FAC1501

LEARNING UNIT 3

THE ACCOUNTING
EQUATION: FINANCIAL
PERFORMANCE

Introductory Financial
Accounting
 LEARNING UNIT 3

2 OVERVIEW

Learning outcomes .............................................................................................................................. 36

Key concepts ....................................................................................................................................... 36
Assessment criteria ............................................................................................................................. 37
3.1 Introduction.................................................................................................................................... 37
3.2 The accounting equation: financial performance ........................................................................... 37
3.3 The trial balance ............................................................................................................................ 46
3.4 The profit or loss account .............................................................................................................. 47
3.5 The statement of profit or loss and other comprehensive income ................................................. 50
3.6 Summary ....................................................................................................................................... 51
3.7 Exercises and solutions................................................................................................................. 53
Self-assessment .................................................................................................................................. 60

LEARNING OUTCOMES

After studying this learning unit, you should be able to

understand the accounting equation concerning income and expenses
explain the effects of financial accounting entries concerning income and expenses on the
accounting equation
prepare entries in general ledger accounts of income and expenses
prepare a trial balance for a service entity
prepare a profit or loss account for a service entity
prepare a statement of profit or loss and other comprehensive income for a service entity

KEY CONCEPTS
Income
Expenses
Debtors
Trial balance
Profit or loss account
Statement of profit or loss and other comprehensive income

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 LEARNING UNIT 3

ASSESSMENT CRITERIA
Business transactions concerning income and expenses are explained with
appropriate examples.
The accounting policy is demonstrated according to the right methods and
procedures when recording in the accounting equation format and in the
ledger accounts.
Expenses and income and gains and losses are defined and classified for
recognition in the statement of profit or loss and other comprehensive income.

3.1 INTRODUCTION
The objective of every entity is to earn as large a profit as possible. It is therefore necessary to determine
the financial performance of the entity by calculating the financial result over a specific period.

3.2 THE ACCOUNTING EQUATION: FINANCIAL PERFORMANCE

The financial result of an entity is measured in terms of the profit or loss which the entity has made
over a specific period. This period is known as the financial period and is usually one year.

An entity makes a profit when the income it has earned from its business activities is more
than the expenditure it has incurred in generating or producing that income.

An entity makes a loss when the expenditure it has incurred in generating or producing
income is more than the income it has earned.

PROFIT/LOSS FOR THE YEAR = INCOME - EXPENSES.

An entity must earn an income to be able to pay its expenses. Profit for the year is the reward
for the capital invested and the entrepreneurial spirit shown.

Profit (gains) or income is credited because it increases the equity (capital) amount owed to
the owner of the entity. If equity increases, the account must be credited.

Dr (debit side) Capital (credit side) Cr

- (decrease) + (increase)

The following rule can be applied to profit/income:

Dr (debit side) Profit/income (credit side) Cr

Always credited
- (decrease) + (increase)

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 LEARNING UNIT 3

INCOME
Profit/income is the increase in
economic benefits of an entity during an
accounting period which results in an
increase in equity. Such an increase can
be the result of an increase in assets or
a decrease in liabilities.

REVENUE PROFIT/GAINS

Gains are increases in economic

normal activities (daily operating benefits, which do not arise from the
activities), for example: normal activities of the entity, for
example:

fees earned profit on sale of non-current asset

sales

interest income

rental income

commission income

credit losses recovered

Expenses are incurred to earn income.

Losses or expenses are debited because it decreases the equity (capital) amount owed to
the owner of the entity. If equity decreases, the losses or expense accounts must be
debited.

Dr (debit side) Capital (credit side) Cr

- (decrease) + (increase)

The following rule can be applied to losses/expenses:

Dr (debit side) Losses/expenses (credit side) Cr

Always debited
+ (increase) - (decrease)

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 LEARNING UNIT 3

EXPENSES
Losses/expenses are the outflow of
economic benefits (payments/losses)
during the accounting period, which
results in a decrease in equity. Such a
decrease can be the result of a decrease
in assets or an increase in liabilities.

EXPENSES LOSSES

Expenses are incurred in the Losses are decreases in economic

benefits, which do not arise from the
activities. They arise from the normal activities of the entity, for
generation of income, for example: example:

Cost of sales Loss on sale of non-current asset

Rental expenses

Interest expenses

Wages and salaries

Advertising

Credit losses

Insurance

Repairs and maintenance

Telephone expenses

Water and electricity

Postage

Rates and taxes

Stationery

Consumables

Packing materials

Bank charges

Depreciation

Administrative expenses

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 LEARNING UNIT 3
Bongile Sithole for the 20.6 financial year that generate
income or give rise to expenditure. The financial year ends annually on 31 December.

Transaction 5:
Mr Bongile Sithole rendered a service on 15 January, for cash, to a client for R60 000.

Explanation:
Received money for services rendered, therefore the bank account (an asset) increases and must
be debited.

Dr (debit side) Assets (credit side) Cr

+ (increase) - (decrease)

Services rendered are income that increases the profit for the year. Therefore, equity increased,
and the services rendered account must be credited. You will now see that the double-entry
principle has been adhered too.
Dr (debit side) Profit/income (credit side) Cr
- (decrease) + (increase)

The effect of the transaction on the accounting equation can be illustrated as follows:

A = E + L

Bank Tools and Capital Income/ Big Builders Uni Bank

equipment expenditure (trade (long-term
payable) loan)

R R R R R R
88 800 8 200 40 000 7 000 50 000

+ 60 000 + 60 000

148 800 8 200 = 40 000 60 000 + 7 000 50 000

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 LEARNING UNIT 3
The above transaction will be recorded in the ledger accounts as follows:

1. The debit-side of the bank account:

Dr Bank 1 Cr
Date Details Fol R Date Details Fol R
20.6 20.6
Jan 1 Capital 40 000 Jan 1 Tools and equipment 1 200
Long-term loan: Uni
Bank 50 000
15 Services rendered 60 000
(account to be
credited)

2. The credit-entry in the services rendered account:

Dr Services rendered 2 Cr
Date Details Fol R Date Details Fol R
20.6

Jan 15 Bank (account to be 60 000

debited)

Transaction 6:
Mr Bongile Sithole rendered a service on 16 January, on credit, to M Beauty for R20 000.

Explanation:
Clients owe BS Electrical money. These clients are called trade receivables (resource controlled by the
entity), as a result of past events (rendering of services), and from which future economic benefits are
expected (money to be received). Therefore, it is an asset. Assets increased and M Beauty (a
trade receivable) must be debited.

A person who owes money to the entity is a trade receivable (debtor).

Dr (debit side) Assets (credit side) Cr

+ (increase) - (decrease)

Services rendered are income that increase the profit for the year. Therefore, equity
increased, and the services rendered account must be credited.
Dr (debit side) Profit/income (credit side) Cr
- (decrease) + (increase)

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 LEARNING UNIT 3
The effect of the transaction on the accounting equation can be illustrated as follows:

A = E + L
Bank Tools and M Beauty Capital Income/ Big Uni Bank
equipment (trade expenditure Builders (long-term
receivable) (trade loan)
payable)
R R R R R R R
88 800 8 200 40 000 7 000 50 000
+ 60 000 + 60 000
+ 20 000 + 20 000
148 800 8 200 20 000 = 40 000 80 000 + 7 000 50 000

The above transaction will be recorded in the ledger accounts as follows:

1. The debit- account:

Dr M Beauty 6 Cr
Date Details Fol R Date Details Fol R
20.6
Jan 16 Services rendered 20 000
(account to be
credited)

2. The credit-entry in the services rendered account:

Dr Services rendered 7 Cr
Date Details Fol R Date Details Fol R
20.6
Jan 15 Bank 60 000
16 M Beauty (account 20 000
to be debited)

Transaction 7:
via internet banking, R1 200.

Explanation:
Telephone expenses are expenses that decrease the profit for the year. Therefore, equity
decreased and the telephone expense account must be debited.
Dr (debit side) Losses/expenses (credit side) Cr
+ (increase) - (decrease)

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 LEARNING UNIT 3
Paid money for the telephone account, therefore the bank account (an asset) decreases and must
be credited. To complete the double-entry, the appropriate expense account must be debited.
Dr (debit side) Assets (credit side) Cr
+ (increase) - (decrease)

The effect of the transaction on the accounting equation can be illustrated as follows:

A = E + L
Bank Tools and M Beauty Capital Income/ Big Uni Bank
equipment (trade expenditure Builders (long-term
receivable) (trade loan)
payable)
R R R R R R R

88 800 8 200 40 000 7 000 50 000

+ 60 000 + 60 000

+ 20 000 + 20 000
- 1 200 - 1 200

147 600 8 200 20 000 = 40 000 78 800 + 7 000 50 000

The above transaction will be recorded in the ledger accounts as follows:

1. The entry on the debit-side of the telephone expenses account:

Dr Telephone expenses 8 Cr
Date Details Fol R Date Details Fol R
20.6
Jan 28 Bank (account to be 1 200
credited)

2. The credit-entry in the bank account:

Dr Bank 1 Cr
Date Details Fol R Date Details Fol R
20.6 20.6
Jan 1 Capital 40 000 Jan 1 Tools and equipment 1 200
Long-term loan: Uni 28 Telephone expenses 1 200
Bank 50 000 (account to be
15 Services rendered 60 000 debited)

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 LEARNING UNIT 3
Transaction 8:
via internet banking, R6 000.

Explanation:
Salaries account is an expense that decreases the profit for the year. Therefore, equity
decreased, and the salaries account must be debited.

Dr (debit side) Losses/expenses (credit side) Cr

+ (increase) - (decrease)

The salary of the receptionist was paid; therefore, the bank account (an asset) decreases and
must be credited. To complete the double-entry, the appropriate expense account must be
debited.

Dr (debit side) Assets (credit side) Cr

+ (increase) - (decrease)

The effect of the transaction on the accounting equation can be illustrated as follows:

A = E + L
Bank Tools and M Beauty Capital Income/ Big Uni Bank
equipment (trade expenditure Builders (long-term
receivable) (trade loan)
payable)
R R R R R R R
88 800 8 200 40 000 7 000 50 000

+ 60 000 + 60 000

+ 20 000 + 20 000
- 1 200 - 1 200

- 6 000 - 6 000

141 600 8 200 20 000 = 40 000 72 800 + 7 000 50 000

The above transaction will be recorded in the ledger accounts as follows:

1. The debit-side of the salaries account:

Dr Salaries 9 Cr
Date Details Fol R Date Details Fol R
20.6
Jan 31 Bank (account to be 6 000
credited)

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 LEARNING UNIT 3
2. The credit-entry in the bank account:

Dr Bank 1 Cr
Date Details Fol R Date Details Fol R
20.6 20.6

Jan 1 Capital 40 000 Jan 1 Tools and equipment 1 200

Long-term loan: Uni 28 Telephone expenses 1 200
Bank 50 000 31 Salaries (account to 6 000
15 Services rendered 60 000 be debited)

A summary of all the ledger accounts in the general ledger, at the end of January 20.6, is as follows:

The bank account must be balanced off.

BS ELECTRICAL
GENERAL LEDGER
Dr Bank 1 Cr
Date Details Fol R Date Details Fol R
20.6 20.6
Jan 1 Capital 40 000 Jan 1 Tools and equipment 1 200
15 Long-term loan: Uni 28 Telephone expenses 1 200
Bank 50 000 31 Salaries 6 000
Services rendered 60 000 Balance c/d 141 600

150 000 150 000

Feb 1 Balance b/d 141 600

Dr Capital 2 Cr
Date Details Fol R Date Details Fol R
20.6
Jan 1 Bank 40 000

Dr Tools and equipment 3 Cr

Date Details Fol R Date Details Fol R
20.6
Jan 1 Big Builders 7 000
Bank 1 200

8 200

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 LEARNING UNIT 3
Dr Big Builders 4 Cr
Date Details Fol R Date Details Fol R
20.6
Jan 1 Tools and equipment 7 000

Dr Long-term loan: Uni Bank account 5 Cr

Date Details Fol R Date Details Fol R
20.6
Jan 1 Bank 50 000

Dr M Beauty 6 Cr
Date Details Fol R Date Details Fol R
20.6
Jan 16 Services rendered 20 000

Dr Services rendered 7 Cr
Date Details Fol R Date Details Fol R
20.6
Jan 15 Bank 60 000
16 M Beauty 20 000

Dr Telephone expenses 8 Cr
Date Details Fol R Date Details Fol R
20.6
Jan 28 Bank 1 200

Dr Salaries 9 Cr
Date Details Fol R Date Details Fol R
20.6
Jan 31 Bank 6 000

The ledger accounts in the general ledger numbered from 1 to 6 are asset accounts, liability accounts
and equity accounts. These balances will appear in the statement of financial position. The ledger
accounts in the general ledger numbered from 7 to 9 are all income/profit accounts and expense/loss
accounts. The arithmetical correctness of the recording of transactions in the general ledger must be
tested on a regular basis. This usually takes place once all transactions up to and including a certain
date (in this case for the month of January) have been recorded in the general ledger and before
any final financial statements are prepared. A trial balance will be compiled to check the arithmetical
correctness of the recording of transactions in the general ledger.

3.3 THE TRIAL BALANCE

The total of all the debit balances on the ledger accounts should be equal to the total of all the
credit balances on the ledger accounts, because all the transactions should have been recorded
in accordance with the double-entry principle. To determine whether this is so, the balances of all
accounts are determined and recorded in a statement known as the trial balance.

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 LEARNING UNIT 3

A trial balance is a list of all the balances of all the accounts in the general ledger on a
particular date.

The names and balances are recorded in the trial balance in the order in which they appear in the
general ledger. There are two columns in which debit balances and credit balances are recorded. The
final totals of the two columns should always be the same.

BS ELECTRICAL
TRIAL BALANCE AS AT 31 JANUARY 20.6
Debit Credit
R R
Bank 141 600
Capital 40 000
Tools and equipment 8 200
Big Builders 7 000
Long-term loan: Uni Bank 50 000
M Beauty 20 000
Services rendered 80 000
Telephone expenses 1 200
Salaries 6 000
177 000 177 000

The errors which may be revealed by a trial balance will be discussed in detail in a later learning unit.
The debit balances total is equal to the credit balances total and the profit or loss account can now
be compiled.

3.4 THE PROFIT OR LOSS ACCOUNT

If Mr Bongile Sithole wants to determine after one month whether it is worthwhile for him to carry on
the business, the profit/income accounts and losses/expense accounts must be closed off to the profit
or loss account so that the profit for the month can be calculated.

The financial result of an entity is measured in terms of the profit or loss which the entity has made
over a specific period. This period is known as the financial period and is usually one year.

At the end of the financial period (usually a year), all expense/loss accounts and income/
profit accounts of a service entity must be closed off to a profit or loss account which
forms the basis for the preparation of a statement of profit or loss and other
comprehensive income.

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 LEARNING UNIT 3
Explanation of the transfer of income to the profit or loss account:

To close off the services rendered account (income), the services rendered account must be debited
with R80 000, which is equal to the total of the amounts on the credit side (R60 000 + R20 000). There
is no total on the debit side. To balance off the ledger account, the total amount of R80 000 will
be entered on the debit side. The name of the account that must be credited to complete the double-
entry is the profit or loss account. The services rendered account will now balance off.

The profit or loss account is credited with R80 000. This is done to adhere to the double-entry
principle.

Dr Services rendered 7 Cr
Date Details Fol R Date Details Fol R
20.6 20.6
Jan 31 Profit or loss (account 80 000 Jan 15 Bank 60 000
to be credited) 16 M. Beauty 20 000

80 000 80 000

Explanation of the transfer of expenditure to the profit or loss account:

To close off the telephone expense account (an expense), the telephone expenses account must be
credited with R1 200 which is equal to the total amount on the debit side, R1 200. There is no balance
on the telephone expense account because the total amount is taken to the profit or loss account.

The profit or loss account is debited with R1 200. This is done to adhere to the double-entry principle.

Dr Telephone expenses 8 Cr
Date Details Fol R Date Details Fol R
20.6 20.6
Jan 28 Bank 1 200 Jan 31 Profit or loss (account 1 200
to be debited)

1 200 1 200

The same principle is applicable to closing off the salaries account (an expense) to the profit or loss
account.

The salaries account must be credited with R6 000, the total of the amount on the debit side, R6 000.
There is no balance on the salaries account because the total amount is taken to the profit or loss
account.

The profit or loss account is debited with R6 000. This is done to adhere to the double-entry principle.

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 LEARNING UNIT 3
Dr Salaries 9 Cr
Date Details Fol R Date Details Fol R
20.6 20.6
Jan 31 Bank 6 000 Jan 31 Profit or loss (account 6 000
to be debited)

6 000 6 000

The profit or loss account is a final account in the general ledger and the statement of profit or loss and
other comprehensive income is one of the financial statements an entity must prepare. It uses the
same information, but the one is an account while the other is a statement (no debit side or credit side).
The profit or loss account is as follows:

Dr Profit or loss 10 Cr
Date Details Fol R Date Details Fol R
20.6 20.6

Jan 31 Telephone expenses 1 200 Jan 31 Services rendered 80 000

(account to be (account to be
credited) debited)
Salaries (account to 6 000
be credited)
Capital (profit for the
month) (account to 72 800
be credited)

80 000 80 000

An entity makes a profit when the income it has earned is more than the expenditure it has incurred
in generating or producing that income. BS Electrical has made a profit for the month because the
income earned, R80 000, is more than the expenses incurred in generating the income, R1 200 +
R6 000 = R7 200. The income earned (profit) is R80 000 - R7 200 = R72 800.

To calculate the profit or loss for the month (the same as calculating the balance c/d):
Add the debit side of the profit or loss account and write down the total in pencil: R1 200 +
R6 000 = R7 200.
Add the credit side of the profit or loss account and write down the total in pencil: R80 000.
The credit total of the profit or loss account is more than the debit total. To make the
two sides equal, the debit side needs an amount of R80 000 - R7 200 = R72 800. This is
the balancing amount and is recorded on the side of the profit or loss account that is
the smallest in this case, the debit side. It is a profit because the income is greater than
the expenses.
The account is then totaled (the biggest total in pencil, that side is the credit side total
of R80 000).
The capital account will be credited, therefore the reference on the debit side of the profit
or loss account will be the capital account (profit for the month).

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 LEARNING UNIT 3
The last transfer is the entry for the profit for the period that must be credited to the capital account
(profit or loss account is debited) because BS Electrical owes the profit to the owner, Mr B Sithole.
The profit for the month is
spirit he has shown. It therefore increases the equity.

Dr Capital 2 Cr
Date Details Fol R Date Details Fol R
20.6
Jan 1 Bank 40 000
31 Profit or loss (profit
for the month) 72 800
(account to be
debited)
112 800

A statement of profit or loss and other comprehensive income will now be compiled using the
information included in the profit or loss account.

3.5 THE STATEMENT OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME
The aim of the statement of profit or loss and other comprehensive income is to reflect the financial
performance (profit/loss) for a financial period.

The statement of profit or loss and other comprehensive income is as follows:

BS ELECTRICAL
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE MONTH ENDED 31 JANUARY 20.6
Notes R
Services rendered 80 000
Distribution, administrative and other expenses (7 200)
Telephone expenses 1 200
Salaries 6 000
Profit for the month 72 800
Other comprehensive income for the month*
Total comprehensive income for the month 72 800

* Other comprehensive income for the month falls outside the scope of the FAC1501 syllabus.

To complete the set of financial statements, the statement of financial position will also be compiled.

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 LEARNING UNIT 3
The statement of financial position is as follows:

BS ELECTRICAL
STATEMENT OF FINANCIAL POSITION AS AT 31 JANUARY 20.6
Notes R
ASSETS
Non-current assets 8 200
Property, plant and equipment (tools and equipment) 8 200

Current assets 161 600

Trade and other receivables (trade receivables control) 20 000
Cash and cash equivalents (bank) 141 600

Total assets 169 800

EQUITY AND LIABILITIES

Equity 112 800
Capital 112 800

Non-current liabilities 50 000

Long-term borrowings (long-term loan: Uni Bank) 50 000

Current liabilities 7 000

Trade and other payables (trade payables control) 7 000

Total equity and liabilities 169 800

Learning units 2 and 3 are the most important learning units in financial accounting. Please make
sure you understand the rules concerning assets, liabilities, equity, profit/income accounts and
losses/expense accounts. You will have no problems with financial accounting in future if you
understand these rules and know how to apply them.

3.6 SUMMARY
The table below presents a useful overview of the accounting equation and the related subcategories
of the elements of financial statements. Examples of relevant ledger accounts are provided under
each category.

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3.7 EXERCISES AND SOLUTIONS

3 EXERCISE 1

(a) How is the financial result calculated in financial accounting terms?

(b) Which financial report reflects the financial result?
(c) Give three examples of income.
(d) Give three examples of expenditure.
(e) How is profit/loss determined for a financial period?
(f) Does a loss increase or decrease the equity of the owner?

4 SOLUTION: EXCERCISE 1

(a) The financial result calculated in financial accounting terms:

PROFIT FOR THE YEAR = INCOME - EXPENDITURE
(b) The statement of profit or loss and other comprehensive income for the year ended reflects
the financial result.
(c) Examples of income:
fees earned
sales
interest income
rental income
commission income
credit losses recovered
(d) Examples of expenditure:
cost of sales
rental expenses
interest expenses
wages and salaries
advertising
credit losses
insurance
repairs and maintenance
telephone expenses
water and electricity
postage
rates and taxes
stationery
consumables
packing materials
bank charges
depreciation
administrative expenses
(e) To determine profit/loss for a financial period:
PROFIT FOR THE YEAR = INCOME - EXPENDITURE
(f) A loss decreases income and profits and therefore also decreases the equity.

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 LEARNING UNIT 3

5 EXERCISE 2

The financial position of T Payn, an attorney, at 28 February 20.6 is as follows:

A = E + L
R50 000 = R30 000 + R20 000
For the year ended 28 February 20.7 he had the following income and expenditure:

R
Fees earned 180 000
Salaries 100 000
Administrative expenses 20 000
Insurance expenses 10 000

6 REQUIRED

7 SOLUTION: EXCERCISE 2

Income = Fees earned R180 000

Expenditure = Salaries R100 000 + Administrative expenses R20 000 + insurance
expenses R10 000
= R130 000
Profit for the year = Income - Expenses
= R180 000 - R130 000
= R50 000
Equity = Capital + Profit for the year
E = R30 000 (20.6) + R50 000 (20.7)
E = R80 000

8 EXERCISE 3

9 REQUIRED

List each of the following ledger accounts under one of the categories in the table below.
e.

ASSETS EQUITY LIABILITIES

Non-current assets Current assets Capital Income Expenditure Non-current Current
liabilities liabilities
Furniture

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 LEARNING UNIT 3
Ledger accounts to be classified:
(a) land and buildings
(b) mortgage
(c) petty cash
(d) postage
(e) interest income
(f) vehicles
(g) salaries
(h) trade receivables
(i) trade payables
(j) bank overdraft
(k) fees earned
(l) electricity deposit
(m) subscriptions

10 SOLUTION: EXCERCISE 3

ASSETS EQUITY LIABILITIES

Non-current Current Capital Income Expenditure Non-current Current
assets assets liabilities liabilities
(a) land and
buildings
(b) mortgage
(c) petty cash
(d) postage
(e) interest
income
(f) vehicles
(g) salaries
(h) trade
receivables
(i) trade
payables
(j) bank
overdraft
(k) fees
earned
(l) electricity
deposit *

(m) subscriptions

* The electricity deposit is an amount paid by the entity to serve as security for the payment of the electricity account. The
amount will be paid back to the entity if they sell the land and buildings and will no longer make use of electricity;
therefore, it is not an expense but a current asset.

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 LEARNING UNIT 3

11 EXERCISE 4

D Paulus started a television antenna installation service on 1 June 20.6. The following transactions
took place during the first month:

Transactions:
June 1 Cash in the bank deposited as opening capital, R25 000.
2 D Paulus made his private equipment available to the business, R9 000.
3 Additional equipment purchased and paid via internet banking,
R12 000.
4 Installation fees for work done on account for Kannadrift Municipality,
R4 200.
6 Vehicle purchased on credit from Virginia Cars Limited, R22 400.
17 Kannadrift Municipality paid R2 200 on their account.
28 Wages paid, R4 000.
30 Paid R9 000 to Virginia Cars Limited in part settlement of the
account.

12 REQUIRED

Use the accounting equation to analyse the above-mentioned transactions as follows:

NB: (1) Show the effect of each transaction on the accounting equation with a plus sign (+) for an
increase and a minus sign (-) for a decrease.
Example: On 1 July 20.6, D Paulus received R2 000 in cash for an installation done for Cook
Financing Corporation.

Accounting equation
Date
Assets = Equity + Liabilities

20.6
July 1 + R2 000 + R2 000 0

Cash received will increase the bank; therefore, assets increased.

The cash was for installation fees, an income; therefore, equity increased.

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 LEARNING UNIT 3

SOLUTION: EXERCISE 4
11S

Date Accounting equation

Assets = Equity + Liabilities

20.6
June 1 + R25 000 + R25 000
2 + R9 000 + R9 000
3 + R12 000
- R12 000
4 + R4 200 + R4 200
6 + R22 400 + R22 400
17 + R2 200
- R2 200
28 - R4 000 - R4 000
30 - R9 000 - R9 000

R47 600 R34 200 R13 400

Assets (R47 600) = Equity (R34 200) + Liabilities (R13 400).

14 EXERCISE 5

The following transactions relate to Witblits Electricians:

Transactions:

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

Obtained a loan from SA Bank, R6 000.
3 Bought equipment on credit from Sparks Dealers, R1 000.
9 Made an internet banking payment for an advertisement in a local newspaper,
R200.
12 Paid the telephone account via internet banking, R75.
13 Received a payment from H House for services rendered, R500.
24 As an additional capital contribution W Blits transferred his motor vehicle to the
business, R9 000.
27 Paid salaries via internet banking, R2 000.
30 Made an internet banking payment to SA Bank as a repayment on the loan,
R1 500.

15 REQUIRED

Prepare the appropriate general ledger accounts which reflect the above transactions in the books
of Witblits Electricians. The general ledger accounts must be properly balanced at 31 October 20.6.

NB: Indicate the correct contra general ledger account.

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 LEARNING UNIT 3

16 SOLUTION: EXCERCISE 5

WITBLITS ELECTRICIANS

GENERAL LEDGER

Dr Capital 1 Cr
Date Details Fol R Date Details Fol R

20.6
Oct 1 Bank 10 000
24 Motor vehicles 9 000

19 000

Dr Bank 2 Cr
Date Details Fol R Date Details Fol R
20.6 20.6
Oct 1 Capital 10 000 Oct 9 Advertisements 200
Long-term loan: 12 Telephone expenses 75
SA Bank 6 000 27 Salaries 2 000
13 Services rendered 500 30 Long-term loan:
SA Bank 1 500
31 Balance c/d 12 725

16 500 16 500

Nov 1 Balance b/d 12 725

Dr Long-term loan: SA Bank 3 Cr

Date Details Fol R Date Details Fol R
20.6 20.6

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

Dr Equipment 4 Cr
Date Details Fol R Date Details Fol R
20.6
Oct 3 Sparks Dealers 1 000

Dr Motor vehicles 5 Cr
Date Details Fol R Date Details Fol R
20.6
Oct 24 Capital 9 000

58
 LEARNING UNIT 3
Dr Sparks Dealers 6 Cr
Date Details Fol R Date Details Fol R
20.6
Oct 3 Equipment 1 000

Dr Services rendered 7 Cr
Date Details Fol R Date Details Fol R
20.6
Oct 13 Bank 500

Dr Telephone expenses 8 Cr
Date Details Fol R Date Details Fol R
20.6
Oct 12 Bank 75

Dr Salaries 9 Cr
Date Details Fol R Date Details Fol R
20.6
Oct 27 Bank 2 000

Dr Advertisements 10 Cr
Date Details Fol R Date Details Fol R
20.6
Oct 9 Bank 200

59
 LEARNING UNIT 3

17 SELF-ASSESSMENT
After you have worked through this learning unit, are you able
128

to
define income?
define expenses?
explain the difference between (and give examples of)
income and expenses?
explain the rules for debiting and crediting different types of
profit/income and losses/expense accounts?
correctly classify any given profit/income and losses/
expense account?
correctly enter any given transaction considering profit/
income and losses/expense into the accounting equation?
correctly apply the accounting equation to any given
transaction considering profit/income and losses/expense?
correctly enter any given transaction concerning profit/
income and losses/expense in the ledger accounts?
prepare a trial balance?
prepare a profit or loss account?
prepare a statement of profit or loss and other
comprehensive income?

If you have marked all , you may continue to the next learning unit.

If you have marked any , you have to revise that specific section.

If you have marked any , you have to re-study that specific section.

60