACCUMULATED DEPRECIATION Asset disposal XXX BANK Asset disposal XXX 72

70 ASSET DISPOSAL Asset account XXX Accumulated XXX depreciation Profit on sale of asset XXX Bank XXX PROFIT ON SALE OF ASSET Asset disposal XXX Example: On 31 August 2011 a vehicle with a cost price of R and accumulated depreciation, until date of sale of R , was sold for R on credit to C Maasdorp. The book value of this vehicle is the difference between the cost price of that vehicle and the accumulated depreciation of the vehicle. Thus, the book value (real value or net carrying amount) of the vehicle is ( ) = R If the proceeds are MORE than the book value, a profit will be recorded. If the proceeds are LESS than the book value, a loss will be recorded. From this information it is known that: Cost price of asset sold = R Accumulated depreciation of asset up to date of sale = R Proceeds from the sale = R The book value is R and the proceeds from the sale are R Thus the proceeds are more than the book value and therefore a profit will be recorded. Profit on sale of asset = R Asset Disposal account: 73

71 ASSET DISPOSAL Aug 31 Vehicle Aug 31 Accumulated depreciation on vehicle Profit on sale of asset Debtors control Example: The following information appeared in the books of Big Jack Traders on 31 March 2010, the end of the financial year: Vehicles R Accumulated depreciation on vehicles R Debtors control R Transaction: On 31 March 2010 sell Vehicle A for R on credit to P Nel. The cost price of this vehicle is R and the accumulated depreciation on the date of sale is R Required: 1. Calculate the book value of Vehicle A on date of sale. 2. Open the following ledger accounts and post the transaction to the relevant accounts. Vehicles. Accumulated Depreciation on Vehicles. Debtors Control. Asset Disposal. Solution 1. Book value = cost price accumulated depreciation = = Vehicles Mar 31 Balance Mar 31 Asset disposal

72 Accumulated Depreciation on Vehicles Mar 31 Asset disposal Mar 31 Balance Debtors Control 2010 Mar 31 Balance Asset disposal Asset Disposal Mar 31 Vehicle Mar 31 Accumulated depreciation on vehicle Profit on sale of asset Debtors control On date of sale the accumulated depreciation of the asset for sale must be updated, if applicable, with additional depreciation. This action is needed to ensure that the real value (book value) of the asset for sale can be calculated. Exercise The following information appeared in the books of Big Jack Traders on 28 February 2010, the end of the financial year: Vehicles R Equipment R Accumulated Depreciation on Vehicles R Accumulated Depreciation on Equipment R Bank R Transaction: On 31 August 2010 Vehicle B with cost price of R was sold for R cash. The net carrying value of this vehicle on 28 February 2011 was R Depreciation on vehicles is calculated at 20% p.a. on cost price. Required: 1. Calculate the total accumulated depreciation for Vehicle B on date of sale. 2. What is the book value of Vehicle B on date of sale? 3. Draw up the Asset Disposal account on 31 August 2010 in the General Ledger. 4. Calculate the closing balance of the following accounts on 1 September 2010: 75

73 Vehicles. Equipment. Accumulated Depreciation on Vehicles. Accumulated Depreciation on Equipment. Bank. Profit or Loss on Sale of Asset. Unit 1.23: Accounting adjustments It is a legal requirement for all businesses to produce accounts at the end of each financial year to show the trading results and position for the year. However, on the last day of the trading year you may not have received source documents such as supplier invoices and bank statements. There are also annual calculations and adjustments that you have to calculate in order to have all the information you need for the end-of-year accounts. Therefore you may have additional calculations and adjustments for such transactions, examples of which are given below. All adjustments are recorded in the General Journal before posting to the relevant ledger accounts. Depreciation of non-current (fixed) assets An asset is recorded at cost on the day of purchase. Over the years these assets (excluding land and buildings) depreciated in value and it was necessary to adjust their cost price accordingly to reflect the total value of assets realistically. Providing for depreciation at the end of the financial year results in an expense called depreciation, but this depreciation accumulates year on year in an account called Accumulated Depreciation. The difference between the cost price (gross carrying amount) and the accumulated depreciation (total depreciation written off to date) is the book value (net carrying amount) of that asset. Providing for depreciation will have the following double entry in the books of the enterprise. Dr Cr Depreciation Accumulated depreciation on assets (vehicles or equipment) There are two methods to write off depreciation: Cost price method (straight-line method) The cost price of the asset will be used in the calculation. Example: Vehicles R Accumulated depreciation on vehicles R

74 Provide for depreciation at 20% p.a. on the cost price method. Calculation: Depreciation = Cost price period % = % = R Vehicles Balance Accumulated Depreciation on Vehicles Balance Depreciation Depreciation Accumulated depreciation on vehicles Depreciation is an Expense account and is reported on in the Income Statement. Balances AFTER the adjustment: Vehicles R Accumulated depreciation on vehicles R R = R Book value of vehicles R R = R Depreciation R Therefore: Gross carrying amount (cost price) of vehicles = R Net carrying amount of vehicles = Gross carrying amount less Accumulated depreciation = R R = R Diminishing value method (book value method) The book value (cost price less accumulated depreciation) of the asset will be used in the calculation. Example: Equipment R Accumulated depreciation on equipment R Provide for depreciation at 20% p.a. on the diminishing value method. Calculation: Depreciation = (Cost price Accumulated depreciation) period % 77

75 = ( ) % = R9 000 Equipment Balance Accumulated Depreciation on Equipment Balance Depreciation Depreciation Accumulated depreciation on equipment Depreciation is an Expense account and is reported on in the Income Statement. Balances AFTER the adjustment: Equipment R Accumulated depreciation on equipment R R9 000 = R Book value of equipment R R = R Depreciation R9 000 Therefore: Gross carrying amount (cost price) of equipment = R Net carrying amount of equipment = Gross carrying amount less Accumulated depreciation = R R = R Exercise 1. Vehicles R Equipment R Accumulated depreciation on vehicles R Accumulated depreciation on equipment R Provide for depreciation as follows: 1.1 on vehicles: 15% p.a. on cost price. 1.2 on equipment: 20% p.a. on the diminishing value method. Thus, after the adjustment, provide the closing balances of the following: 78

76 Vehicles Equipment Accumulated depreciation on vehicles Accumulated depreciation on equipment Depreciation 2. For the financial year ended 30 June 2011: Vehicles R Equipment R Accumulated depreciation on vehicles R Accumulated depreciation on equipment R Note that new vehicles to the value of R were bought on 1 April Provide for depreciation as follows: 2.1 On vehicle: 20% p.a. on cost price. 2.2 On equipment: 25% p.a. on the diminishing value method. Thus, after the adjustment, provide the closing balances of the following: Vehicles Equipment Accumulated depreciation on vehicles Accumulated depreciation on equipment Depreciation Additional bad debts If the debt of a debtor becomes irrecoverable, it is written off as a bad debt. Sometimes on the last day of the financial year additional bad debts need to be written off. Bad Debt will be debited and Debtors Control will be credited with the applicable amount. Example: Write off the debt of Mrs K Walton, a debtor, as irrecoverable, R750. DEBTORS CONTROL Bad debt BAD DEBT Debtors control On the accounting equation: 79

77 ACCOUNTING EQUATION A O L Provision for bad debt You may have reason to believe that one or more of your debtors may not be able to pay their accounts in the future. In this case you can make a provision for bad debt. Debtors are reflected in the Balance Sheet. It is important that this amount should be a realistic value. Therefore provision for bad debt is needed. It is possible to calculate the percentage of the debt written off to the total outstanding debtors. This percentage is given for bad debt for the future financial year and will be used to make provision for bad debt. Provision for bad debt will be discussed under the following headings: Creation of a provision for bad debt. Increase of a provision for bad debt. Decrease of a provision for bad debt. Creation of a provision for bad debt This provision is calculated on the outstanding debtors at a given date. Remember to account first for any additional bad debt BEFORE the provision is calculated. Example: Debtors Control R Create a provision for bad debts at 5% of the debtors. Let s calculate the provision = 5% = Provision for Bad Debt will be credited and Provision for Bad Debt Adjustment will be debited with R Provision for Bad Debt Provision for bad debt adjustment Provision for Bad Debt Adjustment Provision for bad debts

78 On the accounting equation: ACCOUNTING EQUATION A O L Increase of a provision for bad debts Example: Debtors Control R Provision for Bad Debt R2 500 Create a provision for bad debts at 5% of the debtors. Let s calculate the NEW provision = 5% = Thus the provision will increase from R2 500 to R The adjustment in the provision is R500. Provision for Bad Debts will be credited and provision for Bad Debt Adjustment will be debited with R500. Provision for Bad Debts Balance Provision for bad debt adjustment Provision for bad debts Provision for Bad Debt Adjustment Provision for Bad Debt Adjustment is in this example an Expense account of R500. On the accounting equation: ACCOUNTING EQUATION A O L

79 Decrease of a provision for bad debt Example: Debtors Control R Provision for Bad Debt R3 000 Create a provision for bad debts at 5% of the debtors. Let s calculate the NEW provision = 5% = Thus the provision will decrease from R3 000 to R The adjustment in the provision is R250. Provision for Bad Debts will be debited and Provision for Bad Debt Adjustment will be credited with R250. Provision for bad debt adjustment Provision for Bad Debts Balance Balance Provision for Bad Debt Adjustment Provision for bad debt Provision for Bad Debt Adjustment is in this example an Income account of R250. On the accounting equation: ACCOUNTING EQUATION A O L Provision for discount allowed At the end of a financial year you may have debtor accounts that will become due after the end of the year and on which you will allow a discount for prompt payment. For your year-end accounts you need to make provision for discount allowed and for all known items related to the current year. This provision should be calculated on the net estimated amount receivable from debtors. The net estimated receivable amount for debtors will be the debtors control less additional bad debt and less provision for bad debt. The reason why you should exclude the provision 82

80 for bad debt is that you don t allow discount on bad debt and it therefore needs to be excluded from the provision for discount allowed calculation. Provision for discount allowed will be discussed under the following headings: Creation of a provision for discount allowed. Increase of a provision for discount allowed. Decrease of a provision for discount allowed. Creation of a provision for discount allowed This provision is calculated on the net estimated amount receivable from debtors at a given date. This net estimated amount receivable from debtors is debtors control less provision for bad debt. Example: Debtors Control R Provision for Bad Debt R2 500 Create a provision for discount allowed at 3% of the debtors. This provision is calculated on the net estimated receivable amount that would be equal to R less R2 500 = R Let s calculate the provision for discount allowed = 3% = Provision for Discount Allowed will be credited and Provision for Discount Allowed Adjustment will be debited with R Provision for Discount Allowed Provision for discount allowed adjustment Provision for Discount Allowed Debt Adjustment Provision for discount allowed On the accounting equation: ACCOUNTING EQUATION A O L

81 Increase of a provision for discount allowed Example: Debtors Control R Provision for Bad Debt R2 500 Provision for Discount Allowed R1 425 Create a provision for discount allowed at 3% of the debtors. Remember the provision is calculated on the net estimated receivable amount. In this example, this amount is equal to R (R less R2 500). Let s calculate the NEW provision = 3% = Thus the provision will increase from R1 425 to R The adjustment in the provision is R300. Provision for Discount Allowed will be credited and Provision for Discount Allowed Adjustment will be debited with R300. Provision for Discount Allowed Balance Provision for discount allowed adjustment Provision for discount allowed Provision for Discount Allowed Adjustment Provision for Discount Allowed Adjustment is in this example an Expense account of R 300. On the accounting equation: ACCOUNTING EQUATION A O L

82 Decrease of a provision for discount allowed Example: Debtors Control R Provision for Bad Debt R2 500 Provision for Discount Allowed R1 725 Create a provision for discount allowed at 3% of the debtors. Let s calculate the NEW provision = 3% (net estimated receivable amount) = Thus the provision will decrease from R1 725 to R The adjustment in the provision is R150. Provision for Discount Allowed will be debited and Provision for Discount Allowed Adjustment will be credited with R150. Provision for discount allowed adjustment Provision for Discount Allowed Balance Balance Provision for Discount Allowed Adjustment Provision for discount allowed adjustment Provision for Discount Allowed Adjustment is in this example an Income account of R150. On the accounting equation: ACCOUNTING EQUATION A O L Provision for unforeseen expense At the end of the financial year, if the enterprise is aware of a big expense which it is going to incur during the next financial year, a provision must be made for this expense. An example of such a provision would be if there is a looming legal case pending. 85

83 Creation of a provision for unforeseen expense Example: In the following financial year the enterprise is going to be involved in a court case. Create a provision of R for legal fees payable in the following financial year. Provision for Legal Fees will be credited and Provision for Legal Fees Adjustment will be debited with R Provision for Legal Fees Provision for legal fees adjustment Provision for Legal Fees Adjustment Provision for legal fees allowed Provision for legal fees adjustment is, in this example, an expense account of R On the accounting equation: ACCOUNTING EQUATION A O L Accrued expenses (expenses still payable) Enterprises must account for all expenses during the financial year. It can easily happen that an expense incurred during the financial year is not paid before the end of the financial year. In this case no transaction will be recorded in this Expense account and therefore it will not reflect the real expense for this financial year. This requires an adjustment to that Expense account to ensure the amount forwarded to the Income Statement with regard to this expense is a true reflection of the real expense for that financial year. Accrued expense is expense related to the current financial year but which you expect to pay after the end of the financial year. 86

84 Example: The manager of an enterprise is earning a monthly salary of R At the end of the financial year the salary account indicates a total expense of R ; one month s salary is still payable. Therefore the amount of R (only 11 month s expenses) is not a true reflection of what the real expense is with regard to salaries for the particular financial year, given the fact that the manager worked for a period of 12 months. The Salary account must be adjusted with the last month s expense of R10 000, so that the Salary account can reflect expenses for 12 months as it should be in this case. This additional R is an expense still payable and is referred to as accrued expense. The double entry should be: Salary account debited with R and Accrued Expense credited with R The Accrued Expense account is a liability for the reason that this amount is still payable. Balance Accrued expense Salary Accrued Expense Salary The total salary expense is R after the adjustment. On the accounting equation: ACCOUNTING EQUATION A O L The above adjustment is done at the end of the financial year and the Expense account is closed off to the Profit and Loss account (or Income Statement) and the account Accrued Expense is recorded in the Balance Sheet as part of Trade and Other Creditors. However, at the beginning of the following financial year this Accrued Expense account must be written back to the Expense account. This is to ensure that the first payment for salary in the new financial year is to cover the amount still payable with regard to the previous financial year. 87

85 Let s do the reversal of this accrued expense: Accrued Expense Salary Salary Salary Accrued expense The writing back of accrued expense results in the closing off of the Accrued Expense account. The first payment of R on the debit side of the Salary account will cover the amount outstanding from the previous financial year. Accrued income (income receivable) Enterprises must account for all income during the financial year. It can easily happen that an income is incurred during the financial year, but is not received before the end of the financial year. In this case, no transaction will be recorded in this Income account and therefore the real income for this financial year will not be reflected. This requires an adjustment to this Income account to ensure that the amount forwarded to the Income Statement with regard to this income is a true reflection of the real income for that financial year. Accrued income is income related to the current financial year but which you expect to receive after the end of the financial year. Example: The enterprise lets a building to another enterprise for R5 000 per month. At the end of the financial year the Rent Income account indicates a total income of R55 000; one month s rent income is still receivable. Therefore the amount of R (only 11 month s income) is not a true reflection of what the real income is with regard to rent income for the particular financial year, given the fact that the building was leased for a period of 12 months. The Rent Income account must be adjusted with the last month s income of R5 000 so that the Rent Income account can reflect an income for 12 months as it should be in this case. This additional R5 000 is an income still receivable and is referred to as accrued income. The double entry should be: Rent Income account credited with R5 000 and Accrued Income debited with R The Accrued Income account is an asset for the reason that this amount is still receivable. 88

86 Rent Income Balance Accrued income Rent income Accrued Income The total rent income is R after the adjustment. On the accounting equation: ACCOUNTING EQUATION A O L The above adjustment is done at the end of the financial year and the income is closed off to the Profit and Loss account (or Income Statement) and the account Accrued Income is recorded in the Balance Sheet as part of Trade and Other Debtors. However, at the beginning of the following financial year this Accrued Income account must be written back to the Income account. This is to ensure that the first receipt for rent income in the new financial year is to cover the amount still receivable with regard to the previous financial year. Let s do the reversal of this accrued income: Accrued Income Rent income Rent income Rent Income Accrued income The writing back of accrued income results in the closing off of the Accrued Income account. The first receipt of R5 000 on the credit side of the Rent Income account will cover the amount outstanding from the previous financial year. 89

87 Prepaid expenses (expenses paid in advance) It can easily happen that an expense paid during the financial year runs into the next financial year. In this case, the Expense account is overstated with an amount related to the next financial year. Reporting on expenses should only relate to the current financial year. This requires an adjustment to this Expense account to ensure that the amount forwarded to the Income Statement with regard to this expense is a true reflection of the real expense for that financial year. Prepaid expense is an expense related to the next financial year, but which you have already paid in this financial year. Example: Given that the enterprise s financial year ends on 30 June, assume a payment of R is made on 1 October of that financial year to its insurance company as an annual insurance premium. This payment will cover the insurance for the enterprise till 30 September in the next financial year. At the end of the financial year the Insurance account indicates a total expense of R of which three months is related to the next financial year. Therefore the amount of R (including the payment of three months that is related to the next financial year) is not a true reflection of the real expense for insurance for the particular financial year. The Insurance account must R be adjusted with the thee months expense of R6 000 ( = R2 000 per month) so 12 that the Insurance account can reflect an expense that is only related to this financial year. This amount of R6 000 is an expense paid in advance and is referred to as prepaid expense. The double entry should be: Insurance account credited with R6 000 and Prepaid Expense debited with R The Prepaid Expense account is an asset. Insurance Balance Prepaid expense Prepaid Expense Insurance The total insurance expense is R after the adjustment. 90

88 On the accounting equation: ACCOUNTING EQUATION A O L The above adjustment is done at the end of the financial year and the Expense account is closed off to the Profit and Loss account (or Income Statement) and the account Prepaid Expense is recorded in the Balance Sheet as part of Trade and Other Debtors. However, at the beginning of the following financial year this Prepaid Expense account must be written back to the Expense account. Let s do the reversal of this prepaid expense: Prepaid Expense Insurance Insurance Insurance Prepaid expense The writing back of prepaid expense results in the closing off of the Prepaid Expense account. The payment of R6 000 on the debit side of the Insurance account is a relocation of the three months payment that was made in the previous financial year related to this financial year. Income received in advance It can easily happen that an income is received during the financial year running into the next financial year. In this case the Income account is overstated with an amount related to the next financial year. Reporting on income should only relate to the current financial year. This requires an adjustment to this Income account to ensure that the amount forwarded to the Income Statement with regard to this income is a true reflection of the real income for that financial year. Income received in advance is income related to the next financial year but which you have already received in this financial year. 91

89 Example: The enterprise lets a building to another enterprise for R5 000 per month. At the end of the financial year the Rent Income account indicates a total income of R65 000; one month s rent income is received in advance. Therefore the amount of R (13 months of income) is not a true reflection of what the real income is regarding the rent income for the particular financial year, given the fact that the building was leased for a period of 12 months in this financial year. The Rent Income account includes one month of rent income received that is related to the next financial year, and therefore must be adjusted by R5 000 so that the Rent Income account can only reflect an income for 12 months as it should be in this case. This R5 000 is an income received for the next financial year and should be accounted for in that financial year and referred to as income received in advance. The double entry should be: Rent Income account debited with R5 000 and Income Received in Advance credited with R Income received in advance is a liability. Income received in advance Rent Income Balance Income Received in Advance Rent income The total rent income is R after the adjustment. On the accounting equation: ACCOUNTING EQUATION A O L The above adjustment is done at the end of the financial year and the Income account is closed off to the Profit and Loss account (or Income Statement) and the account Income Received in Advance is recorded in the Balance Sheet as part of Trade and Other Creditors. However at the beginning of the following financial year, this Income Received in Advance account must be written back to the Income account. Let s do the reversal of this income received in advance: 92

90 Income Received in Advance Rent income Rent income Rent Income Income received in advance The writing back of income received in advance results in the closing off of the Income Received in Advance account. The receipt of R5 000 on the credit side of the Rent Income account is a relocation of the one month s receipt that was received in the previous financial year related to this financial year. Trading Stock deficit Most businesses determine the value of stock at the end of the financial year by carrying out a physical count of the items sitting in the stores on the last day of the year and checking that count against the stores record cards. The two amounts may not agree, perhaps because of errors in the system or because stock has been stolen during the year. Example: Trading Stock (as reflected in the books on the last day of the financial year) R On the last day of the financial year, the stock on hand after the physical stock take, is R Reporting on trading stock will be done in the Balance Sheet as part of current assets. Therefore reporting it to be R is not a true reflection of the trading stock in this enterprise. An adjustment to the trading stock is needed. The R400 difference is most likely due to theft and would be recorded as a loss in the books of the enterprise as a trading stock deficit. The double entry should be: Trading Stock credited with R400 and Trading Stock Deficit debited with R400. Trading Stock deficit is a loss in stock and is classified as an expense. Trading Stock Balance Trading Stock deficit

91 Trading Stock Deficit Trading Stock The total trading stock is R after the adjustment. On the accounting equation: ACCOUNTING EQUATION A O L Consumable goods on hand Consumable goods on hand are any consumable items like stationery, packing materials, et cetera, on hand at the end of the financial year. Any purchase of consumable goods is classified as an expense. These amounts will only be recorded in total as an expense if no goods are on hand at the end of the financial year. In the case of these goods being on hand, that is if they are unused and will only be used in the next financial year, that part of the payment will therefore follow the expense to the next financial year and be recorded in that financial year. Example: Stationery R5 000 On the last day of the financial year, the stationery on hand after the physical stock take is R The total used stationery in this financial year is R4 000 and this amount will be recorded in the Income Statement as an expense. The unused stationery of R1 000 will be recorded as an expense in the next financial year if used. An adjustment to the Stationery account is needed. The stationery on hand of R1 000 is referred to as consumable goods on hand. The double entry should be: Stationery credited with R1 000 and Consumable Goods on Hand debited with R The Consumable Goods on Hand account is an asset. Stationery Balance Consumable goods on hand

92 Consumable Goods on Hand Stationery The total stationery is R4 000 after the adjustment. On the accounting equation: ACCOUNTING EQUATION A O L Correction of errors and omissions Errors and omissions in accounts should be investigated and corrected in the accounts in which they occur. Example: The following balance appeared in the books at the end of the financial year: Stationery R3 200 Bank Charges R600 During the year stationery to the value of R100 was bought, but the Bank Charges account was incorrectly debited. Rectify the error. A mistake was made by the accountant and therefore the correction must follow. The entry was supposed to be an entry in the Stationery account, but instead it was entered in the Bank Charges account. The double entry should be: Bank Charges credited with R100 and Stationery debited with R100. Stationery Balance Bank charges Bank Charges Balance Stationery

93 After the adjustment the Stationery account is R3 300 and the Bank Charges account is R500. On the accounting equation: ACCOUNTING EQUATION A O L Unit 1.24: Post-adjustment Trial Balance For an accounting function, the end of the financial year is an extremely busy time because the ledger accounts used during the year have to be balanced and closed off, checked for accuracy, and adjustments journalised and transferred to relevant accounts. The last month s Trial Balance drawn up before any end-of-year adjustments is called the pre-adjustment Trial Balance. All adjustments will be considered and applied to the preadjustment Trial Balance. The adjusted balances in a newly drawn up Trial Balance are referred to as the post-adjustment Trial Balance. Example A You are provided with the PRE-ADJUSTMENT TRIAL BALANCE of BIG TIME STORES on 30 June Required: 1. Open all the accounts listed in the pre-adjustment Trial Balance in the General Ledger of Big Time Stores. 2. Journalise the adjustments and post from the General Journal to the ledger accounts. 3. Draw up a post-adjustment Trial Balance of Big Time Stores on 30 June Adjustments: 1. A credit invoice from TS Dealers, R3 400, for stock purchased was omitted from the financial records. Record this transaction. 2. According to a physical stock count on 30 June 2011, the following stock was on hand: Trading Stock R Stationery R A debtor, B Mans, has disappeared and his account of R2 000 must be written off as irrecoverable. 4. Adjust the provision for bad debt to 5% of outstanding debtors. 5. The fixed deposit was increased by R on 1 April Provide for the outstanding interest. 96

94 6. The interest on the loan is still due. On 30 September 2010 the interest rate was decreased from 25% p.a. to 20% p.a. 7. Rent is still receivable for three months. There has been no increase in the monthly rent for this financial year. 8. Insurance includes an annual premium of R2 400 on a new policy which commenced on 1 November An amount of R300 was collected from M Botman whose account had previously been written off. 10. Depreciation must be provided for as follow: On equipment at 15% p.a. according to the diminishing balance method. On vehicles at 20% p.a. on cost price. Take into account that a vehicle with a gross carrying value of R was bought on 1 October In June 2011 the manager s salary of R5 000, was paid, but the Wages account was incorrectly debited. Rectify this error. BIG TIME STORES PRE-ADJUSTMENT TRIAL BALANCE ON 30 JUNE 2011 DR BALANCE SHEET accounts section Capital Drawings Land and buildings Equipment Accumulated depreciation on equipment Vehicles Accumulated depreciation on vehicles Fixed deposit: ABSA Bank (8% p.a.) Trading Stock Debtors control Bank Loan: NEDBANK (20% p.a.) Petty cash 200 Creditors control Provision for bad debt CR NOMINAL accounts section Sales Cost of Sales Debtors allowances Rent income Interest on fixed deposit Discount received Wages

95 Salaries Interest on loan Bad debts Insurance Stationery Solution As part of the solution a short explanation will follow on each of the adjustments to help you understand them better. Adjustments Throughout it is important to identify the accounts applicable in these adjustments and how these accounts will be affected. 1. A credit invoice from TS Dealers, R3 400, for stock purchased was omitted from the financial records. Record this transaction. The journal entry: GENERAL JOURNAL OF BIG TIME STORES JUNE 2011 DR CR DEBTORS CONTROL creditors CONTROL DR CR DR CR 30 Trading Stock TS Dealers Adjusted balances: Trading Stock = R = R Creditors control = R = R According to a physical stock count on 30 June 2011, the following stock was on hand: Trading Stock R Stationery R480 Remember that after adjustment the balance of trading stock is R70 000; therefore the deficit is R1 500 (R R68 500). 98

96 The journal entry: 30 Trading Stock deficit DR CR DEBTORS CONTROL creditors CONTROL Trading Stock Consumable 480 goods on hands Stationery 480 DR CR DR CR Adjusted balances: Trading Stock = R = R Trading Stock deficit = R1 500 Stationery = R = R2 000 Consumable goods on hand = R A debtor, B Mans, has disappeared and his account of R2 000 must be written off as irrecoverable. The journal entry: DR CR DEBTORS CONTROL creditors CONTROL DR CR DR CR 30 Bad debts Adjusted balances: Debtors control = R = R Bad debts = R = R Adjust the provision for bad debt to 5% of debtors. Remember that the provision must be calculated on the net debtors after adjustment 3; therefore on the balance of R Provision for bad debt = % = R The old provision is R2 000 according to the Trial Balance. Therefore the adjustment is a decrease of R100. The journal entry: 30 Provision for bad debts Provision for bad debts adjustment DR CR DEBTORS CONTROL creditors CONTROL DR CR DR CR

97 Adjusted balances: Provision for bad debts = R = R1 900 Provision for bad debts adjustment = R The fixed deposit was increased by R on 1 April Provide for the outstanding interest. A timeline is always useful to ensure that you do the calculation correctly. FINANCIAL YEAR 2010/2011 Jul Aug Sept Oct Nov Dec Jan-11 Feb Mar Apr May Jun Jul Calculation: % = R9 000 OR % = % = R % = Total (real income) = R Total = OR What amount is recorded in the Trial Balance? = R Thus R3 000 ( ) is received in advance. Income received in advance = R The journal entry: 30 Interest on fixed deposit Income received in advance DR CR DEBTORS CONTROL creditors CONTROL DR CR DR CR Adjusted balances: Interest on fixed deposit = R = R Income received in advance = R The interest on the loan is still due. On 30 September 2010 the interest rate was decreased from 25% p.a. to 20% p.a. FINANCIAL YEAR 2010/2011 Jul Aug Sept Oct Nov Dec Jan-11 Feb Mar Apr May Jun Jul 25% 20% Calculation: % = R % = R Total (real income) = R

98 What amount is recorded in the Trial Balance? = R Thus R is still payable. Accrued expenses = R The journal entry: 30 Interest on loan Accrued expense DR CR DEBTORS CONTROL creditors CONTROL DR CR DR CR Adjusted balances: Interest on loan = R = R Accrued expense = R Rent is still receivable for three months. There has been no increase in the monthly rent for this financial year. Three months is still receivable = rent for only nine months was received. Nine months = R and therefore the monthly rent is R2 000 per month. R6 000 (three months) is still receivable. Accrued income = R The journal entry: 30 Accrued income DR CR DEBTORS CONTROL creditors CONTROL DR CR DR CR Rent income Adjusted balances: Rent income = R = R Accrued income = R Insurance includes an annual premium of R2 400 on a new policy which commenced on 1 November FINANCIAL YEAR 2010/2011 Jul Aug Sept Oct Nov Dec Jan-11 Feb Mar Apr May Jun Jul In this financial year = 8 months Annual premium of R2 400 = R200 per month Of this year, eight months are within this financial year; however the last four are in the next financial year. The insurance for these four months is paid in advance. Prepaid expense = R800 (four months R200) 101

99 The journal entry: 30 Prepaid expense 800 Insurance 800 DR CR DEBTORS CONTROL creditors CONTROL DR CR DR CR Adjusted balances: Insurance = R = R Prepaid expense = R An amount of R300 was collected from M Botman whose account had previously been written off. Bad debt recovered. The journal entry: (This transaction will normally be recorded in the CRJ.) DR CR DEBTORS CONTROL creditors CONTROL DR CR DR CR 30 Bank 300 Bad debt 300 recovered Adjusted balances: Bank = R = R1 500 Bad debt recovered = R Depreciation must be provided for as follows: On equipment at 15% p.a. according to the diminishing balance method. On vehicles at 20% p.a. on cost price. Take into account that a vehicle with a gross carrying value of R was bought on 1 October Calculations: Depreciation (equipment) = ( ) 15% = Depreciation (vehicles) FINANCIAL YEAR 2010/2011 Jul Aug Sept Oct Nov Dec Jan-11 Feb Mar Apr May Jun Jul Depreciation (vehicles) = % 3 12 =

100 % 12 9 = Total = The journal entry: DR CR DEBTORS CONTROL creditors CONTROL DR CR DR CR 30 Depreciation ( ) Accumulated depreciation on equipment Accumulated depreciation on vehicles Adjusted balances: Accumulated depreciation on equipment R = R Accumulated depreciation on vehicles R = R Depreciation = R In June 2011 the manager s salary of R5 000 was paid, but the Wages account was incorrectly debited. Rectify this error. The mistake was made in the Wages account; this account must be credited. DR CR DEBTORS CONTROL creditors CONTROL DR CR DR CR 30 Salaries Wages Adjusted balances: Salaries = R = R Wages = R = R0 Now let s get to the information required: 1. Open all the accounts listed in the pre-adjustment Trial Balance in the General Ledger of Big Time Stores. GENERAL LEDGER OF BIG TIME STORES Balance Sheet Accounts Section Capital B Balance Jun 103

101 Balance Jun Drawings B Balance Jun land and Buildings B Balance Jun Equipment B4 accumulated Depreciation on Equipment B Balance Jun Depreciation Balance Jun Vehicles B6 accumulated Depreciation on Vehicles B Balance Jun Depreciation Balance Jun fixed Deposit: ABSA Bank (8% p.a.) B8 trading Stock Balance Trading Stock deficit B Jun Creditors control Jun Balance debtors Control B Balance Bad debts (Journal credits) Jun Jun Balance

102 Balance Jun Bad debt recovered Bank B loan: NEDBANK (20% p.a.) B Balance Jun Petty Cash Balance Jun B Provision for bad debt adjustment Jun creditors Control B Balance Jun Trading Stock Provision for Bad Debt B Balance Jun Balance consumable Goods on Hand Stationery Jun B16 income Received in Advance Interest on fixed deposit Jun B accrued Expenses B Interest on loan Jun 105

103 Rent income Jun accrued Income B Insurance Jun Prepaid Expenses B20 Nominal Accounts Section Sales n Balance Jun Balance Jun cost of SalesN n Balance Jun debtors AllowancesN n3 rent IncomeN n Balance Jun Accrued income Income received in advance Jun interest on Fixed DepositN n Balance Jun discount ReceivedN n Balance Jun Wages n Balance Salaries Jun 106

104 Salaries Balance Jun Wages n8 interest on LoanN Balance Jun Accrued expenses Bad DebtsN Balance Jun Debtors control n9 n10 Insurance n Balance Prepaid expense Jun Jun Stationery Balance Consumable goods on hand Jun Jun n trading Stock DeficitN Trading Stock Jun n13 Provision for Bad Debt AdjustmentN Provision for bad debt n Jun Accumulated depreciation on equipment Jun Accumulated depreciation on equipment Depreciation n16 107

105 2. Journalise the adjustments and post from the General Journal to the ledger accounts. This question was addressed partly in the explanation of the adjustments. The posting is done to the same General Ledger drawn up in Draw up a post-adjustment Trial Balance of Big Time Stores on 30 June BIG TIME STORES POST-ADJUSTMENT TRIAL BALANCE ON 30 JUNE 2011 DR CR BALANCE SHEET accounts section Capital Drawings Land and buildings Equipment Accumulated depreciation on equipment Vehicles Accumulated depreciation on vehicles Fixed deposit: ABSA Bank (8% p.a.) Trading Stock Debtors control Bank Loan: NEDBANK (20% p.a.) Petty cash 200 Creditors control Provision for bad debt Consumable goods on hand 480 Income received in advance Accrued expenses Accrued income Prepaid expenses 800 NOMINAL accounts section Sales Cost of Sales Debtors allowances Rent income Interest on fixed deposit Discount received Wages Salaries Interest on loan Bad debts Insurance

106 Stationery Trading Stock deficit Provision for bad debt adjustment 100 Bad debt recovered 300 Depreciation Unit 1.25: Closing transfers At the end of the financial year, after all adjustments, the nominal accounts section of the post-adjustment Trial Balance is closed off. These accounts are closed off to the Trading account and Profit and Loss Account. The closing off of these accounts is the closing transfers and is done in the General Journal. The eight closing transfers are: Closing off of the Debtors Allowance account to the Sales account, to determine the net sales for the financial year. Closing off the net sales as per Sales account is now closed off to the TRADING account. Closing off of the Cost of Sales account to the TRADING account. The balance of the TRADING account, now the gross profit, is transferred to the PROFIT AND LOSS account. Closing off ALL income accounts to the credit side of the PROFIT AND LOSS account. Closing off ALL expenditure accounts to the debit side of the PROFIT AND LOSS account. The balance of the PROFIT AND LOSS account, now the net profit/loss, is transferred to the Capital account. Closing off the Drawings account to the Capital account. After recording these closing transfers in the General Journal and posting it to the General Ledger, the post-closing Trial Balance can be drawn up. This Trial Balance will only have a balance sheet accounts section for the reason that all nominal accounts have been closed off. Unit 1.26: Final accounts There are two final accounts. These accounts are the TRADING account and PROFIT AND LOSS account, as referred to in the previous section. Trading account In this account the gross profit is calculated by closing off the net sales and cost of sales accounts at year end. The gross profit is then transferred to the Profit and Loss account. Profit and Loss account In this account the net profit/loss is calculated by transferring the gross profit from the Trading account, and closing off all income and expenditure accounts at year-end. The 109

107 net profit/loss is then transferred to the Capital account as it forms part of the owner s equity. Example B (follow-up on Example A) The following post-adjustment Trial Balance appeared in the books of Big Time Stores on 30 June 2011: Required: 1. Journalise the closing transfers. 2. Open all accounts as well as the Trading and Profit and Loss accounts in the General Ledger of Big Time Stores. 3. Post the closing transfers to the General Ledger. 4. Draw up the post-closing Trial Balance. BIG TIME STORES POST-ADJUSTMENT TRIAL BALANCE ON 30 JUNE 2011 DR CR BALANCE SHEET accounts section Capital Drawings Land and buildings Equipment Accumulated depreciation on equipment Vehicles Accumulated depreciation on vehicles Fixed deposit: ABSA Bank (8% p.a.) Trading Stock Debtors control Bank Loan: NEDBANK (20% p.a.) Petty cash 200 Creditors control Provision for bad debt Consumable goods on hand 480 Income received in advance Accrued expenses Accrued income Prepaid expenses 800 NOMINAL accounts section Sales Cost of Sales Debtors allowances Rent income Interest on fixed deposit

108 Discount received Wages Salaries Interest on loan Bad debts Insurance Stationery Trading Stock deficit Provision for bad debt adjustment 100 Bad debt recovered 300 Depreciation GENERAL JOURNAL OF BIG TIME STORES JUNE 2011 DR CR 30 Sales Debtors allowance Sales Trading account Trading account Cost of Sales Trading account Profit and loss account Rent income Interest on fixed deposit Discount received Provision for bad debt adjustment 100 Bad debt recovered 300 Profit and loss account Profit and loss account Salaries Interest on loan Bad debt Insurance Stationery Trading Stock deficit Depreciation Profit and loss account Capital Capital Drawings

109 2. Open all accounts as well as the Trading and Profit and Loss accounts in the General Ledger of Big Time Stores. 3. Post the closing transfers to the General Ledger. GENERAL LEDGER OF BIG TIME STORES Balance Sheet Accounts Section capital B Drawings Balance Jun Balance Jun Profit and loss account Jul 1 Balance Drawings B Balance Capital Jun Jun land and Buildings Balance Jun B3 Equipment Balance Jun B4 accumulated Depreciation on Equipment B Balance Jun Depreciation Vehicles Balance Jun B6 accumulated Depreciation on Vehicles B Balance Jun Depreciation fixed Deposit: ABSA Bank (8% p.a.) Balance Jun B8 112

110 trading Stock Balance Trading Stock deficit B Jun Creditors control Jun Balance Jul 1 Balance debtors Control B Balance Bad debts Jun Jun Balance Jul 1 Balance Bank Balance Jun Bad debt recovered B11 loan: NEDBANK (20% p.a.) B Balance Jun Petty Cash Balance Jun B Provision for bad debt adjustment Jun creditors Control B Balance Jun Trading Stock Provision for Bad Debt B Balance Jun Balance Jul 1 Balance consumable Goods on Hand Stationery Jun B16 113

111 income Received in Advance Interest on fixed deposit Jun B accrued Expenses B Interest on loan Jun Rent income Jun accrued Income B Insurance Jun Prepaid Expenses B Debtors allowance Nominal Accounts Section Sales Jun Trading account Jun Balance n1 cost of SalesN n Balance Trading account Jun Jun debtors AllowancesN n Balance Sales Jun Jun Profit and loss account rent IncomeN Balance Jun Jun Accrued income n4 114

112 Income received in advance Jun Profit and loss account interest on Fixed DepositN n Balance Jun Profit and loss account Jun discount ReceivedN n Balance Jun Wages n Balance Salaries Jun Jun Salaries n Balance Profit and loss account Jun Wages Jun interest on LoanN n Balance Profit and loss account Jun Accrued expenses Jun Bad DebtsN n Balance Profit and loss account Jun Debtors control Jun Insurance n Balance Prepaid expense Jun Jun Profit and loss account

113 Stationery Balance Consumable goods on hand Jun Jun Profit and loss account n trading Stock DeficitN Trading Stock Profit and loss account Jun Jun n Profit and loss account Jun Provision for Bad Debt AdjustmentN Provision for bad debt Jun n Profit and loss account Jun Bad Debt RecoveredN n Bank Jun Accumulated depreciation on equipment Jun Accumulated depreciation on equipment Depreciation Profit and loss account Jun n trading AccountN n Cost of Sales Sales Jun Profit and Jun loss account

114 Profit and Loss accountn Salaries Trading account Jun Interest on loan Jun Rent income Bad debts Interest on fixed deposit 00 Insurance Discount received Stationery Provision for bad debt adjustment Trading Stock deficit Depreciation Bad debt recovered Capital n18 4. Draw up the post-closing Trial Balance. BIG TIME STORES POST-CLOSING TRIAL BALANCE ON 30 JUNE 2011 DR CR BALANCE SHEET accounts section Capital Land and buildings Equipment Accumulated depreciation on equipment Vehicles Accumulated depreciation on vehicles Fixed deposit: ABSA Bank (8% p.a.) Trading Stock Debtors control Bank Loan: NEDBANK (20% p.a.) Petty cash 200 Creditors control Provision for bad debt Consumable goods on hand 480 Income received in advance Accrued expenses Accrued income Prepaid expenses

115 Exercise The following information appeared in the books of AMBO TRADERS for the year ended 28 February AMBO TRADERS PRE-ADJUSTMENT TRIAL BALANCE ON 28 FEBRUARY 2011 DR CR BALANCE SHEET accounts section Capital Drawings Land and buildings Equipment at cost Accumulated depreciation on equipment Fixed deposit: BNF Bank (10% p.a.) Creditors control Debtors control Trading Stock Bank Petty cash Provision for bad debt NOMINAL accounts section Sales Cost of Sales Debtors allowances Interest on fixed deposit Salaries Bad debts Insurance Bad debts recovered 800 Stationery Packing material Wages Rent income Adjustments: 1. A physical stock take on 28 February 2011 shows: Trading Stock R Stationery R Packing material used during the financial year amounted to R The owner took merchandise for personal use at cost price, R (No entry has been made for this transaction.) 118

116 4. Rent income was received for ten months. On 1 January 2011 the monthly rent was increased by 15%. 5. Write off R280 as bad debts. 6. Adjust the provision for bad debt to 5% of debtors. (Take adjustment 5 into account.) 7. Create a provision for discount allowed of 4%. (Round off to the nearest rand.) 8. Depreciation on equipment is to be written off at 20% per annum on the straightline method. Equipment costing R was bought on 1 November Interest on fixed deposit is still outstanding. 10. Included in the insurance is a premium of R3 600 paid on 1 November 2010 for a contract, which will expire on 3 April The salary of the manager has only been paid until 31 December Required: 1. Open all the accounts from the pre-adjustment Trial Balance in the General Ledger of Ambo Traders. 2. Journalise the adjustments in the General Journal and post to the General Ledger accounts. 3. Draw up the post-adjustment Trial Balance. 4. Journalise the closing transfers in the General Journal. 5. Post the closing transfers to the ledger accounts in the General Ledger. 6. Draw up the post-closing Trial Balance. Unit 1.27: Income Statement In the books of an enterprise, the results of a particular financial year are reflected in the Income Statement. The Income Statement is a combination of the Final accounts, Trading and Profit and Loss accounts, but presented in a formal statement that indicates the result for that financial year as a net profit/loss. Let s have a look at the format of an Income Statement: Enterprise s name INCOME STATEMENT FOR THE YEAR ENDING (date) A Sales (less debtors allowances) XXX Less: Cost of Sales XXX Gross profit XXX B Plus other income XXX List all income XXX List all income XXX List all income XXX Gross income XXX Less expenditure XXX List all expenses XXX 119

117 List all expenses XXX List all expenses XXX List all expenses XXX Net profit/loss for the year XXX Sections A and B represent the Trading account and Profit and Loss accounts respectively. Unit 1.28: Balance Sheet In the books of an enterprise, the position of a particular financial year is reflected in the Balance Sheet on a given date. The purpose of the Balance Sheet is to indicate that the total assets are equal to the total equity and liabilities together. Therefore, the Balance Sheet consists of two sections, an Assets section and an Equity and Liabilities section. Let s have a look at the format of a Balance Sheet: Enterprise s name BALANCE SHEET ON (date) ASSETS Notes Non-current assets XXX Land and buildings, vehicles and equipment * XXX Other financial assets (fixed deposits) XXX Current assets XXX Stock * XXX Trade and other debtors * XXX Cash and cash equavalents * XXX TOTAL ASSETS XXX EQUITY AND LIABILITIES Capital * XXX Non-current liabilities XXX Interest-bearing liabilities (loans) XXX Current liabilities XXX Trade and other creditors * XXX Bank overdraft (if applicable) XXX XXX As part of the Balance Sheet, notes are included for some of the line items (indicated by a * on the template) to indicate how the total amount was calculated. This will be illustrated in the example following. 120

118 Example C (follow-up on Example A) The following post-adjustment Trial Balance appeared in the books of Big Time Stores on 30 June 2011: Required: 1. Prepare the INCOME STATEMENT for the year ended 30 June Prepare the BALANCE SHEET as on 30 June NOTE: Show the relevant notes/annexures to the Balance Sheet. BIG TIME STORES POST-ADJUSTMENT TRIAL BALANCE ON 30 JUNE 2011 BALANCE SHEET ACCOUNTS SECTION Capital Drawings Land and buildings Equipment Accumulated depreciation on equipment Vehicles Accumulated depreciation on vehicles Fixed deposit: ABSA Bank (8% p.a.) Trading Stock Debtors control Bank Loan: NEDBANK (20% p.a.) Petty cash 200 Creditors control Provision for bad debt Consumable goods on hand 480 Income received in advance Accrued expenses Accrued income Prepaid expenses 800 NOMINAL accounts section Sales Cost of Sales Debtors allowances Rent income Interest on fixed deposit Discount received Wages Salaries

119 Interest on loan Bad debts Insurance Stationery Trading Stock deficit Provision for bad debt adjustment 100 Bad debt recovered 300 Depreciation Solution: 1. Prepare the INCOME STATEMENT for the year ended 30 June BIG TIME STORES INCOME STATEMENT FOR THE YEAR ENDING 30 JUNE 2011 Sales ( ) Cost of Sales Gross profit Plus other income Rent income Interest on fixed deposit Discount received Provision for bad debt adjustment 100 Bad debt recovered 300 Gross income Less expenditure Salaries Interest on loan Bad debts Insurance Stationery Trading Stock deficit Depreciation Net profit for the year Prepare the BALANCE SHEET as on 30 June NOTE: Show the relevant notes/annexures to the Balance Sheet. 122

120 ASSETS BIG TIME STORES BALANCE SHEET ON 30 JUNE 2011 Notes Non-current assets Land and buildings, vehicles and equipment Other financial assets Current assets Stock Trade and other debtors Cash and cash equivalents TOTAL ASSETS 1 356,805 EQUITY AND LIABILITIES Capital Non-current liabilities Interest-bearing liabilities Current liabilities Trade and other creditors Bank overdraft (if applicable) NOTES TO THE BALANCE SHEET 1. Land and buildings, small vehicles and equipment Gross carrying amount Accumulated depreciation Net carrying amount Land and buildings Vehicles Equipment Reconciliation of the net carrying amount Land and buildings Vehicles Equipment Balance at the beginning of the year Additions Disposal - Depreciation (23 075) (22 200) Balance at the end of the year

121 Given in the adjustment related to depreciation: Take into account that a vehicle with a gross carrying value of R was bought on 1 October The total of the net carrying amount (R ) is entered on the Balance Sheet. 2. Stock Trading Stock Consumable goods on hand Trade and other debtors Debtors control ( ) Less: Provision for bad debt Accrued income: Rent income Prepaid expense: Insurance Cash and cash equivalent Bank ( ) Petty cash Capital Balance as on 30 June Plus: Net profit for the year Less: Drawings Trade and other creditors Creditors control ( ) Accrued expense: Interest on loan Income received in advance: Interest on fixed deposit

122 Summary In this part, we dealt with the different additional transactions that can occur at the end of a financial year and how you should record those transactions so that they appear correctly in the financial year. We explained, in detail, how to deal with endof-the-financial-year adjustments and how they affect the ledger accounts in the General Ledger. We then showed you how to calculate the totals for these account and how to transfer these totals to a Trial Balance and how the information from a Trial Balance is used to present end-of-year accounts in the General Ledger as well as in the form of an Income Statement and Balance Sheet. Exercises Exercise 1 You are provided with the PRE-ADJUSTMENT TRIAL BALANCE of RAMIC TRADERS on 28 February Required: 1. Prepare the INCOME STATEMENT for the year ended 28 February Prepare the BALANCE SHEET as on 28 February NOTE: Show the relevant notes/annexures to the Balance Sheet. Adjustments: 1. According to a physical stock count, the following stock was on hand on 28 February 2010: Trading Stock R Stationery R K Meltz, a tenant, has occupied part of the building since 1 May 2009 at a rental of R2 000 per month. Her rental was increased by 5% on 1 October Adjust the rent accordingly. 3. A debtor, B Mouton, has disappeared and his account of R720 must be written off as irrecoverable. 4. Adjust the provision for bad debt to 5% of debtors. 5. Salaries for February 2010 are still outstanding. 6. Depreciation must be provided for as follows: On equipment at 10% p.a. according to the diminishing balance method. On vehicles at 20% p.a. on cost price. NOTE: A new vehicle was bought for R on 1 September Interest on fixed deposit is still outstanding. 8. Insurance includes an annual premium of R3 600 on a new policy which commenced on 1 November An amount of R280 was collected from a debtor, M Slickt, whose account had previously been written off. 125

123 RAMIC TRADERS PRE-ADJUSTMENT TRIAL BALANCE ON 28 FEBRUARY 2010 BALANCE SHEET accounts section Capital Drawings Land and buildings Equipment Accumulated depreciation on equipment Vehicles Accumulated depreciation on vehicles Fixed deposit: ABSA Bank (12% p.a.) Trading Stock Debtors control Bank Cash float Petty cash 500 Creditors control Provision for bad debt DR CR NOMINAL accounts section Sales Cost of Sales Debtors allowances Rent income Interest on fixed deposit Discount received 400 Salaries Wages Bad debts Insurance Stationery Telephone Bank charges Exercise 2 You are provided with the PRE-ADJUSTMENT TRIAL BALANCE of TIME IT! STORES on 30 June Required: 1. Prepare the INCOME STATEMENT for the year ended 30 June Prepare the BALANCE SHEET as on 30 June NOTE: Show the relevant notes/annexures to the Balance Sheet. 126

124 Adjustments: 1. Discount received, R1 200, applicable to invoice 712, was omitted from the financial records. This must still be recorded in the Discount Received and Creditors Control accounts. 2. According to a physical stock count on 30 June 2011, the following stock was on hand: Trading Stock R Stationery R A debtor, M Bam, has disappeared and his account of R3 500 must be written off as irrecoverable. 4. Adjust the provision for bad debt to 5% of debtors (after taking adjustment 3 into account). 5. The loan was decreased by R on 1 January Provide for interest. 6. Provide for interest on fixed deposit, if this investment of R was made on 1 October Rent is receivable for 12 months in this financial year. However, only six months rent was received. There was a 10% increase in the monthly rent on 1 January Insurance includes an annual premium of R2 400 on a new policy. R800 of this contract is applicable to the financial year starting on 1 July An amount of R300 was transferred from the Bank account to the Petty Cash account, but no entry was made. Record this transfer. 10. Depreciation must be provided for as follows: On vehicles at 20% p.a. according to the diminishing balance method. On equipment at 15% p.a. on cost price. Take into account that new equipment with a gross carrying value of R was bought on 1 October TIME IT! STORES PRE-ADJUSTMENT TRIAL BALANCE ON 30 JUNE 2011 DR CR BALANCE SHEET accounts section Capital Drawings Land and buildings Equipment Accumulated depreciation on equipment Vehicles Accumulated depreciation on vehicles Fixed deposit: ABSA Bank (8% p.a.) Trading Stock Debtors control Bank Loan: NEDBANK (20% p.a.) Petty cash 200 Creditors control Provision for bad debt

125 NOMINAL accounts section Sales Cost of Sales Debtors allowances Rent income Interest on fixed deposit Discount received Salaries Interest on loan Bad debts Insurance Stationery

126 Module 2 Accounting entries for a trading organisation according to the periodic stock system Overview When you have completed this module, you should be able to: Enter transactions related to the movement of stock. Adjust the columns of the respective books of first entry, properly closing off and posting to the General Ledger. Identify the accounts involved in the calculation of cost of sales and do the calculation. Record the year-end adjustment for trading stock in the General Journal and post it to the General Ledger. Implement closing transfers to final accounts. Calculate net profit in the Income and Expenditure Statement. Introduction The stock you keep in your business and the accounting transactions related to stock can be recorded in two ways according to the stock system used: Continuous (perpetual) stock system, through which daily movements of stock are recorded and monitored through a ledger account called Trading Stock. This system is often used in a small retail business which requires that the movement of each product is monitored and controlled as sales and purchases occur. It means that the value of the stock is known at any stage, without counting the stock. Periodic stock system, which only values stock at the end of the trading year and which does not require different bookkeeping accounts or entries during the year. This system is more appropriate for big retail and service businesses with different departments. These enterprises which sell great volumes of goods need to do a physical stock take at the end of the financial year to determine the actual value of the stock. Since the periodic system does not require any different accounting entries, we will use the continuous (perpetual) system to explain the differences between these systems if in use. The following are unique to the periodic stock system: Purchase account to deal with normal activities in stock. The Trading Stock account will only reflect stock takes at the end of a financial year. Creditors Allowance account to deal with purchase returns. 129

127 All indirect costs (like carriage on purchase, etc.) with regard to stock purchases will be accounted for in separate accounts. Calculate cost of sales. Unit 2.1: Recording transactions for stock movements using the periodic stock system If the owner wants only to know the total value of stock at any point, a straightforward Ledger Trading Stock account is all that is needed. However, if the owner wants to know the value of stock for each product in a periodic stock system, the business needs to undertake a stock take at the end of the financial year. ➊ Purchase of trading stock for cash When a periodic stock system is used, purchases are posted to the Purchase account instead of posting them to the Trading Stock account in the case of a continuous stock system. The double entry is as follows for each stock system: CONTINUOUS STOCK SYSTEM PERIODIC STOCK SYSTEM DR Trading stock DR Purchases CR Bank CR Bank Transaction: Buy trading stock, R1 000, from Big Ben and pay by cheque. On the accounting equation: 130

128 CONTINUOUS STOCK SYSTEM PERIODIC STOCK SYSTEM A O L A O L For periodic stock systems, the Trading Stock account is replaced by a Purchase account. Day-to-day stock entries are made in the Purchase account and stock takes are recorded in the Trading Stock account. This account reflects the opening and closing stock for a financial year. ➋ Cash sales of stock The double entry is as follows for each stock system: CONTINUOUS STOCK SYSTEM PERIODIC STOCK SYSTEM DR Bank DR Bank CR Sales CR Sales DR Cost of sales CR Trading stock For periodic stock systems, no cost of sales entries are made for a given sales transaction, because it is difficult to calculate the cost of the sales of each transaction due to the great volume of goods sold. However, cost of sales can be calculated at the end of the financial year. Transaction: Cash sales, R500, according to the cash register roll. Assume the cost price of this stock is R450 in the case of a continuous stock system. On the accounting equation: CONTINUOUS STOCK SYSTEM PERIODIC STOCK SYSTEM A O L A O L ➌ Purchase of trading stock for credit The double entry is as follows for each stock system: 131

129 CONTINUOUS STOCK SYSTEM PERIODIC STOCK SYSTEM DR Trading stock DR Purchases CR Creditors control CR Creditors control Note that the Trading Stock account is replaced by the Purchase account in the case of a periodic stock system. Transaction: Buy trading stock, R750, from Big Ben on credit. On the accounting equation: CONTINUOUS STOCK SYSTEM PERIODIC STOCK SYSTEM A O L A O L ➍ Credit sales of stock The double entry is as follows for each stock system: CONTINUOUS STOCK SYSTEM PERIODIC STOCK SYSTEM DR Debtors control DR Debtors control CR Sales CR Sales DR Cost of sales CR Trading stock Note that no cost of sales entry is recorded in the case of a periodic stock system. Transaction: Credit sales according to the cash register roll, R Assume the cost price of this stock is R1 250 in the case of a continuous stock system. On the accounting equation: CONTINUOUS STOCK SYSTEM PERIODIC STOCK SYSTEM A O L A O L

130 ➎ Returns of stock purchased on credit from a creditor The double entry is as follows for each stock system: CONTINUOUS STOCK SYSTEM PERIODIC STOCK SYSTEM DR Creditors control DR Creditors control CR Trading stock CR Creditors allowances For large enterprises, the management may have an interest in stock returned to creditors and therefore a separate account, Creditors Allowance, is opened for this purpose. Transaction: Return damaged goods purchased before on credit from Manic Traders, R750. On the accounting equation: CONTINUOUS STOCK SYSTEM PERIODIC STOCK SYSTEM A O L A O L ➏ Withdrawal of stock by owner An owner might decide to withdraw some stock for his or her own use. In theory, the owner should pay for such withdrawals to provide the second part of the double-entry system, in which case it can be treated as a normal sales transaction. However, when an owner does not pay it becomes necessary to raise a Ledger account for owner s personal drawings. The double entry is as follows for each stock system: CONTINUOUS STOCK SYSTEM PERIODIC STOCK SYSTEM DR Drawings DR Drawings CR Trading stock CR Purchases Note that the Trading Stock account is replaced by the Purchase account in the case of a periodic stock system. Transaction: The owner took stock of R750 for his own use. On the accounting equation: 133

131 CONTINUOUS STOCK SYSTEM PERIODIC STOCK SYSTEM A O L A O L ➐ Stock returns, sold on credit, to a debtor The double entry is as follows for each stock system: CONTINUOUS STOCK SYSTEM PERIODIC STOCK SYSTEM DR Debtors allowance DR Debtors allowance CR Debtors control CR Debtors control DR Trading stock CR Cost of sales Note that no cost of sales entry is recorded in the case of a periodic stock system. Transaction: A debtor returned unwanted stock, R800. Assume the cost price of this stock is R700 in the case of a continuous stock system. On the accounting equation: CONTINUOUS STOCK SYSTEM PERIODIC STOCK SYSTEM A O L A O L ➑ payment of carriage on purchases and other expenses which increase the cost of purchases (indirect cost) For a continuous stock system, all indirect costs will be posted to the Trading Stock account in the General Ledger. However, individual accounts are opened independently of the Purchase account for a periodic stock system. The double entry is as follows for each stock system: CONTINUOUS STOCK SYSTEM PERIODIC STOCK SYSTEM DR Trading stock DR Carriage on purchase CR Bank CR Bank 134

132 Note that all indirect costs are posted to separate accounts in the case of a periodic stock system. Transaction: Pay carriage on purchase, R250, per cheque to TM transporters. On the accounting equation: CONTINUOUS STOCK SYSTEM PERIODIC STOCK SYSTEM A O L A O L For large enterprises, the management may have an interest in all indirect costs related to stock and therefore separate accounts are opened for this purpose. Examples of these indirect accounts are: Carriage on purchases. Import duties. Customs tax. Shipping freight. ➒ carriage on sales If the delivery cost on a sale to a client is for the business account, it is referred to as carriage on sales. This, however, does not have an effect on the total cost for purchases. Carriage on sales is normally an operating expense with other expenses like Salaries, Telephone, etc. carriage on sales: Is the delivery cost on a sale to a client for the businesst account. Carriage on sales is normally an operating expense, together with other expenses like salaries, telephone, et cetera. 135

133 The double entry is as follows for each stock system: CONTINUOUS STOCK SYSTEM PERIODIC STOCK SYSTEM DR Carriage on sales DR Carriage on sales CR Bank CR Bank Transaction: Pay carriage on sales, R300, per cheque to TM transporters. On the accounting equation: CONTINUOUS STOCK SYSTEM PERIODIC STOCK SYSTEM A O L A O L Exercise The following information was taken from the books of MANIC TRADERS. Required: Indicate which LEDGER ACCOUNTS (account debited and account credited) will be influenced by the following transactions if MANIC TRADERS makes use of a periodic stock system. Complete the columns. 1.1 Issue a cheque to Makro for trading stock purchase, R Credit sales, R3 500 (Cost price = R3 000). 1.3 Owner takes trading stock for own use, R Pay Makro per cheque, R750, as delivery fee for trading stock delivered. Required: Indicate how the ACCOUNTING EQUATION will be influenced by the following transactions. Use (+) to indicate an increase, a ( ) to reflect a decrease and a (0) if there has been no change. Include the applicable amount(s). 1.5 Pay salaries cash, R Buy stationery on credit from Waltons, R Receive R250 from P du Toit, a debtor, in settlement of his account of R Cash sales, R1 500 (Cost price = R1 200) 1.9 Pay Makro, a creditor, R400 on account Receive rent from Aida properties, R Purchase a delivery vehicle, R , from VW Barons for cash. 136

134 Unit 2.2: Adjusting books of first entry to accommodate the periodic stock system Some of the journals will differ from an organisation working according to the periodic stock system and others according to the continuous stock system. The following journals will differ based on the stock system in use: Cash Payments Journal. Cash Receipts Journal. Debtors Journal. Debtors Allowance Journal. Creditors Journal. Creditors Allowance Journal. ➊ Cash Payments Journal and Cash Receipts Journal The only difference between the Cash Receipts Journal for both stock systems is that no cost of sales column is opened in this journal for a periodic stock system. The only difference between the Cash Payments Journal for both stock systems is that the trading stock column is replaced by a purchases column in this journal for a periodic stock system. Cash Receipts Journal For a continuous stock system: Doc no. D Details Details of sundry accounts CASH RECEIPTS JOURNAL OF TH DEALERS MAY 2010 Sundry accounts Sales Cost of sales Analysis of receipts 15 1 TH Smit Capital Bank Sales

135 Doc no. For a periodic stock system: D Details Details of sundry accounts CASH RECEIPTS JOURNAL OF TH DEALERS MAY 2010 Sundry accounts Sales Cost of sales Analysis of receipts 15 1 TH Smit Capital Bank Sales Cash Payments Journal For a continuous stock system: Doc no. D Details Details of sundry accounts CASH PAYMENTS JOURNAL OF TH DEALERS MAY 2010 Sundry accounts Trading stock Creditors control Salaries Trutect TP Suppliers Doc no. For a periodic stock system: CASH PAYMENTS JOURNAL OF TH DEALERS MAY 2010 D Details Details Sundry Purchases Creditors Salaries of sundry accounts control accounts Trutect TP Suppliers Bank Bank ➋ Debtors Journal and Debtors Allowance Journal The only difference between both these journals for both stock systems is that no cost of sales column is opened in these journals for a periodic stock system. Debtors Journal For a continuous stock system: DEBTORS JOURNAL OF TH DEALERS MAY 2010 Doc no. D Debtors Sales Cost of sales 65 1 TH Smit K Nel

136 Doc no. For a periodic stock system: DEBTORS JOURNAL OF TH DEALERS MAY 2010 D Debtors Sales Cost of sales 65 1 TH Smit K Nel Debtors Allowance Journal For a continuous stock system: Doc no DEBTORS ALLOWANCE JOURNAL OF TH DEALERS MAY 2010 D Debtors Debtors allowance Cost of sales 4 8 K Nel R Roux Doc no. For a periodic stock system: DEBTORS ALLOWANCE JOURNAL OF TH DEALERS MAY 2010 D Debtors Debtors allowance 4 8 K Nel R Roux Cost of sales ➌ Creditors Journal and Creditors Allowance Journal The only difference between the Creditors Journal for both stock systems is that the trading stock column is replaced by a purchases column in this journal for a periodic stock system. The only difference between the Creditors Allowance Journal for both stock systems is that the trading stock column is replaced by a creditors allowance column in this journal for a periodic stock system. 139

137 Creditors Journal For a continuous stock system: Doc no. D Creditor Creditors control CREDITORS JOURNAL OF TH DEALERS MAY 2010 Trading stock Stationery Sundry accounts Amount Details Trutect Equipment TP Suppliers Doc no. For a periodic stock system: D Creditor Creditors control CREDITORS JOURNAL OF TH DEALERS MAY 2010 Purchases Stationery Sundry accounts Amount Details Trutect Equipment TP Suppliers Creditors Allowance Journal For a continuous stock system: Doc no CREDITORS ALLOWANCE JOURNAL OF TH DEALERS MAY 2010 D Creditor Creditors control Trading stock Trutect Stationery TP Suppliers Doc no. For a periodic stock system: Sundry accounts Amount CREDITORS ALLOWANCE JOURNAL OF TH DEALERS MAY 2010 D Creditor Creditors control Creditor allowance Trutect Stationery TP Suppliers Sundry accounts Amount Details Details Unit 2.3: Calculating the Cost of Sales value When a periodic stock system is in place, the owner needs to know the exact value of materials used during the year. This is not the total of purchases, because some of the purchases may still remain unused and in stock at year-end. Similarly, the owner must also take into account that the business had some stock unused at the beginning of the year. 140

138 The cost of sale value for each sale transaction is not known for the reason that it is difficult for an enterprise using a periodic stock system to calculate it based on the great volume of goods that has been sold. Therefore, at the end of each financial year a calculation must be done to determine cost of sales for the financial year. This calculation is important for any enterprise to be able to determine its gross profit for the financial year. The calculation is as follows: Calculation of cost of sales Opening stock * + Net purchases ^ + Carriage on purchases + Import duties + Customs tax + Shipping freight Closing stock ** Note * Opening stock is the balance of the Trading Stock account at the beginning of the financial year. ^ Net purchases is equal to the balance of the Purchase account less returns on purchases (creditor allowances). ** Closing stock is the balance of the Trading Stock account at the end of the financial year. Example: The following information appeared in the books of TH Dealers: Trading stock on 1 January 2011 R Sales R Purchases R Debtors allowances R Creditors allowance R9 600 Import duties R1 400 Trading stock on 31 December 2011 R Carriage on purchases R6 750 Note: An invoice of R1 500 for carriage was still outstanding. Required: 1. Calculate the net sales amount as reported on at the end of the financial year. 2. Calculate the cost of sales as reported on at the end of the financial year. 141

139 Solution 1. Net sales = Sales less debtors allowance = = Opening stock Purchases ( ) Carriage on purchases ( ) Import duties Closing stock Cost of sales = Unit 2.4: The end-of-year adjustment for trading stock An enterprise working according to the periodic stock system makes entries only once during the financial year in the Trading Stock account. This is done at the end of the financial year after a stock take. The balance of the trading stock before the stock take is referred to as the opening stock and is closed off to the Trading account. After the stock take, the value of the stock is referred to as the closing stock and is entered as an adjustment in the General Journal and posted to the Trading Stock account. Example: The following balance appeared in the books of BK Traders on 31 December 2010, the end of the financial year: Trading stock (1 January 2010) R Adjustment: According to a stock take on 31 December 2010, the stock on hand is R Solution Note: The balance of trading stock on 1 January 2010 is referred to as the opening stock and the stock as counted on 31 December 2010 is the closing stock Jan 1 Balance TRADING STOCK Transfer opening stock to the Trading account: Dr Trading account Cr Trading Stock Recording the adjustment: Dr Trading Stock R Cr Trading account R

140 TRADING STOCK Jan 1 Balance Dec 31 Trading account Dec 31 Trading account TRADING ACCOUNT Dec 31 Trading stock Dec 31 Trading stock Unit 2.5: Year-end closing transfers for stock The closing transfers to the Trading account for the two stock systems are different. In the Trading account the gross profit is calculated for the financial year. In this unit the focus will be on the closing transfers for stock based on a periodic stock system. Example: The following balances appeared in the books of TH Dealers on 31 December 2010, the last day of the financial year: Trading stock (1 January 2010) R Sales R Purchases R Debtors allowance R2 500 Carriage on purchases R3 750 Import duties R1 000 Creditors allowance R1 200 On 31 December 2010 after a stock take the trading stock on hand is R Required: Journalise the closing transfers in the General Journal. GENERAL JOURNAL OF TH DEALERS december2010 D Debit Credit 31 Sales Debtors allowance Creditor allowance Purchases Trading account Trading stock

141 Trading account Purchases Carriage on purchases Import duties Trading stock Trading account Sales Trading account Trading account Profit and loss account The amount (R ) in the last journal entry is the total gross profit for the financial year. This amount is transferred to the Profit and Loss account. In this account the net profit for the year is calculated. Exercise The following balances appeared in the books of BIG Dealers on 31 July 2010, the last day of the financial year: Trading stock (1 August 2009) R Sales R Purchases R Customs duties R500 Debtors allowance R5 500 Carriage on purchases R8 750 Import duties R4 000 Creditors allowance R7 200 On 31 July 2010 after a stock take the trading stock on hand is R Required: Journalise the closing transfers in the General Journal. Unit 2.6: Dealing with stock in the Income Statement We have talked about the way in which opening and closing stock values are used in the final accounts and how they are transferred to and from ledgers at the beginning and end of financial years. In fact, an Income Statement is made up of three distinct sections, the first one being a trading section, followed by the income section and then the expense section. The calculation of stock used during the year applies to the trading section and is used to determine cost of sales and gross profit. 144

142 Let us see what these look like, using the example we used earlier: Example: The following balances appeared in the books of TH Dealers on 31 December 2010, the last day of the financial year: Trading stock (1 January 2010) R Sales R Purchases R Debtors allowance R2 500 Carriage on purchases R3 750 Import duties R1 000 Creditors allowance R1 200 On 31 December 2010 after a stock take the trading stock on hand is R Required: Draw up the Income Statement of TH Dealers for the year ending 31 December Solution INCOME STATEMENT OF TH DEALERS FOR THE YEAR ENDING 31 december2010 Trading section Sales ( ) Less cost of sales Opening stock Purchases ( ) Carriage on purchases Import duties Closing stock Gross profit Plus other Less expenditure Net profit for the year 145

143 Exercise The following balances appeared in the books of BIG Dealers on 31 July 2010, the last day of the financial year: Trading stock (1 August 2009) R Sales R Purchases R Customs duties R500 Debtors allowance R5 500 Carriage on purchases R8 750 Import duties R4 000 Creditors allowance R7 200 On 31 July 2010 after a stock take the trading stock on hand is R Required: Draw up the Income Statement of TH Dealers for the year ending 31 July Summary In this module we have looked at the accounting entries related to the receipt and management of stock, which is usually called inventory in the accounts. We followed the entries for recording stock movement using the continuous (perpetual) stock control system and also dealt with the entries using the more usual periodic stock control system. At the end of the trading year, a business has to calculate the value of stock used (cost of sales) during the year and start a new year by opening the Trading (Inventory) account with the stock remaining at the end of the previous trading year. We dealt with all the accounting entries related to this calculation. The next two exercises deal with year-end financial statements of an enterprise using a periodic stock system. More exercises The following information was taken from the books of ETC DEALERS on 30 June ETC DEALERS PRE-ADJUSTMENT TRIAL BALANCE ON 30 JUNE 2005 DR CR BALANCE SHEET accounts SECTION Capital Drawings Land and buildings Equipment at cost

144 Vehicles at cost Accumulated Depreciation on Equipment Accumulated depreciation on vehicles Loan: People s Bank (18% p.a.) Trading stock (1 July 2004) Debtors Bank Petty cash 600 Creditors Provision for bad debs NOMINAL accounts SECTION Sales Purchases Sales returns Purchase returns Bad debts Bad debts recovered Stationery Discount received Carriage on purchases Salaries and wages Discount allowed Rates and taxes Rent received Interest on loan Import duty Adjustments: 1. According to a physical stock count, the following were still on hand on 30 June 2005: Trading stock R Stationery R Write an amount of R728 off from the debtors as irrecoverable. 3. Adjust the provision for bad debt to 5% of debtors (take adjustment 2 into account) and create a provision for discount allowed of 2%. (Round off to the nearest rand.) 4. Provide for depreciation as follows: Vehicles: 20% p.a. according to the reducing balance method. Equipment: 15% p.a. according to the straight-line method. Take into account that equipment to the value of R8 000 was bought on 1 April Interest on loan is still outstanding. 6. The rent was paid for 13 months. 7. The owner took trading stock at cost price of R960 for personal use. (No entry has been made in the books.) 147

145 8. Rates and taxes include an annual payment of R10 600, which was paid in respect of the municipal financial year, which ended on 31 December Required: 1.1 Prepare the INCOME STATEMENT for the year ended 30 June Prepare the BALANCE SHEET as at 30 June NOTE: Show the relevant notes/annexures to the Balance Sheet. More exercises The following information relates to DTM TRADERS on 30 April 2003, the last day of the financial year of the enterprise. DTM TRADERS PRE-ADJUSTMENT TRIAL BALANCE ON 30 APRIL 2003 DR CR BALANCE SHEET accounts SECTION Capital Drawings Land and buildings Equipment Vehicles Accumulated depreciation on vehicles Accumulated Depreciation on Equipment Debtors control Creditors control Bank Petty cash 200 Fixed deposit: KLM Bank (15% p.a.) Stock (1 May 2002) Provision for bad debs Long-term loan: AA Bank (15% p.a.) NOMINAL accounts SECTION Sales Purchases Creditors allowance Wages and salaries Insurance Bad debts Water and electricity Telephone Carriage on purchases

146 Import tariffs Interest on loan Packing materials Interest on fixed deposit Discount allowed Discount received Stationery Rent received Adjustments: 1. According to a physical stock count, the following were still on hand on 30 April 2003: Trading stock R Stationery R Write off J Smith s account as irrecoverable, R Adjust the provision for bad debts to 10% of trade debtors and create a provision for discount allowed of 5%. 4. Provide for depreciation on vehicles at 15% p.a. on cost, and on equipment at 20% p.a. according to the diminishing balance method. Take into account that vehicles with a gross carrying value of R were bought on 1 January Interest on the fixed deposit is still outstanding. 6. The long-term loan was negotiated on 1 March 2001 with AA Bank. The first instalment of R was paid on 31 October All interest payments are settled monthly from the current bank account. 7. The owner took stock at cost price of R650 and selling price of R960 for personal use. No entry has been made in the books. 8. The insurance has been paid up until 30 June Rent has been received up until 28 February There has been an increase of 10% instituted on 1 March Required: 1.1 Complete the INCOME STATEMENT for the year ended 30 April Complete ONLY the ASSETS section of the BALANCE SHEET and make the following notes: Property, equipment and vehicles. Stock, trade and other debtors. 149

147 Module 3 Departmental accounts according to the periodic stock system Overview When you have completed this module, you should be able to: Explain the aim of departmental accounts and how to control departmental profits. Interpret departmental codes on source documents and enter them in books of original entry. Adapt the books of original entry by providing additional columns, recording the transactions and closing them off. Adapt relevant accounts in the General Ledger by providing additional columns, recording the transactions and closing them off. Draw up a Departmental Trading Statement at the end of the financial year. Draw up a Departmental Income Statement at the end of the financial year. Unit 3.1: Aim of departmental accounts A business can grow, usually by increasing the number of departments within the business. This will ensure increasing sales and directly increase profitability. When growth includes more departments, it is possible for the management of the business to determine the profitability of each department. By doing this, management can ensure that each department performs optimally, through effective planning and administration. In cases where one or more departments are not preforming to management s expectations, it can easily result in the reorganising of that department or even the closure thereof. An enterprise selling shoes can decide to divide the trading stock (shoes) into two departments: men s shoes and ladies shoes. This will help the enterprise to expand on its merchandise, increasing the sales and profitability of the entire enterprise. Even more, management will be able to determine if both departments are profitable and, if not, whether to continue with the less profitable department. This could lead to this enterprise specialising in ladies shoes or men s shoes if it decided to discontinue the other department. 150

148 Separate accounts for each department will be kept to enable management to determine profit per department. These accounts are usually called departmental accounting. Stock will be recorded according to the periodic stock system for syllabus purposes. Therefore, we can say that the aim of departmental accounting is to enable the business to identify and apply costs to separate departments of the business. Unit 3.2: Adaptation of source documents for departmental purposes As you have probably gathered, departmental accounting usually applies to businesses with different departments, resulting in these enterprises being classified as large businesses. This means that the business must have a way of applying each source document to the correct department. The usual way to address this is to apply a departmental code to each document to ensure that the document is handled by, and applied to, the correct department. Below is an example of how an entrepreneur with several shops may code source documents: Department Men s Shoes Ladies Shoes Code MS LS In cases where a business has only two departments, management can consider amending the source documents to include separate columns for each department on the particular source document. Unit 3.3: Adaptation of books of original entry for departmental purposes Having the appropriate codes or different columns on source documents helps a bookkeeper to apply those documents to the correct accounts, but the different accounts have to be adapted to allow departmental documents to be applied to the correct department. The way to do this is to use journals and ledgers that have enough columns to accommodate all the entries made in the business. Let us look at an example: The following transactions appeared in the books of TH Dealers. May 2010: 1. Mr TH Smit increased his capital contribution by R Receipt 7 was issued to him. 10. Purchase stock from Trutect Suppliers and pay per cheque: Ties, R500 and Hats, R

149 15. Paid the manager T Smit s salary per cheque, R Cash sales, Hats, R150 and Ties, R100. Doc no. D Details Details of sundry accounts CASH RECEIPTS JOURNAL OF TH DEALERS MAY 2010 Sundry accounts Sales Ties Analysis of receipts Bank 1 TH Smit Capital Sales Hats Doc no. D Details Details of sundry accounts CASH PAYMENTS JOURNAL OF TH DEALERS MAY 2010 Sundry accounts Purchases Salaries Bank Ties 10 Trutect T Smit Hats You can also use department columns for other journals such as: Creditors Journal. Creditors Allowance Journal. Debtors Journal. Debtors Allowance Journal. We will not go through the accounting processes for each journal entry, or the closingoff process, since we have already covered these processes earlier in this book and the processes are the same for all bookkeeping transactions. Unit 3.4: Adaptation of General Ledger accounts for departmental purposes You can also use the column system for ledger accounts. Example: Using the information given in Unit 3.3, post from the CRJ and CPJ to the Sales and Purchase accounts of TH Dealers: PURCHASE 2010 Total Ties Hats Total Ties Hats May 31 Bank CPJ SALES Total Ties Hats 2010 Total Ties Hats May 31 Bank CRJ

150 Example: Smit Dealers has two departments, toys and sweets. Use the following information and post to the Purchase account in the General Ledger of Smit Dealers. Close off this account on 30 April April 2010: 1. Balance of the Purchase account: Toys, R350 and Sweets, R Donate the following to a children s home: Toys, R250 and Sweets, R Buy Toys, R100 and Sweets, R50 for cash from Marko. 8. The owner took a toy home for his own child, R Buy Sweets, R300, on credit from The Sweet Factory. 24. Transfer stock from the toy department to the sweet department, R50. PURCHASE 2010 Total Sweet Toys 2010 Total Sweets Toys Apr 1 Balance Apr 4 Donation Bank Drawings Creditors control Transfer Transfer Balance Apr 1 Balance Or as a calculation: Calculation for Purchase accounts: Total Sweets Toys Balance Cash purchases Credit purchases Donation (400) 00 (150) 00 (250) 00 Drawings (80) 00 (80) 00 Transfer (50) 00 Total Note that the total of the calculation is the same as the closing balance of the Ledger account. In a Periodic Stock account, the account used to record stock movement will be done in the Purchase account. However, the Trading Stock account will only be used to record stock take at the end of each financial year. 153

151 Notice that when a transfer is made between departments, this is not an accounting entry (the business has not lost or given up the value of inventory) but is just an entry between departments recorded in the appropriate columns. Unit 3.5: DRAWING UP a departmental trading statement The term "trading" refers to the main activity of a trading enterprise the selling of trading stock. For all enterprises the nominal accounts are closed off to the Trading account and Profit and Loss account. In the case of enterprises without any departments, Sales and Cost of Sales accounts are closed off to the Trading account, to determine the gross profit for the financial year. The result of the Trading account and all other nominal accounts are closed off to the Profit and Loss account to determine the net profit for the financial year. Therefore, a trading statement is the first section (Sales and Cost of Sales) of an Income Statement. The cost of sales will be known if a continuous stock system is followed. For a periodic stock system a calculation must be done to determine the cost of sales for the financial year. Example: The following Trial Balance appeared in the books of TH Dealers on 28 February TH DEALERS POST-ADJUSTMENT TRIAL BALANCE ON 28 FEBRUARY 2010 DR BALANCE SHEET ACCOUNTS section Trading stock: Ties (1 March 2009) Trading stock: Hats (1 March 2009) CR NOMINAL ACCOUNTS section Sales: Ties Sales: Hats Purchases: Hats Purchases: Ties Carriage on purchases: Ties 850 Carriage on purchases: Hats Discount allowed 800 Motor vehicle expenses Insurance Wages Debtors allowances: Hats Debtors allowances: Ties Creditors allowances: Ties Creditors allowances: Hats Sundry expenses

152 Adjustment: 1. According to a physical stock take on 28 February 2010, the following stock was on hand: Ties R Hats R The owner took a hat, R150 and tie, R50 for his personal use. 3. Stock invoice for tie, R500, was posted to the hat department. Rectify this error. 4. The owner donated hats, R350, to the local old-age home. 5. A carriage on purchase invoice for hats, R200, is still outstanding and due for payment. Required: Draw up a departmental trading statement for TH Dealers for the year ending 28 February (Show calculations for the Purchase accounts.) Solution Departmental Trading Statement of TH Dealers for the year ending 28 February 2010: Total Ties Hats Sales * Cost of sales Opening stock Purchases Carriage on purchases Closing stock Gross profit Calculation for Purchase accounts: Total Ties Hats Balance Drawings (200) 00 (50) 00 (150) 00 Error (500) 00 Donation (350) 00 (350) 00 Creditors allowances (17 275) 00 (14 200) 00 (3 075) Important to note: Always show all calculations in brackets as far as possible, but for calculating the purchase amount per department, show the calculation separately. * Refers to the net sales of each department. Net sale is sale less debtors allowance. 155

153 Exercise The following information appeared in the books of Craft Traders which consists of two departments, Art Accessories and Art Equipment. Balances on 30 June 2010: Art Accessories Art Equipment Total Sales Carriage on purchases Purchase returns Purchases Sales returns Trading inventory (1 July 2009) Additional information: 1. The owner took art equipment, cost price R250 and selling price R375, for his own use. No entry has been made in the books. 2. Trading inventory on 30 June 2010: Art accessories R9 900 Art equipment R Art accessories R200 and art equipment R150 were donated to the St Michael s Children s Home. Required: 1. Draw up the Departmental Purchase account in the General Ledger and close off the account. 2. Prepare a Departmental Trading Statement for the year ended 30 June

154 Exercise The following information appeared in the books of Union Mart Traders on 28 February 2005: Extract from the PRE-ADJUSTMENT TRIAL BALANCE of Union Mart Traders on 28 February 2005: Equipment Shoes/Clothes Total Trading stock (1 March 2004) Carriage on sales Purchases Purchases returns Sales Carriage on purchases Stationery Import duty Bad debts 794 Additional information: 1. A physical stock take on 28 February 2005 revealed the following: Trading stock: Equipment R Shoes/Clothes R The equipment department ordered stock on 31 January 2005; R was entered in the books, but the stock has not yet been received. 3. Issued a credit note to S Fagan for equipment returned to the equipment department for R1 200 on 31 January No entry has been made in the books. 4. The owner took equipment, R500, and clothes, R850, for personal use at cost price. No entries have been made in the books. 5. A stock sheet of the shoes/clothes department for R6 000 has been added twice to purchases. Required: Draw up the DEPARTMENTAL TRADING STATEMENT for the year ended 28 February (Show calculation of purchases.) Unit 3.6: DRAWING UP a departmental Income Statement Just as you can produce a Trading Statement, using columns to analyse department performance, so you can extend that statement to produce an Income Statement. The result of a Departmental Trading Statement is to determine the gross profit per department. Therefore, a Departmental Income Statement is an Income Statement per department determining the net profit per department. For calculating the net profit per department, it must be clear that all income and expenditure can be split between departments. Different methods can be followed to do so. 157

155 The following example will illustrate some of these methods: Example: HT Dealers has two departments: Toys and DIY. The following table indicates closing balances of accounts and additional information as it appeared in the books of HT Dealers: Total TOYS DIY Sales Sundry expenses Salaries Rent expense Depreciation Water and electricity Department No. of workers Floor space Toys 3 70m² DIY 2 30m² Allocate the following accounts to the departments as follows: 1. Salaries according to the number of workers. 2. Rent expenses according to floor space. 3. Sundry expenses in proportion to turnover. 4. Depreciation according to the ratio 2:1 (Toys:DIY). Solution 1. Total number of workers is five. Three of the five workers worked in the toy department; therefore 3 of the total salary expenditure must be allocated to the 5 toy department and 2 to the DIY department. 5 Calculation: Toy = = DIY = = Total TOYS DIY Salaries Total floor space is 100m 2. 70m 2 of the 100m 2 floor space is allocated to the toy department; therefore of the total rent expenditure must be allocated to the toy department and to the DIY department. Calculation: Toy = = DIY = =

156 Total TOYS DIY Rent expense "In proportion to turnover" means that the sundry expenses must be allocated to each department based on the sales of that department as a fraction of the total sales. Total TOYS DIY Sales Based on the sales: of was generated by the toy department and of was generated by the DIY department. Calculation: Toy = = (rounded off to the nearest rand) DIY = = (rounded off to the nearest rand) Total TOYS DIY Sundry expenses Toys:DIY = 2:1 (Total of the ratio is 3) Therefore, 2 of 3 or 2 of the total depreciation must be allocated to the toy 3 department and 1 of 3 or 1 of the total depreciation must be allocated to the DIY 3 department. Calculation: Toy = = DIY = = Total TOYS DIY Depreciation The total and the toy department s water and electricity amounts are given. The difference will result in the amount for the DIY department. Total TOYS DIY Water and electricity Example: The following information was extracted from the books of Count Down s Departmental Store, with departments for Sport and Clothing, for the year ended 31 December

157 Total Sport department Clothing department Inventory (1 January 2010) Purchases Purchase returns Sales Sales returns Carriage on purchases Wages Rent paid Sundry expenses Depreciation Additional information: 1. Inventory on hand at 31 December 2010: Sport R Clothing R The owner took sports equipment to the value of R700 for his personal use. No entry has been made in the books. 3. An invoice of R1 000 for clothing purchases was erroneously posted to the Purchase account of the sport department. 4. Carriage on purchases to the value of R300 for the sport department was still due. No entry was made. 5. Clothing worth R550 was stolen on 20 December The insurance claim has not yet been settled and no entry was made in respect of the stolen goods. 6. Expenses must be allocated as follows: Depreciation must be equally divided between the departments. Sundry expenses according to the ratio 3:5 (Sport:Clothing). Rental according to the floor space occupied: Sport : 30m 2 Clothing : 20m 2 Required: Draw up the DEPARTMENTAL INCOME STATEMENT for Count Down s Departmental Store for the year ended 31 December Solution Total Sport dept Clothing dept Sales ( ) ( ) Cost of sales Opening stock Purchases Carriage on purchases

158 Closing stock Gross profit Less expenditure Wages Rent paid Sundry expenses Depreciation Net profit per department Calc: Purchase accounts: Total Sport dept Clothing dept Balance Creditors allowances (27 450) 00 (15 300) 00 (12 150) 00 Drawings (700) 00 (700) 00 Error (1 000) Stolen goods (550) 00 (550) Exercise The following information was obtained from ZENEX GARAGE on 30 June They are using TWO departments, namely SPARES and REPAIRS AND SERVICES. Total Spares Repairs and Services Sales Purchases Stock (1 July 2008) Returns on sales Rent paid Salaries and wages General expenses Depreciation on equipment Returns on purchases Import duty Interest on loan Floor space: The floor space occupied by the SPARES and REPAIRS AND SERVICES departments is m 2 and m 2 respectively. Additional information: 1. A physical stock taking on 30 June 2009 revealed the following stock: Spares R Repairs and services R

159 2. Stock, cost price R1 520, was transferred on 1 June 2009 from the Spares Department to the Repairs and Services Department to be used in the workshop. No entry was made for the transfer. 3. Sixty people are employed by ZENEX Garage. Ten workers are employed in the Spares Department and the rest of the workers in the Repairs and Services Department. Salaries and wages are allocated according to the number of people employed in each department. 4. Rent is allocated according to the floor space used. 5. Interest on the loan is divided equally among the departments. 6. Depreciation on equipment must be allocated in the ratio 3:2 to Spares and Repairs and Services respectively. 7. On 29 June 2009 an invoice for carriage, R12 600, was received from JETSET Transport. R9 350 must be allocated to the Spares Department and the rest to the Repairs and Services Department. No entry was made for this invoice. Required: Draw up the DEPARTMENTAL INCOME STATEMENT for the year ended 30 June 2009 and calculate the net profit for each department. Exercise MADIBA HARDWARE STORE trades as a retail business using TWO departments, namely: Paints and Hardware. Required: As the accountant for the above business organisation, you were requested: 1.1 To show your calculations for the closing balance of the PURCHASE account for each department. 1.2 To draw up the DEPARTMENTAL INCOME STATEMENT to advise the departmental managers on the profitability of their respective departments. 1.3 To indicate your recommendations to the departmental managers. NOTE: Round off ALL amounts to the nearest rand. The business uses a periodic stock system. Information: The following is an extract from the books on 30 June 2010: Paints Hardware Stock (1 July 2009) Purchases Customs duties Carriage on sales Sales Creditors allowance Discount received

160 Other expenses Salaries Sundry expenses Rent expenses Adjustments and additional information: 1. Trading stock at 30 June 2010: Paints R Hardware R Customs duties for Hardware still outstanding, R Paint valued at R900 was donated to Charities Ltd. 4. Hardware was taken by the owner for private use, R B Habana, a debtor, returned hardware valued at R320. No entry has yet been made. 6. Goods to the value of R800 were transferred from the Paint to the Hardware Department. 7. Costs are allocated as follows: Salaries according to the number of workers. Rent expenses according to floor space. Sundry expenses in proportion to turnover. Department No. of workers Floor space Paint 6 70m² Hardware 4 30m² Summary In this module we considered how to deal with accounts for organisations that want to analyse accounting entries according to departments, and explained the aim of this system and how source documents can be coded to ensure that they are posted to the correct departments. We then looked at how journals and ledgers are adapted to facilitate departmental accounts before explaining how the Departmental Trading and Income Statements are generated for these types of accounts. 163

161 Module 4 Non-trading organisations (organisations without a profit motive) Overview When you have completed this module, you should be able to: Explain the difference between organisations with and without a profit motive, and the general and accounting administration of a non-trading organisation. Explain the aim of different ledger accounts typical of a non-trading organisation and interpret and record entries. Explain the aim of special funds and record entries for fund creation and employment of income from the special fund. Define accounting concepts relating to non-profit organisations. Draw up an Analysis Cash Book with relevant entries and post to the correct ledger accounts. Draw up a Trading account for the different activities of a non-trading organisation. Indicate the surplus or deficit by means of a Statement of Income and Expenditure. Draw up a Balance Sheet in vertical form for a non-trading organisation. Unit 4.1: The aim of a non-trading organisation A non-profit organisation (NPO) is an entity whose main purpose does not include profit as an outcome or objective. However, the terms are misleading because such organisations may involve themselves in trading activities from which they seek profits, though these activities are not the main aim of the organisations. For example, NPOs include the following: Table 4.1 Non-profit organisations NPO Main purpose Trading activities Profit opportunities Schools Provide education Tuck shops Tuck shops Clubs Club activities, e.g. Sports Social Purchase and sale of associated items such as clothing and equipment Tuck shops Purchase and sale of associated items such as clothing and equipment Tuck shops As you can see, NPOs include a wide range of activities which may, or may not, include activities that generate a profit. Where a profit is obtained, it is invariably used to support the main non-profit aim of the organisation. 164

162 The term surplus is used instead of profit and likewise the term deficit instead of loss. For all clubs, there is no capital account. Surpluses are accumulated in an accumulated fund account and form the members equity for the club. An example of a non-profit organisation is one that promotes literacy and reading. non-profit organisation (NPO): Is an entity whose main purpose does not include profit as an outcome or objective. However, the term is misleading because such organisations may involve themselves in trading activities from which they seek profits, though these activities are not the main aim of the organisations. NPO administration With the incorporation of an NPO, the constitution predicts the main objectives of this NPO, the composition of management and control thereof. At the annual general meeting a committee is elected by members to administer the dayto-day activities of the NPO. Normally, this committee consists of: Chairperson. Vice-chairperson. Secretary. Treasurer. Additional members. Each of these members has a specific role to fulfil. The treasurer is responsible for the financial record-keeping and for drawing up the annual financial statements. Unit 4.2: Special items (ledger accounts) An NPO may have similar expenses to trading organisations, such as rent, telephones, stationery, postage, advertising, wages and salaries, insurance, et cetera, but NPOs may also need to deal with special items. If we take a sports club as an example, the accounting records of this NPO may have to include items such as the following: Entrance fees paid by new members to join the club for the first time. These fees are an income for the club and are recorded as such. However, the club s constitution may indicate that these fees must be capitalised. Therefore these fees will not be recorded as an income, but directed to the Accumulated Fund account. So, how do we record these fees as an income? 165

163 Example: On 1 July 2011, Mr T Smith joined the DC Tennis Club for the first time. He paid his entrance fee of R250 by cheque. Dr Bank cr 2011 July 1 Entrance fees 250 Dr entrance FeesC cr 2011 July 1 Bank 250 Example: On 1 January 2010, 15 new members joined the AJ Soccer Club. The entrance fee is R500 per person. The constitution determines that 60% of all entrance fees must be capitalised. 1. Record the total entrance fees Dr Bank cr 2010 Jan 1 Entrance fees Dr entrance FeesC cr 2010 Jan 1 Bank Capitalise 60% of the entrance fees (60% of R7 500 = R4 500) Dr entrance FeesC cr Jan 1 Accumulated fund Jan 1 Bank Dr accumulated FundC cr 2010 Jan 1 Entrance fees Membership fees, which are fees paid by all members, normally annually or monthly. This fee is payable as long as a member stays a member of this NPO. This is also the main income of a non-profit enterprise (NPO). This Ledger account will be explained in more detail later in this module. 166

164 Example: On 1 July 2010 Mr T Smith paid his membership of R200 by cheque. Dr Bank cr 2010 July 1 Membership fees 200 Dr membership FeesC cr 2010 July 1 Bank 200 Affiliation fees, which are paid in order to be associated with another organisation; for example, a tennis club may pay an affiliation fee to be part of a national sports group: This is an expense to the NPO. Example: On 1 January 2010 MC Tennis Club paid the annual affiliation fees of R5 000 to SA Tennis Union by cheque. Dr Bank cr 2010 Jan 1 Affiliation fees Dr affiliation FeesC cr 2010 Jan 1 Bank Honorarium, which is a fee paid to someone providing a service to the NPO but not employed by the NPO. This is an expense to the NPO. Example: On 1 January 2010 MC Tennis Club paid the secretary an honorarium by cheque for administrative services rendered, in the amount of R Dr Bank cr 2010 Jan 1 Honorarium Dr Honorarium cr 2010 Jan 1 Bank Legacies and donations are amounts of money that are given to a club or other NPO. Donations are normally considered to be current income and are recorded in the Statement of Income and Expenditure, or the Income Statement for an NPO. 167

165 Legacies are money received from a member s estate. The person making this special donation may stipulate that this money must be used for a specific purpose. Example: Received on 1 July 2010 a donation of R from T Smit, a member of MC Tennis Club. Dr Bank cr 2010 Jul 1 Donation Dr Donations cr 2010 Jul 1 Bank Unit 4.3: Special funds Internally, an NPO must manage the funds at its disposal and the money it receives and uses. However, income is not derived from sales of products or services, but from: Income like entrance and membership fees. Donations and legacies as defined above. Interest on existing funds. As indicated above, a special donation such as legacies can be received by an NPO with special conditions, like the creation of a special fund. Let s look at the following to understand the creation of a special fund. Example: On 31 July 2010 MC Tennis Club received a special donation, R , from the estate of Mr Moolman. His estate stipulated that a special fund should be created. Dr Bank cr 2010 July 31 Moolman Fund Dr moolman FundC cr 2010 July 31 Bank

166 Investing funds for future use When an NPO receives more money than it needs for the next few months of operation, it can invest the excess in order to attract interest. It may place the money in an interestpaying investment account or as a special instruction issued by the donor of a legacy. Example: On 31 July 2010 MC Tennis Club received a special donation, R , from the estate of Mr Moolman. His estate stipulated that a special fund should be created and invested. Creation of the special fund Dr Bank cr 2010 July 31 Moolman Fund Dr moolman FundC cr 2010 July 31 Bank Investment Dr Bank cr July 31 Moolman Fund July 31 Moolman Fund investment Dr moolman FundC cr 2010 July 31 Bank Dr moolman Fund InvestmentC cr 2010 July 31 Bank The R invested has now been taken out of the NPO s bank account and placed in a special investment Ledger account, Fixed Deposit: Moolman Fund. Using interest received for normal operations or capitalisation When money is invested to provide a regular income, such as interest on a bank account, that interest can be used for normal day-to-day operations to cover current expenses: 169

167 Example: On 31 August 2010 received an amount of R7 500 for interest on the Moolman Fund investment at ABC Bank. Dr Bank cr 2010 Aug 31 Interest on fixed deposit Dr interest on Fixed DepositC cr 2010 Aug 31 Bank Alternatively, it can be retained as a capital item by adding it to the amount invested: Example: On 31 August 2010 received an amount of R7 500 for interest on the Moolman Fund investment at ABC Bank. This amount must be capitalised. Dr Bank cr 2010 Aug 31 Interest on fixed deposit Dr interest on Fixed DepositC cr Aug 31 Accumulated fund Aug 31 Bank Dr accumulated FundC cr 2010 Aug 31 Interest on fixed deposit Unit 4.4: Accounting concepts for non-profit organisations In accounting, different phrases or terms can be used to describe the same or similar aspects, and commercial accounts tend to refer to income as sales or revenue, and expenditure as costs. 170

168 Receipts and income Receipts are money deposited into the bank account of an NPO. Capital receipts are the money received from selling an asset, like equipment. Income is the total amount receivable during a financial year. Current income is used when income is received, like membership fees, et cetera. Example: In the Trial Balance: (extract) DR CR NOMINAL ACCOUNTS section Interest on fixed deposit Adjustment: At the end of the financial year R4 000 is still outstanding as interest on the fixed deposit. It is important to note that: Receipts = R Income = R Payments and expenditure Payments are any amount paid by cash or cheque. Expenditure is all expenses the NPO is liable for in a specific financial period. When as asset is purchased it is referred to as capital expenditure, but normal day-today expenses like salaries and stationery are current expenses. Example: In the Trial Balance: (extract) DR NOMINAL ACCOUNTS section Salaries CR Adjustment: At the end of the financial year a salary of R5 000 is prepaid. It is important to note that: Payment = R Expenditure = R

169 Unit 4.5: Analysis Cash Book Due to the nature and simplicity of transactions in the books of an NPO, a Cash Book is used to record all payments and receipts. An Analysis Cash Book is a journal, where the left side of the journal accommodates all receipts and the right side of the journal all payments. ANALYSIS CASH BOOK OF MC TENNIS CLUB APRIL 2010 Doc no. D Details Details of sundry accounts Sundry accounts Membership fees Analysis of receipts Bank Doc no. D Details Details of sundry accounts Sundry accounts Bank 44 1 P Nel K van Zyl Equipment Refreshments Honorarium S Johnson Entrance fee Easy Equip D Dali Donation Pick n Pay T Smith SA Tennis Affiliation fee

170 From the Cash Book, you would then post to the appropriate ledger accounts as follows: Dr entrance FeesC cr 2010 Apr 2 Bank 500 Dr membership FeesC cr 2010 Apr 30 Bank Dr Donation cr 2010 Apr 30 Bank Dr Honorarium cr 2010 Apr 4 Bank 750 Dr affiliation FeesC cr 2010 Apr 30 Bank Dr Equipment cr 2010 Apr 30 Bank Dr Refreshments cr 2010 Apr 30 Bank 450 In small organisations with not many accounting entries each month, the bookkeeper may decide not to take time creating ledger accounts but use the analysis columns of the Cash Book as the record of entries for each category. By using a different page for the debit and credit side of the Cash Book, it is possible to provide a number of columns (in the form of a spreadsheet) for this purpose. Unit 4.6: Operating (Trading) account per activity NPOs have no profit motive and rather focus on creating facilities for members with a mutual interest, like a tennis club. Their main activities are not trading activities and a Trading account is not applicable in this case. 173

171 However, having a tuck shop or bar on site will result in a Trading account for each of these activities. During a financial year all income and expenditure will be recorded. At the end of a financial year, all income and expenditure related to a particular activity, like tuck shop sales and tuck shop purchases, will be closed off to a Trading account to calculate the result, being a surplus or deficit, and this result will be recorded in the financial statements. Let s look at the following example: The following information was extracted from the accounting records of Amac Soccer Club for the year ended 30 June 2010: Balances from the Trial Balance on 1 July 2009: Accumulated funds Tuck shop stock Accrued income: Membership fees 360 Income received in advance: Membership fees 960 Statement of receipts and payments for the year ended 30 June 2010: RECEIPTS PAYMENTS Membership fees Membership fees refund Tuck shop: Purchases Electricity Tuck shop sales Additional information: 1. Tuck shop stock on hand 30 June 2010 amounted to R Required: Prepare the following ledger accounts and balance/close off the accounts: 1. Tuck shop Trading account. 174

172 Solution: Dr tuck Shop Trading AccountC cr Sales Jul 1 Opening stock Jun Jun 30 Purchases Closing stock Surplus: Tuck shop Unit 4.7: Statement of income and expenditure The Statement of Income and Expenditure is the Income Statement of an NPO. In this statement we will only account for income and expenditure. NPOs are non-trading enterprises and this is the reason for not having trading activities as part of this statement. One of the elements under the Income Section within the Statement of Income and Expenditure is membership fees, the main income source for NPOs. Let s focus on more complex examples calculating the membership fee amount that will be forwarded to this statement. Example: The following information was taken from the Blue Bells Cricket Club on 30 June 2010: Balance on 1 July 2009: Accrued income: Membership fees Income received in advance: Membership fees 80 RECEIPTS PAYMENTS Bank 925 Water and electricity 210 Interest on fixed deposits 900 Refreshments purchases Membership fees Stationery Cricket tour Bank Membership fee refund 40 Entrance fees 60 Refreshment sales Donations received 980 Gate takings

173 Additional information: 1. On 30 June 2010 membership fees amounting to R280 were due. 2. The membership fees still outstanding for 2009 must be written off as irrecoverable. Required: Prepare the MEMBERSHIP FEES account for Solution Note: In the beginning of the financial year, the accrued income and income received in advance must first be closed off to the Membership Fees account. These accounts at the beginning of the financial year: Dr accrued IncomeC cr 2009 Jul 1 Membership fees Dr income Received in AdvanceC cr 2009 Jul 1 Membership fees 80 Let s close these accounts off to the Membership Fees account. The reason for this is that both of these accounts were opened due to adjustments made at the end of the previous financial year, and therefore at the beginning of the new financial year these Balance Sheet Section Accounts must be closed off to the applicable account, for this example, the Membership Fees account. Dr accrued IncomeC cr Jul 1 Membership fees Jul 1 Membership fees Dr income Received in AdvanceC cr Jul 1 Membership fees 80 Jul 1 Membership fees 80 These entries are done on the first day of the new financial year. MEMBERSHIP FEES Accrued income Income received in advance Jul Jul There are four stages in drawing up a Membership Fees account: Close off the previous financial year s accrued income and income received in advance to the Membership Fees account. 176

174 Post the transactions recorded during the financial year with respect to membership fees. Membership fees received. Membership fees refunded. Membership fees written off. Record accrued income and income received in advance for the end of the financial year. Close off the Membership Fees account to the Income and Expenditure account. Next step: MEMBERSHIP FEES Accrued income Income received in advance Jul Jul Bank Bank (2009) Jun Jun Bank (2010) Bank (2011) Membership fees written off ( ) Remember that the Membership Fees account is an Income account. This account will increase on the credit side and decrease on the debit side. The bank entry on the debit side is the refund of the membership fee. The three bank entries on the credit side are for membership fees received for three different financial years. Membership fees written off are calculated as follows: In the beginning of this financial year membership fees of R1 400 were still outstanding (accrue income) for the previous financial year. On the credit side an amount of R950 was received for outstanding membership fees for the previous year. Thus, R950 of the R1 400 was collected. The amount of R450 is still outstanding and therefore will be written off. Membership fees written off are a loss for the NPO and will be recorded as such in the Statement of Income and Expenditure (so-called Income Statement). Next step: (third step) Given as ADDITIONAL INFORMATION: 1. On 30 June 2010 membership fees amounting to R280 were due. These are membership fees still to be received for the 2010 financial year. Thus accrued income = R

175 MEMBERSHIP FEES Accrued income Income received in advance Jul Jul Bank Bank (2009) Jun Income received in advance Jun Bank (2010) Bank (2011) Membership fees written off ( ) Accrued income Income received in advance is derived from the bank entry on the credit side for This amount of R120 is thus received for membership for the next financial year. Thus it is income received in advance. The last (fourth) step is to close off this account to the Income and Expenditure account. MEMBERSHIP FEES Accrued income Income received in advance Jul Jul Bank Bank (2009) Jun Income received Jun Bank (2010) in advance Income and Bank (2011) expenditure Membership fees written off ( ) Accrued income The amount of R2 240 is the membership fee income that will be reported on in the Statement of Income and Expenditure. Exercise On 1 January 2010 the following information appeared in the books of Active Tennis Club. Each member pays an annual membership fee of R250. At the end of the club s financial year on 31 December 2009, the membership fees for 12 members were still outstanding for On the other hand, there were four members who had already paid their membership fees for 2010 in advance. 178

176 A total of R was received during 2010 in respect of membership fees. At the end of 2010, 13 members were still in arrears with their membership fees for A total of six members paid their membership fees for 2011 during Only five of the members whose fees were in arrears on 31 December 2009 paid their membership fees during It is the policy of the club to expel members if they are one year in arrears with their subscriptions. On 1 February 2010 two members resigned from the club and their full membership fees for 2010 were refunded. Required: Prepare the MEMBERSHIP FEE account of Active Tennis Club for the year ending 31 December Exercise The information given below was taken from the books of Bafana Sports Club on 28 February Required: 1. Complete the Tuck Shop Trading Account for the year ended 28 February Prepare the MEMBERSHIP FEES account in the General Ledger. Information: A. Balances on 1 March 2009 Accumulated funds Clubhouse property at cost Equipment Accumulated Depreciation on Equipment Fixed deposit: World Bank (16% p.a.) Creditors control Accrued income: Membership fees Income received in advance: Membership fees 500 Tuck shop stock (1 March 2009) B. Summary of RECEIPTS and PAYMENTS for the year ended 28 February 2010 Receipts: Entrance fees R5 800 Membership fees 2009 R R R2 500 Tuck shop sales R Gate takings R

177 Payments: Tuck shop purchases R8 950 Insurance R2 150 Membership fees refunded R500 Additional information: 1. Tuck shop stock on 28 February 2010 amounted to R Depreciation on equipment is calculated at 20% p.a. on cost. 3. Membership fee is R500 per member per annum. 4. The membership fees still outstanding for 2009 must be written off as irrecoverable. 5. At the end of the year membership fees of four members were still outstanding. Let s look at the format of a Statement of Income and Expenditure and of an Income and Expenditure account: The first section is to report on all income for a financial year. A few examples of income are included in the template. The second section is to report on all expenditure for a financial year. A few examples of expenses are included in the template. The difference between the first section, Income, and the second section, Expenditure, results in either a surplus or deficit for a financial year. STATEMENT OF INCOME AND EXPENDITURE for the year ended 31 December 2010 INCOME xxx Membership fees xxx Gate takings xxx Interest on fixed deposit xxx Entrance fees xxx LESS EXPENDITURE xxx Membership fees written off xxx Stationery Insurance Interest on loan xxx Water and electricity xxx Sundry expenses xxx Depreciation Net surplus for the year xxx Alternatively, the reporting on income and expenditure can also be done in a ledger account. All income will be recorded on the credit side of this account and all expenditure on the debit side. xxx xxx xxx 180

178 2010 Membership fees written off INCOME AND EXPENDITURE ACCOUNT xxx 2010 Membership fees xxx Dec 31 Dec 31 Gate takings xxx Stationery xxx Interest on fixed xxx deposit Insurance xxx Interest on loan xxx Entrance fees xxx Water and electricity xxx Sundry expenses xxx Depreciation xxx Accumulated fund xxx xxx xxx Take note that the balance of this account is forwarded to the accumulated fund account. Let s look at the following example: The Dance and Drama Club has been operating for a number of years. Members pay an annual membership fee of R150 p.a. On 1 July 2009 the club s assets and liabilities were as follows: Bank R9 480 Membership fees in arrears R600 Income received in advance: Membership fees R750 Stock on hand: The bar R1 240 Savings account (10% p.a.) R3 000 Amount owed for insurance R400 The club s treasurer was able to present the following information on 30 June 2010: RECEIPTS PAYMENTS Membership fees Bar purchases Administrative expenses Rent Refreshments Donation from members Refund: Membership 450 Interest on savings account 200 Insurance Bar sales

179 Additional information: 1. On 30 June 2010 the club committee decided to write off any arrears of membership fees for the year ended 30 June 2009 and to pay an honorarium of R400 to the treasurer. 2. Four members must still pay their membership fees for An amount of R200 must still be paid for insurance. 4. Interest on the saving account is still due and must be calculated on the balance as on 1 July The club committee has decided that 50% of the donations from members should be capitalised. 6. Stock on hand for the bar as on 30 June 2010, R Required: 1. Complete the following ledger accounts: Membership Fees. Bar Trading Account. Income and Expenditure account for the year ended 30 June Solution MEMBERSHIP FEES Accrued income Income received in advance Jul Jul Bank (refund) Bank (2009) Jun Income received Jun Bank (2010) in advance Income and Bank (2011) expenditure Membership fees written off ( ) Accrued income (4 x 150) Dr tuck Shop Trading AccountC cr Sales Jul 1 Opening stock Jun Closing stock Jun Purchases Surplus: Bar

180 2010 Administrative expenses INCOME AND EXPENDITURE ACCOUNT Membership fees Jun 30 Rent Jun 30 Donation** Refreshments Interest on savings account* Honorarium Surplus: Bar Membership fees written off Insurance*** Accumulated fund Calculations: * 10% = ** 50% = *** = Although it is not part of the question, it is important to see how the entries in the Income and Expenditure account will be reflected in the Statement of Income and Expenditure. STATEMENT OF INCOME AND EXPENDITURE for the year ended 30 June 2010 INCOME Membership fees Donation Interest on savings account Surplus: Bar LESS EXPENDITURE Membership fees written off Administrative expenses Rent Refreshments Honorarium Net surplus for the year Exercise The information given below was extracted from the books of Manic Sports Club on 31 December

181 Required: 1. Draw up the MEMBERSHIP FEES account in the General Ledger. Balance/close off this account. 2. Prepare the STATEMENT OF INCOME AND EXPENDITURE or INCOME AND EXPENDITURE account for the year ended 31 December Information: A. The following balances/totals, amongst others, appeared in the books on 1 January 2010: Accumulated funds Fixed deposit: Nedbank (12% p.a.) Equipment (cost) Accumulated Depreciation on Equipment Bank Income received in advance: Membership fees Accrued income: Membership fees Prepaid expense: Insurance 300 Loan: Nedbank (16% p.a.) B. STATEMENT OF RECEIPTS AND PAYMENTS 31 DECEMBER 2010 RECEIPTS PAYMENTS Gate takings Stationery 440 Membership fees Equipment (1 July 2010) Insurance Interest on loan Water and electricity Interest on fixed deposit Sundry expenses 520 Entrance fees Additional information: 1. 50% of the entrance fees must be capitalised. 2. Membership fees outstanding for 2009 must be written off. 3. Four members must still pay their membership fees for Fees are R100 per member per year. 4. Interest on fixed deposit is still due. 5. Depreciate equipment at 20% p.a. at cost. 6. Stationery on hand at 31 December 2010, R180. Unit 4.8: Balance sheet for an NPO The Balance Sheet for a non-profit organisation is similar to the one for a sole trader. However there is some difference which will be highlighted in the example. 184

182 Example: The following information appeared in the books of Manic Soccer Club on 31 December 2010, the last day of the financial year. MANIC SOCCER CLUB PRE-ADJUSTMENT TRIAL BALANCE ON 31 DECEMBER 2010 DR CR BALANCE SHEET ACCOUNTS section Accumulated fund Mlanda Development Fund Equipment at cost Accumulated Depreciation on Equipment Investment: Mlanda Development Fund Fixed deposit: BNF Bank (13% p.a.) Bank Petty cash 250 Stock: Tuck shop (as on 1 Jan 2010) Accrued income: Membership fees (1 Jan 2010) 450 Income received in advance: Membership fees (1 Jan 2010) NOMINAL ACCOUNTS section Tuck shop sales Tuck shop purchases Gate takings Interest on fixed deposit Affiliation fees Membership fees Bank charges Honorarium Entrance fees Legacy: T Smit Water and electricity Adjustments: 1. Stock take on 31 December 2010: Tuck shop, R On 1 January 2010, R750 for membership fees was paid in advance and R450 was still outstanding from the previous financial year. Of the membership fees outstanding for the previous financial year, R300 was recovered during The balance of the membership fees for that period has to be written off as irrecoverable. At the end of the 2010 financial year membership fees paid in advance for 2011 amounted to R900, while the membership fees in arrears for 2010 amounted to R

183 3. Make provision for interest on fixed deposit. This money was invested on 1 April The water and electricity account for December 2010 has not yet been paid, R Provide for depreciation on equipment at 15% p.a. on the cost price. 6. One-quarter of the legacy has to be capitalised. The balance may be used as current income. 7. Interest on the fund investment was allocated according to the prescriptions of Mr Mlanda s estate % of the entrance fees have to be capitalised. The rest may be used as current income. 9. The honorarium for the treasurer is still outstanding, R750. Required: 1. Draw up the following ledger accounts: Membership Fees. Tuck Shop Trading Account. 2. Draw up the Statement of Income and Expenditure. 3. Draw up the Balance Sheet and relevant notes. Solution 1. MEMBERSHIP FEES Accrued income Income received in advance Jan Jan Dec 31 Income received Dec 31 Bank in advance Income and Membership fees expenditure written off ( ) Accrued income TUCK SHOP trading ACCOUNT Opening stock Sales Jan Dec Closing stock Dec 31 Purchases Surplus: Tuck shop

184 2. STATEMENT OF INCOME AND EXPENDITURE for the year ended 31 December 2010 INCOME Membership fees Surplus: Tuck shop Gate takings Interest on fixed deposit ( % 9 ) Entrance fees (40% 3 500) Legacy: T Smit ( 3_ ) LESS EXPENDITURE Membership fees written off Affiliation fees Honorarium ( ) Water and electricity ( ) Bank charges Depreciation (15% ) Net surplus for the year Balance Sheet of Manic Soccer Club on 31 December 2010 ASSETS NON-CURRENT ASSETS Equipment Other financial assets CURRENT ASSETS Stock Trade and other debtors Cash and cash equivalents TOTAL ASSETS EQUITY AND LIABILITIES Accumulated fund Funds NON-CURRENT LIABILITIES CURRENT LIABILITIES Trade and other creditors TOTAL LIABILITIES

185 NOTES TO THE BALANCE SHEET 1 Equipment Gross carrying amount Accumulated depreciation Net carrying amount Equipment Other financial assets Fixed deposit: BNF Bank Investment: Mlanda Dev Fund Trade and other debtors Accrued income Interest on fixed deposit Membership fees Cash and cash equivalents Bank Petty cash Accumulated fund Balance Surplus for the year Entrance fee (60% ) Legacy ( 1_ ) Funds Mlanda Development Fund Trade and other creditors Accrued expenses Water and electricity Honorarium Income received in advance Exercise The following information appeared in the books of TN Tennis Club on 30 June 2010, the last day of the financial year: TN TENNIS CLUB PRE-ADJUSTMENT TRIAL BALANCE ON 30 JUNE 2010 DR CR BALANCE SHEET ACCOUNTS section Accumulated fund Burger Fund

186 Equipment at cost Accumulated Depreciation on Equipment Investment: Burger Fund Fixed deposit: ABSA Bank (15% p.a.) Bank Petty cash 150 Stock: Tuck shop (as on 1 Jul 2009) Income received in advance: Membership fees (1 Jul 2009) Accrued income: Membership fees (1 Jul 2009) NOMINAL ACCOUNTS section Tuck shop sales Tuck shop purchases Gate takings Interest on fixed deposit Affiliation fees Membership fees Bank charges Honorarium Entrance fees Legacy: T Nel Water and electricity Adjustments: 1. Stock take on 30 June 2010: Tuck shop, R On 1 July 2009, R1 375 for membership fees was paid in advance and R2 200 was still outstanding from the previous financial year. Of the membership fees outstanding for the previous financial year, R1 650 was recovered during The balance of the membership fees for that period has to be written off as irrecoverable. At the end of the 2009/2010 financial year membership fees paid in advance for 2011 amounted to R825, while the membership fees in arrears for 2009/2010 amounted to R Make provision for interest on fixed deposit. 4. Three-quarters of the legacy has to be capitalised. The balance may be used as current income. 5. Interest on the fund investment was allocated according to the prescriptions of Mr Nel s estate % of the entrance fees have to be capitalised. The rest may be used as current income. 7. Write off depreciation on equipment at 12% p.a. on the cost price. 8. The water and electricity account for December 2010 has not yet been paid, R The honorarium for the treasurer is still outstanding, R

187 Required: 1. Draw up the following ledger accounts: Membership Fees. Tuck Shop Trading Account. 2. Draw up the Statement of Income and Expenditure. 3. Draw up the Balance Sheet and relevant notes. Summary In this module we looked at the financial records for a non-profit organisation (NPO) and discovered that NPOs can exist in a wide range of entities that can be funded by government or privately. We considered special items such as entrance fees, membership fees, affiliation fees, honorariums, legacies and donations and examined how these are dealt with in the accounts of an NPO. We then went on to consider special funds and how interest on special funds can be used for operational purposes or can be capitalised for some future specific use. We also considered the differences between capital and current expenditure. We followed up by showing how departmentalised accounts can be used to separate different NPO activities and how those activities can be displayed in a Trading Statement and in the Income and Expenditure Statement for the organisation. We also explained the difference between a commercial Balance Sheet and that for an NPO. 190

188 Module 5 The Cash Flow Statement for a sole trader Overview When you have completed this module, you should be able to: Explain the aim of a Cash Flow Statement. Name the users of a Cash Flow Statement in an organisation and indicate why they are interested in this statement. Define the different items in a Cash Flow Statement and explain the important principles in setting up the statement. Name and explain the different non-cash items. Follow the correct procedure for drawing up a Cash Flow Statement. Explain special items and record them in a Cash Flow Statement. Unit 5.1: The aim of a Cash Flow Statement (CFS) Cash flow is the lifeblood of any business, for it enables the business to buy materials, labour and services as it needs them in order to operate efficiently. This applies to businesses of all sizes, but it is particularly vital to a small business such as a sole trader. A business operation can be well managed to produce the goods or service to meet high sales and customer demand, but that business can fail if it does not have cash available to meet its commitments. In fact, there is a relationship between business operation and cash flow, and between an Income Statement and cash flow, but there are also differences between these processes in that: An Income Statement displays the performance of a business during a past period of time (financial year). An Income Statement shows the total value of sales, total value of income earned and the total value of expenditure committed, but does not show when cash is received or when supplier accounts are paid. 191

189 A Cash Flow Statement predicts the movements of cash into the business and cash out from the business from one financial year to the next financial year. This is why it is important to consider cash flow for a business so as to reduce the possibility of the business having to face cash problems in the future. Therefore, this is the aim of a Cash Flow Statement: to monitor and manage the cash flowing through the business to ensure that the business is operated at its optimum level at all times. Unit 5.2: Users of a Cash Flow Statement Cash Flow Statement: Predicts the movements of cash into the business and cash out from the business from one financial year to the next financial year. This movement is either an inflow or outflow of cash. optimum: best under the circumstances Since cash flow has an impact on the efficiency of a business, it is of particular interest to the following individuals: The owner and/or management who want to know that their business is running at its optimum efficiency. Credit providers who want to know that the credit they have provided or are about to provide is not at risk because of a shortfall in cash resources. Cash flow planners, usually in large organisations, whose job is to predict the cash flowing through a business and to identify times when a shortfall might occur. Unit 5.3: Explanations and concepts of a Cash Flow Statement A Cash Flow Statement predicts the movements of cash into the business and cash out from the business from one financial year to the next financial year. This movement is either an inflow or outflow of cash. A Cash Flow Statement can be divided into three sections: Cash flow from OPERATING (TRADING) activities Operating activities are cash received from clients and cash paid to suppliers and employees. Income is earned by an enterprise from the sale of goods and services. For this enterprise to earn this income various expenses are incurred, like salaries and electricity. These activities are referred to as trading activities and the result of this is a net profit or net loss for a particular financial year. All income will result in an inflow of cash. However, accrued income and income received in advance are non-cash-related. Also for all expenditure, it will result in an outflow of cash. However, accrued expenses and prepaid expenses are non-cash-related. These non-cash-related amounts included in these accounts (income and expenses) are also included in the working capital. Working capital is the current assets (like debtors and stock) and current liabilities (like creditors) of the enterprise. By focusing on the movement between two consecutive financial years for working capital, the non-cash amounts included in income and expenditure are cancelled. 192

190 Cash generated from these activities will result in an increase or decrease in cash flow. If there is a decrease in cash flow an investigation should follow to determine the reason for this. Cash flow from INVESTING activities Investing activities are defined as the addition and/or proceeds from disposal of non-current assets and the movement in other financial assets like fixed deposits. For disposal of non-current assets, the proceeds from that transaction are included as an inflow of cash into the enterprise. Cash flow from FINANCING activities Financing activities include any additional capital contribution from the owner and movement in long-term, interest-bearing liabilities. Cash generated from operating activities or financing activities can be utilised for investing activities for possible expanding operations within the enterprise. Concepts: Inflow or outflow of cash Working capital (part of cash flow from operating activities) For working capital, the movement from one financial year to the next financial year will result in cash flow. DEBTORS ASSETS CURRENT ASSETS Trade and other debtors The line item, trade and other debtors, has increased from R (in 2009) to R (in 2010). Thus an INCREASE in trade and other debtors of R This must now be translated into an inflow or outflow of cash. If debtors are DECREASED it is due to the debtors paying their accounts, resulting in the enterprise receiving money. Thus this is an inflow of cash. In short, if debtors are DECREASED, it will result in a CASH INFLOW. Therefore, if debtors are INCREASED, it will result in a CASH OUTFLOW. For this example, trade and other debtors have INCREASED by R For cash flow purposes, this results in a CASH OUTFLOW of R In the Cash Flow Statement this will be recorded as follows: Increase in debtors (15 000) non-current assets: These assets are bought to be used (not for resale) in the enterprise. Therefore, these assets have a long life span and will be used for periods longer than twelve months. However, these assets can be resold close to the end of their life span and be replaced by new assets for the same purpose or to expand current operations. Examples of fixed assets are land and buildings, vehicles and equipment. 193

191 Note: Negative amounts indicate an outflow of cash. CREDITORS EQUITY AND LIABILITIES CURRENT LIABILITIES Trade and other creditors The line item, trade and other creditors, has decreased from R (in 2009) to R (in 2010). Thus a DECREASE in trade and other creditors of R This must now be translated into an inflow or outflow of cash. If creditors are DECREASED it is due to the enterprise paying its creditors accounts. Thus an outflow of cash. In short, if creditors are DECREASED, it will result in a CASH OUTFLOW. Therefore, if creditors are INCREASED, it will result in a CASH INFLOW. For this example, trade and other creditors have DECREASED by R For cash flow purposes, this results in a CASH OUTFLOW of R In the Cash Flow Statement this will be recorded as follows: Decrease in creditors (5 000) Note: Negative amounts indicate an outflow of cash. STOCK ASSETS CURRENT ASSETS Stock The line item, stock, has decreased from R (in 2009) to R (in 2010). Thus a DECREASE in stock of R This must now be translated into an inflow or outflow of cash. If stock is INCREASED it is due to additional purchases of stock by the enterprise, resulting in the enterprise paying money for this stock. Thus this is an outflow of cash. In short, if stock is INCREASED, it will result in a CASH OUTFLOW. Therefore, if stock is DECREASED, it will result in a CASH INFLOW. For this example, stock has DECREASED by R For cash flow purposes, this results in a CASH INFLOW of R

192 In the Cash Flow Statement this will be recorded as follows: Increase in stock Note: Positive amounts indicate an inflow of cash. Other items Movements in other financial assets like fixed deposits are included in the section, cash flow from investing activities. FIXED DEPOSIT ASSETS NON-CURRENT Other financial assets The line item, other financial assets (fixed deposits) has increased from R (in 2009) to R (in 2010). Thus an INCREASE in fixed deposits of R This must now be translated into an inflow or outflow of cash. If other financial assets are INCREASED it is due to an increase (additional investment) in the value of fixed deposits. Money will be transferred from the current account of the enterprise to the Fixed Deposit account to increase the investment. Thus an outflow of cash. In short, if other financial assets are INCREASED, it will result in a CASH OUTFLOW. Therefore, if other financial assets are DECREASED, it will result in a CASH INFLOW. For this example, other financial assets have INCREASED by R For cash flow purposes, this results in a CASH OUTFLOW of R In the Cash Flow Statement this will be recorded as follows: Increase in fixed deposit (10 000) Note: Negative amounts indicate an outflow of cash. Movements in interest-bearing liabilities (loans) and capital contribution are included in the section, cash flow from financing activities. LOANS EQUITY AND LIABILITIES NON-CURRENT LIABILITIES Interest-bearing liabilities The line item, interest-bearing liabilities (loans), has increased from R (in 2009) to R (in 2010). 195

193 Thus an INCREASE in loans of R This must now be translated into an inflow or outflow of cash. If interest-bearing liabilities are INCREASED it is due to an increase (additional loan) in the value of the loan. Money will be transferred from the loan account of the enterprise to the current account to increase the loan. Thus an inflow of cash. In short, if interest-bearing liabilities are INCREASED, it will result in a CASH INFLOW. Therefore, if interest-bearing liabilities are DECREASED, it will result in a CASH OUTFLOW. For this example, interest-bearing liabilities have INCREASED by R For cash flow purposes, this results in a CASH INFLOW of R In the Cash Flow Statement this will be recorded as follows: Increase in loans Note: Positive amounts indicate an inflow of cash. CAPITAL EQUITY AND LIABILITIES Capital The line item, capital, has increased from R (in 2009) to R (in 2010). Thus an INCREASE in capital of R This must now be translated into an inflow or outflow of cash. The owner of an enterprise can only increase his/her capital. Drawings result in a decrease in the owner s equity. If capital is INCREASED it is due to the owner making an additional capital contribution by depositing money into the current account of the enterprise. Thus an inflow of cash. In short, if capital is INCREASED, it will result in a CASH INFLOW. For this example, capital has INCREASED by R For cash flow purposes, this results in a CASH INFLOW of R In the Cash Flow Statement this will be recorded as follows: Increase in capital Note: Positive amounts indicate an inflow of cash. 196

194 Unit 5.4: Dealing with non-cash items There are some line items that appear in an Income Statement that are accounting expenses or income for the business, but which do not result in an inflow or outflow of cash from the business. Such items include the following: Depreciation, which is an internal calculation relating to the periodic write-off of an asset that has been bought in the past. No cash changes hands in respect of this calculation. Profit or loss on the sale of a fixed (non-current) asset, which is an accounting calculation but does not, in its own right, result from cash flowing to or from the business. In other words, when we produce a Cash Flow Statement, we are only interested in: The actual cash coming (cash inflow) into a business. The actual cash leaving (cash outflow) the business. Unit 5.5: Procedure for DRAWING UP a Cash Flow Statement So, how do we produce a Cash Flow Statement? We have already stated that a Cash Flow Statement represents the cash movements between two consecutive financial periods. ASSETS CURRENT ASSETS Cash and other cash equivalents Given the situation that the cash position of this enterprise has increased from R4 575 (in 2009) to R9 755 (in 2010): The Cash Flow Statement for this financial period will provide a detailed indication if the increase in the cash position for this enterprise was due to the operating, investing and/or financing activities in this period. The following are needed to draw up a Cash Flow Statement: The Income Statement for the current financial year. The Balance Sheet for two consecutive financial years, the current and previous financial year. Additional information on non-current assets: Amount spent on non-current asset addition (new non-current assets). Amount received from the sale of non-current assets. Profit/loss on the sale of fixed assets (included in the Income Statement). Depreciation written off during the financial period (non-cash item). This information can easily be calculated by drawing up the ledger accounts of the assets, accumulated depreciation, depreciation and asset disposal accounts. Other relevant information not provided via the financial statements. The format of the Cash Flow Statement and relevant notes: The Cash Flow Statement can be divided into THREE sections (as mentioned previously in this module): 197

195 Cash flow from operating activities. Cash flow from investing activities. Cash flow from financing activities. The result of these three sections will either be a net increase or decrease in cash for the financial period. Given the situation, from the previous example, that the cash position of this enterprise has increased from R4 575 (in 2009) to R9 755 (in 2010): The net increase is R5 180 ( and these three sections of the Cash Flow Statement will indicate how this increase was obtained. The format of the Cash Flow Statement: It is very important that an outflow of cash is shown as an amount in brackets and an inflow without brackets. CASH FLOW statement OF BLUES dealers for the year ended 30 June 2010 CASH FLOW FROM operating ACtivities XXX Cash received from clients 1 XXX Cash paid to suppliers and employees 2 (XXX) Cash generated for the year* XXX Interest received XXX Interest paid (XXX) Drawings (XXX) CASH FLOW FROM investing ACtivities XXX Addition to land and buildings (XXX) Addition to vehicles (XXX) Addition to equipment (XXX) Proceeds from sale of an asset XXX Increase in fixed deposit OR (XXX) Decrease in fixed deposit XXX CASH FLOW FROM FINANCING ACTIVITIES XXX Increase in capital XXX Increase in loan OR XXX Decrease in loan (XXX) Net increase/decrease in cash** XXX Cash at the beginning of the year XXX Cash at the end of the year XXX Note: * The total of cash received from clients and cash paid to suppliers and employees. ** If the total of the three sections of the Cash Flow Statement is positive, it will result in a net increase in cash. If negative, then it will be a net decrease in cash. 198

196 Notes to the Cash Flow Statement: Important information to remember for each activity: 1. Cash flow from operating activities This section includes the following: Cash received from clients (Note 1 above) In this note the calculation includes sales (turnover) from the Income Statement and movement on debtors from the Balance Sheet. This calculation should result in a positive answer for the reason cash received is an inflow of cash into the enterprise. Cash paid to suppliers and employees (Note 2 above) In this note the calculation includes FOUR steps: 1. The calculation of net expenses for the year Net expenses for the year are sales less profit or sales plus loss for the financial year. 2. Excluding non-cash items Included in 1 are the non-cash items and therefore these items must be excluded from this note. These items are depreciation and profit/loss on sale of assets. 3. Excluding line items to be shown separately on the face of the Cash Flow Statement that are included in the Income Statement. These line items are the items indicated under the section, cash flow from operating activities that is included in 1. To be able to show these items separately, these items must be excluded (reversed) from 1. These items are all interest paid and received. 4. Movement in stock and creditors Indicate whether there is an increase or decrease in stock and an increase or decrease in creditors. Line items like drawings (indicated in the capital note to the Balance Sheet), interest paid (all interest paid in the Income Statement) and interest received (all interest received in the Income Statement) are to be shown on the face of the Cash Flow Statement. These items are included on the face of the Cash Flow Statement. 2. Cash flow from investing activities This section includes the following: Addition of new assets It is necessary to draw up the asset accounts by entering the opening and closing balances and the cost price of any asset disposed of. The balancing amount will be the addition of assets during the financial period. Proceeds from the sale of assets This information is normally given but, if not, draw up an Asset Disposal account to determine the proceeds from the sale of assets. 199

197 Movement on the fixed deposit account(s) The movement will be the difference between the two consecutive years for the item, other financial assets, in the Balance Sheet. 3. Cash flow from financing activities This section includes the following: Additional capital contribution from the owner This amount is the difference between the closing balance of capital for the previous year and the opening balance of capital for the current year. Movement on the loan account(s) The movement will be the difference between the two consecutive years for the item, interest-bearing liabilities, in the Balance Sheet. The following example will explain some of the notes and calculations to the cash flow from operating activities in the Cash Flow Statement. Example: INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2010 Sales Less cost of sales Gross profit Plus other income Interest on fixed deposit Rent income Profit on sale of fixed asset Gross income Less expenditure Salaries Telephone Interest on loan Stationery Depreciation Interest on overdraft 270 Bank charges 500 Insurance Net profit for the year

198 BALANCE statement ON 31 DECEMBER 2010 ASSETS NON-CURRENT ASSETS Property, equipment and vehicles Other financial assets CURRENT ASSETS Stock Trade and other debtors Cash and cash equivalents TOTAL ASSETS EQUITY AND LIABILITIES Capital NON-CURRENT LIABILITIES Interest-bearing liabilities CURRENT LIABILITIES Trade and other creditors Bank overdraft TOTAL EQUITY AND LIABILITIES Consider the following questions: 1. What is the cash position of this enterprise at the BEGINNING of 2010? This will be the balance of cash and other cash equivalents for R What is the cash position of this enterprise at the END of 2010? This will be the balance of cash and other cash equivalents for 2010, but the bank overdraft under current liabilities should also be considered. R(2 000) It is important to note that there was a decrease in cash between 2009 and 2010 to the value of R7 000 (from R5000 to R(2 000)). 3. Complete the cash received from clients note: NOTES 1. Cash received from clients Sales Increase/Decrease in debtors Sales are provided in the Income Statement as R It is also important to remember when calculating the movement in a line item that, for this example, you will work from left (2009) to right (2010) on the Balance Sheet. For debtors, there was an increase from R to R The increase is R

199 NOTES 1. Cash received from clients Sales Increase in debtors (5 200) Why is the increase in debtors an outflow of cash? The reason is that a decrease in debtors is an inflow of cash. 4. Complete the cash paid to suppliers and employees note: NOTES 2. Cash paid to suppliers and employees Sales Net profit for the year/net loss for the year Expenses for the year Profit/Loss on sale of fixed asset Depreciation Interest paid Interest received Increase/Decrease in creditors Increase/Decrease in stock Step 1: The calculation of net expenses for the year Sales and net profit are provided in the Income Statement. Sales = R Net profit = R NOTES 2. Cash paid to suppliers and employees Sales Net profit for the year* ( ) 00 Expenses for the year** ( ) 00 * Remember that the net profit is deducted from the sales. ** Remember that R represents the net expenses for the year and this is an outflow of cash; the reason why this amount is reflected negatively. Step 2: Excluding non-cash items The non-cash items are: 202

200 Under income: Profit on sale of fixed asset = R R(12 500) This amount is added in the Income Statement. Therefore to exclude this item from the Income Statement, because it is a non-cash item, this amount must be deducted from the answer in Step 1 to cancel this item in the Income Statement. Under expenditure: Depreciation = R( ) R This amount is deducted in the Income Statement. Therefore to exclude this item from the Income Statement, because it is a non-cash item, this amount must be added to the answer in Step 1 to cancel this item in the Income Statement. NOTES 2. Cash paid to suppliers and employees Sales Net profit for the year ( ) 00 Expenses for the year ( ) 00 Profit on sale of fixed asset (12 500) 00 Depreciation Step 3: Excluding line items to be shown separately on the face of the Cash Flow Statement that are included in the Income Statement. These items are all interest paid and received. Interest received = Interest on fixed deposit = R2 250 R(2 250) This amount is added into the Income Statement. Therefore to exclude this item from the Income Statement, this amount must be deducted from the answer in Step 1 to cancel this item in the Income Statement. Interest paid = Interest on loan + Interest on overdraft = R(47 700) + R(270) = R(47 970) R This amount is deducted in the Income Statement. Therefore to exclude this item from the Income Statement, this amount must be added to the answer in Step 1 to cancel this item in the Income Statement. NOTES 2. Cash paid to suppliers and employees Sales Net profit for the year ( ) 00 Expenses for the year ( ) 00 Profit on sale of fixed asset (12 500) 00 Depreciation

201 Interest received (2 250) 00 Interest paid Step 4: Movement in stock and creditors Stock: R R Stock has decreased by R Results in a cash inflow. Thus R Creditors: R R Creditors have increased by R Results in a cash inflow. Thus R NOTES 2. Cash paid to suppliers and employees Sales Net profit for the year ( ) 00 Expenses for the year ( ) 00 Profit on sale of fixed asset (12 500) 00 Depreciation Interest received (2 250) 00 Interest paid Decrease in stock Increase in creditors ( ) Show the reconciliation of profit with cash obtained from operations This reconciliation is a combination of note 1 (Cash received from clients) and note 2 (Cash paid to suppliers and employees). In the Cash Flow Statement these two notes result in the cash generated from operations. CASH FLOW statement for the year ended 30 June 2010 CASH FLOW FROM operating ACtivities Cash received from clients Cash paid to suppliers and employees 2 ( ) 00 Cash generated for the year This reconciliation explains the amount of R in the Cash Flow Statement. Reconciliation of profit with cash obtained from operations Net profit for the year Adjusted by: 204

202 Increase in debtors (5 200) 00 Profit on sale of fixed asset (12 500) 00 Depreciation Interest received (2 250) 00 Interest paid Decrease in stock Increase in creditors Note that the total of the reconciliation is the same as the amount for cash generated from operations in the Cash Flow Statement. The following example will explain some of the calculations to the cash flow from investing activities in the Cash Flow Statement. This section focuses mainly on additions in assets and proceeds on the sale of fixed assets. Example NOTE Property, equipment and vehicles Gross carrying amount Accumulated depreciation Net carrying amount Land and buildings Equipment Vehicles Gross carrying amount Accumulated depreciation Net carrying amount Land and buildings Equipment Vehicles Note: During the financial year equipment with a cost price of R was sold for R The net carrying amount of this equipment on date of sale was R

203 Use the information given and complete the following table: Land and Buildings Vehicles Equipment Additions Disposals Depreciation Loss/Profit on sale Proceeds from sale Solution Drawing up the following T-accounts will assist to complete this table. Remember that the closing balances given in 2009 are opening balances for Let s enter the opening balances (OB) of these accounts. Land and Buildings Vehicles Equipment OB OB OB Asset Disposal Accumulated Depreciation on Vehicles Accumulated Depreciation on Equipment OB OB Let s enter the closing balances (CB) of these accounts. Land and Buildings Vehicles Equipment OB CB OB CB OB CB Asset Disposal Accumulated Depreciation on Vehicles Accumulated Depreciation on Equipment CB OB CB OB Let s record the asset disposal transaction. Cost price (CP) = R Accumulated depreciation (AD) = R2 500 Net carrying amount = R ( ) Proceeds (P) = R8 000 Loss on sale (L) = R

204 Land and Buildings Vehicles Equipment OB CB OB CB OB CB AD Asset Disposal (AD) Accumulated Depreciation on Vehicles Accumulated Depreciation on Equipment CP AD CB OB CB OB P 8000 AD L Let s balance all the accounts. The balances on the asset accounts are new additions (A) and on the accumulated depreciation accounts are depreciations (D) written off during the financial year. Land and Buildings Vehicles Equipment (E) OB CB OB CB OB CB A A A AD Asset Disposal (AD) Accumulated Depreciation on Vehicles Accumulated Depreciation on Equipment E AD CB OB CB OB P 8000 D AD D L Let s complete the table from the T-accounts. Land and Buildings Vehicles Equipment Additions Disposals Depreciation Loss on sale Proceeds from sale So how is this information going to be recorded in the Cash Flow Statement? CASH FLOW statement OF BLUES dealers for the year ended 30 June 2010 CASH FLOW FROM investing ACtivities XXX Addition to land and buildings ( ) 00 Addition to vehicles ( ) 00 Addition to equipment (21 500) 00 Proceeds from sale of equipment Increase in fixed deposit OR (XXX) Decrease in fixed deposit XXX 207

205 Remember that all additions are an outflow of cash, but the proceeds from the sale are an inflow of cash. The following example will explain some of the calculations to the cash flow from financing activities in the Cash Flow Statement. This section focuses mainly on movements on the capital and loan accounts. Example: NON-CURRENT LIABILITIES Loan: ABSA (21% p.a.) CAPITAL Balance at the beginning of the year Plus Net profit/less Net loss Less Drawings (36 000) (30 000) Answer the following questions: 1. Was there an increase or decrease in the loan at ABSA? Remember the movement is from right (2009) to left (2010). Therefore, the loan has decreased. 2. This increase/decrease in the loan amounted to R ( ) 3. In which section of the Cash Flow Statement will you report on this and in which way? Cash flow from financing activities Decrease in loan R(50 000) Remember if the Loan account decreased, it is due to a payment (cash outflow) on the Loan account. 4. Was there any additional capital contribution made by the owner? Yes A comparison must be done between the closing balance of 2009 and the opening balance of This increase in the capital amounted to R R = R Is this increase in capital an inflow or outflow in cash? Inflow So how is this information going to be recorded in the Cash Flow Statement? CASH FLOW statement OF BLUES dealers for the year ended 30 June 2010 CASH FLOW FROM FINANCING ACTIVITIES (27 400) 00 Increase in capital Decrease in loan (50 000)

206 We have looked at every aspect of drawing up a Cash Flow Statement. The next example will combine everything into one. Example: The owner of Manic Dealers gave the following Balance Sheet to you. You, as the bookkeeper, have to discuss the cash position with the owner. Additional information: 1. The sales figures for the year were as follows: 2009 R R The following information was extracted from the Income Statement for the year ending 30 June 2010: Interest on loan R2 000 Interest on bank overdraft R200 Interest on fixed deposit R1 800 Interest on current account R The owner contributed additional capital during the year, which ended on 30 June During the financial year, equipment, with a cost price of R7 500, was sold for R (The net carrying amount of this equipment on the date of sale was R5 000.) BALANCE SHEET OF MANIC dealers ON 30 JUNE 2010 ASSETS NON-CURRENT ASSETS Property, equipment and vehicles Other financial assets CURRENT ASSETS Stock Trade and other debtors Cash and cash equivalents TOTAL ASSETS EQUITY AND LIABILITIES Capital Balance Net profit/ Net loss Drawings (36 000) (30 000) NON-CURRENT LIABILITIES Interest-bearing liabilities CURRENT LIABILITIES Trade and other creditors Bank overdraft TOTAL EQUITY AND LIABILITIES

207 NOTES TO THE BALANCE SHEET NOTE Property, equipment and vehicles Gross carrying amount Accumulated depreciation Net carrying amount Land and buildings Equipment Vehicles Gross carrying amount 2010 Accumulated depreciation Net carrying amount Land and buildings Equipment Vehicles NOTE Fixed deposit: ABC Bank (15% p.a.) NOTE 3 Bank (2 000) Required: 1. Show the calculation of the cash received from customers and cash paid to suppliers. 2. Show the reconciliation of profit with cash obtained from operations. 3. Draw up a Cash Flow Statement for the financial year ended 30 June Solution As part of your calculations, you should draw up these T-accounts to have access to information needed to complete the notes and Cash Flow Statement required. Land and Buildings Vehicles Equipment OB CB OB CB OB CB A A AD

208 Asset Disposal (AD) Accumulated Depreciation on Vehicles Accumulated Depreciation on Equipment E AD CB OB CB OB P D AD D L NOTES 1. Cash received from clients Sales Increase in debtors (5 200) NOTES 2. Cash paid to suppliers and employees Sales Net profit for the year (22 100) 00 Expenses for the year ( ) 00 Loss on sale of fixed asset Depreciation ( ) Interest received ( ) (1 900) 00 Interest paid ( ) ( ) Decrease in stock Increase in creditors ( ) Reconciliation of profit with cash obtained from operations Net profit for the year Adjusted by: Increase in debtors (5 200) 00 Loss on sale of fixed asset Depreciation Interest received (1 900) 00 Interest paid Decrease in stock Increase in creditors

209 3. CASH FLOW statement OF MANIC dealers for the year ended 30 June 2010 CASH FLOW FROM operating ACtivities Cash received from clients Cash paid to suppliers and employees 2 ( ) 00 Cash generated for the year Interest received Interest paid (2 200) 00 Drawings (30 000) 00 CASH FLOW FROM investing ACtivities (29 500) 00 Addition to land and buildings Addition to vehicles (36 000) 00 Addition to equipment (2 500) 00 Proceeds from sale of equipment Decrease in fixed deposit CASH FLOW FROM FINANCING ACTIVITIES (2 500) 00 Increase in capital Decrease in loan (3 000) 00 Net decrease in cash (7 000) 00 Cash at the beginning of the year Cash at the end of the year (2 000) 00 Remember the following: 1. An outflow of cash is indicated as a negative amount and an inflow as a positive amount. 2. Cash in the beginning of the financial year is R5 000 and at the end of the financial year, R(2 000). Therefore there was a net decrease of R7 000 in cash during the financial year. The three sections in the Cash Flow Statement indicate the contribution of each activity. 3. The main reasons for this net decrease is due to additional investment in noncurrent assets and the redemption of the loan. Unit 5.6: Dealing with special items Most small businesses use a shorter Cash Flow Statement which covers only the normal operating processes to the point where Net cash from business is calculated. In this case, the business makes special and separate arrangements for exceptional items such as asset disposal. There are certain special items that appear in a business s accounting records that we have not shown in the Cash Flow Statement above and that we also need to deal with now. 212

210 Depreciation In many ways, depreciation is a false accounting item in that it does not arise as part of normal trading activities. In fact, it is an accounting adjustment to allow a business to spread a large asset purchase over the lifetime of the asset rather than try to embrace it in one trading year. For example, you may buy an expensive machine that will continue to operate for many years to come, the cost of which would totally destroy your profits in one year. So, you decide to write the original cost off, or depreciate it, over the next five or ten years. That is a perfectly reasonable decision and one that gets the approval of the South African Revenue Service (SARS). However, you will probably have included the original cost in the Cash Flow Statement at the time of purchase. After that, you are not required to make any future adjustment to cash flow for depreciation. Profit/loss on asset disposal When you dispose of an asset that you no longer require, you have to make the accounting adjustments that we demonstrated in Part 5 of Module 1, including closing off the relevant page in the Fixed Asset Register. You will, of course, record the payment you receive for the sale in your Cash Flow Statement for that period. However, making a profit or loss on the sale compared with the value in the Fixed Asset Register does not produce any additional cash (over the payment received) and does therefore not have to appear in the Cash Flow Statement. Summary In this module we explored the concept of the Cash Flow Statement, its aim, users and what it is used for. We considered the question of non-cash items in a business s accounts and identified the items that need to be included in a Cash Flow Statement. We also looked at the impact of investments and special items before providing guidance on how to produce an effective Cash Flow Statement. 213

211 MORE EXERCISES Question You are the bookkeeper of Big Time Traders. The owner, Mrs S Nel, could not understand how her bank account shows an overdraft of R after a net profit of R was calculated. The following amounts appeared in the Balance Sheets of Big Time Traders on 30 June 2009 and Additional information: 1. The turnover for the financial year ending 30 June 2010 was R The owner made an additional capital contribution during the year. 3. During the year the business paid R540 interest on bank overdraft. 4. On 31 December 2009 R9 000 of the fixed deposit at NET Bank was received but the amount was not reinvested. 5. On 31 August 2009 a vehicle with a cost price of R and accumulated depreciation, until date of sale, of R was sold at a profit of R Part of the mortgage loan was paid back on 31 March BALANCE SHEET OF BIG TIME traders ON 30 JUNE 2010 ASSETS NON-CURRENT ASSETS Property, equipment and vehicles Other financial assets CURRENT ASSETS Stock Trade and other debtors Cash and cash equivalents TOTAL ASSETS EQUITY AND LIABILITIES Capital Balance Net profit/ Net loss (12 600) Drawings (90 000) (30 000) NON-CURRENT LIABILITIES Interest-bearing liabilities (10% p.a.) CURRENT LIABILITIES Trade and other creditors Bank overdraft TOTAL EQUITY AND LIABILITIES

212 NOTES TO THE BALANCE SHEET NOTE Property, equipment and vehicles Gross carrying amount Accumulated depreciation Net carrying amount Land and buildings Equipment Vehicles Gross carrying amount 2010 Accumulated depreciation Net carrying amount Land and buildings Equipment Vehicles NOTE Fixed deposit: ABC Bank (15% p.a.) NOTE 3 Petty cash 450 Bank Required: Draw up a Cash Flow Statement for the financial year ended 30 June 2010 to enable you to discuss the cash flow situation with the owner. (Show only the notes on cash received from customers and cash paid to suppliers and employees.) Question The owner of Hectic Dealers gives the following financial statements to you. He cannot understand how it is possible that there is an overdraft of R at the bank, whereas the Income Statement reflected a profit of R for the year. INCOME STATEMENT OF HECTIC dealers ON 30 JUNE 2010 Sales Less cost of sales Gross profit Plus other income Interest on fixed deposit Rent income

213 Profit on sale of fixed asset Gross income Less expenditure Salaries Telephone Interest on loan Stationery Depreciation Interest on overdraft 270 Bank charges 500 Insurance Net profit for the year BALANCE SHEET OF HECTIC dealers ON 30 JUNE 2010 ASSETS NON-CURRENT ASSETS Property, equipment and vehicles Other financial assets CURRENT ASSETS Stock Trade and other debtors Cash and cash equivalents TOTAL ASSETS EQUITY AND LIABILITIES Capital NON-CURRENT LIABILITIES Interest-bearing liabilities CURRENT LIABILITIES Trade and other creditors Bank overdraft TOTAL EQUITY AND LIABILITIES NOTES TO THE BALANCE SHEET NOTE Property, equipment and vehicles Gross carrying amount Accumulated depreciation Net carrying amount Land and buildings Equipment Vehicles

214 Gross carrying amount 2010 Accumulated depreciation Net carrying amount Land and buildings Equipment Vehicles NOTE Fixed deposit: FAB Bank (15% p.a.) NOTE 3 Petty cash Bank NOTE 4 Capital Balance at the beginning of the year Plus Net profit/less Net loss (6 300) Less Drawings (15 000) (45 000) NOTE 5 Mortgage loan: KYC Bank (18% p.a.) Additional information: 1. On 30 June 2009 an old vehicle, net carrying amount of R52 500, was traded in on a new vehicle, cost price R Required: 1. Draw up the CASH FLOW STATEMENT of HECTIC DEALERS for the year ended 30 June Show the following notes/calculations: Cash received from customers/clients. Cash paid to suppliers and employees. 3. Show the reconciliation of profit with cash obtained from operations. 217

215 Glossary Accounting: Is the process of transaction recording in order to have a permanent record of those transactions. From these records, an enterprise can determine whether a profit was made or a loss was suffered for a financial period. 1 Accounting cycle: Represents the movement of a transaction through the organisation to reach the end of a financial period. 14 Accounting equation: Defines the relationship between assets, owner s equity and liabilities. This relationship defines assets as being equal to the owner s equity and liabilities, or A = O + L. 15 Asset disposal: The selling of assets. There are three ways of disposing of an asset: 1. Selling an asset for cash. 2. Selling an asset on credit. 3. Trade-in on a new asset. 70 Assets: Are the possessions owned by an enterprise, for example a vehicle. All assets can be divided into two groups (types): noncurrent (fixed) assets and current assets. All asset accounts increase on the debit side of the account and decrease on the credit side of the account. 1 Balance Sheet: This statement checks if the total assets are equal to the owner s equity plus liabilities, or if the accounting equation throughout is balanced. Therefore, the Balance Sheet provides the financial position of the enterprise s assets, owner s equity and liabilities on a given date. 15 Bank charges: Are costs charged by a financial institution for rendering a service to its clients and such costs are debited directly to the bank account of the enterprise at the financial institution. Examples of bank charges are service fees, cheque book fees and credit card levies. 32 Bank statement: Is a record of all the transactions that go through your bank account. These transactions are printed out on a bank statement that should be provided on demand, or sent to you monthly, so that you can check all the debits and credits to the bank account in your ledgers. 30 Carriage on sales: Is the delivery cost on a sale to a client for the business account. Carriage on sales is normally an operating expense, together with other expenses like salaries, telephone, et cetera. 135 Cash Flow Statement: Predicts the movements of cash into the business and cash out from the business from one financial year to the next financial year. This movement is either an inflow or outflow of cash. 192 Cash Payments Journal (CPJ): In this journal, all cash payments of the enterprise are captured. The source document applicable to this journal is the cheque counterfoil. Therefore, this journal will be posted to the credit side of the bank account in the General Ledger. Accounts like Trading Stock and Creditors Control will be debited in the General Ledger. 11 Cash Receipts Journal (CRJ): In this journal, all cash receipts of the enterprise are captured. The source documents applicable to this journal are cash register roll slips (for cash sales) and receipts (for all other receipts). 9 Continuous (perpetual) stock system: Records and monitors the daily movements of stock through a ledger account called Trading Stock. This system is often used in a small retail business which requires that the movement of each product be monitored and controlled as sales and purchases occur. It means that the value of the stock is known at any stage, without counting the stock. 129 Control account: Is a ledger account in the General Ledger that contains all the postings for a particular function such as debtors and creditors. The total value of all transactions for a specific function (debtor or creditor) is shown in the control account. 20 Creditors Allowance Journal (CAJ): In this journal, all credit returns to creditors of the enterprise are captured. The source 218

216 document applicable to this journal is the debit note. The creditor control column will be debited to the Creditors Control account and all other columns or entries (like stationery and trading stock) will be credited to the relevant ledger account. 17 Creditors Journal (CJ): In this journal, all credit purchases of the enterprise are captured. The source document applicable to this journal is the credit invoice. The creditor control column will be credited to the Creditors Control account and all other columns or entries (like equipment and trading stock) will be debited to the relevant ledger account. 10 Current assets: Include the cash in the enterprise s current bank account or any other asset that can be converted into cash within a year. Examples of current assets are the cash in the current account, trading stock and debtors. 2 Current liabilities: Are short-term liabilities like an overdrawn bank account and creditors. 2 Debit orders and stop orders: Are instructions to a financial institution to make specific payments to different beneficiaries. Examples of these orders are insurance premiums, municipal accounts and loan instalments. 33 Debtors Allowance Journal (DAJ): In this journal, all credit returns from debtors of the enterprise are captured. The source document applicable to this journal is the credit note. The debtors allowance column will be debited to the Debtors Allowance account and credited to the Debtors Control account. However, the cost of sales column will be credited to the Cost of Sales account and debited to the Trading Stock account. 17 Debtors Journal (DJ): In this journal, all credit sales of the enterprise are captured. The source document applicable to this journal is the credit invoice. The sales column will be debited to the Debtors Control account and credited to the Sales account. However, the cost of sales column will be debited to the Cost of Sales account and credited to the Trading Stock account. 17 Fixed deposit: Is the opposite of taking up a loan. An enterprise may have additional funds on its current account that can be invested to earn a better interest than is offered on the current account. Money in the enterprise s current account is a current asset, and, if this money is invested with a financial institution in the form of a fixed deposit, this will be classified as a long-term (non-current) asset. Fixed deposits are classified as financial assets. 67 General Journal (GJ): This journal is used to capture all transactions for which no specific journal is opened. The source document applicable to this journal is the journal voucher (internal office memo). The first line of every journal entry is the debit entry, which will be posted to the debit side of the relevant account. The second line of every journal entry is the credit entry, which will be posted to the credit side of the relevant account. The control columns will be debited or credited to the relevant control account as journal debits or journal credits. 7 Income Statement: This statement indicates whether a profit was made or a loss suffered for the past financial year. Therefore, the Income Statement provides the financial results for a particular financial year. 15 Liability: Any amount owed by an enterprise to entities or enterprises is called a liability. These entities or enterprises are referred to as creditors. Liabilities can also be divided into two groups: non-current and current liabilities. Liability accounts increase on the credit side of the account and decrease on the debit side of the account. 2 Loans (long-term): An enterprise may have a need for additional funding but, owing to its current situation, does not have enough money of its own. One way of getting additional funding will be to request the owner to make an additional capital contribution but, sometimes, an enterprise will apply to a financial institution to borrow money. The money borrowed from it is a long-term loan and forms part of the longterm liabilities of this enterprise. 65 Manufacturing enterprises: Are businesses that buy raw material and turn it into a product. Examples of manufacturing enterprises are factories that produce products through a manufacturing process, like a clothing factory

217 Non-current assets: These assets are bought to be used (not for resale) in the enterprise. Therefore, these assets have a long life span and will be used for periods longer than twelve months. However, these assets can be resold close to the end of their life span and be replaced by new assets for the same purpose or to expand current operations. Examples of fixed assets are land and buildings, vehicles and equipment. 193 Non-current liabilities: Include long-term loans, and are also known as interest-bearing liabilities. 2 Non-profit organisation (NPO): Is an entity whose main purpose does not include profit as an outcome or objective. However, the term is misleading because such organisations may involve themselves in trading activities from which they seek profits, though these activities are not the main aim of the organisations. 164 Periodic stock system: Only values stock at the end of the trading year and does not require different bookkeeping accounts or entries during the year. This system is more appropriate for big retail and service businesses with different departments. These enterprises, which sell great volumes of goods, need to do a physical stock take at the end of the financial year to determine the actual value of the stock. 129 Petty Cash Journal (PCJ): In this journal, all cash payments (small amounts) of the enterprise are captured. The source document applicable to this journal is the petty cash voucher. The petty cash column will be credited to the Petty Cash account and all other columns or entries (like stationery and refreshments) will be debited to the relevant ledger account. 17 Postdated cheque: Is a promise to pay a particular amount at a later date. 42 Subsidiary Ledger: Records individual transactions related to a particular debtor or creditor. These accounts are the individual accounts for a particular debtor or creditor. The balance of a control account should match the total of all the accounts of a subsidiary ledger. The detailed values (outstanding balances) for individual accounts are shown in the subsidiary ledgers. 50 Trial Balance: Is usually implemented at the end of a given financial period and is used to make sure that accounting entries have been carried out accurately. The Trial Balance often leads to the preparation of financial statements called the Income Statement and Balance Sheet. The Trial Balance has two sections: Balance Sheet Section All asset, liability and owner s equity (excluding the Income and Expenditure account) accounts are included in this section. This section will be used to draw up the Balance Sheet at the end of a financial period. Nominal Accounts Section All Income and Expenditure accounts are included in this section. This section will be used to draw up the Income Statement at the end of a financial period. 14 Wages Journal (WJ) and Salaries Journal (SJ): In this journal, all wage and salary payments to employees of the enterprise are captured. The source document applicable to this journal is the cheque counterfoil

218 Abbreviations/acronyms A: new additions AD: accumulated depreciation/asset disposal b/d: brought down BR: bank reconciliation CAJ: Creditors Allowance Journal CB: closing balance CJ: Creditors Journal CP: cost price CPJ: Cash Payments Journal Cr: Credit CRJ: Cash Receipts Journal D: depreciation DAJ: Debtors Allowance Journal DJ: Debtors Journal Dr: Debit E: equipment GJ: General Journal JSE: Johannesburg Stock Exchange L: loss on sale NPO: non-profit organisation No./no.: number OB: opening balance P: proceeds p.a.: per annum PCJ: Petty Cash Journal R/D: refer to drawer SARS: South African Revenue Service SJ: Salaries Journal TB: Trial Balance WJ: Wages Journal 221

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