HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@gmail.

com

FAC 1503
Accounting for Law
Practitioners

SUMMARY OF THE PRESCRIBED MATERIALS

2015

Disclaimer: Any reference to codes is a reference to official UNISA codes. We do not duplicate
their codes nor represent them as our own. We are a private company and we are in no way
connected with UNISA, nor do we hold a collaboration agreement with UNISA. We simply work
through UNISA material with students as a form of academic support and revision. Our revision
packs are compiled by our lecturers, based on UNISA material and questions are based on the
type of questions asked by UNISA in examinations and assignments.

Whilst every effort has been made to ensure that the information in these notes is accurate, we
take no responsibility for any loss or damage suffered by any person as a result of the reliance
upon the information contained herein.

1
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Study Unit 1
The nature and function of accounting

1.1. Introduction

 Over the centuries accounting developed together with and as part of the
economic system and it performs an extremely useful and important function in
society.
 Through the ages records were always kept by hand, but today computers are
being used increasingly.
 Whichever method is used, the basic principles remain unchanged, since all
activities in a business are still expressed in terms of money and are recorded.
 However, it is important to know the procedures used in a manual system in
order to understand how a computerised accounting system works.

1.2. What is accounting?

1.2.1. Definition

 Accounting is a process consisting of three activities, namely:

o Identifying those events that are evidence of economic activity
(transactions) relevant to the particular business or entity.
o Recording the monetary value of the economic events (transactions) so
as to provide permanent history of the financial activities of the business.
Recording consists of keeping a chronological diary of measured events in
an orderly and systematic manner. Recording implies that economic
events are also classified and summarised.

Difference between accounting and bookkeeping

 Accounting = See above definition.

 Bookkeeping = Involves identification and recording of economic events and
forms one part of the accounting process.

Why accounting?

 Not all users of financial information are trained accountants.

 But users need to make decisions based on basic knowledge of accounting
 Preparer of financial statements takes responsibility for the design of the
accounting system

2
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

 Every Law Practitioner will use accounting to make business decisions, work with
estates that need to be financially captured.
 Practitioners will also have to use their own accounting system to keep track of
all financial details, not only in his business, but as well as in particular trust
accounts!

1.2.2. The nature of accounting

 Accounting is a specialised means of communication which is used to convey a

specialised message about the finances of an enterprise.
 It is essential that the recipient of this specialised message (the user of financial
information) should understand it otherwise the information which is conveyed
has no value.
 Accounting uses words and figures to convey financial information to the users
of such information. As you progress with your study of accounting you will
become familiar with the meaning of these words and figures, which are also
known as the concepts, principles and procedures of accounting. This knowledge
will eventually enable you to understand the message which is contained in
financial statements.
 Each and every person who is involved in an enterprise uses financial
information to a greater or lesser degree.
 Each of us also needs to know something about accounting to manage our
personal financial affairs. Financial resources are limited, or “scarce”, and if we
are going to spend them we must plan properly. Knowledge of accounting is
therefore also useful in this area.
 Accounting is therefore a “language” which is used to convey financial
information to interested parties.

1.3. Universal accounting denominator

 The common unit of measurement in accounting is money and in the RSA the
currency is known as the Rand.
 All the transactions of an enterprise are converted into monetary values before
being processed.
 Using money as the common denominator however, gives rise to two
 important limitations:
o Not all events can be expressed in monetary terms.
o The value of money is unstable and is influenced by many economic
factors, such as inflation.
 Financial statements for part of the process of reporting
 Main idea of accounting is to assist in decision making, control and planning of
any entity.
 Financial statements do not include Directors Report, discussions and analysis by
management.

3
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

1.4. Forms of ownership

 In the RSA there are four main forms of ownership, namely:

o sole traders
o partnerships
o close corporations
o companies (Private and Public)
 Apart from these main forms of enterprises, non-profit undertakings can also be
distinguished for example trusts, clubs, churches etc.

1.5. Users of financial information

Financial information is required by many users, who analyses the information for
various decision-making purposes. The following are the most common users:

 Investors - Providers of capital

 Creditors - Needs to know if you will be able to pay your bills
 Employees - Stability of company
 Government - Taxation policies
 Management - Decision making
 Public - Stability of company/possible investments if Ltd Company
 Lenders - Will loans be paid on time

1.6. The fields of accounting

 Users of financial information can be divided into two categories, namely:

o internal users eg management, employees
o external users eg investors, creditors, government
 Two fields of accounting have developed as a result of this distinction as to the
users of the information.
 Financial accounting is concerned with the provision of financial information to
mainly external parties.
 Management accounting is concerned with the provision of financial
information to people within the enterprise.

4
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Accounting Equation
Owner’s Equity = Assets – Liabilities

1. Owner’s Equity
 Drawings
 Capital
 All transactions that will have an effect on the profit/loss of the business

2. Assets

2 Categories

Fixed Assets Current Assets

Ground & buildings Bank & Cash Equivalents
Equipment Debtors
Furniture Trading Stock
Vehicles

3. Liabilities

Long-term liabilities Short-term liabilities

Long term loans (Mortgage loan) Bank (if in overdraft)
Creditors

Exercise

The following information relates to Mabopane Swop Shop. The periodic inventory
system is in use.

Transactions during July 20.1:

1. Paid a rent deposit of R5 000 to Rent Agent.

2. Purchased foam mattresses on credit from Sleepy Suppliers for R12 000 subject
to a trade discount of 15% and a further 5% settlement discount if the account is
settled within 20 days.
5. Sold merchandise on credit to F Flower, R6 000.
7. Paid the water and electricity account, R3 400.
17. The owner took an antique grandfather clock with a cost price of R25 000 for his
personal use and withdrew R2 500 in cash.
21. Settled the account of Sleepy Supplier's.
28. F Flower paid his account. A settlement discount of R50 was granted.

5
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

30. Paid the monthly installment on the bond, R7 500. The amount was made up as
follows: Capital repayment - R6 500; Interest - R1 000

REQUIRED:

Draw the table as in exercise and analise the influence of the transaction above on the
elements of the accounting equation. Also indicate the account to be debited and
credited in the general ledger. Ignore VAT

General Ledger Effect on equation

No Acc. Debited Acc. Credited Assets Owners Equity Liabilities

Solution

General Ledger Effect on equation

Owners
No Acc. Debited Acc. Credited Assets Liabilities
Equity
+ R5 000
1 Rent Deposit Bank
- R5 000
Trading stock Creditors Control
2 + R12 000 + R12 400
(Sleepy Suppliers)
Debtors Control +R6 000
5 Trading Stock
(F flower) -R6 000
No indication on beginning totals of inventory so we can’t show the profit on the equation

7 Municipal Fees Bank -R3 400 -R3 400

17 Drawings Trading Stock -R 25 000 -R 25 000

Drawings Bank -R2 500 -R2 500

Creditors Control
21 Bank -R11 400 -R12 000
(Sleepy Suppliers)
Creditors Control
Discount Received +R 600
(Sleepy Suppliers)
Debtors Control (F +R 5 550
28 Bank
Flower) - R 5 550
Debtors Control (F
Discount Allowed -R 50 -R 50
Flower)

30 Capital Bond Bank -R6 500 -R 6 500

Interest Paid Bank -R1 000 -R1 000

6
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Study Unit 2
The nature of accounting theory

2.1. Accounting principles

 Why theory of accounting?

 Accounting is supposed to be a practical subject.
 This is true, but no subject which is logically structured can exist without a
theoretical foundation.
 The techniques used in the practice of accounting are based on conceptual and
theoretical ideas.
 These ideas are generally known as accounting principles.
 You will have (for example) need to describe the concepts of capital and the
maintenance thereof.

2.2. Accounting policy

 Situations often occur in our everyday life which are repetitive (ie they are
always the same) but they would each have a different outcome if we acted
differently each time. If we do not have a guideline for how we should act in such
cases, our actions would probably be inconsistent.
 Our friends would think we were unreliable.
 If we lay down a guideline so that we always act the same in a particular
situation, we can say that we are determining a policy for our actions, which will
result in our actions being consistent.
 We encounter precisely the same situation in accounting.
 Transactions of a repetitive nature frequently occur, and the requirement of
consistency means that an enterprise has to establish an accounting policy which
determines how such transactions will be treated.
 Accounting policy is thus a set of decisions about how the enterprise will treat
the same type of transactions in order to achieve a consistent result.

2.3. Disclosure of accounting policy

 Since an accounting policy represents an enterprise's decisions about situations

which it could deal with in various ways, it has to disclose its accounting policy in
its financial statements.
 For example, an enterprise has to indicate what basis it has used to deal with the
depreciation of property, plant and equipment.

7
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

2.4. Generally accepted accounting practice (GAAP)

 This is the next important concept which you will encounter in your accounting
studies.
 For the sake of conciseness we will refer to this as GAAP.
 If everyone were to develop his or her own language and grammatical rules,
communication would break down.
 For this reason we have generally applicable language and grammar rules.
 Accounting, as a specialised medium of communication, has precisely the same
problem.
 If each enterprise were to prepare financial reports according to its own
accounting rules and its interpretation of accounting theory and principles, chaos
would result in the world of economics and business.
 A foundation has therefore been developed over the years for the measurement
and disclosure of the results of financial events (transactions).
 This foundation is a general framework and encompasses, in broad terms,
accounting concepts, principles, methods and procedures, which are collectively
known as GAAP.

2.5. Accounting standards and statements

2.5.1. Introduction

 In RSA, the Accounting Practices Board plays an important role in the

development of GAAP by creating accounting standards.
 The objective of creating accounting standards for particular issues (eg for the
treatment of taxation in financial statements) is to limit the variety of available
accounting practices, but without striving for strict uniformity or creating a set of
rigid rules for all circumstances.
 The ultimate aim of accounting standards is to encourage widespread use of
particular standards in financial reporting and to eliminate undesirable
alternatives.

2.5.2. Framework for the preparation and presentation of financial

statements

 The framework is not a standard but a framework which sets out the objectives
and concepts which underlie the preparation and presentation of financial
statements.

8
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

[Link]. The objective of financial statements

 To provide useful financial statements including information about financial

performance, changes in equity, financial position as well as cash flow on hand.
 To show all interested parties the financial position of the company.

[Link]. Underlying assumptions

 According to the Framework there are two underlying assumptions with regard
to financial statements:
(1) The accrual basis – transactions recorded when they occur
on not when cash is received of expenses paid.
(2) The going concern – Statements are prepared with the
assumption that the entity will be ongoing and not for just
a certain period.

[Link]. Qualitative characteristics of financial statements

The four main qualitative characteristics are:

(1) Understandability – users must understand F/S
(2) Relevance – users must be able to make decisions/forecasting
(3) Reliability – Faithfull; Bona Fide; F/S made according to GAAP
(4) Comparability – users must be able to compare performances to previous
periods

[Link]. The elements of financial statements

The following are elements of financial statements:

 Elements by which the financial position (assets = equity plus liabilities) is
measured:
(1) Assets
(2) Liabilities
(3) Equity
 Elements that measure profitability (Profit or loss = increase or decrease in
equity):
(4) Income
(5) Expenses

9
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Study unit 3
The financial position
Learning outcome
3.1. Introduction

 The primary purpose of accounting is to give information on the financial

position and the financial result of an entity.
 A set of financial statements consist of the following:
o Balance Sheet (Statement of Financial Position)
o Statement of Financial Performance (Statement of Comprehensive
Income)
o Statement of changes in equity
o Cash flow Statement
o Accounting policies and explanatory notes

3.2. Accounting entity

 Every enterprise for which separate financial records are kept is an accounting
entity.
 It is extremely important to see the business as a separate entity from its owners
because transactions entered into by the enterprise have to be dealt with from
the point of view of the enterprise whose books are being done.
 Examples: In the RSA there are four main forms of ownership, namely:
o sole traders
o partnerships
o close corporations
o companies (Private and Public)
 Apart from these main forms of enterprises, non-profit undertakings can also be
distinguished for example trusts, clubs, churches, clubs etc.
 Every transaction will changes the financial results and a change of equity
 Financial period – Normally 1 year
o Year = “F/S for the year ended” / Note: Balance Sheet shows the financial
position on a specific date. “Balance Sheet at 28 Feb 20.1
 F/S can also be prepared for a month for management purposes and control
 Study paragraph 1.7 (again) as well as paragraph 3.2 of the prescribed book.

10
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

3.3. Financial position

 The financial position of the entity is described in terms of assets and interests at
a given time.
 They are reflected in a balance sheet, which is essentially an accounting report
on the financial position of an entity.
 The balance sheet communicates relevant financial information to the owners,
creditors and other interested parties.
 Balance sheet – Shows the financial position
 Statement of Financial Performance – Show financial performance

Owners Equity Assets Liabilities

 Drawings  Fixed (non current) =  Non current( Long
 Capital Ground, Buildings, term) = Long term
 Every expense/income Vehicles; Equipment; loans; Debentures;
that have a effect on  Current = Inventories; Mortgages
your profit Debtors; Bank (if  Current = Creditors;
favourable); Bank (if in overdraft)

3.4. Net asset value

 The difference between the value of assets owned by an enterprise and the
liabilities it has incurred represents net asset value.
 If we express this as an equation, then ASSETS - LIABILITIES = NET ASSET VALUE
 The net asset value represents the portion by which the assets exceed the
liabilities.
 Net asset value is therefore also called equity.

3.5. Application of the basic accounting equation (BAE)

Exercise 1

The assets of Maxi Services amount to R30 000 and its liabilities (creditors) to R5 000.
Calculate the equity.
 We use the BAE.
 The amounts which are given are substituted for the appropriate symbol and the
unknown symbol is calculated.

A =E+L
E =A-L
= R30 000 - R5 000
= R25 000

11
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Exercise 2

T Tom is the owner of Zebra Services which offers a carpet cleaning service. On 30
November 20.1 Zebra Services owns equipment amounting to R100 000. Clients owe
R40 000 for services rendered and Zebra Services owes R20 000 to a supplier for parts
purchased. Zebra Services also has R10 000 in cash in the bank.

Show the BAE for Zebra Services and determine the equity.

Step 1: Identify the assets

 Equipment = R100 000
 Debtors = R 40 000
 Cash = R 10 000

Step 2: Identify the liabilities

 Creditors = R20 000

Substitute these amounts into the equation:

A =E+L
E =A-L
= R(100 000 + 40 000 + 10 000) - R20 000
= R130 000

Zebra Service's financial position can also be presented in the form of a balance sheet as
follow:

ZEBRA SERVICES BALANCE SHEET AS AT 30 NOVEMBER 20.1

ASSETS EQUITY LIABILITIES

Equipment R 100 000 Equity R130 000
Debtors R 40 000 Creditors 20 000
Cash in bank R 10 000

COMMENT

This balance sheet is in a basic form. Later we will deal with balance sheets in more
detail.

12
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

3.6. The double-entry principle

 The double-entry principle is based on the fact that every transaction affects two
or more items in the BAE.
 In principle it means that each transaction must be recorded in such a way that
the equation remains in balance.
 The dual effect which each transaction has on the elements of the BAE is the
fundamental principle on which all entries in an accounting system are based.

13
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Study unit 4
The financial result
Learning outcome
4.1. Introduction

In this study unit we discuss the second component of this primary goal, namely the
financial result of the entity, and indicate how it is reflected in the form of an Statement
of Financial Performance.

4.2. The financial result

 The financial result of an enterprise is measured in terms of the profit or loss

which the enterprise has made over a specific period, which is referred to as the
financial period and which is normally a year.
 An enterprise makes a profit when the income it has earned is more than the
expenditure it has incurred in generating or producing that income.
 The difference between the income and expenditure is known as the profit or
loss for the period.
 Profit is the owner's reward for the capital he or she has invested and the
entrepreneurial spirit he or she has shown.
 It therefore increases the equity. NB!!!

4.3. Income

 The objective of every enterprise is to earn as large an income as possible.

 Income = Revenue that results from ordinary activities like sales; fees earned;
interested received; Royalties; Rent income; Discount received; Commission
received; Bad Debts Recovered.

4.4. Expenditure

 Expenditure is incurred to earn income.

 Expenses: Rent expense; Depreciation; Administrative expenses; Advertising;
Municipal charges; Telephone expenses; Salaries and Wages; Insurance; Bank
Charges; Interest expenses; Cost of Sales; Discount Allowed to Debtors
 Losses: It decreases the economic benefit of economic benefit which does not
arise from normal activities of the entity.
 Example: Damages caused by natural disasters like rain; Fire; Loss of sale of non-
current assets.

14
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

4.5. Influence of profit or loss on equity

 Income (profit) increases and expenditure (losses) decreases the owner's

interest.

Equity = Capital + income – expenses!

Example

The financial position (BAE) of T Payn, an attorney, on 28 February 20.0 is as follows:

A= E +L

R50 000 = R30 000 + R20 000

For the year ended 28 February 20.1 he had the following income and expenditure:

1. Income earned R180 000

2. Salaries paid R100 000
3. Administrative costs R 20 000
4. Insurance paid R 10 000

Calculate T Payn's equity on 28 February 20.1.

Step 1: Calculate all income

Step 2: Calculate all expenses

Profit = Income - Expenditure

= R180 000 - R(100 000 + 20 000 + 10 000)
= R180 000 - R130 000
= R50 000

E = R30 000 + R50 000

= R80 000

COMMENTS

 Capital plus profit for the period together form the equity of the owner. See the
above exercise R(30 000 + 50 000) = R80 000.
 Profit for the period is income minus expenditure.

15
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

4.6. Statement of Financial Performance (financial performance)

 The financial performance is measured in the Statement of Financial

Performance of an entity.
 Examples of items which will appear under the different sub-headings in the
Statement of Financial Performance:

Revenue Other income Distribution , Finance Costs

administrative and other
expenses
Fees earned Credit losses recovered Advertising Interest on bank overdraft
Net sales Commission income Credit losses Interest on mortgage loan
Dividend income Bank Charges Interest paid on capital

Interest income Carriage on sales Interest on long term loans

Profit on sale of asset Delivery expenses Interest paid on capital

Rent income Depreciation Postage

Postage

Rent expense

Repairs

Telephone expense

Water and electricity

Stationery consumed

Nicks Plumbing Statement of Financial Performance for the

year ended 31 May 20.3
Notes* R
Revenue 2 89 000
Distribution, administrative and other expenses (30 000)
Wages 12 000
General expenses 18 000
Finance costs (3 000)
Interest expense 3 000
Profit for the period 56 000

* Notes to the financial statements will be explained at the end of the study unit!

16
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

4.7. Statement of changes in equity

Nicks Plumbing Statement of changes in equity

for the year ended 31 May 20.3

Capital: R

Balance as at 1 June 20.02 50 500

Net profit for the period 56 000
Drawings (65 000)
Balance as at 31 May 20.3 41 500

4.8. Accounting policies and explanatory notes

 Accounting policies and notes are prepared to give additional information on

items appearing in the financial statements
 Notes to the F/S will include the following:
o Accounting policy note – This note must state that the financial
statements comply with GAAP, and the bases of measurement and other
policies must be disclosed.
o There must be a note disclosing the source of the revenue.
o Also notes on the Fixed Assets

17
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

STUDY UNIT 5
The double-entry system & the accounting process
earning outcome
5.1. Introduction

 To make a double-entry correctly, you need a good working knowledge of the

appropriate names for different things in accounting and particularly the
concepts of “debit” and “credit”.

5.2. The double-entry system

 At this stage we are simply using the accounting equation as a teaching aid to
explain the analysis of transactions.
 The BAE does not form part of a formal accounting system.
 To make a double-entry you must:
o Think about what the effect of the transaction is going to be on the BAE,
in other words, how it is going to affect the financial position of the
enterprise.
o Identify the components (accounts) which are involved, that is the
components which will have the desired effect on the equation.
o Determine which account(s) has/have to be debited and which account(s)
has/have to be credited.
o Be sure that the amount(s) debited are equal to the amount(s) credited.
o Be able to indicate the date of the transaction.
o Indicate the name of the contra ledger account in the account in which
you are doing the entry. The contra account is the other account which is
involved in the transaction: the one account refers to the other.
o Indicate the folio number of the subsidiary journal.

5.3. The effect of transactions on the basic accounting equation (BAE)

 A transaction is an agreed upon transfer of value from one party to another

which affects (changes) the amount, nature or composition of an enterprise's
assets, liabilities or equity.
 In other words it affects the BAE. Entering into a transaction gives rise to the first
step in the accounting cycle, namely the completion of a source document.
 Transactions may:
o affect assets and/or equity and/or liabilities
o generate income or give rise to expenditure

18
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

5.4. Transactions which affect only assets, equity and liabilities

5.4.1. Capital contributions

Transaction:

1 Feb 20.1

T Tom decided to start a carpet-cleaning business called Fix-'n-Mat. He withdrew R130

000 from his personal savings account and deposited it in Fix-'n-Mat's bank account.

Analysis:

(1) The asset “Bank” increases by R130 000 and there is now money in Fix-'n-Mat's
bank account.
(2) The owner, T Tom, provides Fix-'n-Mat with funds and increases his interest in
Fix-'n-Mat. The equity “Capital” increases by R130 000.

Owner’s Equity = Assets – Liabilities

General Ledger Effect on equation

Acc. Debited Acc. Credited Assets Owners Equity Liabilities
1. Bank Capital +130 000 + 130 000 0

5.4.2. Acquisition of loans

Transaction:

2 Feb 20.1

Fix-'n-Mat obtained a loan of R25 000 with a payback period of more than a year from
ABC Bank. The amount was paid into its bank account.

Analysis:

(1) The asset “Bank” increases by R25 000.

(2) ABC Bank now has a claim against or an interest in Fix-'n-Mat and a liability,
namely a “Loan: ABC Bank”, comes into being.

19
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Owner’s Equity = Assets – Liabilities

General Ledger Effect on equation

Acc. Debited Acc. Credited Assets Owners Equity Liabilities
1. Bank Capital +130 000 + 130 000 0
2. Bank Loan: ABC Bank +25 000 0 +25 000
Total: 155 000 130 000 25 000

5.4.3. Purchase of assets for cash

Transaction:

6 Feb 20.1

Fix-'n-Mat bought equipment from XY Furnishers for R100 000 and paid by cheque.

Analysis:

(1) The asset “Bank” decreases by R100 000 since money has been withdrawn.
(2) The asset “Equipment” increases.

Owner’s Equity = Assets – Liabilities

General Ledger Effect on equation

Acc. Debited Acc. Credited Assets Owners Equity Liabilities
1. Bank Capital +130 000 + 130 000 0
2. Bank Loan: ABC Bank +25 000 0 +25 000
6. Equipment Bank -100 000
+100 000
Total: 155 000 130 000 25 000

5.4.4. Buying assets on credit (debt)

Transaction:

10 Feb 20.1

Fix-'n-Mat bought furniture for R2 000 on credit from Joc Limited.

20
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Analysis:

(1) The asset “Furniture” increases by R2 000.

(2) A liability, “Creditor”, comes into being.

Owner’s Equity = Assets – Liabilities

General Ledger Effect on equation

Acc. Debited Acc. Credited Assets Owners Equity Liabilities
1. Bank Capital +130 000 + 130 000 0
2. Bank Loan: ABC Bank +25 000 0 +25 000
6. Equipment Bank -100 000
+100 000
10. Furniture Creditor Control +2 000 +2 000
Total: 157 000 130 000 27 000

5.4.5. Payments to creditors

Transaction:

11 Feb 20.1

Fix-'n-Mat paid Joc Limited's account of R2 000.

Analysis:

(1) The asset “Bank” decreases by R2 000.

(2) The liability, “Creditors”, decreases by R2 000.

Owner’s Equity = Assets – Liabilities

General Ledger Effect on equation

Acc. Debited Acc. Credited Assets Owners Liabilities
Equity
1. Bank Capital +130 000 + 130 000 0
2. Bank Loan: ABC Bank +25 000 0 +25 000
6. Equipment Bank -100 000
+100 000
10. Furniture Creditor Control +2 000 +2 000
11. Creditor Control Bank - 2 000 - 2 000
Total: 155 000 130 000 25 000

21
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

5.4.6. Withdrawals by owner

Transaction:

12 Feb 20.1

The owner withdrew R1 000 for his own use.

Analysis:

(1) Fix-'n-Mat's “Bank” decreases by R1 000.

(2) T Tom's “Capital” (equity) in Fix-'n-Mat decreases by R1 000.

Owner’s Equity = Assets – Liabilities

General Ledger Effect on equation

Acc. Debited Acc. Credited Assets Owners Liabilities
Equity
1. Bank Capital +130 000 + 130 000 0
2. Bank Loan: ABC Bank +25 000 0 +25 000
6. Equipment Bank -100 000
+100 000
10. Furniture Creditor Control +2 000 +2 000
11. Creditor Control Bank -2 000 - 2 000
12. Drawings Bank -1 000 -1 000
Total: 154 000 129 000 25 000

5.5. Transactions which give rise to income and expenditure

5.5.1. Income (cash)

Transaction:

13 Feb 20.1

Fix-'n-Mat provided services for a client S Silver and received a cheque for R1 000.

Analysis:

(1) The asset “Bank” increases by R1 000.

(2) The fee which Fix-'n-Mat earns is an income. Equity therefore increases by R1
000.

22
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Owner’s Equity = Assets – Liabilities

General Ledger Effect on equation

Acc. Debited Acc. Credited Assets Owners Liabilities
Equity
1. Bank Capital +130 000 + 130 000 0
2. Bank Loan: ABC Bank +25 000 0 +25 000
6. Equipment Bank -100 000
+100 000
10. Furniture Creditor Control +2 000 +2 000
11. Creditor Control Bank -2 000 - 2 000
12. Drawings Bank -1 000 -1 000
13. Bank Fees Earned +1 000 +1 000
Total: 155 000 130 000 25 000

5.5.2. Expenditure (cash)

Transaction:

16 Feb 20.1

Fix-'n-Mat paid wages by cheque, R800.

Analysis:

(1) The asset “Bank” decreases by R800.

(2) Wages are an expenditure item and the equity decreases by R800.

Owner’s Equity = Assets – Liabilities

General Ledger Effect on equation

Acc. Debited Acc. Credited Assets Owners Liabilities
Equity
1. Bank Capital +130 000 + 130 000 0
2. Bank Loan: ABC Bank +25 000 0 +25 000
6. Equipment Bank -100 000
+100 000
10. Furniture Creditor Control +2 000 +2 000
11. Creditor Control Bank -2 000 - 2 000
12. Drawings Bank -1 000 -1 000
13. Bank Fees Earned +1 000 +1 000
16. Wages Bank - 800 - 800
Total: 154 200 129 200 25 000

23
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

5.5.3. Income (credit)

Transaction:

18 Feb 20.1

Fix-'n-Mat provided services worth R6 000 to C Canon on credit.

Analysis:

(1) C Canon becomes a debtor of Fix-'n-Mat. The asset “Debtors” comes into being
and increases by R6 000.
(2) “Fees earned” are an income item and equity increases by R6 000.

Owner’s Equity = Assets – Liabilities

General Ledger Effect on equation

Acc. Debited Acc. Credited Assets Owners Liabilities
Equity
1. Bank Capital +130 000 + 130 000 0
2. Bank Loan: ABC Bank +25 000 0 +25 000
6. Equipment Bank -100 000
+100 000
10. Furniture Creditor Control +2 000 +2 000
11. Creditor Control Bank -2 000 - 2 000
12. Drawings Bank -1 000 -1 000
13. Bank Fees earned +1 000 +1 000
16. Wages Bank - 800 - 800
18. Debtor Control Fees earned + 6 000 + 6 000
Total: 160 200 135 200 25 000

5.5.4. Expenditure (credit)

Transaction:

21 Feb 20.1

Fix-'n-Mat placed an advertisement in a local newspaper for R200. Payment was due
only in 30 days.

24
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Analysis:

(1) The liability “Creditors” increases by R200.

(2) “Advertisements” are an expenditure item and the equity decreases by R200.

General Ledger Effect on equation

Acc. Debited Acc. Credited Assets Owners Liabilities
Equity
1. Bank Capital +130 000 + 130 000 0
2. Bank Loan: ABC Bank +25 000 0 +25 000
6. Equipment Bank -100 000
+100 000
10. Furniture Creditor Control +2 000 +2 000
11. Creditor Control Bank -2 000 - 2 000
12. Drawings Bank -1 000 -1 000
13. Bank Fees earned +1 000 +1 000
16. Wages Bank - 800 - 800
18. Debtor Control Fees earned + 6 000 + 6 000
21. Advertisements Creditor Control - 200 + 200
Total: 160 200 135 000 25 200

5.5.5. Payments received from debtors

Transaction:

28 Feb 20.1

C Canon settled his account in part, R2 000.

Analysis:

(1) The asset “Bank” increases by R2 000.

(2) The asset “Debtors” decreases by R2 000.

General Ledger Effect on equation

Acc. Debited Acc. Credited Assets Owners Liabilities
Equity
1. Bank Capital +130 000 + 130 000 0
2. Bank Loan: ABC Bank +25 000 0 +25 000
6. Equipment Bank -100 000
+100 000
10. Furniture Creditor Control +2 000 +2 000
11. Creditor Control Bank -2 000 - 2 000

25
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

12. Drawings Bank -1 000 -1 000

13. Bank Fees earned +1 000 +1 000
16. Wages Bank - 800 - 800
18. Debtor Control Fees earned + 6 000 + 6 000
21. Advertisements Creditor Control - 200 + 200
28. Bank Debtor Control + 2 000
- 2 000
Total: 160 200 135 000 25 200

5.6. Summary of transactions

Effect on equation
Assets Owners Equity Liabilities
+130 000 + 130 000 0
+25 000 0 +25 000
-100 000; +100 000
+2 000 +2 000
-2 000 - 2 000
-1 000 -1 000
+1 000 +1 000
- 800 - 800
+ 6 000 + 6 000
- 200 + 200
+ 2 000; - 2 000
160 200 135 000 25 200

26
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

5.7. Basic form of a Financial Position Statement

FIX-'N-MAT
FINANCIAL POSITION STATEMENT AS AT 28 FEBRUARY 20.1

ASSETS NOTES R

Non-current assets 102 000

Equipment 100 000
Furniture 2 000

Current assets 58 200

Trade receivables 4 000
Cash and cash Equivalents 54 200

Total Assets 160 200

EQUITY AND LIABILITIES

Total equity 135 000

Capital 135 000

Non-current liabilities 25 000

Long term loan: ABC Bank 25 000

Current Liabilities 200

Trade and other payables 200

Total equity and liabilities 160 200

5.8. The general ledger account

 Up to now we have dealt only with asset, liability and equity items appearing in a
balance sheet or BAE.
 We recorded transactions in columns in the summary of the BAE to show their
effect on a specific asset, equity or liability item.
 We had columns for debtors, furniture, equipment, capital and so on.
 But it is impractical to prepare a new equation after every new transaction. Just
think what would happen in a business with thousands of transactions!
 To avoid this we are now going to open an account in the general ledger for
every column of the BAE.

27
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

 We speak of the general ledger because there are also subsidiary ledgers, which
we will explain later.
 An account is opened in the general ledger for every asset, liability and equity
item.
 Every account appears on its own on a page in the ledger and each account is
given a number, which is known as a folio number.
 An account is an accounting record in which all transactions relating to a specific
item are recorded.

5.8.1. Assets

 Includes non-current assets and current assets

 Fixed (non-current) = Ground; Buildings; Equipment; Furniture; Computers;
 Current assets = Bank; Debtors; SARS; Petty cash (Bank and Petty cash are added
together to form “Cash & Cash Equivalents”

5.8.2. Equity and liabilities

 Equity = Everything that has to do with profit/loss (income and expenditure) as

well as contributions from the owner (capital) and drawings from the owner
 Liabilities = Non-current liabilities (Long term – example loan longer than period
of year
 Current liabilities = Creditors; Bank (if in overdraft); SARS

5.9. Balancing an account

 With what you have learnt about an account, we now know that an account may
have entries on the debit or the credit side or on both sides.

Bank (B4)
2000 2001
Jun 1 Balance b/d 25 400.00 Feb 28 Total payments CPJ 3 252.15
30 Total receipts CRJ 52 740.75 Balance b/o 74 888.60
78 140.75 78 140.75
2000
July 1 Balance b/d 74 888.60

28
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

5.10. Schematic representation

Equity = Assets - Liabilities

DR CR DR CR DR CR
Equity Accounts
Expenditure Accounts Income Accounts Asset Accounts Liability Accounts

+ - - + + - - +

Debit to increase Credit to increase Debit to increase Credit to increase

Balance = Debit Balance = Credit Balance = Debit Balance = Credit

Balances closed off to:

1. Trading account and/or
2. Profit & Loss account
3. Profit (loss) to Capital Account

Drawings Capital
+ - - +
Debit to increase Credit to decrease Debit to decrease Credit to increase

Prepare:1. Statement of Financial Performance; 2. Statement of

Changes in Equity Use these balances and result of Statement of
Changes in Equity to prepare:
1. Financial Position Statement and
Notes

29
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

30
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

5.11. Recording of transactions in ledger accounts

 When we enter a transaction in a ledger account, we have to ask ourselves:

Which accounts are affected?
 In answer to this question, we are now going to record the transactions in
paragraphs 5.4 and 5.5 in the ledger accounts (T-accounts).

(5.4.1) (5.4.5)

Bank Bank
130 000 2 000

Capital Creditor Control (Joc)

130 000 2 000

(5.4.2) (5.4.6)

Bank Bank
25 000 1 000

Loan Drawings
25 000 1 000

(5.4.3) (5.5.1)

Bank Bank
100 000 1 000

Equipment Income (fees)

100 000 1 000

(5.4.4) (5.5.2)

Furniture Bank
2 000 800

Creditor Control (Joc) Wages

2 000 800

31
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

(5.5.3) Advertisements
200
Debtor Control (C Canon)
6 000
(5.5.5)
Income (Fees)
Bank
6 000
2 000

(5.5.4) Debtor Control (C Canon)

2 000
Creditor Control (News paper)
200

5.12. The general ledger

 In practice all transactions which affect, say, bank are summarised in one
account for bank.
 Each one is closed off and the balance determined.

General Ledger of Fix -'n - Mat

Balance Sheet Section
Bank (B1)
20.1 20.1
Feb 1 Capital B2 130 000 Feb 6 Equipment B5 100 000
2 Loan: ABC Bank B3 25 000 11 Creditors B6 2 000
13 Fees earned N1 1 000 12 Drawings B7 1 000
28 Debtors B4 2 000 16 Wages N3 800
28 Balance c/d 54 200
158 000 158 000
20.1
Mar 1 Balance b/d 54 200

Capital Contribution (B2)

20.1
Feb 1 Bank B1 130 000
Mar 1 Balance b/d 130 000

32
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Loan: ABC Bank (B3)

20.1
Feb 2 Bank B1 25 000
Mar 1 Balance b/d 25 000

Debtors' Control (B4)

20.1 20.1
Feb 18 Fees earned N1 6 000 Feb 28 Bank B1 2 000
Balance c/d 4 000
6 000 6 000
Mar 1 Balance b/d 4 000

Equipment (B5)
20.1
Feb 6 Bank B1 100 000
Mar 1 Balance b/d 100 000

Creditors Control (B6)

20.1 20.1
Feb 11 Bank B1 2 000 Feb 10 Furniture B8 2 000
28 Balance c/d 200 21 Advert N2 200
2 200 2 200
Mar 1 Balance b/d 200

Drawings (B7)
20.1
Feb 12 Bank B1 1 000
Mar 1 Balance b/d 1 000

Furniture (B8)
20.1
Feb 10 Bank B1 2 000
Mar 1 Balance b/d 2 000

GOLDEN RULE
 Equity (eg Capital) and Liabilities (eg Creditors) increase on the credit (Cr) side and decrease on
the debit (Dr) side of the account.
GOLDEN RULE
 Income (eg sales) increases equity and are credited (Cr) to the particular income account.
GOLDEN RULE
 Expenses (eg wages) decreases equity and are debited (Dr) to the particular expense account.

33
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Nominal Section
Fees earned (N1)
20.1
Feb 13 Bank B1 1 000
18 Debtors B4 6 000
Mar 1 Balance b/d 7 000
Advertisement (N2)
20.1
Feb 21 Creditors B6 200
Mar 1 Balance b/d 200
Wages (N3)
20.1
Feb 16 Bank B1 800
Mar 1 Balance b/d 800

 Note that the details of an item in a ledger account are simply the name of the
other ledger account involved in the transaction.
 This other ledger account is known as the contra ledger account.

5.13. The trial balance

 A trial balance is a list of the balances brought down (b/d) of the accounts in the
general ledger on a specific date.
 The following trial balance has been prepared from the ledger accounts in
paragraph 5.13.

FIX-'N-MAT - TRIAL BALANCE AS AT 28 FEBRUARY 20.1

Folio Dr Cr
Balance Sheet Section:
Bank B1 54 200
Capital B2 130 000
Loan: ABC Bank B3 25 000
Debtors control B4 4 000
Equipment B5 100 000
Creditors control B6 200
Drawings B7 1 000
Furniture B8 2 000
Nominal Section:
Fees N1 7 000
Advertisements N2 200
Wages N3 800
162 200 162 200

34
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Note that an account with a debit balance (brought down) is shown on the debit side of
the trial balance and an account with a credit balance (brought down) on the credit side.

1. If we compare the totals of the trial balance with the totals of the columns of the
BAE (see paragraph 5.6), we note the following:

a. Capital in the BAE is R129 000. In the trial balance capital, R130 000 (Cr),
and drawings, R1 000 (Dr), are shown separately. This also gives a net
total of R129 000.

b. Income less expenditure = R6 000. If the expenses in the trial balance,

namely wages and advertisements with debit balances of R800 and R200
respectively, are subtracted from the income, namely fees with a credit
of R7 000, the net amount is R(7 000 - 1 000) = R6 000 credit, which
corresponds to the income in the BAE.

5.14. Preparing financial statements

 In this module we deal with the Financial Position Statement, Statement of

Financial Performance and Statement of changes in equity as well as some of the
notes.
 As mentioned previously, the trial balance serves as a basis for preparing an
Statement of Financial Performance, Statement of changes in equity, and
Financial Position Statement.
 The trial balance represents the information in the ledger.
 The Statement of Financial Performance shows the enterprise's financial result
and the Financial Position Statement shows its financial position.

5.14.1. Statement of Comprehensive Income

We now use the information from the trial balance in paragraph 5.13 above to prepare
an Statement of Financial Performance for Fix-'n-Mat.

FIX-'N-MAT
STATEMENT OF COMPREHENSIVE INCOME FOR THE MONTH ENDED 28 FEBRUARY 20.1
R
Revenue 7 000
Distribution, administrative and other expenses (1 000)
Wages 800
General expenses 200

Profit for the month 6 000

35
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

 Note the title. An Statement of Financial Performance is prepared for a period

ended, not on a certain date.
 The profit for the month as determined in the Statement of Financial
Performance corresponds to the income/expenditure column in the BAE.
 The income and expenditure accounts are called nominal accounts.

5.14.2. The Statement of changes in equity

 This statement shows all the changes in equity which have occurred during the
financial period.
 The purpose of the statement of changes in equity is to reconcile the equity at
the beginning of the financial period with the equity at the end of the financial
period.
 The balance of the equity at the end of the financial period is then shown in the
balance sheet.

FIX-'N-MAT
STATEMENT OF CHANGES IN EQUITY FOR THE MONTH ENDED
28 FEBRUARY 20.1

Capital: R

Balance as at 1 February 20.01 130 000

Net profit for the month 6 000
Drawings (1 000)
Balance as at 28 February 20.01 135 000

 Note that the statement of changes in equity is prepared for a period ended and
not on a specific date.
 The equity at the end of the month corresponds to the net total in the BAE in
paragraph 5.6.

GOLDEN RULE
The balance at the end of the period on the statement of changes in equity must be the
same as the “capital” reflected in the balance sheet.

5.14.3. The Financial Position Statement

 Before we prepare a balance sheet, please refer to paragraph 3.5 in study unit 3
and also to the Financial Position Statement for Fix-'n-Mat which we compiled in
paragraph 5.7.

36
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

 We will now show the balance sheet of Fix-'n-Mat in narrative form and in
compliance with GAAP.

FIX-'N-MAT
STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.1

ASSETS NOTES R

Non-current assets 102 000

Property, plant and Equipment 3 102 000

Current assets 58 200

Trade receivables 4 000
Cash and cash Equivalents (Bank) 54 200

Total Assets 160 200

EQUITY AND LIABILITIES

Total equity 135 000

Capital 135 000

Total Liabilities 25 200

Non-current liabilities 25 000
Long term borrowings 25 000

Current Liabilities 200

Trade and other payables 200

Total equity and liabilities 160 200

5.14.4. Notes

 Additional information on items appearing in the financial statements is given in

the notes to the financial statements.
 These explanatory notes are shown after the cash flow statement. We do not
deal with the cash flow statement in this module and will therefore show the
notes after the Statement of Financial Performance.
 Note number 1 is used to reveal the accounting policies of the business.
 Now let us prepare the notes of Fix-'n-Mat.

37
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

FIX 'N MAT

NOTES FOR THE MONTH ENDED 28 FEBRUARY 20.1

1. Accounting policy.

The financial statements have been prepared on the historical cost basis and
comply with Generally Accepted Accounting Practice.

2. Revenue represents fees earned for services rendered to clients.

3. Property, plant and equipment.

Property, Plant & Equipment Equipment Furniture Total

R R R

Carrying amount: 1 Feb. 20.1 - - -

Cost - - -
Accumulated depreciation - - -

Additions 100 000 2 000 102 000

Depreciation * - - -

Carrying amount: 28 Feb 20.01 100 000 2 000 102 000

Cost 100 000 2 000 102 000

Accumulated depreciation - - -

*No depreciation was written off during this financial period.

5.15. Summary

 We began by explaining the Financial Position Statement (balance sheet) and

financial result (Statement of Financial Performance) and then went back to how
we enter into a transaction to set the accounting process in motion.

38
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

5.16. Exercises and Solutions

The following transactions during February 20.1 relate to G Goodman, a dentist:

Feb 20.1

1. G Goodman deposited as opening capital, R50 000.

2. G Goodman transferred personal equipment to his firm, R6 000
4. Paid rent for February by cheque, R8 000
6. Bought furniture on credit from Badman, R12 000
8. Rendered services on credit to R Rudman, R30 000
12. G Goodman drew a cheque for private use, R1 000
16. Issued a cheque to Badman in part payment of their account,
R5 000
20. Rendered services for cash to C Coleman, R7 000
27. Received payment from R Rudman on his account, R1 300
28. Paid the following by cheque:
(i) Salaries R10 000
(ii) Wages R2 000
(iii) Telephone expense R500

Required:

Record the above transactions using a table as illustrated in the following example:

28 Feb 20.1

G Goodman paid the water and electricity account by cheque, R600.

Date General ledger ASSETS EQUITY LIABILITIES

20.1 Account Account Dr Cr Dr Cr Dr Cr
Feb debited credited
R R R R R R
28 Water & electricity Bank 600 600

39
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Solution

Date General ledger A = E + L

20.1 Feb Account debited Account credited Dr Cr Dr Cr Dr Cr

R R R R R R
1 Bank Capital 50 000 50 000
2 Equipment Capital 6 000 6 000
4 Rent expenses Bank 8 000 8 000
6 Furniture B Badman 12 000 12 000
8 R Rudman Fees earned 30 000 30 000
12 Drawings Bank 1 000 1 000
16 B Badman Bank 5 000 5 000
20 Bank Fees earned 7 000 7 000
27 Bank R Rudman 1 300 1 300
28 Salaries Bank 10 000 10 000
Wages Bank 2 000 2 000
Telephone expense Bank 500 500

Exercise

The following transactions during October 20.1 relate to Witblits Electricians:

1. W Blits, the owner, deposited as opening capital, R10 000

Obtained loan from SA Bank, R 6 000
3. Bought equipment on credit from Sparks Dealers, R1 000
9. Issued a cheque for an advertisement in a local newspaper, R200
12. Paid the telephone account by cheque, R75
13. Received a cheque from H House for services rendered, R500
17. Drew a cheque for private use, R2 000
24. As an additional capital contribution W Blits transferred his motor vehicle to the
business, R9 000
27. Paid salaries by cheque, R2 000
30. Issued a cheque to SA Bank as a repayment on the loan, R1 500

Required:

Prepare the following in the books of Witblits Electricians:

(1) The appropriate ledger accounts which reflect the above transactions, properly
balanced/closed on 31 October 20.1. NB: Indicate the correct contra ledger
account.
(2) The trial balance on 31 October 20.1.

40
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Solution

WITBLITS ELECTRICIANS

1. General ledger

Capital: W Blits
20.1
Oct 1 Bank 10 000
Oct 24 Motor Vehicles 9 000
19 000

Drawings: W Blits
20.1
Oct 17 Bank 2 000

Equipment at cost Price

20.1
Oct 3 Spark Dealers 1 000

Vehicles at cost Price

20.1
Oct 24 Capital 9 000

Bank
20.1 20.1
Oct 1 Capital 10 000 Oct 9 Advertisement 200
Long term loan 6 000 12 Telephone 75
13 Fees earned 500 17 Drawings: Blits 2 000
27 Salaries 2 000
30 Long term loan 1 500
31 Balance c/d 10 725
16 500 16 500
20.1
Nov 1 Balance b/d 10 725

Long Term Loan (SA Bank)

20.1 20.1
Oct 30 Bank 1 500 Oct 1 Bank 6 000
31 Balance c/d 4 500
6 000 6 000

Nov 1 Balance b/d 4 500

Spark Dealers
20.1
Oct 3 Equipment 1 000

41
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Advertisements
20.1
Oct 9 Bank 200

Salaries
20.1
Oct 27 Bank 2 000

Fees earned
20.1
Oct 13 Bank 500

Telephone
20.1
Oct 12 Bank 75

WITBLITS ELECTRICIANS

2. Trial Balance as at 31 October 20.1

Dr Cr
Capital – W Blits 19 000
Drawings 2 000
Equipment at cost 1 000
Vehicles at cost 9 000
Bank 10 725
Long term loan (SA Bank) 4 500
Spark Dealers 1 000
Fees earned 500
Advertisements 200
Salaries 2 000
Telephone expense 75
25 000 25 000

Exercise

The following transactions during March 20.1 relate to P Victor, an attorney:

3. P Victor opened his firm of attorneys and deposited as opening capital, R12 000
4. Paid rent for March, R1 000
5. Bought a photocopier from Foto-Kop on credit, R8 000
Paid Foto-Kop by cheque, R2 000
15. Rendered services on credit to U Wright, R3 000
18. Received a cheque from U Wright, R1 800
21. Bought stationery from AA Dealers on credit, R3 000
23. Deposited cash received for services rendered to U Wrong, R1 200
25. Paid on account to AA Dealers, R1 500

42
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

30. Paid salaries by cheque, R400

31. P Victor drew a cheque for private use, R1 000

Required:

(1) Record the above transactions using a table as illustrated in the following
example:

C Canon settled his account in part, R2 000.

Assets Owners Equity Liabilities

+ 2 000 0 0
- 2 000

(2) Prepare the statement of changes in equity of P Victor for the month ended 31
March 20.1.
(3) Prepare P Victor's Financial Position Statement as at 31 March 20.1 in narrative
form.
(4) Show the accounting policy and the property, plant and equipment notes.

Solution

Assets Owners Equity Liabilities

Date Bank Debtors Equipment Capital Income/Exp Creditors
Mar
3 +12 000 +12 000
4 -1 000 -1 000
5 +8 000 +8 000
-2 000 -2 000
15 +3 000 +3 000
18 +1 800 -1 800
21 -3 000 +3 000
23 +1 200 +1 200
25 -1 500 -1 500
30 -400 -400
31 -1 000 -1 000

43
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

P VICTOR
STATEMENT OF CHANGES IN EQUITY FOR THE MONTH ENDED
31 MARCH 20.1

Capital: R

Capital contribution of owner 12 000

Loss for the month (200)
Drawings (1 000)
Balance as at the end of the month 10 800

P VICTOR
FINANCIAL POSITION STATEMENT AS AT 31 MARCH 20.1

ASSETS NOTES R

Non-current assets 8 000

Property, plant and Equipment 8 000

Current assets 10 300

Trade receivables 1 200
Cash and cash Equivalents (Bank) 9 100

Total Assets 18 300

EQUITY AND LIABILITIES

Total equity 10 800

Capital 10 800

Total Liabilities 7 500

Non-current liabilities
Long term borrowings

Current Liabilities 7 500

Trade and other payables 7 500

Total equity and liabilities 18 300

44
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

P VICTOR
NOTES FOR THE MONTH ENDED 31 MARCH 20.1

1. Accounting policy.

The financial statements have been prepared on the historical cost basis and
comply with Generally Accepted Accounting Practice.

2. Revenue represents fees earned for services rendered to clients.

3. Property, plant and equipment.

Property, Plant & Equipment Equipment Total

R R

Carrying amount: 1 Mar. 20.1 - -

Cost - -
Accumulated depreciation - -

Additions 8 000 8 000

Depreciation * - -

Carrying amount: 31 Mar. 20.01 8 000 8 000

Cost 8 000 8 000

Accumulated depreciation - -

45
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Study unit 6
Processing accounting data

6.1. Introduction

 By now you should know what effect different transactions have on the BAE.
 In this study unit, the books of first entry will be discussed.

6.2. Accounting Cycle

1. Capturing of transactions in different journals

CRJ, CPJ, PJ & PRJ, SJ & SRJ, General Journal

2. Posting of totals of above mentioned journals to the general ledger

3. Bank Reconciliation

4. Compiling of Trail Balance to see if DT = CT

(If not, go back and investigate)

5. Compiling of Statement of Financial Performance & Position

6. Analysis and interpretation of statements

7. Decision making by management

6.3. Book of first entry - Journals

 Because of the large number of transactions that take place in an enterprise, it is

not practical to record each transaction directly in the ledger.
 This makes the ledger very bulky and unmanageable and in a manual system it
means that only one person can write up the books.
 This led to the use of subsidiary journals or books of first entry in which
transactions of the same type are grouped together and analysed before being
recorded in summarised form in the ledger.
 A journal is thus a link between source documents and the ledger. No
transaction may be recorded in the ledger before it has been recorded in a
journal.

46
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

6.4. Types of Journals

 There are various types of journals or books of first entry but for the time being
we will be concentrating on the following:
o the cash receipts and cash payments journals in which all cash
transactions are recorded
o the purchases journal and purchases returns journal in which all credit
purchases and returns of credit purchases are recorded
o the sales journal and sales returns journal in which all credit sales and
returns of credit sales are recorded
o the general journal in which transactions are recorded which are not
recorded in one of the other journals, for example the correction of
errors and the writing off of bad debts

6.5. Cash Journals

6.5.1. Cash receipt journal

 All moneys received which is deposited in the enterprise's bank account is

recorded in the cash receipts journal.
 At the end of the month only one amount, which represents the entire month's
cash receipts, is debited to the bank account.
 The other column totals represent the contra accounts and are credited to such
accounts.
 We will use the transactions in unit 5: The CRJ and ledger would look as follow.

FIX-A-Mat
Cash Receipt Journal – February 20.1 CRJ 1

Sundry Accounts
Analysis of
Doc Day Details receipts Bank Fees earned Details Fol Amount
Rec 1 1 T Tom 130 000 Capital B2 130 000
2 1 ABC Bank 25 000 155 000 ABC Loan B3 25 000
3 13 S Silver 1 000 1 000 1 000
4 28 C Canon 2 000 2 000 C Canon B4 2 000
158 000 1 000 157 000
B1 N1

47
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

General Ledger Postings from CRJ to General Ledger

Bank (B1)
20.1
Feb 28 Receipts CRJ1 158 000

Fees earned (N1)

20.1
Feb 13 Bank B1 1 000
C Canon (B4)
20.1
Feb 28 Bank CRJ 2 000

Loan: ABC Bank (B3)

20.1
Feb 2 Bank CRJ 25 000

Capital Contribution (B2)

20.1
Feb 1 Bank CRJ 130 000

Remarks:

 Source documents for entries in the cash receipts journal are the cash register
roll, duplicate receipts, duplicate cash invoices and duplicate deposit slips.
 The cash receipts for the month are recorded and analysed in date order.
 Each amount received during the day is not banked immediately. Receipts are
first recorded in the analysis of receipts column and the amount which is
banked for that day is recorded in the bank column.
 Check the addition in the columns by cross-casting. In other words, when the
totals of the analysis columns are added, they must equal the total in the bank
column.
 Entries in the sundry accounts column are posted individually to the general
ledger.
 Only the totals of the other columns are posted.
 The cash receipts journal is a book of first entry.
 The double-entry principle has to be applied in the general ledger.
 The amounts are not recorded individually again in the bank account in the
general ledger.
 Note that the credit entries in the accounts add up to R158 000, which
corresponds to the debit entry in the bank account.

48
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

 The number and headings of columns in the journal will depend on the
frequency of occurrence of transactions and can differ from one enterprise to
the other.

6.5.2. Cash payments journal

 All cash payments that are payments by cheque, are recorded in the cash
payments journal.
 At the end of the month only one amount, which represents the entire month's
cash payments, is credited to the bank account.
 The other column totals represent the contra accounts and are debited to such
accounts.
 The amounts in the sundry accounts column are debited individually to the
relevant accounts.
 We will use the transactions in unit 5: The CPJ and ledger would look as follow.

FIX-A-Mat
Cash Payments Journal – February 20.1 CPJ 1

Sundry Accounts

Chq Day Details Bank Wages Details Fol Amount

1 6 XY Furnishers 100 000 Equipment B5 100 000
2 11 Joc Limited 2 000 Joc Limited B6 2 000
3 12 Cash 1 000 Drawings B7 1 000
4 16 Cash 800 800
103 800 800 103 000
B1 N2

General Ledger Postings from CRJ to General Ledger

Bank (B1)
20.1 20.1
Feb 28 Receipts CRJ 158 000 Feb 28 Payments CPJ 103 800

Equipment (B5)
20.1
Feb 6 Bank CPJ 100 000

49
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Joc Limited (B6)

20.1
Feb 11 Bank CPJ 2 000

Drawings (B7)
20.1
Feb 12 Bank CPJ 1 000

Wages (N3)
20.1
Feb 16 Bank CPJ 800

C Canon (B4)
20.1
Feb 28 Bank CRJ 2 000

Loan: ABC Bank (B3)

20.1
Feb 2 Bank CRJ 25 000

Capital Contribution (B2)

20.1
Feb 1 Bank CRJ 130 000

The complete bank account in the general ledger for February would be as follow:

Bank (B1)
20.1 20.1
Feb 28 Receipts CRJ 158 000 Feb 28 Payments CPJ 103 800
28 Balance c/d 54 200
158 000 158 000
20.1
Mar 1 Balance b/d 54 200

Note that this balance is the same as the bank balance we calculated using the BAE in
paragraph 5.6 and the bank account in paragraph 5.12 of study unit 5.

50
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Remarks:

 Source documents for entries in the cash payments journal are cheque
counterfoils and debit notes, or the bank statement issued by the bank.
 Entries are recorded and analysed in the cash payments journal in the same
order as the cheque numbers.
 The amount which is written on the cheque is the amount which is recorded in
the bank column.
 Check whether the adding of the columns is correct by cross-casting. In other
words, when the totals of the analysis columns are added, they must equal the
total of the bank column.
 Entries in the sundry accounts column are posted individually to the general
ledger.
 Only the totals of the other columns are posted.
 The amounts are not recorded individually again in the bank account in the
general ledger.
 The cash payments journal is a book of first entry. The double-entry principle has
to be applied in the general ledger.
 More analysis columns can be included as is required by the organisation.

6.6. Credit journals and the general journal

6.6.1. Introduction

 In many business enterprises goods are bought and sold on credit. In the
process, accounts have to be opened for debtors and creditors.
 If all these accounts are included in the general ledger, the same sort of problem
arises that we have already mentioned - the ledger becomes too bulky and
unmanageable and in a manual system only one person can write up the books.
 For this reason a debtor’s ledger and a creditor’s ledger are opened in which the
individual debtors and creditors accounts are kept.
 A single account is then held in the general ledger for debtors, namely a debtors
control account, and one for creditors, namely a creditors control account.
 This means that the entire accounting system is adapted to make provision for
the control accounts.
 In the cash receipts and the cash payments journal provision is made for
additional columns for debtors control and creditors control.
 You can read more about the debtors control and the creditors control accounts
in study units to follow.

51
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

6.6.2. Inventory systems

 We distinguish between the periodic inventory system and the perpetual

inventory system.
 At this stage all you need to know is that inventory in trade which is purchased
has to be debited to a purchases account if a periodic system is being used.
 Provision must therefore be made for a purchases column in the subsidiary
journal.
 If a perpetual inventory system is used, inventory in trade is debited to the
inventory account and an inventory column is required instead of a purchases
column in the subsidiary journals.

6.6.3. Purchases journal and purchases returns journal

 Merchandise purchased on credit is recorded in the purchases journal.

 At the end of the month only the total credit purchases for the month are
debited to the purchases account and credited to the creditors control account.
 If some of the goods are returned, they are recorded in the purchases returns
journal.
 NB: For the purpose of this module, only merchandise purchased on credit is
recorded in the purchases journal.
 All other credit purchases are recorded in the general journal.
 Trade discount is often allowed by a wholesaler to a retailer.
 The discount percentage that is upon, is calculated and deducted on the cash or
credit invoice.
 The net amount on the invoice is recorded as the amount of purchases in the
books of the purchaser.
 Thus, the trade discount amount is never recorded in the books of the
purchaser.
 To encourage a debtor to pay his/her account within a certain period, a
settlement discount option is given to the debtor.
 If the account is settled within the stipulated period, the settlement discount will
be recorded in the settlement discount granted account in the sellers' books and
the settlement discount received account in the buyers' books.
 The full amount of the invoice must be paid if the account is not settled within
the stipulated period.
 A purchases journal and purchases returns journal has the following form:

52
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

ABC DEALERS
Purchases Journal - May 20.3
Invoice No Day Details Fol Purchases Creditors
1534 3 Grand Wholesalers CL2 1 258 1 258
1535 7 XY Company CL3 983 983
1536 11 AA Limited CL1 2 324 2 324
1537 14 XY Company CL3 437 437
1538 21 XY Company CL3 1 212 1 212
1539 25 Grand Wholesalers CL2 538 538
1540 30 AA Limited CL1 215 215
6 967 6 967
N1 B4

ABC DEALERS
Purchases Return Journal - May 20.3
Credit Note Purchases
No Day Details Fol Returns Creditors
C115 10 Grand Wholesalers CL2 158 158
C116 27 XY Company CL3 114 114
272 272
N2 B4

General Ledger

Purchases (N1)
20.3
May 31 Creditors PJ 6 967

Purchases Returns (N2)

20.3
May 31 Creditors PRJ 272

Creditors Control (B4)

20.3 20.3
May 31 Purchases Return PRJ 272 May 31 Purchases PJ 6 967
Balance b/o 6 695
6 967 6 967
Jun 1 Balance b/o 6 695

53
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Creditors Ledger

AA Limited – CL1
Date Day Details Fol Debit Credit Balance
May 20.3 11 Inv 1536 PJ 2 324 2 324
30 Inv 1540 PJ 215 2 539

Grand Wholesalers – CL2

Date Day Details Fol Debit Credit Balance
May 20.3 3 Inv 1534 PJ 1 258 1 258
10 Credit Note C115 PRJ 158 1 100
25 Inv 1539 PJ 538 1 638

XY Company – CL3
Date Day Details Fol Debit Credit Balance
May 20.3 7 Inv 1535 PJ 983 983
14 Inv 1537 PJ 437 1 420
21 Inv 1538 PJ 1 212 2 632
27 Credit Note C116 PRJ 114 2 518

List of Creditors:
AA Limited 2 539
Grand Wholesalers 1 638
XY Company 2 518
6 695

COMMENTS

 The source documents for entries in the purchases journal are original invoices.
 Because these invoices come from different businesses, they are renumbered
consecutively.
 The source documents for entries in the purchases returns journal are the
original credit notes received from the creditors and they must be renumbered
consecutively.
 Entries are recorded and analysed in date order in the purchases journal and
purchases returns journal.
 The creditor's name and the amount for which purchases or returns were made
must be clearly shown.
 Only the totals of the columns are posted to the general ledger.

54
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

 The amounts in the purchases and the creditors columns are the same in the
purchases journal because we are still ignoring VAT. The same applies for
purchases returns.
 The creditor’s accounts are individually credited in the creditors ledger with
purchases and debited with returns.
 A three-column ledger is preferable to the traditional T account format because
the balance can be calculated after each transaction.
 The total of all the balances of the individual creditor's accounts must
correspond with the balance of the creditors control account.
 The purchases journal and purchases returns journal are books of first entry. The
double-entry procedure has to be applied in the general ledger.

6.6.4 Sales journal and sales returns journal

 Merchandise sold on credit is recorded in the sales journal.

 At the end of the month only the total credit sales for the month are credited to
the sales account and debited to the debtors control account.
 If the debtors return some of the goods, they are recorded in the sales returns
journal.
 NB: For the purposes of this module, only merchandise sold on credit is recorded
in the sales journal. All other credit sales are recorded in the general journal.
 A sales journal and sales returns journal has the following form:

ABC DEALERS
Sales Journal - May 20.3
Invoice No Day Details Fol Sales Debtors
2018 2 M Moloi DL4 268 268
2019 5 A Abdul DL1 315 315
2020 12 G Green DL3 424 424
2021 14 E Els DL2 176 176
2022 17 G Green DL3 587 587
2023 21 M Moloi DL4 643 643
2024 29 E Els DL2 269 269
2025 30 A Abdul DL1 103 103
2 785 2 785
N1 B1

55
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

ABC DEALERS
Sales Returns Journal - May 20.3
Credit No Day Details Fol Sales returns Debtors
D223 8 M Moloi DL4 75 75
D224 19 G Green DL3 114 114
D225 21 E Els DL2 92 92
281 281
N2 B1

General Ledger

Sales (N1)
20.3
May 31 Debtors SJ 2 785

Sales Returns (N2)

20.3
May 31 Debtors SRJ 2281

Debtors Control (B1)

20.3 20.3
May 31 Sales SJ 2 785 May 31 Sale Return SRJ 281
Balance b/o 2 504
2 785 2 785
Jun 1 Balance b/o 2 504

Debtors Ledger

A Abdul - DL1
Date Day Details Fol Debit Credit Balance
May 20.3 5 Inv 2019 SJ 315 315
30 Inv 2025 SJ 103 418

E Els - DL2
Date Day Details Fol Debit Credit Balance
May 20.3 14 Inv 2021 SJ 176 176
21 Credit note D 225 SRJ 92 84
29 Inv 2024 SJ 269 353

56
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

G Green - DL3
Date Day Details Fol Debit Credit Balance
May 20.3 12 Inv 2020 SJ 424 424
17 Inv 2022 SJ 587 1 011
19 Credit Note D224 SRJ 114 897

M Moloi - DL4
Date Day Details Fol Debit Credit Balance
May 20.3 2 Inv 2018 SJ 268 268
8 Credit Note D223 SRJ 75 193
21 Inv 2023 SJ 643 836

List of Debtors
A Abdul 418
E Els 353
G Green 897
M Moloi 836
2 504

COMMENTS

 The source documents for entries in the sales journal are the duplicates of sales
invoices.
 The source documents for entries in the sales returns journal are the duplicates
of credit notes issued to the debtors.
 The debtor's name and the amount of the transaction should be clearly
indicated.
 Entries are recorded and analysed in date order in the sales journal and sales
returns journal.
 Only the totals of the columns are posted to the general ledger.
 The amounts in the sales and the debtors columns are the same in the sales
journal and sales returns journal, because we are still ignoring VAT. The effect of
VAT will be explained later.
 The debtor’s accounts are debited individually in the debtors ledger with sales,
and credited with sales returns.
 The total of all the balances of the individual debtor's accounts must correspond
with the balance of the debtors control account.
 The sales journal and sales returns journal are books of first entry; it is, in other
words, a summary of sales and returns.
 The double-entry principle has to be applied in the general ledger.

57
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

6.6.5. General journal

 All transactions which cannot be entered in one of the journals which we have
discussed are entered in the general journal.
 Examples are credit losses which are written off, interest on debtors accounts,
errors which are corrected (which will be discussed in a later study unit).
 NB: Purchases and sales of goods other than merchandise are recorded in the
general journal for the purposes of this module.
 A general journal takes the following form:

General Journal of ABC Dealers - May 20.3

Day Details Fol Debit Credit

5 Vehicles 43 000
ORA Motors 43 000
Delivery Vehicle bought on credit - Inv F147
16 Packaging Material 430
Stationary 430
Packaging Material per Inv Z214 incorrectly debited to stationary acc
18 Bad Debts 84
F Field 84
F Field's account written of as irrecoverable

COMMENTS

 The account which is entered first is the account which has to be debited in the
general ledger.
 The narration is very important since it gives the reason for the entry and must
also refer to source documents.
 The general journal is a book of first entry. The double-entry principle has to be
applied in the general ledger.
 Theoretically all transactions can be recorded in the general journal.

6.7. The trial balance

 For each transaction, the debit entries must equal the credit entries.
 The total of all the debit balances should, therefore, correspond to the total of
all the credit balances.
 A list of balances is prepared periodically to determine whether any errors have
been made.
 This list of balances is called a trial balance.
 Ref back to Study Unit 5 paragraph 5.13

58
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

FIX-'N-MAT
TRIAL BALANCE AS AT 28 FEBRUARY 20.1

Folio Dr Cr
Balance Sheet Section:
Bank B1 54 200
Capital B2 130 000
Loan: ABC Bank B3 25 000
Debtors control B4 4 000
Equipment B5 100 000
Creditors control B6 200
Drawings B7 1 000
Furniture B8 2 000
Nominal Section:
Fees N1 7 000
Advertisements N2 200
Wages N3 800
162 200 162 200

6.8. Revision exercise and solution

On 1 March 20.5 A Apple opens a supermarket under the trade name AA Supermarket.
He decides to use the periodic inventory system and enters into the following
transactions during March 20.5:

1. A Apple deposited R50 000 in the business's current bank account as a capital
contribution.

Paid rent by cheque to JHB Letting Agents, R2 000.

Bought shop equipment from EQUIP on credit, R10 000 and paid R1 000 as a
deposit.

Paid water and electricity deposit, R1 000.

2. Bought merchandise on credit from TR Wholesalers, R23 541.

Bought packaging material from S Suppliers and paid by cheque, R468.

3. Drew a cash cheque for float, R500.

4. Cash sales on opening day, R18 674.

59
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

5. Bought merchandise on credit from the following wholesalers:

 BB Dealers R7 832
 DBN Distributors R6 965

6. Sublet a storeroom to G Gold and received his cheque for R250.

Cash sales per cash register roll, R12 455.

10. Drew a cheque to pay wages, R1 200.

12. Issued invoices to the following people for goods sold:

 B Blue R478
 S Silver R693.

13. Bought merchandise from Z Zulu and paid by cheque, R5 378.

14. Bought a computer from HI Q, R5 260. Issued a cheque to HI Q for

R1 478, which included a deposit of R1 000 and R478 for paper and computer
supplies.

15. Sold on credit to the following people:

 G Green R324
 R Red R299.

16. Cash sales, R8 790.

17. Drew a cash cheque for the following:

 Wages R1 500
 Owner's own use R1 000.

19. Received a cheque from B Blue, R200.

20. Bought merchandise from TR Wholesalers and paid by cheque,

R2 675.

Merchandise sold for cash, R12 570.

60
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

21. Goods sold on credit:

 B Blue R362
 R Red R178.

23. S Silver paid R100 on his account.

Cash sales, R10 238.

24. Paid R550 to The Newsmaker for placing advertisements.

Drew cash to pay wages, R1 500.

25. Bought stationery on credit from HI Q, R267.

Issued a receipt to R Red, R299.

27. Issued cheques to the following people:

 TR Wholesalers R20 000

 BB Dealers R 6 000
 DBN Distributors R 5 000
 HI Q R 1 000

29. Credit sales to S Silver, R262. He paid off R200 on his account.

Cash sales, R16 742.

30. Issued cheques to the following people:

 L Lemon, the manager's salary, R2 500

 EQUIP on account, R1 000
 JHB Letting Agents for rent for April, R2 000

31. Paid the telephone account, R595

Cash sales, R15 284

31
Issued receipts to the following debtors:
 G Green R324
 B Blue R640

Cashed a cheque R3 000, to pay wages, R1 500, and the balance was for the
owner's own use.

61
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Required

Prepare the following:

(1) The subsidiary journals of AA Supermarket for March 20.5
(2) The debtors, creditors and general ledgers of AA Supermarket for March 20.5
(3) The trial balance of AA Supermarket as at 31 March 20.5. Ignore VAT.

See answers on exercise 6.8 in Unisa S/G p. 79

6.9. Settlement discount

6.9.1. Settlement discount granted

 Discount is often offered to debtors in order to encourage quick settlement of

their debts within the stated credit term.
 The credit term will be shown on the credit invoice, for example 30 days from
date of sale.

6.9.2. Settlement discount received

 Discount is often received from creditors in order to encourage quick settlement

of our outstanding account.

6.10. Value added tax

VAT stands for Value Added Tax. Value Added Tax (VAT) is levied on the supply of
goods and services by vendors or it is a tax businesses charge when they supply their
goods and services. We have to pay VAT on most of the things that we buy.

VAT CONCEPTS

Zero-rated items Zero-rated items are goods or services which are taxed at a
rate of 0%, e.g. milk, brown bread, maize, fruit, etc.
VAT-exempted These items involve services that are not subject to VAT at
items either the standard rate or zero rate, e.g. childcare services,
educational services, etc.
VAT-able items These items are goods/services that are subject to VAT.
VAT Output It is VAT, which your company would charge on items, which
it, sells. Thus a company could wish to sell an item and added
to the amount a standard rate tax would be charged. Just
remember that you are charging on behalf of SARS so
whatever you charge you owe to SARS. Remember what you

62
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

owe is a liability. So Output VAT is a liability and therefore a

credit.
VAT Input It is VAT that you pay on all your business expenses and for
which you have a tax invoice. It also relate to VAT that is paid
on other goods and services bought or rented for the
business. SARS allows you to claim this portion of VAT from
him – so technically SARS owes you – if he owes you it must
be a debit.
VAT Control Is a summary of the VAT Input and Output and shows
whether the business owes SARS money or whether SARS
owes the business money.

VAT CALCULATIONS

How to add VAT (Value Added Tax) to a price (14%)

This is the calculation you need to use when you know a PRICE BEFORE TAX (THE NET
PRICE) but want to find out the PRICE AFTER TAX (THE GROSS PRICE).

VAT rate of 14%.

Net price Multiplied by 1.14 = Gross price
Price before tax Multiplied by 1.14 = Price after tax

Calculations:

The VAT standard rate is rate of 14%

First, get the multiplier:
14 100% = 0.14
0.14 + 1 = 1.14

The multiplier is 1.14

So...
Net price Multiplied by 1.14 = Gross price
Price before tax Multiplied by 1.14 = Price after tax
(Net price) (Gross price)
E.g.:
R100 Multiplied by 1.14 = R114
R100 + Tax = R114 inc Tax

How to deduct VAT from a price - (14%)

People can often add VAT to a figure, but when it comes to taking it off it is a problem.

63
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Taking-off VAT (Tax) from a price

This is the calculation you need to use when you know a PRICE AFTER TAX (THE GROSS
PRICE) but want to find out the PRICE BEFORE TAX (THE NET PRICE).

VAT rate of 14%.

Gross price (price after tax) Divided by 1.14 = Net price
Price after tax Divided by 1.14 = Price before tax (Net price)

Calculations:

The VAT standard rate is rate of 14%

First, get the divisor:
14 100% = 0.14
0.14 + 1 = 1.14

The divisor is 1.14

So the back calculation for 14% VAT is ...
Gross price Divided by 1.14 = Net price
Price after tax Divided by 1.14 = Price before tax
E.g.:
R114.00 Divided by 1.14 = R100
R114.00 inc Tax = R100 + Tax

THREE BOOKKEEPING ACCOUNTS

For the purposes of Value Added Tax (VAT) records, three bookkeeping accounts must
be kept.

The VAT on Inputs Account –This account will usually show a debit (the VAT SARS "owe"
you money for the VAT you have paid and you are entitled to receive from them).

The VAT on Output (Transactions) Account –This account will usually show a credit (the
VAT SARS are "entitled" to receive the VAT from you that you have collected on their
behalf. The money is not yours and it is only temporarily in your possession until the due
date for the payment of VAT.

The VAT Control (Debit and Credit) Account. This is the account to which the 2 first
accounts are posted. The account balance may show a credit, when the periodic report
to the VAT is for a payment to be made, or it may show a debit when the periodic report
shows that that money is to be returned.

64
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

SAR
Pay to
S Claim
Pay to SARS R28

SARS R14 R14

Back

RETAILER

Purchases =
VAT Input =
WHOLESALER Purchases price CONSUMER
=
Sales = Purchases
VAT Output Sales = =
VAT Output = VAT
Selling price = =
Selling price = Purchase price
=
1. The wholesaler sell the product to the retailer at R100 + 14% VAT = R114.00
2. The wholesaler collect VAT of R14.00 from the retailer and pays it over to SARS,
thus taking the VAT out of the business (VAT Output)
3. The retailer claims back the VAT (R14) from SARS, thus put it back into the
business (VAT Input)
4. The retailer adds a mark-up of 100% to the product and sells it to the
consumer for R200 + VAT of R28.00.
5. The retailer collects the VAT (R28) from the consumer and pays it over to SARS,
thus taking the VAT out of the business (VAT Output).
6. The consumer cannot register for VAT and cannot claim back the VAT.
7. SARS collected VAT to the amount of R28 instead of only R14 due to value being
added to the product in the form of a mark-up percentage.

65
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Example 1:

1) Purchase goods on credit from R. Adams, R22 800 (ISP).

+ INVENTORY (A) -
Creditors 20 000

- CREDITORS (L) +
Inventory 20 000
Input VAT 2 800

+ INPUT VAT (A) -

Creditors 2 800

22 800 x 14/114 = 2 800

2) Paid R. Adams R22 000 in full settlement of our account.

+ BANK (A) -
Creditors 22 000

- CREDITORS (L) +
Bank 22 000
Discount received & 800
Output VAT

- DISCOUNT RECEIVED (I) +

Creditors 701-75

- OUTPUT VAT (L) +

Creditors 98-25

800 x 14/114 = 98-25

3) Sold merchandise on credit to T. Tax, R22 914 ( ISP). The mark-up is 20%
on cost price.

+ DEBTORS (A) -
Sales 20 100
Output VAT 2 814

66
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

- SALES (I) +
Debtors 20 100

- OUTPUT VAT (L) +

Debtors 2 814

+ INVENTORY (A) -
Cost of Sales 16 750

+ COST OF SALES (E) -

Inventory 16 750

22 914 x 14/114 = 2 814

22 914 – 2 814 = 20 100
20 100 x 100/120 = 16 750

4) T. Tax paid us R22 014 in full settlement of his account.

+ DEBTORS (A) -
Bank 22 014
Discount allowed & Input VAT
900

+ BANK (A) -
Debtors 22 014

+ DISCOUNT ALLOWED (E) -

Debtors 789-47

+ INPUT VAT (A) -

Debtors 110-53

900 x 14/114 = 110-53

900 – 110-53 = 789-47

5) A debtor S. Sunny’s debt of R11 400 must be written off as irrecoverable.

+ DEBTORS (A) -
Bad debts & Input VAT 11 400

+ BAD DEBTS (E) -

Debtors 10 000

67
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

+ INPUT VAT (A) -

Debtors 1 400

11 400 X 14/114 = 1 400

6) The owner takes stock for his own use, R1 140.

- DRAWINGS (OE) +
Inventory & Input VAT 1 140

+ INVENTORY (A) -
Drawings 1 000

+ INPUT VAT (A) -

Drawings 140
1 140 x 14/114 = 140

7) Issue a credit note to a debtor for damaged goods, R75.

+ DEBTORS (A) -
Debtors allowance &
Output VAT 75

+ DEBTORS ALLOWANCE (E) -

Debtors 65-79

- OUTPUT VAT (L) +

Debtors 9-21
74 x 14/114 = 9-21

8) Receive a credit note from a creditor for damaged goods returned, R114.

- CREDITORS (L) +
Inventory & Input VAT 114

+ INVENTORY (A) -
Creditors 100

+ INPUT VAT (A) -

Creditors 14
114 x 14/114 = 14

68
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Issue a credit note = debtor return goods; Receive a credit note = business send goods back

Example 2:
 30.1.09 - The total purchases that you made amount to R 1,000 by ch eque plus
R 150 VAT on inputs.
 30.1.09 - The total cash sales you made amount to R 4,000 p lus R600 VAT on
outputs.
 15.2.09 - You paid the balance that was owing to SARS.

The bookkeeping records will look as follows:

General Journal
Debit Credit
Purchases / Inventory 1,000
VAT on Input 150
Bank 1,500
(30.1.09) Purchases recorded for January
Bank 4,600
Sales 4,000
VAT on Output 600
(30.1.09) Sales recorded for January
VAT on Output 600
VAT on inputs 150
VAT Control Account 450
(30.1.09) Transfer of surplus to Control Account
VAT Control Account 450
Bank 450
(15.2.09) Payment of VAT reported for January

GENERAL LEDGER
Dr VAT Input Account Cr
Aug. 31 Bank 150 Aug. 31 VAT Control 150

Dr VAT Output Account Cr

Aug. 31 VAT Control 600 Aug. 31 Bank 600

Dr VAT Control Account Cr

Aug. 31 VAT input 150 Aug. 31 VAT Output 600
Bank 450

69
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Notes:

CASH DISCOUNT

One of the trickiest calculations that you will come across during your accounting
studies involves the calculation of VAT on goods that are subject to both trade and cash
discount. Learn it and practice it several times.

VAT is always calculated after deducting cash discount. If the customer does not pay
before the date stipulated on the purchase invoice, they lose the benefit of the cash
discount.

Example
Corinne sells goods on 3 March valued at R1, 276.84 to Dolly. The terms are a trade
discount of 25% and a cash discount of 5% if Dolly settles her account within 30 days.
Calculate the total value of the sales invoice sent to Dolly.

Answer
Price of goods R1, 276.84
Less trade discount 319.21
Selling price to Dolly 957.63 R 957.63
Less cash discount 47.88
909.75
VAT 159.21 159.21
Total value of invoice R 1,116.84

 The total value shown on the copy sales invoice (source document) is entered in
the seller’s (Corinne’s) sales journal.

 The invoice will be received by the purchaser (Dolly) as a purchases invoice

(source document) and will be entered in his purchases journal.

 All the subsidiary books must record any VAT included in the source documents.

Exercise 6.2

 To grasp the principles of VAT, work through the following exercise thoroughly.
 To make calculations easy for teaching purposes and because the real
percentage of VAT tends to change, we use 10% for our calculations of VAT.

70
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

The following information relates to Rundu Dealers, who is registered as a VAT vendor
and who use the periodic inventory system: (The VAT period of the business ends on
unequal months.)

a) TRIAL BALANCE AS AT 28 FEBRUARY 20.4

RUNDU DEALERS
TRIAL BALANCE AS AT 28 FEBRUARY 20.4

Dr Cr
Capital 177 150
Land and building at cost 145 200
Equipment at cost 29 700
Inventory 1 Nov 20.3 19 200
Bank 4 467
W Wolf 583
L Lion 770
T Tiger 2 310
Vat Input 2 715
Vat Output 2 925
Sales 86 400
Purchases 45 640
Distribution, admin and other expenses 20 500
268 785 268 785

(b) TRANSACTIONS FOR MARCH 20.4

1. Cash sales, R14 949.

5. Paid the account of T Tiger by cheque after deducting R110 discount.
7. Received a cheque from W Wolf for R561 in full settlement of his account.
Received a cheque from L Lion for R737 and allowed R33 discount.
12. Received an account from Stationers Ltd for the printing of documents, R759.
13. Credit sales:
- L Lion R2 178
- W Wolf R1 584
14. Sold an old typewriter to O Old for R297 and received his cheque for the amount
due.
Cash sales, R6 600.
21. Issued a credit note to L Lion for an overcharge on the invoice of the13th, R55.
23. Paid C Cheetah by cheque for carriage on goods purchased,
R1 133.
28. Received a credit invoice from T Tiger for goods purchased,
R14 025.

71
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

29. Issued cheques for salaries and wages, R5 746 and for purchases from B Bam R7
700.
30. Issued a debit note to T Tiger for goods returned to him, R770.

Required

(1) Record the above transactions in the following subsidiary journals, properly
totaled, of Rundu Dealers for March 20.4:
(a) Cash receipts journal (analysis columns for bank, sales, VAT Output,
debtors, VAT Input (Dr), settlement discount granted and sundries)
(b) Cash payments journal (analysis columns for bank, purchases, creditors,
settlement discount received, VAT Input, VAT Output (Cr) and sundries)
(c) Sales journal (analysis columns for VAT Output, sales and debtors)
(d) Purchases journal (analysis columns for VAT Input, purchases and
creditors)
(e) Sales returns journal (analysis columns for VAT Output, sales returns and
debtors)
(f) Purchases returns journal (analysis columns for VAT Input, purchases
returns and creditors)
(g) General journal

(2) Post the entries recorded above to the VAT Input and VAT Output accounts.
Close off these accounts to the VAT Control account. Balance the VAT Control
account at 31 March 20.4, the end of the business' VAT period.

See answers on exercise in Unisa S/G p. 88

72
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Study unit 7
Cash and cash equivalents
earning outcome
7.1. The nature of cash and cash equivalents

 Cash in accountancy includes not only coins and notes but also postal orders,
cheques and credit card transactions.
 As money is the primary legal tender, every transaction eventually leads to
either an outflow or an inflow of money for an entity.
 Cash equivalents include savings accounts or any investment that can be
converted into cash in a period shorter than 12 months.
 This qualifies cash and cash equivalents as current assets.

7.2. Internal control over cash

 As money is necessary for survival, the internal controls applicable to cash are
very important for a business.
 The following are measures that can be used by a business for control
purposes:
 Employees' duties should be divided in such a way that an error by
one employee will be detected by another employee in the normal
performance of his duties. It should take at least two employees to
embezzle cash.
 Cash receipts should be recorded in such a way that the actual cash
received can be checked against an independent daily record.
 Cash received should be banked daily.
 All payments except petty cash payments should be made by cheque.
 The bank statement should be compared with the cash receipts and
cash payments journals.
 The bank statement balance should be reconciled with the bank
account balance.

7.3. Reconciliation of the bank statement balance with the bank

account balance

7.3.1. Introduction

 For purposes of safekeeping, money is deposited at a bank.

 Although a bank is a financial institution it is managed like a business.

73
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

 Every entity that entrusts its money to a bank is a creditor of the bank. People or
businesses can also borrow money from a bank and will then be debtors of the
bank.
 The bank will issue, as often as requested or at least once a month, a statement
to the business showing their record of transactions with the business.
 The following will be reflected on the bank statement:
o the opening balance (beginning of the month)
o deposits credited during the month
o cheques paid (debited) during the month
o bank charges for the month
o interest charged (debit) on overdraft or paid on a favourable (credit) bank
balance
o debit and stop orders for the month
o dishonored cheques for the month (cheques deposited, but not paid by
the drawers' bank)
o correction of errors made by the bank in the previous month

7.3.2. Why a bank reconciliation is necessary

 If the bank and the business keep record of the same transactions the balance of
the bank statement and the bank account in the books of the business must be
the same.
 In order to ascertain that the bank account in the books of the business
corresponds to the bank statement, a bank reconciliation statement is prepared.
This means the balance of the bank account in the books of the business is
reconciled with the balance on its bank statement.
 The reconciliation process has two steps:
o first the business's records are updated to account for actual transactions
reflected by the bank statement, and
o secondly record those transactions to which the bank must still attend to
in the bank reconciliation statement.
 The bank reconciliation could be seen as an extension of the bank statement. An
outstanding item that will be credited on the bank statement must be credited
on the bank reconciliation statement and vice versa.

REMEMBER

 A favourable bank account balance is on the debit side of the bank account as
well as on the bank reconciliation statement.
 An unfavorable or overdrawn bank account balance is on the credit side of the
bank account as well as on the bank reconciliation statement.
 A favourable bank statement balance is on the credit side of the bank statement
as well as on the bank reconciliation statement.

74
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

 An unfavorable or overdrawn bank statement balance (indicated by DT, DR or

OD) is on the debit side of the bank statement as well as on the bank
reconciliation statement.

7.3.3. Procedure to follow in the reconciliation process

 Where a bank reconciliation statement was completed for the previous month
the bank statement must first be compared with that bank reconciliation
statement to ascertain whether the outstanding items and corrections have
been done by the bank.
 Remember to compare the items on the debit side of the bank reconciliation
statement with entries on the debit side of the bank statement and credit
entries on the reconciliation with credit entries on the statement.
 Compare the amounts in the cash receipts journal for the current month with
the entries on the credit side of the bank statement.
 Compare the amounts in the cash payments journal for the current month with
entries on the debit side of the bank statement.

Exercise

The bank reconciliation statement for June 20.0 and the CRJ, CPJ, bank account and
bank statement of Benson Traders for July 20.0 reflect the following:

 NB: The ticks (√) indicate that those entries which appear in the books of the
business (i.e. the bank reconciliation at 30 June 20.0 and the two cash journals
for July 20.0) also appear on the bank statement for July 20.0). They do not
require any further attention.
 You should also check these by yourself.

BENSON TRADERS
BANK RECONCILIATION STATEMENT AS AT 30 JUNE 20.0

Debit Credit
Favourable balance per bank statement 11 350
Deposit not yet credited (deposited 1/7/20.0) 2 000
Cheques not yet presented for payment:
 No 11 — dated 23/6/20.0 (Donation) 200
 No 13 — dated 30/6/20.0 (ABC Stores) 350
Favourable balance per bank account 12 800
13 350 13 350

 Chq. no 11 was not presented for payment during July and must be shown as
outstanding on the July 20.0 bank reconciliation statement.

BENSON TRADERS

75
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

CASH RECEIPTS JOURNAL — JULY 20.0 (BANK COLUMN ONLY)

Doc no Date Details Bank

15 Cash sales 6 700

25 Cash sales 3 300
30 Cash sales 1 800
Rent income 850
Interest income 80
12 730
B 15

 Amounts in italics are amounts entered as a result of the amounts reflected on

the bank statement, but not yet in the CRJ. This updates the CRJ

BENSON TRADERS
CASH PAYMENTS JOURNAL — JULY 20.0 (BANK COLUMN ONLY)

Doc no Date Details Bank

14 5 Municipality 900
15 7 John's Wholesalers 2 500
16 9 ABC Stores 1 200
— 14 S Swan (R/D cheque)* 200
17 15 Cash (wages) 450
18 30 Telkom 180
19 Cash (wages) 450
P Saxo (R/D cheque)* 300
Insurance 500
Bank charges 43
6 723
B 15

 Amounts in italics are amounts entered as a result of the amounts reflected on

the bank statement, but not yet in the CPJ. This updates the CPJ.
 The accounts of S Swan and P Saxo must be debited with the amounts of R200 and
R300 respectively. If any discount was involved on receipt of the cheques the
discount must be cancelled via the general journal. The accounts of S Swan and P Saxo
would be debited and the discount allowed would be credited

76
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

REAL BANK LIMITED

Real Bank Limited

Registered Bank
Reg No: 93/3049
Vat Reg No: 2600 2020 202
Benson Traders
Pretoria
Account no: 2621 1234 3323
Statement no: 3
July 20.0

Details Chq. Fee Date Debit Credit Balance

No
Balance b/f 01:07 11 350
Deposit 01:07 2 000 13 350
Cheque 13 1.20 02.07 350 13 000
Unpaid cheque: S Swan 1.00 07:07 200 12 800
Cheque 15 3.50 09:07 2 500 10 300
Deposit 7.00 15:07 6 700 17 000
Cheque 14 1.50 15:07 900 16 100
Cheque 17 1.20 15:07 450 15 650
Cheque 16 1.20 20:07 1 200 14 450
Deposit 3.10 25:07 3 300 17 750
Unpaid cheque: P Saxo 1.60 30:07 300 17 450
Interest 30:07 80 17 530
Deposit: R Charles Cheque 30:07 850 18 380
XYZ Insurance Co Deposit 19 1.20 30:07 450 17 930
book 0.50 30:07 500 17 430
Service fees: July 20 17 410
23 17 387

 The unticked debit entries were entered in the cash payments journal before the
journal was closed off for July 20.0.
 The unticked credit entries were entered in the cash receipts journal before the
journal was closed off for July 20.0

Additional information:

1. S Swan and P Saxo are debtors of the business.

2. The deposit on 30/07/20.0 is in respect of rent received.

77
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Solution:

General Ledger
Bank
20.0 20.0
Jul 1 Balance b/d 12 800 Jul 31 Cash Payments CPJ 6 723
31 Cash Receipts CRJ 12 730 31 Balance c/d 18 807
25 530 25 530
Aug 1 Balance b/d 18 807

BENSON TRADERS
BANK RECONCILIATION STATEMENT AS AT 31 JULY 20.0
Debit Credit
Favourable balance per bank statement 17 387
Deposit not yet credited (deposited 1/8/20.0) 1 800
Cheques not yet presented for payment:
 No 11 — dated 23/6/20.0 (Donation) 200
 No 18 — dated 30/7/20.0 (Telkom) 180
Favourable balance per bank account 18 807
19 187 19 187

Revision exercises and solutions

Revision exercise 1

The following information relates to Ontario Traders:

(a) Pencil totals of the bank column of the cash journals at 31 December 20.8:

 Cash receipts journal - R 25 718

 Cash payments journal - R 27 115

(b) Item that appeared on the bank reconciliation statement at 30 November 20.8
but not on the bank statement:

 Cheque No 632, issued to L Marino on 15 June 20.8 - R 231

(c) Items that appeared in the cash receipts and cash payments journals, but not on
the bank statement:

 A deposit entered in the cash receipts journal on 31 December 20.8,

banked on 3 January 20.9 - R792
 Cheque No 985, issued on 29 December 20.8 to the municipality to pay
the water and electricity account – R 2 211

78
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

(d) Items that appeared on the bank statement but not in the cash journals:
 Bank charges R62
 Interest on bank overdraft R70
 A stop order for an annual donation to a primary school - R220
 A “R/D” cheque originally received from debtor, S Scholly - R308
 A deposit, paid directly into the bank account of Ontario Traders, by a
tenant F Flee - R1 100

(e) Balance the bank account in the general ledger at 30 November 20.8 – R 297 (dt)

(f) Balance as per bank statement at 31 December 20.8 (favourable) R 990

Required:

(1) Complete the cash receipts and cash payments journal of Ontario Traders for
December 20.8.
(2) Show the bank account in the general ledger of Ontario Traders properly
balanced at 31 December 20.8.
(3) Prepare the bank reconciliation statement of Ontario Traders at 31 December
20.8. Begin with the balance as per bank statement.

Solution

ONTARIO TRADERS

(1) CASH RECEIPTS JOURNAL — DECEMBER 20.8 (EXTRACT)

Date Details Bank

31 Subtotal 25 718
Rent income 1 100
L Marino/Creditors control 231
27 049

CASH PAYMENTS JOURNAL — DECEMBER 20.8 (EXTRACT)

Date Details Bank

31 Subtotal 27 115
Bank charges 62
Interest on bank overdraft 70
Donations 220
R Scholly/Debtors control 308
27 775

79
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

(2) General Ledger

Bank
20.8 20.8
Dec 1 Balance b/d 297 Dec 31 Cash Payments CPJ 27 775
31 Cash Receipts CRJ 27 049
Balance c/d 429
27 775 27 775
20.9
Jan 1 Balance b/d 429

(3) BANK RECONCILIATION STATEMENT AS AT 31 DECEMBER 20.8.

Debit Credit
Credit balance per bank statement 990
Deposit not yet credited (deposited 1/8/20.0) 792
Cheques not yet presented for payment:
 No 985 — dated 29/12/20.8 (Municipal charges) 2 211
Credit balance per bank account 429
2 211 2 211

Challenge Exercise:

The information below is taken from the books of Odi Enterprises:

Instructions:

1. Complete the Cash Journals of Odi Enterprises for December 2005.

2. Post to the Bank Account in the General Ledger.
3. Prepare the Bank Reconciliation Statement on 31 December 2005.

Take note: Odi Traders has a current account with Shine Star Bank.

1. Cash Journals showed the following preliminary totals on 31 December 2005:

CASH RECEIPTS JOURNAL – DECEMBER 2005

Bank R58 090

Debtors’ control R24 130
Discount allowed R130
Sales R30 000
Cost of sales R15 000
Sundry accounts R4 070

CASH PAYMENTS JOURNAL – DECEMBER 2005

80
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

Bank R41 520

Debtors’ control R1 440
Discount received R240
Creditors control R11 720
Sundry accounts R28 600

2. Transactions for December 2005 not yet entered:

 Information as per cash register roll: Cash sales, R13 200; cost of sales, R6 600.
 Receipt 420 issued to C Celebrity, R760 in settlement of his account of R800.
 Paid Ngoma Traders by cheque, R1 560 and received R100 discount (cheque no
917).
 Draw a cash cheque no 918 for cash float, R1 000.
 Issued a cheque no 919 to a debtor, B Brocolli, as repayment of an overcharge
for goods sold, R500. (Cost of sales, R250.)
 The following is an extract from the salaries journal for December 2005:

Deductions of employees

WW Pension Fund SA Medhelp PAYE

1 400 1 600 4 400

Employers Contribution

WW Pension Fund SA Medhelp PAYE

1 400 1 600 -

Consecutive cheques (no. 920, 921 and 922) were issued in payment of the deductions
and employers’ contributions.

3. Information from the bank reconciliation statement on 30 November 2005

showed the following:

Favourable bank balance R9 900

Outstanding deposit R2 400
Outstanding cheques:
No 901 R2 800
No 911 R5 400
No 912 R6 200
Credit balance as per bank account R2 100

81
2015 FAC 1503
 HAMILTON TUTORIALS SA (PTY) LTD 081 368 8443 / hamtutorials1@[Link]

4. Comparing the bank statement of December with the bank reconciliation

statement showed the following:

4.1. The deposit of R2 400 was credited by the bank.

4.2. Cheque no 901 was presented at the bank for payment

5. Comparing the bank statement with the cash journals showed the following:

5.1. The tenant H Honest deposited his rent directly in the bank, R1 600.
5.2. Cheque no. 906 issued to Writers Ltd for stationary, R480, was incorrectly
entered in the CPJ as R840.
5.3. Debit order in favour of Surit Insurers, R300, for insurance.
5.4. Items on the bank statement:
 Service fees R318
 Interest on credit balance R72
 Government levy on cheques R40
5.5. Dishonored cheques on 31 December 2005 were:
Name of debtor Amount Reason
 T. True R600 P/dated– 12/01/2006
 F. False R3 000 Insufficient funds
 G. Good R3 600 Signature incorrect
5.6. A deposit, R4 800, made on 25 December 2005 does not appear on the bank
statement as it was incorrectly credited to the owners’ private account.
5.7. The following information is in respect of post dated cheques received:
o Cheque no 413, R1 400 (dated 14 February 2006)
o Cheque no 99, R1 600 (dated 20 January 2006)
5.8. It was discovered that cheque no 911 was lost in the post. The cheque was
issued to Gamka & Co. for repairs. It was decided to cancel the cheque and issue
a new cheque for the amount.
5.9. A deposit made by the enterprise on 31 December 2005 does not appear on the
bank statement.
5.10. None of the cheques issued on 31 December 2005 have been presented to the
bank for payment.
5.11. The bank statement shows a favourable balance on 31 December 2005, R15 444.

82
2015 FAC 1503
 Solution:

Cash Receipt Journal of Odi Enterprises - 31 December 2005

Sundries Accounts
Analysis of Cost of Debtors Discount
Doc Day Details receipts Bank Sales Sales Control allowed Amount Details
2
31 Balances B/D 58 090 30 000 15 000 4 130 130 4 070
CRR 13 200 13 200 6 600

420 C Celebrity 760 800 40

B/s H Honest 1 600 1 600 Rent Received
906 Writers Ltd 360 360 Stationary
B/S Bank 72 72 Interest Received
Gamka # 911 Cancel 5 400 5 400 Repairs

2
79 482 43 200 21 600 4 930 170 11 502
 Cash Payments Journal of Odi Enterprises - 31 December 2005
Sundries Accounts
Discount Debtor's Creditors
Doc Day Details Bank received Control Control Amount Details
31 Balances B/D 41 520 240 1 440 11 720 28 600
917 Ngoma Traders 1 560 100 1 660
918 Cash 1 000 1 000 Cash Float
919 B Brocolli 500 500
920 WW Pension Fund 2 800 2 800 Pension Fund
921 SA Medihelp 3 200 3 200 Medical Aid
922 SARS (PAYE) 4 400 4 400 PAYE
B/S Surit Insurance 300 300 Insurance
B/S Bank Bank Charges 358 358 Bank charges
B/S T True 600 600
B/S F False 3 000 3 000
B/S G Good 3 600 3 600
923 Gamka (New #) 5 400 5 400 Repairs
68 238 340 9 140 13 380 46 058
 Bank Reconciliation of Odi Enterprises on 31 December 2005
Debit Credit
Balance as per Bank Account 9 144
Credit O/S Incorrectly DT to owners Acc 4 800
Credit O/S not on bank statement 13 960
Outstanding Cheques #912 6 200
Outstanding Cheques #917 1 560
Outstanding Cheques #918 1 000
Outstanding Cheques #919 500
Outstanding Cheques #920 2 800
Outstanding Cheques #921 3 200
Outstanding Cheques #922 4 400
Outstanding Cheques #923 5 400
Bank Balance as per Bank Statement 15 444
34 204 34 204

Bank
2005 2005
Dec 31 Cash Receipts CRJ 79 482 Dec 1 Balance b/d 2 100
31 Cash Payments CPJ 68 238
Balance c/d 9 144
79 482 79 482
2006
Jan 1 Balance b/d 9 144
Study unit 8
Trade and other receivables
ning outcome
8.1. Settlement discount granted

 A settlement discount is often offered to debtors in order to encourage a quick

settlement of their debts within the stated credit term.
 The credit term will be shown on the credit invoice, for example, 30 days from
the date of sale.

Example:

A client purchased R550's worth of goods on credit on 1 March 20.0. The client has one
month (the credit term) in which to settle the debt. If the client pays before 31 March
20.0, a settlement discount of 2% will be allowed. If the client settles the account before
31 March 20.0 it means that the amount payable is R539, calculated as follows:

R550 - R(550 x )
= R(550-11)
= R539

 If VAT at 10% (taken at 10% to simplify calculations) is included in the R550, the
VAT collected on behalf of the SA Revenue Service (SARS) (recorded at the date
of sale) will amount to R50 and will be recorded in the VAT Output account.
 The selling price recorded in the sales account in the general ledger is R500.
 The fact that settlement discount has been granted does not affect the original
selling price recorded in the general ledger.
 The discount will, however, have an influence on VAT.
 Although the debtor purchased the goods for R550 the actual income for the
business is R500. If 2% settlement discount is allowed on the R500 the income
for the business is R490. VAT (calculated at 10%) on R490 is R49.
 The original VAT of R50 is therefore overstated and must be reduced by R1, in
other words 2% of R50.
 Such adjustments are made in the VAT Input account and NOT in the VAT Output
account. The reason for this is that the net sales (sales less sales returns)
multiplied by the VAT percentage, should result in the amount of VAT Output.
 The discount of R11 thus includes VAT of R1, which may be calculated as follows:
 Debtors' Control
20.0 R 20.0 R
Mar 1 Sales 550 Mar 31 Bank 539
Discount granted 10
Vat Input 1

550 550

Sales
R 20.0 R
Mar 1 Debtors Control 500

Vat Input
20.0 R R
Mar 31 Debtors Control 1

Vat Output
R 20.0 R
Mar 1 Debtors Control 50

Discount granted/allowed
20.0 R R
Mar 31 Debtors Control 10

Bank
20.0 R R
Mar 31 Debtors Control 539

 Settlement discount granted is considered an expense.

 Settlement discount granted will be written off at the end of the financial period
as an expense in the profit and loss account and is shown under distribution,
administrative and general expenses in the Statement of Financial Performancet.
 The influence of discount on VAT was also discussed in study unit 6.

8.2. Interest charged

 Many enterprises charge interest on the outstanding debt if an account is not

paid within the credit term.
 Suppose the enterprise which sold the goods in the above example has a policy
of charging 18% interest per annum on accounts that are not paid within the
stated credit terms.
  If the client does not pay the account of R550 before 31 March 20.0, but only
pays it at the end of April, he will be charged 18% per annum interest (for 1
month) on R550 and will have to pay R558,25, calculated as follows:

R550 + R(550 x )
= R(550 + 8,25)
= R558,25

 The interest increases the outstanding balance on the individual debtor's

account as well as the balance in the debtors control account.
 This transaction is recorded by means of a general journal entry.

8.3. Bad debts/credit losses

 When goods are sold on credit, there is no guarantee that payment will be
received.
 Some debtors never pay, either because they cannot be traced or do not have
any money.
 Usually the debtor is insolvent (his liabilities exceed his assets).
 Sometimes part of the debt is received and the remainder must be written off.
 If a debt is not expected to be paid it cannot be treated as an asset.
 When a debtor is not expected to pay, the asset must be reduced by the
expected loss.
 This ‘write-off’ of a debt is an expense of running a credit system.
 The alternative would be to insist on cash.
 This expense is called bad debts.
 In practice, often an R/D cheque is the first sign that a debt may not be paid.
 Another sign is an account that is long overdue.
 Interest may be charged on such an account.

EXAMPLE

Sold goods to C Charles on 20 February 20.1 for R600. Payment was received from him
on 30 March in full. The cheque was returned by the bank (marked R/D) on 3 April. On
31 July it was decided to write off his debt as bad.
Show the journal entry to write off C Charles’s account as a bad debt.

GENERAL JOURNAL J2
Date Details Fol Debit Credit
20.1
July 31 Bad Debts G2 600
B Bay G1 600
Amount written off as irrecoverable

The journal entry will be ‘posted’ to the ledger as follows:

Dr DEBTORS CONTROL (B BAY) Cr

20.1 20.1
31 Jul Balance b/d 600 31 Jul Bad debts J 600

Dr BAD DEBTS Cr
20.1
31 Jul Debtors control 600
Study unit 9
Control Accounts

Learning outcome
9.1. Debtor’s Control Account

 A debtor is a person to whom goods are sold on credit.

 Each debtor is allocated an account number and in this account will be found all
transactions which occur between him and the business, eg sales to him, returns
by him, payments received from him, interest charged on his overdue account,
bad debt written off, etc.
 The debtors form part of the assets of the business, however, including all their
accounts in the general ledger will be extremely cumbersome.
 A business may have thousands of debtors and their accounts are kept in a
Debtors Ledger, a book that is totally separate from the General Ledger.
 To incorporate the debtors into the General Ledger we use one account called
the Debtors Control.
 It does not show individual balances at the beginning of the month but a total
which equals all the opening balances of individual debtor’s accounts added
together i.e. the list of debtors.
 At the end of the month the totals of the debtors column in the various journals
affecting debtors are posted to the Debtors Control Account and the account is
balanced and the closing balance brought down.
 During the month entries in the journals would be posted to the individual
accounts of the debtors in the Debtors Ledger and each one balanced at the end
of the month.
 A list of these debtors will be made and totalled.
 The balance of the Debtors Control Account at the end of the month will be
compared with the total of the Debtors List.
 The two should be equal as the same information was posted to the individual
Debtors and the Debtors Control Account – the first item by item, the second
only totals of the journals.
 If the Control balance does not equal the total of the list an investigation must
take place to find the cause or causes.

There are three types of errors, which can result in the discrepancy:

1. Casting errors in the journals.

The correction will only affect the Control account.
2. Posting errors.
The correction will only affect the list total.
3. Errors of omission.
These will affect both the Control account and the list total.

The same concept is used for the Creditors Control Account.

Information which appears in a Debtors Control Account is:

Dr DEBTORS CONTROL Cr
Balance b/d Sales returns SRJ
Sales SJ Bank CRJ
Bank CPJ
Sundry accounts GJ Sundry accounts GJ
Balance c/d

Balance b/d

Information which appears in a Creditors Control Account:

Dr CREDITORS CONTROL Cr
Bank CPJ Balance b/d
Purchases Purchases PJ
Returns PRJ Sundry accounts GJ
Bank CRJ
Sundry accounts GJ
Balance c/d

Balance b/d

EXAMPLE:

The following information for June 20.1 relate to JL Traders:

R
1. Balance of debtors control account – 31 May 20.1 26 800

2. Total of the list of individual debtors balances – 30 June 20.1 23 438

3. Totals of subsidiary journals at 30 June 20.1

Cash receipts journal:

Sales column 50 000
Debtors column 116 420
Discount allowed column 640
Bank column 165 780
 Cash payments journal
Creditors column 12 000
Debtors column (cheques dishonored) 254
Bank column 12 254
Sales journal 114 600
Sales returns journal 900
Purchases journal 106 700
Sundry journal credits i.r.o. debtors 1 020

4. Additional information:

 B Bark, a debtor, is insolvent and 50c in the Rand on his account of R360 must be
written off as bad.

 The balance of R540 on the account of debtor D Den was listed on the list of
debtors as R450.

 The sales journal was overcast by R100.

 A credit note of R36, issued to S Smith, was correctly recorded in the sales
returns journal, but was debited to debtor, S Smith’s account as R63.

 The sundry journal credit entries include an amount of R15 being the balance of J
Oost’s account written off as bad. The amount has not yet been posted to J
Oost’s account.

 Included in the creditor’s column of the cash payments journal is an amount of

R200 in respect of a cheque marked “R/D”. This cheque was originally received
from debtor B Buys. The amount was posted to the account of B Buys in the
debtor’s ledger.

Required:

1. The correct debtors control account of JL Traders for June 20.1, properly
balanced. The first word(s) of each entry must indicate the contra ledger
account.
2. The reconciliation of the total of the list of individual debtors balances with the
balance on the debtors control account as determined in (1) above.
 SOLUTION

JL TRADERS
Debtors control account
20.1 R 20.1 R
May 31 Balance b/d 26 800 June 30 Bank CRJ 116 420
June 30 Sales returns SRJ 900
Sales
(114600 – 100) SJ 114 500 Sundry journal
Creditors Control J 200 (1 020 + 180) 1 200
Bank CPJ 254
Balance c/d 23 234
141 754 141 754

Jun 30 Balance b/d 23 234

Reconciliation of the total of the list of individual debtors balances with the debtors
control account balance at 30 June 20.1:

R R
Total of the debtors list 23 438
Add: Error on list R(540 – 450) 90
23 528
Less: Bad debts – B Bark 180
Credit note R(63 + 36) 99
Bad debts – J Oost 15 294
23 234

Remember:

The procedure for the Debtor’s Control can be summarised as follows:

Personal accounts of debtors (debit

Individual entries in the sales
Posted to side) in the debtors’ ledger on the
journal
day the transaction took place.
Total of the debtors’ control
Debtors control account (debit side)
column in the sales journal Posted to
on the last day of the month.
Individual entries in the sales Personal accounts of debtors (credit
Posted to
returns journal side) in the debtors’ ledger on the
day the transaction took place.
Total of the debtors control Posted to Debtors control account (credit
column in the sales returns journal side) on the last day of the month.
Individual entries in the cash Posted to Personal accounts of debtors (credit
 receipts journal side) in the debtors ledger on the
day the transaction took place.
Total of the debtors control Debtors control account (credit
Posted to
column in the cash receipts journal side) on the last day of the month.

See exercises Study Guide Unit 8; Unit 9 p177 (Ct-Control)

The procedure for the Creditor’s Control can be summarised as follows:

Personal accounts of creditors (credit side) in

Individual entries in the purchases Posted to the creditors ledger on the day the
journal
transaction took place

Total of the creditors control column Posted to Creditors control account (credit side) on the
in the purchases journal last day of the month
Personal accounts of creditors (debit side) in
Individual entries in the purchases Posted to the creditors ledger on the day the
returns journal
transaction took place
Total of the creditors control column Posted to Creditors control account (debit side) on the
in the purchases returns journal last day of the month
Personal accounts of creditors (debit side) in
Individual entries in the cash pay- Posted to the creditors ledger on the day the
ments journal
transaction took place
Total of the creditors control column Posted to Creditors control account (debit side) on the
in the cash payments journal last day of the month
STUDY UNIT 10
GENERAL ASPECTS OF ANALYSIS AND
INTERPRETATION OF FINANCIAL STATEMENTS

10.1. Introduction

 The purpose of financial analysis is to provide information as a basis for making

future decisions.
 A ratio expresses a relationship between one or more figures or groups of
figures. The ratio analysis involves identifying, measuring and evaluation
relationships in order to assess the performance and financial position of the
business or part of it.
 These relationships can then be analysed and reviewed over time to show
trends.

The Steps

1. Identify the ratio you need to calculate – what is the key area of interest?
2. Calculate the ratio
3. Analyse the ratio
4. Interpret the ratio

What are the key areas of interest?

1. Profitability

Is the business making a profit, or positive rate of return?

2. Liquidity

Can the business pay its creditors on time?

3. Solvency

Is the business financially sound and able to meet its non-current liabilities?

4. Activity
What is the company’s rate of growth?
10.2. Types of ratios

LIQUIDITY RATIOS

 Is the company able to pay its creditors on time?

 The source of funds must be able to be converted to cash easily and quickly.
 All the current assets are therefore listed as liquid assets.

The two most important ratios are:

 Current ratio
 Quick ratio (acid-test ratio)

Current ratio

Is the company able to pay its creditors in the short term? It indicates by how much the
current assets exceed the current liabilities.

Current ratio = Current assets

Current liabilities

Example 1:

Quantum (Pty) Ltd

Extract of the Financial Position Statement at 28 February 2008

ASSETS R
Non-current assets
Property, plant and equipment

Current assets 9 000

Inventories 5 100
Trade and other receivables 2 400
Cash and cash equivalents 1 500

Current liabilities
Trade and other payables 3 000
The current ratio is calculated as follows:

Current ratio = Current assets

Current liabilities
= 9 000
3 000
= 3:1

Conclusion

 For every R3 of current assets, R1 of current liabilities is owed.

 The business has 3 times as many current assets as current liabilities.
 A current ratio should be at least 2:1.
 A high ratio means excessive investment in debtors or inventory.
 A low ratio indicates the business may not be able to meet its debts.
 Compare the ratio to the previous year to indicate a trend.

Quick ratio or acid test ratio

 Inventory is now ignored as it is not as liquid as other assets.

 Why?
 Inventory must first be sold and then the money has to be collected from
debtors.

Acid test ratio = Current assets – inventory

Current liabilities

In Example 1:
Acid test ratio = Current assets – inventory
Current liabilities
= 9 000 – 5 100
3 000
= 1.3:1
Conclusion:

 By excluding inventory, the ratio is now lower than the current ratio.
 The acid –test ratio should at least be 1:1.
PROFITABILITY RATIOS

 A key objective is to earn a satisfactory return on capital that has been invested
in the business.
 The profitability ratios evaluate the businesses earning performance during the
current year.

There are four profitability ratios:

 Gross profit percentage
 Profit for the year percentage
 Return on assets
 Earnings per share

Gross profit percentage

This is the businesses gross profit calculated as a percentage of its sales.

Gross profit percentage = Gross profit x 100

Sales 1
Example 2:

Quantum (Pty) Ltd reflected the following items on the Statement of Financial
Performance:

Sales R420 000

Gross profit R84 000

The gross profit percentage = Gross profit x 100

Sales 1
= 84 000 x 100
420 000 1
= 20%

(Remember that gross profit = Sales – cost of sales)

Conclusion:
 For every R100 of sales, a gross profit of R20 has been realized.
 If the % does not meet management’s objectives this could mean:
1. The selling price is too low
2. Sales volume is too low
3. Inventory losses
Profit for the period percentage

This ratio takes all the businesses expenses, operating profit and finance into account.

Profit for the period percentage = Profit before tax x 100

Sales 1

Example 3:
Quantum (Pty) Ltd has a profit before tax of R84 000 and sales of R420 000.

Profit for the period percentage = Profit before tax x 100

Sales 1
= 84 000 x 100
420 000 1
= 20%
Conclusion:

The profit before tax is 20% of the sales.

Return on assets ratio

This ratio measures the businesses returns (profits) in relation to the assets owned by it.

The two ratios are:

Sales x 100
Total assets 1

Profit for the period x 100

Total assets 1
Example 4:
The following figures relate to Estro Ltd
R
Sales 500 000
Profit for the period 100 000
Non-current assets (land and buildings) 150 000
Current assets:
Inventories 20 000
Trade debtors 15 000
Cash and cash equivalents 1 500

Sales x 100 = 500 000 x 100

Total assets 1 (150 000 + 20 000 1
+ 15 000 + 1 500)
= 500 000 x 100
186 500 1
= 268%

Profit for the period x 100 = 100 000 x 100

Total assets 1 186 500 1
= 53.62%

Conclusion:

1. The assets are being used effectively to generate sales

2. Is the business investing in too much or too little assets?

Earnings per share

 Shareholders are only interested in the return they will receive on their
investments.
 They want to know what the profit earned per share is.

The ratio is:

Profit before tax
Number of shares in issue

Example 5:

Astro has the following information available:

Profit before tax 60 000

Number of shares issued 15 000
Earnings per share = Profit before tax
Number of shares in issue
= 60 000
15 000
= R4 per share
Conclusion:

The business has earned R4 per share.

ACTIVITY RATIOS

 These ratios indicate how well management is utilizing the current assets.
 Current assets change as a result of changes in the volume of business activities.

The ratios are:

1. Debtors collection period
2. Inventory turnover rate
3. Number of days inventory on hand
4. Creditors payment period

Debtors collection period

This ratio represents the length of time in days that a business must wait for cash after
making a credit sale. How long does it take for a debtor to pay their account?

Debtors collection period = Trade debtors x 365

Credit sales for the year

(The accounts receivable period must be expressed in days)

Example 6:

Malstrom Ltd gives you the following information:

Trade debtors R4 650

Credit sales for the last 12 months R28 500

Debtors collection period = Trade debtors x 365

Credit sales for the year
= 4 650 x 365
28 500
= 60 days
Conclusion:

 Debtors are taking on average 60 days to pay their account.

 If the debtors take too, long to pay their account, the business will not have
enough cash to pay its creditors.
 The credit limit must be monitored – debtors may be in financial difficulty.

Inventory turnover rate

 A business must hold adequate inventory.

 This ratio indicates how long it will take for inventory to be sold.

Inventory turnover rate = Cost of sales

Average inventory
Average inventory = Opening inventory + closing inventory
2

Example 7:

The following information relates to Malstrom Ltd:

Closing inventory 3 500 28 Feb 2007
Opening inventory 3 100 1 March 2006
Cost of sales 15 050

Inventory turnover rate = Cost of sales

Average inventory

Average inventory = 3 500 + 3 100

2
= 3 300

Inventory turnover rate = Cost of sales

Average inventory
= 15 050
3 300
= 4.56
Conclusion:
 Inventory was converted into sales 4.56 times in one year.
 The inventory turnover rate is an indication of the number of times per year the
inventory is converted into sales.
 This will assist management in its budgeting process.
Number of days inventory on hand

How many months of inventory must a business carry?

Number of says inventory on hand

= Average inventory on hand x 365

Cost of sales

Use Example 7

Number of says inventory on hand

= Average inventory on hand x 365
Cost of sales
= 3 300 x 365
15 050
= 80 days

Conclusion:

Inventories are sold every 80 days. This is less than 3 months.

Creditors’ payment period

 Creditors must be paid within a certain period of time.

 The accounts payable ratio shows the number of days it takes the company to
pay its creditors.

The ratio is:

Creditors payment period = Average creditors x 365

Credit purchases

Example 8:

The following information was obtained from Back Ltd:

Trade creditors (28 February 2006) 175 000

Trade creditors (28 February 2007 156 000
Credit purchases 1 080 000
Creditors payment period = Average creditors x 365
Credit purchases
= (175 000 + 156 000)/2x 365
1 080 000
= 165 500 x 365
1 080 000
= 56 days
Conclusion:

It takes on average 56 days for the company to pay its creditors.

SOLVENCY RATIO

 What is the extent to which the company’s assets exceed it liabilities?

 We consider all the assets and liabilities.
 If the liabilities exceed the assets, the business is INSOLVENT!

Solvency ratio = Total assets

Total liabilities
STUDY UNIT 11
Trust accounting for law practitioners

Students need to take note of the following concepts

1. Trust accounting

 Difference between the accounting records of a law practice and those of other
professional enterprises is the way in which trust money is handled and
recorded.

2. Business transactions vs. Trust transactions

 Business money represents own funds of the law practice.

 Business transactions are for the benefit of the law practice.
 Trust money is money received to be held in trust and handled according to
client’s instructions.
 Trust money is money received to be held in trust and handled according to
client’s instructions.
 Trust transactions are for the benefit of the client.

3. Transactions encountered in a law practice

3.1. Cash received from clients ( held in trust or dealt with according to the
express instructions of the client)
3.2. Cash received from clients for fees charged and expenses incurred on
their behalf.
3.3. Trust money paid to clients, or the rightful recipients, after deduction of
moneys due to attorney.
3.4. Expenses paid on behalf of clients which must subsequently be recovered
from such clients.
3.5. Payment of general office expenses, and personal withdrawals. Under no
circumstances should these be paid from the trust bank account.
3.6. Charging of fees for services rendered
3.7. Transfer of money from the Trust bank account to the Business bank
account. (eg. for fees charged)
Client’s trust account (creditor) >>> Client debtor account
Client’s trust account may never have a debit balance. NB
3.8. Transactions with correspondents
  instructing attorney-law practice issuing the instruction
 executive (or instructed attorney)-law practice receiving
 orders payments may give rise to both business and trust
transactions.

4. Handling of trust money

 Trust money is money entrusted to an attorney, to be held in trust by the

attorney and to be dealt with according to the client’s instructions.
 Trust money, inter alia, comprise:
o Deposits by clients with regard to services still to be rendered, as well as
related expenses;
o Money paid in by a third party(the buyer) in respect of purchase
transactions;
o Payment to executive attorney i.r.o correspondent transactions;
o Transfer of money from the trust bank account to the business bank
account i.r.o the amount owing to the attorney in connection with which
a legitimate debit entry is entered after services have been rendered.

5. Trust Accounting

 Other important issues relating to trust money:

o Trust money does not form part of the assets of an attorney’s practice
because it belongs to a third party.
o Section 73 of the Attorneys Act 53 of 1979 requires a legal practitioner to
keep a separate trust bank account with a banking institution in the
Republic and must deposit any money held or received on behalf of any
person in this account.
o Interest earned on trust money is applied to cover
 bank charges on trust bank account;
 Insurance of trust creditors against fraudulent use of their money;
and
 Audit fees relating to trust accounts.

5.1. Books of first entry

5.1.1. Accounting for trust transactions

 Trust Cash Receipts Journal
 Trust Cash Payments Journal
 Transfers Journal
 Trust bank account
 Trust creditors’ ledger
 5.1.2. Accounting for business transactions
 Cash Receipts Journal
 Cash Payments Journal
 Business bank account
 Fees Journal
 General Journal
 Client’s Ledger

Example

The following trust transactions for August 2011, relates to the law practice of MMA
Attorneys:

2 Received R 7 500 from M Mokone in respect of the registration of a bond in

October 2011

6 Received R25 000 from Senzo Manzini, a client, who requested to be

represented in a forthcoming court case.

24 MMA Attorneys invoiced Senzo Manzini for work done on 15 August 2011, for
R15 000.

26 The trust paid MMA Attorneys R15 000 in respect of work invoiced on 24 August
2011.

30 Paid ABC Inc, Conveyancers, R7 500, for registration of the bond of M Mokone

REQUIRED:

Prepare the following in the books of MMA Attorneys for August 2011

1.1 Trust Cash Receipts Journal

1.2 Trust Cash Payments Journal
1.3 Fees Journal
1.4 Trust bank account
1.5 Trust creditors’ ledger
1.6 General ledger
1.7 Client (debtors) ledger
 1.1.
MMA Attorneys
Trust Cash Receipts – August 2011
Rec Trust
Day Details Fol Bank
no Creditors
2 001 M Mokone TCL 1 7 500 7 500
6 002 Senzo Manzini TCL 2 25 000 25 000
32 500 32 500

1.2.
MMA Attorneys
Trust Cash Payments – August 2011

Doc Trust
Day Details Fol Bank
no Creditors
26 Senzo Manzini (MMA Attorneys) 15 000 15 000
30 M Mokone (ABC Inc) 7 500 7 500
22 500 2 500

1.3.
MMA Attorneys
Fees Journal – August 2011
Doc Clients
Day Details Fol Fees
no Control
24 IN001 Senzo Manzini 15 000 15 000

15 000 15 000

1.4.
MMA Attorneys
Trust Bank Account
Bank
2011 2011
Aug. 31 Total Receipts TCRJ 32 500 Aug. 31 Total Payments CPJ 22 500
31 Balance b/o 10 000
32 500 32 500
Sep 1 Balance b/d 10 000
 1.5.
MMA Attorneys
Trust Creditors Account

2011 2011
Aug. 31 Trust Bank TCPJ 22 500 Aug. 31 Trust Bank TCRJ 32 500
Balance b/o 10 000 10 000
32 500 32 500
Sep 1 Balance b/d 10 000

Trust Creditors Ledger

M Mokone
2011 2011
Aug. 26 Trust Bank TCPJ 7 500 Aug. 2 Trust Bank TCRJ 7 500

7 500 7 500

Senzo Manzini
2011 2011
Aug. 30 Trust Bank TCPJ 15 000 Aug. 6 Trust Bank TCRJ 25 000
Balance b/o 10 000
25 000 25 000
Sep 1 Balance b/d 10 000

1.6.
MMA Attorneys
Business Bank Account
Bank
2011
Aug. 31 Total Receipts BCRJ 15 000

1.7.
MMA Attorneys
Client Control
Client Control Account
2011 2011
Aug. 31 Fees FJ 15 000 Aug. 31 Business Bank BCRJ 15 000

Senzo Manzini
2011 2011
Aug. 24 Fees FJ 15 000 Aug. 26 Business Bank BCRJ 15 000
6. Theory and Revision

1. Explain the term ``trust money'' and give three examples of such money.
2. Explain why trust money does not form part of the assets of an attorney's
practice.
3. Describe what section 78 of the Attorneys Act 53 of 1979 requires of a legal
practitioner as regards the handling of trust money.
4. Interest earned on trust money is applied to cover certain expenses of an
attorney. Name these expenses.
5. Describe three requirements that must be complied with before money may be
transferred from the trust creditors account of a client to his or her account in
the clients ledger.
6. Name the three subsidiary journals involved in a transfer from a trust creditors
account to an account in the clients ledger.
7. Name the journals from which postings to the trust creditors ledger are made.
8. Name the two accounts of which the balances must tally in respect of trust
money.

Solutions
1. Trust money is money entrusted to an attorney, to be held in trust by him or her
and to be dealt with according to the instructions of the client. Examples
a. deposits of clients for services still to be rendered, as well as for expenses
incurred in this regard
b. money deposited by a third party (the purchaser) in respect of a purchase
transaction
c. money which has been deposited and must be paid over to another party
2. Trust money does not form part of the assets of an attorney's practice because it
belongs to a third party.
3. A legal practitioner is obliged to keep a separate trust bank account with a
banking institution in the Republic and must deposit any money held or received
on behalf of any person in this account.
4. Bank charges on the trust bank account; Insurance of trust creditors against
fraudulent use of their money; Audit fees relating to trust accounts.
5. No amount exceeding the debit balance on the client's account may be
transferred from his or her trust account; No amount exceeding the credit
balance on the client's trust account may be transferred; The client must be
aware of such a transfer and must have no objection to it.
6. The transfer journal; The trust cash payments journal; The business cash receipts
journal.
7. The trust cash receipts journal; The trust cash payments journal; The transfer
journal; The general journal.
8. The trust creditors control account and the trust bank account.
STUDY UNIT 12
Practice Management

Students need to take note of the following concepts

Questions
1. Compare the different forms of enterprise in which a law practice may practise in
tabular form.
2. List the items that should be included in a partnership agreement.
3. List the factors that should be taken into account when the system for the
compensation of partners is determined.
4. Name the factors that should be taken into account when fees are charged to
clients.
5. Briefly discuss how a law practice should go about managing its human
resources.
6. List four computer applications that should be available on the computer
systems operating in a law practice.
7. Briefly explain the items that should be included in the financial planning of the
law practice.
8. Briefly explain what a law practice system should consist of to be functional and
logical.
Solution exercise
Answers

1.

Characteristics Sole proprietor Partnership Incorporated

company

Number of members One Two or more, but no One, but limited to 50

more than 20

Legal personality Not a separate legal Not a separate legal Separate legal entity.
entity. Owner is liable entity. Partners are Directors are jointly
for the debts of the jointly and severally and severally responsible
practice liable for debts for debts to the
amount of their investment
in the company's
shares

Management Responsibility and Joint responsibility and One or more directors

management rest with control
the same person

Name of entity No legal requirement No legal requirement Name ends with

``incorporated'',
abbreviated
as ``Inc''
Capital Limited to capital Limited to contributions Limited to share issue
contribution of partners
of one person

Income tax Profit of undertaking Each partner pays tax The company pays a
regarded as the on his/her profit share fixed rate on profits
owner's
personal income
Continued existence Theoretically the entity The partnership dissolves Unlimited existence
ceases to exist when and a new except for liquidation
the owner dies partnership is formed
when a partner retires
or dies or a new partner
is admitted

Solution exercise
2. A partnership agreement should include the following:
 the names of the different partners
 the purpose and scope of the partnership
 the capital contributions expected from the partners
 the duties and limitations of the respective partners
 the method to be followed in settling disputes
 the rules to be applied in the withdrawal of partnership funds
 the formula to be applied in the distribution of profits or losses
 the provisions to be made for the possible dissolution of the firm or
termination of a partner's interest
 the admission of new partners
 modification of the terms of the agreement

3. The partners should take the following factors into account when determining
the compensation system:
 hours billed
 fees collected
 new business generated
 associates or support staff supervised
 capital contributions
 years of practice
 management responsibilities

4. The following factors should be taken into account when fees are charged to clients:
 the time and labour involved
 the likelihood that the acceptance of the particular employment may lead
to other employment by the law practitioner
 the amount involved and the results obtained
 the time limitations imposed by the client
 the law practitioner's experience, reputation and ability
 whether the fee is fixed or contingent

5. Human resource management is a cycle that includes the following:

 The recruitment and hiring of new employees

Law firms spend substantial amounts of money to recruit the best law students
and other legal personnel such as legal secretaries, typists and assistants. Legal
personnel are the people who bring in the business, do the legal work and
represent the clients.
  Training
Training involves teaching basic practice skills that are critical to job
performance. Included in the training process is orientation. The first day at a
new job is the most important day of a person's life in a law practice.

 Evaluation
Evaluation of both law practitioners and staff should take place at some
designated time after the legal employee has been hired. Thereafter regular
evaluations of all personnel are of utmost importance.

 Feedback
Employees should be informed whether expectations have been met. Regular
feedback is vital, and should include both positive and negative comment.

 Compensation
A fair workable compensation scheme should adequately reward everyone in the
law firm for work done and provide incentives for the future.

 Benefits
Benefits such as leave, medical aid, pension fund contributions, travelling costs,
training, further education, housing subsidies, etc should form part of the total
package offered to employees.

 Promotion
Personnel in a law practice should have opportunities for promotion and there
should be clear guidelines on the requirements for promotions and job
descriptions.

 Retirement
The conditions for retirement should be set and available to all employees.

6. Although every firm is unique, most of them require at least the following
computer applications:

high-level word processing; document assembly; calendaring; personal

information management; time and billing; financial management; database;
spreadsheet; presentation; substantive practice management; client contact; e-
mail; data and file transfer; electronic research; document scanning, copying and
faxing; video conferencing; continuing legal education
7. Financial planning includes planning for the following:

Capital
A law firm must determine the capital needs of the business, that is, what is required for
start-up expenses and the reserves necessary for potential negative cash flow during the
initial years of operation. The range of capital investment could be between several
thousand and a few million rand.

Expenses
The expenses include the start-up expenses required to get the firm up and running and
operating expenses which represent all payments for the cost of goods and services
required in the daily operating activities of the law practice.

Income
The fees generated by legal work for clients are the main source of income in a law
practice. The billing and collecting of fees therefore form an integral part of the financial
management of a law practice.

Compensation
Salaries and wages my represent from 50 to 70% of all overhead expenses in a law
practice and should receive specific attention.

Borrowing
Obtaining a loan is risky and costly. Although loans are paid off as fixed expenses over
time, the interest on the loan should be considered before a loan is obtained.

8. A law practice system can consist of the following:

Substantive systems
Substantive systems allow matters to be handled routinely and tasks completed
competently and efficiently.

Document assembly systems

In this process, legal documents are prepared, whether simple or complex, routine or
unique, original or retrieved. The same steps are always followed to create a document.

Administrative support system

These support systems relate to the business of rendering legal services: calendar, filing,
retrieval, conflicts of interest, timekeeping and billing. Administrative support systems
relate to client matters through the law office.
Calendar and tickler system
This relates to scheduling events and other critical dates, directory information,
expenses and reminder notes as indicated below:
 a conflict checking system
 a timekeeping and billing system
 a client trust account system
 a litigation management system
 accounts and bookkeeping systems